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, 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 September 12, 1997, there were 4,969,229 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 SHEET (UNAUDITED)
<CAPTION>
July 31, 1997 Jan. 31, 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,116,000 $ 3,416,000
Trade accounts receivable, net 23,007,000 18,759,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 4,218,000 2,807,000
Deferred income taxes 2,219,000 2,193,000
Inventories 17,022,000 17,244,000
Prepaid expenses and other current assets 785,000 830,000
TOTAL CURRENT ASSETS 48,367,000 45,249,000
RESTRICTED CASH FROM BOND PROCEEDS 3,083,000 3,880,000
PROPERTY, PLANT AND EQUIPMENT, at cost 22,546,000 20,149,000
Less accumulated depreciation 6,033,000 5,095,000
PROPERTY, PLANT AND EQUIPMENT, net 16,513,000 15,054,000
OTHER ASSETS
Goodwill, net 7,722,000 8,120,000
Other, net 3,180,000 3,025,000
TOTAL OTHER ASSETS 10,902,000 11,145,000
TOTAL ASSETS $78,865,000 $75,328,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Drafts payable $ 1,867,000 $ 1,598,000
Accounts payable 5,295,000 6,261,000
Commissions payable 6,373,000 6,049,000
Current maturities of long-term debt 628,000 564,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,168,000 210,000
Other current liabilities 2,403,000 2,723,000
TOTAL CURRENT LIABILITIES 17,734,000 17,405,000
LONG-TERM LIABILITIES
Long-term debt -- less current maturities 25,142,000 23,921,000
Deferred income taxes and other 1,292,000 1,148,000
TOTAL LONG-TERM LIABILITIES 26,434,000 25,069,000
STOCKHOLDERS' EQUITY
Common stock, $ .01 par value, authorized --
15,000,000 shares; outstanding
- 4,969,000 shares 50,000 50,000
Additional paid-in capital 21,422,000 21,384,000
Retained earnings 13,317,000 11,478,000
Accumulated translation adjustment (92,000) (58,000)
TOTAL STOCKHOLDERS' EQUITY 34,697,000 32,854,000
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $78,865,000 $75,328,000
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<PAGE>
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)
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $30,215,000 $26,142,000 $55,979,000 $44,955,000
Cost of sales 21,970,000 20,108,000 41,484,000 34,809,000
GROSS PROFIT 8,245,000 6,034,000 14,495,000 10,146,000
Selling expense 2,564,000 1,451,000 4,691,000 2,714,000
Genl and admin expense 3,166,000 2,404,000 5,915,000 4,352,000
INCOME FROM OPERATIONS 2,515,000 2,179,000 3,889,000 3,080,000
Interest expense - net 394,000 268,000 772,000 525,000
INCOME BEFORE INCOME TAX 2,121,000 1,911,000 3,117,000 2,555,000
Income tax expense 870,000 779,000 1,278,000 1,029,000
NET INCOME $ 1,251,000 $1,132,000 $ 1,839,000 $1,526,000
Net income per common share $ .25 $ .25 $ .36 $ .33
Weighted average common
and common share equivalents
outstanding 5,096,000 4,565,000 5,064,000 4,561,000
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Six Months Ended July 31,
(Unaudited)
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,839,000 $1,526,000
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 1,304,000 695,000
Deferred income taxes 118,000 (436,000)
Change in operating assets and liabilities:
Trade accounts receivable (4,091,000) (3,459,000)
Costs and estimated earnings in excess of billings
on uncompleted contracts (1,411,000) 28,000
Inventories 222,000 (516,000)
Prepaid expenses and other current assets (112,000) 684,000
Current liabilities 265,000 3,670,000
Other operating assets and liabilities (107,000) (53,000)
NET CASH FLOWS FROM
OPERATING ACTIVITIES (1,973,000) 2,139,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash from
Industrial Revenue Bonds 797,000 916,000
Net purchase of property (2,108,000) (1,804,000)
NET CASH FLOWS FROM
INVESTING ACTIVITIES (1,311,000) (888,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capitalized lease obligations (243,000) (208,000)
Stock options exercised 38,000
Proceeds from (repayment of) long-term debt 1,189,000 (1,228,000)
NET CASH FLOWS FROM
FINANCING ACTIVITIES 984,000 (1,436,000)
NET DECREASE IN CASH
AND CASH EQUIVALENTS (2,300,000) (185,000)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,416,000 449,000
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $1,116,000 $264,000
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 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 July 31, 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>
July 31, 1997 January 31, 1997
<C> <S> <S>
Raw materials $12,454,000 $12,443,000
Work in process 2,044,000 2,011,000
Finished goods 2,524,000 2,790,000
Total $17,022,000 $17,244,000
</TABLE>
<TABLE>
4. Supplemental cash flow information:
<CAPTION>
1997 1996
Cash paid during the quarter for:
<C> <S> <S>
Interest $427,000 $463,000
Income taxes 429,000 502,000
Schedule of noncash financial activities:
Fixed assets acquired under capital leases$127,000 $482,000
</TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
July 31, 1997
The statements contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and certain other
information contained elsewhere in this 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", and "likely" 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 materially from those projected. These uncertainties
include, but are not limited to, economic conditions, market demand and
pricing, competitive and cost factors, raw material availability and prices,
global interest rates, currency exchange rates, labor relations and other
risk factors.
Results of Operations
Filtration Products Business
Three months ended July 31
Net sales for the quarter ended July 31, 1997 increased 13.0% from
$9,882,000 to $11,163,000 from the comparable quarter one year ago. The
increase was the result of higher unit sales across most markets and products.
Gross profit as a percent of net sales remained unchanged at 28.0% for the
current quarter compared to one year ago.
Selling expense for the quarter ended July 31, 1997 increased to $1,087,000
from $882,000 and to 9.7% of sales from 8.9% for the comparable quarter
last year. The increase is primarily attributable to additional staff for
domestic sales and marketing and higher gross profit related export sales
commissions.
General and administrative expense for the quarter ended July 31, 1997
increased to $590,000 from $556,000 for the comparable quarter a year ago,
primarily the result of increased profit-related incentive compensation.
General and administrative expense as a percent of net sales decreased from
5.6% to 5.3%.
<PAGE>
Six months ended July 31
Net sales for the six months ended July 31, 1997 increased 5.2% from
$18,859,000 to $19,832,000 from the comparable period one year ago. The
increase was primarily the result of higher filter bag- related product sales
across most markets.
Gross profit as a percent of net sales decreased from 27.5% to 26.1%. This
decrease resulted primarily from a lessfavorable product mix and the
attendant manufacturing inefficiencies.
Selling expenses increased from $1,621,000 to $1,910,000 and from 8.6% of
sales to 9.6% from the comparable quarter last year. The increase is mostly
attributable to additional staff for domestic sales and marketing.
General and administrative expense for the six months ended July 31, 1997
was $1,071,000 compared to $1,074,000 a year ago, essentially unchanged, and
as a percent of sales decreased from 5.7% to 5.4%.
Piping System Products Business
Three months ended July 31
Net sales decreased 25.0% from $16,260,000 to $12,195,000, due primarily to
delayed releases of sales orders in the current year and to unusually large
sales ($2,000,000) from a large sales order in the prior year not replaced in
the current year.
Gross profit as a percent of net sales increased from 20.1% to 23.9%, due
primarily to improved product mix and plant efficiency.
Selling expense increased from $569,000 to $636,000 and from 3.5% of sales
to 5.2%, due primarily to higher commission expense, foreign sales staff,
advertising, and product samples.
General and administrative expense decreased from $1,199,000 to $1,113,000,
due primarily to reduced foreign general and administrative expenses, but
increased from 7.4% of sales to 9.1%, due to a smaller sales base.
Six months ended July 31
Net sales decreased 11.0% from $26,096,000 to $23,207,000, due primarily to
unusually large sales ($2,100,000) from a large sales order in the prior year
not replaced in the current year, and partially due to delayed releases of
sales orders in the current year.
Gross profit as a percent of net sales increased from 19.0% to 22.3%, due
primarily to improved product mix and plant efficiency.
Selling expenses increased from $1,093,000 to $1,243,000 and from 4.2% to
5.4% of sales, due primarily to higher commission expense, foreign sales
staff, advertising, and product samples.
General and administrative expense was virtually unchanged at $2,176,000
compared to $2,165,000 a year ago, but increased from 8.3% of sales to 9.4%,
due to a smaller sales base.
<PAGE>
Industrial Process Cooling Equipment Business
Three months ended July 31
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 37.7% from $4,978,000 to $6,857,000, primarily in the
sales of plant circulating systems.
Gross profit as a percent of net sales decreased from 33.9% to 32.1%. The
decrease resulted primarily from manufacturing inefficiencies and a less
favorable product mix.
Selling expenses increased from $658,000 to $841,000; selling expenses as a
percent of net sales decreased from 13.2% to 12.3%. The dollar increase is
due primarily to increased commission expense from the higher sales volume.
General and administrative expenses decreased from $541,000 to $511,000.
The decrease is primarily due to lower MIS expense, partially offset by
increased medical insurance expenses.
Six months ended July 31
Net sales increased 31.2% from $9,860,000 to $12,940,000, primarily in the
increased sales of plant circulating systems and central chillers.
Gross profit as a percent of sales decreased from 32.6% to 32.1%.
The decrease is due primarily to manufacturing inefficiencies and an
unfavorable product mix.
Selling expenses increased from $1,313,000 to $1,539,000; selling expenses
as a percent of net sales decreased from 13.3% to 11.9%. The increased
dollar amount is primarily due to the commission expense incurred based on the
higher sales volume.
General and administrative expenses decreased from $1,061,000 to $1,035,000;
general and administrative expense as a percent of net sales decreased from
10.8% to 8.0%. The decrease is due primarily to lower MIS expense, partially
offset by increased medical insurance expenses.
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
<PAGE>
Three months ended July 31
General and administrative expense increased from $650,000 to $953,000;
general and administrative expense as a percent of consolidated net sales
increased from 2.5% to 3.2%. The dollar increase was due primarily to the
higher level of support required by the addition to the Industrial Process
Cooling Equipment Business acquired on December 30, 1996, and to higher
medical insurance cost.
Interest expense increased from $268,000 to $394,000, due primarily to higher
borrowings to support the acquisition of the Industrial Process Cooling
Equipment Business.
Six months ended July 31
General and administrative expense increased from $1,113,000 to $1,632,000;
general and administrative expense as a percent of consolidated net sales
increased from 2.5% to 2.9%. 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, and to higher
medical insurance cost.
Interest expense increased from $525,000 to $772,000, 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
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 $3,083,000 at July 31, 1997.
The bonds are secured by bank letters of credit which expired 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 bond; during the second quarter of
1997, the expirations of the letters of credit were extended to the third
quarter of 1998.
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% annually 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. Borrowing of $1,200,000 was outstanding under the Credit Line as of
July 31, 1997.
At July 31, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
<TABLE>
The annual meeting of the stockholders of the Company was held on
June 27, 1997 in order to elect directors. David Unger, Henry M. Mautner,
Gene K. Ogilvie, Fati A. Elgendy, Bradley E. Mautner, Don Gruenberg, 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
<C> <S> <S>
David Unger 3,999,523 164,729
Henry M. Mautner 3,999,523 164,729
Gene K. Ogilvie 3,998,723 165,509
Fati A. Elgendy 3,999,523 164,729
Bradley E. Mautner 3,999,523 164,729
Don Gruenberg 3,997,223 164,029
Arnold F. Brookstone 3,999,523 164,729
Eugene Miller 3,999,523 164,729
Stephen B. Schwartz 3,998,723 165,529
There were no votes against, nor were there abstentions or broker non-votes
with respect to any nominee.
</TABLE>
At the annual meeting, the stockholders also considered and voted on the
Amended and Restated 1994 Stock Option Plan. 3,297,739 shares of Common
Stock were voted to approve the plan, 234,975 shares against, 12,827 shares
abstained and there were 618,711 shares of broker non-votes.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Statement regarding computation of earnings per share
(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 12, 1997 /s/ David Unger
David Unger
Chairman of the Board of Directors
Date: September 12, 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>
Three Months Six Months
Ended July 31, Ended July 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income $1,251,000$ 1,132,000 $1,839,000 $1,526,000
Weighted average number of
common shares outstanding:
Shares outstanding from
beginning of period 4,966,000 4,524,000 4,962,000 4,524,000
Issuances of common stock 1,000 3,000
Common share equivalents:
Assumed exercise of common
stock options 129,000 41,000 99,000 37,000
Weighted average common and
common share equivalents 5,096,000 4,565,000 5,064,000 4,561,000
Net income per share $0.25 $0.25 $0.36 $0.33
4
<PAGE>
Exhibit 11
</TABLE>
<TABLE>
MFRI, Inc. and Subsidiaries
Computation of Fully Diluted Earnings per Common Share
Three Months Six Months
Ended July 31, Ended July 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income $1,251,000$ 1,132,000 $1,839,000 $1,526,000
Weighted average number of
common shares outstanding:
Shares outstanding from
beginning of period 4,966,000 4,524,000 4,962,000 4,524,000
Issuances of common stock 1,000 3,000
Common share equivalents:
Assumed exercise of common
stock options 171,000 41,000 160,000 37,000
Weighted average common and
common share equivalents 5,138,000 4,565,000 5,125,000 4,561,000
Net income per share $0.24 $0.25 $0.36 $0.33
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1997 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE PERIOD 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-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 1116000
<SECURITIES> 0
<RECEIVABLES> 23007000
<ALLOWANCES> 0
<INVENTORY> 17022000
<CURRENT-ASSETS> 48367000
<PP&E> 22546000
<DEPRECIATION> 6033000
<TOTAL-ASSETS> 78865000
<CURRENT-LIABILITIES> 17734000
<BONDS> 25142000
0
0
<COMMON> 50000
<OTHER-SE> 34647000
<TOTAL-LIABILITY-AND-EQUITY> 78865000
<SALES> 55979000
<TOTAL-REVENUES> 55979000
<CGS> 41484000
<TOTAL-COSTS> 41484000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 772000
<INCOME-PRETAX> 3117000
<INCOME-TAX> 1278000
<INCOME-CONTINUING> 1839000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1839000
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
