SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
__________
FORM 10-K/A
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended January 31, 1996
AMENDMENT NO. 2
MFRI, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-18370 36-3922969
(State of (Commission (IRS Employer
Incorporation) File Number) Identification No.)
7720 Lehigh Avenue, Niles, Illinois 60714
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (847) 966-1000<PAGE>
PART II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Filtration Products Business
Results of Operations
The Company's filtration products business is characterized by a large
number of relatively small orders and a limited number of large orders,
typically from electric utilities. In fiscal 1996, the average order amount
was approximately $6,652. The timing of large orders can have a material
effect on the comparison of net sales and gross profit from period to period.
These large orders generally are highly competitive and result in a lower
gross margin. In fiscal 1996, 1995 and 1994, no customer accounted for 10%
or more of the net sales of the Company's filtration products and services.
The Company's filtration products business, to a large extent, is dependent
on government regulation of air pollution at the federal and state levels.
The Company believes that continuing growth in the sale of its filtration
products and services will be materially dependent on continuing enforcement
of environmental laws such as the Clean Air Act Amendments. Although there
can be no assurances as to what ultimate effect, if any, the Clean Air Act
Amendments will have on the Company's filtration products business, the
Company believes that the Clean Air Act Amendments are likely to have a long
term positive effect on demand for the Company's filtration products and
services.
Fiscal 1996 Compared with Fiscal 1995
Net sales increased 17% from $31,270,000 to $36,590,000, due to higher
unit sales of the Company's full line of filtration products. This increase
was primarily due to sales of bag-related products and export sales of filter
bags.
Gross profit as a percent of net sales increased from 21% to 23.9%,
primarily due to plant efficiencies from larger production volumes, higher
intake margins, and a favorable product mix.
Selling expense increased from $2,378,000 to $2,783,000; selling expense
as a percent of net sales was unchanged at 7.6%. The dollar increase is
primarily attributable to increased international sales efforts and higher
gross margin-related incentive compensation.
General and administrative expenses increased from $1,641,000 to
$1,858,000, primarily the result of profit-related incentive compensation.
General and administrative expenses as a percent of net sales decreased from
5.2% to 5.1%.
<PAGE>
Fiscal 1995 Compared with Fiscal 1994
Net sales increased 5% from $29,866,000 to $31,270,000 due to higher unit
sales of the Company's full line of filtration products. This increase was
primarily due to sales to its domestic aftermarket customers.
Gross profit as a percent of net sales decreased from 22.8% to 21.0%,
primarily due to plant spending inefficiencies and competitive pricing
pressures.
Selling expense increased from $2,177,000 to $2,378,000; selling expense as
a percent of net sales increased from 7.3% to 7.6% due to additional
international sales efforts and advertising expenses related to the
introduction of a new product line.
General and administrative expenses decreased from $2,168,000 to
$1,641,000, which was due primarily to certain expenses being charged at the
corporate level in Fiscal 1996 and lower incentive compensation. General and
administrative expenses as a percent of net sales decreased from 7.3% to 5.2%.
Piping System Products Business
Results of Operations
Generally the Company's leak detection and location systems and secondary
containment piping systems have higher profit margins than its district
heating and cooling piping systems. However, the Company has been able to
improve the margins for its district heating and cooling piping systems by
booking orders more selectively. The Company has benefitted from its efforts
to have its leak detection and location systems and secondary containment
piping systems included as part of the specifications for an increasing
number of construction projects.
Although demand for the Company's piping system products is generally
affected by its customers' need to comply with governmental regulations,
purchases of such products at times may be delayed by customers due to
adverse economic factors. In fiscal 1996, 1995 and 1994, no customer
accounted for 10% or more of net sales of the Company's piping system products.
The Company's piping system products business is characterized by large
orders (the average order amount for fiscal 1996 was approximately $31,499),
and the timing of such orders can have a material effect on the comparison of
net sales and gross profit from period to period.
Most of the Company's piping system products are produced for underground
installations and therefore require trenching, which is performed directly
for the customer by installation contractors unaffiliated with the Company.
Generally, sales of the Company's piping system<PAGE>
products tend to be lower
during the winter months, due to weather constraints over much of the country.
Fiscal 1996 Compared with Fiscal 1995
Net sales increased 11% from $44,225,000 to $49,248,000, due primarily to
continued high demand for district heating and cooling systems, which the
Company believes is partially due to the full year effect of the September
1994 purchase of Ricwil, compared with only four months in the prior year.
Gross profit as a percent of net sales increased from 13.6% to 16.6%, due
primarily to completion of most of the low margin order backlog acquired from
Ricwil in the earlier year and partially to benefits of the factory expansion
and related work flow rationalization.
Selling expense increased from $1,455,000 to $1,802,000; selling expense as
a percent of net sales increased from 3.3% to 3.7%. The dollar increase is
primarily attributable to the full year effect of new sales personnel added
during the earlier year and due to higher commission expense on higher sales.
The percent benefit of spreading higher selling expenses over higher sales
was more than offset by additional expenses attributable to new sales personnel.
General and administrative expenses increased from $3,186,000 to
$3,766,000; general and administrative expenses as a percent of net sales
increased from 7.2% to 7.6%. The increases resulted primarily from increased
staffing in field services and engineering.
Foreign net sales increased from $3,186,000 to $3,659,000, due primarily
to the acquisition of SZE Hagenuk in the current year and due partially to
increased sales in Perma Pipe Services Ltd. Foreign operating income (loss)
increased from a loss of $54,000 to a profit of $206,000, due primarily to
profit in SZE Hagenuk and a recovery to profitability in Perma Pipe Services
Ltd. due to some easing of competitive price pressures.
Fiscal 1995 Compared with Fiscal 1994
Net sales increased 36% from $32,524,000 to $44,225,000. This increase
resulted from improved order bookings for fiscal 1995, the successful
completion of a portion of the backlog from the end of fiscal 1994, and the
acquisition of Ricwil LP. The Company believes its efforts to have its leak
detection and location and secondary containment products specified by
customers continued to be successful and experienced continued high demand
for its district heating and cooling piping systems.
Gross profit as a percent of net sales decreased from 19.6% to 13.6%.
This decrease resulted primarily from high operating costs during a factory
expansion and related work flow rationalization, low margins of the acquired
Ricwil order backlog, and costs of assisting certain customers due to
installation difficulties experienced by them with certain of the Company's
new products.
Selling expense increased from $1,010,000 to $1,455,000; selling expense as
a percent of net sales increased from 3.1% to 3.3%. These increases were due
primarily to additions of sales personnel and due to higher commission
expenses on higher sales. The benefit of spreading sales expense over higher
sales was more than offset by additional expenses attributable to new sales
personnel.
General and administrative expense decreased from $3,481,000 to
$3,186,000; general and administrative expenses as a percent of net sales
decreased from 10.7% to 7.2%. The decrease resulted primarily from the prior
year including a $1,138,000 expense allocated from Midwesco, Inc.,
representing expense incurred on behalf of the Piping System Products
Business. As of February 1, 1994, administrative services are provided in
accordance with an amended and restated management services agreement by and
between MFRI and Midwesco, Inc. The nature of the expenses is such that
their costs represents General Corporate expense rather than an operating
expense of the Piping System Products Business and thus is included under
General Corporate expense. During fiscal 1995, acquisition-related expenses
of $280,000 were incurred, primarily for transition activities related to the
transfer of the Ricwil business and assets to the Company. As such
transition activities have no future economic value and were not associated
with or incurred to generate current or future revenues, the total of such
expenses has been charged to Piping System Products operations of the current
year.
Foreign net sales increased from $2,655,000 to $3,186,000 due primarily
to one major sale of a district heating and cooling piping system. Foreign
operating income (loss) decreased from a profit of $47,000 to a loss of
$54,000 due mainly to competitive price pressures.
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
General and administrative expenses not allocated to business segments
increased to $1,933,000 from $1,553,000, due primarily to expenses of upgrading
the Company's computer hardware and software systems, profit-based incentive
compensation, and volume-related expenses of credit and collections. Prior
to fiscal 1995, the Company had only one business segment, the filtration
products business, which in fiscal 1994 incurred expenses of $541,000 related
to operating as a public company and $282,000 charged from Midwesco, Inc.
pursuant to the aforementioned management services agreement. The piping
system products business, while owned by Midwesco, Inc., incurred $1,138,000
of expense allocated from Midwesco, Inc., representing expenses incurred on
behalf of the piping system products business.
<PAGE>
Interest expense of $925,000 represents the cost of borrowing under the
Company's line of credit and term loan, obtained at the time of the
acquisitions of Perma-Pipe on January 28, 1994 and Ricwil on September 30,
1994, respectively, and under Industrial Revenue Bonds issued during the
third quarter of 1995.
Liquidity and Capital Resources
The Company believes its working capital and investment needs will be
financed primarily through operations. However, the Company has obtained a
revolving line of credit of $8,000,000 to fund the Company's working capital
and capital expenditure requirements. This line of credit has a term of
three years and provides for interest at the higher of the federal funds
rate, in effect from time to time, plus 50 basis points and the bank's prime
rate in effect from time to time. The Company has drawn $7,750,000 from
this line of credit as of January 31, 1996. The significant covenants and
restrictions of the line of credit pertain to tangible net worth, liability
to net worth ratio and dividend coverage and interest coverage ratios. The
Company believes that compliance with the covenants and restrictions of the
line of credit will not have a material adverse effect on the Company.
On September 14, 1995 and October 18, 1995, respectively, Midwesco Filter
and Perma-Pipe received the proceeds of Industrial Revenue Bonds. Such
proceeds are available for capital expenditures related to manufacturing
capacity expansions and efficiency improvements during a three-year period
commencing in the fourth quarter of 1994 in the Filtration Business in
Winchester, Virginia ($3,150,000) and the Piping System Products Business
in Lebanon, Tennessee ($3,150,000). The bonds mature approximately 12 years
from the date of issuance, but the Company's agreement with the bank whose
letter of credit secures payment of the bonds requires equal annual principal
reductions sufficient to amortize the bonds in full beginning approximately
four years after issuance. The bonds bear interest at a variable rate, which
initially approximates 5%, including letter of credit and remarketing fees.
Each bond indenture establishes a trusteed project fund for deposit of the
bond proceeds. The trustee is authorized to make disbursements from the
project fund upon requisition from the Company to pay costs of capital
expenditures which comply with the requirements of the loan agreement for
each bond. Pending such disbursements, the trustee invests the balance of
the project fund in investments defined by the indenture and limited by
applicable law. Such invested funds totaled $5,046,000 at January 31, 1996.
The bonds are secured by bank letters of credit which expire approximately
two years from the date of issuance; the Company expects to arrange for
renewal, reissuance or extension of the letter of credit prior to each
expiration date during the term of the bonds.
To finance the Ricwil acquisition, MFRI borrowed $4,000,000 from a bank
under a term loan which bears interest at the bank's prime rate and is
repayable in sixteen consecutive quarterly installments which commenced
January 31, 1995. The proceeds of the loan were used to pay the $860,000
cash portion of the acquisition price, purchase a Ricwil note from a bank for
$2,662,000 including accrued interest, and to repay certain other liabilities
assumed in the Ricwil acquisition.
<PAGE>
As of January 31, 1996, the Company did not have any material commitments
for capital expenditures.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is incorporated
herein by reference to the table under the caption "Nominees For Election as
Directors" and the textual paragraphs following the aforesaid table on pages
4 and 5 of the Company's proxy statement for the 1996 annual meeting of
stockholders. (SEC File No. 0-18370).
Information with respect to executive officers of the Company is included
in Item 1, Part I hereof under the caption "Executive Officers of the
Registrant."
Item 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein
by reference to the first three paragraphs under the caption "Board of
Directors" and to the information under the captions "Executive Compensation"
and "Stock Price Performance Graph" on pages 7 through 11 of the Company's
proxy statement for the 1996 annual meeting of stockholders. (SEC File No.
0-18370).
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management of the Company is incorporated herein by reference to the
information under the caption "Principal Stockholders and Security Ownership
of Management" on pages 2 and 3 of the Company's proxy statement for the 1996
annual meeting of stockholders. (SEC File No. 0-18370).
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and transactions is
incorporated herein by reference to the second, third and fourth paragraphs
under the caption "Compensation Committee Interlocks and Insider
Participation" on pages 8 and 9 of the Company's proxy statement for the 1996
annual meeting of stockholders. (SEC File No. 0-18370).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
MFRI, INC.
Date: July 22, 1996 By: /s/ Michael D. Bennett
Michael D. Bennett
Vice President
