PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended
April 30, 2013
Commission File No. 0-18370
MFRI, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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36-3922969
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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7720 N. Lehigh Avenue, Niles, Illinois
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60714
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(Address of principal executive offices)
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(Zip Code)
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(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
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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
x
No
o
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
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
On
June 5, 2013
, there were
6,943,962
shares of the registrant's common stock outstanding.
MFRI, Inc.
FORM 10-Q
For the fiscal quarter ended
April 30, 2013
TABLE OF CONTENTS
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Item
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Page
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Part I
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||
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1.
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||
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Consolidated Statement of Operations for the Three Months Ended April 30, 2013 and 2012
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||
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Consolidated Statement of Comprehensive Income (Loss) for the Three Months Ended April 30, 2013 and 2012
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2
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Consolidated Statement of Cash Flows for the Three Months Ended April 30, 2013 and 2012
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||
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2.
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||
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4.
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||
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Part II
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||
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6.
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MFRI, INC. AND SUBSIDIARIES
(In thousands, except per share data)
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Three Months Ended April 30,
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||||||
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2013
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2012
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|||
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Net sales
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$57,744
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$44,499
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Cost of sales
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44,612
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37,667
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Gross profit
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13,132
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6,832
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Operating expenses
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||||||
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General and administrative expenses
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6,932
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6,599
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Selling expenses
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3,395
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2,530
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Total operating expenses
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10,327
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9,129
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Income (loss) from operations
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2,805
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(2,297
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)
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Loss from joint venture
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(295
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)
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(246
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)
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Interest expense, net
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490
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371
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Income (loss) from continuing operations before income taxes
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2,020
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(2,914
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)
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Income tax expense (benefit)
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58
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(317
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)
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|||
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Income (loss) from continuing operations
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1,962
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(2,597
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)
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Income from discontinued operations, net of tax
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9,119
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541
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|||
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Net income (loss)
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$11,081
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($2,056
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)
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Weighted average common shares outstanding
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||||||
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Basic
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6,932
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6,915
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Diluted
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6,934
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6,915
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Earnings (loss) per share from continuing operations
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||||||
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Basic and diluted
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$0.28
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($0.38
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)
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Earnings per share from discontinued operations
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||||||
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Basic and diluted
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$1.32
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$0.08
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Earnings (loss) per share
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||||||
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Basic and diluted
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$1.60
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($0.30
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)
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||
See accompanying notes to consolidated financial statements.
1
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands)
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Three Months Ended April 30,
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||||||
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2013
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2012
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Net income (loss)
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$11,081
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($2,056
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)
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Other comprehensive income (loss)
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||||||
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Currency translation adjustments
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(965
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)
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(35
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)
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Interest rate swap, net of tax
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12
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27
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Other comprehensive loss
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(953
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)
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(8
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)
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Comprehensive income (loss)
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$10,128
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($2,064
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)
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See accompanying notes to consolidated financial statements.
2
MFRI, INC. AND SUBSIDIARIES
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(In thousands except per share data)
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April 30, 2013
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January 31, 2013
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ASSETS
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Unaudited
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||||
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Current assets
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||||||
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Cash and cash equivalents
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$10,983
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$7,035
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Restricted cash
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1,517
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725
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Trade accounts receivable, less allowance for doubtful accounts of $364 at April 30, 2013 and $343 at January 31, 2013
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42,222
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25,159
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Inventories, net
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39,402
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38,204
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Assets held for sale
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—
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7,433
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Prepaid expenses and other current assets
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4,753
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4,035
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Costs and estimated earnings in excess of billings on uncompleted contracts
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2,802
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1,935
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Total current assets
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101,679
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84,526
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Property, plant and equipment, net of accumulated depreciation
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45,034
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46,221
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Long-term assets
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Deferred tax assets
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831
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1,766
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Note receivable from joint venture
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5,147
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5,200
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Investment in joint venture
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5,726
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6,022
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Cash surrender value of deferred compensation plan
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3,005
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2,946
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Other assets
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4,445
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2,425
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Patents, net of accumulated amortization
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367
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373
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Total long-term assets
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19,521
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18,732
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Total assets
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$166,234
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$149,479
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LIABILITIES AND STOCKHOLDERS' EQUITY
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||||||
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Current liabilities
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||||||
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Trade accounts payable
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$22,629
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$20,125
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Accrued compensation and payroll taxes
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5,044
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4,731
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Commissions and management incentives payable
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4,743
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2,723
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Current maturities of long-term debt
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12,917
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5,419
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Customers' deposits
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8,268
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7,030
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Liabilities held for sale
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—
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5,141
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Billings in excess of costs and estimated earnings on uncompleted contracts
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2,588
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1,572
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Other accrued liabilities
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2,365
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1,822
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Deferred tax liabilities
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2,448
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696
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Income taxes payable
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530
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34
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Total current liabilities
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61,532
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49,293
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Long-term liabilities
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||||||
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Long-term debt, less current maturities
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30,711
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36,603
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Deferred compensation liabilities
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5,877
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5,670
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Other long-term liabilities
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3,693
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3,658
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Total long-term liabilities
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40,281
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45,931
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Stockholders' equity
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||||||
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Common stock, $.01 par value, authorized 50,000 shares; 6,932 issued and outstanding at April 30, 2013 and 6,924 issued and outstanding at January 31, 2013
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69
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69
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||
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Additional paid-in capital
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50,527
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50,358
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Retained earnings
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15,503
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4,553
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Accumulated other comprehensive loss
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(1,678
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)
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(725
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)
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Total stockholders' equity
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64,421
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54,255
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||
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Total liabilities and stockholders' equity
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$166,234
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$149,479
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See accompanying notes to consolidated financial statements.
3
MFRI, INC. AND SUBSIDIARIES
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(In thousands)
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Three Months Ended April 30,
|
|||||
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2013
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2012
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|
|||
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Operating activities
|
||||||
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Net income (loss)
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$11,081
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($2,056
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)
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Adjustments to reconcile net income (loss) to net cash flows used in operating activities
|
||||||
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Depreciation and amortization
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1,530
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1,364
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Gain on disposal of discontinued operations
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(11,401
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)
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—
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Deferred tax expense (benefit)
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2,667
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(490
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)
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||
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Stock-based compensation expense
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119
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86
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Loss from joint venture
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295
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246
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Cash surrender value of deferred compensation plan
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(59
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)
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(86
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)
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(Gain) loss on disposal of fixed assets
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(161
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)
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1
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Provision for uncollectible accounts
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15
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(9
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)
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||
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Changes in operating assets and liabilities
|
||||||
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Accounts receivable
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(14,534
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)
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(4,542
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)
|
||
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Inventories
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2,805
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(1,461
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)
|
||
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Costs and estimated earnings in excess of billings on uncompleted contracts
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149
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(772
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)
|
||
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Accounts payable
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(1,629
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)
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(658
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)
|
||
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Accrued compensation and payroll taxes
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1,340
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|
394
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|
||
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Customers' deposits
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697
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|
1,237
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|
||
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Income taxes receivable and payable
|
497
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(237
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)
|
||
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Prepaid expenses and other current assets
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(1,028
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)
|
(451
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)
|
||
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Other assets and liabilities
|
(5,321
|
)
|
1,996
|
|
||
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Net cash used in operating activities
|
(12,938
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)
|
(5,438
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)
|
||
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Investing activities
|
||||||
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Net proceeds from sale of discontinued operations
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14,998
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|
—
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|
||
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Additions to property, plant and equipment
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(440
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)
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(2,561
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)
|
||
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Loan to joint venture
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—
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(989
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)
|
||
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Net cash provided by (used in) investing activities
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14,558
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(3,550
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)
|
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Financing activities
|
||||||
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Borrowings
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40,813
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55,106
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Repayment of debt
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(38,877
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)
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(45,123
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)
|
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Decrease in drafts payable
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1,412
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1,858
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Payments on capitalized lease obligations
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(153
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)
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(106
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)
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Stock options exercised
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50
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12
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Net cash provided by financing activities
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3,245
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|
11,747
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Effect of exchange rate changes on cash and cash equivalents
|
(917
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)
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113
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|
||
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Net increase in cash and cash equivalents
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3,948
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2,872
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|
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Cash and cash equivalents - beginning of period
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7,035
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4,209
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|
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Cash and cash equivalents - end of period
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$10,983
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$7,081
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Supplemental cash flow information
|
||||||
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Interest paid
|
|
$633
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$539
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Income taxes paid
|
153
|
|
85
|
|
||
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Funds held in escrow related to the sale of Thermal Care, Inc. assets
|
1,125
|
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—
|
|
||
See accompanying notes to consolidated financial statements.
4
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
APRIL 30, 2013
(Tabular amounts presented in thousands, except per share amounts)
|
1.
|
Basis of presentation.
The interim consolidated financial statements of MFRI, Inc. and subsidiaries ("MFRI," "Company," "Registrant") 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. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of
January 31, 2013
is 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. The Company's fiscal year ends on January 31. Years and balances described as
2013
and
2012
are for the
three months ended April 30,
2013
and
2012
, respectively.
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2.
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Business segment reporting.
The Company has
two
reportable segments. Piping systems engineers, designs, manufactures and sells specialty piping and leak detection and location systems. Filtration products manufactures and sells a wide variety of filter elements for air filtration and particulate collection. Effective May 1, 2013, the Company made changes to its management reporting structure and industrial process cooling is no longer a reportable segment of the Company. Included in corporate and other activity is a subsidiary which engages in the installation of heating, ventilation and air conditioning systems and a subsidiary that engineers, designs, manufactures and sells chillers, plant circulating systems and accessories for industrial process applications, but neither one is sufficiently large to constitute a reportable segment. For additional information, see "Notes to Consolidated Financial Statements, Note 3 Discontinued operations".
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|
Three Months Ended April 30,
|
||||||
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2013
|
|
2012
|
|
|||
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Net sales
|
||||||
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Piping Systems
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$36,058
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|
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$19,744
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|
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Filtration Products
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18,633
|
|
22,976
|
|
||
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Corporate and Other
|
3,053
|
|
1,779
|
|
||
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Total
|
|
$57,744
|
|
|
$44,499
|
|
|
Gross profit
|
||||||
|
Piping Systems
|
|
$10,444
|
|
|
$3,398
|
|
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Filtration Products
|
2,275
|
|
3,112
|
|
||
|
Corporate and Other
|
413
|
|
322
|
|
||
|
Total
|
|
$13,132
|
|
|
$6,832
|
|
|
Income (loss) from operations
|
||||||
|
Piping Systems
|
|
$5,380
|
|
|
$155
|
|
|
Filtration Products
|
(483
|
)
|
196
|
|
||
|
Corporate and Other
|
(2,092
|
)
|
(2,648
|
)
|
||
|
Total
|
|
$2,805
|
|
|
($2,297
|
)
|
|
Income (loss) continuing operations before income taxes
|
||||||
|
Piping Systems
|
|
$5,084
|
|
|
($91
|
)
|
|
Filtration Products
|
(483
|
)
|
196
|
|
||
|
Corporate and Other
|
(2,581
|
)
|
(3,019
|
)
|
||
|
Total
|
|
$2,020
|
|
|
($2,914
|
)
|
5
|
3.
|
Discontinued operations.
On April 30, 2013, the Company sold most of the domestic assets of its subsidiary Thermal Care, Inc. to a subsidiary of IPEG, Inc for
$15 million
cash and
$1.1 million
, which is held in escrow until
May 1, 2014
. This business is reported as discontinued operations in the consolidated financial statements and the notes to consolidated financial statements have been restated to conform to the current year reporting of this business. The January 31, 2013 statement of financial position has been revised to reflect the separate amounts for assets and liabilities that were sold. Results of the discontinued operations for the
three months ended April 30,
2013 and 2012
were as follows:
|
|
Three Months Ended April 30,
|
||||||
|
2013
|
|
2012
|
|
|||
|
Sales
|
|
$7,449
|
|
|
$8,229
|
|
|
Gain on disposal of discontinued operations
|
|
$11,401
|
|
|
$—
|
|
|
Income from discontinued operations
|
74
|
|
578
|
|
||
|
Income from discontinued operations before income taxes
|
11,475
|
|
578
|
|
||
|
Income tax expense
|
2,356
|
|
37
|
|
||
|
Income from discontinued operations
|
|
$9,119
|
|
|
$541
|
|
|
4.
|
Income taxes
.
Income tax expense (or benefit) for each year is allocated to continuing operations, discontinued operations, extraordinary items, other comprehensive income, and other charges or credits recorded directly to shareholders’ equity. This allocation is commonly referred to as intra-period tax allocation as outlined in ASC 740, Income Taxes ("ASC 740"). When considering intra-period tax allocations, a company also should consider the accounting for income taxes in interim periods. ASC 740-20-45-7 requires that the tax effect of pretax income from continuing operations be determined without regard to the tax effects of items not included in continuing operations. This is commonly referred to as the "incremental approach" where the tax provision is generally calculated for continuing operations without regard to other items.
|
ASC 740 also includes an exception to the general principle of intra-period tax allocation discussed above. This exception requires that all items (i.e., extraordinary items, discontinued operations, and so forth, including items charged or credited directly to other comprehensive income) be considered in determining the amount of tax benefit that results from a loss from continuing operations. That is, when a company has a current period loss from continuing operations, management must consider income recorded in other categories in determining the tax benefit that is allocated to continuing operations.
The exception in ASC 740 applies in all situations in which there is a loss from continuing operations and income from other items outside of continuing operations. This would include situations in which a company has recorded a full valuation allowance at the beginning and end of the period and the overall tax provision for the year is zero (i.e., a benefit would be recognized in continuing operations even though the loss from continuing operations does not provide a current year incremental tax benefit). The ASC 740 exception, however, only relates to the allocation of the current year tax provision (which may be zero) and does not change a company’s overall tax provision. While intra-period tax allocation in general does not change the overall tax provision, it may result in a gross-up of the individual components, thereby changing the amount of tax provision included in each category.
The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make 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 local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate
6
significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of 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 from continuing operations was
2.9%
and
10.9%
for the
three months ended April 30,
2013
and
2012
, respectively. The
April 30, 2013
computation of the ETR was affected primarily by the change in the mix of the projected tax-free earnings in the U.A.E. versus total projected earnings. These foreign earnings are considered to be indefinitely reinvested outside the U.S. The Company does not believe that it will be necessary to repatriate equity investments in subsidiaries held outside of the U.S.
Last year, the Company established a full valuation allowance on domestic deferred tax assets. Discontinued operations include
$2.4 million
in tax expense related to the asset sale of Thermal Care, Inc., a subsidiary. For additional information, see "Notes to Consolidated Financial Statements, Note 3 Discontinued operations".
The Company periodically reviews 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.
The Company files income tax returns in U.S. federal and state jurisdictions. As of
April 30, 2013
, open tax years in federal and some state jurisdictions date back to
2010
. In addition, federal and state tax years
January 31, 2002 through January 31, 2009
are subject to adjustment on audit, up to the amount of research tax credits generated in those years. As of
January 31, 2013
, the Company had net operating loss carryforwards of
$7.8 million
expiring in various years beginning in
January 31, 2030
. Additionally, the Company files income tax returns in Denmark, India and Saudi Arabia. As of
April 30, 2013
, open tax years in foreign jurisdictions vary from three to seven years from the date of filing the income tax returns.
|
5.
|
Stock-based
compensation.
The Company has stock-based compensation awards that can be granted to eligible employees, officers or directors.
|
|
Three Months Ended April 30,
|
||||||
|
2013
|
|
2012
|
|
|||
|
Stock-based compensation expense
|
|
$119
|
|
|
$86
|
|
The fair value of the outstanding option awards was estimated on the grant dates using the Black-Scholes option pricing model.
|
Three Months Ended April 30,
|
||
|
Fair value assumptions
|
2013
|
2012
|
|
Expected volatility
|
53.90% - 65.54%
|
58.12% - 66.82%
|
|
Risk free interest rate
|
.74% - 2.82%
|
1.54% - 3.57%
|
|
Dividend yield
|
none
|
none
|
|
Expected life
|
4.9 - 5.7 years
|
4.9 - 5.7 years
|
7
|
Option activity
|
Options
|
Weighted Average Exercise Price Per Share
|
Weighted Average Remaining Contractual Term in Years
|
Aggregate Intrinsic Value
|
|||||
|
Outstanding at beginning of year
|
969
|
|
|
$10.77
|
|
6.6
|
|
$40
|
|
|
Exercised
|
(8
|
)
|
6.38
|
|
6
|
|
|||
|
Expired or forfeited
|
(6
|
)
|
6.95
|
|
|||||
|
Outstanding end of period
|
955
|
|
10.84
|
|
6.3
|
373
|
|
||
|
Exercisable end of period
|
596
|
|
|
$13.20
|
|
5.1
|
|
$199
|
|
|
Unvested option activity
|
Unvested Options Outstanding
|
Weighted Average Exercise Price Per Share
|
Aggregate Intrinsic Value
|
|||||
|
Outstanding at beginning of year
|
383
|
|
|
$6.91
|
|
|
$4
|
|
|
Vested
|
(18
|
)
|
||||||
|
Expired or forfeited
|
(6
|
)
|
6.95
|
|
||||
|
Outstanding end of period
|
359
|
|
|
$6.92
|
|
|
$173
|
|
As of
April 30, 2013
, there was
$822 thousand
of total unrecognized compensation expense related to unvested stock options. The expense is expected to be recognized over a period of
2.3
years.
|
6.
|
Earnings per share.
|
|
Three Months Ended April 30,
|
||||
|
2013
|
|
2012
|
|
|
|
Basic weighted average common shares outstanding
|
6,932
|
|
6,915
|
|
|
Dilutive effect of deferred stock
|
2
|
|
—
|
|
|
Weighted average common shares outstanding assuming full dilution
|
6,934
|
|
6,915
|
|
|
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
|
486
|
|
303
|
|
|
Stock options with an exercise price below the average market price
|
469
|
|
519
|
|
|
7.
|
Interest expense, net.
|
|
Three Months Ended April 30,
|
||||||
|
2013
|
|
2012
|
|
|||
|
Interest expense
|
|
$597
|
|
|
$501
|
|
|
Interest income
|
(107
|
)
|
(130
|
)
|
||
|
Interest expense, net
|
|
$490
|
|
|
$371
|
|
|
8.
|
|
8
April 30, 2013
, the Company was
in compliance with all covenants under the Loan Agreement
. Interest rates are based on options selected by the Company as follows:
(a) a margin in effect plus prime rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period.
At
April 30, 2013
, the prime rate was
3.25%
and the margins added to the prime and LIBOR rates, 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,
2013 and 2012
. As of
April 30, 2013
, the Company had borrowed
$9 million
and had
$10 million
available to it under the revolving line of credit. In addition,
$0.2 million
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 domestic receipts 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, 2013
, the amount of such restricted cash was
$0.8 million
. Cash required for operations is provided by draw downs on the line of credit.
During the quarter the Company's foreign subsidiary in the U.A.E. drew upon its revolving lines for
$4.9 million
. The interest rates were
6%
.
Quarterly interest payments are made.
In
February 2013, the Company entered into an Islamic loan (line of credit) in Saudi Arabia for
$2.7 million
The interest rate is
SIBOR (Singapore Interbank Offered Rate) plus a margin of 3.5%
. Quarterly interest payments are made.
|
9.
|
Fair value of financial instruments.
At
April 30, 2013
, interest rate swap agreements were in effect with a notional value of
$9 million
that matures
November 30, 2013
and a value of
$1.3 million
that matures
December 2021
. The swap agreements, which reduce the exposure to market risks from changing interest rates, exchanges the variable rate to fixed interest rate payments of
2.23%
plus LIBOR margin and
2.47%
, respectively. The exchange traded swaps are valued on a recurring basis using quoted market prices and were classified within Level 2 of the fair value hierarchy because the exchange is not deemed an active market. The derivative mark to market of
$218 thousand
was classified as a long-term liability on the balance sheet.
|
|
10.
|
Other assets.
The
$2 million
increase in
other assets for the period related to the escrow of
$1.1 million
on the sale of Thermal Care, Inc. assets as well as deposits for inventory for the Middle East facilities.
|
|
April 30, 2013
|
|
January 31, 2013
|
|
|||
|
Long-term assets
|
||||||
|
Other assets
|
|
$4,445
|
|
|
$2,425
|
|
|
11.
|
Recent accounting pronouncements
. The Company evaluated recent accounting pronouncements and does not expect them to have a material impact on the consolidated financial statements.
|
|
12.
|
Subsequent Event
The Winchester filtration hourly rated employees are covered by a defined benefit plan. Subsequent to April 30, 2013, the Company decided to freeze the pension plan benefit accruals effective June 30, 2013. This freeze will not have a material effect on the Company's financial statements.
|
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (
"
MD&A
"
)
The statements contained under the caption MD&A and other information contained elsewhere in this quarterly 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
9
materially from those projected as a result of many factors, including but not limited to those under the heading Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Consolidated MFRI, Inc.
MFRI, Inc. is engaged in the manufacture and sale of products in two reportable segments: piping systems and filtration products. The Company website is
www.mfri.com
.
This discussion should be read in conjunction with the consolidated financial statements, including the notes thereto, contained elsewhere in this report. An overview of the segment results is provided in "Notes to Consolidated Financial Statements, Note 2 Business segment reporting" contained in Item 1 of this report.
On April 30, 2013, the Company sold most of the domestic assets of its subsidiary Thermal Care, Inc. to a subsidiary of IPEG, Inc for
$15 million
cash and
$1.1 million
, which is held in escrow until
May 1, 2014
. This business is reported as discontinued operations in the consolidated financial statements and the notes to consolidated financial statements have been restated to conform to the current year reporting of this business. Income from discontinued operations net of tax was
$9.1 million
and
$0.5 million
three months ended April 30,
2013 and 2012
, respectively. The acquiring company has signed a three-year lease for the office space and production facilities occupied by Thermal Care.
Three months ended
April 30, 2013
(
"
current quarter
"
) vs.
Three months ended
April 30, 2012
(
"
prior-year quarter
"
)
Net sales
increased
30%
to
$57.7 million
in the current quarter from
$44.5 million
in the prior-year quarter. Piping systems sales
increased
$16.3 million
in the quarter due to the start of sales in Saudi Arabia. Filtration products
decreased
by
$4.3 million
due primarily to reduced demand for fabric filters.
Gross profit almost doubled to
$13.1 million
in the current quarter from
$6.8 million
in the prior-year quarter due to the sales increase in piping systems while filtration products gross profit decreased due to lower sales volume.
Operating expenses as a percent of net sales decreased to
17.9%
in the current quarter from
20.5%
in the prior-year quarter. Operating expenses
increased
to
$10.3 million
in the current quarter from
$9.1 million
in the prior-year quarter. This dollar increase was due to start-up costs
for the Saudi Arabia facility
, management incentive compensation expense, higher commission expense and bad debt expense partially offset by reduced administrative costs from personnel savings at corporate.
First quarter net income was
$11.1 million
compared to net loss of
$2.1 million
in the comparable prior-year's quarter. Income rose due to the asset sale of Thermal Care, Inc., a subsidiary, and gross profit generated from increased piping system sales.
Piping Systems
Current quarter vs. prior-year quarter
As piping systems is based on large discrete projects, revenues can be subject to large swings in both geographies and reporting periods.
The manufacturing facility in Dammam, Saudi Arabia opened in April 2012. Net sales
increased
83%
to
$36.1 million
in the current quarter from
$19.7 million
in the prior-year quarter. The increase was attributed to projects including the expansion of the Grand Mosque in Mecca and King Abdul-Aziz International airport in Jeddah, Saudi Arabia. The increase is also due to domestic oil and gas projects that were underway during the current quarter and which will continue into the second quarter.
10
Gross margin increased to
29%
of net sales in the current quarter from
17%
of net sales in the prior-year quarter. Gross profit increased due to higher volume produced at the Saudi Arabian and U.A.E. piping facilities.
General and administrative expense
increased
to
$3.3 million
or
9%
of net sales in
2013
from
$2.6 million
or
13%
of net sales in
2012
. This dollar increase related to operational start-up costs for the Saudi Arabia facility, management incentive compensation expense and bad debt expense.
Selling expense
increased
to
$1.7 million
or
4.7%
of net sales in
2013
from
$0.7 million
or
3.5%
of net sales in
2012
due to higher commission expense as a result of additional sales.
Filtration Products
Current quarter vs. prior-year quarter
Net sales
decreased
19%
to
$18.6 million
from
$23 million
in the prior-year quarter. U.S. environmental regulation uncertainty regarding technologies and timing of implementation continues to impact demand for fabric filters and therefore filtration product sales decreased. Gross profit
decreased
27%
to
$2.3 million
from
$3.1 million
due to lower sales volume and extremely competitive market conditions. In response to lower demand for fabric filters, the Company has reduced its workforce. In addition, management has increased marketing activities and taken other actions to drive sales growth and improve margins.
Operating expenses
decreased
3.4%
to
$2.8 million
from
$2.9 million
. Commission expense decreased due to lower sales and staffing was reduced in later quarters during 2012.
Corporate and Other
Current quarter vs. prior-year quarter
Net sales of
$3.1 million
in the current quarter
increased
from
$1.8 million
in the prior-year quarter. Sales volume was higher than the same quarter last year due to project timing.
Corporate operating expenses include interest expense and general and administrative expenses that are not allocated to the segments. Operating expenses
decreased
to
$2.5 million
or
4.3%
of consolidated net sales in the current quarter from
$3 million
or
6.7%
of consolidated net sales in the prior-year quarter. This decrease was mainly due to reduced staffing including retirements and keeping positions unfilled partially offset by higher management incentive compensation expense based on better earnings in the current quarter.
Net interest expense increased to
$490 thousand
in the current quarter from
$371 thousand
in the prior-year quarter, due to less interest income earned overseas by piping systems as working capital was expended in Saudi Arabia.
INCOME TAXES
The Company's consolidated ETR from continuing operations was
2.9%
for the
three months ended April 30,
2013
, which was affected primarily by the change in the mix of the projected tax-free earnings in the U.A.E. versus total projected earnings and losses. Discontinued operations included
$2.4 million
in tax expense related to the asset sale of Thermal Care, Inc, a subsidiary. Under GAAP accounting, this reflects the reduction of the valuation allowance related to the deferred tax asset established from the net operating loss ("NOL") carryforward. The Company remains in an NOL carryforward position. The Company recorded income tax expense due to certain intra-period tax reporting requirements. For additional information, see "Notes to Consolidated Financial Statements, Note 3 Discontinued operations and Note 4 Income taxes".
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of
April 30, 2013
were
$11 million
compared to
$7 million
at
January 31, 2013
. Cash and cash equivalents were primarily held at the foreign subsidiaries. At
April 30, 2013
,
$3 million
was held in the U.S. The Company's working capital was
$40 million
on
April 30, 2013
compared to
$35 million
on
January 31,
11
2013
. Piping system's net sales more than doubled from the fourth quarter in 2012, which caused accounts receivable to increase, by
$14.5 million
since
January 31, 2013
. The Saudi Arabian subsidiary accounts receivable increased $11.4 million. Net cash used in operating activities during the first
three
months of
2013
was
$13 million
compared to
$5.4 million
during the first
three
months of
2012
. The Company does not believe that it will be necessary to repatriate investments in subsidiaries held outside of the U.S.
Net cash provided by investing activities for the three months ended
April 30, 2013
was
$14.6 million
. On April 30, 2013, the Company completed an asset sale of Thermal Care, Inc, a subsidiary for
$15 million
cash and
$1.1 million
, which is held in escrow until
May 1, 2014
. This subsidiary was not a significant cashflow entity. The proceeds paid down a portion of the debt under the Loan Agreement. The Company also had excess cash of
$3 million
at that time.
Debt totaled
$43.6 million
at
April 30, 2013
, a net increase of
$1.6 million
compared to the beginning of the current fiscal year. For additional information, see "Notes to Consolidated Financial Statements, Note 10 Debt". Net cash provided by financing activities was
$3.2 million
.
On July 11, 2002, the Company entered into a Loan Agreement. Under the terms of the Loan Agreement as amended, which matures on November 30, 2016, the Company can borrow up to
$38 million
, subject to borrowing base and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, investments, do not permit payment of dividends and require attainment of levels of profitability and cash flows. At
April 30, 2013
, the Company was in compliance with all covenants under the Loan Agreement. Interest rates 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, 2013
, 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,
2013 and 2012
. As of
April 30, 2013
, the Company had borrowed
$9 million
and had
$10 million
available to it under the revolving line of credit. In addition,
$0.2 million
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 domestic receipts 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, 2013
, the amount of such restricted cash was
$0.8 million
. Cash required for operations is provided by draw downs on the line of credit.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended
January 31, 2013
contained on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments and different amounts could be reported using different assumptions and estimates.
12
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
April 30, 2013
. 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, 2013
to ensure that information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and is accumulated and communicated to the issuer's management, including the 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, 2013
that has materially affected or is reasonably likely to materially affect, internal control over financial reporting.
Item 6.
Exhibits
|
10(a)
|
Asset Purchase Agreement by and among Thermal Care, Inc. and MFRI, INC., and IPEG Acquisition co. and IPEG, INC. Dated as of April 25, 2013
|
|
|
10(h)
|
David Unger employment agreement dated February 13, 2013
|
|
|
10(i)
|
Fati Elgendy employment agreement dated November 12, 2007
|
|
|
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)
|
|
|
101.INS
|
XBRL Instance
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition
|
|
|
101.LAB
|
XBRL Taxonomy Extension Labels
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation
|
|
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MFRI, INC.
|
Date:
|
June 11, 2013
|
/s/ Bradley E. Mautner
|
|
Bradley E. Mautner
|
||
|
Director, President and
|
||
|
Chief Executive Officer
|
||
|
(Principal Executive Officer)
|
||
|
Date:
|
June 11, 2013
|
/s/ Karl J. Schmidt
|
|
Karl J. Schmidt
|
||
|
Vice President and Chief Financial Officer
|
||
|
(Principal Financial and Accounting Officer)
|
||
14
TABLE OF CONTENTS