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 October 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 December 12, 1996, there were 4,555,697 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>
Oct. 31, 1996 Jan. 31, 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 385,000 $ 449,000
Trade accounts receivable, net 19,261,000 16,137,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,798,000 4,032,000
Deferred income taxes 2,218,000 1,733,000
Inventories 15,626,000 13,205,000
Prepaid expenses and other current assets 589,000 1,309,000
TOTAL CURRENT ASSETS 40,877,000 36,865,000
RESTRICTED CASH FROM BOND PROCEEDS 4,184,000 5,046,000
PROPERTY, PLANT AND EQUIPMENT, at cost 16,395,000 13,636,000
Less allowances for depreciation 4,695,000 3,752,000
PROPERTY, PLANT AND EQUIPMENT, net 11,700,000 9,884,000
OTHER ASSETS
Goodwill, net 4,613,000 4,733,000
Other, net 2,829,000 2,457,000
TOTAL OTHER ASSETS 7,422,000 7,190,000
TOTAL ASSETS $64,203,000 $58,985,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Drafts payable $ 1,290,000 $ 2,209,000
Accounts payable 7,288,000 4,807,000
Commissions payable 6,602,000 4,509,000
Current maturities of long-term debt 2,332,000 3,031,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,250,000 490,000
Other current liabilities 2,019,000 2,142,000
TOTAL CURRENT LIABILITIES 20,781,000 17,188,000
LONG-TERM LIABILITIES
Long-term debt -- less current maturities 12,897,000 14,267,000
Deferred income taxes and other 1,348,000 1,307,000
TOTAL LONG-TERM LIABILITIES 14,245,000 15,574,000
STOCKHOLDERS' EQUITY
Common stock, $ .01 par value, authorized --
15,000,000 shares; outstanding - 4,556,000
and 4,524,000 shares, respectively 46,000 45,000
Additional paid-in capital 18,180,000 17,967,000
Retained earnings 10,966,000 8,248,000
Accumulated translation adjustment (15,000) (37,000)
TOTAL STOCKHOLDERS' EQUITY 29,177,000 26,223,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $64,203,000 $58,985,000
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1996 1995 1996 1995
(U n a u d i t e d)
<S> <C> <C> <C> <C>
Net sales $25,326,000 $25,883,000 $70,281,000 $65,762,000
Cost of sales 19,176,000 21,049,000 53,985,000 52,972,000
GROSS PROFIT 6,150,000 4,834,000 16,296,000 12,790,000
Selling expense 1,412,000 1,297,000 4,126,000 3,478,000
General and administrative expense 2,335,000 1,785,000 6,376,000 5,108,000
Management services agreement - net 164,000 132,000 475,000 406,000
INCOME FROM OPERATIONS 2,239,000 1,620,000 5,319,000 3,798,000
Interest expense 228,000 184,000 753,000 574,000
INCOME BEFORE INCOME TAX 2,011,000 1,436,000 4,566,000 3,224,000
Income tax expense 819,000 539,000 1,848,000 1,246,000
NET INCOME $ 1,192,000 $ 897,000 $ 2,718,000 $ 1,978,000
Net income per common share $.26 $.20 $ .59 $ .44
Weighted average common and common
share equivalents outstanding 4,612,000 4,557,000 4,580,000 4,538,000
See notes to condensed consolidated financial statements.<PAGE>
</TABLE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Nine Months Ended October 31
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $2,718,000 $1,978,000
Adjustments to reconcile net income
to net cash from operating activities:
Provision for depreciation and amortization 1,092,000 743,000
Deferred income taxes (444,000) (278,000)
Change in operating assets and liabilities:
Trade accounts receivable (2,813,000) (4,120,000)
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,234,000 158,000
Inventories (2,204,000) (1,274,000)
Prepaid expenses and other current assets 721,000 328,000
Current liabilities 3,963,000 1,157,000
Other operating assets and liabilities (245,000) (320,000)
NET CASH FLOWS
FROM OPERATING ACTIVITIES 4,022,000 (1,628,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in restricted cash from Industrial
Revenue Bonds 862,000 (6,300,000)
Purchase of property and equipment (2,039,000) (1,446,000)
Acquisition of business (211,000) -
NET CASH FLOWS FROM
INVESTING ACTIVITIES (1,388,000) (7,746,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from industrial revenue bonds - 6,300,000
Net payments on capitalized lease obligations (299,000) (19,000)
Net borrowings (repayments) under revolving, term
and mortgage loans (2,399,000) 2,924,000
NET CASH FLOWS FROM FINANCING ACTIVITIES (2,698,000) 9,205,000
NET DECREASE IN CASH AND CASH EQUIVALENTS (64,000) (169,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 449,000 484,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 385,000 $ 315,000
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 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 nine month periods ended October 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>
October 31, 1996 January 31, 1996
<S> <S> <S>
Raw materials (net of inventory reserves) $11,049,000 $10,265,000
Work in process 1,164,000 960,000
Finished goods 3,413,000 1,980,000
Total $15,626,000 $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 $ 793,000 $ 600,000
Income taxes 1,443,000 999,000
Schedule of noncash financial activities:
Fixed assets acquired under capital leases 636,000 202,000
</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 proceeds of
the 1995 industrial revenue bonds.
<PAGE>
MFRI, INC. AND SUBSIDIARIES
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
October 31, 1996
Results of Operations
Filtration Products Business
Three months ended October 31
Net sales for the quarter ended October 31, 1996 decreased 11.2% from
$10,112,000 to $8,977,000 from the comparable quarter one year ago. The
decrease was primarily the result of lower domestic filter bag product sales.
Gross profit as a percent of net sales increased from 23.5% to 27.3%. This
increase resulted from improved pricing, improved manufacturing plant
efficiencies, and a favorable product mix.
Selling expense for the quarter ended October 31, 1996 decreased to $794,000
from $831,000 for the comparable quarter last year. The decrease is mostly
attributable to lower sales commissions due to the lower sales.
General and administrative expense for the quarter ended October 31, 1996
increased to $540,000 from $483,000 for the comparable quarter a year ago.
This increase is primarily the result of increased profit-related incentive
compensation.
Nine months ended October 31
Net sales for the nine months ended October 31, 1996 increased 1.2% from
$27,500,000 to $27,836,000 from the comparable period one year ago, with no
individually noteworthy increases or decreases.
Gross profit as a percent of net sales increased from 23.2% to 27.4%.
This increase resulted from improved pricing, improved manufacturing plant
efficiencies, and a favorable product mix.
Selling expense increased from $2,089,000 to $2,415,000 from the comparable
period last year. The increase is mostly attributable to higher international
expenses and higher gross margin-related commissions.
General and administrative expense for the nine months ended October 31, 1996
increased to $1,614,000 from $1,388,000 for the comparable period a year ago.
This increase is primarily the result of increased profit-related incentive
compensation.
<PAGE>
Piping Systems Products Business
Three months ended October 31
Net sales increased 3.7% from the same quarter one year ago, from $15,771,000 to
$16,349,000, due primarily to increased foreign sales resulting from the
December, 1995 acquisition of SZE Hagenuk.
Gross profit as a percent of net sales increased from 15.6% one year ago to
22.6% in the current quarter, due primarily to improved pricing, product mix and
plant efficiency.
Selling expense increased from $466,000 to $619,000 and from 3.0% of sales to
3.8% of sales, due primarily to the acquisition of SZE Hagenuk.
General and administrative expense increased from $942,000 or 6.0% of sales one
year ago to $1,364,000 or 8.3% of sales in the current quarter, due primarily to
increased profit-related incentive compensation and 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.
Nine months ended October 31
Net sales increased 10.9% from the same nine month period one year ago, from
$38,262,000 to $42,445,000, 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 foreign sales resulting from the
December, 1995 acquisition of SZE Hagenuk.
Gross profit as a percent of net sales increased from 16.7% one year ago to
20.4% in the current nine month period, due primarily to improved pricing,
product mix and plant efficiency.
Selling expense increased from $1,389,000 to $1,712,000 and from 3.6% of sales
to 4.0% of sales, due primarily to increased domestic sales and the acquisition
of SZE Hagenuk.
General and administrative expense increased from $2,765,000 or 7.2% of sales
one year ago to $3,529,000 or 8.3% of sales in the current period, due
primarily to increased profit-related incentive compensation and 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 October 31
General and administrative expenses increased from $492,000 to $594,000;
general and administrative expenses as a percent of net sales increased from
1.9% to 2.3%. 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 $184,000 to $228,000, due primarily to higher
borrowings to finance working capital, fixed asset acquisitions, the
acquisition of SZE Hagenuk, and the purchase of real estate to provide for the
expansion of the Filtration Products business in Winchester, Virginia.
Nine months ended October 31
General and administrative expenses increased from $1,361,000 to $1,707,000;
general and administrative expenses as a percent of net sales increased from
2.1% to 2.4%. 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 $574,000 to $753,000, due primarily to higher
borrowings to finance working capital, fixed asset acquisitions, the
acquisition of SZE Hagenuk, and the 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 the working capital and investment needs of its present
business are adequately financed primarily through operations and its
$7,000,000 revolving line of credit. The Company has drawn $5,250,000 from
this line of credit as of October 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, which commenced 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 $4,184,000 at October 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.
The Company is proposing to acquire the Thermal Care Division ("Thermal Care")
and certain other specified assets and liabilities (including all liabilities
relating to three lawsuits arising from Perma-Pipe warranty obligations and
indebtedness for borrowed funds aggregating $5,000,000) of Midwesco, Inc.
("Midwesco") by the merger of Midwesco with and into the Company (the "Merger").
Thermal Care engineers, designs and manufactures industrial water cooling
equipment. Thermal Care's products include chillers, cooling towers, pump and
tank assemblies, temperature controllers and water treatment equipment.
Thermal Care's cooling products are used to optimize manufacturing productivity
by quickly removing heat from manufacturing processes. Upon consummation of the
Merger, an aggregate of 2,124,307 shares of the Company's common stock will be
issued to the shareholders of Midwesco, or 406,641 shares in excess of the
1,717,666 shares of the Company's common stock currently owned by the
shareholders of Midwesco through the ownership of Midwesco. Such shares of the
Company's common stock currently owned by Midwesco will be cancelled in the
Merger. A Special Meeting of Stockholders of the Company will be held on
December 16, 1996 to consider and vote upon the adoption of the agreement of
merger. It is currently anticipated that the Merger will be effective on or
about January 31, 1997.
The Company believes, subsequent to the Merger, its working capital and
investment needs will require financing in excess of that available through its
$7,000,000 revolving line of credit and, accordingly, is seeking to replace that
facility, the assumed Midwesco debt and the unpaid portion of the $4,000,000
September, 1994 term loan with $15 million of fixed rate senior unsecured notes
due 2006 (the "Notes") and a new $5 million floating rate unsecured revolving
line of credit (the "Credit Line"). The Company has engaged a private placement
agent and financial advisor in connection with the private offering of the Notes
and expects to have the new financing in place prior to January 31, 1997. The
Notes will require principal payment beginning at the end of the fourth year and
continuing annually thereafter, resulting in a seven-year average life. The
Company has received a commitment from an institutional investor to acquire the
Notes at an annual interest rate of 7.21% and a commitment from a bank to
provide the Credit Line at floating rates equal to the prime rate or 150 basis
points over LIBOR, at the Company's option. There can be no assurance that the
foregoing transactions involving the Notes and the Credit Line will occur, and
if consummated, that they will be consummated under the foregoing terms.
As of October 31, 1996, the Company did not have any material commitments for
capital expenditures.
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
(c) On August 15, 1996, the Company, pursuant to an Asset
Purchase Agreement dated as of such date (the "Purchase Agreement"),
acquired substantially all of the assets of Eurotech Air Filtration, Inc.,
an Oregon corporation ("Eurotech"), for cash and 30,571 shares of the
Company's common stock, subject to possible adjustments in accordance
with the terms of the Purchase Agreement. Pursuant to the Purchase
Agreement, Eurotech has the right, subject to certain conditions, to
distribute such shares to its four shareholders. The offer and sale of
such shares were effected in reliance upon the exemption from registration
under Section 4(2) the Securities Act, as amended (the "Securities Act").
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources"
contained herein for a description of the proposed Merger of Midwesco, Inc.
("Midwesco") with and into the Company. On October 21, 1996 the
shareholders of Midwesco approved the Merger by unanimous written consent
and on October 25, 1996 the Company and Midwesco entered into an Agreement
for Merger. It is expected that the shares of the Company's common stock
constituting consideration for the Merger (the "Merger Shares") will be
issued to 20 shareholders of Midwesco, 14 of whom are "accredited
investors" as such term is defined by Rule 501(a) promulgated under the
Securities Act. The offer and sale of the Merger shares were effected in
reliance upon the exemptions from registration under Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated thereunder.
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: December 13, 1996
David Unger
Chairman of the Board of Directors
(Principal Executive Officer)
Date: December 13, 1996
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
::
Exhibit 11
<TABLE>
MFRI, Inc. and Subsidiaries
Computation of Primary Earnings Per Common Share
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income $1,192,000 $897,000 $2,718,000 $1,978,000
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
Issuances of common
stock 26,000 9,000
Common share equivalents:
Assumed exercise of
common stock
options 62,000 28,000 47,000 9,000
Weighted average common
and common share
equivalents 4,612,000 4,557,000 4,580,000 4,538,000
Net income per share 0.26 0.20 0.59 0.44
</TABLE>
::
Exhibit 11
<TABLE>
MFRI, Inc. and Subsidiaries
Computation of Fully Diluted Earnings Per Common Share
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income $1,192,000 $897,000 $2,718,000 $1,978,000
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
Issuances of common
stock 26,000 9,000
Common share equivalents:
Assumed exercise of
common stock options 74,000 28,000 66,000 18,000
Weighted average common
and common share
equivalents 4,624,000 4,557,000 4,599,000 4,547,000
Net income per share 0.26 0.20 0.59 0.44
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1996 AND THE CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 385000
<SECURITIES> 0
<RECEIVABLES> 19261000
<ALLOWANCES> 0
<INVENTORY> 15626000
<CURRENT-ASSETS> 40877000
<PP&E> 16395000
<DEPRECIATION> 4695000
<TOTAL-ASSETS> 64203000
<CURRENT-LIABILITIES> 20781000
<BONDS> 12897000
0
0
<COMMON> 46000
<OTHER-SE> 29131000
<TOTAL-LIABILITY-AND-EQUITY> 64203000
<SALES> 70281000
<TOTAL-REVENUES> 70281000
<CGS> 53985000
<TOTAL-COSTS> 53985000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 753000
<INCOME-PRETAX> 4566000
<INCOME-TAX> 1848000
<INCOME-CONTINUING> 2718000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2718000
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
