UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2014
2017
Commission File No. 0-18370
MFRI,Perma-Pipe International Holdings, Inc.
(Exact name of registrant as specified in its charter)charter)
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| Delaware | 36-3922969 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
7720 N. Lehigh6410 W. Howard Avenue, Niles, Illinois | 60714 |
| (Address of principal executive offices) | (Zip Code) |
(847) 966-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Name of each exchange on which registered |
| Common Stock, $.01 per share | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (the exclusion of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant) was $67,524,506$49,044,548 based on the closing sale price of $10.84$7.65 per share as reported on the NASDAQ Global Market on July 31, 2013.2016.
The number of shares of the registrant's common stock outstanding at April 7, 20142017 was 7,173,037.7,615,954.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 20142017 Annual Meeting of Stockholders are incorporated by reference in Part III.
MFRI,Perma-Pipe International Holdings, Inc.
FORM 10-K
For the fiscal period ended January 31, 20142017
TABLE OF CONTENTS
| | | Item | | Page | | Page |
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| 1. | | 1 | | 1 |
| | | 1 | | 2 |
| | | 3 | Filtration Products | 4 |
| | | 4 | | 4 |
| | | 4 | | 4 |
| | | 5 | | 5 |
| 1A. | | 5 | | 5 |
| 1B. | | 8 | | 9 |
| 2. | | 8 | | 9 |
| 3. | | 8 | | 9 |
| 4. | | 9 | | 9 |
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| 5. | | 9 | | 9 |
| 6. | | 10 | | 11 |
| 7. | | 10 | | 11 |
| 7A. | | 17 | | 18 |
| 8. | | 17 | | 18 |
| 9. | | 17 | | 18 |
| 9A. | | 17 | | 18 |
| 9B. | | 18 | | 19 |
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| 10. | Directors, Executive Officers and Corporate Governance | 18 | Directors, Executive Officers and Corporate Governance | 19 |
| 11. | Executive Compensation | 18 | Executive Compensation | 19 |
| 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 18 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 19 |
| 13. | Certain Relationships and Related Transactions and Director Independence | 18 | Certain Relationships and Related Transactions, and Director Independence | 19 |
| 14. | Principal Accounting Fees and Services | 18 | Principal Accounting Fees and Services | 19 |
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| 15. | | 19 | | 20 |
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| | 20 | | 21 |
| | 52 | | 52 |
PART I
Forward Looking Statements
Statements in this Annual Report on Form 10-K that are not historical facts, so-called "forward-looking statements," are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in MFRI'sPerma-Pipe International Holdings, Inc.'s filings with the Securities and Exchange Commission ("SEC"). See "Risk Factors" in Item 1A.
Available Information
The Company files with and furnishes to the SEC, reports including annual meeting materials, Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as amendments thereto. The Company maintains a website, www.mfri.comwww.permapipe.com, where these reports and related materials are available free of charge as soon as reasonably practicable after the Company electronically delivers such material to the SEC. The information on the Company's website is not part of this Annual Report on Form 10-K and is not incorporated into this or any other filings by the Company with the SEC.
Item 1. BUSINESS
MFRI,As of January31, 2017, Perma-Pipe International Holdings, Inc., collectively with its subsidiaries ("MFRI"PPIH", "Company" or "Registrant"), is engaged in the manufacture and sale of products in twoone reportable segments:segment: Piping SystemsSystems. In February 2017, the Company announced that the board of directors had authorized Company management to move forward with the re-naming and Filtration Products.re-branding of MFRI, Inc. under the Perma-Pipe name now that the Company operates in a single business segment under the Perma-Pipe brand, and the Company believes this decision will better serve its strategy, position it well in the industry and global market,and better reflect the Company’s mission and strategy, and positions it to leverage the strong reputation Perma-Pipe has established since beginning operations. The name change to Perma-Pipe International Holdings, Inc. was effective March 20, 2017. The Company's common stock has been and will continue to be reported under its new ticker symbol “PPIH” since March 21, 2017. Outstanding stock certificates are not affected by the symbol change and will not need to be exchanged. The Company's fiscal year ends on January 31. Years and balances described as 20132016 and 20122015 are the fiscal years ended January 31, 20142017 and 20132016, respectively.
On January 29, 2016, the Company sold certain assets and liabilities of its TDC Filter business based in Bolingbrook, Illinois to the Industrial Air division of CLARCOR, Inc. On January 29, 2016, the Company also sold its Nordic Air Filtration, Denmark and Nordic Air Filtration, Middle East businesses to Hengst Holding GmbH. The aggregated sales price of these filtration businesses was $22.0 million, including cash proceeds of $18.4 million, of which $0.5 million is held in escrow until July 2017. In 2016, the Company sold the remaining assets of the facilities for $3.7 million in cash after expenses and mortgage payoffs.
In addition to paying down debt, the sale of the filtration business gave the Company the opportunity to focus resources on new Piping Systems growth opportunities such as the recent acquisition of 100% ownership of Perma-Pipe Canada, Ltd. ("PPC"), respectively. which the Company believes creates a strong platform to diversify and expand Perma-Pipe Inc.’s ("Perma-Pipe") business into new markets and geographies.
In connection with its strategic repositioning, the year ended Company has reorganized the Company’s corporate staff and reducing expenses to reflect its new strategic focus and structure. Changes to several senior executive positions went into effect in the fourth quarter of 2016, as previously disclosed. The Company believes these changes may yield annualized savings of approximately $1.2 million.
On January 31, 2014,2017, no one customer accounted for 10.6%more than 10% of the Company's net sales. On January 31, 2016, one customer accounted for 10.3% of the Company's net sales.
MFRI,
Two customers accounted for 33.2% of accounts receivable on January 31, 2017, and two customers accounted for 46.5% of accounts receivable at January 31, 2016. As of April 1, 2017, these customers have paid 35.4% of their receivables outstanding on January 31, 2017.
Perma-Pipe International Holdings, Inc.'s Operating Units
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Piping Systems | Filtration Products |
| Perma-Pipe, Inc. | Midwesco Filter Resources, Inc. |
| Niles, IL | Winchester, VA |
| New Iberia, LA | TDC Filter Manufacturing, Inc. |
| Lebanon, TN | Bolingbrook, IL |
| Perma-Pipe Middle East FZC | Nordic Air Filtration A/S |
Fujarah,Fujairah, United Arab Emirates | Nakskov, Denmark |
| Perma-Pipe Saudi Arabia, LLC | |
| Dammam, Kingdom of Saudi Arabia | |
| Perma-Pipe Canada, Ltd. | |
| Camrose, Alberta, Canada | |
| Perma-Pipe India Pvt. Ltd | |
Gandidham,Gandhidham, India | |
Bayou Perma-Pipe Canada, Ltd. | |
Alberta, Canada | |
All operating units shown are, directly or indirectly, wholly owned by MFRI except Bayou Perma-Pipe Canada, Ltd., which isPPIH. PPC was owned 49% by MFRIPPIH and 51% by an unrelated party.party until February 4, 2016 when PPIH purchased the remaining shares and became the sole owner.
Piping Systems
Products and services. The Company engineers, designs, manufactures and sells specialty piping and leak detection and location systems. Piping Systems include (i) industrial and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, (ii) insulated and jacketed piping systems for district heating and cooling ("DHC") piping systems, Municipal Freeze Protection, Oil & Gas, Mining and Industrial applications, (iii) insulation for efficient energy distribution to multiple locations from central energy plants,
(iii) subsea oil and gas gathering flowflowlines and equipment, (iv) above and below ground long lines for oil and mineral transportation.transportation and (v) anti-corrosion coatings for oil and gas distribution and gathering pipelines. The leak detection and location systems are sold with some of its piping systems and also on a stand-alone basis to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property.
Piping Systems frequently engineers and custom fabricates to job site dimensions and incorporates provisions for thermal expansion due to varying temperatures. This custom fabrication helps to minimize the amount of field labor required by the installation contractor. Most of the piping systems are produced for underground installations and, therefore, require trenching, which is the responsibility of the general contractor, and done by unaffiliated installation contractors.
The Piping Systems segment is based on large discrete projects, and domestic Piping Systems is seasonal. See "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") - Piping Systems."
Recent developments. In February 2017, the Company announced that a Perma-Pipe subsidiary has formed a consortium with Danish company LOGSTOR, A/S to bid the East Africa Crude Oil Pipeline ("EACOP") project. This consortium joins the leading pre-insulated piping manufacturers in North America and Europe to take advantage of their combined fabrication, engineering and material science expertise.
The EACOP project is a 1450 Km (900 mile) long heavy crude oil pipeline from the Lake Albert Basin in Uganda to the Tanga port in Tanzania being developed by French oil company Total E&P, China National Offshore Oil
Corporation (CNOOC) and London-based Tullow Oil. The pipeline is 24 inches in diameter, and is electrically heat traced. It will be the longest insulated and heat traced pipeline in the world. There can be no assurance that the Company will be successful in its bid for this project, or the terms of any such potential engagement.
Customers. The customer base is industrially and geographically diverse. In the United States of America ("U.S."), the Company employs national and regional sales managers who use and assist a network of independent manufacturers' representatives, none of whom sells products that are competitive with the Company's Piping Systems. Globally, theThe Company employs a direct sales force as well as an exclusive agent network in Canada, the U.S. and for several countries in the Middle and Far East to market and sell products and services.
Intellectual property. The Company owns several patents covering its piping and electronic leak detection systems. The patents are not material either individually or in the aggregate overall, because the Company believes sales would not be materially reduced if patent protection were not available. The Company owns numerous trademarks connected with its piping and leak detection systems including the following U.S. trademarks: Perma-Pipe®, Chil-Gard®, Double Quik®, Escon-A®, FluidWatch®, Galva-Gard®, Polytherm®, Pal-AT®, Stereo-Heat®, LiquidWatch®, PalCom®, Xtru-therm®, Auto-Therm®, Pex-Gard®, Multi-Therm®, Ultra-Therm®, Cryo-Gard™Cryo-Gard®, Sleeve-Gard®, Electro-Gard® and Sulphur-Therm™Sulphur-Therm®. The Company also owns a number of trademarks throughout the world. Some of the Company's more significant trademarks include: Auto-Therm™Auto-Therm®, Cryo-Gard™Cryo-Gard®, Electro-Gard™Electro-Gard®, Sleeve-Gard®, Permalert®, Pal-AT®, Permalert™, Perma-Pipe®, Polytherm®, Ric-Wil®, Sleeve-Gard™ and Xtru-therm®.
Raw materials. Basic raw materials used in production are pipes and tubes made of carbon steel, alloy, copper, ductile iron, plastics and various chemicals such as polyols, isocyanate, urethane resin, polyethylene and fiberglass, mostly purchased in bulk quantities. The Company believes there are currently adequate supplies and sources of availability of these needed raw materials.
The sensor cables used in the leak detection and location systems are manufactured to the Company's specifications by companies regularly engaged in manufacturing such cables. The Company owns patents for some of the features of its sensor cables. The Company assembles the monitoring component of the leak detection and location systems from components purchased from many sources.
Competition. Piping Systems is highly competitive, and the Company believes its principal competition consists of between ten and twenty major competitors and more small competitors. The Company believes quality, service, engineering design and support, a comprehensive product line and price are key competitive factors. The Company also believes it has a more comprehensive line for DHC than any competitor. Some competitors have greater financial resources and cost advantages as a result of manufacturing a limited range of products.
Government regulation. The demand for the Company's leak detection and location systems and secondary containment piping systems, a small percentage of the total annual piping sales, is driven by federal and state environmental regulation with respect to hazardous waste. The Federal Resource Conservation and Recovery Act requires, in some cases, that the storage, handling and transportation of fluids through underground pipelines feature secondary containment and leak detection. The National Emission Standard for hydrocarbon airborne particulates requires reduction of airborne volatile organic compounds and fugitive emissions. Under this regulation, many major refineries are required to recover fugitive vapors and dispose of the recovered material in a process sewer system, which then becomes a hazardous secondary waste system that must be contained. Although there can be no
assurances as to the ultimate effects of these governmental regulations, the Company believes such regulations may increase the demand for its Piping Systems products.
Filtration Products
Products and services. ThePrior to January 29, 2016, the Company manufacturesmanufactured and sellssold a wide variety of filter elements for cartridge collectors and baghouse air filtration and particulate collection systems. The principal types of industrial air filtration and particulate collection systems in use are baghouses, cartridge collectors, electrostatic precipitators, scrubbers and mechanical collectors. This equipment iswas used to eliminate particulates from the air by passing particulate laden gases through fabric filters (filter bags) or pleated media filter elements, in the case of baghouses or cartridge collectors, between electrically charged collector plates, in the case of electrostatic precipitators and contact with liquid reagents (scrubbers).collectors. The Company manufacturesmanufactured filter elements in standard industry sizes, shapes and filtration media and to custom specifications, maintaining manufacturing standards for more than 10,000 styles of filter elements to suit substantially all industrial applications. Filter elements arewere manufactured from industrial yarn, fabric and paper purchased in bulk. Most filter elements arewere produced from cellulose, acrylic, fiberglass, polyester, aramid, laminated membranes, or polypropylene fibers. The Company also manufactures filter elements from more specialized materials, sometimes using special finishes.
The Company marketsmarketed numerous filter related products and accessories used during the installation, operation and maintenance of cartridge collectors and baghouses, including wire cages used to support filter bags, spring assemblies for proper tensioning of filter bags and clamps and hanger assemblies for attaching filter elements. In addition, the Company marketsmarketed hardware items used in the operation and maintenance of cartridge collectors and baghouses. The Company also providesprovided maintenance services, consisting primarily of air filtration system inspection and filter element replacement, using a network of independent contractors.
Over the past three years, Filtration Products supplied filter elements to more than 4,000 user locations. The Company has particular expertise in supplying filter bags for use with electric arc furnaces in the steel industry. The Company believes its production capacity and quality control procedures make it a leading supplier of filter bags to large users in the electric power industry. Orders from the electric power industry tend to be substantial in size, but are usually at lower margins than other industries.
Customers. The customer base iswas industrially and geographically diverse. These products and services arewere used primarily by operators of utility and industrial coal-fired boilers, incinerators and cogeneration plants and by producers of metals, cement, chemicals and other industrial products.
Filtration Products have an integrated sales program, which consists of field-based sales personnel, manufacturers' representatives, a telemarketing operation and computer-based customer information systems. The Company believes the computer-based information systems are instrumental in increasing sales of filter-related products and accessories and maintenance services, as well as sales of filter elements. Filtration Products arewere marketed domestically under the names Midwesco Filter and TDC Filter Manufacturing.
The Company markets its U.S. manufactured Filtration Products internationally using domestically based sales resources to target major users in foreign countries. The Denmark filtration facility marketsmarketed pleated filter elements under the name Nordic Filtration throughout Europe, Asia and the Middle East, primarily to original equipment manufacturers.
Intellectual property. The Company owns the following trademarks covering Filtration Products: Seamless Tube®, Leak Seeker®, Prekote®, We Take the Dust Out of Industry®, Pleatkeeper®, Pleat Plus® and EFC®. The trademarks are not material either individually or in the aggregate overall because the Company believes sales would not be materially reduced if trademark protection were not available.
Raw materials. The basic raw materials used are industrial fibers and media supplied by leading producers of such materials. The majority of raw materials purchased are woven fiberglass fabric, yarns for manufacturing Seamless Tube® products and other woven, felted, spun bond, laminated membranes and cellulose media. Only a limited
number of suppliers are available for some of these materials. The Company believes supplies of all materials are adequate to meet current demand.
Competition. The filtration products industry is highly competitive. In addition, new installations of cartridge collectors and baghouses are subject to competition from alternative technologies including electrostatic precipitators, scrubbers and mechanical collectors described above under Products and Services. The Company believes, based on domestic sales, that its chief competitors consist of approximately five major and at least 50 smaller businesses, most of which are doing business on a regional or local basis. In Europe, several companies supply filtration products and the Company is a relatively small participant in that market. Some of the Company's competitors have greater financial resources than the Company.
The Company believes quality, service and price are the most important competitive factors in filtration products. Often, a manufacturer has a competitive advantage when its products have performed successfully for a particular customer in the past. Additional effort is required by a competitor to market products to such a customer. In certain applications, the Company believes its proprietary Seamless Tube® product and customer support provide the Company with a competitive advantage. Some competitors may have a competitive advantage with respect to their own proprietary products and processes, such as specialized fabrics and fabric finishes. In addition, some competitors may have cost advantages with respect to products as a result of lower wage rates and/or greater vertical integration.
Government regulation. The sale of filtration products is influenced by governmental regulation of air pollution at the federal and state levels. The regulatory standards are implemented by each state individually. Emission standards are continually becoming more stringent and this drives the requirements for product performance. End users' success in securing delay in implementing required regulation reduces demand for fabric products.
Employees
As of February 28, 2014January 31, 2017, the Company had 1,013 full-time710 employees, of whom 55%72% worked outside the U.S.
International
The Company's international operations as of January 31, 20142017 include subsidiaries and a joint venture in fivefour foreign countries on threetwo continents. The Company's international operations contributed approximately 49.6%55.1% of revenue in 20132016 and 24.1%48.4% of revenue in 2012.2015.
Refer to the Business descriptions on pages 1 through 4 above and Note 1 - Business and segment information in the Notes to Consolidated Financial Statements for additional information on international activities. International operations are subject to risks inherent in conducting business in foreign countries, including price controls, exchange controls, limitations on participation in local enterprises, nationalization, expropriation and other governmental action, and changes in currency exchange rates.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive officers of the Company as of April 1, 2014:2017:
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| Name | Offices and positions, if any, held with the Company; age | Executive officer of the Company or its predecessor since |
Bradley E. MautnerDavid J. Mansfield | Director, President and Chief Executive Officer; Age 5856 | 19942016 |
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| Karl J. Schmidt | Vice President and Chief Financial Officer; Age 6063 | 2013 |
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| Wayne Bosch | Vice President, Chief Human Resources Officer; Age 5760 | 2013 |
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Fati A. Elgendy | President and Chief Operating Officer, Perma-Pipe; Age 65 | 1990 |
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Stephen C. Buck | President, Midwesco Filter; Age 65 | 2007 |
All of the executive officers serve at the discretion of the Board of Directors.
Bradley E. MautnerDavid J. Mansfield, President and Chief Executive Officer, ("CEO"), since February 2013. President since December 2004;November 2016. From 2015 to 2016, Mr. Mansfield served as Chief OperatingFinancial Officer, from December 2004("CFO"), of Compressor Engineering Corp. & CECO Pipeline Services Co., which provides products and services to January 2013; Executivethe gas transmission, midstream, gas processing, and petrochemical industries. In this position, he had overall responsibility for the group’s financial affairs, including the development and execution of turnaround plans and the successful negotiation of a corporate refinancing. From 2009 to 2014, Mr. Mansfield served as CFO and as Acting CEO of Pipestream, Inc. a venture capital-owned technology development company providing a suite of products to the oil and gas pipeline industry. From 1992 to 2009, Mr. Mansfield was employed with Bredero Shaw, the world’s largest provider of protective coatings for the oil and gas pipeline industry, most recently as Vice President from December 2002 to December 2004;Strategic Planning. During his tenure with Bredero Shaw, Mr. Mansfield served in numerous roles including Vice President Controller and Commercial General manager, Europe, Africa & FSU, and played a key role in strategy development and merger and acquisition activities as the company grew from December 1996 through December 2002; Director since 1994.annual revenues of $100 million to over $900 million.
Karl J. Schmidt, Appointed Vice President and Chief Financial OfficerCFO in January 2013. From 2010 to 2012, Mr. Schmidt served as the Chief Financial OfficerCFO of Atkore International (previously Tyco Electrical and Metal Products), a manufacturer of steel pipe and tube products, electrical conduits, cable, and cable management systems. From 2002 to 2009, Mr. Schmidt served as the Executive Vice President and Chief Financial OfficerCFO of Sauer-Danfoss, Inc., a global manufacturer of hydraulic, electrical, and electronic components and solutions for off-road vehicles. In this role he had global responsibility for the accounting and finance, treasury, IT and legal functions of the company, which was listed at the New York Stock Exchange.
Wayne Bosch, Appointed Vice President and Chief Human Resources Officer in December 2013. From 2010 to 2012, Mr. Bosch was Vice President of Human Resources at Pactiv, a $4 billion global manufacturer and distributor of food packaging products. Prior to Pactiv, he leadled the human resource activities at the North American segment of Barilla America, a $6.3 billion global pasta, sauces and bakery manufacturer and was the Chief Human Resources Officer for water filtration leader Culligan International. Mr. Bosch's background spans the entire spectrum of human resources competencies, including mergers and acquisition and business integration, in start-up, turnaround and high-growth businesses. His scope also includes communications, legal, occupational health services, health safety environment, risk management, payroll, facilities and general administrative services.
Fati A. Elgendy, President and Chief Operating Officer of Perma-Pipe since March 1995.
Stephen C. Buck, President of Midwesco Filter since May 2013. Presidentof Thermal Care, a subsidiary of the Company whose assets were sold in April 2013, from October 2007 to April 2013.
Item 1A. RISK FACTORS
The Company's business, financial condition, results of operations and cash flows are subject to various risks, including, but not limited to, those set forth below, which could cause actual results to vary materially from recent results or from anticipated future results. These risk factors should be considered together with information included elsewhere in this Annual Report on Form 10-K.
Economic factors. If the economy experienced a severe and prolonged downturn, it could adversely impact all of the Company's businesses, directly or indirectly. Downturns in such general economic conditions can significantly affect the business of our customers, which in turn affects demand, volume, pricing, and operating margin for our services and products. A downturn in one or more of our significant markets could have a material adverse effect on the Company's business, results of operations or financial condition. Because economic and market conditions
vary within the Company's segments,segment, the Company's performance by segment will also vary. In addition, the Company is exposed to fluctuations in currency exchange rates and commodity prices. Failure to successfully manage any of these risks could have an adverse impact on the Company's financial position, results of operations and cash flow.
Project Cycles.cycles. As theSince Piping Systems segment is based on large discrete projects, operating results could be negatively impacted in the future as a result of large swings in variations in levelsthe level of production.market demand in both geographies and reporting periods.
Customer access to capital funds. Uncertainty about current economic market conditions poses risks that the Company's customers may postpone spending for capital improvement and maintenance projects in response to tighter credit markets or negative financial news, which could have a material negative effect on the demand for the Company's products. The continuing decrease in federal and state spending on projects using the Company's products has significantly decelerated government funded construction activity in the U.S., negatively impacting sales volume at the Company's domestic facilities.
Changes in billing terms can increase exposure to working capital and credit risk. The Company sells systems and products under contracts that allow the Company to either bill upon the completion of certain agreed upon milestones, or upon actual shipment of the system or product. The Company attempts to negotiate progress-billing milestones on large contracts to help manage working capital and to reduce the credit risk associated with these large contracts. Consequently, shifts in the billing terms of the contracts in the backlog from period to period can increase the requirement for working capital and can increase exposure to credit risk.
Crude oil and natural gas prices are volatile, and the substantial and extended decline in commodity prices has had, and may continue to have, a material and adverse effect on demand and pricing in the Company's business. Prices for crude oil and natural gas fluctuate widely. Among the factors that can or could cause these price fluctuations are:
• the level of consumer demand;
• domestic and worldwide supplies of crude oil and natural gas;
• domestic and international drilling activity;
• the actions of other crude oil exporting nations and the Organization of Petroleum Exporting Countries;
• worldwide economic and political conditions, including political instability or armed conflict in oil and gas producing regions; and
• the price and availability of, and demand for, competing energy sources, including alternative energy sources.
Beginning in the fourth quarter of 2014 and continuing through 2015 and into 2016, crude oil prices have substantially declined and remained depressed relative to historical pricing levels. In addition, natural gas prices began to decline substantially in the second quarter of 2014, and such declines continued during 2015 and into 2016. The above described factors and the volatility of commodity prices make it difficult to predict future crude oil and natural gas prices. As a result, the Company cannot predict how long these lower prices will continue, and there can be no assurance that the prices for crude oil and natural gas will not decline further. Additionally, the
decline in oil prices has had budgetary impact on the governments of key Gulf Cooperation Council ("GCC") countries, delaying or canceling major planned infrastructure projects unrelated to oil and gas production. It is impossible to predict when and in what volume these planned projects will be implemented. The GCC is a political and economic alliance of six Middle Eastern countries—Saudi Arabia, Kuwait, the United Arab Emirates ("U.A.E."), Qatar, Bahrain, and Oman. Now that the Company's focus is only on Piping Systems, the Company is more concentrated, and these risk factors could potentially have a greater effect on the Company.
Risks related to international business. International sales represent a significant and increasing portion of the Company's total sales. During 2013,2016, the Company's international sales increased from 24.1%48.4% to 49.6% and includes sales to one customer for 10.6%55.1%. The Company anticipatesCompany's anticipated growth and profitability may involverequire maintaining current international sales volume and may involvenecessitate further international expansion. The Company's financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non U.S. governments, agencies and similar organizations. These conditions include, but are not limited to, changes in a country's or region's economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced international sales and reduced profitability associated with such sales.
Government regulation. Demand for In addition these risks can include extraordinarily delayed collections of accounts receivable. Because the Company's leak detection and location and secondary containment piping systems is driven by government regulation with respect to hazardous waste. Laws such as the Federal Resource Conservation and Recovery Act and standards such as the National Emission Standard for Hydrocarbon Airborne Particulates have increased the demand for the Company's leak detection and location and secondary containment piping systems. Filtration products, toCompany conducts a large extent, are dependent on governmental regulationsignificant portion of air pollution at the federal and state levels. The Company believes that continuing growthits business activities in the saleMiddle East, the political and economic events of filtration products and services will be materially dependentthe countries that comprise the GCC can have a material effect on continuing enforcement of environmental laws such as the Clean Air Act. Although changes in such environmental regulations could significantly alter the demand for the Company's products and services, the Company does not believe such a change is likely to decrease demand in the foreseeable future.Company’s business.
Financing. If there were an event of default under the Company's current revolving credit facilities, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. The Company cannot assure that the assets or cash flow would be sufficient to fully repay amounts due under any of the financing arrangements, if accelerated upon an event of default, or, that the Company would be able to repay, refinance or restructure the payments under any such arrangements. Complying with the covenants under the Company's domestic and/or foreign revolving credit facilityfacilities may limit management's discretion by restricting options such as:
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| · | incurring additional debt; |
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| · | entering into transactions with affiliates; |
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| · | making investments or other restricted payments; |
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| · | payingrepurchase of Company's shares; |
| |
| · | payment of dividends, or makingcapital returns, repayment of intercompany obligations and other distributions;forms of repatriation; and |
Expiring credit agreements may not renew at similar capacity or similar terms. Future foreign credit agreements may further limit the ability to repatriate funds from abroad. Repatriation of funds from certain countries may become limited based on regulatory restrictions or economically unfeasible because of the taxation of funds when moved to another subsidiary or to the parent company.
Any additional financing the Company may obtain could contain similar or more restrictive covenants. The Company's ability to comply with any covenants may be adversely affected by general economic conditions, political decisions, industry conditions and other events beyond management's control.
Competition. The businessesbusiness in which the Company is engaged areis highly competitive. Many of the competitors are larger and have more resources.resources than the Company. Additionally, many of the Company's products are also subject to competition from alternative technologies and alternative products. In periods of declining demand, the Company's fixed cost structure may limit ability to cut costs, which may be a competitive disadvantage compared to firms with lower cost structures, or may result in reduced operating margins and operating losses.
Suppliers.To the extent the Company relies upon a single source for key components of several of its products, the Company believes there are alternate sources available for such components; however, there can be no assurance that the interruption of supplies of such components would not have an adverse effect on the financial condition of
the Company and that the Company, if required to do so, would be able to negotiate agreements with alternative sources on acceptable terms.
Backlog. The Company defines backlog as the revenue value in dollars resulting from confirmed customer purchase orders that have not yet been recognized as revenue. However, by industry practice, orders may be canceled or modified at any time. If a customer cancels an order, the customer is normally responsible for all finished goods, all direct and indirect costs incurred and also for a reasonable allowance for anticipated profits. No assurance can be given that these amounts will be recovered after cancellation. Any cancellation or delay in orders may result in lower than expected revenue.
Attracting and retaining senior management and key personnel. The Company's ability to meet strategic and financial goals will depend to a significant extent on the continued contributions of senior management. Future success will also depend in large part on the ability to identify, attract, motivate, effectively utilize and retain highly qualified managerial, sales, and marketing and technical personnel. The loss of senior management or other key personnel or the inability to identify, attract and retain qualified personnel in the future could make it more difficult to manage the business and could adversely affect operations and financial results.
Rapid growth of business. Expansion may result in unanticipated adverse consequences, including significant strain on management, operations and financial systems as well as on the Company's ability to attract and retain competent employees. In the future, the Company may seek to grow the business by investing in new or existing facilities, making acquisitions, entering into partnerships and joint ventures, or constructing new facilities, which could entail a number of additional risks, including:
strain on working capital;
diversion of management from other activities, which could impair the operation of existing businesses;
failure to successfully integrate the acquired businesses or facilities into existing operations;
inability to maintain key pre-acquisition business relationships;
loss of key personnel of the acquired business or facility;
exposure to unanticipated liabilities; and
failure to realize efficiencies, synergies and cost savings.
As a result of these and other factors, including the general economic risk, the Company may not be able to realize the expected benefits from any recent or future acquisitions, new facility developments, partnerships, joint ventures or other investments.
Percentage-of-completion revenue recognition. All divisions recognize revenues under the stated revenue recognition policy except for sizable domestic complex contracts that require periodic recognition of income. For these contracts, the Company uses the "percentage of completion" accounting methodmethod. This methodology allows revenue and profits to be recognized proportionally over the life of a contract by comparing the amount of the cost incurred to date against the total amount of cost expected to be incurred. The effect of revisions to revenue and total estimated cost is recorded when the amounts are known andor can be reasonably estimated. These revisions can occur at any time and could be material. On a historical basis, management believes that reasonably reliable estimates of the progress towards completion on long-term contracts have been made. However, given the uncertainties associated with these types of contracts, it is possible for actual cost to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits.
Income Taxes. Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates. The Company is a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of earnings for the current fiscal year were earned by foreign subsidiaries. In addition to providing for U.S. income taxes on earnings from the U.S., the Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S. If certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
Regulatory and legal requirements. As a public company, the Company is required to comply with the reporting obligations of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Keeping informed of and in compliance with, changing laws, regulations and standards relating to corporate governance, public disclosure and accounting standards, including the Sarbanes-Oxley Act, Dodd-Frank Act, as well as new and proposed SEC regulations and accounting standards, has required an increased amount of management attention and external resources. Compliance with such requirements may resulthas resulted in increased general and administrative expenses and an increased allocation of management time and attention to compliance activities.
Effective internal control over financial reporting. As a public reporting company, the Company is continually developing, establishing, and maintaining internal controls and procedures. Management is required to report on internal controls over financial reporting under Section 404 Sarbanes-Oxley Act of 2002. If the Company fails to achieve and maintain adequate internal controls, management would not be able to conclude on an ongoing basis that the Company has effective internal controls over financial reporting in accordance with Section 404. If material weaknesses are identified in the future, the reported financial results of the Company could be materially misstated or could subsequently require restatement, which would require additional financial and management resources, and the market price of our stock could decline.
Item 1B. UNRESOLVED STAFF COMMENTS - None.
Item 2. PROPERTIES Principal properties at January 31, 2014:
Piping Systems2017:
|
| | |
| Illinois | OwnedLeased production facilities and office space | 16,80031,650 square feet |
| Louisiana | Owned production facilities and leased land | 30,000 square feet on approximately 87 acres |
| Tennessee | Owned production facilities and office space | 131,800 square feet on approximately 23.5 acres |
| Canada | Joint venture ownedOwned production facilities, office space and leased land and office space | 87,160102,980 square feet on approximately 128138 acres |
| India | Leased production facilities, office space and land | 33,700 square feet on approximately 4.51.2 acres |
| Kingdom of Saudi Arabia | Owned production facilities on leased land | 91,00089,000 square feet on approximately 2111 acres |
| United Arab Emirates | Leased office space and production facilities on leased land | 156,800186,400 square feet on approximately 2416 acres |
Filtration Products
|
| | |
Illinois | Bolingbrook - owned production facilities and office space | 101,500 square feet on 5.5 acres |
| Cicero - owned production facilities and office space, currently idle | 130,700 square feet on 2.8 acres |
Virginia | Owned production facilities | 97,500 square feet on 5.0 acres |
| Leased office space | 6,000 square feet |
Denmark | Owned production facilities and office space | 69,800 square feet on 3.5 acres |
The Company's principal executive offices, which occupy approximately 23,400 square feet of space in Niles, Illinois, are owned by the Company. The Company believes its properties and equipment are well maintained and in good operating condition and that productive capacities will be adequate for present and currently anticipated needs.
The Company has several significant operating lease agreements as follows:
Office Space of approximately 31,650 square feet in Niles, IL is leased until October, 2023.
Nine acres of land in the Kingdom of Saudi Arabia is leased through 2030 and an additional ten acres of land is leased through 2031.2030.
Land for productionProduction facilities in the United Arab Emirates, ("U.A.E.") of approximately 80,200 square feet on approximately 107,600 square feet of land is leased until June, 30, 2030.
Office space of approximately 21,500 square feet and open land for production facilities of approximately 37,700423,000 square feet in the U.A.E. is leased until July, 2032.
Office spaceProduction facilities in the U.A.E. of approximately 6,00078,100 square feet in Virginia is leased through August 31, 2015.until December, 2032.
For further information, see Note 78 - Lease information, in the Notes to Consolidated Financial Statements.Statements.
Item 3. LEGAL PROCEEDINGS - The Company had no material pending litigation.
Item 4. MINE SAFETY DISCLOSURES - Not applicable.
PART II
| |
| Item 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company's fiscal year ends on January 31. Years and balances described as 20132016 and 20122015 are the fiscal years ended January 31, 20142017 and 20132016, respectively.
TheAs of March 21, 2017, the Company's Common Stock is traded on the Nasdaq Global Market under the symbol "PPIH". Previously the Company's Common Stock was traded on the Nasdaq Global Market under the symbol "MFRI".
The following table sets forth, for the periods indicated, the high and low Common Stock sale prices as reported by the Nasdaq Global Market for 20132016 and 20122015.
| | | | High |
| Low |
| High |
| Low |
|
| Fiscal 2013 | | |
| Fiscal 2016 | | |
| Fourth Quarter | | $9.23 | $7.65 |
| Third Quarter | | 8.15 |
| 7.42 |
|
| Second Quarter | | 7.90 |
| 6.70 |
|
| First Quarter | $7.55 | $6.02 | 7.74 |
| 6.98 |
|
| Fiscal 2015 | | |
| Fourth Quarter | | 6.88 |
| 5.17 |
|
| Third Quarter | | 5.68 |
| 4.52 |
|
| Second Quarter | 11.39 |
| 6.99 |
| 6.40 |
| 5.56 |
|
| Third Quarter | 12.08 |
| 9.87 |
| |
| Fourth Quarter | 16.45 |
| 11.19 |
| |
| Fiscal 2012 | | |
| First Quarter | 8.14 |
| 7.00 |
| 6.83 |
| 5.60 |
|
| Second Quarter | 7.38 |
| 6.75 |
| |
| Third Quarter | 7.00 |
| 5.34 |
| |
| Fourth Quarter | 6.14 |
| 4.82 |
| |
As of March 17, 2014,April 1, 2017, there were 6569 stockholders of record and other additional stockholders for whom securities firms acted as nominees.
The Company has never declared or paid a cash dividend and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Management presently intends to retain all available funds for the development of the business and for use as working capital. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other relevant factors. The Company's line of credit agreement does not permit the payment of dividends. For further information, see "Financing" in Item 7 and Note 67 - Debt, in the Notes to Consolidated Financial Statements.
Neither the Company nor any "affiliated purchaser" as defined in Rule 10b-18 purchased any shares of the Company's Common Stock during the period covered by this report. The Company has not made any sale of unregistered securities during the preceding three years.
The Transfer Agent and Registrar for the Common Shares is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004, (212) 509-4000.Broadridge Corporate Issuer Solutions, Inc., P.O. Box 1342 Brentwood, NY 11717, (877) 830-4936 or (720) 378-5591.
Equity Compensation Plan Information
The following table provides information regarding the number of shares of Common Stock that may be issued upon exercise of outstanding options, warrants and rights under the Company's equity compensation plans and the weighted average exercise price and number of shares of Common Stock remaining available for issuance under those plans as of January 31, 20142017.
| | | | Number of shares to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) | Number of shares to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) |
| Plan Category | (a)(1) | (b)(1) | (c) | (a)(1) | (b)(1) | (c) |
| Equity compensation plans approved by stockholders | 775,775 | $11.69 | 805,821 | 524,200 | $11.55 | 96,857 |
(1) The amounts shown in columns (a) and (b) of the above table do not include 28,891290,305 outstanding deferredrestricted stock units granted under the Company's Deferred Stock Purchase Plan and the 2013 Omnibus Stock Incentive Plan as amended June 14, 2013 ("Omnibus Plan").
On June 20, 2013, the stockholders approved the Omnibus Plan and on July 30, 2013, the Company filed a Form S-8 registration statement to register 750,000 shares under the Omnibus Plan. In conjunction with the approval of the Omnibus Plan, no further awards may be granted under the Company's 2009 Non-Employee Directors Stock Option Plan. No award will be granted under the Omnibus Plan after June 13, 2023.
ITEMItem 6. SELECTED FINANCIAL DATA - Not applicable.
| |
| Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The statements contained under the caption MD&A and other information contained elsewhere in this Annual Report on Form 10-K, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely" and "probable" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, those under the heading Item 1A. Risk Factors.
CONSOLIDATED RESULTS OF OPERATIONS
|
| | |
| | January 31, |
Consolidated Backlog ($ in thousands): | 2014 | 2013 |
| Piping Systems * | $60,555 | $89,508 |
| Filtration Products ** | 22,938 | 25,834 |
| Total | $83,493 | $115,342 |
* approximately 100% is expected to be completed in 2014
**approximately 78% is expected to be completed in 2014. |
| | |
| | January 31, |
($ in thousands) | 2017 | 2016 |
| Backlog | $44,615 | $47,937 |
MFRI,Perma-Pipe International Holdings, Inc. is engaged in the manufacture and sale of products in twoone reportable segments:segment: Piping Systems and Filtration Products. As theSystems. The Company's website is www.permapipe.com. Since Piping Systems segment is based on large discrete projects, revenues canoperating results could be subject tonegatively impacted in the future as a result of large swingsvariations in the level of market demand in both geographies and reporting periods.
The analysis presented below and discussed in more detail throughout the MD&A was organized to provide instructive information for understanding the business going forward. However, this discussion should be read in conjunction with the Consolidated Financial Statements in Item 8 of this report, including the notes thereto and the risk factors contained herein. An overview of the segment results is provided in Note 1 - Business and segment information, in the Notes to Consolidated Financial Statements.
Piping Systems
|
| | | | | | |
| ($ in thousands) | 2016 |
| 2015 |
| % Increase (Decrease) |
|
| Net sales | $98,845 | $122,696 | (19.4 | )% |
| | | | |
| Gross profit | 11,716 | 26,741 | (56.2 | )% |
| Percentage of net sales | 12 | % | 22 | % | |
| | | | |
| General and administrative expenses | 8,430 | 11,211 | (24.8 | )% |
| Percentage of net sales | 8.5 | % | 9.1 | % | |
| | | | |
| Selling expense | 5,721 | 4,994 | 14.6 | % |
| Percentage of net sales | 5.8 | % | 4.1 | % | |
| | | | |
| (Loss) income from operations | (2,435) | 10,537 | (123.1 | )% |
| Percentage of net sales | (2.5 | )% | 8.6 | % | |
| | | | |
| Income from joint venture | — |
| 602 |
| (100.0 | )% |
| Loss on consolidation of joint venture | (1,620) | — |
| (100.0 | )% |
2016 Compared to 2015
On April 30, 2013,December 31, 2015, PPIH entered into a purchase agreement with its joint venture partner Aegion Corporation to acquire the remaining 51% ownership of PPC, a coating and insulation company in Camrose, Alberta, which acquisition closed on February 4, 2016.
The purchase price was $13.1 million CAD ($9.6 million USD) in cash and debt at closing and is subject to certain post-closing adjustments. The accounting for this acquisition has been completed.
The acquisition has resulted in $2.3 million of goodwill. In the first quarter of 2016, the Company sold mostrecorded a one-time non-cash loss of $1.6 million from the consolidation of the domestic assetsjoint venture. The Company incurred legal, professional and other costs related to this acquisition. These one-time costs of its subsidiary Thermal Care, Inc. to a subsidiary of IPEG, Inc. for $16.3$0.2 million cash, of which $1.1 million is held in escrow until May 1, 2014. The acquiring company has signed a three-year lease for the office spacewere recognized as general and production facilities occupied by Thermal Care. These operations were previously reported as Industrial Process Cooling. On June 26, 2013, the Company sold substantially all of the assets of the HVAC business previously included in Corporate and Other. In October 2013, the Company decided to sell its remaining industrial process business in Denmark. This business was sold on February 28, 2014 and was previously reported as Industrial Process Cooling. These businesses are reported as discontinued operations in the consolidated financial statements and the notes to consolidated financial statements have been revised to conform to the current year reporting. Income from discontinued operations net of tax was $8.2 million and $2.3 million for the years ended January 31, 2014 and 2013, respectively.
2013 Compared to 2012
administrative expenses.
Net sales were $226.8$98.8 million in 20132016, an increasea decrease of 34%19% from $168.8$122.7 million in 20122015. Piping Systems sales increased 77% or $68.8 million compared toVarious economic factors substantially reduced demand in the prior-year due to sales growth in Saudi Arabia andmarkets the U.A.E. for major projects, such as expandingCompany serves during this fiscal year. Since the Grand Mosque in Mecca and the King Abdul-Aziz International Airport in Jeddah, and a significant domesticCompany serves oil and gas project. Filtration Products sales decreased by $10.7 million due primarilycustomers, the low price of oil has had a significant dampening effect on new exploration projects in the Gulf of Mexico and Canada. Restrained domestic federal and state infrastructure spending, combined with the oil-price induced recession in the Gulf Cooperation Council region, combined to reduced domesticweaken demand for fabric filter bag products.district heating and cooling projects. Saudi Arabia has slowed down spending and the start-up of new infrastructure projects outlined in its Vision 2030 plan, although the Saudi government appears to be taking steps to raise capital for such projects.
Gross profit increased90%decreased 56% to $52.2 million in 2013 from $27.5 million in 2012 mainly due to the sales increase in Piping Systems. Filtration Products' gross profit decreased 14.6% to $10.5$11.7 million in 20132016 from $12.5$26.7 million in 2012 resulting from the decline in sales.
Operating expenses increased7.8% to $39.1 million from $36.3 million. Improved performance led to increased incentive compensation expense partially offset by reduced health insurance costs. In 2012, there was a non-cash $1.5 million charge to recognize the impairment of fixed assets in filtration products related to its idle manufacturing facility located in Cicero, Illinois.
The Company's worldwide effective income tax rates on continuing operations for 2013 and 2012 were negative 4.0% and negative 132.4%, respectively. In the fourth quarter of 2012, the Company recorded a full valuation allowance on domestic deferred tax assets. This resulted in a $13.9 million non-cash charge. For additional information, see the Income Tax section of the MD&A and see Note 8 - Income taxes, in the Notes to Consolidated Financial Statements.
Net income rose to $21.0 million in 2013 compared to a net loss of $18.5 million in 20122015 due to the asset sale of Thermal Care, Inc., the previously mentioned improvement in gross profit primarily related to Piping Systems and the full valuation allowance on domestic deferred tax assets recorded in 2012.
Piping Systems
As the Piping Systems segment is based on large discrete projects, revenues can be subject to large swings in both geographies and reporting periods.
|
| | | | | | |
| ($ in thousands) | 2013 |
| 2012 |
| % Increase |
|
| Net sales | $158,422 | $89,664 | 76.7 | % |
| | | | |
| Gross profit | 43,273 | 17,020 | 154.2 | % |
| Percentage of net sales | 27 | % | 19 | % | |
| | | | |
| Income from operations | 24,213 | 3,452 | 601 | % |
| Percentage of net sales | 15.3 | % | 3.8 | % | |
Net sales of $158.4 millionincreased77% from $89.7 million in the prior-year. The increase is attributed to sales growth in Saudi Arabia and the U.A.E., for major projects, such as expanding the Grand Mosque in Mecca and the King Abdul-Aziz International Airport in Jeddah, and a significant domestic oil and gas project. In the fiscal year ended January 31, 2014, one customer accounted for 10.6% of the Company's net sales. In the fiscal year ended January 31, 2013, no customer accounted for 10.0% or more of the Company's net sales.
lower volume. Gross margin increaseddecreased to 27%12% of net sales from 19%22% of net sales in the prior-year. Gross profit more than doubled dueprior year. Despite having reduced manufacturing plant expenses in the U.S. and Middle East facilities, the resulting lower production levels led to higher volumes produced ata reduced absorption of manufacturing plant costs. Underutilization in the industry in the Middle East facilities andcontinued with resulting pressure on project pricing, all contributing to a reduction in gross margins versus the domestic oil and gas products.prior year.
General and administrative expenses decreased to $8.4 million in 2016 from $11.2 million in 2015. General and administrative expenses decreased by $3.8 million partially offset by a one-time legal settlement of $0.8 million and the addition of $0.2 million related to the Canadian general and administrative expenses in the period. The decrease was due to staffing reductions in the U.S. and the Middle East as well as lower management incentive compensation expense. General and administrative expenses as a percentage of net sales decreased to 8.8%8.5% in 20132016 from 10.9%9.1% in the prior-year. The dollar increase to $14.0 million in 2013 from $9.8 million in 2012 was related to incentive compensation expense associated with improved earnings partially offset by reduced health insurance costs.prior year.
Selling expenses decreased as a percentage of net salesincreased to 3.2% in 2013$5.7 million from 4.2%$5.0 million in the prior-year. The dollar increase to $5.1 million from $3.8 million wasprior year due to the additional staffing in the Middle East.
Filtration Products
The timing of large orders can have a material effect on net sales and gross profit from period to period. Pricing on large orders was extremely competitive and therefore resulted in relatively low gross margins in all periods.
Filtration Products' demand is partially impacted by government regulation of air quality at the federal and state levels. The Company believes that growth in the sale of its filtration products and services will be materially dependent on continued enforcement of environmental laws such as the Clean Air Act. Although there can be no assurance what the ultimate effect of the Clean Air Act will be on filtration products, the Company believes the Clean Air Act is likely to have a positive long-term effect on demand for the Company's filtration products and services.
|
| | | | | | |
| ($ in thousands) | 2013 |
| 2012 |
| % Decrease |
|
| Net sales | $68,413 | $79,143 | (13.6 | )% |
| | | | |
| Gross profit | 8,942 | 10,474 | (14.6 | )% |
| Percentage of net sales | 13.1 | % | 13.3 | % | |
| | | | |
| (Loss) income from operations | (1,629) | (2,962) | (45.0 | )% |
| Percentage of net sales | (2.4 | )% | (3.7 | )% | |
Net sales decreased13.6% to $68.4 million in 2013 from $79.1 million in 2012. Sales declines were the result of lower market demand for domestic fabric filter bag products due to significant decreases in coal fire power generation and steel industries' demand. Gross margin decreased slightly to 13.1% of net sales in 2013 from 13.3% of net sales in 2012. In the fourth quarter, Filtration Products recorded a $0.6 million inventory reserve for slow-moving and obsolete materials. Gross profit decreased14.6% to $8.9 million in 2013 from $10.5 million in the prior-year due to lower sales volume offset by the aforementioned product mix. In response to lower demand for fabric filter bags, the Company has reduced its workforce. Over the past year, the Company has implemented many initiatives to resize the fabric filter business and lower manufacturing costs in all plants. The Company continues to expand its geographic market coverage and improve its margin through expense controls to strengthen this segment.
General and administrative expense decreased to $4.6 million, or 6.8% of net sales, in 2013 from $6.5 million, or 8.2% of net sales, in 2012. The decrease was due to reduced health insurance costs and staffing reductions. This decrease was partially offset by a one-time pension expense resulting from the freezing of the defined benefit pension plan. In the fourth quarter of 2012, Filtration Products recorded a $1.5 million impairment on fixed assets relating to its idle manufacturing facility located in Cicero, Illinois.
Selling expense decreased to $5.9 million in 2013 from $6.9 million in 2012 due to reduction in staff.Canadian activity. As a percentage of net sales, selling expense decreasedexpenses increased to 8.7%5.8% in 20132016 from 8.8%4.1% in 2012.the prior year.
Corporate
Corporate expenses include interest expense and general and administrative expenses that are not allocated to the segments.segment. General and administrative expenses increased 2%9% to $9.5$8.4 million in 20132016 from $9.3$7.7 million in 20122015. As a percentage of sales, it decreasedexpenses increased to 4.2%8.5% from 5.5%6.2%. Changes in the senior executive positions of the Company went into effect in the fourth quarter with related hiring and separation costs of $1.1 million. The spending increased inincrease was partially offset by lower management incentive compensation expense in connection with improved earnings partially offset by reduced health insurance costs.and lower deferred compensation expense.
Interest expense decreased to $1.90.7 million in 20132016 from $2.01.0 million in 20122015 due to a reduction inlower borrowings, relative to the prior-year.both domestic and foreign.
INCOME TAXESIncome taxes
The Company's worldwide effective tax rates ("ETR") were negative 4.0%4.7% and negative 132.4%45.7% in 20132016 and 2012,2015, respectively. The ETR in 20132016 has been significantly impacted by the Company reporting a pre-tax loss for the year, a portion of which was less thangenerated by the statutory U.S. federal incomesubsidiary in the U.A.E., which receives no tax benefit due to a zero tax rate mainlyin that country and due to the mix of the U.A.E. earnings (loss) versus total earnings (loss) because the U.A.E. is not subject to any local country income tax. Additionally, the ETR in 2013 is impacted by the $1.2 million releaseimpact of the full valuation allowance relatedmaintained against domestic deferred tax assets. Other changes in the ETR from the prior year-to-date to the Company's deferred tax assets in Saudi Arabia. As a result of two quarters of positive operating income as well as management's expectations of this subsidiary's profitability for the fiscal year 2013, the Company believes the second quarter of 2013 was the appropriate time to release the valuation allowance. The ETR in 2012 was less than the statutory U.S. federal income tax rate, primarilycurrent year-to-date are due to the full valuation allowanceCanadian acquisition and the allocation of $13.9 million recorded on the domestic deferred tax assets.expense between continuing operations, other comprehensive income and discontinued operations when applying intraperiod allocation rules. The Company remains in an net operating loss ("NOL") carryforward position.
As of January 31, 2014, theThe Company had undistributedhas not provided Federal tax on remaining unremitted earnings of foreign subsidiaries for which deferred taxes haveits Middle East subsidiaries. The Company does not been provided.believe that it will be necessary to repatriate earnings from these subsidiaries. The Company intends and has the ability to reinvest these earnings for the foreseeable
future outside the U.S. If these amounts were distributed to the U.S., in the form of dividends or otherwise, the Company wouldcould be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable, because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
During the fourth quarter of 2014, the Company concluded that not all of the undistributed earnings of Perma-Pipe India Ltd, will remain permanently reinvested outside the U.S. and are available for use in the U.S. or in entities in other foreign countries. As such, the Company recorded a deferred tax liability of $0.1 million and $0.2 million for the periods ending January 31, 2017 and 2016, respectively, related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $0.5 million and $2.8 million of undistributed earnings. The decrease in deferred tax liability relates to a net decrease in the earnings and profits of Perma-Pipe India. Future earnings related to this subsidiary and the Canadian and Denmark subsidiaries are not deemed permanently reinvested. No U.S. cash tax payments will be made upon distribution of these foreign earnings as long as the Company has sufficient tax attributes in the U.S. to reduce the cash tax consequences of potential repatriation.
A reconciliation of the ETR to the U.S. Statutory tax rate is as follows:
| | | | 2013 |
| 2012 |
| 2016 |
| 2015 |
|
| Statutory tax rate | 34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % |
| Repatriation | | (10.3 | )% | 30.2 | % |
| Valuation allowance for domestic deferred tax assets | — | % | (144.4 | )% | (4.4 | )% | 29.6 | % |
| Valuation allowance for state deferred tax assets | — | % | (10.8 | )% | |
| Permanent difference management fee allocation | | — | % | 22.8 | % |
| Permanent differences other | | (1.6 | )% | 7.9 | % |
| Foreign tax credit | | 9.6 | % | (28.0 | )% |
| Differences in foreign tax rate | (24.8 | )% | (9.1 | )% | (16.4 | )% | (29.9 | )% |
| Foreign tax credit | — | % | 0.7 | % | |
| Domestic deferred tax true ups | | — | % | (12.7 | )% |
| Nontaxable income related to the Canadian joint venture | | (4.2 | )% | (7.5 | )% |
| Research tax credit | — | % | 0.5 | % | — | % | (2.0 | )% |
| Valuation allowance for state NOLs | | (0.9 | )% | 3.2 | % |
| Valuation allowance for foreign NOLs | (9.8 | )% | (6.8 | )% | 0.3 | % | 1.2 | % |
| Nontaxable income from the Canadian joint venture | (1.5 | )% | 5.2 | % | |
| Nondeductible Interest | | (1.9 | )% | — | % |
| State taxes, net of federal benefit | (1.6 | )% | 2.7 | % | 0.8 | % | (2.1 | )% |
| All other, net expense | (0.3 | )% | (4.4 | )% | (0.3 | )% | (1.0 | )% |
| Effective income tax rate | (4.0 | )% | (132.4 | )% | 4.7 | % | 45.7 | % |
For further information, see Note 89 - Income taxes, in the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCESNet loss from continuing operations was $12.4 million in 2016 compared to net income from continuing operations of $1.6 million in 2015.
Other
On January 31, 2017, no customer accounted for more than 10% of the Company's net sales. On January 31, 2016, one customer accounted for 10.3% of the Company's net sales.
Two customers accounted for 33.2% of accounts receivable on January 31, 2017, and two customers accounted for 46.5% of accounts receivable on January 31, 2016. As of April 1, 2017, these customers have paid 35.4% of their receivables outstanding on January 31, 2017.
Discontinued operations
Prior to January 29, 2016, the Company was also engaged in the manufacture and sale of products in the Filtration Products segment. On January 29, 2016, the Company sold certain assets and liabilities of its TDC Filter business based in Bolingbrook, Illinois and its Nordic Air Filtration subsidiaries in Denmark and the U.A.E. The Company also liquidated the remaining assets of the Filtration bag business in Winchester, Virginia during the year ended January 31, 2017. The Filtration business segment is reported as discontinued operations in the consolidated financial statements, and the notes to consolidated financial statements have been revised to conform to the current year reporting. There was $1.0 million of tax expense attributed to Discontinued Operations for the year ended January 31, 2017. For further information, see "Notes to Consolidated Financial Statements, Note 4 Discontinued operations"
Liquidity and capital resources
Cash and cash equivalents as of January 31, 20142017 were $13.4$7.6 million,, compared to $7.0$16.6 million at on January 31, 2013. At 2016. On January 31, 2014, $0.22017, $0.2 million was held in the U.S. and $13.2$7.4 million was held in the foreign subsidiaries. The Company's working capital was $47.6$27.8 million at on January 31, 20142017 compared to $35.1$31.8 million at on January 31, 2013. Piping Systems' net sales increased 77% from the prior-year, causing the Saudi Arabian subsidiary's accounts receivable to increase $19.6 million.2016. Cash provided byused in operations in 20132016 was $6.4$4.2 million compared to $5.3$2.9 million in 2012.2015.
The Company has paid out $6.4 million in 2016 under its terminated deferred compensation plans. $3.2 million of these payments were funded by the liquidation of life insurance contracts previously purchased by the Company.
Foreign earnings in the Middle East are considered to be indefinitely reinvested outside the U.S. The Company has not provided Federal tax on unremitted earnings of its Middle East subsidiaries. The Company does not believe that it will be necessary to repatriate equity held outside of the U.S.investments from these subsidiaries.
Net cash provided by investing activities in 20132016 was $12.4 million. On April 30, 2013, the Company completed an asset sale of Thermal Care, Inc.,$10.2 million, compared to $13.9 million in 2015, as a subsidiary, for $16.3 million cash, of which $1.1 million is held in escrow until May 1, 2014. This subsidiary and others included in discontinued operations did not have a significant impact on cashflow. The proceeds from the sale paid down a portionresult of the debt underFiltration divestitures partially offset by $4.7 million related to the Loan Agreement (as defined below).acquisition of PPC. The Company estimates that capital expenditures for 2014 will2017 could be approximately $7.4$3.5 million,, of which and the Company may finance capital expenditures through real estate mortgages, term loans, equipment financing loans, internally generated funds and its revolving line of credit. The majority of such expenditures relates to Piping Systems.diversification and expansion of business in the U.S. and Canada.
In May 2016, the Company completed the sale of its former corporate headquarters, land and building, to a third party at a purchase price of $4.4 million. The sale generated approximately $0.4 million in cash after expenses and mortgage payoff.
In May 2016, the Company also completed the sale of its Bolingbrook Filtration facility to a third party at a purchase price of $7.1 million. The sale generated approximately $1.9 million in cash after expenses and mortgage payoff.
In September 2016, the Company completed the sale of its Cicero Filtration facility to a third party at a price of $0.5 million. The sale generated approximately $0.4 million in cash after expenses.
In October 2016, the Company completed the sale of its Virginia Filtration facility to a third party at a price of $1.5 million. The sale generated approximately $1.4 million in cash after expenses.
Debt totaled $31.7$11.7 million at on January 31, 2014, a decrease of $9.2 million since January 31, 2013.2017. Net cash used in financing activities was $11.7$14.9 million. in 2016 compared to $3.0 million in 2015. The domestic revolver decreased $1.4 million mainly due to proceeds from the domestic sale of the remaining Filtration business. For additional information, see Note 67 - Debt, in the Notes to Consolidated Financial Statements. Other long-term liabilities of $2.2$0.5 million were composed primarily of accrued pension cost and deferred compensation.rent.
The following table summarizes the Company's estimated contractual obligations aton January 31, 20142017.
| | | ($ in thousands) | | Year Ending January 31, | | | Year Ending January 31, | |
| Contractual obligations | Total |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| Thereafter |
| Total |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Thereafter |
|
| Revolving line domestic (1) | $6,951 |
| $— |
|
| $— |
|
| $6,951 |
|
| $— |
|
| $— |
|
| $— |
| |
Revolving line North America (1) | | $3,813 |
| $3,813 |
|
| $— |
|
| $— |
|
| $— |
|
| $— |
|
| $— |
|
| Mortgages (2) | 15,045 |
| 895 |
| 894 |
| 892 |
| 4,054 |
| 618 |
| 7,692 |
| 9,739 |
| 471 |
| 687 |
| 676 |
| 664 |
| 653 |
| 6,588 |
|
| Revolving line foreign (3) | 5,363 |
| 5,363 |
| — |
| — |
| — |
| — |
| — |
| 319 |
| 319 |
| — |
| — |
| — |
| — |
| — |
|
Term loans (4)(2) | 6,524 |
| 2,257 |
| 1,881 |
| 1,760 |
| 626 |
| — |
| — |
| 85 |
| 66 |
| 19 |
| — |
| — |
| — |
| — |
|
| Subtotal | 33,883 |
| 8,515 |
| 2,775 |
| 9,603 |
| 4,680 |
| 618 |
| 7,692 |
| 13,956 |
| 4,669 |
| 706 |
| 676 |
| 664 |
| 653 |
| 6,588 |
|
| Capitalized lease obligations | 2,288 |
| 705 |
| 724 |
| 678 |
| 157 |
| 24 |
| — |
| 295 |
| 231 |
| 63 |
| 1 |
| — |
| — |
| — |
|
Operating lease obligations (5)(4) | 9,199 |
| 2,211 |
| 1,567 |
| 1,378 |
| 1,274 |
| 1,243 |
| 1,526 |
| 18,099 |
| 2,199 |
| 1,705 |
| 1,536 |
| 1,475 |
| 1,477 |
| 9,707 |
|
Projected pension contributions (6)(5) | 3,665 |
| 335 |
| 348 |
| 345 |
| 366 |
| 364 |
| 1,907 |
| 3,462 |
| 348 |
| 345 |
| 347 |
| 342 |
| 347 |
| 1,733 |
|
| Deferred compensation (7) | 6,698 |
| 189 |
| 6,509 |
| — |
| — |
| — |
| — |
| |
| Employment agreements (8) | 101 |
| — |
| — |
| — |
| — |
| — |
| 101 |
| |
| Contractual obligations of discontinued operations (8) | 45 |
| 45 |
| — |
| — |
| — |
| — |
| — |
| |
| Uncertain tax position obligations (10) | 189 |
| — |
| — |
| — |
| — |
| — |
| 189 |
| |
| Employment agreements (6) | | 1,085 |
| 605 |
| 154 |
| — |
| — |
| — |
| 326 |
|
| Contractual obligations of discontinued operations (7) | | 199 |
| 199 |
| — |
| — |
| — |
| — |
| — |
|
| Uncertain tax position obligations (8) | | 159 |
| — |
| — |
| — |
| — |
| — |
| 159 |
|
| Total | $56,068 | $12,000 | $11,923 | $12,004 | $6,477 | $2,249 | $11,415 | $37,255 | $8,251 | $2,973 | $2,560 | $2,481 | $2,477 | $18,513 |
Notes to contractual obligations table
| |
| (1) | Interest obligations exclude floating rate interest on debt payable under the domestic revolving line of credit. Based on the amount of such debt aton January 31, 20142017, and the weighted average interest rate of 3.86%3.83% on that debt, such interest was being incurred at an annual rate of approximately $0.40.1 million. |
| |
| (2) | Scheduled maturities, including interest. |
| |
| (3) | Scheduled maturities of foreign revolver line, including interest. |
| |
| (4) | Term loan obligations exclude floating rate interest on term loan with a January 31, 2014 balance of $0.2 million. Based on the amount of such debt as of January 31, 2014, and the weighted average interest rate of 4.21% on that debt, such interest was being incurred at an annual rate of approximately $17 thousand.
|
| |
(5) | Minimum contractual amounts, assuming no changes in variable expenses. |
| |
(6)(5) | Includes estimated future benefit payments. |
| |
(7) | Non-qualified deferred compensation plan - The Company has a Supplemental Retirement and Deferred Compensation Plan ("Supplemental Plan"), pursuant to which key employees deferred compensation. Refer to Note 9 - Retirement plans, in the Notes to Consolidated Financial Statements.
|
| |
(8)(6) | Refer to the proxy statementindex for a description of compensation plans for Named Executive Officers.and separation plans. |
(9)(7) Included payments for other liabilities.liabilities included in discontinued operations.
(10)(8) Refer to Note 89 - Income taxes, in the Notes to Consolidated Financial Statements for a description of the uncertain tax position obligations.
Financing
Revolving line North America. On July 11, 2002,September 24, 2014, the Company entered into a secured loanCredit and securitySecurity agreement with a financial institution (as amended, "Loan"Credit Agreement"). Under the terms of the LoanCredit Agreement, which matures on November 30, 2016,September 24, 2018, the Company can borrow up to $25.0a combined $15.0 million, in the U.S. and Canada, subject to borrowing base availability from secured domestic and certain Canadian assets, such as accounts receivable and inventory, and other requirements, under a revolving line of credit. The LoanCredit Agreement covenants restrict debt, liens, and certain investments,do not permit payment of dividends, and require attainment of specific levels of profitability and cash flows when reaching certain levels of availability. At flows. On January 31, 2014,2017, the Company was in compliance with all covenants under the LoanCredit Agreement. The domestic revolving line balances as of January 31, 2017 and 2016 were included as current liabilities in the consolidated balance sheets, because the Credit Agreement has a subjective acceleration clause..
Interest rates arevary based on options selected by the Company as follows: average availability in the preceding fiscal quarter and are: (a) a margin in effect of 0.25 in effect plus prime rate; and/a base rate, if below certain availability limits; or (b) a margin of 2.25 in effect plus the LIBOREurodollar rate for the corresponding interest period. As of On January 31, 2014,2017, the Company had borrowed $7.0$3.8 million at prime5%, 3.77% and LIBOR rates3.95% and had $13.0$5.8 million available to it under the revolving line of credit. In addition, $0.1$0.2 million of availability was used under the LoanCredit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. The Loan Agreement provides that all domestic receipts are deposited in a bank account from which all funds may o
nly be used to pay the debt under the Loan Agreement. At January 31, 2014, the amount of such restricted cash was $0.05 million. Cash required for operations is provided by draw-downs on the line of credit.
Revolving lines foreign. The Company also has credit arrangements used by its Danish and Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries
in which the Company operates. TheSome credit arrangement covenantcovenants requires a minimum tangible net worth to be maintained. Atmaintained, including intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends. On January 31, 20142017, the Company was in compliance with the covenants under the credit arrangement.arrangements. Interest rates are 4.0% per annum below National Bank of Fujairah Base Rate, minimum 3.5% per annum, and Emirates Inter Bank Offered Rate (EIBOR) plus 3.50% per annum. The Company's interest rates range from 3.5% to 6.0%. AtOn January 31, 20142017, the Company can borrow $26.0 million under these credit arrangements $20.5 million.arrangements. The Company borrowed $5.4$0.3 million and had $15.5$20.8 million available under these credit arrangements.arrangements as of January 31, 2017. In addition, $4.9 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases. For further information, see Note 7 - Debt, in the Notes to Consolidated Financial Statements.
The Company believes its current cash and cash flow from operations, together with borrowing capacity under the revolving credit facilities, will be sufficient to fund anticipated operations, working capital and capital spending needs for at least the next 12 months.
On April 27, 2010,February 1, 2016, the Company obtainedexecuted a loan with no maturity datepromissory note in favor of United Pipeline Systems Limited, an affiliate of Aegion, Inc. for $2.0 million. The promissory note was paid on July 28, 2016. In addition, the Company on July 28, 2016 paid off the balance of $2.2 million in previously affiliated debt to Aegion in its Canadian subsidiary which was acquired in the amountpurchase of $2.0PPC.
On July 28, 2016, the Company borrowed $8.0 million collateralizedCAD (approximately $6.1 million USD at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the cash surrender valuemanufacturing facility located in Alberta, Canada that matures on December 23, 2042. The interest rate is variable, currently at 4.7%, with monthly payments of insurance policies on the lives$31 thousand CAD (approximately $24 thousand USD) for interest; and monthly payments of key executive officers. The loans carried interest at a rate of 4.25% and required interest only$27 thousand CAD (approximately $20 thousand USD) for principal. Principal payments annually. Atbegin January 31, 2013, the balance was $1.8 million. In 2013, the loan was paid in full.2018.
CRITICAL ACCOUNTING ESTIMATES AND POLICIESCritical 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. The Company recognizes revenues, including shipping and handling charges billed to customers, when all the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and (iii)(iv) collectability is reasonably assured. All subsidiaries of the Company, except as noted below, recognize revenues upon shipment or delivery of goods or services when title and risk of loss pass to customers.
Percentage of completion revenue recognition. All divisions recognize revenues under the above stated revenue recognition policy except for sizabledomestic complex contracts that require periodic recognition of income. For these contracts, the Company uses the "percentage of completion" 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 choice of accounting method is made at the time the contract is received based on the expected length and complexity of the project. The percentage of completion 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 and the amount can be reliably estimated.
Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories.
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 recognizes the financial statement benefit of a tax position 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 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Equity-based compensation. Stock compensation expense for employee equity awards is recognized ratably over the requisite service period of the award. The Black-Scholes option-pricing model is utilized to estimate the fair value of option awards. Determining the fair value of stock options using the Black-Scholes model requires judgment, including estimates for (1) risk-free interest rate - an estimate based on the yield of zero-coupon treasury securities with a maturity equal to the expected life of the option; (2) expected volatility - an estimate based on the historical volatility of the Company's Common Stock; and (3) expected life of the option - an estimate based on historical experience including the effect of employee terminations.
Fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are based upon reasonable estimates of their fair value due to their short-term nature. The carrying value of the cash surrender value of life insurance policies approximated fair value and was based on the market value of the underlying investments, which may increase or decrease due to fluctuations in the overall financial markets. The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable rates.
The Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing interest rates under the revolving credit agreement. Any differences paid or received on the interest rate swap agreements are recognized as adjustments to interest expense over the life of the swap, thereby adjusting the effective interest rate on the underlying obligation.
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. |
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company for each of the two years in the periods ended as of January 31, 20142017 and 20132016 and the notes thereto are set forth as an exhibit hereto.
| |
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - None. |
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of January 31, 2014.2017. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of January 31, 20142017 to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and is accumulated and communicated to the issuer's management, including the principal executive and financial officers, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the Exchange Act, MFRI'sPPIH's management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of its internal control over financial reporting as of the end of the last fiscal year. The framework on which such evaluation was based is contained in the report entitled "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO"2013 COSO Report").
The Company's system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on its assessment, management has concluded that the Company has maintained effective internal control
over financial reporting as of January 31, 2014,2017, based on criteria in the 2013 COSO Report.
Item 9B. OTHER INFORMATION - On April 10, 2014, the Board of Directors terminated the Supplemental Plan and the Deferred Stock Purchase Plan. Refer to Note 9 - Retirement plans, in the Notes to Consolidated Financial StatementsNone.
PART III
| |
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for the 20142017 annual meeting of stockholders.
Information with respect to executive officers of the Company is included in Part I Item 1 hereof under the caption "Executive Officers of the Registrant".
| |
| Item 11. | EXECUTIVE COMPENSATION |
Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for the 20142017 annual meeting of stockholders.
| |
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
AND RELATED STOCKHOLDER MATTERS
Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for the 20142017 annual meeting of stockholders.
| |
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for the 20142017 annual meeting of stockholders.
Item 14. PRINCIPAL ACCOUNTANTING FEES AND SERVICES
Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for the 20142017 annual meeting of stockholders.
PART IV
| |
| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
a. List of documents filed as part of this report:
| |
| (1) | Financial Statements - Consolidated Financial Statements of the Company |
Refer to Part II, Item 8 of this report.
| |
| (2) | Financial Statement Schedules |
Schedule II - Valuation and Qualifying Accounts
| |
| b. | Exhibits: The exhibits, as listed in the Exhibit Index included herein, are submitted as a separate section of this report. |
c. The response to this portion of Item 15 is submitted under 15a(2) above.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
MFRIPerma-Pipe International Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of MFRIPerma-Pipe International Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of January 31, 20142017 and 2013,2016, and the related consolidated statementstatements of operations, comprehensive income (loss),loss, changes in stockholders’ equity, and cash flows for each of the two years in the period ended January 31, 2014.2017. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)15 (a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position position of MFRIPerma-Pipe International Holdings, Inc. and subsidiaries as of January 31, 20142017 and 2013,2016, and the results of their operations and their cash flows for each of the two years in the period ended January 31, 20142017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
Chicago, Illinois
April 15, 201414, 2017
MFRI,PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF OPERATIONS
| | | | Twelve months ended January 31, | Twelve months ended January 31, |
| (In thousands, except per share data) | 2014 |
| 2013 |
| 2017 |
| 2016 |
|
| | | |
| Net sales | $226,835 | $168,807 | $98,845 | $122,696 |
| Cost of sales | 174,620 |
| 141,313 |
| 87,129 |
| 95,955 |
|
| Gross profit | 52,215 |
| 27,494 |
| 11,716 |
| 26,741 |
|
| | | |
| Operating expenses: | | |
| General and administrative expense | 28,116 |
| 25,580 |
| 16,783 |
| 18,869 |
|
| Selling expense | 11,016 |
| 10,734 |
| 5,721 |
| 4,994 |
|
| Total operating expenses | 39,132 |
| 36,314 |
| 22,504 |
| 23,863 |
|
| | | |
| Income (loss) from operations | 13,083 |
| (8,820 | ) | |
| (Loss) income from operations | | (10,788 | ) | 2,878 |
|
| | | |
| Income from joint venture | 528 |
| 1,386 |
| — |
| 602 |
|
| Loss on consolidation of joint venture | | (1,620 | ) | — |
|
| | | |
| Interest expense, net | 1,311 |
| 1,498 |
| 569 |
| 470 |
|
| Income (loss) from continuing operations before income taxes | 12,300 |
| (8,932 | ) | |
| (Loss) income from continuing operations before income taxes | | (12,977 | ) | 3,010 |
|
| | | |
| Income tax (benefit) expense | (493 | ) | 11,825 |
| (611 | ) | 1,375 |
|
| | | |
| Income (loss) from continuing operations | 12,793 |
| (20,757 | ) | |
| (Loss) income from continuing operations | | (12,366 | ) | 1,635 |
|
| | | |
| Income from discontinued operations, net of tax | 8,234 |
| 2,272 |
| |
| Income (loss) from discontinued operations, net of tax | | 688 |
| (6,044 | ) |
| | | |
| Net income (loss) | $21,027 | ($18,485) | |
| Net loss | | ($11,678) | ($4,409) |
| | | |
| Weighted average common shares outstanding | | |
| Basic | 7,028 |
| 6,922 |
| 7,488 |
| 7,280 |
|
| Diluted | 7,096 |
| 6,922 |
| 7,488 |
| 7,371 |
|
| | | |
| Earnings (loss) per share from continuing operations | | |
| Basic | $1.82 | ($3.00) | |
| Diluted | $1.80 | ($3.00) | |
| Earnings per share from discontinued operations | | |
| Basic | $1.17 | $0.33 | |
| Diluted | $1.16 | $0.33 | |
| Earnings (loss) per share | | |
| Basic | $2.99 | ($2.67) | |
| Diluted | $2.96 | ($2.67) | |
| (Loss) earnings per share from continuing operations | | |
| Basic and diluted | | ($1.65) | $0.22 |
| Earnings (loss) per share from discontinued operations | | |
| Basic and diluted | | $0.09 | ($0.83) |
| Loss per share | | |
| Basic and diluted | | ($1.56) | ($0.61) |
See accompanying Notes to Consolidated Financial Statements.
Note: Earnings per share calculations could be impacted by rounding.
MFRI,PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(In thousands)
| | | | Twelve months ended January 31, | Twelve months ended January 31, |
| | 2014 |
| 2013 |
| 2017 |
| 2016 |
|
| | | |
| Net income (loss) | $21,027 | ($18,485) | |
| Net loss | | ($11,678) | ($4,409) |
| | | |
| Other comprehensive income (loss) | | |
| Currency translation adjustments, net of tax | (1,268 | ) | (251 | ) | 818 |
| (481 | ) |
| Minimum pension liability adjustment, net of tax | 682 |
| 112 |
| 423 |
| 863 |
|
| Unrealized gain on marketable security, net of tax | | 15 |
| 77 |
|
| Interest rate swap, net of tax | 151 |
| (6 | ) | — |
| 91 |
|
| Other comprehensive loss | (435 | ) | (145 | ) | |
| Other comprehensive income | | 1,256 |
| 550 |
|
| | | |
| Comprehensive income (loss) | $20,592 | ($18,630) | |
| Comprehensive loss | | ($10,422) | ($3,859) |
See accompanying Notes to Consolidated Financial Statements.
MFRI,PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | January 31, | January 31, |
| (In thousands, except per share data) | 2014 | 2013 | 2017 | 2016 |
| ASSETS | | |
| Current assets | | |
| Cash and cash equivalents | $13,395 | $7,034 | $7,603 | $16,631 |
| Restricted cash | 439 |
| 725 |
| 1,097 |
| 2,324 |
|
| Trade accounts receivable, less allowance for doubtful accounts of $194 at January 31, 2014 and $290 at January 31, 2013 | 45,659 |
| 23,278 |
| |
| Inventories, net | 33,547 |
| 37,529 |
| |
| Trade accounts receivable, less allowance for doubtful accounts of $305 on January 31, 2017 and $33 on January 31, 2016 | | 31,271 |
| 36,090 |
|
| Inventories | | 13,565 |
| 15,625 |
|
| Assets of discontinued operations | | 25 |
| 14,241 |
|
| Assets held for sale | 1,223 |
| 10,218 |
| — |
| 3,062 |
|
| Cash surrender value on life insurance policies | | — |
| 3,049 |
|
| Prepaid expenses and other current assets | 5,353 |
| 3,932 |
| 2,172 |
| 2,397 |
|
| Costs and estimated earnings in excess of billings on uncompleted contracts | 1,476 |
| 1,630 |
| 2,091 |
| 2,463 |
|
| Total current assets | 101,092 |
| 84,346 |
| 57,824 |
| 95,882 |
|
| Property, plant and equipment, net of accumulated depreciation | 42,541 |
| 45,582 |
| 36,275 |
| 25,400 |
|
| Other assets | | |
| Deferred tax assets - long-term | 1,667 |
| 1,358 |
| |
| Goodwill | | 2,279 |
| — |
|
| Note receivable from joint venture | 4,659 |
| 5,200 |
| — |
| 1,905 |
|
| Investment in joint venture | 6,550 |
| 6,022 |
| — |
| 9,112 |
|
| Cash surrender value on life insurance policies | 3,110 |
| 2,946 |
| |
| Other assets | 2,363 |
| 2,408 |
| 5,233 |
| 5,799 |
|
| Assets held for sale long-term | 914 |
| 1,253 |
| |
| Patents, net of accumulated amortization | 373 |
| 373 |
| |
| Total other assets | 19,636 |
| 19,560 |
| 7,512 |
| 16,816 |
|
| Total assets | $163,269 | $149,488 | $101,611 | $138,098 |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | |
| Current liabilities | | |
| Trade accounts payable | $15,276 | $18,740 | $10,901 | $11,026 |
| Commissions and management incentives payable | 9,235 |
| 2,723 |
| 1,845 |
| 2,874 |
|
| Deferred compensation liability, current | | — |
| 6,167 |
|
| Accrued compensation and payroll taxes | 5,254 |
| 4,361 |
| 4,236 |
| 4,274 |
|
| Revolving line North America | | 3,813 |
| 5,237 |
|
| Current maturities of long-term debt | 8,274 |
| 5,384 |
| 658 |
| 8,767 |
|
| Customers' deposits | 7,372 |
| 7,030 |
| 2,640 |
| 3,690 |
|
| Liabilities of discontinued operations | | 199 |
| 12,836 |
|
| Liabilities held for sale | 527 |
| 7,531 |
| — |
| 3,439 |
|
| Outside commission liability | | 1,612 |
| 1,295 |
|
| Other accrued liabilities | 1,842 |
| 1,735 |
| 2,360 |
| 965 |
|
| Billings in excess of costs and estimated earnings on uncompleted contracts | 2,222 |
| 985 |
| 1,100 |
| 1,176 |
|
| Deferred tax liabilities - current | 889 |
| 687 |
| |
| Income tax payable | 2,593 |
| 34 |
| 684 |
| 2,339 |
|
| Total current liabilities | 53,484 |
| 49,210 |
| 30,048 |
| 64,085 |
|
| Long-term liabilities | | |
| Long-term debt, less current maturities | 23,469 |
| 35,579 |
| 7,258 |
| 1,470 |
|
| Deferred compensation liabilities | 6,509 |
| 5,670 |
| 2,523 |
| 3,124 |
|
| Liabilities held for sale long-term | 968 |
| 1,485 |
| |
| Deferred tax liabilities - long-term | | 1,829 |
| 160 |
|
| Other long-term liabilities | 2,203 |
| 3,289 |
| 540 |
| 231 |
|
| Total long-term liabilities | 33,149 |
| 46,023 |
| 12,150 |
| 4,985 |
|
| Stockholders' equity | | |
| Common stock, $.01 par value, authorized 50,000 shares; 7,169 issued and outstanding January 31, 2014 and 6,924 issued and outstanding January 31, 2013 | 72 |
| 69 |
| |
| Common stock, $.01 par value, authorized 50,000 shares; 7,596 issued and outstanding January 31, 2017 and 7,306 issued and outstanding January 31, 2016 | | 76 |
| 74 |
|
| Additional paid-in capital | 52,144 |
| 50,358 |
| 53,716 |
| 53,031 |
|
| Treasury Stock 27 shares on January 31, 2017 and 45 shares on January 31, 2016 | | (170 | ) | (290 | ) |
| Retained earnings | 25,580 |
| 4,553 |
| 8,515 |
| 20,193 |
|
| Accumulated other comprehensive loss | (1,160 | ) | (725 | ) | (2,724 | ) | (3,980 | ) |
| Total stockholders' equity | 76,636 |
| 54,255 |
| 59,413 |
| 69,028 |
|
| Total liabilities and stockholders' equity | $163,269 | $149,488 | $101,611 | $138,098 |
See accompanying Notes to Consolidated Financial Statements.
MFRI,PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS' EQUITY
|
| | | | | | | | | | |
| ($ in thousands, except share data) | | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity |
| Common Stock |
| Total stockholders' equity at January 31, 2012 | $69 | $49,828 | $23,038 | ($580) | $72,355 |
| | | | | | |
| Net loss | | | (18,485 | ) | | (18,485 | ) |
| Stock options exercised | — |
| 35 |
| | | 35 |
|
| Stock-based compensation | | 484 |
| | | 484 |
|
| Excess tax benefit from stock options exercised | | 11 |
| | | 11 |
|
| Interest rate swap | | | | 97 |
| 97 |
|
| Pension liability adjustment | | | | 466 |
| 466 |
|
| Foreign currency translation adjustment | | | | (263 | ) | (263 | ) |
| Tax benefit on above items | | | | (445 | ) | (445 | ) |
| Total stockholders' equity at January 31, 2013 | $69 | $50,358 | $4,553 | ($725) | $54,255 |
| | | | | | |
| Net income | | | 21,027 |
| | 21,027 |
|
| Stock options exercised | 3 |
| 1,585 |
| | | 1,588 |
|
| Stock-based compensation expense | | 196 |
| | | 196 |
|
| Deferred shares issued | | 5 |
| | | 5 |
|
| Interest rate swap | | | | 151 |
| 151 |
|
| Pension liability adjustment | | | | 966 |
| 966 |
|
| Foreign currency translation adjustment | | | | (1,269 | ) | (1,269 | ) |
| Tax benefit on above items | | | | (283) | (283) |
| Total stockholders' equity at January 31, 2014 | $72 | $52,144 | $25,580 | ($1,160) | $76,636 |
|
| | | | | | | | | | | | |
| ($ in thousands, except share data) | | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity |
| Common Stock |
| Total stockholders' equity on January 31, 2015 | $73 | $52,655 | $24,602 | $0 | ($4,530) | $72,800 |
| | | | | | | |
| Net loss | | | (4,409 | ) | | | (4,409 | ) |
| Common stock issued under stock plans, net of shares used for tax withholding | 1 |
| 98 |
| | | | 99 |
|
| Repurchase of common stock | | | | (290 | ) | | (290 | ) |
| Stock-based compensation expense | | 278 |
| | | | 278 |
|
| Interest rate swap | | | | | 119 |
| 119 |
|
| Pension liability adjustment | | | | | 821 |
| 821 |
|
| Marketable security | | | | | 118 |
| 118 |
|
| Foreign currency translation adjustment | | | | | (486 | ) | (486 | ) |
| Tax expense on above items | | | | | (22 | ) | (22 | ) |
| Total stockholders' equity on January 31, 2016 | $74 | $53,031 | $20,193 | ($290) | ($3,980) | $69,028 |
| | | | | | | |
| Net loss | | | (11,678 | ) | | | (11,678 | ) |
| Common stock issued under stock plans, net of shares used for tax withholding | 2 |
| 296 |
| | 120 |
| | 418 |
|
| Stock-based compensation expense | | 389 |
| | | | 389 |
|
| Pension liability adjustment | | | | | 831 |
| 831 |
|
| Marketable security | | | | | 24 |
| 24 |
|
| Foreign currency translation adjustment | | | | | 799 |
| 799 |
|
| Tax expense on above items | | | | | (398) | (398) |
| Total stockholders' equity on January 31, 2017 | $76 | $53,716 | $8,515 | ($170) | ($2,724) | $59,413 |
| | | Common stock shares | 2013 |
| 2012 |
| 2016 |
| 2015 |
|
| Balance beginning of year | 6,924,084 |
| 6,912,771 |
| 7,305,925 |
| 7,290,576 |
|
| Treasury stock released (purchased) | | 17,813 |
| (44,566 | ) |
| Shares issued | 244,453 |
| 11,313 |
| 271,771 |
| 59,915 |
|
| Balance end of year | 7,168,537 |
| 6,924,084 |
| 7,595,509 |
| 7,305,925 |
|
See accompanying Notes to Consolidated Financial Statements.
MFRI,PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS
| | | | Twelve months ended January 31, | Twelve months ended January 31, |
| ($ in thousands) | 2014 | 2013 | 2017 | 2016 |
| Operating activities | | |
| Net income (loss) | $21,027 | ($18,485) | |
| Adjustments to reconcile net income (loss) to net cash flows provided by operating activities | | |
| Net loss | | ($11,678) | ($4,409) |
| Adjustments to reconcile net loss to net cash flows used in operating activities | | |
| Depreciation and amortization | 5,785 |
| 5,806 |
| 5,521 |
| 5,929 |
|
| Loss on consolidation of joint venture | | 1,620 |
| — |
|
| Gain on disposal of discontinued operations | (11,449 | ) | — |
| (127 | ) | (8,099 | ) |
| Impairment on fixed assets | — |
| 1,520 |
| |
| Deferred tax (benefit) expense | (3,190 | ) | 12,594 |
| |
| Impairment expense on discontinued operation | | — |
| 6,480 |
|
| Deferred tax benefit | | (33 | ) | (249 | ) |
| Income from joint venture | (528 | ) | (1,386 | ) | — |
| (602 | ) |
| Stock-based compensation expense | 196 |
| 484 |
| 389 |
| 278 |
|
| Cash surrender value on life insurance policies | (164 | ) | (163 | ) | (135 | ) | 206 |
|
| Provision on uncollectible accounts | 419 |
| 114 |
| 657 |
| (59 | ) |
| Loss on disposal of fixed assets | 328 |
| 64 |
| |
| (Gain) loss on disposal of fixed assets | | (292 | ) | 101 |
|
| Changes in operating assets and liabilities | | |
| Accounts payable | (4,438 | ) | 2,908 |
| (1,917 | ) | 5,819 |
|
| Accrued compensation and payroll taxes | 6,026 |
| (844 | ) | (9,227 | ) | 299 |
|
| Inventories | 8,608 |
| (2,080 | ) | 5,452 |
| 4,027 |
|
| Customers' deposits | (198 | ) | 5,138 |
| (2,303 | ) | (2,400 | ) |
| Income taxes receivable and payable | 2,564 |
| (384 | ) | (128 | ) | 620 |
|
| Prepaid expenses and other current assets | (619 | ) | 563 |
| (997 | ) | 1,914 |
|
| Accounts receivable | (18,592 | ) | 204 |
| 13,698 |
| (2,809 | ) |
| Costs and estimated earnings in excess of billings on uncompleted contracts | 1,110 |
| 34 |
| 296 |
| (1,268 | ) |
| Notes receivable | 331 |
| — |
| |
| Other assets and liabilities | (816 | ) | (740 | ) | (5,027 | ) | (8,675 | ) |
| Net cash provided by operating activities | 6,400 |
| 5,347 |
| |
| Net cash used in operating activities | | (4,231 | ) | (2,897 | ) |
| Investing activities | | |
| Net proceeds from sale of discontinued operations | 15,172 |
| — |
| 9,606 |
| 16,373 |
|
| Capital expenditures | (2,761 | ) | (5,360 | ) | (2,257 | ) | (6,457 | ) |
| Loan to joint venture | — |
| (989 | ) | |
| Proceeds from surrender of corporate-owned life insurance policies | | 3,185 |
| — |
|
| Acquisition of interest in subsidiary, net of cash acquired | | (4,672 | ) | — |
|
| Receipts on loan from joint venture | | — |
| 1,890 |
|
| Proceeds from sales of property and equipment | 16 |
| 95 |
| 4,356 |
| 2,059 |
|
| Net cash provided by (used in) investing activities | 12,427 |
| (6,254 | ) | |
| Net cash provided by investing activities | | 10,218 |
| 13,865 |
|
| Financing activities | | |
| Proceeds from revolving lines | | 40,033 |
| 105,636 |
|
| Proceeds from debt | 83,530 |
| 194,035 |
| 6,059 |
| 918 |
|
| Payments of debt on revolving lines of credit | (85,490 | ) | (185,659 | ) | |
| Proceeds from borrowing against life insurance policies | | — |
| 1,916 |
|
| Payments of debt on revolving lines | | (49,303 | ) | (105,378 | ) |
| Payments of other debt | (7,643 | ) | (4,025 | ) | (10,151 | ) | (2,544 | ) |
| Payments of borrowing against life insurance policies | | — |
| (1,916 | ) |
| Decrease in drafts payable | (3,125 | ) | (8 | ) | (323 | ) | (467 | ) |
| Payments on capitalized lease obligations | (603 | ) | (591 | ) | (1,677 | ) | (998 | ) |
| Stock options exercised and deferred shares issued | 1,592 |
| 35 |
| |
| Tax benefit of stock options exercised | — |
| 11 |
| |
| Net cash (used in) provided by financing activities | (11,739 | ) | 3,798 |
| |
| Release (repurchase) of common stock | | 120 |
| (290 | ) |
| Stock options exercised and restricted shares issued | | 297 |
| 98 |
|
| Net cash used in financing activities | | (14,945 | ) | (3,025 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (727 | ) | (66 | ) | (70 | ) | (1,212 | ) |
| Net increase in cash and cash equivalents | 6,361 |
| 2,825 |
| |
| Net (decrease) increase in cash and cash equivalents | | (9,028 | ) | 6,731 |
|
| Cash and cash equivalents - beginning of period | 7,034 |
| 4,209 |
| 16,631 |
| 9,900 |
|
| Cash and cash equivalents - end of period |
| $13,395 |
|
| $7,034 |
|
| $7,603 |
|
| $16,631 |
|
| Supplemental cash flow information | | |
| Interest paid | $1,958 | $2,314 | $773 | $749 |
| Income taxes paid | 409 |
| 200 |
| 1,381 |
| 970 |
|
| Fixed assets acquired under capital leases | 107 |
| 569 |
| 8 |
| — |
|
| Funds held in escrow related to the sale of Thermal Care, Inc. assets | 1,125 |
| — |
| |
| Funds held in escrow related to the sale of Filtration assets | | 502 |
| 1,905 |
|
See accompanying Notes to Consolidated Financial Statements.
MFRI,PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED January 31, 20142017 and 20132016
(Tabular dollars in thousands, except per share data)
Note 1 - Business and segment information
MFRI,Perma-Pipe International Holdings, Inc. ("MFRI"PPIH", the "Company", or the "Registrant") was incorporated in Delaware on October 12, 1993. MFRIAs of January 31, 2016, PPIH is engaged in the manufacture and sale of products in twoone distinct segments:segment: Piping SystemsSystems. As described below, prior to January 29, 2016, the Company was also engaged in the manufacture and sale of products in the Filtration Products.Products segment. In February 2017, the Company announced that the board of directors had authorized Company management to move forward with the re-naming and re-branding of MFRI, Inc. under the Perma-Pipe name now that the Company operates in a single business segment under the Perma-Pipe brand, and the Company believes this decision will better serve its strategy, position it well in the industry and global market, and better reflect the Company’s mission and strategy, and positions it to leverage the strong reputation Perma-Pipe has established since beginning operations. The name change to Perma-Pipe International Holdings, Inc. was effective March 20, 2017. The Company's common stock has been and will continue to be reported under its new ticker symbol “PPIH” since March 21, 2017.
Fiscal year. The Company's fiscal year ends on January 31. Years and balances described as 20132016 and 20122015 are the fiscal years ended January 31, 20142017 and 20132016, respectively.
Nature of business. Piping Systems engineers, designs, manufactures and sells specialty piping and leak detection and location systems. This segment's specialty piping systems include (i) industrial and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, (ii) insulated and jacketed piping systems for district heating and cooling, piping systemsMunicipal Freeze Protection, Oil & Gas, Mining and Industrial applications, (iii) insulation for efficient energy distribution to multiple locations from central energy plants, and (iii)subsea oil and gas gathering flowflowlines and equipment, (iv) above and below ground long lines for oil and mineral transportation. Piping Systems'transportation and (v) anti-corrosion coatings for oil and gas distribution and gathering pipelines. The leak detection and location systems are sold with manysome of its piping systems and also on a stand-alone basis to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property. Filtration Products manufactures and sells a wide variety of filter elements for use in industrial air filtration systems and particulate collection systems. Air filtration systems are used in a wide variety of industries to limit particulate emissions, primarily to comply with environmental regulations. Filtration Products markets air filtration related products and accessories, and provides maintenance services, consisting primarily of dust collector inspection, filter cleaning and filter replacement.
MFRI's reportable segments are strategic businesses that offer different productsPrior to January 29, 2016, the Company had a Filtration Products segment. This business is reported as discontinued operations in the consolidated financial statements, and services. Each is managed separately based on fundamental operating differences. Each strategic business was acquired as a unit and management at the timenotes to consolidated financial statements have been restated to conform to the current year reporting of acquisition was retained. The Company evaluates performance based on gross profit and income or loss from operations.this business. For further information, see Note 4 - Discontinued operations, in the Notes to Consolidated Financial Statements.
In the fiscal year ended January 31, 2014, one customer in Piping Systems accounted for 10.6% of the Company's net sales. In the fiscal year ended January 31, 2013, no customer accounted for 10.0% or more of the Company's net sales. At January 31, 2014, one customer in Piping Systems accounted for 24.5% of accounts receivable.
Segment information was as follows:
| | | | 2013 | 2012 | 2016 | 2015 |
| Net sales | | |
| Piping Systems | $158,422 | $89,664 | $98,845 | $122,696 |
| Filtration Products | 68,413 | 79,143 | |
| Total net sales | $226,835 | $168,807 | |
| Gross profit | | |
| Piping Systems | $43,273 | $17,020 | $11,716 | $26,741 |
| Filtration Products | 8,942 | 10,474 | |
| Total gross profit | $52,215 | $27,494 | |
| Income (loss) from operations | | |
| Piping Systems | $24,213 | $3,452 | $(2,435) | $10,537 |
| Filtration Products | (1,629) | (2,962) | |
| Corporate | (9,501) | (9,310) | (8,353) | (7,659) |
| Total income (loss) from operations | $13,083 | $(8,820) | |
| Total (loss) income from operations | | $(10,788) | $2,878 |
| | | |
| Segment assets | | |
| Piping Systems | $109,154 | $83,944 | $98,855 | $112,161 |
| Filtration Products | 41,765 | 52,958 | |
| Corporate | 12,350 | 12,586 | 2,731 | 10,229 |
| Total segment assets | $163,269 | $149,488 | $101,586 | $122,390 |
| Capital expenditures | | | | |
| Piping Systems | $2,425 | $4,206 | $1,925 | $4,762 |
| Filtration Products | 294 | 995 | |
| Corporate | 42 | 159 | 332 | 289 |
| Total capital expenditures | $2,761 | $5,360 | $2,257 | $5,051 |
| Depreciation and amortization | | |
| Piping Systems | $3,489 | $3,344 | $5,009 | $3,735 |
| Filtration Products | 1,729 | 1,750 | |
| Corporate | 567 | 712 | 327 | 469 |
| Total depreciation and amortization | $5,785 | $5,806 | $5,336 | $4,204 |
| Interest expense, net | | |
| Piping Systems | $495 | $226 | |
| Filtration Products | 1,966 | 2,239 | |
| Corporate | (1,150) | (967) | |
| Total interest expense, net | $1,311 | $1,498 | |
| Impairment of fixed assets | | |
| Filtration Products | $0 | $1,520 | |
Geographic information. Net sales are attributed to a geographic area based on the destination of the product shipment. Sales to foreign customers was 57% in 20132016 compared to 30%50% in 2012.2015. Long-lived assets are based on the physical location of the assets and consist of property, plant and equipment used in the generation of revenues in the geographic area.
| | | | 2013 | 2012 | 2016 | 2015 |
|
| Net sales | | | |
| United States | $97,311 | $104,830 | $42,048 | $58,707 |
| Middle East | 94,500 | 24,631 | 28,009 | 60,749 |
| Europe | 14,933 | 16,324 | |
| Canada | 7,591 | 9,771 | 25,915 | 2,581 |
| India | 773 | 6,317 | 2,360 | 372 |
| Other Americas | 6,915 | 2,317 | |
| Other | 4,812 | 4,617 | 513 | 287 |
| Total net sales | $226,835 | $168,807 | $98,845 | $122,696 |
| | | | |
| Long-lived assets | | |
| Property, plant and equipment, net of accumulated depreciation | | | |
| United States | $25,260 | $26,952 | $11,747 | $13,822 |
| Canada | | 13,276 | — |
|
| Middle East | 12,751 | 13,204 | 10,987 | 11,211 |
| Denmark | 4,020 | 4,445 | |
| India | 510 | 981 | 265 | 367 |
| Total long-lived assets | $42,541 | $45,582 | |
| Total | | $36,275 | $25,400 |
Note 2 - Significant accounting policies
Use of estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue recognition.The Company recognizes revenues including shipping and handling charges billed to customers, when all the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and (iii)(iv) collectability is reasonably assured. All subsidiaries of the Company, except as noted below, recognize revenues upon shipment or delivery of goods or services when title and risk of loss pass to customers.
Percentage of completion revenue recognition. All divisions recognize revenues under the above stated revenue recognition policy except for sizabledomestic complex contracts that require periodic recognition of income. For these contracts, the Company uses the "percentage of completion" 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 choice of accounting method is made at the time the contract is received based on the expected length and complexity of the project. The percentage of completion 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 the Company are recognized in contract revenues when realization is probable and the amount can be reliably estimated.
Shipping and handling. Shipping and handling costs are included in cost of sales, and the amounts invoiced to customers relating to shipping and handling are included in net sales.
Sales tax. Sales tax is reported on a net basis in the consolidated financial statements.
Operating cycle. The length of piping systemsPiping Systems contracts vary, but are typically less than one year. The Company includes in current assets and liabilities amounts realizable and payable in the normal course of contract completion unless completion of such contracts extends significantly beyond one year. The Company's other businesses do not have an operating cycle beyond one year.
Consolidation. The consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated. The Company accounted for the former investment in joint venture using the equity method.
Translation of foreign currency. Assets and liabilities of consolidated foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at year-end. Revenues and expenses are translated at average weighted exchange rates prevailing during the year. Gains or losses on foreign currency transactions and the related tax effects are reflected in net income. The resulting translation adjustments are included in stockholders' equity as part of accumulated other comprehensive income (loss).
Contingencies. The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, including those involving environmental, tax, product liability and general liability claims. The Company accrues for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the Company's estimates of the outcomes of these matters, and its experience in contesting, litigating and settling other similar matters. The Company does not currently anticipate the amount of any ultimate liability with respect to these matters will materially affect the Company's financial position, liquidity or future operations.
Cash and cash equivalents. All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Cash and cash equivalents were $13.47.6 million and $7.016.6 million as of January 31, 20142017 and 20132016, respectively. The balance is primarily cashOn January 31, 2017, $0.2 million was held in the U.S. and cash equivalents at$7.4 million was held in the foreign subsidiaries. On January 31, 2016, $0.2 million was held in the U.S. and $16.4 million was held in the foreign subsidiaries.
The Company has not experienced any losses as a result of its cash concentration. Consequently, no significant concentration of credit risk is considered to exist. Accounts payable included drafts payable of $0.2 million21 thousand and $3.3 million$290 thousand as of January 31, 20142017 and 20132016, respectively.
Restricted cash. The Loan Agreement provides that all domestic receipts are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. AtRestricted cash held by foreign subsidiaries were $1.1 million and $2.3 million as of January 31, 20142017 and 2016, the amount of such restricted cash was $0.05 million and $0.4 million of restricted cash was held by a foreign subsidiary. At January 31, 2013, the amount of such restricted cash was $0.1 million and $0.6 million of restricted cash was held by a foreign subsidiary.respectively.
Accounts receivable. The majority of the Company's accounts receivable are due from geographically dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customer's financial condition, including the availability of credit insurance. In the U.S., collateral is not generally required. In the U.A.E. and Saudi Arabia, letters of credit are obtained for substantially all material orders. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from customers net of an allowance for claims and doubtful accounts. The allowance for doubtful accounts is calculated using a percentage of sales method based upon collection history and an estimate of uncollectible accounts. Management may exercise its judgment in adjusting the provision as a consequence of known items, such as current economic factors and credit trends. Past due trade accounts receivable balances are written off when the Company's collection efforts have been unsuccessful in collecting the amount due. Accounts receivable adjustments are recorded against the allowance for doubtful accounts.
Concentration of credit risk. The Company maintains its U.S. cash in bank deposit accounts at financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC"). Cash balances are below FDIC limits. The Company has not experienced any losses in such accounts. The Company has a broad customer base doing business in all regions of the U.S. as well as other areas in the world. In the fiscal year endedOn January 31, 20142017, oneno customer in Piping Systems
accounted for 10.6%more than 10% of the Company's net sales. In the fiscal year endedOn January 31, 2013, no2016, one customer accounted for 10.0% or more10.3% of the Company's net sales. At
Two customers accounted for 33.2% of accounts receivable on January 31, 20142017,, one customer in Piping Systemsand two customers accounted for 24.5%46.5% of accounts receivable.receivable on January 31, 2016. As of April 1, 2017, these customers have paid 35.4% of their receivables outstanding on January 31, 2017.
Accumulated other comprehensive loss. Represents the change in equity from non-owner transactions and consisted of foreign currency translation, minimum pension liability and interest rate swaps.marketable securities.
| | | | 2013 |
| 2012 |
| 2016 |
| 2015 |
|
| Equity adjustment foreign currency |
| ($90 | ) |
| $1,179 |
| |
| Equity adjustment foreign currency, gross | |
| ($1,409 | ) |
| ($2,208 | ) |
| Minimum pension liability, gross | (1,513) | (2,479) | (1,472) | (2,303) |
| Interest rate swap, gross | (68) | (219) | |
| Marketable security, gross | | 142 | 118 |
| Subtotal excluding tax effect | (1,671) | (1,519) | (2,739) | (4,393) |
| Tax effect of foreign exchange | 12 | |
| Tax effect of foreign exchange currency | | (50) | (69) |
| Tax effect of minimum pension liability | 482 | 765 | 115 | 523 |
| Tax effect of interest rate swap | 17 | |
| Tax effect of marketable security | | (50) | (41) |
| Total other comprehensive loss | ($1,160) | ($725) | ($2,724) | ($3,980) |
Pension plan. The defined benefit plan that covered Winchester filtration hourly rated employees was frozen on June 30, 2013. The benefits are based on fixed amounts multiplied by years of service of retired participants. The Company engages outside actuaries to calculate its obligations and costs. The funding policy is to contribute such amounts as are necessary to provide for benefits attributed to service to date. The amounts contributed to the plan are sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974.
Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. In the fourth quarter, Filtration Products recorded an additional $0.6 million inventory reserve for slow moving and obsolete materials.
| | | | 2013 | 2012 | 2016 | 2015 |
| Raw materials | $27,330 | $31,820 | $13,648 | $15,291 |
| Work in process | 2,855 | 2,333 | 1,105 | 1,168 |
| Finished goods | 4,311 | 4,051 | 836 | 722 |
| Subtotal | 34,496 | 38,204 | 15,589 | 17,181 |
| Less allowances | 949 | 675 | |
| Inventories, net | $33,547 | $37,529 | |
| Less allowance | | 2,024 | 1,556 |
| Inventories | | $13,565 | $15,625 |
Long-lived assets. Property, plant and equipment are stated at cost. Interest is capitalized in connection with the construction of facilities and amortized over the asset's estimated useful life. Long-lived assets are reviewed for possible impairment whenever events indicate that the carrying amount of such assets may not be recoverable. If such a review indicates impairment, the carrying amount of such assets is reduced to an estimated fair value.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to 30 years. Leasehold improvements are depreciated over the remaining life of the lease or its useful life, whichever is shorter. Amortization of assets under capital leases is included in depreciation and amortization. Depreciation expense was approximately $5.8$5.3 million in 20132016 and $4.2 million in 2012.2015.
| | | | 2013 | 2012 | 2016 | 2015 |
| Land, buildings and improvements | $36,535 | $36,572 | $22,330 | $14,758 |
| Machinery and equipment | 50,793 | 49,919 | 44,538 | 41,534 |
| Furniture, office equipment and computer systems | 9,723 | 11,065 | 4,704 | 5,632 |
| Transportation equipment | 206 | 189 | 3,690 | 40 |
| Subtotal | 97,257 | 97,745 | 75,262 | 61,964 |
| Less accumulated depreciation and amortization | 54,716 | 52,163 | 38,987 | 36,564 |
| Property, plant and equipment, net | $42,541 | $45,582 | $36,275 | $25,400 |
Impairment of long-lived assets.The Company evaluates long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. A factor considered important that could trigger an impairment review includes a year-to-date loss from operations. An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate.
The Company Piping Systems has an idle facility in Cicero, Illinois that has not yet been sold and does not meeta year-to-date loss. Based on the criteria to be presented as held for saleCompany's review there was no impairment of long-lived assets as of January 31, 2014. 2017 and 2016.
Goodwill. The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. All identifiable goodwill as of January 31, 2017, is attributable to the purchase of PPC. The Company does not amortize goodwill.
|
| | | | | | | | | |
| | January 31, 2016 | Acquired | January 31, 2017 |
| Goodwill |
| $— |
|
| $2,279 |
|
| $2,279 |
|
In 2013, management performedJanuary 2017, the requiredFinancial Accounting Standards Board ("FASB") issued authoritative guidance that simplifies the assessment of goodwill for impairment analysis onwhen the idle facility to determine ifestimated fair value of a reporting unit is less than its carrying value was recoverable. Managementby eliminating the requirement to determine the fair value of goodwill. Under the new guidance, the amount of goodwill impairment will be determined thatby the amount the carrying value of the idle facility was fully recoverable. For 2012, management identified recent sales datareporting unit exceeds its fair value. The new guidance is effective for similar facilities for salethe Company beginning January 1, 2020, with early adoption permitted. The Company adopted this new guidance in the area and analyzedfourth quarter of 2016.
The Company performs an impairment assessment of goodwill annually as of January 31, or more frequently if triggering events occur, based on the expected cash flows from different sales scenarios and determined that the carryingestimated fair value of the idle facilityrelated reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. There was not fully recoverable. For 2012, management recorded anno impairment loss of $1.5 million, to adjust the idle facility to its estimated recoverable amount.goodwill in 2016.
Other intangible assets with definite lives. The Company owns several patents including those covering features of its piping and electronic leak detection systems. The patents are not material either individually or in the aggregate overall because the Company believes sales would not be materially reduced if patent protection were not available. Patents are capitalized and amortized on a straight-line basis over a period not to exceed the legal lives of the patents. The Company expenses costs incurred to renew or extend the term of intangible assets. Gross patents were $2.62.63 million and $2.59 million as of January 31, 2017 and 2016, respectively. Accumulated amortization was approximately $2.4 million and $2.3 million as of January 31, 20142017 and 2013. Accumulated amortization was approximately $2.23 million and $2.18 million as of January 31, 2014 and 20132016, respectively. Future amortizations over the next five years ending January 31 will be $48,900 in 2014, $45,700 in 2015, $41,900 in 2016, $38,80044,400 in 2017, $28,80035,400 in 2018, $32,400 in 2019, $26,000 in 2020, $17,200 in 2021, and $168,40091,161 thereafter.
Investment in joint venture. In October 2009, the Company invested $5.9 million, which consisted of $2.0 million for a 49% interest and $3.9 million for a note receivable, in a Canadian joint venture with The Bayou Companies, Inc., a subsidiary of Aegion Corporation. The joint venture completed an acquisition of Garneau, Inc.'s pipe coating and insulation facility and associated assets located in Camrose, Alberta, Canada, which provides the Company the opportunity to participate in the growing oil sands market. In February 2012, the Company loaned $1.0 million to its Canadian joint venture to be used for capital expenditures.
The Company accounts for the investment in joint venture using the equity method. The financial results included in the Company's consolidated financial statements.
|
| | |
| | 2013 | 2012 |
| Share of income from joint venture | $528 | $1,386 |
The following information summarizes the joint venture financial data:
|
| | |
| | 2013 | 2012 |
| Current assets | $13,034 | $14,058 |
| Noncurrent assets | 17,093 | 19,442 |
| Current liabilities | 2,921 | 2,703 |
| Noncurrent liabilities | 14,837 | 18,274 |
| Equity | 12,369 | 12,523 |
| Revenue | 29,110 | 30,448 |
| Gross profit | 4,748 | 7,211 |
| Income from continuing operations | 2,619 | 3,380 |
| Net income | 1,078 | 2,680 |
Research and development. Research and development expenses consist of materials, salaries and related expenses of engineering personnel and outside services for product development projects. Research and development costs are expensed as incurred. Research and development expense was approximately $0.2 million in $0.72016 and $1.1 million in 2013 and $2.2 million in 20122015.
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 and liabilities for realizability at each reporting period.
The Company recognizes the financial statement benefit of a tax position 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 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. For further information, see Note 89 - Income taxes in the Notes to Consolidated Financial Statements.
Net income (loss)loss per common share. Earnings per share ("EPS") are computed by dividing net income (loss)loss by the weighted average number of common shares outstanding (basic). The yearyears 20132015 and 2016 had net earnings. The year 2012 had net losseslosses; therefore, the diluted loss per share was identical to the basic loss per share rather than assuming conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings per share. The year 2016 had a loss from continuing operations. The year 2015 had earnings from continuing operations. The EPS from continuing operations in 2015 are computed by dividing income by the weighted average number of common shares outstanding (basic). The dilutive shares are in the following table:
| | | Basic weighted average number of common shares outstanding | 2013 |
| 2012 |
| 2016 |
| 2015 |
|
| Basic weighted average number of common shares outstanding | 7,028 |
| 6,922 |
| 7,488 |
| 7,280 |
|
| Dilutive effect of stock options | 68 |
| — |
| |
| Dilutive effect of stock options, deferred stock and restricted stock units | | — |
| 91 |
|
| Weighted average number of common shares outstanding assuming full dilution | 7,096 |
| 6,922 |
| 7,488 |
| 7,371 |
|
| | | |
| Weighted average number of stock options not included in the computation of diluted EPS of common stock because the option exercise prices exceeded the average market prices | 201 |
| 783 |
| 306 |
| 710 |
|
| Canceled options during the year | (73 | ) | (36 | ) | (159 | ) | (77 | ) |
| Stock options with an exercise price below the average stock price | 575 |
| 186 |
| 218 |
| 10 |
|
Equity-based compensation. The Company issues various types of stock-based awards to employees and directors: restricted stock, deferred stock and stock options. Compensation expense associated with restricted and deferred stock is based on the fair value of the common stock on the date of grant. Stock compensation expense for stock options is recognized ratably over the requisite service period of the award. The Black-Scholes option-pricing model is utilized to estimate the fair value of option awards. Determining the fair value of stock options using the
Black-Scholes model requires judgment, including estimates for (1) risk-free interest rate - an estimate based on the yield
of zero-coupon treasury securities with a maturity equal to the expected life of the option; (2) expected volatility - an estimate based on the historical volatility of the Company's Common Stock;common stock; and (3) expected life of the option - an estimate based on historical experience including the effect of employee terminations. If any of these assumptions differ significantly from actual, stock-based compensation expense could be impacted.
Fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable market rates.
The Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing interest rates under the revolving credit agreement. Any differences paid or receivedholds a marketable equity security of approximately $0.1 million on January 31, 2017, which it classifies as available-for-sale and recorded in other non-current assets on the interest rate swap agreements are recognizedConsolidated Balance Sheet. This security is carried at estimated fair value with unrealized gains and losses reflected in Accumulated Other Comprehensive Income and classified as adjustments to interest expense overLevel 1 in the lifefair value hierarchy. The assessment for impairment of marketable equity securities as available-for sale is based on established financial methodologies, including quoted market prices for publicly traded securities. If the Company determines that a loss in the value of the swap, thereby adjusting the effective interest rate on the underlying obligation.investment is other than temporary, any such losses are recorded in other expense (income), net.
Reclassifications. Reclassifications were made to prior-year financial statementsbalance sheet to conform to the current-year presentations. The Company reclassified debt issuance costs and the assets and liabilities related to the defined benefit plan that covered Filtration employees from discontinued to continuing operations.
Recent accounting pronouncements. In 2013,January 2017, the FinancialFASB issued authoritative guidance that simplifies the assessment of goodwill for impairment when the estimated fair value of a reporting unit is less than its carrying value by eliminating the requirement to determine the fair value of goodwill. Under the new guidance, the amount of goodwill impairment will be determined by the amount the carrying value of the reporting unit exceeds its fair value. The new guidance is effective for the Company beginning January 1, 2020, with early adoption permitted. The Company performs its annual goodwill impairment assessment process annually as of January 31, or more frequently if triggering events occur. The Company adopted this new guidance in the fourth quarter of 2016, and it did not have a material impact on the Company's operating results, financial position or cash flows.
In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the current guidance. The new guidance is effective for the Company beginning February 1, 2018, with early adoption permitted. The Company is currently assessing the potential impact the guidance will have upon adoption.
In August 2016, the FASB issued Accounting Standards BoardUpdate ("FASB"ASU") 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new standard provides guidance on eight targeted areas and how they are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the effect that this standard will have on the consolidated financial statements and related disclosures.
In March 2016, the FASB issued new accounting guidance clarifyingrelating to the accounting for share-based payment transactions. This guidance involves several aspects of the releaseaccounting for share-based payment transactions, including the income tax consequences, classifications of a cumulative translation adjustment into net income when a parentawards as either sells a partequity or allliabilities and classification on the statement of cash flows. The standard is effective for the Company beginning in its investment in a foreign entity or no longer holds a controllingfiscal year 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the effect that this standard will have on the consolidated financial interest in a subsidiary or groupstatements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires entities to recognize assets and liabilities for most leases on their balance sheets. It also requires additional qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of assets that is a nonprofit activity or a business within a foreign entity. The new standardcash flows arising from leases. ASU No. 2016-02 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2013.2018, with early adoption permitted. The Company does not anticipateis currently evaluating the effect that this adoptionstandard will have on the consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a significantGoing Concern ("ASU 2014-15"). ASU 2014-15 provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016. The adoption of ASU 2014-15 did not have a material impact on the Company’s consolidated financial statements.
In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers ("Topic 606")", with several clarifying updates issued during 2016. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The mandatory adoption will require new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for the Company beginning February 1, 2018, with early adoption permitted. The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company has not yet selected the transition method The Company currently expects to adopt the new revenue standards in its first quarter of 2018.
The Company is currently evaluating the impact of adopting the standard on the Company’s financial position, results of operations, or cash flows.
In September 2013,flows and related disclosures and has not concluded on its adoption methodology. Although it is early in the Department of Treasury and Internal Revenue Service issuedevaluation process, the final tangible property regulationsCompany does not expect Topic 606 to have a material impact on the capitalizationfinancial statements, though internal processes, record keeping and disclosures may be significantly impacted. As a portion of costs incurredthe Company’s sales are generated from the sale of finished products to customers, these sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. These are largely un-affected by the new standard. The remaining sales is not believed to be material because Topic 606 generally supports the recognition of revenue over time under the cost-to-cost method for acquisitions, maintenance and improvements. The final regulations are effective for taxable years beginning on or after January 1, 2014. Early adoptionthe majority of the contracts, which is permissible for taxable years beginning on or after January 1, 2012. The Company is evaluatingconsistent with the effectscurrent percentage of final regulations on its operating results and financial position.completion revenue recognition model.
The Company evaluated other recent accounting pronouncements and does not expect them to have a material impact on the consolidated financial statements.
Note 3 - Acquisition
PPIH entered into a purchase agreement with its joint venture partner Aegion Corporation to acquire the remaining 51% ownership of Perma-Pipe Canada, Ltd. ("PPC"), a coating and insulation company in Camrose, Alberta, which acquisition closed on February 4, 2016. PPIH had owned a 49% interest in PPC since 2009, when the joint venture was formed with Aegion to serve the oil and gas industry in Western Canada.
The purchase price was $13.1 million CAD ($9.6 million USD) in cash and debt at closing and is subject to certain post-closing adjustments. The accounting for this acquisition has been completed. The following table represents the allocation of the total consideration in the acquisition of PPC:
|
| | | | |
| Total purchase consideration: | | |
| Cash | |
| $7,587 |
|
| Loan payable | | 2,000 |
|
| Purchase consideration to third party | | 9,587 |
|
| | |
| Fair value of 49% previously held equity interest | | 7,492 |
|
| Total purchase consideration | |
| $17,079 |
|
| | |
| Fair value of net assets acquired: | | |
| Cash and cash equivalents | |
| $2,915 |
|
| Property and equipment | | 13,124 |
|
| Goodwill | | 2,279 |
|
| Net working capital | | 406 |
|
| Other assets (liabilities) net | | (1,645 | ) |
| Net assets acquired | |
| $17,079 |
|
The acquisition resulted in $2.3 million of goodwill. Goodwill is not deductible for income tax purposes. The Company incurred legal, professional and other costs related to this acquisition. These one-time costs of $0.2 million were recognized as general and administrative expenses.
In the first quarter of 2016, the Company recognized a non-cash loss of $1.6 million, which represents the difference between the pre-existing book value interest in PPC immediately prior to the acquisition remeasured to its fair value upon the acquisition date.
Note 34 - Discontinued operations
On April 30, 2013,In January, 2016, the Company sold most of the domesticcertain assets and liabilities of its subsidiary Thermal Care, Inc.TDC Filter business based in Bolingbrook, Illinois to a subsidiarythe Industrial Air division of IPEG, Inc. for $16.3CLARCOR, Inc.. On January 29, 2016, the Company also sold its Nordic Air Filtration, Denmark and Nordic Air Filtration, Middle East businesses to Hengst Holding GmbH. The aggregated sales price of these filtration businesses was $22.0 million, including cash proceeds of $18.4 million, of which $1.1$0.5 million is held in escrow until July, 2017.
In May, 1, 2014 and included in other assets on the consolidated balance sheet. On June 26, 2013,2016, the Company sold substantially allcompleted the sale of its Bolingbrook Filtration manufacturing facility to a third party at a price of $7.1 million. The sale generated approximately $1.9 million in cash after expenses and mortgage payoffs.
In September, 2016, the assetsCompany completed the sale of the HVAC business previously includedits Cicero Filtration facility to a third party at a price of $0.5 million. The sale generated approximately $0.4 million in Corporate and Other. cash after expenses.
In October, 2013,2016, the Company decidedcompleted the sale of its Virginia Filtration facility to sell its remaining industrial processa third party at a price of $1.5 million. The sale generated approximately $1.4 million in cash after expenses.
The Filtration business in Denmark. This business was sold on February 28, 2014. From October 2013 until it was sold, the business was operational and selling product. These businesses aresegment is reported as discontinued operations in the consolidated financial statements, and the notes to consolidated financial statements have been revised to conform to the current year reporting. TheThere was tax expense of $1.0 million and $0.1 million for the years ended January 31, 2013 Balance Sheet has been revised to reflect the separate amounts for assets2017 and liabilities that were sold.2016, respectively. Income from discontinued operations net of tax was $0.7 million in 2016 and a loss of $6.0 million in 2015.
Impairment. $8.2The Company evaluates assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate. In the fourth quarter of 2015, Filtration Products recorded a $6.5 million and $2.3 million for impairment expense relating to the years ended January 31, 2014 and 2013, respectively.Virginia facility.
Results of the discontinued operations were as follows:
|
| | | | | | |
| | 2013 |
| 2012 |
|
| Net sales |
| $14,063 |
|
| $43,210 |
|
| | | |
| Gain on disposal of discontinued operations |
| $11,082 |
|
| $— |
|
| (Loss) income from discontinued operations | (28 | ) | 1,237 |
|
| Income from discontinued operations before income taxes | 11,054 |
| 1,237 |
|
| Income tax expense (benefit) | 2,820 |
| (1,035 | ) |
| Income from discontinued operations, net of tax |
| $8,234 |
|
| $2,272 |
|
| | | |
|
| | | | | | |
| | 2016 |
| 2015 |
|
| Net sales |
| $10,467 |
|
| $64,975 |
|
| | | |
| Gain on disposal of discontinued operations |
| $209 |
|
| $8,099 |
|
| Impairment expense on discontinued operations | — |
| (6,480 | ) |
| Income (loss) from discontinued operations | 1,522 |
| (7,569 | ) |
| Income (loss) from discontinued operations before income taxes | 1,731 |
| (5,950 | ) |
| Income tax expense | 1,043 |
| 94 |
|
| Income (loss) from discontinued operations, net of tax |
| $688 |
|
| ($6,044 | ) |
| | | |
Components of assets and liabilities from discontinued operations consist of the following:
| | | | | | | | January 31, |
| | 2013 |
| 2012 |
| 2017 | 2016 |
| Current assets | |
| |
| Cash and cash equivalents |
| $1 |
|
| $1 |
|
| $— |
|
| $5 |
|
| Trade accounts receivable, net | 595 |
| 4,564 |
| 25 |
| 5,720 |
|
| Inventories, net | 593 |
| 4,804 |
| — |
| 2,000 |
|
| Other assets | 34 |
| 849 |
| — |
| 60 |
|
| Total current assets from discontinued operations | 1,223 |
| 10,218 |
| |
| Property, plant and equipment, net of accumulated depreciation | 551 |
| 819 |
| — |
| 6,456 |
|
| Non-Current assets | | |
| Other assets | 363 |
| 434 |
| |
| Total noncurrent assets from discontinued operations | 914 |
| 1,253 |
| |
| Total assets from discontinued operations |
| $2,688 |
|
| $12,290 |
|
| $25 |
|
| $14,241 |
|
| | | |
| Current liabilities | | |
| Trade accounts payable, accrued expenses and other |
| $492 |
|
| $7,496 |
|
| $199 |
|
| $7,514 |
|
| Current maturities of long-term debt | 35 |
| 35 |
| — |
| 5,322 |
|
| Total current liabilities from discontinued operations | 527 |
| 7,531 |
| |
| Long-term liabilities | 968 |
| 1,485 |
| |
| Total liabilities from discontinued operations |
| $1,495 |
|
| $9,016 |
| 199 |
| 12,836 |
|
Cashflows from discontinued operations:
|
| | | | | | |
| | January 31, |
| | 2017 | 2016 |
| Net cash provided by (used in) discontinued operating activities |
| $1,133 |
|
| ($7,113 | ) |
| Net cash provided by discontinued investing activities | 9,606 |
| 17,026 |
|
| Net cash used in discontinued financing activities | (10,739 | ) | (3,025 | ) |
Note 45 - Retention
RetentionA retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of $5.0$2.7 million and $1.1$2.8 million were included in the balance of trade accounts receivable as of January 31, 20142017 and 20132016, respectively.
Retention payable is the amount withheld by the Company until a contract is completed. There was no A retention payables at January 31, 2014 and $0.4receivable of $3.2 million was included in the balance of trade accounts payable atother long-term assets as of January31, 2013.2017 and 2016 due to the long-term nature of the receivables.
Note 56 - Costs and estimated earnings on uncompleted contracts
| | | | 2013 | 2012 | 2016 | 2015 |
| Costs incurred on uncompleted contracts | $52,064 | $39,556 | $82,280 | $78,843 |
| Estimated earnings | 18,915 | 13,861 | 51,546 | 46,359 |
| Earned revenue | 70,979 | 53,417 | 133,826 | 125,202 |
| Less billings to date | 71,725 | 52,772 | 132,835 | 123,915 |
| Costs in excess of billings, net | ($746) | $645 | $991 | $1,287 |
| Balance sheet classification | | | | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | $1,476 | $1,630 | $2,091 | $2,463 |
| Billings in excess of costs and estimated earnings on uncompleted contracts | (2,222) | (985) | (1,100) | (1,176) |
| Costs in excess of billings, net | ($746) | $645 | $991 | $1,287 |
Note 67 - Debt
| | | | 2013 |
| 2012 |
| 2016 |
| 2015 |
|
| Revolving line domestic | $6,951 | $13,989 | |
| Revolving line North America | | $3,813 | $5,237 |
| Mortgage notes | 11,172 |
| 11,540 |
| 7,463 |
| 1,443 |
|
| Revolving lines foreign | 5,059 |
| 2,242 |
| 301 |
| 8,131 |
|
| Term loans | 6,494 |
| 10,608 |
| 80 |
| 246 |
|
| Capitalized lease obligations (See Note 7 - Lease information) | 2,067 |
| 2,584 |
| |
| Capitalized lease obligations | | 283 |
| 442 |
|
| Total debt | 31,743 |
| 40,963 |
| 11,940 |
| 15,499 |
|
| Unamortized debt issuance costs | | (165 | ) | (23 | ) |
| Less current maturities | 8,274 |
| 5,384 |
| 4,517 |
| 14,006 |
|
| Total long-term debt | $23,469 | $35,579 | $7,258 | $1,470 |
| | | |
| Current portion of long-term debt | | $4,517 | $14,006 |
| Unamortized debt issuance costs | | (46 | ) | (2 | ) |
| Total short-term debt | | $4,471 | $14,004 |
The following table summarizes the Company's scheduled maturities aton January 31,:31:
| | | | Total | 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| Thereafter |
| Total | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Thereafter |
|
| Revolving line domestic | $6,951 |
| $— |
|
| $— |
| $6,951 |
| $— |
|
| $— |
|
| $— |
| |
| Revolving line North America | | $3,813 |
| $3,813 |
|
| $— |
|
| $— |
|
| $— |
|
| $— |
|
| $— |
|
| Mortgages | 11,172 | 380 | 395 | 410 | 3,590 | 374 | 6,023 | 7,463 | 121 | 355 | 357 | 362 | 367 | 5,901 |
| Revolving line foreign | 5,059 | 5,059 | — |
| — |
| — |
| — |
| 0 | 301 | 301 | — |
| — |
| — |
| — |
| — |
|
| Term loans | 6,494 | 2,241 | 1,874 | 1,757 | 622 |
| — |
| 0 | 80 | 62 | 18 | — |
| — |
| — |
| — |
|
| Capitalized lease obligations | 2,067 | 594 | 648 | 647 | 154 | 24 | — |
| 283 | 220 | 62 | 1 |
| — |
| — |
| — |
|
| Total | $31,743 | $8,274 | $2,917 | $9,765 | $4,366 | $398 | $6,023 | $11,940 | $4,517 | $435 | $358 | $362 | $367 | $5,901 |
Revolving line North America. On July 11, 2002,September 24, 2014, the Company entered into a secured loanCredit and securitySecurity agreement with a financial institution (as amended, "Loan"Credit Agreement"). Under the terms of the LoanCredit Agreement, which
matures on November 30, 2016,September 24, 2018, the Company can borrow up to $25.0a combined $15.0 million, in the U.S. and Canada, subject to borrowing base availability from secured domestic and certain Canadian assets, such as accounts receivable and inventory, and other requirements, under a revolving line of credit. The Company granted a continuing lien upon the Company’s assets. The LoanCredit Agreement covenants restrict debt, liens, and certain investments, do not permit payment of dividends, and require attainment of specific levels of profitability and cash flows. At flows. On January 31, 2014,2017, the Company was in compliance with all covenants under the LoanCredit Agreement. The domestic revolving line balances as of January 31, 2017 and 2016 were included as current liabilities in the consolidated balance sheets, because the Credit Agreement. has a subjective acceleration clause.
Interest rates arevary based on options selected by the Company as follows: average availability in the preceding fiscal quarter and are: (a) a margin in effect of 0.25 in effect plus prime rate; and/a base rate, if below certain availability limits; or (b) a margin of 2.25 in effect plus the LIBOREurodollar rate for the corresponding interest period. At On January 31, 2014, these rates were 3.5% and 2.5%, respectively. As of January 31, 2014,2017, the Company had borrowed $7.0$3.8 million at prime5%, 3.77% and LIBOR rates3.95% and had $13.0$5.8 million available to it under the revolving line of credit. In addition, $0.1$0.2 million of availability was used under the LoanCredit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. The Loan Agreement provides that all domestic receipts are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At January 31, 2014, the amount of such restricted cash was $0.05 million. Cash required for operations is provided by draw-downs on the line of credit.
Revolving lines foreign. The Company also has credit arrangements used by its Danish and Middle Eastern subsidiaries. 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. TheSome credit arrangement covenantcovenants requires a minimum tangible net worth to be maintained. At maintained including intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends. On January 31, 2014,2017, the Company was in compliance with the covenant under the credit arrangement. Interest rates are 4.0% per annum below National Bank of Fujairah Base Rate, minimum 3.5% per annum, and Emirates Inter Bank Offered Rate (EIBOR) plus 3.5% per annum. The Company's interest rates range from 3.5% to 6.0% at on January 31, 2014. At 2017. On January 31, 2014,2017, the Company can borrow $26.0 million under these credit arrangements $20.5 million.arrangements. The Company borrowed $5.1$0.3 million and had $15.5$20.8 million available under these credit arrangements.arrangements as of January 31, 2017. In addition, $4.9 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases.
The Company has a revolving line for 50 million Saudi Riyal (approximately $13.3 million U.S. dollars at the prevailing exchange rate on the transaction date) from a Saudi Arabian bank. The loan has an interest rate of approximately 6% and matures September 2017.
The Company has a revolving line for 15 million Dirhams (approximately $4.2 million U.S. dollars at the prevailing exchange rate on the transaction date) from a bank in the U.A.E. The loan has an interest rate of approximately 6% and matures June 2017.
The Company has a revolving line for 31 million Dirhams (approximately $8.5 million U.S. dollars at the prevailing exchange rate on the transaction date) from a bank in the U.A.E. The loan has an interest rate of approximately 6% and matures November 2017.
The Company guarantees the subsidiaries' debt including all foreign debt.
Mortgages. On July 28, 2016, the Company borrowed $8.0 million CAD (approximately $6.1 million USD at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the manufacturing facility located in Alberta, Canada that matures on December 23, 2042. The interest rate is variable, currently at 4.7%, with monthly payments of $31 thousand CAD (approximately $24 thousand USD) for interest; and monthly payments of $27 thousand CAD (approximately $20 thousand USD) for principal. Principal payments begin January 2018.
On June 19, 2012,, Perma-Pipe, Inc. borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at 4.5% with monthly payments of $13 thousand for both principal and interest and matures July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate, provided
that the applicable interest rate shall not adjust more than 2.0% per annum and shall be subject to a ceiling of 18.0% and a floor of 4.5%.
OnTerm loans. Between March 27, 2012,2015 and September 2015, the Company obtained a loanloans in the aggregate amount of 7.91.3 million Danish Kroners ("DKK")Dirhams (approximately $1.4 million U.S. dollars at the prevailing exchange rate on the transaction date) from a Danish bank under a mortgage note secured by its Filtration Products manufacturing facility in Denmark. The loan has an interest rate of 2.2%, monthly payments of approximately $7.5$341 thousand for both principal and interest and matures March 2032.
On March 4, 2008, the Company borrowed $5.4 million under a mortgage note secured by the Filtration Products manufacturing facility located in Bolingbrook, Illinois that matures March 2033. The 25 year mortgage resets its interest rate every five years based on a published index. The interest rate is 4.04% with monthly payments of $30 thousand for principal and interest combined.
On January 18, 2008, the Company borrowed $3.7 million under a mortgage note secured by its manufacturing and office facility in Niles, Illinois. The loan bears interest at 6.3% with monthly payments of $23 thousand for both principal and interest based on an amortization schedule of thirty years with a balloon payment at maturity in January 2018.
Term loans. On August 28, 2007, the Company amended and restated the Term Loan Note to $3.0 million ("Term Loan"). This secured promissory note is one of the term loan notes referred to in, and is issued pursuant to, the Loan Agreement and is entitled to all of the benefits and security of the Loan Agreement. Interest rates under the Term Loan are based on options selected by the Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At January 31, 2014, the prime rate was 3.25%, the LIBOR rate was 0.25% and the margin added to the prime rate, which is determined each quarter based on the applicable financial statement ratio, was 0.50 percentage points. The Company is scheduled to pay $107 thousand of principal on the first days of March and June. The third amendment to the loan agreement allows for an additional term loan of $2.5 million less $0.6 million, the amount outstanding on this loan, in 2013 subject to attaining certain performance levels. The weighted average interest rates based on this loan at January 31, 2014 and 2013 were 4.21% and 4.24%, respectively.
On December 10, 2012, the Company obtained a loan in the amount of 1.4 million Euros (approximately $1.8 million U.S. dollars at the prevailing exchange rate on transaction date) from a Danish bank by its Filtration Products manufacturing facility in Denmark. The loan is secured by equipment. The interest rate at
January 31, 2014 was 3.7%. The loan has a variable interest rate plus margin, quarterly payments of approximately $108 thousand for both principal and interest and matures December 2017.
Between November 25, 2012 and year end, the Company obtained a loan in the amount of 0.4 million Dirhams (approximately $115 thousand U.S. dollars at the exchange rate prevailing on the transaction date)dates). The loan bearsloans bear interest at 3.4%5.0% and 6.0% with monthly payments of $5$17 thousand for both principal and interest and maturesmature between JanuaryApril 1, 2017 and March of 2015.
On April 10, 2012, the Company obtained a loan from a U.A.E. bank to purchase equipment and office furniture for a building for the Piping System's facility in Saudi Arabia, in the amount of 22.2 million Dirhams (approximately $5.9 million U.S. dollars at the exchange rate prevailing on the transaction date). The loan is secured by the equipment and office furniture purchased and bears interest at 5.5% with quarterly payments of approximately $408 thousand for both principal and interest and matures April, 2017.
On May 14, 2010, Perma-Pipe, Inc. borrowed $1.0 million under an equipment loan secured by equipment. The loan bears interest at 5.8% with monthly payments of $24 thousand for both principal and interest and matures May 2014.
On April 8, 2003, the Company obtained a loan from a Danish bank to purchase equipment and office furniture for a building for the Filtration Products' facility in Denmark, in the amount of 0.7 million Euros (approximately $0.8 million U.S. dollars at the exchange rate prevailing on the transaction date). The loan is secured by the equipment and office furniture purchased and bears interest at 6.1% with quarterly payments of $9 thousand for both principal and interest and matures April 2014.October 31, 2017.
Capital leases. On November 28, 2013, Filtration Products' Denmark location obtained a capital lease in the amount of 0.5 million DKK (approximately $79 thousand U.S. dollars at the prevailing exchange rate on the transaction date) from a Danish bank to finance capital expenditures. The loan bears interest at a fixed rate of 3.7% per annum with monthly principal and interest payments of $2 thousand and matures December 2018.
On July 13, 2012, Filtration Products' Denmark location obtained a capital lease in the amount of 1.5 million DKK (approximately $0.3 million U.S. dollars at the prevailing exchange rate on the transaction date) from a Danish bank to finance capital expenditures. The loan bears interest at a fixed rate of 5.2% per annum with monthly principal and interest payments of $4 thousand and matures August 2017.
On May 1, 2012, Piping Systems and Filtration Products borrowed $1.1$0.4 million under an equipment loan secured by equipment. The loan bears interest at 6.5% with monthly payments of $21$8 thousand for both principal and interest and matures June 2017.
On January 31, 2012, Perma-Pipe, Inc. borrowed $1.2 million under an equipment loan secured by equipment. The loan bears interest at 6.7% with monthly payments of $24 thousand for both principal and interest and matures January 2017.
On July 1, 2011, Filtration Products' Denmark locationAugust 5, 2016, Piping Systems obtained a capital lease in the amount of 2.2 million DKK (approximately $0.4 million U.S. dollars at the prevailing exchange rate on the transaction date) from a Danish bank to finance capital expenditures. The loan bears interest at a fixed rate of 6.4% per annum with monthly principal and interest payments of $6 thousand and matures June 2016.
Between 2011 and 2012, the Company obtained several capital leases totaling $81 thousand to finance capital computer equipment. The interest rate for these capital leases range from 3.8% to 4.6% per annum with monthly principal and interest payments of $3 thousand and matures between June 2014 and May 2015.
In 2011 and 2013, Piping Systems obtained several capital leases totaling 3.10.6 million Indian Rupees (approximately $57$8 thousand U.S. dollars at the prevailing exchange rate on the transaction date) to finance vehicle equipment.
The interest rate for thesethis capital leases range from 12.8% to 17.8%lease is 15.6% per annum with monthly principal and interest payments of $1 thousand$270, and the lease matures in 2014 and 2016.July 5, 2019.
On April 23, 2010, Filtration Products' Denmark locationFebruary 1, 2013, Piping Systems obtained a capital lease in the amount of 1.0 million DKKfor 41,000 CAD (approximately $0.2 million$41 thousand U.S. dollars at the prevailing exchange rate on the transaction date) from a Danish bank to finance vehicle equipment. The interest rate for this capital expenditures. The loan bears interest at a fixed rate of 9.7%lease is 4% per annum with monthly principal and interest payments of $2.5$1 thousand,, and the lease matures June 2015.in November 30, 2017.
On March 12, 2013, Piping Systems obtained two capital leases for 710,000 CAD (approximately $728 thousand U.S. dollars at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 4% per annum with monthly principal and interest payments of $12 thousand, and these leases mature on March 11, 2017.
On June 26, 2014, Piping Systems obtained two capital leases for 880,000 CAD (approximately $942 thousand U.S. dollars at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 3.25% per annum with monthly principal and interest payments of $14 thousand, and these leases mature on June 25, 2018.
On July 1, 2014, Piping Systems obtained a capital lease for 49,000 CAD (approximately $52 thousand U.S. dollars at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for this capital lease is 3.25% per annum with monthly principal and interest payments of $1 thousand, and the lease matures in June 30, 2018.
Note 78 - Lease information
| | | Property under capitalized leases | 2013 |
| 2012 |
| 2016 |
| 2015 |
|
| Machinery and equipment | $3,328 | $3,325 | $1,308 | $1,747 |
| Transportation equipment | 31 |
| 42 |
| 22 |
| 22 |
|
| Computer equipment | 92 |
| 92 |
| |
| Subtotal | 3,451 |
| 3,459 |
| 1,330 |
| 1,769 |
|
| Less accumulated amortization | 871 |
| 546 |
| 646 |
| 726 |
|
| Total | $2,580 | $2,913 | $684 | $1,043 |
| | | |
| Fixed assets acquired under capital leases | $107 | $569 | |
The Company has several significant operating lease agreements as follows:
Office Space of approximately 31,650 square feet in Niles, IL is leased until October, 2023.
Nine acres of land in the Kingdom of Saudi Arabia is leased through 2030 and an additional ten acres of land is leased through 2031.2030.
Land for productionProduction facilities in the U.A.EU.A.E. of approximately 80,200 square feet on approximately 107,600 square feet of land is leased until June, 30, 2030.
Office space of approximately 21,500 square feet and open land for production facilities of approximately 37,700423,000 square feet in the U.A.E. is leased until July, 2032.
Office space
Production facilities in the U.A.E. of approximately 6,00078,100 square feet in Virginia is leased through August 31, 2015.until December, 2032.
AtThe Company leases its administrative offices in the U.A.E. from a partnership in which a Company employee is a partner. Total rent paid to the partnership was $0.3 million in 2016 and 2015, respectively. Lease payments are based on prevailing market rates.
On January 31, 2014,2017, future minimum annual rental commitments under non-cancelable lease obligations were as follows:
| | | | Operating Leases | Capital Leases | Operating Leases | Capital Leases |
| 2014 | $2,211 | $705 | |
| 2015 | 1,567 |
| 724 |
| |
| 2016 | 1,378 |
| 678 |
| |
| 2017 | 1,274 |
| 157 |
| $2,199 | $231 |
| 2018 | 1,243 |
| 24 |
| 1,705 |
| 63 |
|
| 2019 | | 1,536 |
| 1 |
|
| 2020 | | 1,475 |
| — |
|
| 2021 | | 1,477 |
| — |
|
| Thereafter | 1,526 |
| — |
| 9,707 |
| — |
|
| Subtotal | 9,199 |
| 2,288 |
| 18,099 |
| 295 |
|
| Less Amount representing interest | | 221 |
| | 12 |
|
| Future minimum lease payments | $9,199 | $2,067 | $18,099 | $283 |
Rental expense for operating leases was $1.4$2.1 million and $2.1$0.7 million in 20132016 and 20122015, respectively.
Note 89 - Income taxes
| | | Income (loss) from continuing operations | 2013 |
| 2012 |
| |
| (Loss) income from continuing operations | | 2016 | 2015 |
|
| Domestic | ($7,485) | ($6,719) | ($8,465) | ($2,066) |
| Foreign | 19,785 |
| (2,213 | ) | (4,512) | 5,076 |
|
| Total | $12,300 | ($8,932) | ($12,977) | $3,010 |
|
| | | | |
| Components of income tax (benefit) expense | | |
| Current | | |
| Federal | ($245) | ($964) |
| Foreign | 3,024 |
| 229 |
|
| State and other | (82 | ) | (34 | ) |
| Subtotal | 2,697 |
| (769 | ) |
| Deferred | | |
| Federal | (2,715 | ) | 12,545 |
|
| Foreign | (475 | ) | 466 |
|
| State and other | — |
| (417 | ) |
| Subtotal | (3,190 | ) | 12,594 |
|
| Total | $(493) | $11,825 |
The excess tax benefit related to stock options recorded through equity was $11 thousand in 2012 and did not affect net loss. The amounts were recorded to additional paid-in capital on the consolidated balance sheets and in financing activities on the consolidated statement of cash flows. |
| | | | |
| Components of income tax (benefit) expense | 2016 |
| 2015 |
|
| Current | | |
| Federal | ($106) | $12 |
| Foreign | 837 | 1,541 |
|
| State and other | (1,309) | 71 |
|
| Subtotal | (578) | 1,624 |
|
| Deferred | | |
| Federal | — |
| — |
|
| Foreign | (33) | (249) |
| State and other | — |
| — |
|
| Subtotal | (33) | (249) |
| Total | ($611) | $1,375 |
The determination of the consolidated provision for income taxes, deferred tax assets and liabilities, and the related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the Company is required to calculate and provide for estimated income tax expense for each of the tax jurisdictions. The process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Changes in the estimated level of annual pre-tax income, in tax laws, and resulting from tax audits can affect
the overall ETR,effective tax rate ("ETR"), which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.
The ETR in 20132016 has been significantly impacted by the Company reporting a pre-tax loss for the year, a portion of which was less thangenerated by the statutory U.S. federal incomesubsidiary in the U.A.E., which receives no tax benefit due to a zero tax rate mainlyin that country and due to the mix of the U.A.E. earnings (loss) versus total earnings (loss) because the U.A.E. is not subject to any local country income tax. Additionally, the ETR in 2013 is impacted by the $1.2 million releaseimpact of the full valuation allowance related to the Company's deferred tax assets in Saudi Arabia. As a result of two quarters of positive operating income as well as management's expectations of this subsidiary's profitability for the fiscal year 2013, the Company believes the second quarter of 2013 was the appropriate time to release the valuation allowance. The ETR in 2012 was less than the statutory U.S. federal income tax rate, primarily due to the full valuation allowance of $13.9 million recorded on themaintained against domestic deferred tax assets. Other changes in the ETR from the prior year-to-date to the current year-to-date are due to the Canadian acquisition and the allocation of tax expense between continuing operations, other comprehensive income and discontinued operations when applying intraperiod allocation rules. The Company remains in a domestic NOL carryforward position.
The Company has not provided U.S. Federal tax on remaining unremitted earnings of its Middle East subsidiaries. The Company does not believe that it will be necessary to repatriate earnings from these subsidiaries. The Company intends and has the ability to reinvest these earnings for the foreseeable future outside the U.S. If these amounts were distributed to the U.S., in the form of dividends or otherwise, the Company could be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable, because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
35During the fourth quarter of 2014, the Company concluded that not all of the undistributed earnings of Perma-Pipe India Ltd, will remain permanently reinvested outside the U.S. and are available for use in the U.S. or in entities in other foreign countries. As such, the Company recorded a deferred tax liability of $0.1 million and $0.2 million for the periods ending January 31, 2017 and 2016, respectively, related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $0.5 million and $2.8 million of undistributed earnings, respectively. Future earnings related to this subsidiary, and the Canadian and Denmark subsidiaries are not deemed permanently reinvested. No U.S. cash tax payments will be made upon distribution of these foreign earnings as long as the Company has sufficient tax attributes in the U.S. to reduce the cash tax consequences of potential repatriation.
The difference between the provision for income taxes and the amount computed by applying the U.S. Federal ETRstatutory rate of 34% was as follows:
| | | | 2013 |
| 2012 |
| 2016 |
| 2015 |
|
| Tax benefit at federal statutory rate | $4,182 | ($3,037) | |
| Tax (benefit) expense at federal statutory rate | | ($4,412) | $1,023 |
| Permanent differences management fee allocation | | — |
| 619 |
|
| Domestic valuation allowance | — |
| 12,975 |
| 567 |
| 804 |
|
| Permanent differences other | | 205 |
| 214 |
|
| Valuation allowance for state NOLs | — |
| 972 |
| 122 |
| 88 |
|
| Differences in foreign tax rate | (3,049 | ) | 823 |
| 2,131 |
| (780) |
| Foreign tax credit | — |
| (67 | ) | (1,249) | (761) |
| Domestic deferred tax true ups | | — |
| (346) |
| Research tax credit | — |
| (46 | ) | — |
| (54) |
| Repatriation | | 1,338 |
| 821 |
|
| Valuation allowance for foreign NOLs | (1,209 | ) | 613 |
| (36) | 32 |
|
| Nontaxable income from the Canadian joint venture | (179 | ) | (471 | ) | |
| Nontaxable loss (income) from the Canadian joint venture | | 551 |
| (205) |
| Nondeductible interest | | 242 |
| — |
|
| State taxes, net of federal benefit | (192 | ) | (247 | ) | (103) | (58) |
| All other, net expense | (46 | ) | 310 |
| 33 |
| (22) |
| Total |
| ($493 | ) |
| $11,825 |
| ($611) |
| $1,375 |
|
The Company has a U.S. Federal operating loss carryforward of $9.1$28.4 million that will begin to expire in the year ending January 31, 20302031. In addition, there are suspended excess tax benefits of $0.3 million.
The deferred tax asset ("DTA") for state NOL carryforwards of $1.2$1.9 million relates to amounts that expire at various times from 20142017 to 2031. The amount that expired in 2013 is approximately $2 thousand.2031.
The Company has a DTA for foreign NOL carryforwardscarryforward of $0.5$0.1 million for its subsidiary in Saudi Arabia that can be carried forward indefinitely and does not have a valuation allowance recorded against it. The ultimate realization of this tax benefit is dependent upon the generation of sufficient operating income in the foreign tax jurisdictions. The Company has a DTA foreign NOL carryforwards of $0.5 million for its subsidiary in Saudi Arabia that can be carried forward indefinitely and does not have a valuation allowance recorded against it.
The Company periodically reviews the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates, evaluates future sources of taxable income and tax planning strategies and may make further adjustments based on management's outlook for continued profits in each jurisdictionjurisdiction.
For the year ending January 31, 20142017, the Company has determined that there is not a greater than 50% likelihood that all of the domestic DTAs will be realized based on the available evidence. The Company recorded a full valuation allowance against the remaining domestic net DTAs as ofon January 31, 2013 net of uncertain tax positions ("UTP"). The Company continues to have a valuation allowance on its domestic DTAs since domestic losses continue to be generated.
In 2012, the Company relied heavily on Subpart F income as a future source of taxable income to support their conclusion that the domestic deferred tax assets were more-likely-than-not realizable. During the fourth quarter, legislation was passed which extended the provisions of IRC 954(c)(6). Because of this, the Company will not have Subpart F income related to royalty payments and can no longer rely on Subpart F income as a future source of taxable income during the periods that IRC 954(c)(6) is in effect. Accordingly, the Company recorded a full valuation allowance against the net domestic DTA discretely during the fourth quarter of 2012.
The Company has not provided for Federal tax on unremitted earnings of its international subsidiaries. The Company anticipates that unremitted earnings will be reinvested overseas to fund current working capital requirements and expansion in foreign markets. Accordingly, a provision for income tax expense in excess of foreign jurisdiction income tax requirements relative to such unremitted earnings has not been provided in the accompanying financial statements. A deferred tax asset of $1.3$4.7 million was established in 2011 for U.S. foreign tax credits attributed to repatriated foreign earnings. The excess foreign tax credits are subject to a ten-year carryforward and will expire in January 31, 2022.
2022. As of January 31, 2014,2017, the Company hadhas not made a provision for U.S. or additional foreign withholding taxes on approximately $36.6 million of undistributed earnings of foreign subsidiaries for which deferred taxes have not been provided. The Company intends and has the opportunities to reinvest these earnings for the foreseeable futureindefinitely reinvested outside the U.S. If these amounts were distributed toof the U.S., mainly in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs. The most significant foreign entity, which has undistributed earnings is Perma-Pipe Middle East, FZC in the U.A.E., where cumulative undistributed earnings as of January 31, 2014 were $22 million.East.
| | | Components of deferred income tax assets | 2013 |
| 2012 |
| 2016 |
| 2015 |
|
| U.S. Federal NOL carryforward | $2,298 | $3,680 | $9,348 | $3,044 |
| Non-qualified deferred compensation | 2,358 |
| 2,092 |
| |
| Deferred compensation | | 346 |
| 2,382 |
|
| Research tax credit | 1,965 |
| 1,964 |
| 2,703 |
| 2,057 |
|
| Foreign NOL carryforward | 1,004 |
| 612 |
| 186 |
| 231 |
|
| Foreign tax credit | 1,294 |
| 1,297 |
| 4,695 |
| 2,861 |
|
| Stock compensation | 1,162 |
| 1,417 |
| 804 |
| 1,061 |
|
| Other accruals not yet deducted | 581 |
| 1,086 |
| 514 |
| 438 |
|
| State NOL carryforward | 1,173 |
| 1,066 |
| 1,877 |
| 1,419 |
|
| Accrued commissions and incentives | 814 |
| 837 |
| 765 |
| 723 |
|
| Accrued pension | 182 |
| 428 |
| |
| Inventory valuation allowance | 413 |
| 306 |
| 110 |
| 73 |
|
| Other | 217 |
| 94 |
| 4 |
| 116 |
|
| Inventory uniform capitalization | 102 |
| 132 |
| |
| Deferred tax assets, gross | 13,563 |
| 15,011 |
| 21,352 |
| 14,405 |
|
| Valuation allowance | (11,591 | ) | (12,960 | ) | (18,437 | ) | (13,333 | ) |
| Total deferred tax assets, net of valuation allowances | $1,972 | $2,051 | $2,915 | $1,072 |
| | | |
| Components of the deferred income tax liability | | |
| Depreciation | $963 | $1,040 | ($2,778) | ($633) |
| Foreign subsidiaries unremitted earnings | | (1,750 | ) | (412 | ) |
| Prepaid | 231 |
| 340 |
| (69 | ) | (88 | ) |
| Total deferred tax liabilities | $1,194 | $1,380 | ($4,597) | ($1,133) |
| | | |
| Deferred tax asset, net | $778 | $671 | |
| Deferred tax liability, net | | ($1,682) | ($61) |
| | | |
| Balance sheet classification | | |
| Long-term assets | $1,667 | $1,358 | $147 | $99 |
| Current liabilities | 889 |
| 687 |
| |
| Total deferred tax assets, net of valuation allowances | $778 | $671 | |
| Long-term liability | | (1,829 | ) | (160 | ) |
| Total deferred tax liabilities, net of valuation allowances | | ($1,682) | ($61) |
The following table summarizes UTP activity, excluding the related accrual for interest and penalties:
| | | | 2013 |
| 2012 |
| 2016 |
| 2015 |
|
| Balance at beginning of the year | $1,373 | $1,213 | $1,313 | $1,288 |
| Increases in positions taken in a prior period | — |
| 30 |
| 3 |
| 11 |
|
| Increases in positions taken in a current period | 11 |
| 200 |
| 19 |
| 14 |
|
| Decreases due to lapse of statute of limitations | (26 | ) | (70 | ) | (4 | ) | — |
|
| Balance at end of the year | $1,358 | $1,373 | $1,331 | $1,313 |
Included in the total UTP liability aton January 31, 20142017 were estimated accrued interest of $18$30 thousand and penalties of $25$16 thousand and at on January 31, 2013,2016, accrued interest was $81$28 thousand and penalties were $66$17 thousand.
These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheet.sheets. The Company's policy is to include interest and penalties in income tax expense. AtOn January 31, 20142017, the Company did not anticipate any significant adjustments to its unrecognized tax benefits caused by the settlement of the ongoing tax examinations detailed above, or other factors, within the next twelve months. Included in the balance aton January 31, 20142017 were amounts offset by deferred taxes (i.e., temporary differences) or amounts that could be offset by refunds in other taxing jurisdictions (i.e., corollary adjustments). Thus, $1.41.3 million of the amount accrued aton January 31, 20142017 would impact the ETR, if reversed.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The IRSInternal Revenue Service, ("IRS"), began an audit of the fiscal year
ended January 31, 20122015 in August 2016. Subsequent to year-end, in March 2017, the third quarter of 2013.Company received an informal notice from the IRS that it had concluded the tax audit for the year ended January 31, 2015. No changes were made to the reported tax. Tax years backrelated to January 31, 20112014, 2015 and 2016 are open for federal and state tax purposes. In addition, federal and state tax years January 31, 2002 through January 31, 2009 are subject to adjustment on audit, up to the amount of research tax credit generated in those years.
The Company's management periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the Company transacts business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for federal, foreign and state tax issues are included in currentother long-term liabilities on the consolidated balance sheet.
Note 910 - Retirement plans
Pension plan
The defined benefit plan that covered Winchester filtration hourly rated employees was frozen on June 30, 2013 per the third Amendment to the Plan dated May 15, 2013. Per the third amendment, theThe accrued benefit of each participant was frozen as of the freeze date, and no further benefits shall accrue with respect to any service or hours of service after the freeze date. The benefits are based on fixed amounts multiplied by years of service of participants. The Company engages outside actuaries to calculate its obligations and costs. The funding policy is to contribute such amounts as are necessary to provide for benefits attributed to service to date. The amounts contributed to the plan are sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974.
Asset allocation
The plans hold no securities of MFRI,Perma-Pipe International Holdings, Inc.; 100% of the assets are held for benefits under the plan. The fair value of the major categories of the pension plans' investments are presented below. The FASB has established a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
| | | Level 1 market value of plan assets | 2013 | 2012 | 2016 |
| 2015 |
|
| Equity securities | $3,340 | $3,343 | $3,000 | $3,062 |
| U.S. bond market | 2,453 | 2,183 | 2,188 | 2,168 |
| High-quality inflation-indexed bonds issued by the U.S. Treasury and government agencies as well as domestic corporations | 0 | 279 | |
| Real estate securities | 149 | 126 | 214 |
| — |
|
| Subtotal | 5,942 | 5,931 | 5,402 | 5,230 |
| Level 2 significant other observable inputs | | |
| Money market fund | 409 | 134 | $306 | $351 |
| Equity securities | | 520 | 302 |
| Subtotal | | 826 | 653 |
| Total | $6,351 | $6,065 | $6,228 | $5,883 |
AtOn January 31, 20142017, plan assets were held 50%64% in equity, 37%33% in debt 2% in real estate securities and 11%3% in other. The investment policy is to invest all funds not needed to pay benefits and investment expenses for the year, with target asset allocations of 55% equities (with a range of 40% - 65%), 25% fixed income (with a range of 20% - 35%) and 20% Alternative Investments (with a range of 15% - 25%), diversified across a variety of sub-asset classes and investment styles, following a flexible asset allocation approach that will allow the plan to participate in market opportunities as they become available. The expected long-term rate of return on assets is based on historical long-term rates of equity and fixed income investments and the asset mix objective of the funds.
Investment market conditions in 20132016 resulted in $531 thousand0.7 million actual returngain on plan assets as presented below, which increased the fair value of plan assets at year end. The Company did not change its 8% expected return on plan assets used in determining cost and benefit obligations, which is the return that the Company has assumed during every profitable and unprofitable investment year since 1991. The plan's investments are intended to earn long-term returns to fund long-term obligations, and investment portfolios with asset allocations similar to those of the plan's investment policy have attained such returns over several decades. Future contributions that may be necessary to maintain funding requirements are not expected to materially affect the Company's liquidity.
|
| | | | |
| Reconciliation of benefit obligations, plan assets and funded status of plan | 2013 |
| 2012 |
|
| Accumulated benefit obligations | | |
| Vested benefits | $6,243 | $6,650 |
| Accumulated benefits | $6,827 | $7,240 |
| | | |
| Change in benefit obligation | | |
| Benefit obligation - beginning of year | $7,240 | $7,186 |
| Service cost | 78 |
| 171 |
|
| Interest cost | 293 |
| 299 |
|
| Actuarial (gain) loss | (539 | ) | (113 | ) |
| Benefits paid | (245 | ) | (303 | ) |
| Benefit obligation - end of year | $6,827 | $7,240 |
| | | |
| Change in plan assets | | |
| Fair value of plan assets - beginning of year | $6,065 | $5,502 |
| Actual gain on plan assets | 531 |
| 574 |
|
| Company contributions | 0 |
| 292 |
|
| Benefits paid | (245 | ) | (303 | ) |
| Fair value of plan assets - end of year | $6,351 | $6,065 |
| | | |
| Unfunded status | $(476) | $(1,175) |
| | | |
| Balance sheet classification | | |
| Prepaid expenses and other current assets | $335 | $328 |
| Other assets | 1,038 |
| 1,304 |
|
| Other long-term liabilities | (1,849 | ) | (2,807 | ) |
| Net amount recognized | $(476) | $(1,175) |
| | | |
| Amounts recognized in accumulated other comprehensive income | | |
| Unrecognized actuarial loss | $1,513 | $2,206 |
| Unamortized prior service cost | 0 |
| 273 |
|
| Net amount recognized | $1,513 | $2,479 |
|
| | | | |
| Weighted-average assumptions used to determine net cost and benefit obligations | 2013 |
| 2012 |
|
| End of year benefit obligation | 4.50 | % | 4.00 | % |
| Service cost discount rate * | 4.50 | % | 4.25 | % |
| Expected return on plan assets | 8.00 | % | 8.00 | % |
| Rate of compensation increase | N/A |
| N/A |
|
|
| | | | |
| Reconciliation of benefit obligations, plan assets and funded status of plan | 2016 |
| 2015 |
|
| Accumulated benefit obligations | | |
| Vested benefits | $6,500 | $6,587 |
| Accumulated benefits | $6,500 | $7,020 |
| | | |
| Change in benefit obligation | | |
| Benefit obligation - beginning of year | $7,020 | $8,129 |
| Interest cost | 278 |
| 266 |
|
| Actuarial gain | (493 | ) | (1,115 | ) |
| Benefits paid | (305 | ) | (260 | ) |
| Benefit obligation - end of year | $6,500 | $7,020 |
| | | |
| Change in plan assets | | |
| Fair value of plan assets - beginning of year | $5,883 | $6,168 |
| Actual gain (loss) on plan assets | 650 |
| (25 | ) |
| Benefits paid | (305 | ) | (260 | ) |
| Fair value of plan assets - end of year | $6,228 | $5,883 |
| | | |
| Unfunded status | $(272) | $(1,137) |
| | | |
| Balance sheet classification | | |
| Prepaid expenses and other current assets | $348 | $326 |
| Other assets | 1,201 |
| 1,166 |
|
| Deferred compensation liabilities | (1,821 | ) | (2,629 | ) |
| Net amount recognized | $(272) | $(1,137) |
| | | |
| Amounts recognized in accumulated other comprehensive loss | | |
| Unrecognized actuarial loss | $1,472 | $2,303 |
| Net amount recognized | $1,472 | $2,303 |
*4.00% prior to the re-measurement on June 30, 2013 due to the plan freeze and 4.50% after the re-measurement.
|
| | | | |
| Weighted-average assumptions used to determine net cost and benefit obligations | 2016 |
| 2015 |
|
| End of year benefit obligation discount rate | 4.00 | % | 4.05 | % |
| Service cost discount rate | 4.05 | % | 3.35 | % |
| Expected return on plan assets | 8.00 | % | 8.00 | % |
The discount rate was based on a Citigroup pension discount curve of high quality fixed income investments with cash flows matching the plans' expected benefit payments. The Company determines the expected long-term rate of return on plan assets by performing a detailed analysis of historical and expected returns based on the strategic asset allocation approved by the Board of Directors and the underlying return fundamentals of each asset class. The Company's historical experience with the pension fund asset performance is also considered.
| | | Components of net periodic benefit cost | 2013 | 2012 | 2016 | 2015 |
| Service cost | $78 | $171 | |
| Interest cost | 293 | 299 | $278 | $266 |
| Expected return on plan assets | (483) | (444) | (458) | (479) |
| Amortization of prior service cost | 21 | 50 | |
| Recognized actuarial loss | 105 | 173 | 146 | 210 |
| Curtailment cost | 252 | 0 | |
| Net periodic benefit cost | $266 | $249 | |
| Net periodic benefit income | | ($34) | ($3) |
|
| | | | |
| Amounts recognized in other comprehensive income | | |
| Actuarial gain (loss) on obligation | $539 | $113 |
| Actual gain (loss) on plan assets | 153 |
| 303 |
|
| Reclassify prior service cost | 21 |
| 50 |
|
| Total in other comprehensive income (loss) | $713 | $466 |
| Other comprehensive income is also affected by the tax effect of the valuation allowance recorded on the domestic deferred tax assets. | | |
|
| | | |
| Cash flows | | |
| Expected employer contributions for the fiscal year ending January 31, 2015 | | $0 |
| Expected employee contributions for the fiscal year ending January 31, 2015 | | — |
|
| Estimated future benefit payments reflecting expected future service for the fiscal year(s) ending January 31,: | | |
| 2015 | | 335 |
|
| 2016 | | 348 |
|
| 2017 | | 345 |
|
| 2018 | | 366 |
|
| 2019 | | 364 |
|
| 2020 - 2024 | | $1,907 |
|
| | | | |
| Amounts recognized in other comprehensive income | | |
| Actuarial loss on obligation | $493 | $1,115 |
| Actual loss (gain) on plan assets | 338 |
| (294 | ) |
| Total in other comprehensive income | $831 | $821 |
| Other comprehensive income is also affected by the tax effect of the valuation allowance recorded on the domestic deferred tax assets. |
|
| | | | |
| Cash flows | | |
| Expected employer contributions for the fiscal year ending January 31, 2018 | |
| $— |
|
| Expected employee contributions for the fiscal year ending January 31, 2018 | | — |
|
| Estimated future benefit payments reflecting expected future service for the fiscal year(s) ending January 31,: | | |
| 2018 | | 348 |
|
| 2019 | | 345 |
|
| 2020 | | 347 |
|
| 2021 | | 342 |
|
| 2022 | | 347 |
|
| 2023 - 2027 | | $1,733 |
401(k) plan
The domestic employees of the Company participate in the MFRI Inc.401(k) Employee Savings and Protection Plan, which is applicable to all employees except employees covered by collective bargaining agreement benefits. The plan allows employee pretax payroll contributions of up to 16% of total compensation. The Company matches 50% of each participant's contribution, up to a maximum of 3%3.5% of each participant's salary. For employees covered by the Winchester Bargaining Unit Savings Plan, the Company matches 15% of each participant's contribution, up to a maximum of 6% of each participant's salary.
Contributions to the 401(k) plan were $430 thousand0.4 million and $560 thousand0.6 million for the years ended January 31, 20142017 and 20132016, respectively.
Deferred compensation plan
The Company has a Supplemental Retirement and Deferred Compensation Plan ("Supplemental Plan"), pursuant to which key employees deferred compensation. Life insurance contracts have been purchased which may be used to fund the Company's obligation under these agreements. Participants receive distributions from the plan at the later of age 65 or six months after separation from service. Distributions can be lump sum or annual payments over a specified number of years based on elections made when the participant enters the plan.
|
| | | | |
| Deferred compensation liability | 2013 |
| 2012 |
|
| Current | $189 | $163 |
| Long-term | 6,509 |
| 5,670 |
|
| Total | $6,698 | $5,833 |
| | | |
| Deferred compensation expense | $519 | $484 |
On April 10,2014, the Company's Board of Directors terminated the Supplemental Plan and its Deferred Stock Purchase Plan, adopted on December 5, 2012 (collectively, the "Plans"), effective April 10, 2014 ("Termination Date"). No additional contributions will be made by the Company or participants under the Plans after the Termination Date. All funds and Company stock remaining in participant accounts will be distributed not later than 24 months after the Termination Date. As of the Termination Date, the Company was obligated to deliver 28,891 shares of Company common stock under the Deferred Stock Purchase Plan.
Multi-employer plans
The Company contributes to a multi-employer plan for certain collective bargaining U.S. employees and for foreign employees according to their countries requirements.employees. The risks of participating in this multi-employer plan are different from a single employer plan in the following aspects:
Assets contributed to the multi-employer plans by one employer may be used to provide benefits to employees of other participating employers.
If a participating employer ceases contributing to the plan, the unfunded obligations of the plan may be inherited by the remaining participating employers.
If the Company chooses to stop participating in the multi-employer plan, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company has assessed and determined that the multi-employer plans to which it contributes are not significant to the Company's consolidated financial statements. The Company does not expect to incur a withdrawal liability or expect to significantly increase its contribution over the remainder of the contract period. The Company made contributions to the bargaining unit supported multi-employer pension plans.
|
| | | | | | | | | | | | |
| | | | Funded Zone Status | FIP/RP Status Pending/Implemented | Contribution | | |
| Plan Name | EIN | Plan # | 2013 | 2012 | Surcharge Imposed | Collective Bargaining Expiration Date |
| | | | | | | | | |
| Northern Illinois Pension Plan | 362663798 | 001 | Green | No |
| $— |
|
| $7 |
| No | 6/1/2014 |
| Pipe Fitters Retirement Fund, Local 597 | 626105084 | 001 | Green | No | 275 |
| 102 |
| No | 6/1/2014 |
| Plumbers & Pipefitters Local 572 Pension Fund | 626102837 | 001 | Green | No | 192 |
| 250 |
| No | 3/31/2016 |
| | | | | | | | | |
| Plans for which financial information is not publicly available outside MFRI's financial statements | | |
| Denmark | N/A | N/A | N/A | N/A |
| $350 |
|
| $353 |
| N/A | |
|
| | | | | | | | | | |
| | | | Funded Zone Status | FIP/RP Status Pending/Implemented | Contribution | | |
| Plan Name | EIN | Plan # | 2016 | 2015 | Surcharge Imposed | Collective Bargaining Expiration Date |
| Plumbers & Pipefitters Local 572 Pension Fund | 626102837 | 001 | Green | No | 257 |
| 233 |
| No | 3/31/2019 |
Note 1011 - Stock-based compensation
The Company has stock-based compensation awards that can be granted to eligible employees, officers or directors.
|
| | | | | | |
| | 2016 |
| 2015 |
|
| Stock-based compensation (benefit) expense |
| ($540 | ) |
| $116 |
|
| Restricted stock based compensation expense |
| $1,243 |
|
| $470 |
|
Stock-based compensation was a benefit year-to-date due to cancellations. A majority of these cancellations related to former employees from the discontinued operations.
Stock options
On June 20, 2013, the stockholders approved the 2013 Omnibus Stock Incentive Plan ("Omnibus Plan"). Under the Omnibus Plan, 350,000 shares of common stock are reserved for issuance to employees, officers, and directors of, and other individuals providing bona fide services to or for, the Company and its affiliates. In addition, on January 31, 2014 and each January 31 thereafter until January 31, 2023, the aggregate number of shares that may be issued with respect to Awards pursuant to the terms of this Plan will be increased by the number equal to 2% of the aggregate amount of common stock outstanding as of such date, provided, however, the maximum number of additional shares that may be issued pursuant to this sentence will not exceed 400,000. The Omnibus Plan permits
the granting of stock options (including incentive stock options qualifying under Code section 422 and nonstatutory stock options), stock appreciation rights, restricted or unrestricted stock awards, restricted stock units, performance awards, deferred stock awards, other stock-based awards, or any combination of the foregoing. Awards will be valued at the Company's closing stock price on the date of grant.
Options vest ratably over four years and are exercisable for up to ten years from the date of grant. To cover the exercise of vested options, the Company issues new shares from its authorized but unissued share pool. The Company calculates all stock compensation expense based on the grant date fair value of the option and recognizes expense on a straight-line basis over the four-year vesting period of the option.
The fair value of each option award was estimated on the date of grant using the Black-Scholes option-pricing model that used the assumptions noted in the following table. The principal variable assumptions utilized in valuing options and the methodology for estimating such model inputs include:
| |
| 1. | risk-freeRisk-free interest rate - an estimate based on the "Market yield on U.S. Treasury securities at the rate for the period described in assumption 3 below, quoted on investment basis" for the end of week closest to the stock option grant date, from the Federal Reserve website; |
| |
| 2. | expectedExpected volatility - an estimate based on the historical volatility of MFRI Common Stock'sPPIH common stock's weekly closing stock price for the expected life ;life; and |
| |
| 3. | expectedExpected life of the option - an estimate based on historical experience including the effect of employee terminations. |
| | | | | 2013 |
| 2012 |
| | 2016 |
| 2015 |
|
| 1. | Risk-free interest rate | .74%-2.82% |
| .74%-3.57% |
| Risk-free interest rate | 1.2 | % | 1.7 | % |
| 2. | Expected volatility | 42.12%-65.54% |
| 53.90%-66.82% |
| Expected volatility | 43.2 | % | 43.4 | % |
| 3. | Expected life in years | 4.9 to 5.7 |
| 4.9 to 5.7 |
| Expected life in years | 5.0 |
| 5.0 |
|
| 4. | Dividend yield | — |
| — |
| Dividend yield | — | % | — | % |
The following summarizes the activity related to options outstanding under all plans for the years ended January31,20132016 and 20142017:
| | | | Options |
| Weighted average exercise price |
| Weighted average remaining contractual term | Aggregate intrinsic value |
| Options |
| Weighted average exercise price |
| Weighted average remaining contractual term | Aggregate intrinsic value |
|
| Outstanding at January 31, 2012 | 843 |
| $11.48 | 6.9 | $430 | |
| Outstanding on January 31, 2015 | | 764 |
| $11.45 | 5.7 | $0 |
| | | | | | | |
| Granted | 173 |
| 6.78 |
| | | 51 |
| 6.38 |
| | |
| Exercised | (11 | ) | 3.10 |
| | 46 |
| (18 | ) | 6.48 |
| | 3 |
|
| Expired or forfeited | (36 | ) | 10.47 |
| | | (77 | ) | 9.93 |
| | |
| Outstanding at January 31, 2013 | 969 |
| 10.77 |
| 6.6 | 40 |
| |
| Outstanding on January 31, 2016 | | 720 |
| 11.38 |
| 5.1 | 34 |
|
| | | | | | | |
| Options exercisable at January 31, 2013 | 586 |
| $13.30 | 5.3 | 37 |
| |
| Options exercisable on January 31, 2016 | | 554 |
| $11.94 | 4.2 | 30 |
|
| | | | | | | |
| Granted | 103 |
| 10.55 |
| | | 22 |
| 7.33 |
| | |
| Exercised | (223 | ) | 7.11 |
| | 1,082 |
| (59 | ) | 6.70 |
| | 68 |
|
| Expired or forfeited | (73 | ) | 11.90 |
| | | (159 | ) | 11.98 |
| | |
| Outstanding at January 31, 2014 | 776 |
| 11.69 |
| 6.1 | 3,859 |
| |
| Outstanding on January 31, 2017 | | 524 |
| 11.55 |
| 4.5 | 534 |
|
| | | | | | | |
| Options exercisable at January 31, 2014 | 513 |
| $13.43 | 4.8 | $2,226 | |
| Options exercisable on January 31, 2017 | | 450 |
| $11.92 | 3.9 | $465 |
The weighted average fair value of options granted, net of options surrendered, during 20132016 and 20122015 are estimated at $4.782.85 and $3.312.54, per share, respectively, on the date of grant.
| | | Unvested options outstanding | Options |
| Weighted-average grant date fair value |
| Aggregate intrinsic value | Options |
| Weighted-average grant date fair value |
| Aggregate intrinsic value |
| Outstanding at beginning of year | 383 |
| $6.91 | $4 | |
| Outstanding on January 31, 2016 | | 166 |
| $9.51 | $3 |
| Granted | 103 |
| 10.55 |
| | 22 |
| 7.33 |
| |
| Vested | (184 | ) | | | (72 | ) | | |
| Expired or forfeited | (39 | ) | 7.05 |
| | (42 | ) | 8.98 |
| |
| Outstanding at January 31, 2014 | 263 |
| $8.31 | $1,633 | |
| Outstanding on January 31, 2017 | | 74 |
| $9.31 | $69 |
Based on historical experience the Company expects 85% of these options to vest.
As of January 31, 20142017, there was $0.90.2 million of unrecognized compensation cost related to unvested stock options granted under the plans. That cost is expected to be recognized over the weighted-average period of 2.42.0 years. The stock-based compensation expense for the years ended January 31, 2014 and 2013 was $0.2 million and $0.5 million, respectively.
Deferred stock
On December 5, 2012, the Company adopted the Deferred Stock Purchase Plan. Under the Deferred Stock Purchase Plan, 200,000 shares of common stock are reserved for issuance. Each deferred stock constitutes an unfunded and unsecured promise by the Company to deliver one share of common stock (or the equivalent value thereof in cash or property at the Company's election). In addition, directors may elect to receive, in lieu of annual retainer and committee chair fees and at the time these fees would otherwise be payable, fully vested deferred stock with an initial value equal to the amount based on the fair market value of common stock at the date of grant. Tier I and Tier II executive officers of the Company, as defined in the Compensation Committee Charter of the Company may elect to receive, in lieu of a portion of his annual incentive compensation not to exceed 50% of such bonus payable for a given year, a deferred stock award. Deferred stock is payable following the separation from the Company for non-employee directors. To the extent that a payment is required to be delayed for six months in order to comply with Section 409A, as determined by the Corporation, such payment amount shall be paid as soon as administratively practicable after the end of the six month period starting on the date of the Tier I and Tier II executive officer's “separation from service” under Section 409A. Refer to "Deferred compensation plan" in Note 9 - Retirement plans, in the Notes to Consolidated Financial Statements
In June 20132016 under the Omnibus Plan described above, the Company granted deferred stock units to each non-employee director at the time of the annual meeting of stockholders equal to the result of dividing $30,000$40,000 by the fair market value of the common stock on the date of grant. The stock will be distributed to the directors upon their separation from service.
As of January 31, 20142017, there were approximately 28,89160,495 deferred stock units outstanding included in restricted stock activity below.
|
| | | | | | |
| | 2016 |
| 2015 |
|
| Deferred compensation liabilities |
| $529 |
|
| $495 |
|
Restricted stock
In June 20132016 under the Omnibus Plan described above, the Company granted restricted stock to Tier I and Tier II executive officers. The restricted stock vest ratably over twothree years. Until restricted stock becomes vested and nonforfeitable, it may not be sold, assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation of law or otherwise), except by will or the laws of descent and distribution, and shall not be subject to execution, attachment or similar process. The Company issues new shares from its treasury stock or authorized but unissued share pool. The Company calculates restricted stock compensation expense based on the grant date fair value and recognizes expense on a straight-line basis over the two-year vesting period. The following table summarizes restricted stock activity for the yearyears ended January 31, 20142017 and 2016:, respectively:
| | | | Restricted shares |
| Weighted average exercise price |
| Aggregate intrinsic value |
| Restricted shares |
| Weighted average grant price |
| Aggregate intrinsic value |
|
| Outstanding at beginning of year | — |
|
| $— |
|
| $— |
| |
| Outstanding on January 31, 2015 | | 86 |
|
| $14.52 |
|
| $1,242 |
|
| Granted | 52 |
| 11.24 |
| | 108 |
| 6.38 |
| |
| Issued | (21 | ) | | (26 | ) | |
| Forfeited | (2 | ) | 11.25 |
| | (5 | ) | 6.38 |
| |
| Outstanding at January 31, 2014 | 29 |
|
| $14.52 |
|
| $419 |
| |
| Outstanding on January 31, 2016 | | 163 |
|
| $6.40 |
|
| $1,040 |
|
| | | | |
| Granted | | 254 |
| 7.29 |
| |
| Issued | | (91 | ) | |
| Forfeited or used to cover payroll taxes | | (36 | ) | 7.75 |
| |
| Outstanding on January 31, 2017 | | 290 |
|
| $8.75 |
|
| $2,540 |
|
As of January 31, 20142017, there was $0.2$1.2 million of unrecognized compensation cost related to unvested restricted stock granted under the plans. That cost is expected to be recognized over the weighted-average period of 1.62.2 years. The restricted stock-based compensation expense
Note 12 - Treasury stock / share repurchase program
On February 5, 2015, the Company's Board of Directors approved a share repurchase program, which authorizes the Company to use up to $2 million for the year ended Januarypurchase of its outstanding shares of common stock. Share repurchases were permitted to be executed through open market or privately negotiated transactions on or prior to December 31, 2014 was $0.1 million.2015.
The following table sets forth information with respect to repurchases by the Company of its shares of common stock during 2015:
|
| | |
| Period | Total number of shares purchased (in thousands) | Average price paid per share |
| February | 28 | $6.64 |
| March | 17 | 6.27 |
| April to December | — | — |
Note 1113 - Stock rights
On September 15, 2009, the Company entered into the Amendment ("Amendment") to Rights Agreement dated as of September 15, 1999. Among other things, the Amendment extends the term of the Rights Agreement until September 15, 2019 and amends definitions to include positions in derivative instruments related to the Company's common stock as constituting beneficial ownership of such stock.
On September 15, 1999, the Company's Board of Directors declared a dividend of one common stock purchase right (a "Right") for each share of MFRI'sPPIH's common stock outstanding at the close of business on September 22, 1999. The stock issued after September 22, 1999 and before the redemption or expiration of the Rights is also entitled to one Right for each such additional share. Each Right entitles the registered holders, under certain circumstances, to purchase from the Company one share of MFRI'sPPIH's common stock at $25, subject to adjustment. At no time will the Rights have any voting power.
The Rights may not be exercised until 10 days after a person or group acquires 15% or more of the Company's common stock, or announces a tender offer that, if consummated, would result in 15% or more ownership of the
Company's common stock. Separate Rights certificates will not be issued, and the Rights will not be traded separately from the stock until then. Should an acquirer become the beneficial owner of 15% or more of the Company's common stock, Rights holders other than the acquirer would have the right to buy common stock in MFRI,PPIH, or in the surviving enterprise if MFRIPPIH is acquired, having a value of two times the exercise price then in effect. Also, MFRI'sthe PPIH Board of Directors may exchange the Rights (other than those of the acquirer, which will have become void), in whole or in part, at an exchange ratio of one share of MFRIPPIH common stock (and/or other securities, cash or other assets having equal value) per Right subject to adjustment. The Rights described in this paragraph and the preceding paragraph shall not apply to an acquisition, merger or consolidation approved by the Company's Board of Directors.
The Rights will expire on September 15, 2019, unless exchanged or redeemed prior to that date. The redemption price is $0.01 per Right. MFRI'sPPIH's Board of Directors may redeem the Rights by a majority vote at any time prior to the 20th day following public announcement that a person or group has acquired 15% of MFRI'sPPIH common stock. Under certain circumstances, the decision to redeem requires the concurrence of a majority of the independent directors.
Note 1214 - Interest expense, net
| | | | 2013 |
| 2012 |
| 2016 |
| 2015 |
|
| Interest expense | $1,855 | $2,009 | $746 | $950 |
| Interest income | (544 | ) | (511 | ) | (177 | ) | (480 | ) |
| Interest expense, net | $1,311 | $1,498 | $569 | $470 |
Note 13 - Fair value of financial instruments
At January 31, 2014, an interest rate swap agreement that relates to a mortgage note in Denmark was in effect with a notional value of $1.3 million that matures December 2021. The swap agreement, which reduces the exposure to market risks from changing interest rates, exchanges the variable rate to fixed interest rate payments of 2.47%. The exchange-traded swap is valued on a recurring basis using quoted market prices and was classified within Level 2 of the fair value hierarchy which includes significant other observable inputs because the exchange is not deemed an active market. The swap agreement is a fair value hedge. The derivative mark to market of $68 thousand was included in other long-term liabilities on the consolidated balance sheet. The interest rate swap agreement in effect at January 31, 2013 with a notional value of $9 million was terminated in June 2013.
Note 14 - Subsequent events
The Company has evaluated the period after the balance sheet date up through April 15, 2014, which is the date that the consolidated financial statements were issued, and determined that other than noted below, there were no subsequent events or transactions that required recognition or disclosure in the consolidated financial statements.
In October 2013, the Company decided to sell its remaining industrial process business in Denmark. This business was sold on February 28, 2014. This business is reported as discontinued operations in the consolidated financial statements and the notes to consolidated financial statements have been revised to conform to the current year reporting.
On April 10, 2014, the Company's Board of Directors terminated the Plans effective the Termination Date. No additional contributions will be made by the Company or participants under the Plans after the Termination Date. All funds and Company stock remaining in participant accounts will be distributed not later than 24 months after the Termination Date.
Schedule II
MFRI, INC. AND SUBSIDIARIESPerma-Pipe International Holdings, Inc. and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 20142017 and 2013
2016
| | | | Balance at beginning of period | Charged to costs and expenses | Deductions from reserves (1) | Charged to other accounts (2) | Balance at end of period | Balance at beginning of period | Charged to costs and expenses | Deductions from reserves (1) | Charged to other accounts (2) | Balance at end of period |
| | | |
| Year Ended January 31, 2014 | | |
| Year Ended January 31, 2017 | | |
| Allowance for possible losses in collection of trade receivables | $290 | $128 | $228 | $4 | $194 | $33 | $246 | $1 | $27 | $305 |
| | | |
| Year Ended January 31, 2013 | | |
| Year Ended January 31, 2016 | | |
| Allowance for possible losses in collection of trade receivables | $204 | $151 | $81 | $16 | $290 | $31 | $6 | $4 | $0 | $33 |
| | | |
(1) Uncollectible accounts charged off
(2) Primarily related to recoveries from accounts previously charged off and currency translation
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MFRI, INC.Perma-Pipe International Holdings, Inc.
|
| | |
| Date: | April 15, 201414, 2017 | /s/ Bradley E. MautnerDavid J. Mansfield |
| | | Bradley E. MautnerDavid J. Mansfield |
| | | Director, President and Chief Executive Officer |
| | | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
|
| | | | |
BRADLEY E. MAUTNER*DAVID J. MANSFIELD | Director, President and Chief Executive Officer (Principal Executive Officer) | )) | |
| | | ) | |
| KARL J. SCHMIDT* | Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ) ) | April 15, 2014 |
| | ) | |
DAVID UNGER* | Director and Chairman of the Board of Directors | ) | |
| | ) | |
DENNIS KESSLER* | Director | ) | |
| | ) | |
ARNOLD F. BROOKSTONE* | Director | ) | |
| | ) | |
STEPHEN B. SCHWARTZ* | Director | ) | |
| | ) | |
MICHAEL J. GADE* | Director | ) | |
| | ) | |
MARK A. ZORKO* | Director | ) | 14, 2017 |
| | | ) | |
| DAVID S. BARRIE* | Director and Chairman of the Board of Directors | | |
| | | |
| DAVID B. BROWN* | Director | ) | |
| | | | |
| BRADLEY E. MAUTNER* | Director | ) | |
| | | |
| JEROME T. WALKER* | Director | ) | |
| | | |
| MARK A. ZORKO* | Director | ) | |
| | | | | |
| *By: | /s/ Bradley E. MautnerDavid J. Mansfield | Individually and as Attorney in Fact | | |
| | Bradley E. MautnerDavid J. Mansfield | | | |
EXHIBIT INDEX
The exhibits listed below are filed herewith except the exhibits described below as incorporated by reference. Exhibits not filed herewith are incorporated by reference to such exhibits filed by the Company under the location set forth under the caption “Description and Location” below. The Commission file number for our Exchange Act filings referenced below is 0-18370.
|
| | | |
| | EXHIBIT INDEX |
| | |
The exhibits listed below are filed herewith except the exhibits described below as incorporated by reference. Exhibits not filed herewith are incorporated by reference to such exhibits filed by the Company under the location set forth under the caption “Description and Location” below. The Commission file number for our Exchange Act filings referenced below is 0-18370.
|
| Exhibit No. | | Description and Location |
| 3(i) |
| | Certificate of Incorporation of MFRI,Perma-Pipe International Holdings, Inc. [Incorporated by reference to Exhibit 3.3 to Registration Statement No. 33-70298] |
| 3(ii) |
| | Certificate of Amendment to Certificate of Incorporation of Perma-Pipe International Holdings, Inc. [Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on March 20, 2017] |
| 3(iii) |
| | Second Amended and Restated By-Laws of MFRI,Perma-Pipe International Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on February 4, 2013] |
| 3(iv) |
| | Third Amended and Restated By-Laws of Perma-Pipe International Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on March 20, 2017] |
| 4(a) |
| | Specimen Common Stock Certificate [Incorporated by reference to Exhibit 4 to Registration Statement No. 33-70794] |
| 4(b) |
| | Rights Agreement [Incorporated by reference to Exhibit [4.1]4.1 of the Company's [Current Report on Form 8-K filed on September 24, 1999] |
4(c)
|
| | Amendment to Rights Agreement [Incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K filed on September 17, 2009] |
10(b) |
| | 1994 Stock Option Plan [Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1994] |
10(c)10(a) |
| | 2001 Independent Directors Stock Option Plan, [Incorporated by reference to Exhibit (d)(5) to the Company's Schedule TO filed on May 25, 2001] * |
10(d)10(b) |
| | Form of Directors and Officers Indemnification Agreement [Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2006 filed on May 15, 2006] * |
10(e)10(c) |
| | MFRI 2004 Stock Incentive Plan [Incorporated by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004 filed on June 1, 2004] * |
10(f) |
| | Second Amended and Restated Loan and Security Agreement between the Company and Bank of America dated April 30, 2012 [Incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q filed on June 11, 2012] |
10(g) |
| | First Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Bank of America dated June 8,2012 |
10(h) |
| | Second Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Bank of America dated October 12, 2012 |
10(i) |
| | Third Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Bank of America dated March 15,2013 |
10(j) |
| | Fourth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Bank of America dated April 25, 2013 [Incorporated by reference to Exhibit 10(1) to the Company's Annual Report on Form 10-K filed for the fiscal year ended January 31, 2013 on May 2, 2013] |
10(k) |
| | Fifth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Bank of America dated June 7, 2013 [Incorporated by reference to Exhibit 10(l)to the Company's Quarterly Report on Form10-Q filed on September 12, 2013] |
10(l) |
| | Sixth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Bank of America dated July 29, 2013 [Incorporated by reference to Exhibit 10(m) to the Company's Quarterly Report on Form 10-Q filed on September 12, 2013] |
10(m) |
| | Code of Conduct [Incorporated by reference to Exhibit 14 of the Company's Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004 filed on June 1, 2004] |
10(n) |
| | Employment agreement with Fati Elgendy dated November 12, 2007 [Incorporated by reference to DEF14A filed on May 29, 2008] |
10(o) |
| | First Amendment to Employment Agreement with Fati Elgendy dated March 19, 2014 |
10(p)10(d) |
| | 2009 Non-Employee Directors Stock Option Plan [Incorporated by reference to Exhibit 10(k) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed on April 19, 2010]* |
10(q) |
| | Deferred Stock Purchase Plan [Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Forms S-8 File No. 333-186055, effective January 16, 2013] |
10(r)10(e) |
| | 2013 Omnibus Stock Incentive Plan as Amended June 14, 2013 [Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 14, 2013] * |
| 10(f) |
| | Code of Conduct [Incorporated by reference to Exhibit 14 of the Company's Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004 filed on June 1, 2004] |
| 10(g) |
| | Credit and Security Agreement between the Company and BMO Harris Bank, N.A. dated September 24, 2014 [Incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q filed on December 9, 2014] |
| 10(h) |
| | First Amendment to Credit and Security Agreement between the Company and BMO Harris Bank, N.A. dated February 5, 2015 [Incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2015 filed on April 16, 2015] |
| 10(i) |
| | Limited Waiver and Second Amendment to Credit and Security Agreement between the Company and BMO Harris Bank, N.A. dated April 30, 2015 [Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q filed on June 12, 2015] |
| 10(j) |
| | Third Amendment to Credit and Security Agreement between the Company and BMO Harris Bank, N.A. dated January 29, 2016 [Incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2016 filed on April 28, 2016] |
| 10(k) |
| | Fourth Amendment to Credit and Security Agreement between the Company and BMO Harris Bank, N.A. dated February 29, 2016 [Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 2, 2016] |
| 10(l) |
| | Fifth Amendment to Credit and Security Agreement between the Company and BMO Harris Bank, N.A. dated October 25, 2016 [Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 27, 2016] |
| 10(m) |
| | Sixth Amendment to Credit and Security Agreement between the Company and BMO Harris Bank, N.A. dated December 30, 2016 |
| 10(n) |
| | Asset Purchase Agreement dated as of January 29, 2016 by and among MFRI, Inc., TDC Filter Manufacturing Inc. and BHA Altair, LLC [Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on February 4, 2016] |
|
| | | |
| | EXHIBIT INDEX |
| 10(o) |
| | Share Purchase Agreement dated as of January 29, 2016 by and among MFRI, Inc., MFRI Holdings (B.V.I.) Ltd, Midwesco Filter Resources Denmark A/S and Hengst Holding GmbH [Incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on February 4, 2016] |
| 10(p) |
| | Employment agreement with David J. Mansfield dated October 19, 2016 [Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on December 13, 2016]* |
| 10(q) |
| | Agreement with Bradley Mautner dated January 31, 2017 [Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on February 3, 2017]* |
| 10(r) |
| | Consulting agreement with Fati Elgendy dated February 1, 2017 [Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on February 3, 2017]* |
| 10(s) |
| | Employment agreement with Karl J. Schmidt dated March 17, 2017 [Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 20, 2017]* |
| 21 |
| | Subsidiaries of MFRI,Perma-Pipe International Holdings, Inc. |
| 23 |
| | Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP |
|
| | | |
| 24 |
| | Power of Attorney executed by directors and officers of the Company |
| 31 |
| | Rule 13a - 14(a)/15d - 14(a) Certifications (1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 |
| | Section 1350 Certifications (1) Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS |
| | XBRL Instance |
| 101.SCH |
| | XBRL Taxonomy Extension Schema |
| 101.CAL |
| | XBRL Taxonomy Extension Calculation |
| 101.DEF |
| | XBRL Taxonomy Extension Definition |
| 101.LAB |
| | XBRL Taxonomy Extension Labels |
| 101.PRE |
| | XBRL Taxonomy Extension Presentation |
*Management contracts and compensatory plans or agreements
