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, 2000
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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 ____________
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 15, 2000, 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, 2000. The results of
operations for the quarter and nine months ended October 31, 2000 are not
necessarily indicative of the results to be expected for the full year 2000.
<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,
------------------ -----------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $36,943 $37,019 $112,677 $103,063
Cost of sales 29,418 27,949 88,244 77,378
------- ------- -------- --------
Gross profit 7,525 9,070 24,433 25,685
Selling expense 2,923 3,105 9,302 8,800
General and administrative expense 3,521 3,595 10,766 10,927
------- ------- -------- --------
Income from operations 1,081 2,370 4,365 5,958
Interest expense - net 796 735 2,243 2,148
------- ------- -------- -------
Income before income taxes 285 1,635 2,122 3,810
Income taxes 128 670 881 1,562
------- ------- -------- -------
Net income $ 157 $ 965 $ 1,241 $ 2,248
======= ======= ======== =======
Net income per common share - basic $0.03 $0.20 $0.25 $0.46
Net income per common share - diluted $0.03 $0.20 $0.25 $0.46
Weighted average common shares outstanding 4,922 4,922 4,922 4,922
Weighted average common shares outstanding
assuming full dilution 4,922 4,937 4,923 4,930
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except per share information)
<CAPTION>
October 31, January 31,
2000 2000
---------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 543 $ 665
Trade accounts receivable, net 23,904 22,842
Costs and estimated earnings in excess
of billings on uncompleted contracts 5,006 2,517
Deferred income taxes 2,418 2,432
Inventories 23,532 20,800
Prepaid expenses and other current assets 1,596 2,239
-------- -------
Total current assets 56,999 51,495
Property, Plant and Equipment, At Cost 45,093 40,261
Less Accumulated Depreciation 14,075 11,788
-------- -------
Property, plant and equipment, net 31,018 28,473
Other Assets:
Goodwill, net 12,934 13,499
Other, net 4,038 4,309
-------- -------
Total other assets 16,972 17,808
-------- -------
Total Assets $104,989 $97,776
======== =======
LIABILITIES AND STOCKHOLDERS'EQUITY
Current Liabilities:
Accounts payable $ 9,035 $ 9,700
Commissions payable 6,017 5,640
Current maturities of long-term debt 4,174 2,774
Billings in excess of costs and estimated
earnings on uncompleted contracts 942 317
Other current liabilities 6,180 5,322
-------- -------
Total current liabilities 26,348 23,753
Long-Term Liabilities:
Long-term debt, less current maturities 37,762 33,755
Deferred income taxes 1,933 1,974
Other 246 466
-------- -------
Total long-term liabilities 39,941 36,195
Stockholders' Equity:
Common stock, $.01 par value,
authorized -50,000 and 15,000 shares at
October 31 and January 31,respectively;
outstanding -4,922 shares at October 31
and January 31 49 49
Additional paid-in capital 21,397 21,397
Retained earnings 18,214 16,973
Accumulated other comprehensive loss (960) (591)
--------- --------
Total stockholders' equity 38,700 37,828
--------- --------
Total Liabilities and Stockholders' Equity $104,989 $97,776
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<CAPTION>
Nine Months Ended October 31,
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,241 $ 2,248
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 3,342 2,882
Change in operating assets and liabilities:
Trade accounts receivable (1,357) (5,381)
Costs and estimated earnings in excess of
billings on uncompleted contracts (2,504) (751)
Inventories (2,909) (1,269)
Prepaid expenses and other current assets 596 878
Current liabilities 1,317 2,402
Other operating assets and liabilities (302) (427)
--------- ---------
Net Cash Flows from Operating Activities (576) 582
--------- ---------
Cash Flows from Investing Activities:
Proceeds from sale of property and equipment - 342
Net purchases of property and equipment (4,682) (2,777)
--------- ---------
Net Cash Flows from Investing Activities (4,682) (2,435)
--------- ---------
Cash Flows from Financing Activities:
Payments on capitalized lease obligations (157) (195)
Borrowings under revolving, term and mortgage loans 103,354 41,179
Repayment of debt (98,076) (38,109)
--------- ---------
Net Cash Flows from Financing Activities 5,121 2,875
--------- ---------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents 15 (55)
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (122) 967
Cash and Cash Equivalents - Beginning of Period 665 579
-------- --------
Cash and Cash Equivalents - End of Period $ 543 $ 1,546
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2000
1. Inventories consisted of the following:
<TABLE>
<CAPTION>
(In thousands) October 31, January 31,
2000 2000
---------- -----------
<S> <C> <C>
Raw materials $15,722 $15,851
Work in process 3,404 2,641
Finished goods 4,406 2,308
------- -------
Total $23,532 $20,800
======= =======
</TABLE>
2. Supplemental cash flow information:
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended October 31,
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash paid for:
Interest, net of capitalized amounts $2,132 $1,982
Income taxes, net of refunds received 226 143
Purchase of building:
Fair value of assets acquired $4,300 $ -
Cash paid 1,767 -
----- ------ -
Liabilities assumed $2,533 $ -
====== ======
</TABLE>
<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,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net Income $157 $965 $1,241 $2,248
===== ==== ====== ======
Basic weighted average common
shares outstanding 4,922 4,922 4,922 4,922
Dilutive effect of stock options - 15 1 8
----- ----- ----- -----
Weighted average common shares
outstanding assuming full dilution 4,922 4,937 4,923 4,930
===== ===== ===== =====
Net income per common share - basic $0.03 $0.20 $0.25 $0.46
Net income per common share - diluted $0.03 $0.20 $0.25 $0.46
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 911,000 and
746,000 for the three months ended October 31, 2000 and 1999, respectively,
and 876,000 and 755,000 for the nine months ended October 31, 2000 and 1999,
respectively. These options were outstanding at the end of each of the
respective periods.
</TABLE>
4. The components of comprehensive income, net of tax, were as follows:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
October 31, October 31,
------------------- -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $157 $965 $1,241 $2,248
Change in foreign currency
translation adjustments (213) (24) (369) (166)
------ ----- ------- -------
Comprehensive income $(56) $941 $ 872 $2,082
====== ==== ====== ======
</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,
2000 2000
----------- -----------
<S> <C> <C>
Accumulated translation adjustment $(891) $(522)
Minimum pension liability adjustment (net of
tax benefit of $43) (69) ( 69)
------ ------
Total $(960) $(591)
====== ======
</TABLE>
<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,
------------------ -----------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Sales:
Filtration Products $14,632 $13,360 $ 45,395 $ 40,370
Piping Systems 15,078 16,208 44,691 40,814
Industrial Process Cooling Equipment 7,233 7,451 22,591 21,879
------- ------- -------- --------
Total Net Sales $36,943 $37,019 $112,677 $103,063
======= ======= ======== ========
Gross Profit:
Filtration Products $ 2,513 $ 2,959 $ 9,170 $ 9,756
Piping Systems 2,653 3,702 8,014 8,940
Industrial Process Cooling Equipment 2,359 2,409 7,249 6,989
------- ------- ------- -------
Total Gross Profit $ 7,525 $ 9,070 $24,433 $25,685
======= ======= ======= =======
Income from Operations:
Filtration Products $ 502 $ 688 $ 2,571 $ 3,114
Piping Systems 792 1,900 2,555 3,580
Industrial Process Cooling Equipment 857 795 2,434 2,164
Corporate (1,070) (1,013) (3,195) (2,900)
-------- -------- ------- --------
Total Income from Operations $ 1,081 $ 2,370 $ 4,365 $ 5,958
======= ======= ======= =======
</TABLE>
6. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No.133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and or hedging activities. This
statement is effective for fiscal years beginning after June 15, 2000.
Management believes that the adoption of SFAS No. 133 will have no material
impact on its financial position, results of operations and cash flows.
<PAGE>
7. On September 20, 2000, the Company purchased an 8.1-acre parcel of land with
a 131,000-square foot building in Niles, Illinois from two principal
stockholders who are also members of management. Prior to the purchase, the
land and building had been leased from the two principal stockholders. The
aggregate purchase price was $4,438,000, which includes the assumption of a
mortgage note with a remaining balance of $2,405,000. The property has an
appraised value of $4,600,000.
The purchase was approved by the Company's Committee of Independent
Directors. Management of the Company believes that the purchase price was
comparable to what would have been paid in an arm's-length transaction.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 $36,943,000 for the quarter ended October 31, 2000 decreased 0.2
percent from $37,019,000 for the comparable quarter last year. Gross profit of
$7,525,000 decreased 17.0 percent from $9,070,000 in the prior year quarter and
gross margin declined to 20.4 percent of net sales in the current year from 24.5
percent of net sales in the prior year. Gross profit and gross margin in the
filtration products business and the piping systems business were adversely
impacted by lower margins on a large utility contract in the filtration products
business and higher than expected costs on two large contracts in the piping
systems business.
Net income decreased 83.7 percent to $157,000 or $0.03 per common share (basic)
in the current year from $965,000 or $0.20 per common share (basic) in the prior
year mainly due to the reduction in gross profit discussed above.
Nine months ended October 31
Net sales of $112,677,000 for the nine months ended October 31, 2000 increased
9.3 percent from $103,063,000 for the comparable period last year. Gross profit
of $24,433,000 in the current year decreased 4.9 percent from $25,685,000 in the
prior year, while the gross margin decreased from 24.9 percent of net sales in
the prior year to 21.7 percent of net sales in the current year. Net sales
increased in all business segments compared with the prior year, while gross
profit decreased in the filtration products business and the piping system
business. Margins in the filtration products business and the piping systems
business were adversely impacted by lower margins on a large utility contract in
the filtration products business and higher than expected costs on two large
contracts in the piping systems business.
<PAGE>
Net income decreased 44.8 percent to $1,241,000 or $0.25 per common share
(basic) in the current year from $2,248,000 or $0.46 per common share (basic) in
the prior year mainly due to the reduction in gross profit discussed above and
increased selling expenses.
Filtration Products Business
Three months ended October 31
Net sales for the quarter ended October 31, 2000 increased 9.5 percent to
$14,632,000 from $13,360,000 in the comparable quarter one year ago. This
increase is the result of higher sales in all product categories, particularly
in pleated filter elements and non-filtration products and services.
Gross profit as a percent of net sales decreased from 22.1 percent in the prior
year to 17.2 percent in the current year, primarily as a result of high product
warranty expenses, reduced manufacturing efficiencies, lower margins on a large
utility contract in the current quarter, and continuing competitive pricing
pressures.
Selling expense for the quarter ended October 31, 2000 decreased to $1,287,000
or 8.8 percent of net sales from $1,511,000 or 11.3 percent of net sales for the
comparable quarter last year. The decrease is primarily attributable to the
reduced sales expense in the international marketing effort.
General and administrative expense decreased to $724,000 or 4.9 percent of net
sales in the current year quarter from $760,000 or 5.7 percent of net sales for
the comparable period one year ago, primarily due to reduced profit-based
incentive compensation.
Nine months ended October 31
Net sales for the nine months ended October 31, 2000 increased 12.4 percent to
$45,395,000 from $40,370,000 for the comparable period last year. This increase
is the result of higher sales in all product categories, particularly in pleated
filter elements and non-filtration products and services.
Gross profit for the nine months as a percent of net sales decreased from 24.2
percent in the prior year to 20.2 percent in the current year, primarily as a
result of high product warranty expenses, reduced manufacturing efficiencies,
lower margins on a large utility contract in the current year nine-month period,
and continuing competitive pricing pressures.
Selling expense for the nine months ended October 31, 2000 increased to
$4,171,000 from $4,014,000 for the comparable period last year, but decreased
from 9.9 percent of net sales in the prior year to 9.2 percent of net sales in
the current year. The dollar increase is attributable to higher expenses to
support pleated product sales, partially offset by reduced selling expense in
the international marketing effort.
General and administrative expense decreased to $2,428,000 or 5.3 percent of net
sales in the current year from $2,628,000 or 6.5 percent of net sales for the
comparable period one year ago, primarily due to reduced profit-based incentive
compensation.
<PAGE>
Piping Systems Business
Three months ended October 31
Net sales decreased 7.0 percent to $15,078,000 for the quarter ended October 31,
2000 from $16,208,000 for the prior year quarter, primarily due to decreased
sales in the district heating and cooling market.
Gross profit as a percent of net sales decreased to 17.6 percent in the current
year from 22.8 percent in the prior year, mainly as a result of higher than
expected costs on two large contracts.
Selling expense increased from $682,000 or 4.2 percent of net sales to $770,000
or 5.1 percent of net sales, primarily due to an increase in commission expense
for inside sales personnel in the current year.
General and administrative expense decreased from $1,120,000 in the prior year
quarter to $1,091,000 in the current year quarter, but increased as a percent of
net sales from 6.9 percent to 7.2 percent. The dollar decrease is primarily due
to reduced profit-based incentive compensation.
Nine months ended October 31
Net sales increased 9.5 percent to $44,691,000 for the nine months ended October
31, 2000 from $40,814,000 in the prior year comparable period, mainly due to
increased sales of long lines for mineral transportation and sales of leak
detection systems.
Gross profit as a percent of net sales decreased from 21.9 percent in the prior
year to 17.9 percent in the current year, mainly as a result of a higher than
expected costs on two large contracts.
Selling expense increased from $2,045,000 in the prior year to $2,240,000 in the
current year, but remained flat at 5.0 percent of net sales. The dollar increase
is primarily due to an increase in commission expense for inside sales personnel
in the current year.
General and administrative expense decreased from $3,315,000 or 8.1 percent of
net sales in the prior year to $3,219,000 or 7.2 percent of net sales in the
current year, mainly due to reduced profit-based incentive compensation.
Industrial Process Cooling Equipment Business
Three months ended October 31
Net sales of $7,233,000 for the quarter ended October 31, 2000 decreased 2.9
percent from $7,451,000 for the comparable quarter in the prior year due to low
sales volume in the month of August. Sales in September and October returned to
levels comparable to the months prior to August.
<PAGE>
Gross margins as a percentage of net sales increased from 32.3 percent for the
prior year to 32.6 percent for the current year. The increase is due to a more
favorable product mix of sales in the current year.
Selling expenses of $867,000 or 12.0 percent of net sales in the current year
decreased from $912,000 or 12.2 percent of net sales in the prior year. The
decrease is due mainly to a decrease in commission expense.
General and administrative expenses decreased from $702,000 or 9.4 percent of
net sales in the prior year to $635,000 or 8.8 percent in the current year. The
decrease in costs is due mainly to lower product development costs.
Nine months ended October 31
Net sales of $22,591,000 for the nine months ended October 31, 2000 increased
3.3 percent from $21,879,000 for the comparable period in the prior year. The
increase resulted from growth in sales to original equipment manufacturers.
Gross margins as a percentage of net sales remained relatively flat at 32.1
percent for the current year as compared to 31.9 percent in the prior year.
Selling expenses increased from $2,741,000 or 12.5 percent of net sales for the
comparable period in the prior year to $2,891,000 or 12.8 percent of net sales
for the current year. The increase is due to higher commissions in the first
quarter of the current year.
General and administrative expenses decreased from $2,084,000 or 9.5 percent of
net sales for the comparable period in the prior year to $1,924,000 or 8.5
percent of net sales in the current year. The decrease is due mainly to lower
product development costs.
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 $1,013,000 or 2.7 percent of
net sales in the prior year quarter to $1,070,000 or 2.9 percent of net sales in
the current year quarter, mainly due to increases in employee-related expenses.
Interest expense increased 8.3 percent to $796,000 for the quarter ended October
31, 2000 compared to $735,000 for the prior year quarter, due to increased
borrowings for working capital requirements.
<PAGE>
Nine months ended October 31
General and administrative expenses increased from $2,900,000 in the prior year
to $3,195,000 in the current year, primarily due to increases in
employee-related expenses. The percentage of general and administrative expenses
to net sales remained flat at 2.8 percent.
Interest expense increased 4.4 percent to $2,243,000 for the nine months ended
October 31, 2000 compared to $2,148,000 for the comparable period in the prior
year, due to increased borrowings in the third quarter for working capital
requirements.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Operating Cash Flow
Cash and cash equivalents as of October 31, 2000 were $543,000 as compared to
$1,546,000 at October 31, 1999. For the nine months ended October 31, 2000,
$5,278,000 net proceeds of long-term debt were used to fund purchases of
property and equipment of $4,682,000, net operating activities of $576,000 and
payments on capitalized lease obligations of $157,000.
Net cash used by operating activities was $576,000 for the nine months ended
October 31, 2000, compared with net cash provided by operating activities of
$582,000 for the nine months ended October 31, 1999. The higher sales volume in
the current year increased working capital requirements, primarily to fund
increases in inventories and costs and estimated earnings in excess of billings
on uncompleted contracts.
Net cash used for investing activities for the nine months ended October 31,
2000 was $4,682,000 versus $2,435,000 for the same period one year ago. Capital
expenditures increased from $2,777,000 in the prior year to $4,682,000 in the
current year. In the current year, the Company purchased an 8.1 acre parcel of
land with a 131,000-square foot building in Niles, Illinois, from two principal
stockholders who are also memebers of management for approximately $4,438,000.
Prior to the purchase, the land and building had been leased from the two
principal stockholders. The purchase price included cash paid of $1,767,000 and
the assumption of a $2,405,000 mortgage note. The Company also purchased two
buildings with a total area of 12,000 square feet, in New Iberia, Louisiana, for
$380,000 in the current year. In the prior year, proceeds from the sale of
property and equipment 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.
Net cash obtained from financing activities for the nine months ended October
31, 2000 was $5,121,000 versus $2,875,000 for the comparable period in the prior
year. In the current year, the Company obtained $5,278,000 from net proceeds of
long-term debt and utilized $157,000 to repay capitalized lease obligations. The
Company obtained $3,070,000 from net proceeds of long-term debt and used
$195,000 to repay capitalized lease obligations in the prior year.
<PAGE>
The Company's current ratio was 2.2 to 1 at October 31, 2000 and January 31,
2000. Debt to total capitalization increased to 52.0 percent from 49.1 percent
at January 31, 2000.
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 were amended on
November 15, 2000, increasing the interest rate to 7.46 percent. The Notes due
2007, as amended, require a principal payment of $2,143,000 on January 31,
2001.The Company made this payment on December 12, 2000. In addition, the
amendment requires level principal payments of $536,000 beginning April 30,
2001, and continuing quarterly thereafter, resulting in a seven-year average
life. The note purchase agreement contains certain financial covenants. At
October 31, 2000, the Company was not in compliance with two of these covenants.
The Company has obtained a waiver for such non-compliance and is negotiating
amendments to the note purchase agreement which the Company and the note holders
expect to finalize during the fourth quarter.
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. The note purchase agreement
contains certain financial covenants. At October 31, 2000, the Company was not
in compliance with two of these covenants. The Company has obtained a waiver for
such non-compliance and is negotiating amendments to the note purchase agreement
which the Company and the note holders expect to finalize during the fourth
quarter.
On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank. Under the terms of this agreement, the Company can borrow up to
$10,000,000 under a revolving line of credit, which matures on July 31, 2003.
Interest rates are based on one of three options selected by the Company at the
time of each borrowing, as follows: (1) the higher of the prime rate or the
federal funds rate plus 0.50 percent, (2) the LIBOR rate plus a margin for the
term of the loan, or (3) a rate quoted by the bank for the term of the loan. At
October 31, 2000, the prime rate was 9.50 percent and the margin added to the
LIBOR rate, which is determined each quarter based on a financial statement
ratio, was 1.50 percent. The Company had borrowed $5,600,000 under the revolving
line of credit at October 31, 2000. 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. In addition, $583,000 was drawn under the agreement as letters of
credit. These letters of credit principally guarantee performance to third
parties as a result of various trade activities; guarantee performance under
the mortgage note secured by the manufacturing facility located in Cicero,
Illinois with respect to the making certain repairs and the payment of property
taxes and insurance premiums; and guarantee repayment of a foreign subsidiary's
borrowings under an overdraft facility. The credit agreement contains certain
financial covenants. At October 31, 2000, the Company was not in compliance
with two of these covenants. The Company has obtained a waiver for such non-
compliance and is negotiating amendments to the credit agreement which the
Company and the bank expect to finalize during the fourth quarter.
<PAGE>
In 1995, the Company received an aggregate of $6,300,000 of proceeds of
Industrial Revenue Bonds which were utilized by the Filtration Products Business
in Winchester, Virginia and the Piping Systems Business in Lebanon, Tennessee,
and which mature in August and September 2007, respectively. 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 re-marketing fees. On November 1, 1999,
the Company utilized $1,100,000 of unspent bond proceeds to redeem bonds
outstanding as provided in the indenture.
On September 20, 2000, the Company purchased an 8.1-acre parcel of land with a
131,000-square foot building in Niles, Illinois, from two principal stockholders
who are also members of management for approximately $4,438,000. This amount
includes the assumption of a $2,500,000 mortgage note with a remaining balance
of $2,405,000. The loan bears interest at 7.52 percent and the term of the loan
is ten years with an amortization schedule of 25 years. At the date of purchase,
the remaining term of the loan was 7.25 years.
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 TDC
acquisition. The loan bears interest at 6.76 percent and the term of the loan is
ten years with an amortization schedule of 25 years.
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 10, 1999, the Company obtained a loan from a Danish bank in the amount
of 3,000,000 DKK (approximately $425,000) to complete the permanent financing of
the Nordic Air acquisition. 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.
The Company anticipates that cash flows from operating activities will be
sufficient to support scheduled principal repayments through 2001.
<PAGE>
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. Foreign currency exchange rate risk
is mitigated through several means: maintenance of local production facilities
in the markets served, invoicing of customers in the same currency as the source
of the products and limited use of foreign currency denominated debt. The
Company utilizes foreign currency forward contracts to reduce exposure to
exchange rate risks. The forward contracts are short-term in duration, generally
one year or less. The major currency exposure hedged by the Company is the
Canadian dollar. The contract amounts, carrying amounts and fair values of these
contracts were not significant at January 31, 2000, 1999, and 1998. During the
quarter ended April 30, 2000, the Company received a contract from the Greater
Toronto Airport Authority which is expected to generate approximately 5,600,000
Canadian dollar receipts net of Canadian dollar disbursements (approximately
$3,900,000). The Company is using forward contracts to hedge risk from exchange
rate changes in the Canadian dollar resulting from transactions related to this
contract. The forward contracts are scheduled to settle on or near the maturity
dates of the anticipated contract transactions.
The next phase of the Euro implementation, the changeover from national
currencies to the Euro, is scheduled to begin on January 1, 2002, and is not
expected to materially affect the Company's foreign currency exchange risk
profile, although some customers may require the Company to invoice or pay in
Euros rather than the functional currency of the manufacturing entity.
Negotiations with the holders of the Company's fixed rate notes are likely to
include interest rate amendments commensurate with current market interest rates
for such debt. Although the amount of such increase cannot be estimated at this
time, the Company anticipates no material impact on the adequacy of cash flows
from operating activities to support required interest payments.
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 - None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFRI, INC.
Date: December 15, 2000 /s/ David Unger
--------------------------------------------
David Unger
Chairman of the Board of Directors
Date: December 15, 2000 /s/ Michael D. Bennett
---------------------------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
