PPIH Perma Pipe International Holdings Inc

Note 1 - Business information

Perma-Pipe International Holdings, Inc. ("PPIH", the "Company", or the "Registrant") was incorporated in Delaware on October 12, 1993. The Company is engaged in the manufacture and sale of products in one distinct segment: Piping.

Fiscal year. The Company's fiscal year ends on January 31. Years and balances described as 2018 and 2017 are the fiscal years ended January 31, 2019 and 2018, respectively.

Nature of business. The Company engineers, designs, manufactures and sells specialty piping systems, and leak detection systems. Specialty piping systems include: (i) insulated and jacketed district heating and cooling ("DHC") piping systems for efficient energy distribution from central energy plants to multiple locations, (ii) primary and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, and (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines. The Company's leak detection systems are sold with its piping systems or 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.

Geographic information. Net sales attributed to a geographic area are based on the destination of the product shipment. Sales to foreign customers was 61.0% in 2018 compared to 59.5% in 2017. 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.

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.  During 2018, and in accordance with Accounting Standards Update No. 2014-19, “Revenue from Contracts with Customers” (“ASC 606”), the Company recognizes revenue when a customer obtains control of promised goods or services. See Note 5 - Revenue Recognition for more detail. During 2017, the Company recognized revenues, including shipping and handling charges billed to customers, when all the following criteria were met: (i) persuasive evidence of an arrangement existed, (ii) delivery had occurred or services have been rendered, (iii) the seller's price to the buyer was fixed or determinable, and (iv) collectability was reasonably assured.

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 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.

Consolidation. The consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries, all of which are wholly owned. All intercompany balances and transactions have been eliminated.

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). The aggregated foreign exchange transaction loss recognized in the income statement was $0.1 million and $0.7 million for the years 2018 and 2017, respectively. 

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 $10.2 million and $7.1 million as of January 31, 2019 and 2018, respectively. On January 31, 2019, $0.1 million was held in the U.S. and $10.1 million was held in the foreign subsidiaries. On January 31, 2018, $0.7 million was held in the U.S. and $6.4 million was held in the foreign subsidiaries.

Accounts payable included drafts payable of $0.2 million and less than $0.1 million on January 31, 2019 and 2018, respectively.

Restricted cash.  Restricted cash held in the U.S. on January 31, 2019 was $1.5 million, all of which is a cash collateral held by PNC Bank in relation to the new credit agreement. There was no restricted cash held in the U.S. on January 31, 2018. Restricted cash, held by foreign subsidiaries, was $1.1 million and $1.2 million as of January 31, 2019 and 2018, respectively. Restricted cash held by foreign subsidiaries related to fixed deposits that also serve as security deposits and guarantees.

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 usually obtained for significant 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. Standard payment terms are net 30 days. The allowance for doubtful accounts is based on specifically identified amounts in customers' accounts, where future collectability is deemed uncertain. 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 and the amount is deemed uncollectible. The write off is recorded against the allowance for doubtful accounts. 

One of the Company’s accounts receivable in the total amount of $5.4 million as of January 31, 2018 (inclusive of a retention receivable amount of $3.7 million, of which $3.5 million and 3.2 million were included in the balance of other long-term assets as of January 31, 2019 and January 31, 2018, due to the long-term nature of the receivables) has been outstanding for several years. The Company completed all of its deliverables in 2015, and has been engaged in ongoing active efforts to collect this outstanding amount. During fiscal year 2018, the Company received payments of approximately $ 0.7 million, which reduced the balance of this receivable to $ 4.7  million as of January 31, 2019. Subsequent to January 31, 2019, the Company received a further $ 0.3  million, thus reducing this balance to $ 4.4  million. As a result, the Company did not reserve any allowance against this receivable as of January 31, 2019. The Company continues to engage with the customer to ensure full payment of open balances, and has also received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. However, if the Company’s efforts to collect on this account are not successful in fiscal 2019, then the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts. 

Three customers accounted for 39.4% and 34.9% of accounts receivable on January 31, 2019 and 2018, respectively.

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.

Accumulated other comprehensive loss. Accumulated other comprehensive loss represents the change in equity from non-owner transactions and consisted of foreign currency translation, minimum pension liability and marketable securities.

Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories.

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. Depreciation expense was approximately $4.5 million in 2018 and $4.9 million in 2017.

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. The Company reported income from operations in 2018, compared to losses from operations in 2017. An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate. Based on the Company's review of the projected cash flows over the remaining useful lives of the assets, management had determined that there was no impairment of long-lived assets as of January 31, 2018. Since there was no triggering event in 2018, management has determined that there was no impairment of long-lived assets as of January 31, 2019.

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, 2019 and 2018, is attributable to the purchase of Perma-Pipe Canada, Ltd. ("PPC"). 

The Company performs an impairment assessment of goodwill annually as of January 31, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit. 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 no impairment to goodwill during 2018 or 2017.

Other intangible assets with definite lives. The Company owns several patents including those covering features of its piping and electronic leak detection systems. 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 $2.6 million as of January 31, 2019 and 2018. Accumulated amortization was approximately $2.5 million and $2.4 million as of January 31, 2019 and 2018. Future amortization over the next five years ending January 31 will be less than $0.1 million in the years 2019 to 2023 and less than $0.1 million thereafter. Amortization expense is expected to be recognized over the weighted-average period of 7.3 years.

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 and $0.3 million in 2018 and 2017, respectively.

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% likelihood of being realized upon ultimate settlement with the relevant tax authority. For further information, see Note 8 - Income taxes in the Notes to Consolidated Financial Statements.

Net loss per common share. Earnings per share ("EPS") is computed by dividing net loss by the weighted average number of common shares outstanding (basic). The Company reported net losses in 2018 and 2017; 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 dilutive shares are in the following table:

Equity-based compensation. The Company issues various types of stock-based awards to employees and directors: restricted stock, deferred stock and stock options. Non-cash compensation expense associated with restricted stock is based on the fair value of the common stock at the date of grant, and amortized using the straight line method over the vesting period. Compensation expense associated with deferred stock which is awarded to the Board of Directors (non-employee) is based upon the fair value of the common stock at the date of grant, and since the grant vests immediately it is expensed on the date of the 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.

Segments.  Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker ("CODM") in making decisions regarding resource allocation and assessing performance The Company’s Chief Executive Officer is the CODM, and he uses a combination of several management reports, including the Company's financial information in determining how to allocate resources and assess performance. The Company has determined that it operates in one segment.

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.

Recent accounting pronouncements . In March 2017, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that changes the income statement presentation of the components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and is eligible for capitalization as an asset. The other components of net periodic benefit cost, such as interest cost, the expected return on assets, amortization of actuarial gains and losses and prior service cost, should be presented below operating income. The guidance is effective for the Company starting February 1, 2018 and was applied retrospectively to the presentation of net periodic benefit cost, and recorded in miscellaneous income and expense in 2017 and 2018. Since the plans have not incurred any service costs, there has been no need to capitalize any costs. The adoption of this guidance did not have a material impact on the Company's results of operations or financial position.

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 adoption of this guidance did not have a material impact on the Company's results of operations or financial position.

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 cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  The Company will adopt the ASU effective February 1, 2019 using the alternative transition approach - a cumulative effect adjustment to retained earnings at that date, which is expected to be zero. The Company will avail itself of the practical expedients provided under the ASU and its subsequent amendments regarding identification of leases, lease classification, indirect costs, and the combination of lease and non-lease components. The Company expects to record a right-of-use asset and lease liability of approximately $10.0 million to $11.0 million at adoption. 

In May 2014, FASB issued ASU No. 2014-09, " Revenue from Contracts with Customers ("Topic 606")", with several clarifying updates issued during 2016. This ASU was effective for the Company beginning February 1, 2018. The adoption of this ASU did not have a material impact on the Company's results of operations or financial position. Refer to Note 5 - Revenue recognition - for more detail.

The Company evaluated other recent accounting pronouncements and does not expect them to have a material impact on the consolidated financial statements.

Note 3 - Discontinued operations

The Company had a Filtration Products segment, which was sold in fiscal 2016, and was r eported as discontinued operations in the consolidated financial statements for those corresponding years. Included in accrued expenses reported for January 31, 2018 is an amount of $0.1 million for warranty liability. Net cash used in discontinued operating activities during 2017 was less than $0.1 million. There were no expenses related to discontinued operations in fiscal 2018. 

Note 4 - Retention

A retention receivable is a portion of an outstanding receivable balance amount withheld by a customer until a contract is fully completed as specified in the contractual agreement. Retention receivables of $1.7 million and $2.4 million were included in the balance of trade accounts receivable as of January 31, 2019 and 2018, respectively. A retention receivable of $4.3 million and $3.2 million was included in the balance of other long-term assets as of January 31, 2019 and 2018 due to the long-term nature of the receivables. See Note 2 - Accounts receivable for further information regarding the future realization of these long-term balances.

Note 5 - Revenue recognition 

On February 1, 2018, the Company adopted Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers," ("Topic 606"), using the modified retrospective method applied to contracts that were not completed as of that date. Under this methodology the effect, if any, of initially applying the new revenue standard was to be recorded as an adjustment to the opening balance of retained earnings, while periods prior to the adoption date were not to be adjusted and continue to be reported in accordance with the accounting policies in effect for those periods.

The Company conducted a complete and thorough analysis of each single element of the five-step model of Topic 606 and concluded that there was no material impact to the Company as a result of the adoption of the new standard. As such, the Company was not required to make a cumulative adjustment to the opening balances of retained earnings, contract assets or contract liabilities upon its initial application of the new revenue standard. 

Revenue from contracts with customers:

The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured.

The Company’s standard revenue transactions are classified in to two main categories:

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In accordance with ASC 606-10-25-27 through 29, the Company recognizes specialty piping and coating systems revenue over time as the manufacturing process progresses because one of the following conditions exist:

Products revenue is recognized when goods are shipped or services are performed (ASC 606-10-25-30).

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A breakdown of the Company's revenues by revenue class for fiscal years 2018 and 2017 are as follows:

The input method as noted in ASC 606-10-55-20 is used by the U.S. operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract using the percentage-of-completion method. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the percentage-of-completion method is the most faithful depiction of the Company’s performance as it measures the value of the goods and services transferred to the customer. Costs include all material, labor, and direct costs incurred to satisfy the performance obligations of the contract. Revenue recognition begins when projects costs are incurred.

The output method as noted in ASC 606-10-55-17 is used by all other operating entities to measure revenue by the direct measurement of the outputs produced relative to the remaining goods promised under the contract. Due to the types of end customers, generally these contracts require formal inspection protocols or specific export documentation for units produced, or produced and shipped, therefore, the output method is the most faithful depiction of the Company’s performance. Depending on the conditions of the contract, revenue may be recognized based on units produced, inspected and held by the Company prior to shipment or on units produced, inspected and shipped. 

Some of the Company’s operating entities invoice and collect milestones or other contractual obligations prior to the transfer of goods and services, but does not recognize revenue until the performance obligations are satisfied under the methods discussed above.

Contract modifications that occur prior to the start of the manufacturing process will supersede the original contract and revenue is recognized using the modified contract value. Contract modifications that occur during the manufacturing process (changes in scope of work, job performance, material costs, and/or final contract settlements) are recognized in the period in which the revisions are known. Provisions for losses on uncompleted contracts are made in contract liabilities account in the period such losses are identified.

Contract assets and liabilities:

Contract assets represent revenue recognized in excess of amounts billed (unbilled receivables) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Contract liabilities represent billings in excess of costs (unearned revenue) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Both customer billings and the satisfaction (or partial satisfaction) of the performance obligation(s) occur throughout the manufacturing process and impacts the period end balances in these accounts.

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The Company anticipates that substantially all costs incurred for uncompleted contracts as of January 31, 2019 will be billed and collected within one year.

The following tables set forth the changes in the Company's contract assets and liabilities for the periods indicated. The Company expects to recognize the remaining balances as of January 31, 2019 within one year.

The following table shows the reconciliation of the cost in excess of billings:

Practical expedients:

Costs to obtain a contract are not considered project costs as they are not usually incremental, nor does job duration span more than one year. The Company applies practical expedient for these types of costs and as such are expensed in the period incurred.

As the Company's contracts are less than one year, the Company has applied the practical expedient regarding disclosure of the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period.

The following table summarizes the Company's scheduled maturities on January 31:

Revolving line North America .  On September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a new Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”), providing for a new three-year $18 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”). The Senior Credit Facility replaced the Company’s then existing $15 million Credit and Security Agreement, dated September 24, 2014, among various subsidiaries of the Company and Bank of Montreal, as successor by assignment to BMO Harris Bank N.A., as amended (the “Prior Credit Agreement”). 

The Company initially used borrowings under the new Senior Credit Facility to pay off outstanding amounts under the Prior Credit Agreement (which totaled approximately USD $3,773,823 plus CAD 4,794,528) and cash collateralize a letter of credit (USD $154,500). The Company has used proceeds from the new Senior Credit Facility for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs and other corporate purposes. Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or LIBOR, plus, in each case, an applicable margin. The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility. Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally be payable in arrears on the last day of each interest period. Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility. The facility fee is payable quarterly in arrears. 

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of its North American subsidiaries. The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. Subject to certain qualifications and exceptions, the Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3 million annually (plus a limited carryover of unused amounts). 

The Senior Credit Facility also contains financial covenants requiring (i) the North America Loan Parties to achieve consolidated net income (excluding the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) before interest, taxes, depreciation, amortization and certain other adjustments (“EBITDA”) of at least $1,807,000 for the period from August 1, 2018 through October 31, 2018; (ii) the North America Loan Parties to achieve EBITDA of at least $2,462,000 for the period from August 1, 2018 through January 31, 2019; (iii) the North America Loan Parties to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility (excluding from the calculation items related to the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) to be not less than 1.10 to 1.00 for the nine-month period ending April 30, 2019 and for the quarter ending July 31, 2019 and each quarter end thereafter on a trailing four-quarter basis; and (iv) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility of not less than 1.10 to 1.00 for the nine-month period ending October 31, 2018 and for the quarter ending January 31, 2019 and each quarter end thereafter on a trailing four-quarter basis. The Company was in compliance with this requirement as of January 31, 2019. 

As of January 31, 2019, the Company had borrowed an aggregate of $8.9 million at 8.0% and 6.0%, with a weighted average rate of 6.43%, and had $3.1 million available under the Senior Credit Facility.

Revolving lines foreign. The Company also has credit arrangements used by its 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. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends. On January 31, 2019, the Company was in compliance with the covenants under the credit arrangements. On January 31, 2019, interest rates were based on the EIBOR plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On January 31, 2019, the Company's interest rates ranged from 6.15% to 6.51%, with a weighted average rate of 6.51%, and the Company could borrow $9.1 million under these credit arrangements. On January 31, 2019, $7.9 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. On January 31, 2019, the Company had borrowed $0.1 million, and had an additional $1.1 million available. The foreign revolving lines balances as of January 31, 2019 and 2018, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

The Company had a revolving line for 8.0 million Dirhams (approximately $2.2 million U.S. dollars at January 31, 2019) from a bank in the U.A.E. The loan had an interest rate of approximately 6.15% and  expired on March 31, 2019. The Company is in current negotiations to renew and expand this facility.  

The Company has a revolving line for 25.0 million Dirhams (approximately $6.8 million U.S. dollars at January 31, 2019) from a bank in the U.A.E. The loan has an interest rate of approximately 6.51% and matures July 2019.

The Company’ credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis.

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 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 6.05%, with monthly payments of $38 thousand CAD (approximately $29 thousand) for interest; and monthly payments of $27 thousand CAD (approximately $21 thousand) for principal. Principal payments began January 2018.

On June 19, 2012, the Company 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%.

Capital leases. On October 20, 2017, the Company obtained a capital lease for $0.18 million CAD (approximately $0.1 million at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 4.0% per annum with monthly principal and interest payments of $3 thousand, and these leases mature on September 29, 2022.

On May 5, 2017, the Company obtained two capital leases for a total of $0.94 million CAD (approximately $0.7 million USD at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 7.8% per annum with monthly principal and interest payments of $9 thousand, and these leases mature on April 30, 2021.

On August 5, 2016, the Company obtained a capital lease for 0.6 million Indian Rupees (approximately $8 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 15.6% per annum with monthly principal and interest payments of less than a thousand dollars, and the lease matures on July 5, 2019.

The Company has several significant operating lease agreements as follows:

The Company had leased one of its administrative offices in the U.A.E. from a partnership in which a former employee of the Company was a partner. The Company ended this lease arrangement in 2017 and paid total rent of $0.2 million to the partnership in 2017. No payments were made in 2018. Lease payments were based on prevailing market rates.

On January 31, 2019, future minimum annual rental commitments under non-cancelable lease obligations were as follows:

Rental expense for operating leases was $2.6 million and $2.9 million in 2018 and 2017, respectively.

The U.S. Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base erosion anti-abuse tax, respectively. Since the Company is a fiscal taxpayer, the Company was subject to a blended federal rate of 33.83% as of January 31, 2018. In addition, in 2017 the Company was subject to the onetime transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax. The Company is subject to a current and deferred federal tax rate of 21% as of January 31, 2019.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of January 31, 2018, as permitted by SAB 118. The accounting for the tax effects of the Tax Act have been completed as of January 31, 2019, and the Company recorded a tax expense of less than $0.1 million related to the one-time transition tax.

One-time transition tax

The 2017 provisional estimate of the aggregate deferred foreign income inclusion of $23.2 million was adjusted to $22.2 million during 2018. At the time the provisional estimate was prepared, the Company expected to offset the inclusion with Net Operating Losses ("NOLs"). However, when preparing the tax return for the period the Company elected to claim foreign tax credits against the transition tax to preserve the NOLs. The net impact to the deferred balances was an increase in the NOL Deferred Tax Asset ("DTA") of $4.9 million and a decrease in the foreign tax credit DTA of $7.4 million. The changes in balances were offset by valuation allowances and did not impact tax expense. The transition tax of $7.5 million was mostly offset by the use of foreign tax credit carryforwards, resulting in a net tax expense of less than $0.1 million. There was no tax impact on the related adjustments to the deferred balances due to the Company applying a valuation allowance against the net deferred balances. 

As a result of the onetime transition tax, the Company estimates that distributions from foreign subsidiaries will no longer be subject to U.S. tax. Earnings in the Company's subsidiaries in Canada, and Denmark, are not permanently reinvested, and earnings in the India subsidiary are partially permanently reinvested. The earnings will be subject to tax in their local jurisdiction, and the impact of the India dividend distribution tax and Canadian withholding taxes will be considered. As such, the Company has accrued a liability of $0.4 million in 2018 related to these taxes.

U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. The Company intends to permanently reinvest the undistributed earnings of the Middle Eastern subsidiaries. The Middle Eastern subsidiaries have unremitted earnings of $26.3 million as of January 31, 2019, all of which has been subject to the transition tax in the U.S. Unremitted earnings of $18.7 million in the United Arab Emirates would not be subject to withholding tax in the event of a distribution, $7.5 million of unremitted earnings in Saudi Arabia would be subject to withholding tax of $1.5 million, and the $4.6 million of earnings permanently reinvested in India would be subject to dividend distribution tax of $0.9 million.

Deferred tax effects

As a result of the Tax Act, in 2017, the Company revalued deferred balances to a tax rate of 21% as of the date of enactment, which resulted in a tax expense of $2.2 million and tax benefit of $0.4 million r elated to a reduction in the federal benefit of state taxes. This tax expense was fully offset by a valuation allowance, therefore, there was no impact to the income statement. 

Global intangible low taxed income ("GILTI") 

Beginning for tax years starting after December 31, 2017, the Tax Act creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. The Company has elected to account for the tax effects of these provisions in the period that is subject to such tax and the impact is reflected in the Company’s full year provision. However, the inclusion of $2.1 million during the p eriod does not result in additional tax expense since the Company has NOL carryforwards and a valuation allowance applied against the net domestic deferred tax assets.

The difference between the provision for income taxes and the amount computed by applying the U.S. Federal statutory rate of 21% in 2018 and 33.83% in 2017 was as follows:

The Company's worldwide effective tax rates ("ETR") were 132.7% and 2.3% in 2018 and 2017, respectively. The change in the ETR from the prior year to the current year is largely due to the fact that the Company is in a positive operating income position in certain taxable jurisdictions. Additional factors include the tax benefit of a Canadian business combination which was realized in 2017, and the valuation allowance against the domestic deferred tax asset. Due to this, even relatively small changes to ordinary income will have a large impact to the ETR. The income tax expense in 2018 is $2.2 million, compared to income tax benefit of $0.2 million in 2017. The Company accrues taxes in various countries where they are generating income while applying a valuation allowance in the U.S. which attributes to the unusually large ETR.