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, 1998
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18370
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MFRI, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3922969
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7720 Lehigh Avenue Niles, Illinois 60714
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(Address of principal executive offices) (Zip code)
(847) 966-1000
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Registrant's telephone number, including area code)
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(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 11, 1998, there were 4,922,364 shares of the Registrant's
common stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying interim condensed consolidated financial statements of
MFRI, Inc. and subsidiaries (the "Company") are unaudited, but include all
adjustments which the Company's management considers necessary to present fairly
the financial position and results of operations for the periods presented.
These adjustments consist of normal recurring adjustments. 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 on Form 10-K for the year ended January 31, 1998. The results of
operations for the quarter and nine months ended October 31, 1998 are not
necessarily indicative of the results to be expected for the full year 1998.
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share information)
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
---------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $32,418 $28,518 $95,142 $84,497
Cost of sales 24,428 21,194 70,955 62,678
------- ------- ------- -------
Gross profit 7,990 7,324 24,187 21,819
Selling expense 2,895 2,322 8,441 7,013
General and administrative expense 3,455 3,064 10,729 8,979
------- ------- ------- -------
Income from operations 1,640 1,938 5,017 5,827
Interest expense - net 705 394 1,951 1,166
------- ------- ------- -------
Income before income taxes 935 1,544 3,066 4,661
Income taxes 389 633 1,241 1,911
------- ------- ------- -------
Net income $ 546 $ 911 $ 1,825 $ 2,750
======= ======= ======= =======
Net income per common share - basic $0.11 $0.18 $0.37 $0.55
Net income per common share - diluted $0.11 $0.18 $0.36 $0.54
Weighted average common shares outstanding 4,981 4,974 4,982 4,968
Weighted average common shares outstanding
assuming full dilution 5,006 5,180 5,074 5,106
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except per share information)
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,745 $ 976
Trade accounts receivable, net 23,156 21,641
Costs and estimated earnings in excess
of billings on uncompleted contracts 3,855 3,489
Deferred income taxes 2,587 2,308
Inventories 21,634 19,595
Prepaid expenses and other current assets 2,621 2,758
------- -------
Total current assets 55,598 50,767
Restricted Cash from Bond Proceeds - 2,929
Property, Plant and Equipment, At Cost 36,765 30,028
Less Accumulated Depreciation 8,849 6,998
------- -------
Property, plant and equipment, net 27,916 23,030
Other Assets:
Goodwill, net 12,434 12,399
Other, net 3,857 3,816
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Total other assets 16,291 16,215
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Total Assets $99,805 $92,941
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Drafts payable $ 6,104 $ 1,882
Accounts payable 6,088 7,180
Commissions payable 6,442 5,821
Current maturities of long-term debt 561 573
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,092 461
Other current liabilities 3,589 3,544
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Total current liabilities 23,876 19,461
Long-Term Liabilities:
Long-term debt, less current maturities 36,006 35,275
Deferred income taxes 1,507 1,453
Other 893 711
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Total long-term liabilities 38,406 37,439
Stockholders' Equity:
Common stock, $.01 par value, authorized-15,000
shares; outstanding-4,922 and 4,981 shares
at October 31 and January 31, respectively 49 50
Additional paid-in capital 21,390 21,864
Retained earnings 16,061 14,236
Accumulated other comprehensive income 23 (109)
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Total stockholders' equity 37,523 36,041
------- --------
Total Liabilities and Stockholders' Equity $99,805 $92,941
======= =======
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<CAPTION>
Nine Months Ended
October 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,825 $ 2,750
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 2,455 1,984
Deferred income taxes (225) 390
Change in operating assets and liabilities:
Trade accounts receivable (1,492) (2,305)
Costs and estimated earnings in excess of
billings on uncompleted contracts (366) (1,196)
Inventories (1,564) (598)
Prepaid expenses and other current assets (373) (57)
Current liabilities 4,292 2,756
Other operating assets and liabilities (376) (150)
-------- --------
Net Cash Flows from Operating Activities 4,176 3,574
-------- --------
Cash Flows from Investing Activities:
Change in restricted cash from
Industrial Revenue Bonds 2,929 977
Net purchases of property and equipment (5,308) (3,127)
Acquisition of business, net of cash acquired (1,725) -
-------- --------
Net Cash Flows from Investing Activities (4,104) (2,150)
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Cash Flows from Financing Activities:
Payments on capitalized lease obligations (313) (348)
Stock options exercised 53 91
Proceeds from long-term debt, net 957 (140)
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Net Cash Flows from Financing Activities 697 (397)
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Net Increase in Cash and Cash Equivalents 769 1,027
Cash and Cash Equivalents - Beginning of Period 976 3,416
-------- --------
Cash and Cash Equivalents - End of Period $ 1,745 $ 4,443
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
<TABLE>
1. Inventories consisted of the following:
(In thousands)
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
<S> <C> <C>
Raw materials $16,224 $14,296
Work in process 2,094 1,557
Finished goods 3,316 3,742
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Total $21,634 $19,595
======= =======
</TABLE>
2. Supplemental cash flow information:
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Cash paid during the quarter for:
Interest, net of capitalized amounts $ 1,670 $ 1,277
Income taxes, net of refunds received 798 1,376
Schedule of noncash financial activities:
Fixed assets acquired under capital leases $ - $ 269
Shares returned from escrow due to
settlement of legal contingencies
related to the merger of
Midwesco, Inc. into MFRI, Inc. 527
Purchase of business:
Fair value of assets acquired (net of
cash received) $ 1,768
Cost in excess of net assets acquired 352
Cash paid (1,725)
Liability under noncompete agreement (279)
--------
Liabilities assumed $ 116
========
</TABLE>
<PAGE>
3. On June 1, 1998, the Company acquired certain assets and liabilities of
Boe-Therm A/S ("Boe-Therm"), including inventory and manufacturing
facilities, for an aggregate purchase price of $2,004,000. Financing
was provided by borrowings under the Company's unsecured line of
credit, loans obtained from a Danish bank and a noncompete agreement
which is to be paid ratably over a period of four years. Boe-Therm,
located in Assens, Denmark, is a manufacturer of liquid chillers for
removing heat from industrial processes. Boe-Therm's third-party sales
for the five months ended October 31, 1998 were $1,600,000.
The acquisition has been accounted for as a purchase and the accounts
of Boe-Therm have been included in the consolidated financial
statements since the date of acquisition. The purchase price was
allocated to the assets and liabilities acquired, based on their
estimated fair values. The excess ($352,000) of the purchase price over
the fair value of the net assets acquired has been recorded as goodwill
and is being amortized over a 25 year period on the straight-line
basis.
4. The basic weighted average shares reconcile to fully diluted weighted average
shares as follows:
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ -----------------
1998 1997 1998 1997
----- ----- ------ ------
<S> <C> <C> <C> <C>
Net income $ 546 $ 911 $1,825 $2,750
===== ===== ====== ======
Basic weighted average common
shares outstanding 4,981 4,974 4,982 4,968
Dilutive effect of stock options 25 206 92 138
----- ----- ------ ------
Weighted average common shares
outstanding assuming full
dilution 5,006 5,180 5,074 5,106
===== ===== ====== ======
Net income per common share - basic $0.11 $0.18 $0.37 $0.55
Net income per common share - diluted $0.11 $0.18 $0.36 $0.54
</TABLE>
The weighted average number of stock options not included in the
computation of diluted earnings per share of common stock because the
options exercise price exceeded the average market price of the common
shares were 746,000 and 0 for the three months ended October 31, 1998
and 1997, respectively, and 299,000 and 44,000 for the nine months
ended October 31, 1998 and 1997, respectively. These options were
outstanding at the end of each of the respective periods.
<PAGE>
5. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," as of February 1,
1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. This standard expands or
modifies current disclosures and, accordingly, had no impact on the
Company's reported financial position, results of operations and cash
flows.
The components of comprehensive income, net of tax, were as follows:
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ------ ------
<S> <C> <C> <C> <C>
Net income $546 $911 $1,825 $2,750
Change in foreign currency
translation adjustments 119 37 132 3
---- ---- ------ ------
Comprehensive income $665 $948 $1,957 $2,753
==== ==== ====== ======
</TABLE>
Accumulated other comprehensive income presented on the accompanying
condensed consolidated balance sheet consists of accumulated foreign
currency translation adjustments.
6. Event subsequent to October 31, 1998
On November 2, 1998, the Company acquired all the outstanding shares of
capital stock of Nordic Air Filtration A/S ("Nordic Air") for an
aggregate purchase price of approximately $2,000,000. Nordic Air,
located in Naskov, Denmark, is a manufacturer of pleated air filtration
products. Sales of Nordic Air for the most recent fiscal year which
ended on June 30, 1998 were approximately $2,300,000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
October 31, 1998
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
MFRI, Inc.
Three months ended October 31
Net sales of $32,418,000 for the quarter ended October 31, 1998 increased 13.7
percent from $28,518,000 for the comparable quarter last year. Gross profit of
$7,990,000 or 24.6 percent of net sales in the current year quarter increased
9.1 percent from $7,324,000 or 25.7 percent of net sales in the prior year
quarter. These dollar increases were primarily the result of including the
operating results of Boe-Therm A/S ("Boe-Therm"), acquired in June 1998, and TDC
Filter Manufacturing, Inc. ("TDC"), acquired in December 1997, in the current
year quarter. The accounts of these businesses were not included in the accounts
of the Company prior to their respective dates of acquisition.
Net income decreased 40.1 percent from $911,000 or $0.18 per common share
(basic) in the prior year to $546,000 or $0.11 per common share (basic) in the
current year. The decline in margins as a percentage of net sales coupled with
higher selling, general and administrative expenses and higher interest costs
were the main reasons for the decrease in net income for the quarter.
Nine months ended October 31
Net sales of $95,142,000 for the nine months ended October 31, 1998 increased
12.6 percent from $84,497,000 for the comparable period last year. Gross profit
of $24,187,000 or 25.4 percent of net sales in the current year increased 10.9
percent from $21,819,000 or 25.8 percent of net sales in the prior year. Net
sales and gross profit in terms of dollars increased in all business segments
compared to the prior year, primarily as a result of including the operating
results of Boe-Therm and TDC subsequent to their respective acquisition dates.
<PAGE>
Net income decreased 33.6 percent from $2,750,000 or $0.55 per common share
(basic) in the prior year to $1,825,000 or $0.37 per common share (basic) in the
current year. This decrease was primarily due to legal and settlement costs
related to the disposition of the last lawsuit acquired in the December 1996
merger of Midwesco, Inc. into MFRI, Inc. (the "Midwesco Merger") and legal
expenses related to the defense of patent infringement lawsuits, coupled with
increased selling, general and administrative expenses associated with the
acquisitions of TDC and Boe-Therm, higher interest costs and the write-off of a
foreign subsidiary's bad debt in the current year.
Filtration Products Business
Three months ended October 31
Net sales for the quarter ended October 31, 1998 increased 39.0 percent to
$11,771,000 from $8,467,000 in the comparable quarter one year ago. This
increase is the result of higher sales of filter elements for baghouse and
cartridge collectors, primarily due to the acquisition of TDC in December 1997.
Gross profit as a percent of net sales decreased from 25.4 percent in the prior
year to 23.2 percent, primarily as a result of competitive pricing pressures in
the marketplace and manufacturing inefficiencies.
Selling expense for the quarter ended October 31, 1998 increased to $1,208,000
or 10.3 percent of net sales from $842,000 or 9.9 percent of net sales for the
comparable quarter last year. These increases are attributable to additional
sales resources, mainly as a result of the TDC acquisition.
General and administrative expense increased to $687,000 or 5.8 percent of net
sales in the current year quarter from $505,000 or 6.0 percent of net sales for
the comparable period one year ago. These changes are due to additional
administrative resources and expenses, primarily as a result of the TDC
acquisition, partially offset by lower management incentive compensation.
Nine months ended October 31
Net sales for the nine months ended October 31, 1998 increased 27.1 percent to
$35,973,000 from $28,299,000 in the comparable period last year. This increase
is the result of higher sales of filter elements for cartridge collectors
primarily due to the TDC acquisition.
Gross profit for the nine months as a percent of net sales decreased from 25.9
percent in the prior year to 23.6 percent, primarily as a result of competitive
pricing pressures in the marketplace, unusually high medical insurance claims
costs and manufacturing inefficiencies.
Selling expense for the nine months ended October 31, 1998 increased to
$3,640,000 or 10.1 percent of net sales from $2,752,000 or 9.7 percent of net
sales for the comparable period last year. This increase is attributable to
additional sales resources, mainly as a result of the TDC acquisition.
<PAGE>
General and administrative expense increased to $2,187,000 or 6.1 percent of net
sales in the current year from $1,576,000 or 5.6 percent of net sales for the
comparable period one year ago. These changes are due to additional
administrative resources and expenses, primarily as a result of the TDC
acquisition, partially offset by lower management incentive compensation.
Piping System Products Business
Three months ended October 31
Net sales decreased 3.0 percent to $13,629,000 for the quarter ended October
31, 1998 from $14,055,000 in the prior year quarter, primarily due to lower
sales of a foreign subsidiary.
Gross profit as a percent of net sales decreased from 22.7 percent in the prior
year to 21.7 percent, mainly as a result of competitive pressures in the
marketplace and lower margins on sales of oil and gas gathering flowlines, as
the Company began operations at the New Iberia, Louisiana facility during the
quarter.
Selling expense increased from $706,000 or 5.0 percent of net sales to $758,000
or 5.6 percent of net sales due to increased sales staffing for the
international and oil and gas markets.
General and administrative expense decreased from $1,218,000 in the prior year
quarter to $1,194,000 in the current year quarter primarily due to lower
management incentive compensation. General and administrative expense as a
percentage of sales increased from 8.7 percent of net sales in the prior year
quarter to 8.8 percent of net sales in the current year due to the expense being
spread over a smaller sales base.
Nine months ended October 31
Net sales increased 1.7 percent to $37,900,000 for the nine months ended October
31, 1998 from $37,262,000 in the prior year comparable period mainly due to
introduction of the PROtherm product line for both land and sub-sea applications
during the current year.
Gross profit as a percent of net sales increased from 22.4 percent in the prior
year to 22.6 percent, mainly resulting from favorable product mix of sales and
manufacturing efficiencies in the domestic operations.
Selling expense increased from $1,949,000 or 5.2 percent of net sales to
$2,111,000 or 5.6 percent of net sales, largely due to increased staffing for
international and oil and gas sales.
General and administrative expense increased from $3,395,000 or 9.1 percent of
net sales in the prior year to $4,038,000 or 10.7 percent of net sales in the
current year primarily due to increased engineering costs; legal and settlement
costs related to the disposition of the last lawsuit acquired in the Midwesco
Merger; legal expenses related to the defense of a patent infringement lawsuit
and the write-off of a foreign subsidiary's bad debt.
<PAGE>
Industrial Process Cooling Equipment Business
Three months ended October 31
Net sales of $7,018,000 for the quarter ended October 31, 1998 increased 17.0
percent from $5,996,000 for the comparable quarter in the prior year, mainly due
to the inclusion of the operating results of Boe-Therm, which was acquired in
June 1998.
Gross profit as a percent of net sales decreased from 33.1 percent for the prior
year quarter to 32.7 percent for the comparable period in the current year,
primarily due to a less favorable product mix of sales.
Selling expenses increased from $774,000 or 12.9 percent of net sales in the
prior year to $929,000 or 13.2 percent of net sales in the current year.
Increased sales commissions and the inclusion of the operating results of
Boe-Therm were the main reasons for the increase.
General and administrative expenses increased from $532,000 or 8.9 percent of
net sales in the prior year quarter to $737,000 or 10.5 percent of net sales in
the current year. This increase was primarily due to increased engineering and
salaries expenses compared to the prior year, coupled with the inclusion of the
operating results of Boe-Therm in the current year quarter.
Nine months ended October 31
Net sales of $21,269,000 for the nine months ended October 31, 1998 increased
12.3 percent from $18,936,000 for the comparable period in the prior year,
mainly due to higher sales of portable chillers and temperature controllers and
the inclusion of the operating results of Boe-Therm in the current year.
Gross profit as a percent of net sales increased from 32.4 percent last year to
33.6 percent in the current year, primarily due to a more favorable product mix
of sales and increased manufacturing efficiencies.
Selling expenses increased from $2,312,000 last year to $2,690,000 and from 12.2
percent to 12.6 percent of net sales. Increased commission expense and the
inclusion of Boe-Therm marketing and advertising expenses were the main reasons
for this increase.
General and administrative expenses increased from $1,567,000 or 8.3 percent of
net sales to $1,982,000 or 9.3 percent of net sales. This increase was primarily
due to increased management information systems, engineering and salaries
expenses compared to the prior year and the inclusion of the operating results
of Boe-Therm subsequent to the date of acquisition.
<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 expense increased slightly to $837,000 or 2.6 percent
of net sales in the current year quarter from $809,000 or 2.8 percent of net
sales for the comparable period in the prior year. Higher occupancy, data
processing and employee-related expenses were partially offset by lower
profit-based incentive compensation and stock-related expenses.
Interest expense increased from $394,000 in the prior year to $705,000 in the
current year, due to higher borrowings in the current year quarter as a result
of the acquisition of TDC in December 1997 and Boe-Therm in June 1998.
Nine months ended October 31
General and administrative expenses increased from $2,441,000 or 2.9 percent of
net sales in the prior year to $2,522,000 or 2.7 percent of net sales in the
current year. The dollar increase was primarily due to higher occupancy and
collection expenses in the current year, partially offset by decreases in data
processing expenses and profit-based incentive compensation.
Interest expense increased from $1,166,000 in the prior year to $1,951,000 in
the current year, due to higher borrowings in the current year as a result of
the acquisition of TDC in December 1997 and Boe-Therm in June 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Operating Cash Flow
Cash and cash equivalents as of October 31, 1998 were $1,745,000 as compared to
$976,000 at January 31, 1998. Net cash inflows of $4,176,000 generated from
operating activities, $2,929,000 received from the restricted cash of the
Industrial Revenue Bonds, $957,000 net proceeds of long-term debt and $53,000
proceeds from stock options exercised were used to fund purchases of property,
plant and equipment of $5,308,000, the business acquisition of $1,725,000 and
payments on capitalized lease obligations of $313,000.
Net cash provided by operating activities was $4,176,000 for the nine months
ended October 31, 1998, mainly due to earnings for the nine months and the
increase in current liabilities, primarily drafts payable, partially offset by
increases in accounts receivable and inventory. For the nine months ended
October 31, 1997, net cash provided by operating activities was $3,574,000,
primarily as a result of strong earnings results for the nine months and the
increase in current liabilities, partially offset by increases in accounts
receivable and costs and estimated earnings in excess of billings on uncompleted
contracts.
<PAGE>
Net cash used for investing activities for the nine months ended October 31,
1998 was $4,104,000 versus $2,150,000 for the same period one year ago. Capital
expenditures increased from $3,127,000 in the prior year to $5,308,000 in the
current year. This increase is primarily due to costs incurred to construct
equipment for the manufacturing facility at New Iberia, Louisiana for which the
Company has a commitment from a third party to provide operating lease financing
of $1,345,000 upon completion. (See Financing.) In addition, the Company used
$1,725,000 for the acquisition of a business in the current year, net of cash
acquired. Cash received from the restricted cash of the Industrial Revenue Bonds
in the current year was $2,929,000 compared to $977,000 during the comparable
period one year ago.
Net cash obtained from financing activities for the nine months ended October
31, 1998 was $697,000 while cash used for financing activities for the nine
months ended October 31, 1997 was $397,000. In the current year, the Company
obtained $957,000 from net proceeds of long-term debt and $53,000 from stock
options exercised and utilized $313,000 to repay capitalized lease obligations.
The Company used $140,000 to repay long-term debt, net; used $348,000 to repay
capitalized lease obligations and received $91,000 from exercises of stock
options in the prior year. In addition, the Company received 66,890 shares of
common stock held in the special escrow established as part of the Midwesco
Merger to indemnify MFRI, Inc. for legal and settlement costs related to three
lawsuits acquired in the Midwesco Merger in the event that such costs exceeded
the $400,000 reserve established at the time of the merger.
The Company's current ratio at October 31, 1998 was 2.3 to 1 versus 2.6 to 1
at January 31, 1998. Debt to total capitalization decreased to 49.4 percent
from 49.9 percent at January 31, 1998.
Financing
On September 14, 1995, the filtration products business in Winchester, Virginia
received $3,150,000 proceeds of Industrial Revenue Bonds. In addition, the
piping systems products business in Lebanon, Tennessee received $3,150,000
proceeds of Industrial Revenue Bonds on October 18, 1995. Such proceeds were
available for capital expenditures related to manufacturing capacity expansions
and efficiency improvements during a three-year period which commenced in the
fourth quarter of 1995 and ended during the Company's fiscal quarter ended
October 31, 1998. Each bond indenture established a trusteed project fund for
deposit of the bond proceeds. The trustee was authorized to make disbursements
from the project fund upon requisition from the Company to pay costs of capital
expenditures which complied with the requirements of the loan agreement for each
bond. Pending such disbursements, the trustee invested the balance of the
project fund in investments defined by the indenture and limited by applicable
law. At the end of the three-year period, $997,000 of the invested funds had not
been disbursed and have been used to reduce the principal portion of the bonds.
These bonds are fully secured by bank letters of credit, which the Company
expects to renew, reissue or extend prior to each expiration date during the
term of the bonds. During the third quarter of 1998, the expirations of the
letters of credit were extended to the third quarter of 1999. The bonds bear
interest at a variable rate, which approximates five percent per annum,
including letters of credit and remarketing fees.
<PAGE>
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 Midwesco
Filter property in Winchester, Virginia. The purchase was financed 80% by a
seven-year mortgage bearing interest at 8.38% and 20% by the industrial revenue
bonds described above.
On December 15, 1996, the Company entered into a private placement of
$15,000,000 of 7.21 percent unsecured senior notes due 2007 (the "Notes due
2007"). The Notes due 2007 require principal payments beginning in the year
ended January 31, 2001, and continuing annually thereafter, resulting in a
seven-year average life.
On September 17, 1998, the Company entered into a private placement of
$10,000,000 of 6.97 percent unsecured senior notes due 2008 (the "Notes due
2008"). The Notes due 2008 require principal payments beginning in the year
ended January 31, 2003, and continuing annually thereafter, resulting in a
seven-year average life. Proceeds of the Notes due 2008 were used to reduce the
Company's borrowings under the unsecured line of credit described below.
The Company entered into an unsecured credit agreement with a bank on December
19, 1996. Under the terms of the agreement as most recently amended, the Company
may borrow up to $6,000,000 under a revolving line of credit which matures on
March 31, 2000. Interest rates are based on one of two options selected by the
Company at the time of each borrowing - the prime rate or the LIBOR rate plus a
margin for the term of the loan. At October 31, 1998, the prime rate was 8.0
percent and the margin added to the LIBOR rate, which is redetermined each
quarter based on the Company's interest coverage ratio, was 1.25 percent. The
Company had borrowed $400,000 under the revolving line of credit at October 31,
1998. Additionally, $702,000 was drawn under the agreement as letters of credit,
principally to guarantee performance to third parties resulting from various
trade activities and to guarantee performance of certain repairs and payment of
property taxes and insurance related to the mortgage note secured by the
manufacturing facility and equipment located in Cicero, Illinois described in
more detail below. The loan agreement contains certain financial covenants. As
of October 31, 1998, the Company was not in compliance with two such financial
covenants. The Company has obtained a waiver for such non-compliance.
On June 1, 1998, the Company obtained two loans from a Danish bank to partially
finance the acquisition of Boe-Therm. The first loan in the amount of 2,750,000
Danish krone ("DKK") (approximately $400,000) is secured by the machinery and
equipment of Boe-Therm, bears interest at 5.80 percent and has a term of five
years. The second loan in the amount of 4,500,000 DKK (approximately $650,000)
is secured by the land and building of Boe-Therm, bears interest at 6.48 percent
and has a term of twenty years. In addition, the Company has in place an
overdraft facility with this Danish bank, whereby Boe-Therm may borrow up to
1,000,000 DKK (approximately $150,000) at a variable rate, which was 7.00
percent at the inception of the agreement. (Please note that the U.S. dollar
equivalents of the above loans were computed using the exchange rate at the date
of acquisition.)
<PAGE>
On June 30, 1998, the Company borrowed $1,400,000 under a mortgage note secured
by the manufacturing facility and equipment in Cicero, Illinois acquired in the
TDC acquisition. The loan bears interest at 6.76 percent and the term of the
loan is ten years with an amortization schedule of 25 years.
During the quarter ended April 30, 1998, the Company began construction of
equipment for a manufacturing facility in New Iberia, Louisiana, for the
production of oil and gas gathering flowlines and low temperature district
heating products. The Company has a commitment from a lender to provide
operating lease financing of $1,345,000 for this equipment upon completion. At
October 31, 1998, expenditures for the equipment were included in construction
in process, a component of property, plant and equipment in the Condensed
Consolidated Balance Sheet.
YEAR 2000
Certain computer systems with date-sensitive programs may not properly recognize
the year 2000 and may, as a result, create unreliable data or fail to operate at
all in the year 2000 and thereafter. Such occurrences could have a material
adverse effect on the Company's results of operations and financial condition.
Accordingly, the Company is assessing its financial and operating systems for
the presence of such deficiencies and is developing and executing detailed
corrective plans. The Company is also communicating with significant suppliers
of goods and services and with customers (collectively, "Third Parties") to
assess its exposure to their potential year 2000 issues. Finally, the Company
is assessing its products for the presence of technology which might adversely
affect those products and the customers to whom they have been delivered. The
Company has an active committee lead by senior management to coordinate these
efforts. Although there can be no assurances, based on current assessments,
Management expects the Company's year 2000 issues to be identified and corrected
before the year 2000, and does not expect the costs of correction to have a
material adverse effect on the Company's results of operations or financial
condition. All internal systems are expected to be corrected and tested by
April 30, 1999. Appropriate assurances have been received from most Third
Parties, with the remainder expected by April 30, 1999. Although the Company is
still assessing the need for contingency plans, current assessment indicates no
need for such plans.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 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 11, 1998 /s/ David Unger
--------------------------------------------
David Unger
Chairman of the Board of Directors
Date: December 11, 1998 /s/ Michael D. Bennett
--------------------------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1998 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-31-1999
<PERIOD-START> JAN-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 1745000
<SECURITIES> 0
<RECEIVABLES> 23156000
<ALLOWANCES> 0
<INVENTORY> 21634000
<CURRENT-ASSETS> 55598000
<PP&E> 36765000
<DEPRECIATION> 8849000
<TOTAL-ASSETS> 99805000
<CURRENT-LIABILITIES> 23876000
<BONDS> 36006000
0
0
<COMMON> 49000
<OTHER-SE> 37474000
<TOTAL-LIABILITY-AND-EQUITY> 99805000
<SALES> 95142000
<TOTAL-REVENUES> 95142000
<CGS> 70955000
<TOTAL-COSTS> 70955000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1951000
<INCOME-PRETAX> 3066000
<INCOME-TAX> 1241000
<INCOME-CONTINUING> 1825000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1825000
<EPS-PRIMARY> .37
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</TABLE>
