SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
---------------------------------------------
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 September 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 six months ended July 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 Six Months Ended
July 31, July 31,
------------------ ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $36,505 $32,734 $66,044 $62,724
Cost of sales 27,179 24,299 49,429 46,527
------- ------- ------- -------
Gross profit 9,326 8,435 16,615 16,197
Selling expense 2,928 2,723 5,695 5,546
General and administrative expense 3,869 3,811 7,332 7,274
------- ------- ------- -------
Income from operations 2,529 1,901 3,588 3,377
Interest expense - net 737 670 1,413 1,246
------- ------- ------- -------
Income before income taxes 1,792 1,231 2,175 2,131
Income taxes 735 492 892 852
------- ------- ------- -------
Net income $ 1,057 $ 739 $ 1,283 $ 1,279
======= ======= ======= =======
Net income per common share - basic $0.21 $0.15 $0.26 $0.26
Net income per common share - diluted $0.21 $0.14 $0.26 $0.25
Weighted average common shares outstanding 4,922 4,983 4,922 4,982
Weighted average common shares outstanding
assuming full dilution 4,932 5,114 4,927 5,108
</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>
July 31, January 31,
1999 1999
--------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 654 $ 579
Trade accounts receivable, net 24,207 20,892
Costs and estimated earnings in excess
of billings on uncompleted contracts 3,821 2,533
Deferred income taxes 2,807 2,812
Inventories 23,601 22,227
Prepaid expenses and other current assets 2,702 3,126
-------- -------
Total current assets 57,792 52,169
Property, Plant and Equipment, At Cost 37,347 36,323
Less Accumulated Depreciation 10,529 9,474
-------- -------
Property, plant and equipment, net 26,818 26,849
Other Assets:
Goodwill, net 13,820 14,200
Other, net 4,707 4,768
-------- -------
Total other assets 18,527 18,968
-------- -------
Total Assets $103,137 $97,986
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,282 $ 9,497
Commissions payable 5,899 4,855
Current maturities of long-term debt 1,493 1,664
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,486 529
Other current liabilities 4,666 6,148
-------- -------
Total current liabilities 23,826 22,693
Long-Term Liabilities:
Long-term debt, less current maturities 39,319 36,292
Deferred income taxes 2,239 2,257
Other 844 976
-------- -------
Total long-term liabilities 42,402 39,525
Stockholders' Equity:
Common stock, $.01 par value,
authorized-15,000 shares; outstanding -
4,922 shares at July 31 and January 31 49 49
Additional paid-in capital 21,397 21,397
Retained earnings 15,855 14,572
Accumulated other comprehensive loss (392) (250)
--------- --------
Total stockholders' equity 36,909 35,768
--------- --------
Total Liabilities and Stockholders' Equity $103,137 $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>
Six Months Ended July 31,
-------------------------
1999 1998
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,283 $ 1,279
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 1,925 1,632
Deferred income taxes - (195)
Change in operating assets and liabilities:
Trade accounts receivable (3,390) (1,555)
Costs and estimated earnings in excess of billings
on uncompleted contracts (1,290) (1,263)
Inventories (1,457) (1,167)
Prepaid expenses and other current assets 412 525
Current liabilities 1,389 4,027
Other operating assets and liabilities (284) (185)
-------- -------
Net Cash Flows from Operating Activities (1,412) 3,098
-------- -------
Cash Flows from Investing Activities:
Increase in restricted cash from
Industrial Revenue Bonds - 1,432
Proceeds from sale of property and equipment 342 -
Net purchases of property and equipment (1,830) (3,825)
Acquisition of business, net of cash acquired - (1,725)
-------- --------
Net Cash Flows from Investing Activities (1,488) (4,118)
-------- --------
Cash Flows from Financing Activities:
Payments on capitalized lease obligations (144) (226)
Stock options exercised - 53
Proceeds from long-term debt, net 3,147 665
-------- -------
Net Cash Flows from Financing Activities 3,003 492
-------- --------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (28) 13
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 75 (515)
Cash and Cash Equivalents - Beginning of Period 579 976
-------- --------
Cash and Cash Equivalents - End of Period $ 654 $ 461
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 1999
1. Inventories consisted of the following:
<TABLE>
<CAPTION>
(In thousands) July 31, January 31,
1999 1999
-------- -----------
<S> <C> <C>
Raw materials $15,972 $16,313
Work in process 2,455 2,494
Finished goods 5,174 3,420
------- -------
Total $23,601 $22,227
======= =======
</TABLE>
2. Supplemental cash flow information:
<TABLE>
<CAPTION>
(In thousands) Six Months Ended July 31,
1999 1998
------- -------
<S> <C> <C>
Cash paid during the quarter for:
Interest, net of capitalized amounts $ 899 $ 539
Income taxes, net of refunds received 111 48
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>
3. The basic weighted average shares reconcile to diluted weighted average
shares as follows:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
July 31, July 31,
------------------ ----------------
1999 1998 1999 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net Income $1,057 $ 739 $1,283 $1,279
====== ====== ====== ======
Basic weighted average common
shares outstanding 4,922 4,983 4,922 4,982
Dilutive effect of stock options 10 131 5 126
------ ------ ------ ------
Weighted average common shares
outstanding assuming full dilution 4,932 5,114 4,927 5,108
====== ====== ====== ======
Net income per common share - basic $0.21 $0.15 $0.26 $0.26
Net income per common share - diluted $0.21 $0.14 $0.26 $0.25
</TABLE>
4
<PAGE>
At July 31, 1999 and 1998, 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 790,000 and 75,000, 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>
(In thousands) Three Months Ended Six Months Ended
July 31, July 31,
------------------ ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $1,057 $ 739 $1,283 $1,279
Change in foreign currency
translation adjustments 31 5 (142) 13
------ ------ ------- ------
Comprehensive income $1,088 $ 744 $1,141 $1,292
====== ====== ======= ======
</TABLE>
Accumulated other comprehensive loss presented on the accompanying
condensed consolidated balance sheets consists of the following:
<TABLE>
<CAPTION>
(In thousands) July 31, January 31,
1999 1999
------- -----------
<S> <C> <C>
Accumulated translation adjustment $ (264) $ (122)
Minimum pension liability adjustment (net of
tax benefit of $79) (128) (128)
------- -------
Total $ (392) $ (250)
======= =======
</TABLE>
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 Six Months Ended
July 31, July 31,
------------------ ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales:
Filtration Products $13,632 $11,665 $27,010 $24,202
Piping Systems 15,302 13,619 24,606 24,271
Industrial Process
Cooling Equipment 7,571 7,450 14,428 14,251
------- ------- ------- -------
Total Net Sales $36,505 $32,734 $66,044 $62,724
======= ======= ======= =======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
July 31, July 31,
------------------ ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross Profit:
Filtration Products $ 3,504 $ 2,796 $ 6,797 $ 5,747
Piping Systems 3,374 3,088 5,238 5,609
Industrial Process
Cooling Equipment 2,448 2,551 4,580 4,841
------- ------- ------- ------
Total Gross Profit $ 9,326 $ 8,435 $16,615 $16,197
======= ======== ======= =======
Income from Operations:
Filtration Products $ 1,287 $ 864 $ 2,426 $ 1,815
Piping Systems 1,506 942 1,680 1,412
Industrial Process
Cooling Equipment 756 1,009 1,369 1,835
Corporate (1,020) (914) (1,887) (1,685)
-------- -------- -------- --------
Total Income from Operations $ 2,529 $ 1,901 $ 3,588 $ 3,377
======== ========= ======== ========
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
July 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 July 31
Net sales of $36,505,000 for the quarter ended July 31, 1999 increased 11.5
percent from $32,734,000 for the comparable quarter last year. Gross profit of
$9,326,000 or 25.5 percent of net sales in the current year quarter increased
10.6 percent from $8,435,000 or 25.8 percent of net sales in the prior year
quarter. Net sales increased in all business segments. In terms of dollars,
gross profit increased in all business segments with the exception of the
industrial process cooling equipment business.
Net income increased 43.0 percent to $1,057,000 or $0.21 per common share
(basic) in the current year from $739,000 or $0.15 per common share (basic) in
the prior year. The improved margins 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").
Six months ended July 31
Net sales of $66,044,000 for the six months ended July 31, 1999 increased 5.3
percent from $62,724,000 for the comparable period last year. Gross profit of
$16,615,000 or 25.2 percent of net sales in the current year increased 2.6
percent from $16,197,000 or 25.8 percent of net sales in the prior year. Net
sales increased in all business segments compared to the prior year. In terms of
dollars, improved margins in the filtration products business were partially
offset by lower margins in the piping systems business and the industrial
process cooling equipment business compared with the prior year.
7
<PAGE>
Net income was essentially flat compared with the prior year, increasing 0.3
percent to $1,283,000 or $0.26 per common share (basic) in the current year from
$1,279,000 or $0.26 per common share (basic) in the prior year.
Filtration Products Business
Three months ended July 31
Net sales for the quarter ended July 31, 1999 increased 16.9 percent to
$13,632,000 from $11,665,000 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 increased from 24.0 percent in the prior
year to 25.7 percent, primarily as a result of the acquisition of Nordic Air and
improved manufacturing efficiencies.
Selling expense for the quarter ended July 31, 1999 increased to $1,259,000 from
$1,190,000 for the comparable quarter last year, but decreased from 10.2 percent
of net sales in the prior year quarter to 9.2 percent in the current year. The
dollar increase is attributable to additional sales resources utilized in the
current year.
General and administrative expense increased to $958,000 or 7.0 percent of net
sales in the current year quarter from $742,000 or 6.4 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 management incentive compensation.
Six months ended July 31
Net sales for the six months ended July 31, 1999 increased 11.6 percent to
$27,010,000 from $24,202,000 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 six months as a percent of net sales increased from 23.7
percent in the prior year to 25.2 percent, primarily as a result the acquisition
of Nordic Air and improved manufacturing efficiencies.
Selling expense for the six months ended July 31, 1999 increased to $2,503,000
from $2,432,000 for the comparable period last year, but decreased from 10.0
percent of net sales in the prior year to 9.3 percent of net sales in the
current year. The dollar increase is attributable to additional sales resources
utilized in the current year.
General and administrative expense increased to $1,868,000 or 6.9 percent of net
sales in the current year from $1,500,000 or 6.2 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 management incentive compensation.
8
<PAGE>
Piping Systems Business
Three months ended July 31
Net sales increased 12.4 percent to $15,302,000 for the quarter ended July 31,
1999 from $13,619,000 for the prior year quarter. Increased sales in the
district heating and cooling market and sales in the oil and gas market, a
relatively new market for the piping systems business, were the primary reasons
for the increase. The first shipments in the oil and gas market were made during
the third quarter last year.
Gross profit as a percent of net sales decreased from 22.7 percent in the prior
year to 22.0 percent, mainly as a result of lower margins on district heating
and cooling sales.
Selling expense increased from $629,000 or 4.6 percent of net sales to $700,000
or 4.6 percent of net sales. The increase was the result of sales staff added
for the oil and gas and international markets.
General and administrative expense decreased from $1,517,000 or 11.1 percent of
net sales in the prior year quarter to $1,168,000 or 7.6 percent of net sales in
the current year quarter. General and administrative expense in the prior year
included legal and settlement costs related to the disposition of one of the
lawsuits acquired in the Midwesco Merger.
Six months ended July 31
Net sales increased 1.4 percent to $24,606,000 for the six months ended July 31,
1999 from $24,271,000 in the prior year comparable period due to sales to the
oil and gas market. As mentioned above, shipments in this market began in the
third quarter of 1998.
Gross profit as a percent of net sales decreased from 23.1 percent in the prior
year to 21.3 percent, mainly resulting from unfavorable product mix of sales in
the domestic operations.
Selling expense remained virtually unchanged, increasing slightly from
$1,353,000 or 5.6 percent of net sales to $1,363,000 or 5.5 percent of net
sales. The percentage decline was the result of the increased sales volume in
the current year.
General and administrative expense decreased from $2,844,000 or 11.7 percent of
net sales in the prior year to $2,195,000 or 8.9 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 described above, 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 July 31
Net sales of $7,571,000 for the quarter ended July 31, 1999 increased 1.6
percent from $7,450,000 for the comparable quarter in the prior year, mainly due
to increased sales to original equipment manufacturers and the inclusion of the
operating results of Boe-Therm A/S ("Boe-Therm"), which was acquired on June 1,
1998, for the full quarter in the current year.
Gross profit as a percent of net sales decreased from 34.2 percent for the prior
year quarter to 32.3 percent for the comparable period in the current year,
primarily due to increased price competition in the current year quarter.
Selling expense increased from $904,000 or 12.1 percent of net sales in the
prior year to $970,000 or 12.8 percent of net sales in the current year.
Additional sales support for the international market and increased
participation in international trade shows are the main reasons for this
increase.
General and administrative expense increased from $638,000 or 8.6 percent of net
sales to $722,000 or 9.5 percent of net sales. This increase was primarily due
to increased research and development costs and additional engineering support
for original equipment manufacturers compared to the prior year, coupled with
the inclusion of the operating results of Boe-Therm for the full quarter in the
current year.
Six months ended July 31
Net sales of $14,428,000 for the six months ended July 31, 1999 increased 1.2
percent from $14,251,000 for the comparable period in the prior year, mainly due
to the inclusion of the operating results of Boe-Therm in the current year.
Gross profit as a percent of net sales decreased from 34.0 percent last year to
31.7 percent in the current year, primarily due to increased price competition
and higher material costs in the current year.
Selling expense increased from $1,761,000 last year to $1,829,000 for the
current year and from 12.4 percent to 12.7 percent of net sales. This increase
was primarily due to the inclusion of the operating results of Boe-Therm in the
current year, as well as increased expenses related to the international market.
General and administrative expense increased from $1,245,000 or 8.7 percent of
net sales to $1,382,000 or 9.6 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 July 31
General and administrative expense as a percent of net sales remained at 2.8
percent in both the current year and prior year quarters, but increased to
$1,020,000 in the current year quarter from $914,000 in the comparable period in
the prior year. The dollar increase was mainly due to an increase in
profit-based incentive compensation and building occupancy costs.
Interest expense increased from $670,000 in the prior year to $737,000 in the
current year, 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.
Six months ended July 31
General and administrative expenses increased from $1,685,000 or 2.7 percent of
net sales in the prior year to $1,887,000 or 2.9 percent of net sales in the
current year. The dollar increase was primarily due to higher medical claims
expenses and building occupancy costs.
Interest expense increased from $1,246,000 in the prior year to $1,413,000 in
the current year, 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 July 31, 1999 were $654,000 as compared to
$461,000 at January 31, 1998. For the six months ended July 31, 1999, net cash
inflows of $3,147,000 from proceeds of long-term debt and $342,000 proceeds from
sale of property and equipment were used to fund net operating activities of
$1,412,000, net purchases of property and equipment of $1,830,000 and payments
on capitalized lease obligations of $144,000.
Net cash used by operating activities was $1,412,000 for the six months ended
July 31, 1999, mainly due to increases in accounts receivable. For the six
months ended July 31, 1998, net cash provided by operating activities totaled
$3,098,000, mainly because of increased current liabilities, primarily accounts
payable.
11
<PAGE>
Net cash used for investing activities for the six months ended July 31, 1999
was $1,488,000 versus $4,118,000 for the same period one year ago. Capital
expenditures decreased from $3,825,000 in the prior year to $1,830,000 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 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
$1,432,000.
Net cash obtained from financing activities for the six months ended July 31,
1999 was $3,003,000 versus $492,000 for the comparable period in the prior year.
In the current year, the Company obtained $3,147,000 from net proceeds of
long-term debt and utilized $144,000 to repay capitalized lease obligations. The
Company obtained $665,000 from net proceeds of long-term debt, $53,000 from
stock options exercised and used $226,000 to repay capitalized lease obligations
in the prior year.
The Company's current ratio at July 31, 1999 was 2.4 to 1 versus 2.3 to 1 at
January 31, 1999. Debt to total capitalization increased to 52.5 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 July 31, 1999, the prime
rate was 8.00 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 $3,600,000 under the revolving line of credit
at July 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,
$394,000 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.
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, $1,042,000 of the invested funds had not
been disbursed and will be used to redeem a portion of the principal of the
bonds outstanding. As provided by the indenture, the Company has directed the
trustee to apply such funds to the redemption of Bonds at the earliest possible
date, and has reduced the principal portion of the bonds by the amount of
unspent funds at July 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 and equipment in Cicero, Illinois acquired in 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.
The Company also has short-term credit arrangements utilized by its European
subsidiaries. These credit arrangements are generally in the form of overdraft
facilities or accounts receivable factoring arrangements 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 September 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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on June 30, 1999
in order to elect directors. David Unger, Henry M. Mautner, Gene K. Ogilvie,
Fati A. Elgendy, Bradley E. Mautner, Don Gruenberg, Arnold F. Brookstone, Eugene
Miller, Stephen B. Schwartz and Dennis Kessler were elected as directors of the
Company at the meeting. The following is a tabulation of the votes cast for, or
withheld, with respect to each nominee:
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
David Unger 3,920,474 141,470
Henry M. Mautner 3,920,474 141,470
Gene K. Ogilvie 3,920,474 141,470
Fati A. Elgendy 3,920,474 141,470
Bradley E. Mautner 3,920,474 141,470
Don Gruenberg 3,920,474 141,470
Arnold F. Brookstone 3,920,474 141,470
Eugene Miller 3,920,474 141,470
Stephen B. Schwartz 3,920,474 141,470
Dennis Kessler 3,920,474 141,470
</TABLE>
There were no votes cast against, nor were there any abstentions or broker
non-votes with respect to, any nominee.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K - None
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: September 10, 1999 /s/ David Unger
------------------------------------------
David Unger
Chairman of the Board of Directors
Date: September 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 JULY 31, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 654000
<SECURITIES> 0
<RECEIVABLES> 24207000
<ALLOWANCES> 0
<INVENTORY> 23601000
<CURRENT-ASSETS> 57792000
<PP&E> 37347000
<DEPRECIATION> 10529000
<TOTAL-ASSETS> 103137000
<CURRENT-LIABILITIES> 23826000
<BONDS> 39319000
0
0
<COMMON> 49000
<OTHER-SE> 36860000
<TOTAL-LIABILITY-AND-EQUITY> 103137000
<SALES> 66044000
<TOTAL-REVENUES> 66044000
<CGS> 49429000
<TOTAL-COSTS> 49429000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1413000
<INCOME-PRETAX> 2175000
<INCOME-TAX> 892000
<INCOME-CONTINUING> 1283000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1283000
<EPS-BASIC> .26
<EPS-DILUTED> .26
</TABLE>
