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Note 4 - Revenue Recognition
 12 Months Ended
Jan. 31, 2023
Notes to Financial Statements  
Revenue from Contract with Customer [Text Block]

Note 4 - Revenue recognition 

 

The Company accounts for its revenues under ASC 606, Revenue from Contracts with Customers.

 

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 into two main categories:

 

 

1)

Systems and Coating - which include all bundled products in which Perma-Pipe engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines. Additionally, this systems classification also includes coating applied to pipes and structures. 

 

 

2)

Products - which include cables, leak detection products, heat trace products, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract.

 

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:

 

 

1)

the customer owns the material that is being insulated or coated, so the customer controls the asset and thus the work-in-process; or

 

 

2)

the customer controls the work-in-process due to the custom nature of the pre-insulated, fabricated system being manufactured as evidenced by the Company’s right to payment for work performed to date plus profit margin for products that have no alternative use to the Company.

 

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

 

A breakdown of the Company's revenues by revenue class for the years ended January 31, 2023 and 2022 are as follows (in thousands):

 

  

2022

  

2021

 
  

Sales

  

% to Total

  

Sales

  

% to Total

 

Products

 $14,626   10% $13,575   10%
                 

Specialty Piping Systems and Coating

                

Revenue recognized under input method

  44,648   31%  44,778   32%

Revenue recognized under output method

  83,295   59%  80,199   58%

Total

 $142,569   100% $138,552   100%

 

The input method as noted in ASC 606-10-55-20 is used by certain U.S. operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract over time. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the "over time" 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 do 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 are made for estimated losses on uncompleted contracts in the contract liabilities account in the period in which such losses are determined.

 

Contract assets and liabilities

 

Contract assets represent revenue recognized in excess of amounts billed 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 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 impact the period end balances in these accounts.

 

The Company anticipates that substantially all costs incurred for uncompleted contracts as of  January 31, 2023 will be billed and collected within one year.

 

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

 

(In thousands)

 

2022

  

2021

 

Costs incurred on uncompleted contracts

 $18,342  $20,021 

Estimated earnings

  9,370   12,030 

Earned revenue

  27,712   32,051 

Less billings to date

  26,329   31,019 

Costs in excess of billings, net

 $1,383  $1,032 

Balance sheet classification

        

Contract assets: Costs and estimated earnings in excess of billings on uncompleted contracts

 $3,126  $2,309 

Contract liabilities: Billings in excess of costs and estimated earnings on uncompleted contracts

  (1,743)  (1,277)

Costs in excess of billings, net

 $1,383  $1,032 

 

Substantially all of the $1.3 million and $0.8 million contract liabilities balances at  January 31, 2022 and 2021, respectively, were recognized in revenues during 2022 and 2021, respectively.

 

Unbilled accounts receivable:

 

The Company has recorded $11.6 million and $2.7 million of unbilled accounts receivable on the consolidated balance sheets as of  January 31, 2023 and 2022, respectively, from revenues generated by its subsidiaries in the Middle East and North Africa. The Company has fulfilled all performance obligations and has recorded revenue under the respective contracts. The deliverables under these contracts have been accepted by the customer and billings will be made once the customer takes possession of or arranges shipping for the products. The Company anticipates that substantially all of the amounts included in unbilled accounts receivable as of  January 31, 2023 will be billed within one year. 

 

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 the 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.