PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010
Commission
File No. 0-18370
MFRI,
Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
36-3922969
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
7720
N. Lehigh Avenue, Niles, Illinois
|
60714
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
(847)
966-1000
|
|
|
(Registrant’s
telephone number, including area
code)
|
|
|
Securities
registered pursuant to Section 12(b) of the
Act:
|
|
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock, $.01 per share
|
The
NASDAQ Stock Market, LLC
|
Securities registered pursuant to
Section 12(g) of the Act:
None
Indicate by check mark 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one): Large accelerated filer
¨
Accelerated
filer
¨
Non-accelerated
filer
x
Smaller
reporting company
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of
the
Exchange Act). Yes
¨
No
x
On June
7, 2010, there were 6,839,183 shares of the registrant’s common stock
outstanding.
MFRI,
Inc.
FORM
10-Q
For
the quarterly period ended April 30, 2010
TABLE
OF CONTENTS
|
Item
|
Page
|
||
|
Part
I
|
Financial
Information
|
||
|
1.
|
Financial
Statements
|
||
|
Condensed
Consolidated Statements of Operations for the Three Months Ended April 30,
2010 and 2009
|
1
|
||
|
Condensed
Consolidated Balance Sheets as of April 30, 2010 and January 31,
2010
|
2
|
||
|
Condensed
Consolidated Statements of Cash Flows for the Three Months Ended April 30,
2010 and 2009
|
3
|
||
|
Notes
to Condensed Consolidated Financial Statements
|
4
|
||
|
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
9
|
|
|
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
14
|
|
|
4.
|
Controls
and Procedures
|
14
|
|
|
Part
II
|
Other
Information
|
||
|
6.
|
Exhibits
|
15
|
|
|
Signatures
|
16
|
||
MFRI,
INC. AND SUBSIDIARIES
(In
thousands, except per share information)
|
Three
Months Ended
April
30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
sales
|
$ | 49,850 | $ | 67,579 | ||||
|
Cost
of sales
|
39,098 | 48,852 | ||||||
|
Gross
profit
|
10,752 | 18,727 | ||||||
|
Operating
expenses:
|
||||||||
|
General and administrative
expenses
|
7,535 | 8,756 | ||||||
|
Selling expenses
|
3,379 | 3,099 | ||||||
|
Total operating
expenses
|
10,914 | 11,855 | ||||||
|
(Loss)
income from operations
|
(162 | ) | 6,872 | |||||
|
Loss
from joint venture
|
97 | 0 | ||||||
|
Interest
expense, net
|
285 | 688 | ||||||
|
(Loss)
income before income taxes
|
(544 | ) | 6,184 | |||||
|
Income
tax (benefit) expense
|
(60 | ) | 178 | |||||
|
Net
(loss) income
|
$ | (484 | ) | $ | 6,006 | |||
|
Weighted
average number of common shares outstanding:
|
||||||||
|
Basic
|
6,837 | 6,816 | ||||||
|
Diluted
|
6,837 | 6,852 | ||||||
|
(Loss)
earnings per share:
Basic
|
$ | (0.07 | ) | $ | 0.88 | |||
|
Diluted
|
$ | (0.07 | ) | $ | 0.88 | |||
See
accompanying notes to condensed consolidated financial
statements.
1
MFRI,
INC. AND SUBSIDIARIES
|
(In
thousands)
|
April
30,
2010
unaudited
|
January
31,
2010
|
||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 10,159 | $ | 8,067 | ||||
|
Restricted cash
|
1,072 | 641 | ||||||
|
Trade accounts receivable, less
allowance for doubtful accounts of $374
at
April 30, 2010 and $379 at January 31, 2010
|
36,625 | 36,157 | ||||||
|
Inventories, net
|
37,808 | 35,349 | ||||||
|
Prepaid expenses and other current
assets
|
4,492 | 3,781 | ||||||
|
Costs and estimated earnings in
excess of billings on
uncompleted
contracts
|
3,015 | 3,127 | ||||||
|
Deferred tax assets -
current
|
2,893 | 2,769 | ||||||
|
Income tax
receivable
|
316 | 1,414 | ||||||
|
Total current
assets
|
96,380 | 91,305 | ||||||
|
Property,
plant and equipment, net of accumulated depreciation
|
45,430 | 45,812 | ||||||
|
Other
assets:
|
||||||||
|
Deferred tax assets –
long-term
|
5,293 | 4,187 | ||||||
|
Note receivable from joint
venture
|
4,285 | 4,003 | ||||||
|
Cash surrender value of deferred
compensation plan
|
2,725 | 2,491 | ||||||
|
Investments in joint
ventures
|
2,000 | 2,097 | ||||||
|
Other assets
|
449 | 414 | ||||||
|
Patents, net of accumulated
amortization
|
240 | 238 | ||||||
|
Total other
assets
|
14,992 | 13,430 | ||||||
|
Total
assets
|
$ | 156,802 | $ | 150,547 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Trade accounts
payable
|
$ | 20,533 | $ | 13,024 | ||||
|
Commissions and management
incentives payable
|
5,703 | 9,895 | ||||||
|
Current maturities of long-term
debt
|
4,383 | 3,118 | ||||||
|
Accrued compensation and payroll
taxes
|
4,185 | 3,812 | ||||||
|
Customers'
deposits
|
3,634 | 3,521 | ||||||
|
Other accrued
liabilities
|
3,180 | 4,116 | ||||||
|
Billings in excess of costs and
estimated earnings
on uncompleted
contracts
|
1,132 | 796 | ||||||
|
Total current
liabilities
|
42,750 | 38,282 | ||||||
|
Long-term
liabilities:
|
||||||||
|
Long-term debt, less current
maturities
|
34,648 | 34,072 | ||||||
|
Deferred compensation
liabilities
|
4,884 | 3,892 | ||||||
|
Other long-term
liabilities
|
1,792 | 1,739 | ||||||
|
Total long-term
liabilities
|
41,324 | 39,703 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Common stock, $.01 par value,
authorized 50,000 shares; 6,839 issued and
outstanding at April 30, 2010 and 6,836 issued and outstanding at
January
31, 2010
|
68 | 68 | ||||||
|
Additional paid-in
capital
|
48,354 | 48,086 | ||||||
|
Retained earnings
|
23,118 | 23,594 | ||||||
|
Accumulated other comprehensive
income
|
1,188 | 814 | ||||||
|
Total stockholders’
equity
|
72,728 | 72,562 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 156,802 | $ | 150,547 | ||||
See
accompanying notes to condensed consolidated financial
statements.
2
MFRI,
INC. AND SUBSIDIARIES
|
(In
thousands)
|
Three
Months Ended
April
30,
|
|||||||
|
2010
|
2009
|
|||||||
|
Cash
(used in) provided by operating activities
|
||||||||
|
Net (loss) income
|
$ | (484 | ) | $ | 6,006 | |||
|
Adjustments
to reconcile net (loss) income to net cash flows (used in)
provided
by operating activities
|
||||||||
|
Depreciation and
amortization
|
1,549 | 1,739 | ||||||
|
Deferred tax
benefit
|
(1,268 | ) | (1,470 | ) | ||||
|
Stock-based compensation
expense
|
257 | 226 | ||||||
|
Cash surrender value of deferred
compensation plan
|
(234 | ) | (922 | ) | ||||
|
Loss from joint
venture
|
97 | 0 | ||||||
|
Changes
in operating assets and liabilities
|
||||||||
|
Accounts
payable
|
4,953 | (341 | ) | |||||
|
Accrued compensation and payroll
taxes
|
(3,870 | ) | (4,167 | ) | ||||
|
Inventories
|
(2,148 | ) | 6,307 | |||||
|
Prepaid expenses and other current
assets
|
(1,435 | ) | (1,590 | ) | ||||
|
Income taxes receivable and
payable
|
1,129 | 1,315 | ||||||
|
Accounts receivable,
net
|
(439 | ) | 4,428 | |||||
|
Other assets and
liabilities
|
175 | 1,782 | ||||||
|
Customers'
deposits
|
113 | (1,052 | ) | |||||
|
Net
cash (used in) provided by operating activities
|
(1,605 | ) | 12,261 | |||||
|
Cash
used in investing activities
|
||||||||
|
Purchases of property, plant and
equipment
|
(1,216 | ) | (1,955 | ) | ||||
|
Net
cash used in investing activities
|
(1,216 | ) | (1,955 | ) | ||||
|
Cash
provided by (used in) financing activities
|
||||||||
|
Borrowings
|
20,969 | 55,880 | ||||||
|
Repayment of debt
|
(18,853 | ) | (58,287 | ) | ||||
|
Net borrowings
(repayment)
|
2,116 | (2,407 | ) | |||||
|
Increase (decrease) in drafts
payable
|
2,510 | (3,601 | ) | |||||
|
Payments on capitalized lease
obligations
|
(54 | ) | (43 | ) | ||||
|
Tax benefit of stock options
exercised
|
4 | 3 | ||||||
|
Stock options
exercised
|
6 | 7 | ||||||
|
Net
cash provided by (used in) financing activities
|
4,582 | (6,041 | ) | |||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
331 | (497 | ) | |||||
|
Net
increase in cash and cash equivalents
|
2,092 | 3,768 | ||||||
|
Cash
and cash equivalents – beginning of period
|
8,067 | 2,735 | ||||||
|
Cash
and cash equivalents – end of period
|
$ | 10,159 | $ | 6,503 | ||||
|
Supplemental
cash flow information
|
||||||||
|
Cash paid for:
|
||||||||
|
Interest
|
$ | 413 | $ | 681 | ||||
|
Income taxes paid
|
58 | 116 | ||||||
See accompanying notes to condensed
consolidated financial statements.
3
MFRI,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL
30, 2010
(Tabular
amounts presented in thousands, except per share amounts)
|
1.
|
Basis of
presentation.
The 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. The
consolidated balance sheet as of January 31, 2010 has been derived from
the audited consolidated balance sheet as of that date. The
results of operations for any interim period are not necessarily
indicative of future or annual results. 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. Reclassifications have been made in prior year financial
statements to conform to the current year presentation. The
Company’s fiscal year ends on January 31. Years and balances
described as 2010 and 2009 are for the three months ended April 30, 2010
and 2009, respectively.
|
|
2.
|
Business
Segment Reporting.
The Company has three reportable
segments. The piping systems business engineers, designs,
manufactures and sells specialty piping systems and leak detection and
location systems. The filtration products business manufactures
and sells a wide variety of filter elements for air filtration and
particulate collection systems. The industrial process cooling
equipment business engineers, designs, manufactures and sells chillers,
cooling towers, plant circulating systems and accessories for industrial
process applications. Included in corporate and other activity
is a subsidiary which engages in the installation of heating, ventilation
and air conditioning systems (“HVAC”), but which is not sufficiently large
to constitute a reportable segment.
|
|
Three
Months Ended
April
30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
sales:
|
||||||||
|
Piping Systems
|
$ | 25,216 | $ | 32,627 | ||||
|
Filtration Products
|
19,114 | 23,305 | ||||||
|
Industrial Process Cooling
Equipment
|
5,191 | 5,053 | ||||||
|
Corporate and Other
|
329 | 6,594 | ||||||
|
Total
net sales
|
$ | 49,850 | $ | 67,579 | ||||
|
Gross
profit:
|
||||||||
|
Piping Systems
|
$ | 7,002 | $ | 14,148 | ||||
|
Filtration Products
|
2,637 | 2,646 | ||||||
|
Industrial Process Cooling
Equipment
|
1,289 | 1,051 | ||||||
|
Corporate and Other
|
(176 | ) | 882 | |||||
|
Total
gross profit
|
$ | 10,752 | $ | 18,727 | ||||
|
Income
(loss) from operations:
|
||||||||
|
Piping Systems
|
$ | 3,436 | $ | 9,952 | ||||
|
Filtration Products
|
(519 | ) | (285 | ) | ||||
|
Industrial Process Cooling
Equipment
|
(184 | ) | (495 | ) | ||||
|
Corporate and Other
|
(2,895 | ) | (2,300 | ) | ||||
|
(Loss)
income from operations
|
$ | (162 | ) | $ | 6,872 | ) | ||
|
Income
(loss) before income taxes:
|
||||||||
|
Piping Systems
|
$ | 3,339 | $ | 9,952 | ||||
|
Filtration Products
|
(519 | ) | (285 | ) | ||||
|
Industrial Process Cooling
Equipment
|
(184 | ) | (495 | ) | ||||
|
Corporate and Other
|
(3,180 | ) | (2,988 | ) | ||||
|
(Loss)
income before income taxes
|
$ | (544 | ) | $ | 6,184 | |||
4
|
3.
|
Income
Taxes.
Each quarter, the Company estimates the annual
effective income tax rate ("ETR") for the full year and applies that rate
to the income (loss) before income taxes in determining its provision for
income taxes for the interim periods. The Company’s
consolidated ETR was 11.1% and 2.9% for the three months ended April 30,
2010 and 2009, respectively. The computation of the projected
annual tax rate has been significantly impacted by the change in the mix
of the projected earnings in the United Arab Emirates (“U.A.E.”) versus
total projected earnings. The year-to-date ETR was less than
the statutory U.S. federal income tax rate, mainly due to the large
proportion of income earned in the
U.A.E.
|
The
determination of the consolidated provision for income taxes, deferred tax
assets and liabilities, and the related valuation allowance requires management
to make certain judgments and estimates. As a company with
subsidiaries in foreign jurisdictions, the Company is required to calculate and
provide for estimated income tax liabilities for each of the tax
jurisdictions. Income earned in the U.A.E. is not subject to any
local country income tax. The process of calculating income taxes
involves estimating current tax obligations and exposures in each jurisdiction
as well as making judgments regarding the future recoverability of deferred tax
assets. Changes in the estimated level of annual pre-tax income, in
tax laws, and changes resulting from tax audits can affect the overall effective
income tax rate, which impacts the level of income tax expense and net
income. Judgments and estimates related to the Company’s projections
and assumptions are inherently uncertain; therefore, actual results could differ
materially from projections.
During
2009, the Company reevaluated the need for a valuation allowance against
deferred tax assets and established a partial valuation allowance for the
research and development credits, as the Company no longer believed that it was
more likely than not that a portion of the research and development credits
would be utilized within the next five years. The Company will
continue to periodically review the adequacy of its valuation allowance in all
of the tax jurisdictions in which it operates and may make further adjustments
based on management’s outlook for continued profits in each
jurisdiction.
|
4.
|
Pension
Plan for Hourly-Rated Employees of Midwesco Filter Resources, Inc.,
Winchester, Virginia
. The fair value of the major
categories of the pension plans' investments remain at Level
1. The market-related value of plan assets
were:
|
|
April
30,
2010
|
January
31,
2010
|
|||||||
|
Vanguard Balanced Index
Fund
|
$ | 4,178 | $ | 3,828 | ||||
|
Vanguard Inflation Protected
Fund
|
217 | 214 | ||||||
|
Vanguard REIT Index
Fund
|
83 | 67 | ||||||
|
Fifth
Third Banksafe Trust
|
54 | 141 | ||||||
|
Total
|
$ | 4,532 | $ | 4,250 | ||||
|
Three
Months Ended
April
30,
|
||||||||
|
Components of net periodic benefit
costs:
|
2010
|
2009
|
||||||
|
Service
cost
|
$ | 30 | $ | 29 | ||||
|
Interest cost
|
70 | 65 | ||||||
|
Expected return on plan
assets
|
(86 | ) | (61 | ) | ||||
|
Amortization of prior service
cost
|
33 | 27 | ||||||
|
Recognized actuarial
loss
|
16 | 25 | ||||||
|
Net
periodic benefit costs
|
$ | 63 | $ | 85 | ||||
Employer
contributions for the fiscal year ending January 31, 2011 are expected to be
$317,000. For the three months ended April 30, 2010, no contributions
were made.
|
5.
|
Equity-based
compensation.
At
April 30, 2010, the Company has equity-based compensation plans from which
stock-based compensation awards can be granted to eligible employees,
officers or directors.
|
|
Stock-based compensation expense
was:
|
2010
|
2009
|
||||||
|
Three
month period ended April 30
|
$ | 257 | $ | 226 | ||||
|
|
The
fair values of the outstanding option awards were estimated on the grant
dates using the Black-Scholes option pricing model and the assumptions
shown in the following table:
|
5
|
Three
Months Ended
April
30, 2010
|
Three
Months Ended
April
30, 2009
|
|||||||
|
Expected
volatility
|
51.72%-66.82 | % | 51.72%-66.82 | % | ||||
|
Risk-free
interest rate
|
1.88%-5.16 | % | 1.88%-5.16 | % | ||||
|
Dividend
yield
|
0 | % | 0 | % | ||||
|
Expected
life
|
5 -
7 years
|
5 -
7 years
|
||||||
Option
activity for the three months ended April 30, 2010 was:
|
Options
|
Weighted-Average
Exercise Price
Per
Share
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
||||||||||
|
Outstanding
on January 31, 2010
|
680 | $ | 13.20 |
7.2
years
|
$ | 379 | |||||||
|
Granted
|
0 | ||||||||||||
|
Exercised
|
(3 | ) | 2.16 | 13 | |||||||||
|
Expired
or forfeited
|
(4 | ) | 17.12 | ||||||||||
|
Outstanding on April 30,
2010
|
673 | $ | 13.21 |
7.0
years
|
$ | 363 | |||||||
|
Exercisable on April 30,
2010
|
306 | $ | 12.35 |
5.4
years
|
$ | 350 | |||||||
|
Weighted-average fair value of
options granted
during first three months of 2010 |
n/a | ||||||||||||
|
|
Unvested
option activity for the three months ended April 30, 2010
was:
|
|
Unvested
Options
Outstanding
|
Weighted-
Average
Price
Per
Share
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding on January 31,
2010
|
377 | $ | 13.87 | $ | 13 | |||||||
|
Granted
|
0 | |||||||||||
|
Vested
|
(7 | ) | ||||||||||
|
Expired
or forfeited
|
(4 | ) | 17.12 | |||||||||
|
Outstanding on April 30,
2010
|
366 | $ | 13.93 | $ | 12 | |||||||
|
|
As
of April 30, 2010, there was $1,726,000 of total unrecognized compensation
cost related to unvested stock-based compensation options granted under
the equity-based compensation plans. The cost is expected to be
recognized over a period of 2.3
years.
|
6
|
6.
|
Basic
weighted-average shares reconciled to diluted weighted average
shares.
|
|
Three
Months Ended
April
30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Basic weighted average number of common shares outstanding
|
6,837 | 6,816 | ||||||
|
Dilutive
effect of stock options
|
0 | 36 | ||||||
|
Weighted average number of common shares
outstanding assuming full
dilution
|
6,837 | 6,852 | ||||||
|
Stock options not included in the computation of iluted earnings per share
of common stock
because the option exercise
prices exceede the average market prices of the common
shares
|
566 | 438 | ||||||
|
Stock options with an exercise price below the verage market
price
|
107 | 116 | ||||||
|
7.
|
Comprehensive
(loss) income, net of tax.
|
|
Three
Months Ended
April
30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
(loss) income
|
$ | (484 | ) | $ | 6,006 | |||
|
Foreign
currency translation adjustments
|
374 | (165 | ) | |||||
|
Comprehensive (loss)
income
|
$ | (110 | ) | $ | 5,841 | |||
|
8.
|
Investments
in joint ventures.
In October 2009, the Company paid a
total of $5.88 million, $1.96 million for the 49% investment and $3.92
million in a loan, in a Canadian joint venture with The Bayou Companies,
Inc., a subsidiary of Insituform Technologies, Inc. This joint
venture completed a Can $12.25 million acquisition of Garneau, Inc’s pipe
coating and insulation facility and associated assets located in Camrose,
Alberta, Canada, which provides the Company the opportunity to particpate
in the growing oil sands market.
|
From
April 2002 through December 2009, the piping systems business and two unrelated
companies operated an equally owned joint venture to more efficiently market
their complementary thermal insulation products and systems for use in undersea
pipeline flow assurance projects worldwide. The joint venture
agreement expired on December 31, 2009. Business in progress at that
date will be completed in accordance with the terms of the joint venture
agreement. No material adverse effect is expected from termination of
the joint venture.
The
Company accounts for the investments in joint ventures using the equity
method. The financial results are included in the Company’s condensed
consolidated financial statements.
|
9.
|
Interest
expense, net.
|
|
Three
Months Ended
April
30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Interest expense
|
$ | 366 | $ | 689 | ||||
|
Interest (income)
|
(81 | ) | (1 | ) | ||||
|
Interest expense, net
|
$ | 285 | $ | 688 | ||||
|
10.
|
New
accounting pronouncements
. In February 2010, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2010-09, “Subsequent Events – Amendments to Certain
Recognition and Disclosure Requirements” (“ASU 2010-09”), amended guidance
on subsequent events. Under this amended guidance, SEC filers
are no longer required to disclose the date through which subsequent
events have been evaluated in originally issued and revised financial
statements. This guidance was effective
immediately.
|
7
In
January 2010, the FASB issued ASU 2010-06, “Value Measurements and Disclosures –
Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”),
authoritative guidance that expands the required disclosures about fair value
measurements. This guidance provides for new disclosures requiring
the Company to (i) disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements and describe the reasons
for the transfers and (ii) present separately information about purchases,
sales, issuances and settlements in the reconciliation of Level 3 fair value
measurements. This guidance also provides clarification of existing
disclosures requiring the Company to (i) determine each class of assets and
liabilities based on the nature and risks of the investments rather than by
major security type and (ii) for each class of assets and liabilities, disclose
the valuation techniques and inputs used to measure fair value for both Level 2
and Level 3 fair value measurements. These disclosures and
clarification are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuance, and settlements in the rollforward
of
activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010 and for interim
periods within those fiscal years. The Company adopted the provisions
of ASU 2010-06 as of February 1, 2010 and the provisions did not have a material
impact on the Company’s consolidated financial statements.
In March
2010, the FASB issued
ASU
2010-11,
“Derivatives and Hedging – Scope Exception Related to Embedded Credit
Derivatives”. The amendments are effective for each reporting entity
at the beginning of its first fiscal quarter beginning after June 15,
2010. Early adoption is permitted at the beginning of each entity’s
first fiscal quarter beginning after March 5, 2010. The Company does
not expect the provisions of
ASU
2010-11 to have a material effect on the consolidated financial
statements.
|
11.
|
|
|
12.
|
Subsequent
event. Interest rate swap.
On May 17, 2010,
the Company entered into a $9 million notional amount interest rate swap
agreement with Bank of America that commences on May 19,
2010. The swap expires November 30, 2013, the same date as the
Loan Agreement. This swap obligates the Company to pay a 2.23%
fixed rate of interest on the notional amount and requires the
counterparty to pay the Company a floating interest rate based on the
monthly LIBOR interest rate.
|
8
The
statements contained under the caption “MD&A 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, competition, international rapid
growth, changes in government policies and laws, worldwide economic conditions,
government regulation, economic factors, consumer access to capital funds,
backlog, financing, internal control, market demand and pricing, global interest
rates, currency exchange rates, labor relations and other risk
factors.
RESULTS OF
OPERATIONS
Consolidated
MFRI, Inc.
MFRI,
Inc. ("MFRI", the "Company" or the "Registrant") is engaged in the manufacture
and sale of products in three reportable business segments: piping systems,
filtration products, and industrial process cooling equipment. The
Company website address is
www.mfri.com
.
This
discussion should be read in conjunction with the condensed consolidated
financial statements, including the notes thereto, contained elsewhere in this
report. An overview of the segment results is provided in Note 2 of
the Notes to Condensed Consolidated Financial Statements contained in Item 1 of
this report.
Critical
Accounting Policies and Estimates
MD&A
discusses the interim consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Management
believes that judgment and estimates related to the following critical
accounting policies could materially affect the consolidated financial
statements:
|
·
|
Revenue
|
|
·
|
Percentage
of completion method revenue
recognition
|
|
·
|
Inventory
valuation, the allowance for doubtful accounts and other accrued
liabilities
|
|
·
|
Income
taxes
|
|
·
|
Equity-based
compensation
|
In the
first quarter of 2010, there were no changes in the above critical accounting
policies.
Substantially
all of the Company’s businesses directly or indirectly serve markets that were
adversely impacted by recent global economic conditions. Although
improvement is expected, the timing of economic recovery in the markets served
remains uncertain. A further downturn in one or more of the Company’s
significant markets could have a material adverse effect on the Company’s
business, results of operations or financial condition. Because
economic and market conditions vary within the Company’s business segments, the
Company’s future performance by business segment will also
vary. Should the current credit crisis and general economic recession
continue, the Company could continue to experience a period of declining net
sales, which could adversely impact the Company’s results of
operations. The adverse effect of the credit crisis experienced by
the Emirate of Dubai has significantly decelerated construction activity both in
the U.A.E. and across other Gulf Cooperation Council
countries, negatively
impacting sales volume at the U.A.E. facility.
9
Three
months ended April 30, 2010 (“current quarter”) vs. Three months ended April 30,
2009 (“prior-year quarter”)
Net sales
of $49,850,000 in the current quarter decreased 26.2% from $67,579,000 in the
prior-year quarter. The prior-year quarter included sales related to
the India pipeline project and HVAC activity. (See discussion of each
business segment below.)
Gross
profit of $10,752,000 in the current quarter decreased 42.6% from $18,727,000 in
the prior-year quarter, and gross margin decreased to 21.6% of net sales in the
current quarter from 27.7% of net sales in the prior-year
quarter. The prior-year quarter included gross profit related to the
India pipeline project. Excluding the effects of the India pipeline
project and HVAC activity, gross profit was in line with prior year. (See
discussion of each business segment below.)
General
and administrative expenses decreased 13.9% to $7,535,000 in the current quarter
from $8,756,000 in the prior-year quarter. The decrease was mainly
due to decreased profit-based management incentive expense. (See
discussion of each business segment below.)
Selling
expenses increased 9.0% to $3,379,000 in the current quarter from $3,099,000 in
the prior-year quarter. Selling expenses increased in all
segments. (See discussion of each business segment
below.)
Net loss
was $484,000 in the current quarter compared to net income of $6,006,000 in the
prior-year quarter. The decrease in net income was primarily due to
sales related to the India pipeline project and HVAC activity that occurred in
the prior-year first quarter.
Piping
Systems Business
Current
quarter vs. Prior-year quarter
Net sales
decreased 22.7% to $25,216,000 in the current quarter from $32,627,000 in the
prior-year quarter, attributed primarily to the absence of sales associated with
the India pipeline project. An order for an additional 150 kilometers
(93 miles)
to
the India pipeline project has been received and is expected to begin
manufacturing in the second quarter.
Gross
profit decreased to 27.8% of net sales in the current quarter from 43.4% of net
sales in the prior-year quarter, again primarily due to the absence of sales
associated wth the India pipeline project in the current quarter.
General
and administrative expenses decreased to $2,758,000 in the current quarter from
$3,560,000 for the prior-year quarter. The decrease was primarily due
to lower profit-based management incentive expense, foreign currency exchange
gain and lower professional fees partially offset by legal
costs. General and administrative expenses as a percentage of net
sales remained level at 10.9%.
Selling
expenses increased to $808,000 or 3.2% of net sales in the current quarter from
$637,000 or 2.0% of net sales for the prior-year quarter. This
increase was mainly due to increased oil and gas international sales expenses,
both domestic and international commissions, and additional advertising
expense.
10
Filtration
Products Business
Current
quarter vs. Prior-year quarter
Net sales
in the current quarter decreased 18.0% to $19,114,000 from $23,305,000 in the
prior-year quarter. Sales declines were the result of lower market
demand across most filtration products. In addition, customer
infrastructure projects continue to be significantly curtailed in response to
the current economy. Early in 2010, there has been some modest
improvement in the United States economy that was reflected in higher filter
consumption by end users in the pleated filter products.
Gross
profit increased to 13.8% of net sales in the current quarter from 11.4% of net
sales in the prior-year quarter, primarily due to cost containment efforts and
improved product mix.
General
and administrative expenses increased to $1,326,000 or 6.9% of net sales in the
current quarter from $1,165,000 or 5.0% of net sales in the prior-year quarter,
primarily due to foreign currency exchange loss and product
development.
Selling
expenses increased to $1,830,000 or 9.6% of net sales in the current quarter
from $1,766,000 or 7.6% of net sales for the comparable quarter last year
primarily due to additional selling personnel and increased advertising
expense.
Industrial
Process Cooling Equipment Business
Current
quarter vs. Prior-year quarter
Net sales
of $5,191,000 in the current quarter increased 2.7% from $5,053,000 in the
prior-year quarter due to improving business conditions in the plastic and
industrial market sectors.
Gross
profit increased in the current quarter to 24.8% of net sales from 20.8% of net
sales in the prior-year quarter, primarily due to cost containment measures and
lower warranty costs.
General
and administrative expenses decreased in the current quarter to $733,000 or
14.1% of net sales from $849,000 or 16.8% of net sales in the prior-year
quarter. The change in spending was a result of staffing
reductions.
Selling
expenses increased to $741,000 or 14.3% of net sales in the current quarter from
$696,000 or 13.8% of net sales in the prior-year quarter. This was
primarily driven by an increase in commission expense.
General
Corporate and Other
Current
quarter vs. Prior-year quarter
Net sales
of $329,000 in the current quarter decreased from $6,594,000 in the prior-year
quarter due to decreased HVAC activity. New construction activity has
been adversely affected by the current economy. In 2010, the Company
has obtained a new HVAC order for approximately $8 million. Fieldwork
on this new project is expected to begin late in the second quarter of
2010. Additionally, the goal for 2010 is to rebuild the backlog to
drive activity in 2011 and 2012.
General
corporate expenses included interest expense and general and administrative
expenses that were not allocated to the business segments. General
and administrative expenses decreased to $2,718,000 in the current quarter from
$3,182,000 in the prior-year quarter. This change was mainly due to
decreased profit-based management incentive expense, partially offset by
increased deferred compensation expense. General and administrative
expenses as a percentage of consolidated net sales increased to 5.5% in the
current quarter from 4.7% in the prior-year quarter due to the effect of lower
sales.
11
Interest
expense decreased to $366,000 in the current quarter from $689,000 in the
prior-year quarter, primarily due to decreased borrowings and lower interest
rates. Interest income increased to $81,000 from $1,000 due to
interest earned overseas in the piping systems business.
Income
Taxes
The ETR
in the periods presented was the result of the mix of income earned in various
tax jurisdictions that apply a broad range of income tax
rates. Income earned in the U.A.E. is not subject to any local
country income tax. Taxes are based on an estimated ETR that is
calculated each quarter. The ETR was 11.1% for the three months ended
April 30, 2010. The computation of the projected annual tax rate has
been significantly impacted by the change in the mix of the projected earnings
in the U.A.E. versus total projected earnings. The year-to-date ETR
was less than the statutory U.S. federal income tax rate, mainly due to the
large proportion of income earned in the U.A.E. During 2009, the
Company established a partial valuation allowance for the research and
development credits, as the Company no longer believed that it was more likely
than not that a portion of the research and development credits would be
utilized within the next five years. For additional information, see
Note 3 Income Taxes in the Notes to Condensed Consolidated
Financial
Statements.
LIQUIDITY AND CAPITAL
RESOURCES
Cash and
cash equivalents as of April 30, 2010 were $10,159,000 compared to $8,067,000 at
January 31, 2010. The Company’s working capital was $53,630,000 at
April 30, 2010 compared to $53,023,000 at January 31, 2010. The
Company used $1,605,000 from operating activities during the first three months
of 2010.
Net cash
used in investing activities for the three months ended April 30, 2010 included
$1,216,000 for capital expenditures, primarily for machinery and equipment in
the piping systems business.
Debt
totaled $39,031,000 at April 30, 2010, an increase of $2,062,000 compared to the
beginning of the current fiscal year. Net cash provided by financing
activities was $4,582,000.
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 as amended, which matures on November 30, 2013, the Company can borrow
up to $38,000,000, subject to borrowing base and other requirements, under a
revolving line of credit. The Loan Agreement covenants restrict debt,
liens, and investments, do not permit payment of dividends, and require
attainment of certain levels of profitability and cash flows. At
April 30, 2010, the Company was in compliance with covenants under the Loan
Agreement. At January 31, 2010, the Company was not in compliance
with a fixed charge covenant (the “Covenant”) under the Loan
Agreement. A waiver was obtained for such noncompliance, and the
Covenant has been amended to levels consistent with the Company’s current
business plan. 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, 2010, the prime rate was 3.25%, 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 0.50 and 2.75 percentage
points, respectively. Monthly interest payments were made during the
three months ended April 30, 2010 and 2009. As of April 30, 2010, the
Company had borrowed $16,631,300 and had $7,612,200 available to it under the
revolving line of credit. In addition, $125,200 of availability was
used under the Loan Agreement primarily to support letters of credit to
guarantee amounts committed for inventory purchases. 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, 2010, the amount of such restricted cash
was $667,100. Cash required for operations is provided by draw-downs
on the line of credit.
CRITICAL ACCOUNTING
ESTIMATES AND POLICIES
Reclassifications.
Reclassifications
were made to prior-year financial statements to conform to the current-year
presentations.
12
Revenue
Recognition.
The Company recognizes revenues including
shipping and handling charges billed to customers, when all the following
criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) the seller’s price to the buyer is fixed or determinable, and (iii)
collectability is reasonably assured. All subsidiaries of the
Company, except as noted below, recognize revenues upon shipment or delivery of
goods or services when title and risk of loss pass to customers.
Percentage of
completion revenue recognition.
All divisions recognize
revenues under the above stated revenue recognition policy except for sizable
complex contracts that require periodic recognition of income. For
these contracts, the Company uses "percentage of completion" accounting
method. Under this approach, income is recognized in each reporting
period based on the status of the uncompleted contracts and the current
estimates of costs to complete. The choice of accounting method is
made at the time the contract is received based on the expected length and
complexity of the project. The percentage of completion is determined
by the relationship of costs incurred to the total estimated costs of the
contract. Provisions are made for estimated losses on uncompleted
contracts in the period in which such losses are determined. Changes
in job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions and final contract settlements, may
result in revisions to costs and income. Such revisions are
recognized in the period in which they are determined. Claims for
additional compensation due the Company are recognized in contract revenues when
realization is probable and the amount can be reliably estimated.
Inventories.
Inventories
are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method for substantially all inventories.
Income
Taxes.
Deferred income taxes have been provided for temporary
differences arising from differences in basis of assets and liabilities for tax
and financial reporting purposes. Deferred income taxes on temporary
differences have been recorded at the current tax rate. The Company
assesses its deferred tax assets for realizability at each reporting
period.
The
Company recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax
authority.
Stock
Options.
Stock
compensation
expense for employee equity awards are recognized ratably over the requisite
service period of the award. The Black-Scholes option-pricing model
is utilized to estimate the fair value of awards. Determining the
fair value of stock options using the Black-Scholes model requires judgment,
including estimates for (1) risk-free interest rate – an estimate based on the
yield of zero–coupon treasury securities with a maturity equal to the expected
life of the option; (2) expected volatility – an estimate based on the
historical volatility of the Company’s Common Stock; and (3) expected life of
the option – an estimate based on historical experience including the effect of
employee terminations.
New accounting
pronouncements.
In February 2010, FASB issued ASU 2010-09,
“Subsequent Events – Amendments to Certain Recognition and Disclosure
Requirements” (“ASU 2010-09”), amended guidance on subsequent
events. Under this amended guidance, SEC filers are no longer
required to disclose the date through which subsequent events have been
evaluated in originally issued and revised financial statements. This
guidance was effective immediately.
In
January 2010, the FASB issued ASU 2010-06, “Value Measurements and Disclosures –
Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”),
authoritative guidance that expands the required disclosures about fair value
measurements. This guidance provides for new disclosures requiring
the Company to (i) disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements and describe the reasons
for the transfers and (ii) present separately information about purchases,
sales, issuances and settlements in the reconciliation of Level 3 fair value
measurements. This guidance also provides clarification of existing
disclosures requiring the Company to (i) determine each class of assets and
liabilities based on the nature and risks of the investments rather than by
major security type and (ii) for each class of assets and liabilities, disclose
the valuation techniques and inputs used to measure fair value for both Level 2
and Level 3 fair value measurements. These disclosures and
clarification are effective
13
for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuance, and settlements in the
rollforward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010 and
for interim periods within those fiscal years. The Company adopted
the provisions of ASU 2010-06 as of February 1, 2010 and the provisions did not
have a material impact on the Company’s consolidated financial
statements.
In March
2010, the FASB issued ASU 2010-11, “Derivatives and Hedging – Scope Exception
Related to Embedded Credit Derivatives”. The amendments are effective
for each reporting entity at the beginning of its first fiscal quarter beginning
after June 15, 2010. Early adoption is permitted at the beginning of
each entity’s first fiscal quarter beginning after March 5, 2010. The
Company does not expect the provisions of ASU 2010-11 to have a material effect
on the consolidated financial statements.
Other
accounting standards that have been issued by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
The
Company is subject to market risk associated with changes in foreign currency
exchange rates, interest rates and commodity prices. Foreign currency
exchange rate risk is mitigated through maintenance of local production
facilities in the markets served, often, though not always, invoicing customers
in the same currency as the source of the products and use of foreign
currency-denominated debt in Denmark, India, and U.A.E. At times, the
Company has attempted to mitigate interest rate risk by maintaining a balance of
fixed-rate and floating-rate debt.
A
hypothetical ten percent change in market interest rates over the next year
would increase or decrease interest expense on the Company's floating rate debt
instruments by approximately $55,000.
Commodity
price risk is the possibility of higher or lower costs due to changes in the
prices of commodities, such as ferrous alloys which the Company uses in the
production of piping systems. The Company attempts to mitigate such
risks by obtaining price commitments from commodity suppliers and, when it
appears appropriate, purchasing quantities in advance of likely price
increases.
The Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of April 30, 2010. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of April 30, 2010 to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms and is accumulated and communicated to the
issuer’s management, including its principal executive and financial officers,
to allow timely decisions regarding required disclosure.
There has
been no change in internal control over financial reporting during the quarter
ended April 30, 2010 that has materially affected or is reasonably likely to
materially affect, internal control over financial reporting.
14
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
|
|
(Chief
Executive Officer and Chief Financial Officer certification pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002)
|
15
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:
|
June
11, 2010
|
/s/
David Unger
|
|
David
Unger
|
||
|
Chairman
of the Board of Directors, and
|
||
|
Chief
Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
|
Date:
|
June
11, 2010
|
/s/
Michael D. Bennett
|
|
Michael
D. Bennett
|
||
|
Vice
President, Secretary and Treasurer
|
||
|
|
(Principal
Financial and Accounting Officer)
|
16
TABLE OF CONTENTS