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 April 30, 1997
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 June 12, 1997, there were 4,965,729 shares of the Registrant's common stock
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
April 30, 1997 Jan. 31, 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,050,000 $ 3,416,000
Trade accounts receivable, net 18,113,000 18,759,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 4,493,000 2,807,000
Deferred income taxes 2,498,000 2,193,000
Inventories 18,403,000 17,244,000
Prepaid expenses and other current assets 853,000 830,000
TOTAL CURRENT ASSETS 47,410,000 45,249,000
RESTRICTED CASH FROM BOND PROCEEDS 3,917,000 3,880,000
PROPERTY, PLANT AND EQUIPMENT, at cost 21,314,000 20,149,000
Less accumulated depreciation 5,575,000 5,095,000
PROPERTY, PLANT AND EQUIPMENT, net 15,739,000 15,054,000
OTHER ASSETS
Goodwill, net 7,785,000 8,120,000
Other, net 3,233,000 3,025,000
TOTAL OTHER ASSETS 11,018,000 11,145,000
TOTAL ASSETS $78,084,000 $75,328,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Drafts payable $ 2,968,000 $ 1,598,000
Accounts payable 6,192,000 6,261,000
Commissions payable 5,676,000 6,049,000
Current maturities of long-term debt 555,000 564,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,465,000 210,000
Other current liabilities 2,634,000 2,723,000
TOTAL CURRENT LIABILITIES 19,490,000 17,405,000
LONG-TERM LIABILITIES
Long-term debt -- less current maturities 23,904,000 23,921,000
Deferred income taxes and other 1,232,000 1,148,000
TOTAL LONG-TERM LIABILITIES 25,136,000 25,069,000
STOCKHOLDERS' EQUITY
Common stock, $ .01 par value, authorized --
15,000,000 shares;
outstanding - 4,966,000 shares 50,000 50,000
Additional paid-in capital 21,399,000 21,384,000
Retained earnings 12,066,000 11,478,000
Accumulated translation adjustment (57,000) (58,000)
TOTAL STOCKHOLDERS' EQUITY 33,458,000 32,854,000
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $78,084,000 $75,328,000
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Three Months Ended April 30,
1997 1996
<S> <C> <C>
Net Sales $25,764,000 $18,813,000
Cost of sales 19,514,000 14,701,000
GROSS PROFIT 6,250,000 4,112,000
Selling expense 2,127,000 1,263,000
General and administrative expense 2,749,000 1,948,000
INCOME FROM OPERATIONS 1,374,000 901,000
Interest expense - net 378,000 257,000
INCOME BEFORE INCOME TAXES 996,000 644,000
Income taxes 408,000 250,000
NET INCOME $ 588,000 $ 394,000
Net income per common share $ .12 $ .09
Weighted average common and
common share equivalents outstanding 5,033,000 4,557,000
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Three Months Ended April 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 588,000 $ 394,000
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 661,000 305,000
Deferred income taxes (221,000) (446,000)
Change in operating assets and liabilities:
Trade accounts receivable 646,000 176,000
Costs and estimated earnings in excess of billings
on uncompleted contracts (1,686,000) (847,000)
Inventories (1,159,000) (28,000)
Prepaid expenses and other current assets (23,000) 614,000
Current liabilities 2,094,000 717,000
Other operating assets and liabilities (42,000) (43,000)
NET CASH FLOWS FROM
OPERATING ACTIVITIES 858,000 842,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (Increase) in restricted cash from
Industrial Revenue Bonds (37,000) 771,000
Net purchase of property and equipment (1,308,000) (549,000)
NET CASH FLOWS FROM
INVESTING ACTIVITIES (1,345,000) 222,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capitalized lease obligations (98,000) (84,000)
Stock options exercised 15,000
Proceeds from (repayment of) long-term debt 204,000 (1,149,000)
NET CASH FLOWS FROM
FINANCING ACTIVITIES 121,000 (1,233,000)
NET DECREASE IN CASH
AND CASH EQUIVALENTS (366,000) (169,000)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,416,000 449,000
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $3,050,000 $ 280,000
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
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 Commisison 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, 1997.
2. The results of operations for the quarters ended April 30, 1997 and
1996 are not necessarily indicative of the results to be expected for the
full year.
<TABLE>
3. Inventories consisted of the following:
<CAPTION>
Apr 30, 1997 Jan 31, 1997
<S> <C> <C>
Raw materials $13,083,000 $12,443,000
Work in process 2,120,000 2,011,000
Finished goods 3,200,000 2,790,000
Total $18,403,000 $17,244,000
</TABLE>
<TABLE>
4. Supplemental cash flow information:
<CAPTION>
1997 1996
<S> <C> <C>
Cash paid during the quarter for:
Interest $121,000 $269,000
Income taxes 671,000 278,000
Schedule of noncash financial activities:
Fixed assets acquired under capital leases $132,000 $347,000
</TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
April 30, 1997
Results of Operations
Filtration Products Business
Net sales for the quarter ended April 30, 1997 decreased 3.4% from $8,977,000
to $8,669,000 from the comparable quarter one year ago. The decline is
primarily the result of lower filter bag product sales, partially offset by
higher sales of bag-related parts and services.
Gross profit as a percent of net sales decreased from 26.9% to 23.7%. This
decrease resulted primarily from manufacturing plant inefficiencies,
resulting mainly from lower filter bag volume.
Selling expense for the quarter ended April 30, 1997 increased to $822,000
from $739,000 for the comparable quarter last year. The increase is mostly
attributable to additional staff for domestic sales and marketing.
General and administrative expense for the quarter ended April 30, 1997
decreased to $482,000 from $518,000 for the comparable period a year ago.
This decrease is primarily the result of decreased profit-related incentive
compensation.
Piping System Products Business
Net sales for the quarter ended April 30, 1997 increased 12.0% from $9,836,000
to $11,012,000, due primarily to higher domestic pipe sales.
Gross profit as a percent of net sales increased from 17.2% to 20.4%, due
primarily to favorable product mix of sales and manufacturing efficiencies.
Selling expense increased from $524,000 to $607,000 and selling expense as a
percent of net sales increased from 5.3% to 5.5%, due primarily to higher
commissions related to higher sales.
General and administrative expense increased from $966,000 to $1,064,000 and as
a percent of sales decreased from 9.8% to 9.7%, due primarily to higher
profit-related incentive compensation and increased staffing for customer
service.
<PAGE>
Industrial Process Cooling Equipment Business
Although the Industrial Process Cooling Equipment Business was not included in
the accounts of the Company prior to December 30, 1996, the following proforma
information is presented to help the reader understand this business.
Net sales increased 24.6% from $4,882,000 to $6,083,000 primarily due to sales
of central chillers and resale chillers.
Gross profit as a percent of net sales increased from 31.2% to 32.0%. The
increased percentage is due to greater efficiencies in the factory because of
the increased volume and a favorable product mix.
Selling expenses increased from $655,000 to $698,000; selling expenses as a
percent of net sales decreased from 13.4% to 11.5%. The dollar increase is
due primarily to increased commission expense resulting from higher sales and
timing of advertising expenses.
General and administrative expenses increased from $520,000 to $524,000;
general and administrative expenses as a percent of sales decreased from 10.7%
to 8.6%. The dollar increase resulted primarily from an increased profit-
based incentive compensation, partially offset by other individually minor
decreases.
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
General and administrative expense increased from $464,000 to $679,000;
general and administrative expense as a percent of consolidated net sales
increased from 2.5% to 2.6%, The dollar increase was due primarily to the
higher level of support required by the addition of the Industrial Process
Cooling Equipment Business acquired on December 30, 1996.
Interest expense increased from $257,000 to $378,000, due primarily to higher
borrowings to support the acquisition of the Industrial Process Cooling
Equipment Business.
Liquidity and Capital Resources
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 1995 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 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 approximated 5% per annum, 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
<PAGE>
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 $3,917,000 at April 30, 1997.
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 activities. The purchase was financed 80% by a seven-year
mortgage bearing interest at 8.38% and 20% by the aforementioned revenue bonds.
Working capital and investment needs of the Company have historically been
funded through the Company's operations and a bank line of credit. The
Company assumed approximately $6,611,000 of debt in the December 30, 1996
acquisition of the Industrial Process Cooling Equipment Business
(the "Acquisition"), $5,000,000 of which represented assumed bank and other
debt, with the remainder representing assumed capitalized lease obligations.
Effective December 15, 1996, the Company replaced its bank line of credit with
$15 million of fixed rate senior unsecured notes due 2007 (the "Notes") and a
new $5 million floating rate unsecured revolving line of credit (the "Credit
Line"). Proceeds of the Notes were also used to repay the debt assumed by
the company in the Acquisition. The Notes bear interest at an annual rate of
7.21% and require principal payment beginning in the year ended January 31,
2001, and continuing annually thereafter, resulting in a seven-year average
life. No amounts were outstanding under the Credit Line as of April 30, 1997.
At April 30, 1997 the Company had contracted for and begun to execute a
substantial portion of an estimated $650,000 capacity expansion project at
its Lebanon, Tennessee piping systems manufacturing facility, to be primarily
financed from the proceeds of the Tennessee Industrial Revenue Bonds.
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. 11 - Statement regarding computation of per share earnings
(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: June 13, 1997 /s/ David Unger
David Unger
Chairman of the Board of Directors
Date: June 13, 1997 /s/ Michael D. Bennett
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
<PAGE>
Exhibit 11
<TABLE>
MFRI, Inc. and Subsidiaries
Computation of Primary Earnings per Common Share
<CAPTION>
Primary Fully Diluted
Three Months Three Months
Ended April 30, Ended April 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income $ 588,000 $ 394,000 $ 588,000 $ 394,000
Weighted average number of
common shares outstanding:
Shares outstanding from
beginning of period 4,962,000 4,524,000 4,962,000 4,524,000
Issuances of common stock 1,000 1,000
Acquisition of treasury stock
Common share equivalents:
Assumed exercise of common
stock options 70,000 33,000 70,000 33,000
Weighted average common and
common share equivalents 5,033,000 4,557,000 5,033,000 4,557,000
Net income per share $0.12 $0.09 $0.12 $0.09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1997 AND THE CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE QUARTER THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> APR-30-1997
<CASH> 3050000
<SECURITIES> 0
<RECEIVABLES> 18113000
<ALLOWANCES> 0
<INVENTORY> 18403000
<CURRENT-ASSETS> 47410000
<PP&E> 21314000
<DEPRECIATION> 5575000
<TOTAL-ASSETS> 78084000
<CURRENT-LIABILITIES> 19490000
<BONDS> 23904000
0
0
<COMMON> 50000
<OTHER-SE> 33408000
<TOTAL-LIABILITY-AND-EQUITY> 78084000
<SALES> 25764000
<TOTAL-REVENUES> 25764000
<CGS> 19514000
<TOTAL-COSTS> 19514000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 378000
<INCOME-PRETAX> 996000
<INCOME-TAX> 408000
<INCOME-CONTINUING> 588000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 588000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
