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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2004
--------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number 0-18370
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MFRI, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3922969
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7720 Lehigh Avenue Niles, Illinois 60714
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(847) 966-1000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12-b). Yes No X
----- -----
On June 14, 2004, there were 4,922,364 shares of the Registrant's common stock
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying interim condensed consolidated financial statements of MFRI,
Inc. and subsidiaries (the "Company") are unaudited, but include all adjustments
which the Company's management considers necessary to present fairly the
financial position and results of operations for the periods presented. These
adjustments consist of normal recurring adjustments. Certain information and
footnote disclosures have been condensed or omitted pursuant to Securities and
Exchange Commission rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's annual
report on Form 10-K/A for the year ended January 31, 2004. Certain
reclassifications have been made in prior-year financial statements to conform
to the current-year presentation. The results of operations for the quarter
ended April 30, 2004 are not necessarily indicative of the results to be
expected for the full year ending January 31, 2005.
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands except per share information)
Three Months Ended
April 30,
---------------------
2004 2003
-------- --------
Net sales $ 32,128 $ 28,010
Cost of sales 26,222 22,816
-------- --------
5,906 5,194
Gross profit
Selling expense 2,612 2,600
General and administrative expense 3,457 3,543
-------- --------
Loss from operations (163) (949)
Income from Joint Venture 23 10
Interest expense - net 420 492
-------- --------
Loss before income taxes (560) (1,431)
Income tax (benefit) (231) (566)
-------- --------
Net loss $ (329) $ (865)
======== ========
Weighted average common shares outstanding
basic and diluted 4,922 4,922
Basic earnings per share
Net loss $ (0.07) $ (0.18)
Diluted earnings per share
Net loss $ (0.07) $ (0.18)
See notes to condensed consolidated financial statements.
1
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
April 30, January 31,
Assets 2004 2004
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 408 $ 154
Restricted cash 274 238
Trade accounts receivable, net 20,490 18,353
Accounts receivable - related companies 1,053 853
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,823 1,115
Income taxes receivable 668 393
Inventories 19,673 18,275
Deferred income taxes 2,967 1,639
Prepaid expenses and other current assets 823 857
-------- --------
Total current assets 48,179 41,877
Property, plant and equipment, net 28,151 28,828
Other Assets:
Patents, net of accumulated amortization 670 716
Goodwill 2,494 2,549
Other assets 3,512 4,957
-------- --------
Total other assets 6,676 8,222
-------- --------
Total Assets $ 83,006 $ 78,927
======== ========
Liabilities and Stockholder' Equity
- --------------------------------------------------------------------------------
Current Liabilities:
Trade accounts payable $ 14,279 $ 12,337
Accrued compensation and payroll taxes 2,635 2,673
Other accrued liabilities 2,912 2,835
Commissions payable 2,688 3,046
Current maturities of long-term debt 15,384 11,864
Billings in excess of costs and estimated earnings
on uncompleted contracts 346 299
Income taxes payable 112 64
-------- --------
Total current liabilities 38,356 33,118
Long-Term Liabilities:
Long-term debt, less current maturities 16,002 16,661
Other 2,307 2,275
-------- --------
Total long-term liabilities 18,309 18,936
Stockholders' Equity:
Common stock, $.01 par value, authorized - 50,000
shares in April 2004 and January 2004;
4,922 issued and outstanding in April 2004 and
January 2004 49 49
Additional paid-in capital 21,397 21,397
Retained earnings 4,771 5,100
Accumulated other comprehensive loss 124 327
-------- --------
Total stockholders' equity 26,341 26,873
-------- --------
Total Liabilities and Stockholders' Equity $ 83,006 $ 78,927
======== ========
See notes to condensed consolidated financial statements.
2
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) Three Months Ended
April 30,
---------------------
2004 2003
-------- --------
Cash Flows from Operating Activities:
Net loss $ (329) $ (865)
Adjustments to reconcile net loss to
net cash flows from operating activities:
(Income) from joint venture (23) (10)
Provision for depreciation and amortization 987 945
Provision for uncollectible accounts 10 35
Loss on sale of property, plant and equipment 1 10
Change in operating assets and liabilities:
Trade accounts receivable (2,147) (2,176)
Costs and estimated earnings in excess of
billings on uncompleted contracts (662) 119
Inventories (1,480) (97)
Prepaid expenses and other current assets (488) 374
Current liabilities 1,965 2,560
Other operating assets and liabilities (303) (427)
-------- --------
Net Cash Flows from Operating Activities (2,469) 468
-------- --------
Cash Flows from Investing Activities:
Proceeds from sale of property and equipment - 10
Purchases of property and equipment (273) (1,438)
-------- --------
Net Cash Flows from Investing Activities (273) (1,428)
-------- --------
Cash Flows from Financing Activities:
Payments on capitalized lease obligations (24) (38)
Borrowings under revolving, term and mortgage loans 8,731 1,417
Repayment of debt (5,691) (389)
-------- --------
Net Cash Flows from Financing Activities 3,016 990
-------- --------
Effect of Exchange Rate Changes on Cash
And Cash Equivalents (20) (56)
-------- --------
Net Increase in Cash and Cash Equivalents 254 (26)
Cash and Cash Equivalents - Beginning of Period 154 346
-------- --------
Cash and Cash Equivalents - End of Period $ 408 $ 320
======== ========
Supplemental cash flow information:
Cash paid for:
Interest, net of capitalized amounts $ 463 $ 480
Income taxes, net of refunds received (104) 3
See notes to condensed consolidated financial statements.
3
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 2004
1. The unaudited financial statements herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission. The accompanying interim financial statements have been
prepared under the presumption that users of the interim financial
information have either read or have access to the audited financial
statements for the latest fiscal year ended January 31, 2004. Accordingly,
footnote disclosures which would substantially duplicate the disclosures
contained in the January 31, 2004 audited financial statements have been
omitted from these interim financial statements. Certain reclassifications
have been made in prior-year financial statements to conform to the
current-year presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these interim
financial statements be read in conjunction with the financial statements
and the notes thereto included in the Company's latest Annual Report on
Form 10-K/A.
2. Inventories consisted of the following:
April 30, January 31,
(In thousands) 2004 2004
-------- --------
Raw materials $ 15,244 $ 13,593
Work in process 1,906 1,905
Finished goods 2,523 2,777
-------- --------
Total $ 19,673 $ 18,275
======== ========
3. Goodwill: Goodwill represents the excess cost over fair value of the net
assets of purchased businesses. The Company does not amortize goodwill. The
Company performs an annual impairment assessment of goodwill in the first
quarter of each year, based on the fair value of the related reporting
unit. When performing its annual impairment assessment, the Company
compares the fair value of the related reporting unit to its carrying
value. Fair values are determined by discounting estimated future cash
flows. If the fair value of an operating unit is less than its carrying
value, an impairment loss is recorded. The Company's annual impairment test
at February 1, 2004 did not result in an impairment. Goodwill was
$2,494,000 and $2,549,000 at April 30, 2004 and January 31, 2004,
respectively. The change in Goodwill was due to foreign currency
translation.
4. Other intangible assets with definite lives: Patents are capitalized and
amortized on a straight-line basis over a period not to exceed the legal
lives of the patents. Patents, net of accumulated amortization, were
$669,000 and $716,000 at April 30, 2004 and January 31, 2004, respectively.
Accumulated amortization was $1,500,000 and $1,453,000 at April 30, 2004
and January 31, 2004, respectively. Future amortizations over the next five
years ending January 31, will be 2005 - $182,000, 2006 - $182,000, 2007 -
$175,000, 2008 - $29,000, 2009 - $26,000, and 2110 - $22,000.
4
5. Employee Retirement Plans: The market-related value of plan assets at April
30, 2004 and January 31, 2004 were $2,778,110 and $2,682,942 respectively.
Net cost recognized for the three months ended April 30 is as follows:
Three Months Ended
April 30,
---------------------
2004 2003
-------- --------
Components of net periodic benefit cost:
Service cost $ 25 $ 24
Interest cost 47 42
Expected return on plan assets (56) (42)
Amortization of prior service cost 21 14
Recognized actuarial loss 20 24
-------- --------
Net periodic benefit cost $ 57 $ 62
======== ========
Expected employer contributions for fiscal year ending 1/31/2005 is $329,000. No
contributions have been made in the first quarter.
6. The basic weighted average shares reconcile to diluted weighted average
shares as follows:
Three Months Ended
(In thousands) April 30,
---------------------
2004 2003
-------- --------
Net Loss $ (329) $ (865)
======== ========
Basic weighted average common
shares outstanding 4,922 4,922
Dilutive effect of stock options - -
-------- --------
Weighted average common shares
outstanding assuming full dilution 4,922 4,922
======== ========
Basic earnings per share
Net loss $ (0.07) $ (0.18)
Diluted earnings per share
Net loss $ (0.07) $ (0.18)
The weighted average number of stock options not included in the
computation of diluted earnings per share of common stock because the
option exercise prices exceeded the average market prices of the common
shares were 791,000 and 939,000 for the three months ended April 30, 2004
and 2003, respectively. At April 30, 2004, 227,250 stock options had an
exercise price below the average stock price however, the inclusion of such
stock options would be anti-dilutive and as a result, these stock options
are excluded from the computation of weighted average common shares
outstanding assuming full dilution. There were no stock options below the
average stock price at April 30, 2003. These options were outstanding at
the end of the respective periods.
5
7. The components of comprehensive loss, net of tax, were as follows:
Three Months Ended
(In thounsands) April 30,
---------------------
2004 2003
-------- --------
Net Loss $ (329) $ (865)
Change in foreign currency translation adjustments (203) 152
-------- --------
Comprehensive loss $ (532) $ (713)
======== ========
Accumulated other comprehensive loss presented on the accompanying
condensed consolidated balance sheets consists of the following:
April 30, January 31,
(In thousands) 2004 2004
-------- --------
Accumulated translation adjustment $ 479 $ 682
Minimum pension liability adjustment (net of
tax benefit of $217 at April 30 and
January 31, 2004) (355) (355)
-------- --------
Total $ 124 $ 327
======== ========
8. The Company has three reportable segments under the criteria of Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Filtration Products Business
manufactures and sells a wide variety of filter elements for air filtration
and particulate collection systems. The Piping Systems Business engineers,
designs, manufactures, and sells specialty piping systems and leak
detection and location systems. The Industrial Process Cooling Equipment
Business engineers, designs, manufactures and sells chillers, cooling
towers, plant circulating systems and accessories for industrial process
applications.
Three Months Ended
(In thounsands) April 30,
---------------------
2004 2003
-------- --------
Net Sales:
Filtration Products $ 16,296 $ 13,390
Piping Systems 8,990 8,805
Industrial Process Cooling Equipment 6,842 5,815
-------- --------
Total Net Sales $ 32,128 $ 28,010
======== ========
Gross Profit:
Filtration Products $ 2,877 $ 2,275
Piping Systems 1,199 1,274
Industrial Process Cooling Equipment 1,830 1,645
-------- --------
Total Gross Profit $ 5,906 $ 5,194
======== ========
Income (loss) from Operations:
Filtration Products $ 778 $ 198
Piping Systems 109 105
Industrial Process Cooling Equipment 139 8
Corporate (1,189) (1,260)
-------- --------
Income (loss) from Operations $ (163) $ (949)
======== ========
9. In December 2003, the Financial Accounting Standards Board (FASB)
issued a revision to SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits." This Statement retains
the disclosures previously required by SFAS 132 but adds additional
disclosure requirements about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
6
defined benefit postretirement plans. It also calls for the required
information to be provided separately for pension plans and for other
postretirement benefit plans. In addition to expanded annual
disclosures, the standard improves information available to investors
in interim financial statements. SFAS 132R is effective for fiscal
years ending after December 15, 2003, and for quarters beginning after
December 15, 2003. The adoption of SFAS 132R did not have a material
impact on the Company's financial statements, however, required
interim disclosures have been reflected in the current financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This Interpretation
requires the recognition of certain guarantees as liabilities at fair
market value and is effective for guarantees issued or modified after
December 31, 2002. Adoption of the provisions of the Interpretation
has not had and will not have a material effect on the financial
statements of the Company, based on guarantees in effect on April 30,
2004.
10. The Company's stock option plans are accounted for using the intrinsic
value method and, accordingly, no compensation cost has been
recognized as all options were granted at an exercise price equal to
fair value at the date of grant. Had compensation cost been determined
using the fair value method in 2004 and 2003, the Company's pro forma
net income (loss) and earnings (loss) per share would have been as
follows:
Three Months Ended
April 30,
---------------------
2004 2003
-------- --------
Net loss - as reported (in thousands) $ (329) $ (865)
Compensation cost under fair-market value-based
accounting method, net of tax (in thousands) (42) (34)
-------- --------
Net loss - pro forma (in thousands) (371) (899)
Net loss per common share - basic, as reported $ (0.07) $ (0.18)
Net loss per common share - basic, pro forma $ (0.08) $ (0.18)
Net loss per common share - diluted, as reported $ (0.07) $ (0.18)
Net loss per common share - diluted, pro forma $ (0.08) $ (0.18)
Reported diluted EPS higher than pro forma diluted
EPS $ (0.01) -
No stock options were granted for the quarters ended April 30, 2004 and
2003.
11. On July 11, 2002, the Company entered into secured note purchase agreements
with certain institutional investors ("Note Purchase Agreements"). Under
the terms of the Note Purchase Agreements, the Company entered into a
five-year $6,000,000 term loan replacing prior term loans with an aggregate
original principal balance of $25,000,000 ("Prior Term Loans"). The
outstanding principal balance of the Prior Term Loans at July 11, 2002 was
$16,000,000. The Company borrowed $10,000,000 from its new revolving line
of credit from another financial institution (described below) to pay down
this loan from $16,000,000 to $6,000,000. Interest rates under the Note
Purchase Agreements are 12% per annum if the outstanding principal is
greater than $5,000,000 or 10% per annum if the outstanding principal is
$5,000,000 or less. The Company is scheduled to pay $188,000 in aggregate
principal on the last days of March, June, September and December in each
year, commencing on September 30, 2002 and ending on June 30, 2007. In
addition, the Company is scheduled to make annual prepayments of excess
cash flow (as defined in the Note Purchase Agreements). Finally, the Loan
Agreement (defined below) and the Note Purchase Agreements permit voluntary
prepayments sufficient to reduce the outstanding term loan principal to
$5,000,000 subject to certain conditions. The Company met such conditions
and made such a prepayment on July 31, 2002.
At January 31, 2004 and April 30, 2004, the Company was not in compliance
with one covenant under the Note Purchase Agreements. The Company and the
lenders are discussing a waiver. Also, the Company's noncompliance with a
covenant under the Loan Agreement constitutes an event of default under the
7
Note Purchase Agreements (see the paragraphs below that refer to the Loan
Agreement). Although this noncompliance constitutes an event of default
under the Note Purchase Agreement, the lender has not declared an event of
default or accelerated the indebtedness of the Company evidenced by the
Notes. The Company has made all required payments of principal and interest
under the Note Purchase Agreements to date.
On July 11, 2002, the Company entered into a secured loan and security
agreement with a financial institution ("Loan Agreement"). Under the terms
of the Loan Agreement, which matures on July 10, 2005, the Company can
borrow up to $27,000,000, subject to borrowing base and other requirements,
under a revolving line of credit. Interest rates generally 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 April 30, 2004, the prime rate was 4.00%,
and the margins added to the prime rate and the LIBOR rate, which are
determined each quarter based on the applicable financial statement ratio,
were 1.25 and 3.25 percentage points, respectively. As of April 30, 2004,
the Company had borrowed $10,958,000 and had $79,000 available to it under
the revolving line of credit. In addition, $6,493,000 of availability was
used under the Loan Agreement primarily to support letters of credit to
guarantee amounts owed for Industrial Revenue Bond borrowings. The Loan
Agreement provides that all payments by the Company's customers are
deposited in a bank account from which all funds may only be used to pay
the debt under the Loan Agreement. At April 30, 2004, the amount of
restricted cash was $274,000. Cash required for operations is provided by
draw-downs on the line of credit.
At January 31, 2004 and April 30, 2004, the Company was not in compliance
with two covenants under the Loan Agreement. The Company and the lenders
are discussing a waiver. Although this noncompliance constitutes an event
of default under the Loan Agreement, the lender has not declared an event
of default or accelerated the indebtedness of the Company under the Loan
Agreement. The Company has made all required payments of principal and
interest under the Loan Agreement to date.
The Company and the lenders under the Note Purchase Agreements and the Loan
Agreement are discussing waivers and amendments. The Company believes it is
probable that agreements will be reached for the waivers and amendments,
although agreement is not assured. If it does not occur, the Company
believes it will be able to obtain replacement financing on acceptable
terms, although there is no assurance that any such financing will be
obtained. As required by accounting principles generally accepted in the
United States, due to the unwaived covenant noncompliance discussed above,
all amounts owing under the Note Purchase Agreements and the Loan Agreement
have been classified as current as of January 31, 2004 and April 30, 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements contained under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and certain other information
contained elsewhere in this report, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "continue,"
"remains," "intend," "aim," "should," "prospects," "could," "future,"
"potential," "believes," "plans," "likely," and "probable," or the negative
thereof or other variations thereon or comparable terminology, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbors created thereby. These
statements should be considered as subject to the many risks and uncertainties
that exist in the Company's operations and business environment. Such risks and
uncertainties could cause actual results to differ materially from those
projected. These uncertainties include, but are not limited to, economic
conditions, market demand and pricing, competitive and cost factors, raw
material availability and prices, global interest rates, currency exchange
rates, labor relations and other risk factors.
8
RESULTS OF OPERATIONS
MFRI, Inc.
Three months ended April 30
Net sales of $32,128,000 for the quarter ended April 30, 2004 increased 14.7%
from $28,010,000 for the comparable quarter ended April 30, 2004. (See
discussion of each business segment below.)
Gross profit of $5,906,000 increased 13.7% from $5,194,000 in the prior year
quarter, and gross margin remained level at 18.4% of net sales. (See discussion
of each business segment below.)
Net loss decreased 62% to $329,000 in the current year quarter from $865,000 in
the prior year quarter, and net loss per common share (diluted) decreased to
$0.07 from a loss of $0.18. The decrease in net loss was primarily due to
increased sales.
Filtration Products Business
Three months ended April 30
Net sales for the quarter ended April 30, 2004 increased 21.7% to $16,296,000
from $13,390,000 for the comparable quarter in the prior year. This increase is
primarily due to a better economic environment including improved conditions in
the domestic steel industry.
Gross profit as a percent of net sales increased from 17.0% in the prior year to
17.7% in the current year, primarily as a result of improved manufacturing
efficiency on higher unit volume.
Selling expense for the quarter ended April 30, 2004 remained across the group
level at $1,432,000 but decreased as a percentage of net sales from 10.7% to
8.8% for the comparable quarter in the prior year.
General and administrative expenses increased 3.3% to $667,000 in the current
year quarter from $646,000 for the comparable quarter in the prior year. This
increase is primarily due to increased professional services expenses.
Piping Systems Business
Three months ended April 30
Net sales increased 2.1% from $8,805,000 in the prior year quarter to $8,990,000
for the quarter ended April 30, 2004. This increase is primarily due to some
recovery from the weak economy.
Gross profit decreased from 14.5% to 13.3% due to tighter margins and some
increases in raw material prices.
Selling expense decreased from $341,000 or 3.9% of net sales for the prior year
quarter to $323,000 or 3.6% of net sales in the current year quarter. The
decrease is primarily due to lower travel and marketing costs.
General and administrative expense decreased from $827,000 in the prior year
quarter to $767,000 in the current year quarter, and decreased as a percent of
net sales from 9.4% to 8.5%. The decrease is primarily due to lower legal
expenses and some incentive expense.
Industrial Process Cooling Equipment Business
Three months ended April 30
Net sales of $6,842,000 for the quarter ended April 30, 2004 increased by 17.7%
from $5,815,000 for the comparable quarter in the prior year. The increase is
due primarily to some recovery from the weak economy. Sales increased in both
the domestic and international markets.
9
Gross profit decreased from 28.3% of net sales in the prior year quarter to
26.7% of net sales in the current year quarter, primarily due to sales to direct
markets.
Selling expense increased to $857,000 or 12.5% of net sales in the current year
quarter from $828,000 or 14.2% of net sales in the prior year quarter. The
increase is due to the higher commissions associated with higher shipments and
greater export sales.
General and administrative expense increased from $810,000 or 13.9% of net sales
in the prior year quarter to $834,000 or 12.2% of net sales in the current year
quarter. This increase is due to costs associated with a data retention
database.
General Corporate Expense
General corporate expense includes interest expense and general and
administrative expense incurred by MFRI, Inc. Corporate that has not been
allocated to the business segments.
Three months ended April 30
General and administrative expense decreased from $1,260,000 in the prior year
quarter to $1,189,000 in the current year quarter, and decreased as a percentage
of net sales from 4.5% in the prior year quarter to 3.7% in the current year
quarter. The decrease is mainly due to lower repairs and maintenance expense,
lower utilities cost and reduced staff size.
Interest expense decreased to $420,000 for the current year quarter from
$492,000 in the prior year quarter. The decrease is primarily due to slightly
lower average costs of borrowing and interest income received on a federal tax
refund.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of April 30, 2004 were $408,000 as compared to
$320,000 at April 30, 2003. The Company used $2,469,000 from operations in the
first quarter. Operating cash flows decreased by $2,937,000 from April 2003.
These cash flows were supported by net borrowings of $3,016,000.
Trade receivables increased $2,147,000, and inventories increased $1,480,000 in
the first quarter. Prepaid expenses and other current assets increased $488,000
due to an increased income tax receivable and an increased receivable from
related companies. Other operating assets and liabilities decreased $303,000 in
the first quarter.
Net cash used for investing activities in the first quarter 2004 and 2003 were
$273,000 and $1,428,000, respectively. Capital expenditures decreased from
$1,165,000 from the prior year. The prior year's capital additions of $1,438,000
mainly related to the Company's construction of a new building for one of its
foreign subsidiaries. Current capital expenditures relate to a new ERP business
applications software and equipment purchases.
Debt totaled $31,386,000, an increase of $2,861,000 since the beginning of the
year. Net cash inflows from financing activities were $3,016,000, consisting of
borrowings of $8,731,000 and payments of $5,691,000 and $24,000 used for
payments on capitalized lease obligations.
10
The following table summarizes the Company's scheduled maturities, excluding the
revolving lines of credit at April 30, 2004:
Total 1/31/05 1/31/06 1/31/07 1/31/08 1/31/09 Thereafter
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Mortgages $10,551,800 $434,000 $626,100 $666,300 $709,700 $756,000 $7,359,700
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Senior Debt 3,687,500 562,500 750,000 750,000 1,625,000 - -
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
IRB Payable 5,200,000 - - - 5,200,000 - -
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Term Loans 117,200 117,200
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Capitalized Lease 51,500 43,500 6,000 2,000 - - -
Obligations
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Total $19,608,000 $1,157,200 $1,382,100 $1,418,300 $7,534,700 $756,000 $7,359,700
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Other long term liability of $2,307,000 is composed of accrued pension cost and
deferred compensation.
The Company's working capital was approximately $9,823,000 at April 30, 2004
compared to approximately $8,759,000 at January 31, 2004.
The Company's current ratio was 1.3 to 1 and 1.3 to 1 at April 30, 2004 and
January 31, 2004, respectively. Debt to total capitalization at April 30, 2004
increased to 54.4% from 51.5% at January 31, 2004.
Financing
On July 11, 2002, the Company entered into secured note purchase agreements with
certain institutional investors ("Note Purchase Agreements"). Under the terms of
the Note Purchase Agreements, the Company entered into a five-year $6,000,000
term loan replacing prior term loans with an aggregate original principal
balance of $25,000,000 ("Prior Term Loans"). The outstanding principal balance
of the Prior Term Loans at July 11, 2002 was $16,000,000. The Company borrowed
$10,000,000 from its new revolving line of credit from another financial
institution (described below) to pay down this loan from $16,000,000 to
$6,000,000. Interest rates under the Note Purchase Agreements are 12% per annum
if the outstanding principal is greater than $5,000,000 or 10% per annum if the
outstanding principal is $5,000,000 or less. The Company is scheduled to pay
$188,000 in aggregate principal on the last days of March, June, September and
December in each year, commencing on September 30, 2002 and ending on June 30,
2007. In addition, the Company is scheduled to make annual prepayments of excess
cash flow (as defined in the Note Purchase Agreements). Finally, the Loan
Agreement (defined below) and the Note Purchase Agreements permit voluntary
prepayments sufficient to reduce the outstanding term loan principal to
$5,000,000 subject to certain conditions. The Company met such conditions and
made such a prepayment on July 31, 2002.
At January 31, 2004 and April 30, 2004, the Company was not in compliance with
one covenant under the Note Purchase Agreements. The Company and the lenders are
discussing a waiver. Also, the Company's noncompliance with a covenant under the
Loan Agreement constitutes an event of default under the Note Purchase
Agreements (see the paragraphs below that refer to the Loan Agreement). Although
this noncompliance constitutes an event of default under the Note Purchase
Agreement, the lender has not declared an event of default or accelerated the
indebtedness of the Company evidenced by the Notes. The Company has made all
required payments of principal and interest under the Note Purchase Agreements
to date.
On July 11, 2002, the Company entered into a secured loan and security agreement
with a financial institution ("Loan Agreement"). Under the terms of the Loan
Agreement, which matures on July 10, 2005, the Company can borrow up to
$27,000,000, subject to borrowing base and other requirements, under a revolving
line of credit. Interest rates generally 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 April 30,
2004, the prime rate was 4.00%, and the margins added to the prime rate and the
LIBOR rate, which are determined each quarter based on the applicable financial
statement ratio, were 1.25 and 3.25 percentage points, respectively. As of April
30, 2004, the Company had borrowed $10,958,000 and had $79,000 available to it
under the revolving line of credit. In addition, $6,493,000 of availability was
11
used under the Loan Agreement primarily to support letters of credit to
guarantee amounts owed for Industrial Revenue Bond borrowings. The Loan
Agreement provides that all payments by the Company's customers are deposited in
a bank account from which all funds may only be used to pay the debt under the
Loan Agreement. At April 30, 2004, the amount of restricted cash was $274,000.
Cash required for operations is provided by draw-downs on the line of credit.
At January 31, 2004 and April 30, 2004, the Company was not in compliance with
two covenants under the Loan Agreement. The Company and the lenders are
discussing a waiver. Although this noncompliance constitutes an event of default
under the Loan Agreement, the lender has not declared an event of default or
accelerated the indebtedness of the Company under the Loan Agreement. The
Company has made all required payments of principal and interest under the Loan
Agreement to date.
The Company and the lenders under the Note Purchase Agreements and the Loan
Agreement are discussing waivers and amendments. The Company believes it is
probable that agreements will be reached for the waivers and amendments,
although agreement is not assured. If it does not occur, the Company believes it
will be able to obtain replacement financing on acceptable terms, although there
is no assurance that any such financing will be obtained. As required by
accounting principles generally accepted in the United States, due to the
unwaived covenant noncompliance discussed above, all amounts owing under the
Note Purchase Agreements and the Loan Agreement have been classified as current
as of January 31, 2004 and April 30, 2004.
ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revision to SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits." This Statement retains the disclosures previously
required by SFAS 132 but adds additional disclosure requirements about the
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. It also
calls for the required information to be provided separately for pension plans
and for other postretirement benefit plans. In addition to expanded annual
disclosures, the standard improves information available to investors in interim
financial statements. SFAS 132R is effective for fiscal years ending after
December 15, 2003, and for quarters beginning after December 15, 2003. The
adoption of SFAS 132R did not have a material impact on the Company's financial
statements, however, required interim disclosures have been reflected in the
current financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This Interpretation requires the recognition of certain
guarantees as liabilities at fair market value and is effective for guarantees
issued or modified after December 31, 2002. Adoption of the provisions of the
Interpretation has not had and will not have a material effect on the financial
statements of the Company, based on guarantees in effect on April 30, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in foreign
currency exchange rates and interest rates. Foreign currency exchange rate risk
is mitigated through maintenance of local production facilities in the markets
served, invoicing of customers in the same currency as the source of the
products and use of foreign currency denominated debt in Denmark. The Company
also utilizes foreign currency forward contracts to reduce exposure to exchange
rate risks. The forward contracts are short-term in duration, generally one year
or less. The major currency exposure hedged by the Company is the Canadian
dollar. The contract amounts, carrying amounts and fair values of these
contracts were not significant at April 30, 2004 or January 31, 2004.
12
The changeover from national currencies to the Euro began on January 1, 2002,
and has not materially affected, and is not expected to materially affect, the
Company's foreign currency exchange risk profile, although some customers may
require the Company to invoice or pay in Euros rather than the functional
currency of the manufacturing entity.
The Company has attempted to mitigate its interest rate risk by maintaining a
balance of fixed-rate long-term debt with floating rate debt.
Commodity price risk is the possibility of higher or lower costs due to changes
in the prices of commodities, such as ferrous alloys (e.g., steel) which we use
in the production of piping systems. The Company attempts to mitigate such risks
by obtaining price commitments from its commodity suppliers and, when it appears
appropriate, purchasing quantities in advance of likely price increases.
Item 4. Controls and Procedures
As of April 30, 2004, the Company carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rule
13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company required to be included in
the Company's periodic SEC filings. There have been no significant changes in
the Company's internal controls, or in other factors that could significantly
affect these controls, subsequent to the date of that evaluation.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
(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
13
SIGNATURES
Pursuant to the requirements 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.
Date: June 14, 2004 /s/ David Unger
--------------------------------------------
David Unger
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: June 14, 2004 /s/ Michael D. Bennett
--------------------------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
14
Exhibit 31.1
I, David Unger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MFRI, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: June 14, 2004
/s/ David Unger
- ---------------------------
David Unger
Director and Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
15
Exhibit 31.2
I, Michael D. Bennett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MFRI, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: June 14, 2004
/s/ Michael D. Bennett
- ---------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
16
Exhibit 32.1
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, David Unger, President and Chief Executive Officer (principal executive
officer) of MFRI, Inc. (the "Registrant"), certify that to the best of my
knowledge, based upon a review of the Quarterly Report on Form 10-Q for the
period ended April 30, 2004 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
/s/ David Unger
- ------------------------------
David Unger
Director and Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
June 14, 2004
A signed original of this written statement required by Section 906 has been
provided to MFRI, Inc. and will be retained by MFRI, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Michael D. Bennett, Chief Financial Officer (principal financial officer) of
MFRI, Inc. (the "Registrant"), certify that to the best of my knowledge, based
upon a review of the Quarterly Report on Form 10-Q for the period ended April,
2004 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
/s/ Michael D. Bennett
- ------------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
June 14, 2004
A signed original of this written statement required by Section 906 has been
provided to MFRI, Inc. and will be retained by MFRI, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.