PPIH 10-Q Quarterly Report July 31, 2010

PERMA-PIPE INTERNATIONAL HOLDINGS, INC.

10-Ks and 10-Qs

10-Q	Quarter ended July 31, 2025
10-Q	Quarter ended April 30, 2025
10-K	Fiscal year ended Jan. 31, 2025
10-Q	Quarter ended Oct. 31, 2024
10-Q	Quarter ended July 31, 2024
10-Q	Quarter ended April 30, 2024
10-K	Fiscal year ended Jan. 31, 2024
10-Q	Quarter ended Oct. 31, 2023
10-Q	Quarter ended July 31, 2023
10-Q	Quarter ended April 30, 2023
10-K	Fiscal year ended Jan. 31, 2023
10-Q	Quarter ended Oct. 31, 2022
10-Q	Quarter ended July 31, 2022
10-Q	Quarter ended April 30, 2022
10-K	Fiscal year ended Jan. 31, 2022
10-Q	Quarter ended Oct. 31, 2021
10-Q	Quarter ended July 31, 2021
10-Q	Quarter ended April 30, 2021
10-K	Fiscal year ended Jan. 31, 2021
10-Q	Quarter ended Oct. 31, 2020
10-Q	Quarter ended July 31, 2020
10-Q	Quarter ended April 30, 2020
10-K	Fiscal year ended Jan. 31, 2020
10-Q	Quarter ended Oct. 31, 2019
10-Q	Quarter ended July 22, 2019
10-Q	Quarter ended April 30, 2019
10-K	Fiscal year ended Jan. 31, 2019
10-Q	Quarter ended Oct. 31, 2018
10-Q	Quarter ended July 31, 2018
10-Q	Quarter ended April 30, 2018
10-K	Fiscal year ended Jan. 31, 2018
10-Q	Quarter ended Oct. 31, 2017
10-Q	Quarter ended July 31, 2017
10-Q	Quarter ended April 30, 2017
10-K	Fiscal year ended Jan. 31, 2017
10-Q	Quarter ended Oct. 31, 2016
10-Q	Quarter ended July 31, 2016
10-Q	Quarter ended April 30, 2016
10-K	Fiscal year ended Jan. 31, 2016
10-Q	Quarter ended Oct. 31, 2015
10-Q	Quarter ended July 31, 2015
10-Q	Quarter ended April 30, 2015
10-K	Fiscal year ended Jan. 31, 2015
10-Q	Quarter ended Oct. 31, 2014
10-Q	Quarter ended July 31, 2014
10-Q	Quarter ended April 30, 2014
10-K	Fiscal year ended Jan. 31, 2014
10-Q	Quarter ended Oct. 31, 2013
10-Q	Quarter ended July 31, 2013
10-Q	Quarter ended April 30, 2013
10-K	Fiscal year ended Jan. 31, 2013
10-Q	Quarter ended Oct. 31, 2012
10-Q	Quarter ended July 31, 2012
10-Q	Quarter ended April 30, 2012
10-K	Fiscal year ended Jan. 31, 2012
10-Q	Quarter ended Oct. 31, 2011
10-Q	Quarter ended July 31, 2011
10-Q	Quarter ended April 30, 2011
10-K	Fiscal year ended Jan. 31, 2011
10-Q	Quarter ended Oct. 31, 2010
10-Q	Quarter ended July 31, 2010
10-Q	Quarter ended April 30, 2010
10-K	Fiscal year ended April 16, 2010

PROXIES

DEF 14A	Filed on May 14, 2025
DEF 14A	Filed on March 31, 2025
DEF 14A	Filed on June 21, 2024
DEF 14A	Filed on Jan. 31, 2024
DEF 14A	Filed on June 22, 2023
DEF 14A	Filed on May 9, 2023
DEF 14A	Filed on June 22, 2022
DEF 14A	Filed on May 13, 2022
DEF 14A	Filed on April 16, 2021
DEF 14A	Filed on May 11, 2020
DEF 14A	Filed on May 8, 2019
DEF 14A	Filed on April 25, 2018
DEF 14A	Filed on May 12, 2017
DEF 14A	Filed on May 19, 2016
DEF 14A	Filed on May 8, 2015
DEF 14A	Filed on May 8, 2014
DEF 14A	Filed on June 6, 2013
DEF 14A	Filed on June 7, 2012
DEF 14A	Filed on May 27, 2011
DEF 14A	Filed on June 8, 2010
DEF 14A	Filed on None

10-Q 1 form10q073110.htm MFRI 2ND QUARTER 10Q 2010 form10q073110.htm

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 July 31, 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)

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 September 7, 2010, there were 6,839,483 shares of the registrant’s common stock outstanding.

MFRI, Inc.

TABLE OF CONTENTS

Item		Page

Part I	Financial Information
1.	Financial Statements
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2010 and 2009	1
	Condensed Consolidated Balance Sheets as of July 31, 2010 and January 31, 2010	2
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2010 and 2009	3
	Notes to Condensed Consolidated Financial Statements	4
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
3.	Quantitative and Qualitative Disclosures About Market Risk	15
4.	Controls and Procedures	15

Part II	Other Information
6.	Exhibits	15

Signatures		16

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MFRI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share information)

	Three Months Ended July 31,						Six Months Ended July 31,
	2010			2009			2010			2009
Net sales	$	61,887		$	61,106		$	111,737		$	128,685
Cost of sales		48,144			46,477			87,242			95,329
Gross profit		13,743			14,629			24,495			33,356

Operating expenses
General and administrative expenses		7,529			8,519			15,064			17,275
Selling expenses		3,389			3,328			6,768			6,427
Total operating expenses		10,918			11,847			21,832			23,702

Income from operations		2,825			2,782			2,663			9,654

Loss from joint ventures		24			106			121			106

Interest expense, net		404			530			689			1,218

Income before income taxes		2,397			2,146			1,853			8,330

Income tax benefit		(485	)		(1,605	)		(545	)		(1,427	)
Net income	$	2,882		$	3,751		$	2,398		$	9,757

Weighted average number of common shares outstanding
Basic		6,839			6,819			6,838			6,818
Diluted		6,860			6,846			6,863			6,854

Earnings per share
Basic	$	0.42		$	0.55		$	0.35		$	1.43
Diluted		0.42			0.55			0.35			1.42

See accompanying notes to condensed consolidated financial statements.

MFRI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)	July 31, 2010 Unaudited		January 31, 2010
ASSETS
Current assets
Cash and cash equivalents	$	13,102	$	8,067
Restricted cash		712		641
Trade accounts receivable, less allowance for doubtful accounts of $368 at July 31, 2010 and $379 at January 31, 2010		41,450		36,157
Inventories, net		35,405		35,349
Prepaid expenses and other current assets		4,408		3,781
Costs and estimated earnings in excess of billings on uncompleted contracts		3,714		3,127
Deferred tax assets - current		3,064		2,769
Income tax receivable		211		1,414
Total current assets		102,066		91,305

Property, plant and equipment, net of accumulated depreciation		44,380		45,812

Other assets
Deferred tax assets – long-term		5,379		4,187
Note receivable from joint venture		4,137		4,003
Cash surrender value of deferred compensation plan		2,763		2,491
Investments in joint ventures		1,976		2,097
Patents, net of accumulated amortization		230		238
Other assets		198		414
Total other assets		14,683		13,430
Total assets	$	161,129	$	150,547

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Trade accounts payable	$	16,373	$	13,024
Commissions and management incentives payable		7,609		9,895
Current maturities of long-term debt		5,100		3,118
Accrued compensation and payroll taxes		4,142		3,812
Other accrued liabilities		3,700		4,116
Customers' deposits		3,094		3,521
Billings in excess of costs and estimated earnings on uncompleted contracts		1,022		796
Total current liabilities		41,040		38,282

Long-term liabilities
Long-term debt, less current maturities		38,417		34,072
Deferred compensation liabilities		4,776		3,892
Other long-term liabilities		1,777		1,739
Total long-term liabilities		44,970		39,703

Stockholders’ equity
Common stock, $.01 par value, authorized 50,000 shares; 6,839 issued and outstanding at July 31, 2010 and 6,836 issued and outstanding at January 31, 2010		68		68
Additional paid-in capital		48,579		48,086
Retained earnings		25,992		23,594
Accumulated other comprehensive income		480		814
Total stockholders’ equity		75,119		72,562
Total liabilities and stockholders’ equity	$	161,129	$	150,547

See accompanying notes to condensed consolidated financial statements.

MFRI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended July 31,
( In thousands)	2010			2009
Operating activities
Net income	$	2,398		$	9,757
Adjustments to reconcile net income to net cash flows (used in) provided by operating activities
Depreciation and amortization		3,065			3,477
Deferred tax benefit		(1,551	)		(1,095	)
Stock-based compensation expense		482			447
Cash surrender value of deferred compensation plan		(271	)		(660	)
Loss from joint ventures		121			106
Loss on sale of fixed assets		48			0
Changes in operating assets and liabilities
Accounts receivable, net		(5,462	)		12,211
Accounts payable		3,018			(5,999	)
Accrued compensation and payroll taxes		(1,983	)		(1,530	)
Income taxes receivable and payable		1,205			(2,716	)
Prepaid expenses and other current assets		(855	)		(4,120	)
Inventories		(632	)		8,876
Other assets and liabilities		475			1,271
Customers' deposits		(427	)		(3,743	)
Net cash (used in) provided by operating activities		(369	)		16,282

Investing activities
Additions to property, plant and equipment		(1,934	)		(3,462	)
Proceeds from sales of property and equipment		18			0
Net cash used in investing activities		(1,916	)		(3,462	)

Financing activities
Borrowings		61,861			115,367
Payment of debt		(55,084	)		(124,092	)
Net borrowings (payment)		6,777			(8,725	)
Increase (decrease) in drafts payable		389			(2,276	)
Payment on capitalized lease obligations		(110	)		(84	)
Tax benefit of stock options exercised		4			5
Stock options exercised		6			15
Net cash provided by (used in) financing activities		7,066			(11,065	)


Effect of exchange rate changes on cash and cash equivalents		254			1,311

Net increase in cash and cash equivalents		5,035			3,066
Cash and cash equivalents – beginning of period		8,067			2,735
Cash and cash equivalents – end of period	$	13,102		$	5,801

Supplemental cash flow information
Cash paid for
Interest	$	946		$	1,319
Income taxes (refund) paid, net		(121	)		709

See accompanying notes to condensed consolidated financial statements.

MFRI, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JULY 31, 2010

(Tabular amounts presented in thousands, except per share amounts)

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 six months ended July 31, 2010 and 2009, respectively.

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 July 31,						Six Months Ended July 31,
	2010			2009			2010			2009
Net sales
Piping Systems	$	33,160		$	32,556		$	58,376		$	65,183
Filtration Products		21,045			18,435			40,159			41,740
Industrial Process Cooling Equipment		7,316			5,563			12,507			10,616
Corporate and Other		366			4,552			695			11,146
Total	$	61,887		$	61,106		$	111,737		$	128,685

Gross profit
Piping Systems	$	9,268		$	11,309		$	16,270		$	25,457
Filtration Products		2,441			1,214			5,078			3,860
Industrial Process Cooling Equipment		2,112			1,452			3,401			2,503
Corporate and Other		(78	)		654			(254	)		1,536
Total	$	13,743		$	14,629		$	24,495		$	33,356

Income (loss) from operations
Piping Systems	$	5,487		$	6,864		$	8,923		$	16,816
Filtration Products		(514	)		(1,810	)		(1,033	)		(2,095	)
Industrial Process Cooling Equipment		365			(288	)		181			(783	)
Corporate and Other		(2,513	)		(1,984	)		(5,408	)		(4,284	)
Total	$	2,825		$	2,782		$	2,663		$	9,654

Income (loss) before income taxes
Piping Systems	$	5,463		$	6,758		$	8,802		$	16,710
Filtration Products		(514	)		(1,810	)		(1,033	)		(2,095	)
Industrial Process Cooling Equipment		365			(288	)		181			(783	)
Corporate and Other		(2,917	)		(2,514	)		(6,097	)		(5,502	)
Total	$	2,397		$	2,146		$	1,853		$	8,330

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 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 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. Income earned in the United Arab Emirates (“U.A.E.”) is not subject to any local country income tax. 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.

The Company’s consolidated ETR was (29.4%) and (17.1%) for the six months ended July 31, 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 income tax free 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.

The Company will continue to review periodically 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 plan’s investments remained at Level 1.

Level 1 market value of plan assets	July 31, 2010		January 31, 2010
Equity securities	$	2,451	$	2,297
U.S. bond market		1,656		1,531
High-quality inflation-indexed bonds issued by the U.S. Treasury and government agencies as well as domestic corporations		220		214
Real Estate		82		67
Money market fund		34		141
Total	$	4,443	$	4,250

	Three Months Ended July 31,						Six Months Ended July 31,
Components of net periodic benefit costs	2010			2009			2010			2009
Service cost	$	29		$	29		$	59		$	58
Interest cost		70			65			140			130
Expected return on plan assets		(85	)		(61	)		(171	)		(122	)
Amortization of prior service cost		33			27			66			54
Recognized actuarial loss		16			25			32			50
Net periodic benefit costs	$	63		$	85		$	126		$	170

Employer contributions for the remainder of the fiscal year ending January 31, 2011 are expected to be $249,700. For the six months ended July 31, 2010, $67,600 in contributions was made.

5.	Equity-based compensation. At July 31, 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	2010		2009
Three month period ended July 31	$	225	$	221
Six month period ended July 31	$	482	$	447

The fair value of the outstanding option awards were estimated on the grant dates using the Black-Scholes option pricing model.

Fair value assumptions	Six Months Ended July 31, 2010			Six Months Ended July 31, 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	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		162			6.10
Exercised		(2	)		2.17			13
Expired or forfeited		(14	)		15.12
Outstanding on July 31, 2010		826		$	11.80	7.3 years	$	341

Exercisable on July 31, 2010		430		$	13.30	5.8 years	$	306
Weighted-average fair value of options granted during first six months of 2010					3.40

Unvested option activity	Unvested Options Outstanding			Weighted- Average Price Per Share		Aggregate Intrinsic Value
Outstanding on January 31, 2010		377		$	13.87	$	13
Granted		162			6.10
Vested		(133	)
Expired or forfeited		(10	)		14.67
Outstanding on July 31, 2010		396		$	10.18	$	35

As of July 31, 2010, there was $1,925,000 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 2.7 years.

6.	Earnings per share.

	Three Months Ended July 31,				Six Months Ended July 31,
	2010		2009		2010		2009
Basic weighted average number of common shares outstanding		6,839		6,819		6,838		6,818
Dilutive effect of stock options		21		27		25		36
Weighted average number of common shares outstanding assuming full dilution		6,860		6,846		6,863		6,854

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		558		572		558		592

Stock options with an exercise price below the average market price		268		128		268		108

7.	Comprehensive income, net of tax.

	Three Months Ended July 31,					Six Months Ended July 31,
	2010			2009		2010			2009
Net income	$	2,882		$	3,751	$	2,398		$	9,757
Interest rate swap		(308	)		0		(308	)		0
Foreign currency translation adjustments		(401	)		2,338		(27	)		2,173
Comprehensive income	$	2,173		$	6,089	$	2,063		$	11,930

Investments in joint ventures. In October 2009, the Company invested $5.88 million, which consisted of $1.96 million for a 49% interest and $3.92 million for a loan, in a Canadian joint venture with The Bayou Companies, Inc., a subsidiary of Insituform Technologies, Inc. This joint venture completed an 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 participate 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 market more efficiently 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 including final settlements is in progress and is 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 July 31,						Six Months Ended July 31,
	2010			2009			2010			2009
Interest expense	$	523		$	535		$	918		$	1,224
Interest income		(119	)		(5	)		(229	)		(6	)
Interest expense, net	$	404		$	530		$	689		$	1,218

10.

New accounting pronouncements . 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.

11.

Debt. 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 July 31, 2010, the Company was in compliance with covenants under the Loan Agreement. 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 July 31, 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 2.50 percentage points, respectively. Monthly interest payments were made during the six months ended July 31, 2010 and 2009. As of July 31, 2010, the Company had borrowed $19,679,100 and had $9,176,700 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 July 31, 2010, the amount of such restricted cash was $712,000. Cash required for operations is provided by draw-downs on the line of credit.

At July 31, 2010, one interest rate swap agreement was in effect with a notional value of $9,000,000 maturing in 2013. The swap agreement, which reduces the exposure to market risks from changing interest rates, exchanges the variable rate to fixed interest rate payments of 2.23% plus LIBOR margin. The interest rate swap was effective as a cash flow hedge and no charge to earnings was required during the six months ended July 31, 2010. The fair value of the derivative financial instrument was ($308,000), recorded in other assets and accumulated other comprehensive income associated with the cash flow hedge.

Item 2. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations

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 judgments and estimates related to the following critical accounting policies could materially affect the consolidated financial statements:

·	Revenue recognition

·	Percentage of completion revenue recognition

Inventory

·	Income taxes

·	Equity-based compensation

·	Fair value of financial instruments

In the second quarter of 2010, fair value of financial instruments was included 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 continued to be 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.

Three months ended July 31, 2010 (“current quarter”) vs. Three months ended July 31, 2009 (“prior-year quarter”)

Net sales of $61,887,000 in the current quarter increased 1.3% from $61,106,000 in the prior-year quarter. Sales increased in all reportable segments (See discussion of each business segment below.)

Gross profit of $13,743,000 in the current quarter decreased 6.1% from $14,629,000 in the prior-year quarter, and gross margin decreased to 22.2% of net sales in the current quarter from 23.9% of net sales in the prior-year quarter. The largest gross profit decrease resulted from the reduced sales and gross profits in the Dubai piping market, while gross profit increased in the filtration products, industrial process cooling and in the U.S. piping systems businesses. (See discussion of each business segment below.)

In July 2010, the Company announced that the facility in South Africa will be closed in the third quarter. Expenses related to the closing were approximately $475,000. These expenses are included in cost of goods sold, general and administrative and selling expenses for the three months ended July 31, 2010.

General and administrative expenses decreased 11.6% to $7,529,000 in the current quarter from $8,519,000 in the prior-year quarter. The reduction was mainly due to lower profit-based management incentive expense and deferred compensation expense partially offset by one-time closing costs in South Africa. (See discussion of each business segment below.)

Selling expenses increased 1.8% to $3,389,000 in the current quarter from $3,328,000 in the prior-year quarter. Selling expenses increased due to commissions for higher sales. (See discussion of each business segment below.)

Net income was $2,882,000 in the current quarter compared to net income of $3,751,000 in the prior-year quarter. The decrease in net income was primarily due to the lack of sales to replace the India pipeline project and HVAC activity that occurred in the prior-year quarter.

Six months ended July 31, 2010 (“YTD”) vs. Six months ended July 31, 2009 (“prior-year YTD”)

Net sales of $111,737,000 decreased 13.2% from $128,685,000 for the prior-year YTD. Year-to-date sales decreased in all businesses except industrial process cooling. The prior-year period for the piping systems business included higher sales related to the India pipeline project, which was completed in the fall of 2009, and a stronger Dubai market. HVAC activity decreased in the current year. (See discussion of each business segment below.)

Gross profit of $24,495,000 decreased 26.6% from $33,356,000 in the prior-year YTD, and gross margin decreased to 21.9% of net sales YTD from 25.9% of net sales in the prior-year YTD. Gross profit in the piping systems business decreased to $16,270,000 YTD from $25,457,000 in the prior-year YTD. The decrease in gross profit was attributed primarily to the absence of sales associated with the India pipeline project. The Company does not expect a project similar in size to the one in India to be replaced in the 2010 backlog, however work began on a smaller India pipeline project in the second quarter. The filtration products and industrial process cooling businesses each experienced an increase in their gross profit for the period. This increase in gross profit was primarily due to increased volume, margin and benefits from previous expense reduction initiatives. (See discussion of each business segment below.)

General and administrative expenses decreased 12.8% to $15,064,000 YTD from $17,275,000 in the prior-year YTD. The reduction was mainly due to lower profit-based management incentive expense and legal fees partially offset by one-time closing costs in South Africa and an increase in stock compensation expense. (See discussion of each business segment below.)

Selling expenses increased 5.3% to $6,768,000 YTD from $6,427,000 in the prior-year YTD primarily driven by the piping systems business and the industrial process cooling equipment business, which had increased commission expense from higher sales. (See discussion of each business segment below.)

Net income was $2,398,000 YTD compared to $9,757,000 in the prior-year YTD. This decrease was due to the lower volume of the piping systems business in the U.A.E., and 2009 activities not repeated in 2010 including the India pipeline project and profits from the HVAC activities.

Piping Systems Business

Current quarter vs. prior-year quarter

Net sales increased 1.9% to $33,160,000 in the current quarter from $32,556,000 in the prior-year quarter primarily due to an increase in domestic sales.

Gross margin decreased to 27.9% of net sales in the current quarter from 34.7% of net sales in the prior-year quarter, attributed primarily to the reduced sales and gross profits in the Dubai piping market .

General and administrative expenses decreased to $2,997,000 or 9.0% of net sales in the current quarter from $3,778,000 or 11.6% of net sales for the prior-year quarter. The reduction was primarily due to lower profit-based management incentive, decreased legal costs and foreign currency exchange gain.

Selling expenses increased to $784,000 or 2.4% of net sales in the current quarter from $666,000 or 2.0% of net sales for the prior-year quarter. This increase was mainly due to higher domestic sales commissions.

YTD vs. prior-year YTD

Net sales of $58,376,000 YTD decreased 10.4% from $65,183,000 in the prior-year YTD, attributed primarily to a drop in sales in both domestic heating and cooling, and oil and gas products. The insulation of pipe for a crude oil pipeline project in India began full production in the third quarter 2008 and contributed to the increase in sales of $10,138,000 in the first half of 2009. As of July 31, 2009, the Company had successfully completed over 99% of the production on the India pipeline project.

Gross margin decreased to 27.9% of net sales YTD from 39.1% of net sales in the prior-year attributed primarily to the reduced volume in the U.A.E. and the absence of sales associated with the India pipeline project in the current year.

General and administrative expenses decreased to $5,755,000 or 9.9% of net sales YTD from $7,338,000 or 11.3% of net sales for the prior-year YTD. The reduction in general and administrative expenses was primarily due to the lower profit-based management incentive and foreign currency exchange gain.

Selling expenses increased to $1,592,000 or 2.7% of net sales YTD from $1,303,000 or 2.0% of net sales for the prior-year YTD. This increase was mainly due to higher domestic sales commissions.

Filtration Products Business

Current quarter vs. prior-year quarter

Net sales in the current quarter increased 14.2% to $21,045,000 from $18,435,000 in the prior-year quarter due to improving business conditions in filtration products.

Gross margin increased to 11.6% of net sales in the current quarter from 6.6% of net sales in the prior-year quarter, primarily due to cost containment efforts and improved product mix.

General and administrative expenses were $1,293,000 in the current quarter compared to $1,245,000 in the prior-year quarter. Continuing general and administrative expenses declined for the division, but were offset by one-time closing costs in South Africa. General and administrative expenses as a percentage of net sales decreased to 6.1% in the current quarter from 6.8% in the prior-year quarter.

Selling expenses decreased to $1,661,000 or 7.9% of net sales in the current quarter from $1,779,000 or 9.7% of net sales for the comparable quarter last year primarily as a result of staff reductions.

YTD vs. prior-year YTD

YTD net sales decreased 3.8% to $40,159,000 from $41,740,000 in the prior-year YTD. Sales decline is due to poor business conditions in the first quarter compared to prior year.

Gross margin increased to 12.6% of net sales YTD from 9.2% of net sales in the prior-year YTD primarily due to cost containment efforts and improved product mix.

General and administrative expenses increased to $2,619,000 or 6.5% of net sales YTD from $2,410,000 or 5.8% of net sales in the prior-year YTD. The increase is mainly driven by one-time closing costs in South Africa.

Selling expenses decreased to $3,491,000 YTD from $3,545,000 in the prior-year YTD primarily due to decreased commission expense due to change in selling channel, lower advertising expense and fewer selling personnel. Selling expenses as a percentage of net sales increased to 8.7% YTD from 8.5% in the prior-year YTD.

Industrial Process Cooling Equipment Business

Current quarter vs. prior-year quarter

Net sales of $7,316,000 in the current quarter increased 31.5% from $5,563,000 in the prior-year quarter due to improving business conditions in the plastic and industrial market sectors.

Gross margin increased in the current quarter to 28.9% of net sales from 26.1% of net sales in the prior-year quarter, primarily due to product mix, lower warranty costs and higher sales volume to spread fixed overhead expenses.

General and administrative expenses decreased in the current quarter to $802,000 or 11.0% of net sales from $859,000 or 15.4% of net sales in the prior-year quarter. The change in spending was the result of cost containment measures and foreign currency exchange gain.

Selling expenses increased to $944,000 in the current quarter from $883,000 in the prior-year quarter. This was primarily driven by an increase in commission expense due to increased sales. Selling expense as a percentage of net sales decreased to 12.9% from 15.9% of net sales in the prior-year quarter.

YTD vs. prior-year YTD

YTD net sales of $12,507,000 increased 17.8% from $10,616,000 in the prior-year due to improving business conditions in the plastic and industrial market sectors.

Gross margin increased to 27.2% of net sales from 23.6% of net sales in the prior-year YTD primarily due to product mix, lower warranty costs and higher sales volume to spread fixed overhead expenses.

General and administrative expenses decreased YTD to $1,535,000 or 12.3% of net sales from $1,708,000 or 16.1% of net sales in the prior-year YTD. The change in spending was a result of lower compensation and related expenses due to workforce reductions and foreign currency exchange gain.

Selling expenses increased to $1,685,000 YTD from $1,579,000 in the prior-year YTD. This was primarily driven by an increase in commission expense due to increased sales. Selling expense as a percentage of net sales decreased to 13.5% YTD from 14.9% of net sales in the prior-year YTD due to the containment of selling costs other than commissions.

General Corporate and Other

Current quarter vs. prior-year quarter

Net sales of $366,000 in the current quarter decreased from $4,552,000 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 will begin in the third quarter of 2010 and continue into 2011.

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 $2,437,000 or 3.9% of consolidated net sales in the current quarter from $2,637,000 or 4.3% of consolidated net sales in the prior-year quarter. This change was mainly due to decreased deferred compensation expense and profit-based management incentive expense, partially offset by increased professional expense.

Interest expense decreased to $523,000 in the current quarter from $535,000 in the prior-year quarter, primarily due to lower borrowings and interest rates partially offset by $34,000 recorded in expense related to the interest rate swap. Interest income increased to $119,000 from $5,000 due to interest earned overseas in the piping systems business.

YTD vs. prior-year YTD

YTD net sales of $695,000 decreased from $11,146,000 in the prior-year YTD due to decreased HVAC activity. During the first half of last year, many larger project related activity occurred in the HVAC business as the Company worked off existing backlog. 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 will begin in the third quarter of 2010 and continue into 2011. The goal for 2010 is to rebuild the backlog to drive activity in 2011 and 2012.

General and administrative expenses decreased to $5,155,000 YTD from $5,819,000 in the prior-year YTD. The decrease was due mainly to decreased profit-based management incentive expense partially offset by additional stock compensation expense. General and administrative expenses as a percentage of consolidated net sales were level in the current quarter from the prior-year quarter.

YTD interest expense decreased to $918,000 from $1,224,000 in the prior-year YTD primarily due to lower borrowings and interest rates partially offset by $34,000 recorded in expense related to the interest rate swap. Interest income increased to $229,000 from $6,000 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 (29.4%) for the six months ended July 31, 2010. The computation of the projected annual tax rate has been significantly impacted by the change in the mix of the projected income tax free 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. 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 July 31, 2010 were $13,102,000 compared to $8,067,000 at January 31, 2010. The Company’s working capital was $61,026,000 at July 31, 2010 compared to $53,023,000 at January 31, 2010. The Company used $369,000 from operating activities during the first six months of 2010.

Net cash used in investing activities for the six months ended July 31, 2010 included $1,934,000 for capital expenditures, primarily for machinery and equipment in the piping systems business.

Debt totaled $43,517,000 at July 31, 2010, a net increase of $6,327,000 compared to the beginning of the current fiscal year. Net cash provided by financing activities was $7,066,000.

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 July 31, 2010, the Company was in compliance with covenants under the Loan Agreement. 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 July 31, 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 2.50 percentage points, respectively. Monthly interest payments were made during the six months ended July 31, 2010 and 2009. As of July 31, 2010, the Company had borrowed $19,679,100 and had $9,176,700 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 July 31, 2010, the amount of such restricted cash was $712,000. Cash required for operations is provided by draw-downs on the line of credit.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Reclassifications. Reclassifications were made to prior-year financial statements to conform to the current-year presentations.

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 recognize revenues upon shipment or delivery of goods or services when title and risk of loss pass to customers, except as noted below.

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.

Inventory. 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.

Equity-based compensation. 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.

Fair value of financial instruments . The carrying values of cash and cash equivalents, accounts receivable and accounts payable are based upon reasonable estimates of their fair value due to their short-term nature. The carrying amount of the Company’s short-term debt, revolving line of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable rates.

The Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing interest rates under the revolving credit agreement. Any differences paid or received on the interest rate swap agreements are recognized as adjustments to interest expense over the life of the swap, thereby adjusting the effective interest rate on the underlying obligation.

New accounting pronouncements. See Part I, Item 1, “Financial Statements – Notes to Condensed Consolidated Financial Statements,” Note 10 – “Recent Accounting Pronouncements,” for information regarding new accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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.

At July 31, 2010, one interest rate swap agreement was in effect with a notional value of $9,000,000 maturing in 2013. The swap agreement, which reduces the exposure to market risks from changing interest rates, exchanges the variable rate to fixed interest rate payments of 2.23% plus LIBOR margin. The interest rate swap was effective as a cash flow hedge and no charge to earnings was required during the six months ended July 31, 2010. The fair value of the derivative financial instrument was ($308,000), and recorded in other assets and accumulated other comprehensive income associated with the cash flow hedge.

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 $65,000.

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.

Item 4. Controls and Procedures

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 July 31, 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 July 31, 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 July 31, 2010 that has materially affected or is reasonably likely to materially affect, internal control over financial reporting.

PART II – OTHER INFORMATION

Item 6. Exhibits

10(i)* Tenth Amendment to Amended and Restated Loan and Security Agreement

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)

*Filed herewith

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:	September 9, 2010	/s/ David Unger
		David Unger
		Chairman of the Board of Directors, and
		Chief Executive Officer
		(Principal Executive Officer)


Date:	September 9, 2010	/s/ Michael D. Bennett
		Michael D. Bennett
		Vice President, Chief Financial Officer, Secretary and Treasurer
		(Principal Financial and Accounting Officer)

TABLE OF CONTENTS

Part I Financial Information Item 1. Financial Statements Item 2. Management S Discussion and Analysis ( Md&a ) Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 6. Exhibits

PPIH 10-Q Quarter ended July 31, 2010