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, 1999
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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 10, 1999, 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, 1999. The results of
operations for the quarter and nine months ended October 31, 1999 are not
necessarily indicative of the results to be expected for the full year 1999.
<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,
---------------- -----------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales $37,019 $32,418 $103,063 $95,142
Cost of sales 27,949 24,428 77,378 70,955
------- ------- -------- -------
Gross profit 9,070 7,990 25,685 24,187
Selling expense 3,105 2,895 8,800 8,441
General and administrative expense 3,595 3,455 10,927 10,729
------- ------- -------- -------
Income from operations 2,370 1,640 5,958 5,017
Interest expense - net 735 705 2,148 1,951
------- ------- -------- -------
Income before income taxes 1,635 935 3,810 3,066
Income taxes 670 389 1,562 1,241
------- ------- -------- -------
Net income $ 965 $ 546 $ 2,248 $ 1,825
======= ======= ======== =======
Net income per common share - basic $0.20 $0.11 $0.46 $0.37
Net income per common share - diluted $0.20 $0.11 $0.46 $0.36
Weighted average common shares outstanding 4,922 4,981 4,922 4,982
Weighted average common shares outstanding
assuming full dilution 4,937 5,006 4,930 5,074
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except per share information)
<CAPTION>
October 31, January 31,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,546 $ 579
Trade accounts receivable, net 26,292 20,892
Costs and estimated earnings in excess
of billings on uncompleted contracts 3,284 2,533
Deferred income taxes 2,807 2,812
Inventories 23,407 22,227
Prepaid expenses and other current assets 2,723 3,126
-------- -------
Total current assets 60,059 52,169
Property, Plant and Equipment, At Cost 38,106 36,323
Less Accumulated Depreciation 11,075 9,474
-------- -------
Property, plant and equipment, net 27,031 26,849
Other Assets:
Goodwill, net 13,686 14,200
Other, net 4,662 4,768
-------- -------
Total other assets 18,348 18,968
-------- -------
Total Assets $105,438 $97,986
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,656 $ 9,497
Commissions payable 6,292 4,855
Current maturities of long-term debt 546 1,664
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,597 529
Other current liabilities 5,368 6,148
-------- -------
Total current liabilities 24,459 22,693
Long-Term Liabilities:
Long-term debt, less current maturities 40,101 36,292
Deferred income taxes 2,240 2,257
Other 788 976
-------- -------
Total long-term liabilities 43,129 39,525
Stockholders' Equity:
Common stock,$.01 par value,
authorized-15,000 shares; outstanding -
4,922 shares at October 31 and January 31 49 49
Additional paid-in capital 21,397 21,397
Retained earnings 16,820 14,572
Accumulated other comprehensive loss (416) (250)
-------- -------
Total stockholders' equity 37,850 35,768
-------- -------
Total Liabilities and Stockholders' Equity $105,438 $97,986
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<CAPTION>
Nine Months Ended
October 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,248 $ 1,825
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 2,882 2,455
Deferred income taxes - (225)
Change in operating assets and liabilities:
Trade accounts receivable (5,381) (1,492)
Costs and estimated earnings in excess of billings
on uncompleted contracts (751) (366)
Inventories (1,269) (1,564)
Prepaid expenses and other current assets 878 (373)
Current liabilities 2,402 4,292
Other operating assets and liabilities (427) (450)
-------- -------
Net Cash Flows from Operating Activities 582 4,102
-------- -------
Cash Flows from Investing Activities:
Increase in restricted cash from
Industrial Revenue Bonds - 2,929
Proceeds from sale of property and equipment 342 -
Net purchases of property and equipment (2,777) (5,308)
Acquisition of business, net of cash acquired - (1,725)
-------- --------
Net Cash Flows from Investing Activities (2,435) (4,104)
-------- --------
Cash Flows from Financing Activities:
Payments on capitalized lease obligations (195) (313)
Stock options exercised - 53
Proceeds from long-term debt, net 3,070 957
------- -------
Net Cash Flows from Financing Activities 2,875 697
------- -------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (55) 74
-------- -------
Net Increase in Cash and Cash Equivalents 967 769
Cash and Cash Equivalents - Beginning of Period 579 976
------- -------
Cash and Cash Equivalents - End of Period $ 1,546 $ 1,745
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 1999
1. Inventories consisted of the following:
<TABLE>
<CAPTION>
(In thousands) October 31, January 31,
1999 1999
----------- -----------
<S> <C> <C>
Raw materials $15,915 $16,313
Work in process 2,662 2,494
Finished goods 4,830 3,420
------- -------
Total $23,407 $22,227
======= =======
</TABLE>
2. Supplemental cash flow information:
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended
October 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Cash paid during the quarter for:
Interest, net of capitalized amounts $ 1,982 $ 1,670
Income taxes, net of refunds received 143 798
Schedule of noncash financial activities:
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)
Note payable to seller - (279)
------- --------
Liabilities assumed $ - $ 116
======= ========
</TABLE>
4
<PAGE>
3. The basic weighted average shares reconcile to diluted weighted average
shares as follows:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
October 31, October 31,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $ 965 $ 546 $2,248 $1,825
====== ====== ====== ======
Basic weighted average common
shares outstanding 4,922 4,981 4,922 4,982
Dilutive effect of stock options 15 25 8 92
------ ------ ------ ------
Weighted average common shares
outstanding assuming full dilution 4,937 5,006 4,930 5,074
====== ====== ====== ======
Net income per common share - basic $0.20 $0.11 $0.46 $0.37
Net income per common share - diluted $0.20 $0.11 $0.46 $0.36
</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 746,000 for the three months ended October 31, 1999 and 1998,
respectively, and 775,000 and 299,000 for the nine months ended October 31,
1999 and 1998, respectively. These options were outstanding at the end of
each of the respective periods.
4. The components of comprehensive income, net of tax, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands) October 31, October 31,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $ 965 $ 546 $2,248 $1,825
Change in foreign currency
translation adjustments (24) 119 (166) 132
------- ------ ------- ------
Comprehensive income $ 941 $ 665 $2,082 $1,957
======= ====== ======= ======
</TABLE>
Accumulated other comprehensive loss presented on the accompanying condensed
consolidated balance sheets consists of the following:
<TABLE>
<CAPTION>
(In thousands) October 31, January 31,
1999 1999
----------- -----------
<S> <C> <C>
Accumulated translation adjustment $(288) $(122)
Minimum pension liability adjustment (net of
tax benefit of $79) (128) (128)
------ ------
Total $(416) $(250)
====== ======
</TABLE>
5
<PAGE>
5. The Company has three reportable segments under the criteria of Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Filtration Products Business
manufactures and sells a wide variety of filter elements for air filtration
and particulate collection systems. The Piping Systems Business engineers,
designs and manufactures specialty piping systems and leak detection and
location systems. The Industrial Process Cooling Equipment Business
engineers, designs and manufactures chillers, mold temperature controllers,
cooling towers, plant circulating systems and coolers for industrial
process applications.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
October 31, October 31,
------------------ -----------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net Sales:
Filtration Products $13,360 $11,771 $ 40,370 $35,973
Piping Systems 16,208 13,629 40,814 37,900
Industrial Process Cooling Equipment 7,451 7,018 21,879 21,269
------- ------- -------- -------
Total Net Sales $37,019 $32,418 $103,063 $95,142
======= ======= ======== =======
Gross Profit:
Filtration Products $ 2,959 $ 2,732 $ 9,756 $ 8,479
Piping Systems 3,702 2,960 8,940 8,569
Industrial Process Cooling Equipment 2,409 2,298 6,989 7,139
------- ------- -------- -------
Total Gross Profit $ 9,070 $ 7,990 $ 25,685 $24,187
======= ======= ======== =======
Income from Operations:
Filtration Products $ 688 $ 837 $ 3,114 $ 2,652
Piping Systems 1,900 1,008 3,580 2,420
Industrial Process Cooling Equipment 795 632 2,164 2,467
Corporate (1,013) (837) (2,900) (2,522)
-------- -------- --------- --------
Total Income from Operations $ 2,370 $ 1,640 $ 5,958 $ 5,017
======== ======== ========= ========
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
October 31, 1999
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 $37,019,000 for the quarter ended October 31, 1999 increased 14.2
percent from $32,418,000 for the comparable quarter last year. Gross profit of
$9,070,000 increased 13.5 percent from $7,990,000 in the prior year quarter. The
gross margin of 24.5 percent of net sales in the current year was relatively
flat compared with 24.6 percent of net sales in the prior year. Net sales and
gross profit increased in all business segments compared with the prior year
quarter.
Net income increased 76.7 percent to $965,000 or $0.20 per common share (basic)
in the current year from $546,000 or $0.11 per common share (basic) in the prior
year. The improved gross profit discussed above, coupled with a reduction in
selling, general and administrative expenses as a percentage of net sales, were
the major reasons for the increase.
Nine months ended October 31
Net sales of $103,063,000 for the nine months ended October 31, 1999 increased
8.3 percent from $95,142,000 for the comparable period last year. Gross profit
of $25,685,000 in the current year increased 6.2 percent from $24,187,000 in the
prior year, while the gross margin decreased from 25.4 percent of net sales in
the prior year to 24.9 percent of net sales in the current year. Net sales
increased in all business segments compared with the prior year. In terms of
dollars, improved gross profit in the filtration products business and the
piping systems business were partially offset by lower gross profit in the
industrial process cooling equipment business compared with the prior year.
7
<PAGE>
Net income increased 23.2 percent to $2,248,000 or $0.46 per common share
(basic) in the current year from $1,825,000 or $0.37 per common share (basic) in
the prior year. The improved gross profit discussed above, coupled with a
reduction in selling, general and administrative expenses as a percentage of net
sales, were the major reasons for the increase. Selling, general and
administrative expenses in the prior year included legal and settlement costs
for the last of three lawsuits acquired in the December 1996 merger of Midwesco,
Inc. into MFRI, Inc. (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.
Filtration Products Business
Three months ended October 31
Net sales for the quarter ended October 31, 1999 increased 13.5 percent to
$13,360,000 from $11,771,000 in the comparable quarter one year ago. This
increase is the result of higher sales in all product categories, as well as the
inclusion of the results of operations of Nordic Air Filtration A/S ("Nordic
Air"), which was acquired in November 1998. The results of Nordic Air were not
included in the accounts of the Company prior to its acquisition.
Gross profit as a percent of net sales decreased from 23.2 percent in the prior
year to 22.1 percent in the current year, primarily as a result of competitive
pricing pressures and somewhat reduced manufacturing efficiencies in the current
year quarter.
Selling expense for the quarter ended October 31, 1999 increased to $1,511,000
or 11.3 percent of net sales from $1,208,000 or 10.3 percent of net sales for
the comparable quarter last year. The increase is attributable to the Nordic Air
acquisition and additional sales resources utilized by the domestic operations
in the current year.
General and administrative expense increased to $760,000 in the current year
quarter from $687,000 for the comparable period one year ago, but decreased from
5.8 percent of sales in the prior year to 5.7 percent of sales in the current
year. These changes are primarily due to additional administrative resources and
expenses resulting from the Nordic Air acquisition and higher profit-based
incentive compensation.
Nine months ended October 31
Net sales for the nine months ended October 31, 1999 increased 12.2 percent to
$40,370,000 from $35,973,000 for the comparable period last year. This increase
is the result of higher sales in all product categories and the acquisition of
Nordic Air.
Gross profit for the nine months as a percent of net sales increased from 23.6
percent in the prior year to 24.2 percent in the current year, primarily as a
result of a more favorable product mix of sales and improved manufacturing
efficiencies during the current year nine-month period.
8
<PAGE>
Selling expense for the nine months ended October 31, 1999 increased to
$4,014,000 from $3,640,000 for the comparable period last year, but decreased
from 10.1 percent of net sales in the prior year to 9.9 percent of net sales in
the current year. The dollar increase is attributable to the Nordic Air
acquisition and additional sales resources utilized by the domestic operations
in the current year.
General and administrative expense increased to $2,628,000 or 6.5 percent of net
sales in the current year from $2,187,000 or 6.1 percent of net sales for the
comparable period one year ago. These changes are primarily due to additional
administrative resources and expenses resulting from the Nordic Air acquisition
and higher profit-based incentive compensation.
Piping Systems Business
Three months ended October 31
Net sales increased 18.9 percent to $16,208,000 for the quarter ended October
31, 1999 from $13,629,000 for the prior year quarter, primarily due to increased
sales in the district heating and cooling market.
Gross profit as a percent of net sales increased to 22.8 percent in the current
year from 21.7 percent in the prior year, mainly as a result of higher margins
on district heating and cooling sales.
Selling expense decreased from $758,000 or 5.6 percent of net sales to $682,000
or 4.2 percent of net sales. A reduction in marketing staff and lower travel
expenses were the primary reasons for the decrease.
General and administrative expense decreased from $1,194,000 or 8.8 percent of
net sales in the prior year quarter to $1,120,000 or 6.9 percent of net sales in
the current year quarter, primarily resulting from lower research and
development costs and planned staff reductions.
Nine months ended October 31
Net sales increased 7.7 percent to $40,814,000 for the nine months ended October
31, 1999 from $37,900,000 in the prior year comparable period, mainly due to
increased sales in the district heating and cooling market and the oil and gas
market.
Gross profit as a percent of net sales decreased from 22.6 percent in the prior
year to 21.9 percent in the current year, mainly as a result of a less favorable
product mix of sales in the domestic operations.
Selling expense decreased from $2,111,000 or 5.6 percent of net sales in the
prior year to $2,045,000 or 5.0 percent of net sales in the current year,
primarily due to reduced marketing expenses.
General and administrative expense decreased from $4,038,000 or 10.7 percent of
net sales in the prior year to $3,315,000 or 8.1 percent of net sales in the
current year. The prior year general and administrative expenses included legal
and settlement costs related to the disposition of the last of three lawsuits
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.
9
<PAGE>
Industrial Process Cooling Equipment Business
Three months ended October 31
Net sales of $7,451,000 for the quarter ended October 31, 1999 increased 6.2
percent from $7,018,000 for the comparable quarter in the prior year mainly due
to increased sales to original equipment manufacturers.
Gross profit as a percent of net sales decreased from 32.7 percent for the prior
year quarter to 32.3 percent for the current year, primarily due to a slightly
less favorable product mix of sales in the current year.
Selling expense remained relatively flat at $912,000 or 12.2 percent of net
sales in the current year compared with $929,000 or 13.2 percent of net sales in
the prior year. Sales have increased even though selling expenses were
essentially unchanged.
General and administrative expense decreased from $737,000 or 10.5 percent of
net sales in the prior year to $702,000 or 9.4 percent of net sales in the
current year. This decrease was primarily the result of planned staff
reductions.
Nine months ended October 31
Net sales of $21,879,000 for the nine months ended October 31, 1999 increased
2.9 percent from $21,269,000 for the comparable period in the prior year, mainly
due to the inclusion of the operating results of Boe-Therm A/S ("Boe-Therm") for
the full nine months in the current year. Boe-Therm was acquired on June 1,
1998.
Gross profit as a percent of net sales decreased from 33.6 percent last year to
31.9 percent in the current year, primarily due to increased price competition
and higher material and labor costs in the current year.
Selling expense increased from $2,690,000 last year to $2,741,000 in the current
year, but decreased slightly from 12.6 percent of net sales last year to 12.5
percent of net sales in the current year. The dollar increase was primarily due
to the inclusion of the operating results of Boe-Therm in the current year.
General and administrative expense increased from $1,982,000 or 9.3 percent of
net sales to $2,084,000 or 9.5 percent of net sales. Increased engineering
expenses for product support and research and development costs, coupled with
the inclusion of the operating results of Boe-Therm in the current year, were
the major reasons for the increase.
10
<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 from $837,000 or 2.6 percent of net
sales in the prior year quarter to $1,013,000 or 2.7 percent of net sales in the
current year quarter, mainly due to increases in profit-based incentive
compensation, building occupancy costs and data processing expenses.
Interest expense increased from $705,000 in the prior year to $735,000 in the
current year, mainly due to higher borrowings in the current year quarter as a
result of the acquisitions of Boe-Therm and Nordic Air, coupled with increased
net borrowings under the Industrial Revenue Bonds compared to the prior year
quarter.
Nine months ended October 31
General and administrative expenses increased from $2,522,000 or 2.7 percent of
net sales in the prior year to $2,900,000 or 2.8 percent of net sales in the
current year, primarily due to increases in profit-based incentive compensation,
medical claims expenses, building occupancy costs and data processing expenses.
Interest expense increased from $1,951,000 in the prior year to $2,148,000 in
the current year, mainly due to higher borrowings in the current year as a
result of the acquisitions of Boe-Therm and Nordic Air, coupled with increased
net borrowings under the Industrial Revenue Bonds compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Operating Cash Flow
Cash and cash equivalents as of October 31, 1999 were $1,546,000 as compared to
$579,000 at January 31, 1999. For the nine months ended October 31, 1999, net
cash inflows of $582,000 from operating activities, $3,070,000 net proceeds of
long-term debt and $342,000 proceeds from sale of property and equipment were
used to fund purchases of property and equipment of $2,777,000 and payments on
capitalized lease obligations of $195,000.
Net cash provided by operating activities was $582,000 for the nine months ended
October 31, 1999, compared with $4,102,000 for the nine months ended October 31,
1998. Net cash requirements to fund operating assets and liabilities were higher
in the current year to support the increase in earnings.
11
<PAGE>
Net cash used for investing activities for the nine months ended October 31,
1999 was $2,435,000 versus $4,104,000 for the same period one year ago. Capital
expenditures decreased from $5,308,000 in the prior year to $2,777,000 in the
current year. This decrease is primarily due to construction in process in the
prior year for the manufacturing facility at New Iberia, Louisiana. Proceeds
from the sale of property and equipment in the current year were $342,000,
mainly resulting from the sale of certain equipment in New Iberia, Louisiana to
a third party in July 1999. The Company leased back the equipment from the third
party purchaser. In addition, the Company used $1,725,000 for the acquisition of
a business in the prior year, net of cash acquired. Cash received from the
restricted cash of the Industrial Revenue Bonds in the prior year was
$2,929,000.
Net cash obtained from financing activities for the nine months ended October
31, 1999 was $2,875,000 versus $697,000 for the comparable period in the prior
year. In the current year, the Company obtained $3,070,000 from net proceeds of
long-term debt and utilized $195,000 to repay capitalized lease obligations. The
Company obtained $957,000 from net proceeds of long-term debt, $53,000 from
stock options exercised and used $313,000 to repay capitalized lease obligations
in the prior year.
The Company's current ratio at October 31, 1999 was 2.5 to 1 versus 2.3 to 1 at
January 31, 1999. Debt to total capitalization increased to 51.8 percent from
51.5 percent at January 31, 1999.
Financing
On December 15, 1996, the Company entered into a private placement with
institutional investors of $15,000,000 of 7.21 percent unsecured senior notes
due January 31, 2007 (the "Notes due 2007"). The Notes due 2007 require level
principal payments beginning 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 with
institutional investors of $10,000,000 of 6.97 percent unsecured senior notes
due September 17, 2008 (the "Notes due 2008"). The Notes due 2008 require level
principal payments beginning September 17, 2002 and continuing annually
thereafter, resulting in a seven-year average life.
On December 19, 1996, the Company entered into an unsecured credit agreement
with a bank. 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, 2001. 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, 1999, the
prime rate was 8.25 percent and the margin added to the LIBOR rate, which is
determined each quarter based on the Company's interest coverage ratio, was 2.50
percent. The Company had borrowed $4,200,000 under the revolving line of credit
at October 31, 1999. The Company's policy is to classify borrowings under the
revolving line of credit as long-term debt since the Company has the ability and
the intent to maintain this obligation for longer than one year. Additionally,
$384,000 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
located in Cicero, Illinois.
12
<PAGE>
On September 14, 1995, the Filtration Products Business in Winchester, Virginia
received $3,150,000 proceeds of Industrial Revenue Bonds, which mature on August
1, 2007, and on October 18, 1995, the Piping Systems Business in Lebanon,
Tennessee received $3,150,000 proceeds of Industrial Revenue Bonds, which mature
on September 1, 2007. 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. The bonds bear interest at a variable rate,
which approximates five percent per annum, including letter of credit and
remarketing fees. The bond 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
balance of which was invested as authorized by the indenture and limited by
applicable law. As of October 31, 1998, $1,100,000 of the invested funds had not
been disbursed. On November 1, 1999, these undisbursed funds were used to redeem
principal of the bonds outstanding. The Company has reduced the principal
portion of the bonds by the amount of unspent funds at October 31, 1999.
On May 8, 1996, the Company purchased a 10.3-acre parcel of land with a
67,000-square foot building adjacent to its Midwesco Filter property in
Winchester, Virginia for approximately $1.1 million. The purchase was financed
80 percent by a seven-year mortgage note bearing interest at 8.38 percent and 20
percent by the industrial revenue bonds described above.
On June 30, 1998, the Company borrowed $1,400,000 under a mortgage note secured
by the manufacturing facility in Cicero, Illinois acquired with the acquisition
of TDC Filter Manufacturing, Inc. in December 1997. The loan bears interest at
6.76 percent and the term of the loan is ten years with an amortization schedule
of 25 years.
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 4,500,000
Danish krone ("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. The second loan in the amount of 2,750,000 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. In addition, on February 16, 1999, the
Company obtained a loan from a Danish bank in the amount of 850,000 DKK
(approximately $125,000) to finance the purchase of a parcel of land directly
adjacent to the manufacturing facility in Assens, Denmark. This loan is secured
by the land and building purchased.
On August 11, 1999, the Company obtained a term loan in the amount of 3,000,000
DKK (approximately $425,000) from a Danish bank to finance the acquisition of
Nordic Air on a long-term basis. The loan bears interest at 6.22 percent and has
a term of five years.
The Company also has short-term credit arrangements utilized by its European
subsidiaries. These credit arrangements are generally in the form of overdraft
facilities at rates competitive in the countries in which the Company operates.
13
<PAGE>
YEAR 2000
Many computer systems in use today were designed and developed using two digits,
rather than four, to specify the year. As a result, such systems may not
correctly recognize the year 2000, which could cause computer applications to
fail or to create erroneous results. The Company recognizes this as a potential
risk and has implemented a plan to address the Year 2000 issue.
The Company's State of Readiness
The Company has instituted an internally managed Year 2000 Plan to identify,
test and correct potential Year 2000 problems, including non-information
technology systems and impacts from outside parties including suppliers,
customers, and service providers. The Company's efforts have included obtaining
vendor certifications, direct inquiry with outside parties, and the performance
of internal testing on software products and controls. Although the Company can
provide no assurances that all Year 2000 problems will be identified, the
Company expects to be Year 2000 compliant as of December 31, 1999.
Costs to Address the Company's Year 2000 Issues
The costs incurred by the Company related to the Year 2000 issue were the time
spent by employees to address this issue and the costs of outside contractors to
provide assistance with programming. The total Year 2000 costs have not been and
are not expected to be material to the Company's financial position or results
of operations. As of December 10, 1999, total costs of outside services to reach
Year 2000 compliance were estimated to be $100,000.
The Risks of the Company's Year 2000 Issues
The Company's primary risk with respect to the Year 2000 issue is the inability
of external parties to provide goods and services in a timely, accurate manner,
resulting in production delays and added costs while pursuing alternative
sources. While there can be no guarantee that the systems of other parties on
which the Company's operations rely will be Year 2000 compliant, the Company
believes that the performance of the Year 2000 Plan and the contingency plans
will ensure that this risk will not have a material adverse impact to the
Company.
The Company's Contingency Plans
The Company has completed contingency plans that address recovery of its
critical information systems. Ongoing updates to these plans will continue
throughout 1999, and will consider the Company's ability to perform certain
processes manually, repair or obtain replacement systems, change suppliers
and/or service providers, and work around affected operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in foreign
currency exchange rates and interest rates as described in the Company's annual
report on Form 10-K for the year ended January 31, 1999, which risk is not
material.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
On September 24, 1999, the Company filed a Current Report on Form 8-K
to report, under Item 5 of the form, a summary description of the Rights
Agreement which was adopted by the Board of Directors as of September
15, 1999. A copy of the Rights Agreement dated as of September 15, 1999
was filed as Exhibit 4.1 on Item 7.
15
<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 10, 1999 /s/ David Unger
--------------------------------------------
David Unger
Chairman of the Board of Directors
Date: December 10, 1999 /s/ Michael D. Bennett
--------------------------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31,
1999 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>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 1546000
<SECURITIES> 0
<RECEIVABLES> 26292000
<ALLOWANCES> 0
<INVENTORY> 23407000
<CURRENT-ASSETS> 60059000
<PP&E> 38106000
<DEPRECIATION> 11075000
<TOTAL-ASSETS> 105438000
<CURRENT-LIABILITIES> 24459000
<BONDS> 40101000
0
0
<COMMON> 49000
<OTHER-SE> 37801000
<TOTAL-LIABILITY-AND-EQUITY> 105438000
<SALES> 103063000
<TOTAL-REVENUES> 103063000
<CGS> 77378000
<TOTAL-COSTS> 77378000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2148000
<INCOME-PRETAX> 3810000
<INCOME-TAX> 1562000
<INCOME-CONTINUING> 2248000
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<EPS-BASIC> .46
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