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, 1998
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 11, 1998, there were 4,983,754 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 to stockholders for the year ended January 31, 1998. The results of
operations for the quarter ended April 30, 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 April 30,
1998 1997
<S> <C> <C>
Net sales $29,990 $25,764
Cost of sales 22,228 19,514
-------- --------
Gross profit 7,762 6,250
Selling expense 2,823 2,127
General and administrative expense 3,463 2,749
-------- --------
Income from operations 1,476 1,374
Interest expense - net 576 378
-------- --------
Income before income taxes 900 996
Income taxes 360 408
-------- --------
Net income $ 540 $ 588
======== ========
Net income per common share - basic $0.11 $0.12
Net income per common share - diluted $0.11 $0.12
Weighted average common shares outstanding 4,981 4,964
Weighted average common shares outstanding
assuming full dilution 5,108 5,033
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>
April 30, January 31,
1998 1998
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 552 $ 976
Trade accounts receivable, net 22,025 21,641
Costs and estimated earnings in excess
of billings on uncompleted contracts 4,453 3,489
Deferred income taxes 2,538 2,308
Inventories 20,613 19,595
Prepaid expenses and other current assets 2,262 2,758
--------- ---------
Total current assets 52,443 50,767
Restricted Cash from Bond Proceeds 1,878 2,929
Property, Plant and Equipment, At Cost 31,012 30,028
Less Accumulated Depreciation 7,589 6,998
--------- ---------
Property, plant and equipment, net 23,423 23,030
Other Assets:
Goodwill, net 12,306 12,399
Other, net 3,773 3,816
--------- ---------
Total other assets 16,079 16,215
--------- ---------
Total Assets $93,823 $92,941
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Drafts payable $ 4,132 $ 1,882
Accounts payable 8,033 7,180
Commissions payable 5,637 5,821
Current maturities of long-term debt 371 573
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,204 461
Other current liabilities 3,479 3,544
--------- ---------
Total current liabilities 22,856 19,461
Long-Term Liabilities:
Long-term debt, less current maturities 32,264 35,275
Deferred income taxes 1,448 1,453
Other 666 711
--------- ---------
Total long-term liabilities 34,378 37,439
Stockholders' Equity:
Common stock, $ .01 par value, authorized -
15,000 shares; outstanding - 4,981 shares 50 50
Additional paid-in capital 21,864 21,864
Retained earnings 14,776 14,236
Accumulated other comprehensive income (101) (109)
---------- ----------
Total stockholders' equity 36,589 36,041
--------- ---------
Total Liabilities and Stockholders' Equity $93,823 $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>
Three Months Ended April 30,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 540 $ 588
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 802 661
Deferred income taxes (235) (221)
Change in operating assets and liabilities:
Trade accounts receivable (384) 646
Costs and estimated earnings in excess of billings
on uncompleted contracts (964) (1,686)
Inventories (1,018) (1,159)
Prepaid expenses and other current assets 496 (23)
Current liabilities 3,596 2,094
Other operating assets and liabilities (65) (42)
---------- ----------
Net Cash Flows from Operating Activities 2,768 858
---------- ----------
Cash Flows from Investing Activities:
Decrease (increase) in restricted cash from
Industrial Revenue Bonds 1,051 (37)
Net purchases of property and equipment (1,030) (1,308)
---------- -----------
Net Cash Flows from Investing Activities 21 (1,345)
---------- -----------
Cash Flows from Financing Activities:
Payments on capitalized lease obligations (112) (98)
Stock options exercised - 15
Proceeds from (repayment of) long-term debt (3,101) 204
---------- -----------
Net Cash Flows from Financing Activities (3,213) 121
---------- -----------
Net Decrease in Cash and Cash Equivalents (424) (366)
Cash and Cash Equavalents - Beginning of Period 976 3,416
---------- -----------
Cash and Cash Equivalents - End of Period $ 552 $ 3,050
========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
<TABLE>
1. Inventories consisted of the following:
(In thousands)
<CAPTION>
April 30, January 31,
1998 1998
<S> <C> <C>
Raw materials $15,897 $14,296
Work in process 1,964 1,557
Finished goods 2,752 3,742
------- -------
Total $20,613 $19,595
======= =======
</TABLE>
<TABLE>
2. Supplemental cash flow information:
(In thousands)
<CAPTION>
Three Months Ended April 30,
1998 1997
<S> <C> <C>
Cash paid during the quarter for:
Interest, net of capitalized amounts $ 218 $ 269
Income taxes, net of refunds received 30 278
Schedule of noncash financial activities:
Fixed assets acquired under capital leases $ - $ 347
</TABLE>
<TABLE>
3. The basic weighted average shares reconcile to fully diluted weighted average
shares as follows:
(In thousands)
<CAPTION>
Three Months Ended April 30,
1998 1997
<S> <C> <C>
Net Income $ 540 $ 588
======= =======
Basic weighted average common shares outstanding 4,981 4,964
Dilutive effect of stock options 127 69
------- -------
Weighted average common shares
outstanding assuming full dilution 5,108 5,033
======= =======
Net income per common share - basic $0.11 $0.12
Net income per common share - diluted $0.11 $0.12
</TABLE>
At April 30, 1998 and 1997, 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 75,000 and 131,200,
respectively. These options were outstanding at the end of each of the
respective quarters.
<PAGE>
4. 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 April 30,
1998 1997
<S> <C> <C>
Net Income $ 540 $ 588
Change in foreign currency translation adjustments 8 1
------- -------
Comprehensive income $ 548 $ 589
======= =======
</TABLE>
Accumulated other comprehensive income presented on the accompanying
condensed consolidated balance sheet consists of accumulated foreign
currency translation adjustments.
5. Event subsequent to April 30, 1998:
On June 1, 1998, the Company acquired certain assets of Boe-Therm A/S
("Boe-Therm"), including its inventory and manufacturing facilities,
for a total purchase price of approximately $2,000,000. Boe-Therm,
located in Assens, Denmark, is a manufacturer of liquid chillers for
removing heat from industrial processes. Boe-Therm's net sales were
approximately $3,250,000 for the year 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
April 30, 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.
Net sales of $29,990,000 for the quarter ended April 30, 1998 increased 16.4%
from $25,764,000 for the comparable quarter one year ago. Gross profit of
$7,762,000 or 25.9 percent of net sales in the current year quarter increased
24.2 percent from $6,250,000 or 24.3 percent of net sales in the prior year
quarter. The increases in net sales and gross profit were primarily due to the
inclusion of the operating results of TDC Filter Manufacturing, Inc. ("TDC"),
which was acquired in December 1997. The accounts of this business were not
included in the accounts of the Company prior to the date of acquisition.
Net income decreased 8.2 percent from $588,000 or $0.12 per common share (basic)
in the prior year to $540,000 or $0.11 per common share (basic) in the current
year. The increase in net income attributable to the acquisition of TDC was more
than offset by legal fees incurred to defend a patent infringement lawsuit in
the current year coupled with higher interest expense compared to the prior year
quarter.
Filtration Products Business
Net sales for the quarter ended April 30, 1998 increased 44.6 percent to
$12,537,000 from $8,669,000 in the comparable quarter one year ago. This
increase is the result of higher sales of filter elements for baghouses and
cartridge collectors, primarily due to the TDC acquisition.
<PAGE>
Gross profit as a percent of net sales decreased slightly from 23.7 percent to
23.5 percent, primarily as a result of competitive pricing pressures in
the marketplace and manufacturing inefficiencies.
Selling expense for the quarter ended April 30, 1998 increased to $1,242,000 or
9.9 percent of net sales from $822,000 or 9.5 percent of net sales for the
comparable quarter last year. These increases are attributable to additional
sales resources, mostly as a result of the TDC acquisition.
General and administrative expense increased to $758,000 or 6.0 percent of net
sales in the current year quarter from $482,000 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.
Piping System Products Business
Net sales decreased 3.3 percent from $11,012,000 in the prior year quarter to
$10,652,000 for the quarter ended April 30, 1998, primarily due to a decline in
domestic pipe sales.
Gross profit as a percent of net sales increased from 20.4 percent to 23.7
percent, mainly resulting from favorable product mix of sales and
manufacturing efficiencies.
Selling expense increased from $607,000 or 5.5 percent of net sales to $724,000
or 6.8 percent of net sales, largely due to marketing expenses related to
PROtherm products, which were introduced during the quarter ended April 30,
1998.
General and administrative expense increased from $1,064,000 or 9.7 percent of
net sales in the prior year quarter to $1,327,000 or 12.5 percent of net sales
in the current year quarter primarily due to legal expenses related to a patent
infringement lawsuit, increased engineering costs, higher general and
administrative expenses of foreign subsidiaries and other individually minor
increases.
Industrial Process Cooling Equipment Business
Net sales of $6,801,000 for the quarter ended April 30, 1998 increased 11.8
percent from $6,083,000 for the comparable quarter in the prior year, mainly due
to higher sales of portable chillers and temperature controllers.
Gross profit as a percent of net sales increased from 32.0 percent to 33.7
percent, primarily due to a favorable product mix of sales.
Selling expenses increased from $698,000 to $857,000 and from 11.5 percent to
12.6 percent of net sales. Increased commission expense coupled with product mix
of sales were the main reasons for this increase.
General and administrative expenses increased from $524,000 or 8.6 percent of
net sales to $607,000 or 8.9 percent of net sales. This increase was primarily
due to increased management information systems, engineering and salaries
expenses compared to the prior year.
<PAGE>
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 $679,000 to $771,000, but
remained constant at 2.6 percent of consolidated net sales. The dollar increase
was due primarily to higher employee-related expenses.
Interest expense increased from $378,000 to $576,000, due to higher borrowings
in the current year quarter as a result of the acquisition of TDC in
December 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Operating Cash Flow
Cash and cash equivalents as of April 30, 1998 were $552,000 as compared to
$976,000 at January 31, 1998. Net cash inflows of $2,768,000 generated from
operating activities coupled with $1,051,000 from the restricted cash of the
Industrial Revenue Bonds were used to fund purchases of property, plant and
equipment of $1,030,000 and net repayment of long-term debt and capital lease
obligations of $3,213,000.
Net cash provided by operating activities totaled $2,768,000 for the three
months ended April 30, 1998 versus $858,000 for the same period one year ago.
This increase was largely due to reduced working capital levels, primarily
resulting from higher accounts payable.
Net cash provided by investing activities for the quarter ended April 30, 1998
was $21,000, while net cash used for investing activities during the quarter
ended April 30, 1997 was $1,345,000. Capital expenditures declined from
$1,308,000 in the prior year quarter to $1,031,000 in the current year quarter.
Net earnings on restricted cash from Industrial Revenue Bonds in the prior year
were $37,000, while cash received from the restricted cash of the Industrial
Revenue Bonds in the current year was $1,051,000.
Net cash used for financing activities in the current year quarter was
$3,213,000 to repay capital lease obligations and long-term debt. In the prior
year quarter, $121,000 was received from financing activities, as $204,000 net
proceeds from long-term debt and $15,000 received from stock options exercised
were partially offset by $98,000 used to repay capitalized lease obligations.
The Company's current ratio at April 30, 1998 was 2.3 to 1 versus 2.6 to 1
at January 31, 1998. Debt to total capitalization decreased to 47.1 percent
from 49.9 percent at January 31, 1998.
<PAGE>
Financing
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 which commenced in the
fourth quarter of 1995 in the filtration products business in Winchester,
Virginia ($3,150,000) and the piping systems products business in Lebanon,
Tennessee ($3,150,000). The bonds bear interest at a variable rate, which
initially approximated five percent per annum, including letters of credit and
remarketing fees. Each bond indenture established 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 $1,878,000 at April 30, 1998. The bonds are fully 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 letters 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 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.
Working capital and investment needs of the Company have historically been
funded through the Company's operations and a bank line of credit. To finance
the September 1994 acquisition of Ricwil Piping Systems Company, the Company
borrowed $4,000,000 from a bank under a term loan. The Company assumed
approximately $6,611,000 of Midwesco, Inc. long-term debt in the Midwesco
Merger, $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 revolving line of credit and the unpaid
portion of the $4,000,000 September 1994 term loan with $15,000,000 of fixed
rate senior unsecured notes due 2007 (the "Notes") and a new $5,000,000 floating
rate unsecured revolving line of credit. Proceeds of the Notes were also used to
repay the Midwesco, Inc. debt assumed by the Company. The Notes bear interest at
an annual rate of 7.21 percent and require principal payment beginning in the
year ended January 31, 2001, and continuing annually thereafter, resulting in a
seven-year average life. The loan agreement for the Notes contains certain
financial covenants. As of April 30, 1998, the Company was not in compliance
with one such covenant. The Company has obtained a waiver for such
non-compliance.
During 1997, the terms of the unsecured credit agreement were amended. Under the
terms of the agreement as amended, the Company may borrow up to $12,000,000
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 April 30, 1998, the prime rate was 8.5 percent and the margin added to
the LIBOR rate, which is redetermined each quarter based on the Company's
interest coverage ratio, was 1.75 percent. The Company had borrowed $8,000,000
under the revolving line of credit at April 30, 1998. Additionally, $153,000 was
drawn under the agreement as letters of credit principally to guarantee
performance to third parties resulting from various trade activities.
<PAGE>
During the quarter ended April 30, 1998, the Company began construction of a
manufacturing facility in New Iberia, Louisiana, for the production of oil and
gas gathering flowlines and low temperature district heating products. The
Company is currently evaluating sources of lease financing for this facility. At
April 30, 1998, expenditures for the facility were included in construction in
process, a component of property, plant and equipment, in the Condensed
Consolidated Balance Sheet.
Subsequent Events
The Company has received a commitment for a mortgage loan in the amount of
$1,400,000 secured by the manufacturing facility and equipment in Cicero,
Illinois acquired in the TDC acquisition. The loan will bear interest at a fixed
rate determined on the basis of the ten-year U.S. Treasury yield at the time of
closing. The term of the loan is ten years with an amortization schedule of 25
years.
On June 1, 1998, the Company acquired certain assets of Boe-Therm A/S
("Boe-Therm"), including its inventory and manufacturing facilities, for a total
purchase price of approximately $2,000,000. Boe-Therm, located in Assens,
Denmark, is a manufacturer of liquid chillers for removing heat from industrial
processes. Boe-Therm's net sales were approximately $3,250,000 for the year
1997. The purchase price consisted of approximately $700,000 cash and long-term
financing of approximately $1,000,000, which was obtained locally in Denmark. In
addition, under the terms of a noncompete agreement, $300,000 is to be paid
ratably over a period of four years. Working capital will initially be provided
by a revolving credit agreement of approximately $150,000, also obtained locally
in Denmark.
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 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. 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.
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: June 12, 1998 /s/ David Unger
------------------------
David Unger
Chairman of the Board of Directors
Date: June 12, 1998 /s/ Michael D. Bennett
----------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1998 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-31-1999
<PERIOD-START> JAN-31-1998
<PERIOD-END> APR-30-1998
<CASH> 552000
<SECURITIES> 0
<RECEIVABLES> 22025000
<ALLOWANCES> 0
<INVENTORY> 20613000
<CURRENT-ASSETS> 52443000
<PP&E> 31012000
<DEPRECIATION> 7589000
<TOTAL-ASSETS> 93823000
<CURRENT-LIABILITIES> 22856000
<BONDS> 32264000
0
0
<COMMON> 50000
<OTHER-SE> 36539000
<TOTAL-LIABILITY-AND-EQUITY> 93823000
<SALES> 29990000
<TOTAL-REVENUES> 29990000
<CGS> 22228000
<TOTAL-COSTS> 22228000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 576000
<INCOME-PRETAX> 900000
<INCOME-TAX> 360000
<INCOME-CONTINUING> 540000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 540000
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
