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. 24 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 October 31, Nine Months Ended October 31, 2025 2024 Change favorable (unfavorable) 2025 2024 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 $ 61,148 $ 41,563 $ 19,585 $ 155,796 $ 113,397 $ 42,399 Gross profit 21,005 34 % 14,086 34 % 6,919 52,151 33 % 38,077 34 % 14,074 General and administrative expenses 8,346 14 % 7,330 18 % (1,016 ) 26,127 17 % 19,457 17 % (6,670 ) Selling expenses 1,256 2 % 1,170 3 % (86 ) 3,545 2 % 3,757 3 % 212 Interest expense 497 468 (29 ) 1,318 1,489 171 Other expense 6 50 44 72 156 84 Income before income taxes 10,900 5,068 5,832 21,089 13,218 7,871 Income tax expense 2,986 1,615 (1,371 ) 6,058 3,692 (2,366 ) Net income 7,914 3,453 4,461 15,031 9,526 5,505 Less: Net income attributable to non-controlling interest 1,599 962 (637 ) 2,913 2,303 (610 ) Net income attributable to common stock 6,315 2,491 3,824 12,118 7,223 4,895 25 Table of Contents Three months ended October 31, 2025 vs. Three months ended October 31, 2024 Net sales: Net sales were $ 61.1 million and $ 41.6 million in the three months ended October 31, 2025 and 2024, respectively. The increase o f $19.5 million was a result of increased sales volumes in the Middle East and in North America. Gross profit: Gross profit was $21.0 million and $14.1 million in the three months ended October 31, 2025 and 2024, respectively. The increase of $6.9 million was driven primarily by increased volume of activity in the quarter. General and administrative expenses: General and administrative expenses were $8.3 million and $7.3 million in the three months ended October 31, 2025 and 2024, respectively. The increase of $1.0 million was mainly due to higher payroll expenses and, to a lesser extent, professional fees in the quarter. Selling expenses: Selling expenses were $ 1.3 million and $ 1.2 million in the three months ended October 31, 2025 and 2024, respectively. The increase of $ 0.1 million was due to higher payroll expense in the quarter. Interest expense: Net interest expense remained consistent and was $0.5 million in the three months ended October 31, 2025 and 2024, respectively. Income tax expense: The Company's ETR was 27% and 32% in the three months ended October 31, 2025 and 2024, respectively. The lower ETR for the three months ended October 31, 2025 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 $6.3 million and $2.5 million in the three months ended October 31, 2025 and 2024 , respectively. The increase of $3.8 million was mainly due to increased sales activity in the quarter, and better project execution. 26 Table of Contents Nine months ended October 31, 2025 vs. Nine months ended October 31, 2024 Net sales: Net sales were $155.8 million and $113.4 million in the nine months ended October 31, 2025 and 2024, respectively. The increase o f $42.4 million was a result of increased sales volumes in the Middle East and in North America. Gross profit: Gross profit was $52.2 million and $38.1 million in the nine months ended October 31, 2025 and 2024, respectively. The increase of $14.1 million was driven primarily by increased volume of activity. General and administrative expenses: General and administrative expenses were $26.1 million and $19.5 million in the nine months ended October 31, 2025 and 2024, respectively. The increase of $6.6 million was due to higher payroll expenses and professional fees. This includes a one-time charge of approximately $2.0 million due to an acceleration of certain executive compensation expense as a result of a departure from the organization. Selling expenses: Selling expenses remained consistent and were $3.5 million and $3.8 million in the nine months ended October 31, 2025 and 2024, respectively. The decrease of $0.3 million was primarily attributable to lower payroll expenses. Interest expense: Net interest expense was $1.3 million and $1.5 million in the nine months ended October 31, 2025 and 2024, respectively. The decrease of $0.2 million was the result of an overall reduction in interest rates during the current year. Income tax expense: The Company's ETR was 29% and 28% in the nine months ended October 31, 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 $12.1 million and $7.2 million in the nine months ended October 31, 2025 and 2024 , respectively. The increase of $4.9 million was mainly due to increased sales volumes and better project execution during the current year. 27 Table of Contents Liquidity and capital resources Cash and cash equivalents as of October 31, 2025 were $27.2 million compared to $15.7 million on January 31, 2025. On October 31, 2025, $0.3 million was held in the United States, and $26.9 million was held at the Company's foreign subsidiaries. The Company's working capital was $65.3 million on October 31, 2025 compared to $54.7 million on January 31, 2025. Of the working capital components, accounts receivable increased by $13.5 million and cash and cash equivalents increased by $11.5 million as the result of the movements discussed below. As of October 31, 2025, the Company ha d $3.3 million of borrowing capacity under the Renewed Senior Credit Facility in North America and $28.5 million of borrowing capacity under its foreign revolving credit agreements. The Company had $10.3 million borrowed under the Renewed Senior Credit Facility and $3.4 million borro wed under its foreign revolving credit agreements at October 31, 2025. Net cash provided by operating activities was $ 16.0 million and $7.9 million in the nine months ended October 31, 2025 and 2024 , respectively. The increase of $8.1 million was primarily attributable to net income, customer deposits, and changes in accounts payable and other assets and liabilities, partially offset by increases in accounts receivable, unbilled receivables, inventories, prepaid expenses and other current assets, and inventories. Net cash used in investing activities in the nine months ended October 31, 2025 and 2024 was $8.4 million and $1.6 million, respectively. The increase of $6.8 million was primarily due to increases in the amount of capital expenditures during the year. Net cash provided by financing activities in the nine months ended October 31, 2025 and 2024 was $ 4.1 million and $ 1.3 million, respectively. Debt totaled $ 29.9 million and $ 24.5 million as of October 31, 2025 and January 31, 2025 , respectively. See Note 10 - Debt, in the Notes to Consolidated Financial Statements for further discussion relating to this topic. As of October 31, 2025, Perma-Pipe had $27.2 million of cash and cash equivalents on hand and committed debt facility agreements with commercial banks aggregating $74.9 million, for which $31.8 million was available. The Company believes these amounts are sufficient to meet future business requirements for at least the next 12 months and beyond. Debt Debt consisted of the following: October 31, 2025 January 31, 2025 Revolving credit agreement - North America, due September 2026 $ 10,289 $ 6,765 Revolving credit agreements - United Arab Emirates, due November 2025 1,112 465 Revolving credit agreement - Saudi Arabia, due April 2026 2,042 1,545 Revolving credit agreement - Egypt, due November 2025 258 - Finance obligation - buildings and land, due April 2036 8,853 9,023 Mortgage payable, due December 2042 3,921 3,956 Loan payable to GIG 2,753 2,753 Finance leases 631 75 Less: debt issuance costs (115 ) (116 ) Total debt 29,744 24,466 Less: current maturities of long-term debt 17,083 9,246 Long-term debt, net of current maturities $ 12,661 $ 15,220 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 October 31, 2025, the Company had borrowed an aggregate of $10.3 million at a rate of 8.5% and had $3.3 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 October 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 all of 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 $0.3 million is recognized in current maturities of long-term debt and the long-term portion of $8.6 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of October 31, 2025 . The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term. 28 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 October 31, 2025) from a bank in the U.A.E. As of October 31, 2025, the facility has an interest rate of approximately 7.6% and expired in November 2025, of which, the Company does not intend to renew and extend this credit arrangement. The Company had no borrowings outstanding under this credit facility as of October 31, 2025, and $0.4 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. As of October 31, 2025, this revolving line has been cancelled and there is no further borrowing availability under this credit facility, and approximately $1.6 million of unused borrowing availability at January 31, 2025. The Company has a revolving line for 17.5 million U.A.E. Dirhams (approximately $ 4.8 million at October 31, 2025 ) from a bank in the U.A.E. As of October 31, 2025 , the facility has an interest rate of approximately 7.6% and expired in November 2025, of which, 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. The Company had borrowed an aggregate of $1.1 million as of October 31, 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. As of October 31, 2025 , approximately $1.9 million has been utilized in the form of a bank guarantee. The Company had unused borrowing availability of approximately $1.8 million and $2.5 million as of October 31, 2025 and January 31, 2025 , respectively. The Company has a revolving line for 47.7 million U.A.E. Dirhams (approximately $13.0 million at October 31, 2025) from a bank in the U.A.E. As of October 31, 2025, the facility has a minimum 8.0% interest rate and expires in December 2025, for which the Company intends to renew and extend this revolving credit facility. As of October 31, 2025 and January 31, 2025 , the Company had no borrowings outstanding with respect to this credit facility. As of October 31, 2025 approximately $6.8 million has been utilized in the form of a bank guarantee. The Company had unused borrowing availability of $6.2 million and $6.5 million as of October 31, 2025 and January 31, 2025, respectively. The Company has a guarantee for 48.6 million U.A.E. Dirhams (approximately $13.2 million at October 31, 2025) from a bank in the U.A.E. There is no interest rate on this facility, however, it earns a 1% commission. As of October 31, 2025, approximately $11.0 million has been utilized in the form of a bank guarantee, with $2.2 million of availability remaining. Additionally, in August 2025, a line of credit was added to the agreement for 51.4 million U.A.E Dirhams (approximately $14.0 million at October 31, 2025) which will incur an additional 0.8% commission. As of October 31, 2025, there were no borrowings outstanding with respect to this additional line of credit, and approximately $14.0 million of unused availability. 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 October 31, 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 October 31, 2025 , the facility has an interest rate of approximately 8.0% and expired in November 2025, of which, 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 October 31, 2025 and January 31, 2025, the Company had an immaterial amount outstanding with respect to this credit arrangement, which is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. Further, as of October 31, 2025 and January 31, 2025 , the Company had unused borrowing capacity of approximately $1.8 million and $2.0 million, respectively. 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 October 31, 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 expires in April 2026. As of October 31, 2025 , the facility has an interest rate of approximately 9.0%. The Company had borrowed an aggregate of $2.0 million and $1.5 million as of October 31, 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 October 31, 2025 and January 31, 2025 , was $2.5 million and $3.0 million, respectively. 29 Table of Contents 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 October 31, 2025 and January 31, 2025 , the amount of foreign subsidiary debt guaranteed by the Company was approxim ately $6.2 million and $4.8 million, respectively. 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 October 31, 2025. Although certain arrangements have expired or are set to expire 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 arrangements have continued without interruption or penalty. On October 31, 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 October 31, 2025, the Company's interest rates ranged from 7.6% to 20.8%, with a weighted average rate of 8.0%, and the Company had facility limits totaling $56.9 million under these credit arrangements. As of October 31, 2025 , $25.0 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 October 31, 2025 , the Company had borrow ed $6.2 million and had an additional $28.5 million of borrowing availability remaining 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 October 31, 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 on the Company's consolidated balance sheets as a component of current maturities of long-term debt at October 31, 2025, and as a component of long-term debt, net of current maturities at January 31, 2025. 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 October 31, 2025, the remaining balance on the mortgage in Canada is approximately CAD 5.5 million (approximately $ 3.9 million at October 31, 2025). The interest rate is variable, and was 6.6% at October 31, 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 October 31, 2025 and January 31, 2025. We assess going concern uncertainty on a quarterly basis to determine if we have sufficient cash and cash equivalents on hand, working capital and access to capital through financing agreements to operate for a period of at least a year from the date of our consolidated financial statements are issued (the look-forward period). Our ability to continue as a going concern is dependent on many factors, including, among other things, our ability to comply with the covenants in our debt agreements, our ability to cure any defaults that may occur under our debt agreements, or forbearances with respect to any such defaults, and our ability to pay, retire, amend, replace or refinance our indebtedness as principal payments come due. We can offer no assurances that we will be able to successfully obtain financing. A summary of our liquidity and relevant cash flows is presented above. We believe that our unrestricted cash, cash flows from operating activities and availability and commitments under existing financing agreements are sufficient to meet future business requirements for the look-forward period. 30 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 October 31, 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 current 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 nine months ended October 31, 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 October 31, 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. 31 Table of Contents