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 -------------------------------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ------- EXCHANGE ACT OF 1934 For the transition period from to --------- --------- Commission file number 0-18370 MFRI, INC. - ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3922969 - ---------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7720 Lehigh Avenue Niles, Illinois 60714 - ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (847) 966-1000 - ---------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ---------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- On June 9, 2000, there were 4,922,364 shares of the Registrant's common stock outstanding.
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 ------- ------- <S> <C> <C> Net sales $34,155 $29,539 Cost of sales 26,397 22,250 ------- ------- Gross profit 7,758 7,289 Selling expense 3,202 2,825 General and administrative expense 3,407 3,405 ------- ------- Income from operations 1,149 1,059 Interest expense - net 681 676 ------- ------- Income before income taxes 468 383 Income taxes 192 157 ------- ------- 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
MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands except per share information) <TABLE> <CAPTION> April 30, January 31, 2000 2000 --------- ----------- <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 -------- ------- Total current assets 55,708 51,495 Property, Plant and Equipment, At Cost 41,576 40,261 Less Accumulated Depreciation 12,716 11,788 -------- ------- Property, plant and equipment, net 28,860 28,473 Other Assets: Goodwill, net 13,240 13,499 Other, net 4,253 4,309 -------- ------- Total other assets 17,493 17,808 -------- ------- 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 -------- ------- 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 -------- ------- 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) --------- -------- Total stockholders' equity 37,922 37,828 -------- ------- Total Liabilities and Stockholders' Equity $102,061 $97,776 ======== ======= </TABLE> See notes to condensed consolidated financial statements. 2
MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) <TABLE> <CAPTION> Three Months Ended April 30, ---------------------------- 2000 1999 -------- ------- <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) --------- -------- Net Cash Flows from Operating Activities (2,260) (79) --------- -------- Cash Flows from Investing Activities: Net purchases of property and equipment (1,457) (1,100) --------- -------- Net Cash Flows from Investing Activities (1,457) (1,100) --------- -------- 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) --------- -------- Net Cash Flows from Financing Activities 4,068 1,118 --------- -------- Effect of Exchange Rate Changes on Cash and Cash Equivalents 6 (30) --------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 357 (91) Cash and Cash Equivalents - Beginning of Period 665 579 -------- -------- Cash and Cash Equivalents - End of Period $ 1,022 $ 488 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 3
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 -------- ----------- <S> <C> <C> Raw materials $17,948 $15,851 Work in process 2,601 2,641 Finished goods 3,490 2,308 ------- ------- Total $24,039 $20,800 ======= ======= </TABLE> 2. Supplemental cash flow information: <TABLE> <CAPTION> (In thousands) Three Months Ended April 30, ---------------------------- 2000 1999 -------- -------- <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 ------- -------- <S> <C> <C> Net income $ 276 $ 226 ======= ======== Basic weighted average common shares outstanding 4,922 4,922 Dilutive effect of stock options 2 - ------- -------- 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
4. The components of comprehensive income, net of tax, were as follows: <TABLE> <CAPTION> (In thousands) Three Months Ended April 30, ---------------------------- 2000 1999 ------- ------- <S> <C> <C> Net income $ 276 $ 226 Change in foreign currency translation adjustments (182) (173) -------- -------- 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 --------- ----------- <S> <C> <C> Accumulated translation adjustment $ (704) $ (522) Minimum pension liability adjustment (net of tax benefit of $43) (69) (69) -------- -------- 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 ------- ------- <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 ------- ------- 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 ------- ------- 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) ------- -------- Total Income from Operations $ 1,149 $ 1,059 ======= ======= </TABLE> 5
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
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
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
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
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
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
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