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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 0-18370
MFRI, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3922969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7720 Lehigh Avenue Niles, Illinois 60714
(Address of principal executive offices) (Zip code)
(847) 966-1000
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
On September 12, 1996, there were 4,555,197 shares of the Registrant's common
stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
July 31, 1996 Jan. 31, 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 264,000 $ 449,000
Trade accounts receivable, net 19,596,000 16,137,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 4,004,000 4,032,000
Deferred income taxes 2,191,000 1,733,000
Inventories 13,721,000 13,205,000
Prepaid expenses and other current assets 625,000 1,309,000
TOTAL CURRENT ASSETS 40,401,000 36,865,000
RESTRICTED CASH FROM BOND PROCEEDS 4,130,000 5,046,000
PROPERTY, PLANT AND EQUIPMENT, at cost 15,980,000 13,636,000
Less allowances for depreciation 4,355,000 3,752,000
PROPERTY, PLANT AND EQUIPMENT, net 11,625,000 9,884,000
OTHER ASSETS
Goodwill, net 4,644,000 4,733,000
Other, net 2,449,000 2,457,000
TOTAL OTHER ASSETS 7,093,000 7,190,000
TOTAL ASSETS $63,249,000 $58,985,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Drafts payable $ 3,916,000 $ 2,209,000
Accounts payable 4,593,000 4,807,000
Commissions payable 5,740,000 4,509,000
Current maturities of long-term debt 2,183,000 3,031,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,770,000 490,000
Other current liabilities 1,808,000 2,142,000
TOTAL CURRENT LIABILITIES 20,010,000 17,188,000
LONG-TERM LIABILITIES
Long-term debt -- less current maturities 14,161,000 14,267,000
Deferred income taxes and other 1,329,000 1,307,000
TOTAL LONG-TERM LIABILITIES 15,490,000 15,574,000
STOCKHOLDERS' EQUITY
Common stock, $ .01 par value,
authorized -- 15,000,000 shares;
outstanding - 4,524,000 shares 45,000 45,000
Additional paid-in capital 17,967,000 17,967,000
Retained earnings 9,774,000 8,248,000
Accumulated translation adjustment (37,000) (37,000)
TOTAL STOCKHOLDERS' EQUITY 27,749,000 26,223,000
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $63,249,000 $58,985,000
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
(U n a u d i t e d)
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $26,142,000 $21,858,000 $44,955,000 $39,879,000
Cost of sales 20,108,000 17,341,000 34,809,000 31,923,000
GROSS PROFIT 6,034,000 4,517,000 10,146,000 7,956,000
Selling expense 1,451,000 1,158,000 2,714,000 2,181,000
General and administrative expense 2,246,000 1,753,000 4,041,000 3,323,000
Management services agreement - net 158,000 148,000 311,000 274,000
INCOME FROM OPERATIONS 2,179,000 1,458,000 3,080,000 2,178,000
Interest expense 268,000 188,000 525,000 390,000
INCOME BEFORE INCOME TAX 1,911,000 1,270,000 2,555,000 1,788,000
Income tax expense 779,000 511,000 1,029,000 707,000
NET INCOME $1,132,000 $ 759,000 $ 1,526,000 $1,081,000
Net income per common share $ .25 $ .17 $ .33 $ .24
Weighted average common and common
share equivalents outstanding 4,565,000 4,529,000 4,561,000 4,529,000
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months Ended July 31
(Unaudited)
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $1,526,000 $1,081,000
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 695,000 470,000
Deferred income taxes (436,000) (222,000)
Change in operating assets and liabilities:
Trade accounts receivable (3,459,000) (1,760,000)
Costs and estimated earnings in excess of
billings on uncompleted contracts 28,000 (1,108,000)
Inventories (516,000) (1,318,000)
Prepaid expenses and other current assets 684,000 638,000
Current liabilities 3,670,000 2,449,000
Other operating assets and liabilities (53,000) (190,000)
NET CASH FLOWS FROM
OPERATING ACTIVITIES 2,139,000 40,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash from
Industrial Revenue Bonds 916,000
Purchase of property and equipment (1,804,000) (937,000)
NET CASH FLOWS FROM
INVESTING ACTIVITIES (888,000) (937,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on capitalized lease obligations (208,000) (74,000)
Net borrowings (repayments) under revolving,
term and mortgage loans (1,228,000) 583,000
NET CASH FLOWS FROM
FINANCING ACTIVITIES (1,436,000) 509,000
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (185,000) (388,000)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 449,000 484,000
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 264,000 $ 96,000
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
1. The unaudited, condensed consolidated financial statements of MFRI, Inc. and
subsidiaries (the "Company"), in the opinion of the Company, reflect all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position for those periods. Certain
information and footnote disclosures have been condensed or omitted pursuant
to Securities and Exchange Commission rules and regulations. These
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included
in the Company's annual report to stockholders for the year ended
January 31, 1996.
2. The results of operations for the six month periods ended July 31, 1996 and
1995 are not necessarily indicative of the results to be expected for the
full year.
<TABLE>
3. Inventories consisted of the following:
<CAPTION>
July 31, 1996 January 31, 1996
<S> <C> <C>
Raw materials (net of
inventory reserves) $10,313,000 $10,265,000
Work in process 1,010,000 960,000
Finished goods 2,398,000 1,980,000
Total $13,721,000 $13,205,000
</TABLE>
<TABLE>
4. Supplemental cash flow information:
<CAPTION>
1996 1995
Cash paid during the year-to-date period for:
<S> <C> <C>
Interest $ 463,000 $ 374,000
Income taxes 502,000 522,000
Schedule of noncash financial activities:
Fixed assets acquired
under capital leases 482,000 132,000
</TABLE>
5. On May 8, 1996, the Company purchased for approximately $1.1 million a
10.3-acre parcel of land with a 67,000-square foot building adjacent to its
Filtration Products property in Winchester, Virginia to accommodate the
Company's growing marketing effort. The purchase was financed 80% by a
seven-year mortgage bearing interest at 8.38%, and 20% from the 1995 industrial
revenue bonds.
<PAGE>
MFRI, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
July 31, 1996
Results of Operations
Filtration Products Business
Three months ended July 31
Net sales for the quarter ended July 31, 1996 increased 19.1% from $8,294,000
to $9,882,000 from the comparable quarter one year ago. The increase was
primarily the result of higher filter bag product sales, particularly for
export.
Gross profit as a percent of net sales increased from 25.6% to 28.0%. This
increase resulted from improved pricing, increased manufacturing plant
efficiencies, and a favorable product mix.
Selling expense for the quarter ended July 31, 1996 increased to $882,000 from
$654,000 for the comparable quarter last year. The increase is mostly
attributable to higher international expenses and higher gross margin related
commissions.
General and administrative expense for the quarter ended July 31, 1996 increased
o $556,000 from $497,000 for the comparable period a year ago. This increase
is primarily the result of increased profit-related incentive compensation.
Six months ended July 31
Net sales for the six months ended July 31, 1996 increased 8.5% from $17,388,000
to $18,859,000 from the comparable period one year ago. The increase was
primarily the result of higher filter bag product sales, particularly for
export.
Gross profit as a percent of net sales increased from 23.1% to 27.5%. This
increase resulted from improved pricing, increased manufacturing plant
efficiencies, and a favorable product mix.
Selling expense increased from $1,258,000 to $1,621,000 from the comparable
quarter last year. The increase is mostly attributable to higher international
expenses and higher gross margin related commissions.
General and administrative expense for the six months ended July 31, 1996
increased to $1,074,000 from $906,000 for the comparable period a year ago.
This increase is primarily the result of increased profit-related incentive
compensation.
<PAGE>
Piping System Products Business
Three months ended July 31
Net sales increased 19.9% from the same quarter one year ago, from $13,564,000
to $16,260,000, due primarily to increased secondary containment piping systems
sales (mainly due to sales for the U.S. Department of Energy's Hanford, WA
nuclear facility) and increased international sales resulting from the
December, 1995 acquisition of SZE Hagenuk.
Gross profit as a percent of net sales increased from 17.6% one year ago to
20.1% in the current quarter, due primarily to improved product mix and plant
efficiency.
Selling expense increased from $504,000 to $569,000 due primarily to the
acquisition of SZE Hagenuk. Selling expense as a percent of sales decreased
from 3.7% to 3.5% due to spreading selling expense over a higher sales base.
General and administrative expense increased from $942,000 or 6.9% of sales one
year ago to $1,199,000 or 7.4% of sales in the current quarter, due primarily
to increased staffing in the customer service area and the acquisition of
SZE Hagenuk, partially offset by a redeployment of certain executive salaries
from Piping System Products to General Corporate Expenses.
Six months ended July 31
Net sales increased 16.0% from the same six month period one year ago, from
22,491,000 to $26,096,000, due primarily to increased secondary containment
piping systems sales (mainly due to sales for the U.S. Department of Energy's
Hanford, WA nuclear facility) and increased international sales resulting
from the December, 1995 acquisition of SZE Hagenuk.
Gross profit as a percent of net sales increased from 17.5% one year ago to
19.0% in the current six month period, due primarily to improved product mix
and plant efficiency.
Selling expense increased from $923,000 to $1,093,000 and from 4.1% of sales
to 4.2% of sales, due primarily to the acquisition of SZE Hagenuk.
General and administrative expense increased from $1,823,000 or 8.1% of sales
one year ago to $2,165,000 or 8.3% of sales in the current period, due
primarily to increased staffing in the customer service area and the
acquisition of SZE Hagenuk, partially offset by a redeployment of certain
executive salaries from Piping System Products to General Corporate Expenses.
<PAGE>
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
Three months ended July 31
General and administrative expenses increased from $463,000 to $649,000;
general and administrative expenses as a percent of net sales increased from
2.1% to 2.5%. The increases resulted primarily from increased profit-based
incentive compensation, and higher administrative, financial management and
accounting salaries expense. The increased administrative, financial management
and accounting salaries expenses reflect shifts in time devoted to corporate
administrative matters from other areas, with some offsetting decrease in
Perma-Pipe administrative expense.
Interest expense increased from $188,000 to $268,000, due primarily to higher
borrowings to finance working capital, fixed asset acquisitions, the
acquisition of SZE Hagenuk, and purchase of real estate to provide for the
expansion of the Filtration Products business in Winchester, Virginia.
Six months ended July 31
General and administrative expenses increased from $868,000 to $1,113,000;
general and administrative expenses as a percent of net sales increased from
2.2% to 2.5%. The increases resulted primarily from increased profit-based
incentive compensation, and higher administrative , financial management and
accounting salaries expense. The increased administrative, financial
management and accounting salaries expenses reflect shifts in time devoted to
corporate administrative matters from other areas, with some offsetting
decrease in Perma-Pipe administrative expense.
Interest expense increased from $390,000 to $525,000, due primarily to higher
borrowings to finance working capital, fixed asset acquisitions, the
acquisition of SZE Hagenuk, and purchase of real estate to provide for the
expansion of the Filtration Products business in Winchester, Virginia.
<PAGE>
Liquidity and Capital Resources
The Company believes its working capital and investment needs will be financed
primarily through operations and its $7,000,000 revolving line of credit.
The Company has drawn $6,250,000 from this line of credit as of July 31, 1996.
To finance a September 1994 acquisition, the Company borrowed $4,000,000 from a
bank under a term loan which is repayable in sixteen consecutive quarterly
installments commencing January 31, 1995.
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 Products Business in Winchester,
Virginia ($3,150,000) and the Piping System Products Business in Lebanon,
Tennessee ($3,150,000). The bonds mature approximately twelve 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
approximated 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 $4,130,000 at July 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.
On May 8, 1996, the Company purchased for approximately $1.1 million a 10.3-acre
parcel of land with a 67,000-square foot building adjacent to its Filtration
Products property in Winchester, Virginia to accommodate the Company's growing
marketing effort. The purchase was financed 80% by a seven-year mortgage
bearing interest at 8.38%, and 20% by the aforementioned revenue bonds.
As of July 31, 1996, the Company did not have any material commitments for
capital expenditures.
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
<TABLE>
The annual meeting of the stockholders of the Company was held on June 26, 1996
in order to elect directors. David Unger, Henry M. Mautner, Gene K. Ogilvie,
Fati A. Elgendy, Bradley E. Mautner, Arnold F. Brookstone, Eugene Miller and
Stephen B. Schwartz were elected as directors of the Company at the meeting.
The following is a tabulation of the votes cast for, or withheld, with respect
to each nominee:
<CAPTION>
For Withheld
<S> <C> <C>
David Unger 4,123,532 2,400
Henry M. Mautner 4,123,532 2,400
Gene K. Ogilvie 4,123,532 2,400
Fati A. Elgendy 4,123,532 2,400
Bradley E. Mautner 4,123,532 2,400
Arnold F. Brookstone 4,123,532 2,400
Eugene Miller 4,123,532 2,400
Stephen B. Schwartz 4,123,532 2,400
There were no votes against, nor were there abstentions or broker non-votes
with respect to any nominee.
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) Reports on Form 8-K -- None
<PAGE>
SIGNATURE
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 13, 1996 /s/ David Unger
David Unger
Chairman of the Board of Directors
(Principal Executive Officer)
Date: September 13, 1996 /s/ Michael D. Bennett
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
<TABLE>
MFRI, Inc. and Subsidiaries
Computation of Primary Earnings Per Common Share
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income $1,132,000 $759,000 $1,526,000 $1,081,000
Weighted average number of
common shares outstanding:
Shares outstanding from
beginning of period 4,524,000 4,529,000 4,524,000 4,529,000
Common share equivalents:
Assumed exercise of
common stock options 41,000 37,000
Weighted average common and
common share equivalents 4,565,000 4,529,000 4,561,000 4,529,000
Net income per share $0.25 $0.17 $0.33 $0.24
</TABLE>
Exhibit 11
<TABLE>
MFRI, Inc. and Subsidiaries
Computation of Fully Diluted Earnings Per Common Share
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income $1,132,000 $759,000 $1,526,000 $1,081,000
Weighted average number of
common shares outstanding:
Shares outstanding from
beginning of period 4,524,000 4,529,000 4,524,000 4,529,000
Common share equivalents:
Assumed exercise of
common stock options 41,000 37,000
Weighted average common and
common share equivalents 4,565,000 4,529,000 4,561,000 4,529,000
Net income per share $0.25 $0.17 $0.33 $0.24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 264000
<SECURITIES> 0
<RECEIVABLES> 19596000
<ALLOWANCES> 0
<INVENTORY> 13721000
<CURRENT-ASSETS> 40401000
<PP&E> 15980000
<DEPRECIATION> 4355000
<TOTAL-ASSETS> 63249000
<CURRENT-LIABILITIES> 20010000
<BONDS> 14161000
0
0
<COMMON> 45000
<OTHER-SE> 27704000
<TOTAL-LIABILITY-AND-EQUITY> 63249000
<SALES> 44955000
<TOTAL-REVENUES> 44955000
<CGS> 34809000
<TOTAL-COSTS> 34809000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 525000
<INCOME-PRETAX> 2555000
<INCOME-TAX> 1029000
<INCOME-CONTINUING> 1526000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1526000
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
