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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 October 31, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18370
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MFRI, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3922969
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7720 Lehigh Avenue Niles, Illinois 60714
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(Address of principal executive offices) (Zip Code)
(847) 966-1000
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(Registrant's telephone number, including area code)
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(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 Rule 12b-2 of the Exchange Act). Yes No X
----- -----
On December 14, 2004, there were 5,030,895 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-2 Amendment No. 2 for the year ended January 31, 2004 as
filed on December 15, 2004. Reclassifications have been made in prior-year
financial statements to conform to the current-year presentation. The results of
operations for the quarter ended October 31, 2004 are not necessarily indicative
of the results to be expected for the full year ending January 31, 2005. One of
the reasons for this is that, generally, sales of the Company's piping systems
have had a tendency to be lower during the winter months, due to weather
constraints over much of the country.
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands except per share information)
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $ 39,708 $ 32,635 $109,904 $ 93,793
Cost of sales 30,544 25,732 85,882 74,016
-------- -------- -------- --------
Gross profit 9,164 6,903 24,022 19,778
Operating expenses:
Selling expense 2,583 2,418 7,690 7,582
General and administrative expense 4,098 4,242 11,500 11,571
-------- -------- -------- --------
Total operating expenses 6,681 6,660 19,190 19,153
-------- -------- -------- --------
Income from operations 2,483 243 4,832 625
Income (loss) from joint venture 189 8 178 193
Interest expense - net 456 500 1,331 1,519
-------- -------- -------- --------
Income (loss) before income taxes 2,216 (249) 3,679 (701)
Income taxes (benefit) 602 (123) 1,026 (313)
-------- -------- -------- --------
Net income (loss) $ 1,614 $ (126) $ 2,653 $ (388)
======== ======== ======== ========
Weighted average common shares outstanding
basic 4,961 4,922 4,935 4,922
Weighted average common shares outstanding
Diluted 5,304 4,922 5,109 4,922
Basic earnings per share
Net income (loss) $ 0.33 $ (0.03) $ 0.54 $ (0.08)
Diluted earnings per share
Net income (loss) $ 0.30 $ (0.03) $ 0.52 $ (0.08)
See notes to condensed consolidated financial statements.
1
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
October 31, January 31,
Assets 2004 2004
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 529 $ 154
Restricted cash 1,394 238
Trade accounts receivable, net 26,479 18,353
Accounts receivable - related companies 885 853
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,511 1,115
Income taxes receivable 572 393
Inventories 20,519 18,275
Deferred income taxes 1,651 1,639
Prepaid expenses and other current assets 586 857
-------- --------
Total current assets 54,126 41,877
Property, plant and equipment, net 25,788 28,828
Other Assets:
Patents, net of accumulated amortization 581 716
Goodwill 2,591 2,549
Other assets 4,934 4,957
-------- --------
Total other assets 8,106 8,222
-------- --------
Total Assets $ 88,020 $ 78,927
======== ========
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------
Current Liabilities:
Trade accounts payable $ 12,927 $ 12,337
Accrued compensation and payroll taxes 2,477 2,673
Other accrued liabilities 3,505 2,835
Commissions payable 4,854 3,046
Current maturities of long-term debt 14,220 11,864
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,178 299
Income taxes payable 1,508 64
-------- --------
Total current liabilities 40,669 33,118
Long-Term Liabilities:
Long-term debt, less current maturities 15,046 16,661
Other 2,372 2,275
-------- --------
Total long-term liabilities 17,418 18,936
Stockholders' Equity:
Common stock, $.01 par value, authorized - 50,000
shares in October 2004 and January 2004; 4,999
issued and outstanding in October 2004 and 4,922
issued and outstanding in January 2004 50 49
Additional paid-in capital 21,622 21,397
Retained earnings 7,753 5,100
Accumulated other comprehensive income 508 327
-------- --------
Total stockholders' equity 29,933 26,873
-------- --------
Total Liabilities and Stockholders' Equity $ 88,020 $ 78,927
======== ========
See notes to condensed consolidated financial statements.
2
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
(In thousands) October 31,
---------------------
2004 2003
-------- --------
Cash Flows from Operating Activities:
Net income (loss) $ 2,653 $ (388)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
(Income) from joint venture (178) (193)
Depreciation and amortization 2,779 3,082
Provision for uncollectible accounts (1) (74)
(Gain) loss on sale of property, plant
and equipment 17 (27)
Change in operating assets and liabilities:
Trade accounts receivable (8,125) (5,272)
Costs and estimated earnings in excess of
billings on uncompleted contracts 483 899
Inventories (2,186) 1,228
Prepaid expenses and other current assets 314 701
Current liabilities 345 1,413
Other operating assets and liabilities 2,521 54
-------- --------
Net Cash Flows from Operating Activities (1,378) 1,423
-------- --------
Cash Flows from Investing Activities:
Proceeds from sale of property and equipment 1,786 475
Purchases of property and equipment (987) (3,789)
Investment in joint venture 50 160
-------- --------
Net Cash Flows from Investing Activities 849 (3,154)
-------- --------
Cash Flows from Financing Activities:
Payments on capitalized lease obligations (51) (101)
Borrowings under revolving, term and mortgage loans 10,616 15,875
Repayment of debt (9,940) (14,467)
Proceeds from stock options exercised 228 -
-------- --------
Net Cash Flows from Financing Activities 853 1,307
-------- --------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents 51 261
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 375 (163)
Cash and Cash Equivalents - Beginning of Period 154 346
-------- --------
Cash and Cash Equivalents - End of Period $ 529 $ 183
======== ========
Supplemental cash flow information:
Cash paid for:
Interest, net of capitalized amounts $ 1,306 $ 1,518
Income taxes paid (refunded) (196) 5
See notes to condensed consolidated financial statements.
3
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2004
1. The unaudited financial statements herein have been prepared by the Company
in accordance with generally accepted accounting principals and pursuant to
the rules and regulations of the Securities and Exchange Commission.
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.
Reclassifications have been made in prior-year financial statements to
conform to the current-year presentation. Interim financial statements
should 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
Amendment No. 2.
2. The Company's stock option plans are accounted for using the intrinsic
value method and accordingly, no compensation cost has been recognized. 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 Nine Months Ended
October 31, October 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) - as reported (in
thousands) $ 1,614 $ (126) $ 2,653 $ (388)
Compensation cost under fair-market
value-based accounting method, net
of tax (in thousands) (54) (42) (159) (121)
Net income (loss) - pro forma (in
thousands) $ 1,560 $ (168) $ 2,494 $ (509)
Net income (loss) per common share -
basic, as reported $ 0.33 $ (0.03) $ 0.54 $ (0.08)
Net income (loss) per common share -
basic, pro forma $ 0.31 $ (0.03) $ 0.51 $ (0.10)
Net income (loss) per common share -
diluted, as reported $ 0.30 $ (0.03) $ 0.52 $ (0.08)
Net income (loss) per common share -
diluted, pro forma $ 0.29 $ (0.03) $ 0.49 $ (0.10)
3. Inventories consisted of the following:
October 31, January 31,
(In thousands) 2004 2004
-------- --------
Raw materials $ 16,239 $ 13,593
Work in process 2,001 1,905
Finished goods 2,279 2,777
-------- --------
Total $ 20,519 $ 18,275
======== ========
4. 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
$2,591,000 and $2,549,000 at October 31, 2004 and January 31, 2004,
respectively. The change in Goodwill was due to foreign currency
translation.
4
5. 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
$581,000 and $716,000 at October 31, 2004 and January 31, 2004,
respectively. Accumulated amortization was $1,588,000 and $1,453,000 at
October 31, 2004 and January 31, 2004, respectively. Future amortization
over the next five years ending January 31, will be 2005 - $45,100, 2006 -
$180,500, 2007 - $173,800, 2008 - $29,400, 2009 - $26,400 and 2010 -
$22,100.
6. Employee Retirement Plans: The market-related value of plan assets at
October 31, 2004 and January 31, 2004 were $2,943,579 and $2,682,942,
respectively. Net cost recognized for the three and nine months ended
October 31 was as follows:
Three Months Ended Nine Months Ended
(In thousands) October 31, October 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Components of net periodic benefit
cost:
Service cost $ 25 $ 24 $ 75 $ 72
Interest cost 47 42 141 127
Expected return on plan assets (56) (42) (168) (125)
Amortization of prior service cost 21 14 62 43
Recognized actuarial loss 20 24 59 73
-------- -------- -------- --------
Net periodic benefit cost $ 57 $ 62 $ 169 $ 190
Employer contributions for fiscal year ending January 31, 2005 are expected
to be $252,191. As of October 2004, $185,953 in contributions were made. In
November 2004, a $66,238 contribution was made. In February 2005, a $76,800
contribution is expected to be made.
7. The basic weighted average shares reconcile to diluted weighted average
shares as follows:
Three Months Ended Nine Months Ended
(In thousands) October 31, October 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) $ 1,614 $ (126) $ 2,653 $ (388)
======== ======== ======== ========
Basic weighted average common
shares outstanding 4,961 4,922 4,935 4,922
Dilutive effect of stock options 343 - 174 -
-------- -------- -------- --------
Weighted average common shares
outstanding assuming full dilution 5,304 4,922 5,109 4,922
======== ======== ======== ========
Basic earnings per share
Net income (loss) $ 0.33 $ (0.03) $ 0.54 $ (0.08)
Diluted earnings per share
Net income (loss) $ 0.30 $ (0.03) $ 0.52 $ (0.08)
5
Three Months Ended Nine Months Ended
(In thousands) October 31, October 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
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 122,000 1,036,000 158,500 993,000
Stock options with an exercise price below the
average stock price 861,704 - 848,904 -
In September and October 2004, a total of 76,746 stock options were
exercised. In November 2004, 28,098 stock options were exercised. As of
December 7, 2004 3,687 stock options were exercised in December. As of
December 7, 2004 a total of 108,531 stock options were exercised.
8. The components of comprehensive income (loss), net of tax, were as follows:
Three Months Ended Nine Months Ended
(In thousands) October 31, October 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) $ 1,614 $ (126) $ 2,653 $ (388)
Change in foreign currency translation
adjustments 364 128 181 299
-------- -------- -------- --------
Comprehensive income (loss) $ 1,978 $ 2 $ 2,834 $ (89)
======== ======== ======== ========
Accumulated other comprehensive income presented on the accompanying condensed
consolidated balance sheets consists of the following:
October 31, January 31,
(In thousands) 2004 2004
-------- --------
Accumulated translation adjustment $ 863 $ 682
Minimum pension liability adjustment (net of
tax benefit of $217 at October 31 and
January 31, 2004) (355) (355)
-------- --------
Total $ 508 327
======== ========
9. 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.
6
Three Months Ended Nine Months Ended
(In thousands) October 31, October 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net Sales:
Filtration Products $ 14,067 $ 13,836 $ 45,733 $ 41,813
Piping Systems 18,544 12,274 42,531 33,227
Industrial Process Cooling Equipment 7,097 6,525 21,640 18,753
-------- -------- -------- --------
Total Net Sales $ 39,708 $ 32,635 $109,904 $ 93,793
======== ======== ======== ========
Gross Profit:
Filtration Products $ 3,238 $ 2,547 $ 9,363 $ 7,882
Piping Systems 3,773 2,428 8,406 6,506
Industrial Process Cooling Equipment 2,153 1,928 6,253 5,390
-------- -------- -------- --------
Total Gross Profit $ 9,164 $ 6,903 $ 24,022 $ 19,778
======== ======== ======== ========
Income (loss) from Operations:
Filtration Products $ 1,060 $ 367 $ 2,830 $ 1,326
Piping Systems 2,417 680 4,644 2,336
Industrial Process Cooling Equipment 452 325 1,238 607
Corporate (1,446) (1,129) (3,880) (3,644)
-------- -------- -------- --------
Income from Operations $ 2,483 $ 243 $ 4,832 $ 625
======== ======== ======== ========
10. 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 was effective for
fiscal years ending after December 15, 2003, and for quarters beginning
after December 15, 2003. The adoption of SFAS 132R has not had 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 a material
effect on the financial statements of the Company, based on guarantees in
effect on October 31, 2004.
11. On September 14, 1995, Midwesco Filter Resources, Inc. in Winchester,
Virginia received $2,050,000 of proceeds from Industrial Revenue Bonds,
which were to mature on August 1, 2007. These bonds had been fully secured
by bank letters of credit. As a result of the sale of land and a building
on June 17, 2004, the Company redeemed the bonds in September 2004.
On July 11, 2002, the Company entered into secured note purchase agreements
with certain institutional investors ("Note Purchase Agreements"). At July
31, 2004 and October 31, 2004, the Company was in compliance with covenants
under the Note Purchase Agreement. At January 31, 2004 and April 30, 2004,
the Company was not in compliance with one covenant under the Note Purchase
Agreements. Waivers have been obtained for noncompliance of debt covenants
for fiscal periods ending on or prior to April 30, 2004.
7
On July 11, 2002, the Company entered into a secured loan and security
agreement with a financial institution ("Loan Agreement"). As of October
31, 2004, the Company had borrowed $12,844,000 and had $4,223,000 available
to it under the revolving line of credit. In addition, $4,446,600 of
availability was used under the Loan Agreement primarily to support letters
of credit to guarantee amounts owed for an Industrial Revenue Bond
borrowing. The Company has determined that borrowings outstanding under its
revolving credit facility should be classified as current maturities of
long-term debt in accordance with the provisions set forth in Emerging
Issues Task Force 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements That Include both a
Subjective Acceleration Clause and a Lock-Box Arrangement".
At July 31, 2004 and October 31, 2004, the Company was in compliance with
covenants under the Loan Agreement. At January 31, 2004 and April 30, 2004,
the Company was not in compliance with covenants under the Loan Agreement.
Waivers have been obtained for noncompliance of debt covenants for fiscal
periods ending on or prior to 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.
RESULTS OF OPERATIONS
MFRI, Inc.
Generally, sales of the Company's piping systems have had a tendency to be lower
during the winter months, due to weather constraints over much of the country.
Three months ended October 31
Net sales of $39,708,000 for the quarter increased 21.7% from $32,635,000 for
the comparable quarter in the prior year. (See discussion of each business
segment below.)
Gross profit of $9,164,000 increased 32.8% from $6,903,000 in the prior year
quarter, and gross margin increased to 23.1% of net sales in the current year
from 21.2 % of net sales in the prior year. (See discussion of each business
segment below.)
Net income rose to $1,614,000 in the current quarter from a loss of $126,000 in
the prior year quarter. The increase in net income was due to increased revenue
at level margins. (See discussion of each business segment below.)
8
Nine months ended October 31
Net sales of $109,904,000 for the nine months increased 17.2% from $93,793,000
for the comparable period in the prior year. (See discussion of each business
segment below.)
Gross profit of $24,022,000 increased 21.5% from $19,778,000 for the comparable
period in the prior year, while gross margin increased to 21.9% of net sales in
the current year from 21.1% of net sales in the prior year. (See discussion of
each business segment below.)
Net income rose to $2,653,000 for the nine months from a loss of $388,000 for
the comparable period in the prior year. The increase in net income was due to
increased revenue at level margins. (See discussion of each business segment
below.)
Filtration Products Business
Three months ended October 31
Net sales for the quarter increased 1.7% to $14,067,000 from $13,836,000 for the
comparable quarter in the prior year. This increase was 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 18.4% in the prior year to
23.0% in the current year, primarily as a result of improved manufacturing
efficiency on slightly higher unit volume and a favorable product mix.
Selling expense decreased to $1,377,000 or 9.8% of net sales from $1,380,000 or
10.0% of net sales for the comparable quarter last year.
General and administrative expenses remained relatively level at $801,000 or
5.7% of net sales in the current-year quarter compared to $800,000 or 5.8% of
net sales in the prior-year quarter.
Nine months ended October 31
Net sales for the nine months increased 9.4% to $45,733,000 from $41,813,000 for
the comparable period in the prior year. This increase was 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 18.8% in the prior year to
20.5% in the current year, primarily as a result of improved manufacturing
efficiency on higher unit volume and a favorable product mix.
Selling expense for the nine months decreased to $4,171,000 or 9.1% of net sales
from $4,232,000 or 10.1% of net sales for the comparable period in the prior
year. The decrease was primarily due to less commission expense and lower travel
costs.
General and administrative expenses increased from $2,323,000 or 5.6% of net
sales in the prior-year period to $2,361,000 or 5.2% of net sales in the current
year period. This increase was primarily due to increased professional services
expenses.
Piping Systems Business
Generally, sales of the Company's piping systems have had a tendency to be lower
during the winter months, due to weather constraints over much of the country.
9
Three months ended October 31
Net sales increased 51.1% from $12,274,000 in the prior-year quarter to
$18,544,000 for the current quarter. This increase was primarily due to some
recovery from the weak economy in both the private and public sectors.
Gross profit as a percent of net sales increased from 19.8% to 20.3% due to
product mix.
Selling expense increased from $228,000 or 1.9% of net sales for the prior year
quarter to $333,000 or 1.8% of net sales in the current year quarter. The
increase was primarily due to higher commissions.
General and administrative expense decreased from $1,520,000 in the prior year
quarter to $1,024,000 in the current year quarter, and decreased as a percent of
net sales from 12.4% to 5.5%. The decrease was primarily due to the prior-year
quarter legal settlement of $510,000 and $284,000 in legal fees associated with
that settlement.
Nine months ended October 31
Net sales of $42,531,000 for the nine months increased 28.0% from $33,227,000
for the comparable period in the prior year. This increase was primarily due to
some recovery from the weak economy in both the private and public sectors.
Gross profit as a percent of net sales increased from 19.6% to 19.8%, mainly due
to product mix.
Selling expense increased from $915,000 or 2.8% of net sales in the prior year
period to $932,000 or 2.2% of net sales in the current year period. The dollar
increase was primarily due to increased commissions.
General and administrative expense decreased to $2,829,000, compared with
$3,255,000 in the prior year period, and decreased as a percent of net sales
from 9.8% to 6.7%. The decrease was primarily due to a legal settlement of
$510,000 and legal fees associated with that settlement incurred in the nine
months ended October 31, 2003.
Industrial Process Cooling Equipment Business
Three months ended October 31
Net sales of $7,097,000 for the quarter increased 8.8% from $6,525,000 for the
comparable quarter in the prior year. The increase was due primarily to some
recovery from the weak economy. Sales increased in both the domestic and
international markets.
Gross profit increased to 30.3% of net sales from 29.6% of net sales in the
prior-year quarter, primarily due to improved pricing and production
efficiencies.
Selling expense increased to $874,000 or 12.3% of net sales in the current-year
quarter from $809,000 or 12.4% of net sales in the prior-year quarter. The
dollar increase was due to the higher commissions associated with increased
sales and greater distributor sales.
General and administrative expense increased to $828,000 or 11.7% of net sales
from $794,000 or 12.2% of net sales in the prior-year quarter. This dollar
increase was primarily due to higher costs for the international operation
resulting from additional headcount and some additional engineering product
development expenses.
10
Nine months ended October 31
Net sales of $21,640,000 for the nine months increased 15.4% from $18,753,000
for the comparable period in the prior year, mainly due to some recovery from
the weak economy. Sales increased in both the domestic and international
markets.
Gross margin increased from 28.7% of net sales in the prior year to 28.9% of net
sales in the current year, primarily due to improved pricing and production
efficiencies.
Selling expense increased to $2,586,000 or 12.0% of net sales in the current
year period from $2,434,000 or 13.0% of net sales in the prior year. The dollar
increase was primarily due to the higher commissions associated with increased
sales and greater distributor sales.
General and administrative expense increased to $2,431,000 or 11.2% of net sales
in the current year period from $2,349,000 or 12.5% of net sales in the prior
year. This increase was primarily due to higher costs for the international
operation resulting from additional headcount and increased product development
costs.
General Corporate Expense
General corporate expense included interest expense and general and
administrative expenses that were not allocated to the business segments.
Three months ended October 31
General and administrative expense increased from $1,129,000 in the prior year
quarter to $1,446,000 in the current year quarter, and increased as a percentage
of net sales from 3.5% in the prior year quarter to 3.6% in the current year
quarter. The increase was mainly due to management incentive compensation and
building repairs and maintenance costs.
Interest expense decreased to $456,000 for the current year quarter from
$500,000 in the prior year quarter. The decrease was primarily due to lower
interest expense due to the sale of a building in Winchester, Virginia in June
2004, and redemption of the Industrial Revenue Bonds in September 2004.
Nine months ended October 31
General and administrative expense increased from $3,644,000 in the prior year
period to $3,879,000 in the current-year nine-month period, and decreased as a
percentage of net sales from 3.9% in the prior year period to 3.5% in the
current year period. The increase was mainly due to management incentive
compensation and building repairs and maintenance costs.
Interest expense decreased to $1,331,000 for the current year period from
$1,519,000 for the comparable period in the prior year. The decrease was
primarily due to lower interest expense due to the sale of a building in
Winchester, Virginia in June 2004, and redemption of the Industrial Revenue
Bonds in September 2004. Interest income on federal tax refunds was received in
the current year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of October 31, 2004 were $529,000 as compared to
$154,000 at January 31, 2004. The Company used $1,378,000 from operations during
the first nine months. Operating cash flows decreased by $2,801,000 from the
same period in the prior year. The cash from investing activities of $849,000
mainly resulted from the sale of a building and land to a third party in June
2004. A cash distribution of $50,000 was received from the Company's investment
in a joint venture. These cash flows, plus borrowings of $676,000 from the
Company's credit facility, were used to support $987,000 in capital spending.
Exercise of stock options resulted in $228,000 of cash inflow.
11
Trade receivables increased $8,125,000 and inventories increased $2,186,000 from
January 31, 2004 due to increased sales. Prepaid expenses and other current
assets decreased $314,000 due to insurance premiums that will be renewed in
November and utilization of sales tax credits. Other operating assets and
liabilities increased $2,519,000 from January 31, 2004 due to increased
commission liability and increased accrued liabilities.
Net cash flow from investing activities for the nine months ended October 31,
2004 was $849,000. Net cash used for investing activities for the nine months
ended October 31, 2003 was $3,154,000. Proceeds from the sale of property and
equipment increased $1,311,000 from the prior year. On June 17, 2004, the
Company sold one of its buildings located in Winchester, Virginia. The building
sold consisted of 66,998 square feet on 10 acres. The Company is leasing from
the Buyer approximately 12,000 square feet of the building. This transaction did
not materially affect the earnings of the Company. Capital expenditures
decreased $2,802,000 from the prior year. The prior year's capital additions of
$3,789,000 mainly related to the Company's construction of a new building for
one of its foreign subsidiaries. Current year capital expenditures related to
new ERP business applications software and equipment purchases.
Debt totaled $29,266,000, an increase of $741,000 since the beginning of the
year. Net cash inflows from financing activities were $852,000, primarily as a
result of borrowings of $10,616,000 and payments of $9,940,000 as well as
$51,000 used for payments on capitalized lease obligations. Exercise of stock
options resulted in $228,000 of cash inflow.
The following table summarizes the Company's estimated contractual obligations,
excluding the revolving lines of credit at October 31, 2004:
Total 1/31/05 1/31/06 1/31/07 1/31/08 1/31/09 Thereafter
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Mortgages $ 9,252,400 $125,400 $502,800 $ 533,900 $ 567,700 $603,600 $6,919,000
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Senior Debt 3,312,500 187,500 750,000 750,000 1,625,000 - -
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
IRB Payable 3,150,000 - - - 3,150,000 - -
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Term Loans 125,400 125,400
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Capitalized Lease 23,900 15,900 6,000 2,000 - - -
Obligations
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Sub Total (1) $15,864,200 $ 454,200 $1,258,800 1,285,900 5,342,700 $603,600 $6,919,000
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Operating lease
Obligations 2,070,800 $ 340,000 $ 520,000 $426,800 $366,500 $ 53,000 $ 364,500
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Purchase Committments (2) 8,300,900 7,085,400 1,022,000 139,700 40,000 13,800 -
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
Total 26,235,900 $ 7,879,600 $2,800,800 $1,852,400 $5,749,200 $670,400 $7,283,500
- ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- ---------------
(1) Scheduled maturities, excluding the revolving line of credits
(2) Purchase commitments were for purchases made in the normal course of
business to meet operational and capital expenditure requirements.
Other long term liability of $2,372,000 was composed of accrued pension cost and
deferred compensation.
The Company's working capital was approximately $13,458,000 at October 31, 2004
compared to approximately $8,759,000 at January 31, 2004. The change was
primarily due to the increased accounts receivable.
The Company's current ratio remained at 1.3 to 1 for October 31, 2004 and
January 31, 2004, respectively. Debt to total capitalization at October 31, 2004
decreased to 49.4% from 51.5% at January 31, 2004.
On September 14, 1995, Midwesco Filter Resources, Inc. in Winchester, Virginia
received $2,050,000 of proceeds from Industrial Revenue Bonds, which were to
mature on August 1, 2007. These bonds had been fully secured by bank letters of
credit. As a result of the sale of land and a building on June 17, 2004, the
Company redeemed the bonds in September 2004.
12
On July 11, 2002, the Company entered into secured note purchase agreements with
certain institutional investors ("Note Purchase Agreements"). At July 31, 2004
and October 31, 2004, the Company was in compliance with covenants under the
Note Purchase Agreement. At January 31, 2004 and April 30, 2004, the Company was
not in compliance with one covenant under the Note Purchase Agreements. Waivers
were previously obtained for noncompliance of debt covenants for fiscal periods
ending on or prior to April 30, 2004.
On July 11, 2002, the Company entered into a secured loan and security agreement
with a financial institution ("Loan Agreement"). As of October 31, 2004, the
Company had borrowed $12,844,000 and had $4,223,000 available to it under the
revolving line of credit. In addition, $4,446,600 of availability was used under
the Loan Agreement primarily to support letters of credit to guarantee amounts
owed for an Industrial Revenue Bond borrowing. The Company has determined that
borrowings outstanding under its revolving credit facility should be classified
as current maturities of long-term debt in accordance with the provisions set
forth in Emerging Issues Task Force 95-22, "Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements That Include both a
Subjective Acceleration Clause and a Lock-Box Arrangement."
At July 31, 2004 and October 31, 2004, the Company was in compliance with
covenants under the Loan Agreement. At January 31, 2004 and April 30, 2004, the
Company was not in compliance with covenants under the Loan Agreement. Waivers
were previously obtained for noncompliance of debt covenants for fiscal periods
ending on or prior to 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 was effective for fiscal years ending after
December 15, 2003, and for quarters beginning after December 15, 2003. The
adoption of SFAS 132R has not had 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 a material effect on the financial statements of the
Company, based on guarantees in effect on October 31, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company was subject to market risk associated with changes in foreign
currency exchange rates and interest rates. Foreign currency exchange rate risk
was 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 utilized foreign currency forward contracts to reduce exposure to exchange
rate risks. The forward contracts were short-term in duration, generally one
year or less. The major currency exposure hedged by the Company was the Canadian
dollar. The contract amounts, carrying amounts and fair values of these
contracts were not significant at October 31, 2004 or January 31, 2004.
13
The changeover from national currencies to the Euro began on January 1, 2002 and
has not materially affected, 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 are
used in the production of the piping systems. The Company attempted to mitigate
such risks by obtaining price commitments from its commodity suppliers and, when
it appeared appropriate, purchasing quantities in advance of likely price
increases.
Item 4. Controls and Procedures
As of October 31, 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 were effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed in the Company's periodic SEC filings. There have been no
changes in the Company's internal controls over financial reporting during the
fiscal quarter to which this report relates that have materially effected or are
reasonably likely to effect the Company's internal controls over financial
reporting.
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
14
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.
MFRI, INC.
Date: December 15, 2004 /s/ David Unger
--------------------------------------------
David Unger
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: December 15, 2004 /s/ Michael D. Bennett
--------------------------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
15
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: December 15, 2004
/s/ David Unger
- ---------------------------
Director and Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
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: December 15, 2004
/s/ Michael D. Bennett
- ---------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
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, 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 October 31,
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
and Chief Executive Officer
(Principal Executive Officer)
December 15, 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 October
31, 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)
December 15, 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.