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, 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 December 12, 1997, there were 4,977,679 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, 1997 Jan. 31, 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,443,000 $ 3,416,000
Trade accounts receivable, net 21,221,000 18,759,000
Costs and estimated earnings in excess
of billings on uncompleted contracts 4,003,000 2,807,000
Deferred income taxes 2,257,000 2,193,000
Inventories 17,842,000 17,244,000
Prepaid expenses and other current assets 730,000 830,000
TOTAL CURRENT ASSETS 50,496,000 45,249,000
RESTRICTED CASH FROM BOND PROCEEDS 2,903,000 3,880,000
PROPERTY, PLANT AND EQUIPMENT, at cost 23,457,000 20,149,000
Less accumulated depreciation 6,521,000 5,095,000
PROPERTY, PLANT AND EQUIPMENT, net 16,936,000 15,054,000
OTHER ASSETS
Goodwill, net 7,659,000 8,120,000
Other, net 3,169,000 3,025,000
TOTAL OTHER ASSETS 10,828,000 11,145,000
TOTAL ASSETS $81,163,000 $75,328,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Drafts payable $ 2,781,000 $ 1,598,000
Accounts payable 6,442,000 6,261,000
Commissions payable 6,534,000 6,049,000
Current maturities of long-term debt 550,000 564,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,070,000 210,000
Other current liabilities 2,770,000 2,723,000
TOTAL CURRENT LIABILITIES 20,147,000 17,405,000
LONG-TERM LIABILITIES
Long-term debt -- less current maturities 23,716,000 23,921,000
Deferred income taxes and other 1,602,000 1,148,000
TOTAL LONG-TERM LIABILITIES 25,318,000 25,069,000
STOCKHOLDERS' EQUITY
Common stock, $ .01 par value,
authorized -- 15,000,000 shares;
outstanding - 4,978,000 shares 50,000 50,000
Additional paid-in capital 21,475,000 21,384,000
Retained earnings 14,228,000 11,478,000
Accumulated translation adjustment (55,000) (58,000)
TOTAL STOCKHOLDERS' EQUITY 35,698,000 32,854,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $81,163,000 $75,328,000
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,
1997 1996 1997 1996
(U n a u d i t e d)
<S> <C> <C> <C> <C>
Net sales $28,518,000 $25,326,000 $84,497,000 $70,281,000
Cost of sales 21,194,000 19,176,000 62,678 000 53,985,000
GROSS PROFIT 7,324,000 6,150,000 21,819,000 16,296,000
Selling expense 2,322,000 1,412,000 7,013,000 4,126,000
General and
administrative
expense 3,064,000 2,499,000 8,979,000 6,851,000
INCOME FROM
OPERATIONS 1,938,000 2,239,000 5,827,000 5,319,000
Interest expense 394,000 228,000 1,166,000 753,000
INCOME BEFORE
INCOME TAX 1,544,000 2,011,000 4,661,000 4,566,000
Income tax expense 633,000 819,000 1,911,000 1,848,000
NET INCOME $ 911,000 $1,192,000 $ 2,750,000 $ 2,718,000
Net income per
common share $.18 $.26 $ .54 $ .59
Weighted average
common and common
share equivalents
outstanding 5,183,000 4,612,000 5,104,000 4,580,000
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Nine Months Ended October 31
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $2,750,000 $2,718,000
Adjustments to reconcile net income
to net cash from operating activities:
Provision for depreciation and amortization 1,984,000 1,092,000
Deferred income taxes 390,000 (444,000)
Change in operating assets and liabilities:
Trade accounts receivable (2,305,000) (2,813,000)
Costs and estimated earnings in excess of
billings on uncompleted contracts (1,196,000) 1,234,000
Inventories (598,000) (2,204,000)
Prepaid expenses and other current assets (57,000) 721,000
Current liabilities 2,756,000 3,963,000
Other operating assets and liabilities (150,000) (245,000)
NET CASH FLOWS
FROM OPERATING ACTIVITIES 3,574,000 4,022,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash from
Industrial Revenue Bonds 977,000 862,000
Purchase of property and equipment (3,127,000) (2,039,000)
Acquisition of business (211,000) NET CASH FLOWS FROM
INVESTING ACTIVITIES (2,150,000) (1,388,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on capitalized lease obligations (348,000) (299,000)
Stock options exercised 91,000
Net repayments under revolving,
term and mortgage loans (140,000) (2,399,000)
NET CASH FLOWS FROM FINANCING ACTIVITIES (397,000) (2,698,000)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,027,000 (64,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,416,000 449,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,443,000 $ 385,000
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 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 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, 1997.
2. The results of operations for the quarters ended October 31, 1997 and 1996
are not necessarily indicative of the results to be expected for the full
year.
3. Inventories consisted of the following:
October 31, 1997 January 31, 1997
Raw materials $13,202,000 $12,443,000
Work in process 1,712,000 2,011,000
Finished goods 2,928,000 2,790,000
Total $17,842,000 $17,244,000
4. Supplemental cash flow information:
1997 1996
Cash paid during the year-to-date period for:
Interest $ 1,277,000 $ 600,000
Income taxes 1,376,000 999,000
Schedule of noncash financial activities:
Fixed assets acquired under
capital leases $ 269,000 $ 202,000
<PAGE>
5. Event subsequent to October 31, 1997:
On December 3, 1997, the Company acquired all the outstanding shares of
capital stock of TDC Filter Manufacturing, Inc. ("TDC"), together with its
offices and manufacturing facility, for an aggregate purchase price of
approximately $9,700,000, including $2,000,000 to repay the debt of TDC
(subject to adjustment). TDC net sales were approximately $11,400,000 for
its year ended March 31, 1997. TDC makes pleated filter cartridges for use
in air pollution control and gas turbine intake systems and supplies both
original equipment manufacturers and aftermarket users of cartridge
filtration media.
<PAGE>
MFRI, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
October 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 October 31
Net sales for the quarter ended October 31, 1997 decreased 5.7% from $8,977,000
to $8,467,000 from the comparable quarter one year ago. The decrease was the
result of lower export unit sales of filter bags, partially offset by higher
sales of bag-related products.
Gross profit as a percent of net sales decreased from 27.3% to 25.4% for the
current quarter compared to one year ago, due primarily to a less favorable
product mix and spreading fixed factory cost over lower production volume.
Selling expense for the quarter ended October 31, 1997 increased to $842,000
from $794,000 and to 9.9% of sales from 8.8% for the comparable quarter last
year. The increase is primarily attributable to additional staff for domestic
sales and marketing.
General and administrative expense for the quarter ended October 31, 1997
decreased to $505,000 from $540,000 for the comparable quarter a year ago,
primarily the result of decreased profit-related incentive compensation.
General and administrative expense as a percent of net sales remained unchanged
at 6.0%.
<PAGE>
Nine months ended October 31
Net sales for the nine months ended October 31, 1997 increased 1.7% from
$27,836,000 to $28,299,000 from the comparable period one year ago. The
increase was primarily the result of higher bag- related product sales across
most markets, partially offset by lower export unit sales of filter bags.
Gross profit as a percent of net sales decreased from 27.4% to 25.9%. This
decrease resulted primarily from a less favorable product mix and spreading
fixed factory costs over lower production volume.
Selling expenses increased from $2,415,000 to $2,752,000 and from 8.7% of sales
to 9.7% 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 nine months ended October 31, 1997
decreased to $1,576,000 from $1,614,000 a year ago and from 5.8% to 5.6% of net
sales, primarily the result of decreased profit-related incentive compensation.
Piping System Products Business
Three months ended October 31
Net sales decreased 14.0% from $16,349,000 to $14,055,000, due primarily to
delayed releases of sales orders in the current year and to unusually large
sales ($1,400,000) 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 22.6% to 22.7%, due
primarily to improved product mix and plant efficiency.
Selling expense increased from $619,000 to $706,000 and from 3.8% of sales to
5.0%, due primarily to higher commission expense and foreign subsidiary sales
staff.
General and administrative expense decreased from $1,364,000 to $1,217,000, due
primarily to reduced foreign subsidiary general and administrative expenses, but
increased from 8.3% of sales to 8.7%, due to a smaller sales base.
Nine months ended October 31
Net sales decreased 12.2% from $42,445,000 to $37,262,000, due primarily to
unusually large sales ($3,500,000) 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 20.4% to 22.4%, due
primarily to improved product mix and plant efficiency.
Selling expenses increased from $1,712,000 to $1,949,000 and from 4.0% to 5.2%
of sales, due primarily to higher commission expense and foreign sales staff.
General and administrative expense was virtually unchanged at $3,394,000
compared to $3,423,000 a year ago, but increased from 8.1% of sales to 9.1%,
due to a smaller sales base.
Industrial Process Cooling Equipment Business
Three months ended October 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 16.7% from $5,138,000 to $5,996,000, primarily in the sales
of portable chillers and temperature control units.
Gross profit as a percent of net sales increased from 31.5% to 33.1%. The
increase resulted primarily from manufacturing efficiencies and a more favorable
product mix.
Selling expenses increased from $681,000 to $774,000; selling expenses as a
percent of net sales decreased from 13.3% to 12.9%. The dollar increase is
due primarily to increased commission expense from the higher sales volume.
General and administrative expenses decreased from $537,000 to $532,000 and from
10.5% to 8.9% of sales. The decrease is primarily due to lower MIS expense,
partially offset by increased engineering sales support expenses.
Nine months ended October 31
Net sales increased 26.3% from $14,998,000 to $18,936,000, primarily due to
increased sales of plant circulating systems, portable chillers and temperature
control units.
Gross profit as a percent of sales decreased from 32.6% to 32.4%. The decrease
is due primarily to a less favorable product mix.
Selling expenses increased from $2,005,000 to $2,313,000; selling expenses as a
percent of net sales decreased from 13.4% to 12.2%. The increased dollar amount
is primarily due to increased commission expenses incurred based on the higher
sales volume and increased advertising expense.
General and administrative expenses decreased from $1,598,000 to $1,567,000;
general and administrative expense as a percent of net sales decreased from
10.7% to 8.3%. The decrease is due primarily to lower MIS expense, partially
offset by increased engineering sales support expenses.
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense. Comparisons described
below are to last year as reported, and are not proforma for the Industrial
Process Cooling Equipment Business acquisition.
<PAGE>
Three months ended October 31
General and administrative expense increased from $594,000 to $809,000; general
and administrative expense as a percent of consolidated net sales increased from
2.3% to 2.8%. 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.
Interest expense increased from $228,000 to $394,000, due primarily to higher
borrowings to support the acquisition of the Industrial Process Cooling
Equipment Business.
Nine months ended October 31
General and administrative expense increased from $1,707,000 to $2,441,000;
general and administrative expense as a percent of consolidated net sales
increased from 2.4% 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.
Interest expense increased from $753,000 to $1,166,000, due primarily to higher
borrowings to support the acquisition of the Industrial Process Cooling
Equipment Business.
Average Shares Outstanding
Weighted average common and common share equivalents outstanding increased by
571,000 shares (12.4%) for the three months ended Ocbtober 31, 1997 and by
524,000 shares (11.4%) for the nine months ended October 31, 1997, due primarily
to the net issuance of 406,000 shares of common stock in connection with the
acquisition of the Industrial Process Cooling Equipment Business at
December 31, 1996.
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 $2,903,000 at October 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 landwith 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.
Prior to December 30, 1996, working capital and investment needs of the Company
were 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"), which was increased to $12 million subsequent to October 31, 1997, at
the time of completing the acquisition of TDC Filter Manufacturing, Inc.
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
amount was borrowed under the Credit Line as of October 31, 1997.
At October 31, 1997 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
None
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 -- The Company filed a Current Report on Form 8-K,
dated as of August 11, 1997, reporting Item 5 - Other Events and Item 7
- Financial Statements Pro Forma Financial Information and Exhibits.
<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 12, 1997 /s/ David Unger
David Unger
Chairman of the Board of Directors
Date: December 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 Nine Months
Ended October 31, Ended October 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income $ 911,000 $ 1,192,000 $2,750,000 $2,718,000
Weighted average number of
common shares outstanding:
Shares outstanding from
beginning of period 4,969,000 4,524,000 4,962,000 4,524,000
Issuances of common stock 5,000 26,000 6,000 9,000
Common share equivalents:
Assumed exercise of common
stock options 209,000 62,000 136,000 47,000
Weighted average common and
common share equivalents 5,183,000 4,612,000 5,104,000 4,580,000
Net income per share $0.18 $0.26 $0.54 $0.59
</TABLE>
<PAGE>
Exhibit 11
<TABLE>
MFRI, Inc. and Subsidiaries
Computation of Fully Diluted Earnings per Common Share
<CAPTION>
Three Months Nine Months
Ended October 31, Ended October 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income $ 911,000 $ 1,192,000 $2,750,000 $2,718,000
Weighted average number of
common shares outstanding:
Shares outstanding from
beginning of period 4,969,000 4,524,000 4,962,000 4,524,000
Issuances of common stock 5,000 26,000 6,000 9,000
Common share equivalents:
Assumed exercise of common
stock options 223,000 74,000 181,000 66,000
Weighted average common and
common share equivalents 5,197,000 4,624,000 5,149,000 4,599,000
Net income per share $0.18 $0.26 $0.53 $0.59
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1997 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-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 4443000
<SECURITIES> 0
<RECEIVABLES> 21221000
<ALLOWANCES> 0
<INVENTORY> 17842000
<CURRENT-ASSETS> 50496000
<PP&E> 23457000
<DEPRECIATION> 6521000
<TOTAL-ASSETS> 81163000
<CURRENT-LIABILITIES> 20147000
<BONDS> 23716000
0
0
<COMMON> 50000
<OTHER-SE> 35648000
<TOTAL-LIABILITY-AND-EQUITY> 81163000
<SALES> 84497000
<TOTAL-REVENUES> 84497000
<CGS> 62678000
<TOTAL-COSTS> 62678000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1166000
<INCOME-PRETAX> 4661000
<INCOME-TAX> 1911000
<INCOME-CONTINUING> 2750000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2750000
<EPS-PRIMARY> .54
<EPS-DILUTED> .53
</TABLE>
