SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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
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Commission file number 0-18370
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
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On June 9, 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. Certain previously
reported amounts have been reclassified to conform to the current period
presentation. The results of operations for the quarter ended April 30, 2000 are
not necessarily indicative of the results to be expected for the full year 2000.
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share information)
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
2000 1999
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<S> <C> <C>
Net sales $34,155 $29,539
Cost of sales 26,397 22,250
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Gross profit 7,758 7,289
Selling expense 3,202 2,825
General and administrative expense 3,407 3,405
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Income from operations 1,149 1,059
Interest expense - net 681 676
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Income before income taxes 468 383
Income taxes 192 157
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Net income $ 276 $ 226
======= =======
Net income per common share - basic $0.06 $0.05
Net income per common share - diluted $0.06 $0.05
Weighted average common shares outstanding 4,922 4,922
Weighted average common shares outstanding
assuming full dilution 4,924 4,922
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except per share information)
<TABLE>
<CAPTION>
April 30, January 31,
2000 2000
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,022 $ 665
Trade accounts receivable, net 21,108 22,842
Costs and estimated earnings in excess
of billings on uncompleted contracts 5,068 2,517
Deferred income taxes 2,426 2,432
Inventories 24,039 20,800
Prepaid expenses and other current assets 2,045 2,239
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Total current assets 55,708 51,495
Property, Plant and Equipment, At Cost 41,576 40,261
Less Accumulated Depreciation 12,716 11,788
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Property, plant and equipment, net 28,860 28,473
Other Assets:
Goodwill, net 13,240 13,499
Other, net 4,253 4,309
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Total other assets 17,493 17,808
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Total Assets $102,061 $97,776
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,236 $ 9,700
Commissions payable 4,905 5,640
Current maturities of long-term debt 2,718 2,774
Billings in excess of costs and estimated
earnings on uncompleted contracts 637 317
Other current liabilities 5,527 5,322
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Total current liabilities 24,023 23,753
Long-Term Liabilities:
Long-term debt, less current maturities 37,776 33,755
Deferred income taxes 1,959 1,974
Other 381 466
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Total long-term liabilities 40,116 36,195
Stockholders' Equity:
Common stock, $.01 par value,
authorized-15,000 shares; outstanding -
4,922 shares at April 30 and January 31 49 49
Additional paid-in capital 21,397 21,397
Retained earnings 17,249 16,973
Accumulated other comprehensive loss (773) (591)
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Total stockholders' equity 37,922 37,828
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Total Liabilities and Stockholders' Equity $102,061 $97,776
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
2000 1999
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<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 276 $ 226
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 1,190 920
Change in operating assets and liabilities:
Trade accounts receivable 1,603 1,508
Costs and estimated earnings in excess of
billings on uncompleted contracts (2,555) (1,046)
Inventories (3,320) (1,620)
Prepaid expenses and other current assets 187 (30)
Current liabilities 455 9
Other operating assets and liabilities (96) (46)
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Net Cash Flows from Operating Activities (2,260) (79)
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Cash Flows from Investing Activities:
Net purchases of property and equipment (1,457) (1,100)
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Net Cash Flows from Investing Activities (1,457) (1,100)
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Cash Flows from Financing Activities:
Payments on capitalized lease obligations (56) (62)
Borrowings under revolving, term and mortgage loans 14,824 7,685
Repayment of debt (10,700) (6,505)
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Net Cash Flows from Financing Activities 4,068 1,118
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Effect of Exchange Rate Changes on Cash and
Cash Equivalents 6 (30)
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Net Increase (Decrease) in Cash and Cash Equivalents 357 (91)
Cash and Cash Equivalents - Beginning of Period 665 579
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Cash and Cash Equivalents - End of Period $ 1,022 $ 488
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000
1. Inventories consisted of the following:
<TABLE>
<CAPTION>
(In thousands) April 30, January 31,
2000 2000
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<S> <C> <C>
Raw materials $17,948 $15,851
Work in process 2,601 2,641
Finished goods 3,490 2,308
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Total $24,039 $20,800
======= =======
</TABLE>
2. Supplemental cash flow information:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended April 30,
----------------------------
2000 1999
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<S> <C> <C>
Cash paid during the quarter for:
Interest, net of capitalized amounts $ 574 $ 564
Income taxes, net of refunds received 16 97
</TABLE>
3. The basic weighted average shares reconcile to diluted weighted average
shares as follows:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended April 30,
----------------------------
2000 1999
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<S> <C> <C>
Net income $ 276 $ 226
======= ========
Basic weighted average common shares
outstanding 4,922 4,922
Dilutive effect of stock options 2 -
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Weighted average common shares
outstanding assuming full dilution 4,924 4,922
======= ========
Net income per common share - basic $0.06 $0.05
Net income per common share - diluted $0.06 $0.05
</TABLE>
At April 30, 2000 and 1999, 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 714,000 and 834,000, respectively. These options
were outstanding at the end of each of the respective quarters.
4
<PAGE>
4. The components of comprehensive income, net of tax, were as follows:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended April 30,
----------------------------
2000 1999
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<S> <C> <C>
Net income $ 276 $ 226
Change in foreign currency translation
adjustments (182) (173)
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Comprehensive income $ 94 $ 53
======== ========
</TABLE>
Accumulated other comprehensive loss presented on the accompanying condensed
consolidated balance sheets consists of the following:
<TABLE>
<CAPTION>
(In thousands) April 30, January 31,
2000 2000
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<S> <C> <C>
Accumulated translation adjustment $ (704) $ (522)
Minimum pension liability adjustment
(net of tax benefit of $43) (69) (69)
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Total $ (773) $ (591)
======== ========
</TABLE>
5. The Company has three reportable segments under the criteria of Statementof
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 April 30,
----------------------------
2000 1999
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<S> <C> <C>
Net Sales:
Filtration Products $14,385 $13,378
Piping Systems 12,701 9,304
Industrial Process Cooling Equipment 7,069 6,857
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Total Net Sales $34,155 $29,539
======= =======
Gross Profit:
Filtration Products $ 3,345 $ 3,293
Piping Systems 2,252 1,864
Industrial Process Cooling Equipment 2,161 2,132
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Total Gross Profit $ 7,758 $ 7,289
======== =======
Income from Operations:
Filtration Products $ 965 $ 1,139
Piping Systems 546 174
Industrial Process Cooling Equipment 555 613
Corporate (917) (867)
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Total Income from Operations $ 1,149 $ 1,059
======= =======
</TABLE>
5
<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.
Net sales of $34,155,000 for the quarter ended April 30, 2000 increased 15.6
percent from $29,539,000 for the comparable quarter one year ago. Gross profit
of $7,758,000 for the current year quarter increased 6.4 percent from $7,289,000
in the prior year quarter. Sales and gross profit increased in all business
segments as a result of strong performance in the domestic operations, mainly in
the piping systems business. The gross profit margin as a percent of net sales
in the current year quarter was 22.7 percent, a decrease from 24.7 percent in
the comparable quarter last year.
Net income increased 22.1 percent from $226,000 or $0.05 per common share
(diluted) in the prior year to $276,000 or $0.06 per common share (diluted) in
the current year. The increase in gross profit discussed above, coupled with a
reduction of selling, general and administrative expenses as a percentage of net
sales, were the major reasons for the increase.
Filtration Products Business
Net sales for the quarter ended April 30, 2000 increased 7.5 percent to
$14,385,000 from $13,378,000 in the comparable quarter one year ago. This
increase is the result of higher sales of pleated filter elements and products
and services related to filter bags.
Gross profit as a percent of net sales decreased to 23.3 percent from 24.6
percent, primarily as a result of competitive pricing pressures, product mix of
sales and manufacturing inefficiencies.
6
<PAGE>
Selling expense for the quarter ended April 30, 2000 increased to $1,497,000 or
10.4 percent of net sales from $1,302,000 or 9.7 percent of net sales for the
comparable quarter last year, primarily due to additional sales resources
utilized in the current year.
General and administrative expense increased slightly to $883,000 in the current
year quarter from $852,000 for the comparable period one year ago, but decreased
as a percentage of net sales from 6.4 percent in the prior year quarter to 6.1
percent in the current year quarter.
Piping System Products Business
Net sales increased 36.5 percent from $9,304,000 in the prior year quarter to
$12,701,000 for the quarter ended April 30, 2000. This increase was primarily
due to higher domestic sales, particularly sales of long lines for mineral
transportation, where the first $2,400,000 of a $5,500,000 sales order was
realized in the first quarter of the current year, with the balance expected to
be realized in the second quarter.
Gross profit as a percent of net sales decreased from 20.0 percent to 17.7
percent, mainly resulting from a less favorable product mix of sales and an
increase in labor costs.
Selling expense increased from $663,000 in the prior year to $705,000 in the
current year, but declined as a percentage of net sales from 7.1 percent in the
prior year to 5.6 percent in the current year. The dollar increase is primarily
due to an increase in commission expense in the current year resulting from the
higher sales volume.
General and administrative expense remained relatively flat at $1,001,000 in the
current year compared to $1,027,000 in the prior year. As a percentage of net
sales, general and administrative expense declined from 11.0 percent in the
prior year quarter to 7.9 percent in the current year quarter.
Industrial Process Cooling Equipment Business
Net sales of $7,069,000 for the quarter ended April 30, 2000 increased 3.1
percent from $6,857,000 for the comparable quarter in the prior year, primarily
due to increased sales to original equipment manufacturers in the current year.
Gross profit as a percent of net sales decreased from 31.1 percent in the prior
year's quarter to 30.6 percent in the current year's quarter, mainly due to a
less favorable product mix of sales in the current year.
Selling expense increased to $999,000 or 14.1 percent of net sales in the
current year from $859,000 or 12.5 percent of net sales in the prior year. This
increase is due to additional personnel needed to expand into new markets,
coupled with an increase in commission expense due to the higher sales volume in
the current year.
7
<PAGE>
General and administrative expense decreased from $660,000 or 9.6 percent of net
sales in the prior year quarter to $607,000 or 8.6 percent of net sales in the
current year quarter, primarily due to reductions in personnel costs and
research and development expenses in the current year.
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
General and administrative expense increased from $867,000 in the prior year
quarter to $917,000 in the current year quarter, but declined as a percentage of
net sales from 2.9 percent last year to 2.7 percent in the current year. Higher
employee-related expenses and building occupancy costs were the main reasons for
the dollar increase.
Interest expense remained relatively flat at $681,000 in the quarter ended April
30, 2000 compared to $676,000 in the prior year quarter.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Operating Cash Flow
Cash and cash equivalents as of April 30, 2000 were $1,022,000 as compared to
$665,000 at January 31, 2000. Net proceeds from long-term debt of $4,124,000
were used to fund net cash outflows of $2,260,000 from operating activities,
purchases of property, plant and equipment of $1,457,000 and net repayment of
capital lease obligations of $56,000.
Net cash outflows from operating activities were $2,260,000 for the three months
ended April 30, 2000 versus $79,000 for the same period one year ago. 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 compared to the prior year.
Net cash used for investing activities for the quarters ended April 30, 2000 and
1999 were $1,457,000 and $1,100,000, respectively, and consisted of net
purchases of property, plant and equipment.
In the quarter ended April 30, 2000, net cash provided by financing activities
was $4,068,000. Net proceeds from long-term debt of $4,124,000 were partially
offset by repayment of capital lease obligations of $56,000. In the prior year
quarter, net cash provided by financing activities was $1,118,000. Net proceeds
from long-term debt of $1,180,000 were partially offset by repayment of capital
lease obligations of $62,000.
The Company's current ratio at April 30, 2000 was 2.3 to 1 versus 2.2 to 1 at
January 31, 2000. Debt to total capitalization increased to 51.6 percent from
49.1 percent at January 31, 2000.
8
<PAGE>
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. Extension of the line of credit is presently being
negotiated. Interest rates are based on one of two options selected by the
Company at the time of each borrowing - the prime rate or the LIBOR rate plus a
margin for the term of the loan. At April 30, 2000, the prime rate was 9.00
percent and the margin added to the LIBOR rate, which is determined each quarter
based on the Company's interest coverage ratio, was 1.50 percent. The Company
had borrowed $4,200,000 under the revolving line of credit at April 30, 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, $522,000 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 of certain repairs and payment of property
taxes and insurance related to the mortgage note secured by the manufacturing
facility located in Cicero, Illinois; and guarantee repayment of a foreign
subsidiary's borrowings under an overdraft facility.
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 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.
9
<PAGE>
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.
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.
The impact on the Company's cash flows and results of operations from changes in
interest rates would not be material because a major portion of the Company's
long-term debt is fixed-rate or low interest rate Industrial Revenue Bond debt.
10
<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 - None
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFRI, INC.
Date: June 12, 2000 /s/ David Unger
-------------------------------------
David Unger
Chairman of the Board of Directors
Date: June 12, 2000 /s/ Michael D. Bennett
-------------------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
12
