UNITED STATES 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, 2004 -------------------------------------------------- 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 ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- On September 13, 2004, 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/A for the year ended January 31, 2004. Certain reclassifications have been made in prior-year financial statements to conform to the current-year presentation. The results of operations for the quarter ended July 31, 2004 are not necessarily indicative of the results to be expected for the full year ending January 31, 2005. MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands except per share information) <TABLE> <CAPTION> Three Months Ended Six Months Ended July 31, July 31, --------------------- --------------------- 2004 2003 2004 2003 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $ 38,068 $ 33,148 $ 70,196 $ 61,158 Cost of sales 29,116 25,467 55,338 48,283 -------- -------- -------- -------- Gross profit 8,952 7,681 14,858 12,875 Operating expenses: Selling expense 2,494 2,564 5,106 5,164 General and administrative expense 3,946 3,786 7,403 7,329 -------- -------- -------- -------- Total operating expenses 6,440 6,350 12,509 12,493 -------- -------- -------- -------- Income from operations 2,512 1,331 2,349 382 Income (loss) from joint venture (33) 176 (10) 186 Interest expense - net 455 528 875 1,020 -------- -------- -------- -------- Income (loss) before income taxes 2,024 979 1,464 (452) Income taxes (benefit) 655 376 424 (190) -------- -------- -------- -------- $ 1,369 $ 603 $ 1,040 (262) Net income (loss) ======== ======== ======== ======== Weighted average common shares outstanding basic 4,922 4,922 4,922 4,922 Weighted average common shares outstanding diluted 4,997 4,922 4,987 4,922 Basic earnings per share Net income (loss) $ 0.28 $ 0.12 $ 0.21 $ (0.05) Diluted earnings per share Net income (loss) $ 0.27 $ 0.12 $ 0.21 $ (0.05) </TABLE> See notes to condensed consolidated financial statements. 1
MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) <TABLE> <CAPTION> July 31, January 31, Assets 2004 2004 - -------------------------------------------------------------------------------- Current Assets: <S> <C> <C> Cash and cash equivalents $ 693 $ 154 Restricted cash 1,034 238 Trade accounts receivable, net 24,112 18,353 Accounts receivable - related companies 872 853 Costs and estimated earnings in excess of billings on uncompleted contracts 1,488 1,115 Income taxes receivable 473 393 Inventories 18,980 18,275 Deferred income taxes 1,651 1,639 Prepaid expenses and other current assets 970 857 -------- -------- Total current assets 50,273 41,877 Property, plant and equipment, net 25,954 28,828 Other Assets: Patents, net of accumulated amortization 627 716 Goodwill 2,500 2,549 Other assets 4,881 4,957 -------- -------- Total other assets 8,008 8,222 -------- -------- Total Assets $ 84,235 $ 78,927 ======== ======== Liabilities and Stockholders' Equity - -------------------------------------------------------------------------------- Current Liabilities: Trade accounts payable $ 13,633 $ 12,337 Accrued compensation and payroll taxes 2,520 2,673 Other accrued liabilities 3,524 2,835 Commissions payable 3,470 3,046 Current maturities of long-term debt 3,418 11,864 Billings in excess of costs and estimated earnings on uncompleted contracts 380 299 Income taxes payable 657 64 -------- -------- Total current liabilities 27,602 33,118 Long-Term Liabilities: Long-term debt, less current maturities 26,563 16,661 Other 2,340 2,275 -------- -------- Total long-term liabilities 28,903 18,936 Stockholders' Equity: Common stock, $.01 par value, authorized - 50,000 shares in July 2004 and January 2004; 4,922 issued and outstanding in July 2004 and January 2004 49 49 Additional paid-in capital 21,397 21,397 Retained earnings 6,140 5,100 Accumulated other comprehensive loss 144 327 -------- -------- Total stockholders' equity 27,730 26,873 -------- -------- Total Liabilities and Stockholders' Equity $ 84,235 $ 78,927 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 2
MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> (In thousands) Six Months Ended July 31, --------------------- 2004 2003 -------- -------- Cash Flows from Operating Activities: <S> <C> <C> Net income (loss) $ 1,040 $ (262) Adjustments to reconcile net income (loss) to net cash flows from operating activities: (Income) loss from joint venture 10 (186) Provision for depreciation and amortization 1,911 2,023 Provision for uncollectible accounts 63 65 (Gain)loss on sale of property, plant and equipment 17 (21) Change in operating assets and liabilities: Trade accounts receivable (5,822) (1,556) Costs and estimated earnings in excess of billings on uncompleted contracts (293) (199) Inventories (781) 502 Prepaid expenses and other current assets (580) 512 Current liabilities 1,199 135 Other operating assets and liabilities 985 560 -------- -------- Net Cash Flows from Operating Activities (2,249) 1,573 -------- -------- Cash Flows from Investing Activities: Proceeds from sale of property and equipment 1,786 466 Purchases of property and equipment (635) (2,804) -------- -------- Net Cash Flows from Investing Activities 1,152 (2,338) -------- -------- Cash Flows from Financing Activities: Payments on capitalized lease obligations (38) (75) Borrowings under revolving, term and mortgage loans 9,061 11,669 Repayment of debt (7,429) (11,019) -------- -------- Net Cash Flows from Financing Activities 1,594 575 -------- -------- Effect of Exchange Rate Changes on Cash and Cash Equivalents 42 48 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 539 (142) Cash and Cash Equivalents - Beginning of Period 154 346 -------- -------- Cash and Cash Equivalents - End of Period $ 693 $ 204 ======== ======== Supplemental cash flow information: Cash paid for: Interest, net of capitalized amounts $ 1,008 $ 1,016 Income taxes paid (refunded) (99) 5 </TABLE> See notes to condensed consolidated financial statements. 3
MFRI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 31, 2004 1. The unaudited financial statements herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended January 31, 2004. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the January 31, 2004 audited financial statements have been omitted from these interim financial statements. Certain reclassifications have been made in prior-year financial statements to conform to the current-year presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K/A. <TABLE> <CAPTION> 2. Inventories consisted of the following: July 31, January 31, (In thousands) 2004 2004 -------- -------- <S> <C> <C> Raw materials $ 14,895 $ 13,593 Work in process 1,929 1,905 Finished goods 2,156 2,777 -------- -------- Total $ 18,980 $ 18,275 ======== ======== </TABLE> 3. Goodwill: Goodwill represents the excess cost over fair value of the net assets of purchased businesses. The Company does not amortize goodwill. The Company performs an annual impairment assessment of goodwill in the first quarter of each year, based on the fair value of the related reporting unit. When performing its annual impairment assessment, the Company compares the fair value of the related reporting unit to its carrying value. Fair values are determined by discounting estimated future cash flows. If the fair value of an operating unit is less than its carrying value, an impairment loss is recorded. The Company's annual impairment test at February 1, 2004 did not result in an impairment. Goodwill was $2,500,000 and $2,549,000 at July 31, 2004 and January 31, 2004, respectively. The change in Goodwill was due to foreign currency translation. 4. Other intangible assets with definite lives: Patents are capitalized and amortized on a straight-line basis over a period not to exceed the legal lives of the patents. Patents, net of accumulated amortization, were $627,000 and $716,000 at July 31, 2004 and January 31, 2004, respectively. Accumulated amortization was $1,542,000 and $1,453,000 at July 31, 2004 and January 31, 2004, respectively. Future amortization over the next five years ending January 31, will be 2005 - $180,500, 2006 - $180,500, 2007 - $173,800, 2008 - $29,400 and 2009 - $26,400. 4
5. Employee Retirement Plans: The market-related value of plan assets at July 31, 2004 and January 31, 2004 were $2,751,036 and $2,682,942 respectively. Net cost recognized for the six months ended July 31 is as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended (In thousands) July 31, July 31, --------------------- --------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Components of net periodic benefit cost: <S> <C> <C> <C> <C> Service cost $ 25 $ 24 $ 50 $ 48 Interest cost 47 42 94 85 Expected return on plan assets (56) (42) 112 (83 Amortization of prior service cost 21 14 41 29 Recognized actuarial loss 20 24 39 49 -------- -------- -------- -------- Net periodic benefit cost $ 57 $ 62 $ 112 $ 128 </TABLE> Expected employer contributions for fiscal year ending 1/31/2005 are $329,000. In May 2004, a $66,238 contribution was made. 6. The basic weighted average shares reconcile to diluted weighted average shares as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended (In thousands) July 31, July 31, --------------------- --------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net income (loss) $ 1,369 $ 603 $ 1,040 $ (262) ======== ======== ======== ======== Basic weighted average common <S> <C> <C> <C> <C> shares outstanding 4,922 4,922 4,922 4,922 Dilutive effect of stock options 75 - 65 - -------- -------- -------- -------- Weighted average common shares outstanding assuming full dilution 4,997 4,922 4,987 4,922 ======== ======== ======== ======== Basic earnings per share Net income (loss) $ 0.28 $ 0.12 $ 0.21 $ (0.05) Diluted earnings per share Net income (loss) $ 0.27 $ 0.12 $ 0.21 $ (0.05) </TABLE> 7. The weighted average number of stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares were 106,000 and 1,002,000 for the three months ended July 31, 2004 and 2003, respectively, and 792,000 and 971,000 for the six months ended July 31, 2004 and 2003, respectively. At July 31, 2004, 914,650 stock options had an exercise price below the average stock price for the three month period. At July 31, 2004, 227,250 stock options had an exercise price below the average stock price for the six month period. However these options were outstanding as no shares were exercised. There were no stock options below the average stock price at July 31, 2003. 5
8. The components of comprehensive income (loss), net of tax, were as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended (In thousands) July 31, July 31, --------------------- --------------------- 2004 2003 2004 2003 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net income (loss) $ 1,369 $ 603 $ 1,040 $ (262) Change in foreign currency translation adjustments 20 19 (183) 171 -------- -------- -------- -------- Comprehensive income (loss) $ 1,389 $ 622 $ 857 $ (91) ======== ======== ======== ======== </TABLE> Accumulated other comprehensive loss presented on the accompanying condensed consolidated balance sheet consists of the following: <TABLE> <CAPTION> July 31, January 31, (In thousands) 2004 2004 -------- -------- <S> <C> <C> Accumulated translation adjustment $ 499 $ 682 Minimum pension liability adjustment (net of tax benefit of $217 at July 31 and January 31, 2004) (355) (355) -------- -------- Total $ 144 $ 327 ======== ======== </TABLE> 6
9. 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, manufactures and sells specialty piping systems and leak detection and location systems. The Industrial Process Cooling Equipment Business engineers, designs, manufactures and sells chillers, cooling towers, plant circulating systems and accessories for industrial process applications. <TABLE> <CAPTION> Three Months Ended Six Months Ended (In thousands) July 31, July 31, --------------------- --------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net Sales: <S> <C> <C> <C> <C> Filtration Products $ 15,370 $ 14,587 $ 31,666 $ 27,977 Piping Systems 14,997 12,148 23,987 20,953 Industrial Process Cooling Equipment 7,701 6,413 14,543 12,228 -------- -------- -------- -------- Total Net Sales $ 38,068 $ 33,148 $ 70,196 $ 61,158 ======== ======== ======== ======== Gross Profit: Filtration Products $ 3,248 $ 3,060 $ 6,125 $ 5,335 Piping Systems 3,433 2,804 4,632 4,078 Industrial Process Cooling Equipment 2,271 1,817 4,101 3,462 -------- -------- -------- -------- Total Gross Profit $ 8,952 $ 7,681 $ 14,858 $ 12,875 ======== ======== ======== ======== Income (loss) from Operations: Filtration Products $ 992 $ 761 $ 1,770 $ 959 Piping Systems 2,119 1,551 2,228 1,656 Industrial Process Cooling Equipment 646 273 785 281 Corporate (1,245) (1,254) (2,434) (2,514) -------- -------- -------- -------- Income from Operations $ 2,512 $ 1,331 $ 2,349 $ 382 ======== ======== ======== ======== </TABLE> 10. In December 2003, the Financial Accounting Standards Board (FASB) issued a revision to SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." This Statement retains the disclosures previously required by SFAS 132 but adds additional disclosure requirements about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. It also calls for the required information to be provided separately for pension plans and for other postretirement benefit plans. In addition to expanded annual disclosures, the standard improves information available to investors in interim financial statements. SFAS 132R is effective for fiscal years ending after December 15, 2003, and for quarters beginning after December 15, 2003. The adoption of SFAS 132R did not have a material impact on the Company's financial statements, however, required interim disclosures have been reflected in the current financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation requires the recognition of certain guarantees as liabilities at fair market value and is effective for guarantees issued or modified after December 31, 2002. Adoption of the provisions of the Interpretation has not had and will not have a material effect on the financial statements of the Company, based on guarantees in effect on July 31, 2004. 11. The Company's stock option plans are accounted for using the intrinsic value method and, accordingly, no compensation cost has been recognized. Had compensation cost been determined using the fair value method in 2004 and 2003, the Company's pro forma net income (loss) and earnings (loss) per share would have been as follows: 7
<TABLE> <CAPTION> Three Months Ended Six Months Ended (In thousands) July 31, July 31, --------------------- --------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net income (loss) - as reported (in <S> <C> <C> <C> <C> thousands) $ 1,369 $ 603 $ 1,040 $ (262) Compensation cost under fair-market value-based accounting method, net of tax (in thousands) (26) (45) (54) (79) Net income (loss) - pro forma (in thousands) $ 1,343 $ 558 $ 986 $ (341) Net income (loss) per common share - basic, as reported $ 0.28 $ 0.12 $ 0.21 $ (0.05) Net income (loss) per common share - basic, pro forma $ 0.27 $ 0.11 $ 0.20 $ (0.07) Net income (loss) per common share - diluted, as reported $ 0.27 $ 0.12 $ 0.21 $ (0.05) Net income (loss) per common share - diluted, pro forma $ 0.27 $ 0.11 $ 0.20 $ (0.07) </TABLE> 12. On April 26, 2002, Midwesco Filter borrowed $3,450,000 under two mortgage notes secured by two parcels of real property and improvements owned by Midwesco Filter in Winchester, Virginia. Proceeds from the mortgages, net of a prior mortgage loan, were approximately $2,700,000 and were used to make principal payments to the lenders under the Prior Term Loans and the Bank. On June 17, 2004, Midwesco Filter sold one of its buildings located in Winchester, Virginia. The building sold consisted of 66,998 square feet on 10 acres. The mortgage of $1,088,000 was paid at the closing. The note on the remainder property bears interest at 7.10% with a monthly payment of $23,616 for both principal and interest, and the note's amortization schedule and term are ten years. On September 14, 1995, Midwesco Filter in Winchester, Virginia received $2,050,000 of proceeds of Industrial Revenue Bonds, which mature on August 1, 2007. These bonds are fully secured by bank letters of credit. Due to the sale of land and a building on June 17, 2004, the Company will redeem the bonds in the third quarter of 2004. On July 11, 2002, the Company entered into secured note purchase agreements with certain institutional investors ("Note Purchase Agreements"). Under the terms of the Note Purchase Agreements, the Company entered into a five-year $6,000,000 term loan replacing prior term loans with an aggregate original principal balance of $25,000,000 ("Prior Term Loans"). The outstanding principal balance of the Prior Term Loans at July 11, 2002 was $16,000,000. The Company borrowed $10,000,000 from its new revolving line of credit from another financial institution (described below) to pay down this loan from $16,000,000 to $6,000,000. Interest rates under the Note Purchase Agreements are 12% per annum if the outstanding principal is greater than $5,000,000 or 10% per annum if the outstanding principal is $5,000,000 or less. The Company is scheduled to pay $188,000 in aggregate principal on the last days of March, June, September and December in each year, commencing on September 30, 2002 and ending on June 30, 2007. In addition, the Company is scheduled to make annual prepayments of excess cash flow (as defined in the Note Purchase Agreements). Finally, the Loan Agreement (defined below) and the Note Purchase Agreements permit voluntary prepayments sufficient to reduce the outstanding term loan principal to $5,000,000 subject to certain conditions. The Company met such conditions and made such a prepayment on July 31, 2002. At January 31, 2004 and April 30, 2004, the Company was not in compliance with one covenant under the Note Purchase Agreements. Waivers have been obtained for violation of debt covenants for fiscal periods ending on or prior to April 30, 2004. At July 31, 2004, the Company was in compliance with covenants under the Loan Agreement. 8
On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan Agreement"). Under the terms of the Loan Agreement, which matures on July 10, 2006, the Company can borrow up to $27,000,000, subject to borrowing base and other requirements, under a revolving line of credit. Interest rates generally are based on options selected by the Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At July 31, 2004, the prime rate was 4.25%, and the margins added to the prime rate and the LIBOR rate, which are determined each quarter based on the applicable financial statement ratio, were 1.25 and 3.25 percentage points, respectively. As of July 31, 2004, the Company had borrowed $11,290,000 and had $1,776,000 available to it under the revolving line of credit. In addition, $6,694,000 of availability was used under the Loan Agreement primarily to support letters of credit to guarantee amounts owed for Industrial Revenue Bond borrowings. The Loan Agreement provides that all payments by the Company's customers are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At July 31, 2004, the amount of restricted cash was $1,034,000. Cash required for operations is provided by draw-downs on the line of credit. At January 31, 2004 and April 30, 2004, the Company was not in compliance with covenants under the Loan Agreement. Waivers have been obtained for violation of debt covenants for fiscal periods ending on or prior to April 30, 2004. At July 31, 2004, the Company was in compliance with covenants under the Loan Agreement. 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," "likely," and "probable," 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 $38,068,000 for the quarter increased 14.8% from $33,148,000 for the comparable quarter in the prior year. (See discussion of each business segment below.) Gross profit of $8,952,000 increased 16.6% from $7,681,000 in the prior year quarter, and gross margin increased to 23.5% of net sales in the current year from 23.2% of net sales in the prior year. (See discussion of each business segment below.) Net income rose to $1,369,000 in the current quarter from $603,000 in the prior year quarter. The increase in net income was due to increased revenue at level margins. (See discussion of each business segment below.) 9
Six months ended July 31 Net sales of $70,196,000 for the six months increased 14.8% from $61,158,000 for the comparable period in the prior year. (See discussion of each business segment below.) Gross profit of $14,858,000 increased 15.4% from $12,875,000 for the comparable period in the prior year, while gross margin increased to 21.2% of net sales in the current year from 21.1% of net sales in the prior year. (See discussion of each business segment below.) Net income rose to $1,040,000 for the six months from a loss of $262,000 for the comparable period in the prior year. The increase in net income was due to increased revenue at level margins. (See discussion of each business segment below.) Filtration Products Business Three months ended July 31 Net sales for the quarter increased 5.4% to $15,370,000 from $14,587,000 for the comparable quarter in the prior year. This increase is primarily due to a better economic environment including improved conditions in the domestic steel industry. Gross profit as a percent of net sales increased from 21.0% in the prior year to 21.1% in the current year, primarily as a result of improved manufacturing efficiency on higher unit volume. Selling expense decreased to $1,363,000 or 8.9% of net sales from $1,421,000 or 9.7% of net sales for the comparable quarter last year. General and administrative expenses increased from $877,000 or 6.0% of net sales in the prior-year quarter to $894,000 or 5.8% of net sales in the current-year quarter. This increase is primarily due to increased professional services expenses. Six months ended July 31 Net sales for the six months increased 13.2% to $31,666,000 from $27,977,000 for the comparable period in the prior year. This increase is primarily due to a better economic environment including improved conditions in the domestic steel industry. Gross profit as a percent of net sales increased from 19.1% in the prior year to 19.3% in the current year, primarily as a result of improved manufacturing efficiency on higher unit volume. Selling expense for the six months decreased to $2,795,000 or 8.8% of net sales from $2,852,000 or 10.2% of net sales for the comparable period in the prior year. General and administrative expenses increased from $1,523,000 or 5.4% of net sales in the prior-year period to $1,561,000 or 4.9% of net sales in the current year period. This increase is primarily due to increased professional services expenses. Piping Systems Business Three months ended July 31 Net sales increased 23.5% from $12,148,000 in the prior-year quarter to $14,997,000 for the current quarter. This increase is primarily due to some recovery from the weak economy. Gross profit as a percent of net sales decreased from 23.1% to 22.9% due to an increase in the price of steel. 10
Selling expense decreased from $346,000 or 2.9% of net sales for the prior-year quarter to $276,000 or 1.8% of net sales in the current year quarter. The decrease is primarily due to lower travel and marketing costs. General and administrative expense increased from $909,000 in the prior year quarter to $1,038,000 in the current year quarter, and decreased as a percent of net sales from 7.5% to 6.9%. The dollar increase is primarily due to expenses associated with implementation of a new enterprise resource planning system and higher incentive expenses. Six months ended July 31 Net sales of $23,987,000 for the six months increased 14.5% from $20,953,000 for the comparable period in the prior year. This increase is primarily due to some recovery from the weak economy. Gross profit as a percent of net sales decreased from 19.5% to 19.3%, mainly due to an increase in the price of steel. Selling expense decreased from $687,000 or 3.3% of net sales in the prior year period to $599,000 or 2.5% of net sales in the current year period. The dollar decrease is primarily due to lower travel and marketing costs. General and administrative expense increased to $1,805,000, compared with $1,736,000 in the prior year period, and decreased as a percent of net sales from 8.3% to 7.5%. The increase is primarily due to expenses associated with implementation of a new enterprise resource planning system and higher incentive expenses. Industrial Process Cooling Equipment Business Three months ended July 31 Net sales of $7,701,000 for the quarter increased 20.1% from $6,413,000 for the comparable quarter in the prior year. The increase is due primarily to some recovery from the weak economy. Sales increased in both the domestic and international markets. Gross profit increased to 29.5% of net sales from 28.3% of net sales in the prior-year quarter, primarily due to improved pricing and production efficiencies. Selling expense increased to $855,000 or 11.1% of net sales in the current-year quarter from $797,000 or 12.4% of net sales in the prior-year quarter. The dollar increase is due to the higher commissions associated with increased sales and greater export sales. General and administrative expense increased to $769,000 or 10.0% of net sales from $746,000 or 11.6% of net sales in the prior-year quarter. This dollar increase is due to costs for the international operation resulting from additional headcount. Six months ended July 31 Net sales of $14,543,000 for the six months increased 18.9% from $12,228,000 for the comparable period in the prior year, mainly due to some recovery from the weak economy. Sales increased in both the domestic and international markets. Gross margin decreased from 28.3% of net sales in the prior year to 28.2% of net sales in the current year, primarily due to sales to direct markets. Selling expense increased to $1,712,000 or 11.8% of net sales in the current year period from $1,625,000 or 13.3% of net sales in the prior year. The dollar increase is primarily due to the higher commissions associated with increased sales and greater export sales. 11
General and administrative expense increased to $1,603,000 or 11.0% of net sales in the current year period from $1,556,000 or 12.7% of net sales in the prior year. This increase is due to costs for the international operation resulting from additional headcount and increased product development costs. General Corporate Expense General corporate expense includes interest expense and general and administrative expense incurred by MFRI, Inc. Corporate that have not been allocated to the business segments. Three months ended July 31 General and administrative expense decreased from $1,254,000 in the prior year quarter to $1,245,000 in the current year quarter, and decreased as a percentage of net sales from 3.8% in the prior year quarter to 3.3% in the current year quarter. The decrease is mainly due to lower repairs and maintenance expense, lower utilities cost and reduced staff size. Interest expense decreased to $455,000 for the current year quarter from $528,000 in the prior year quarter. The decrease is primarily due to a lower debt balance than the prior year. Six months ended July 31 General and administrative expense decreased from $2,514,000 in the prior year period to $2,434,000 in the current-year six-month period, and decreased as a percentage of net sales from 4.1% in the prior year period to 3.5% in the current year period. The decrease is mainly due to lower repairs and maintenance expense, lower utilities cost and reduced staff size. Interest expense decreased to $875,000 for the current year period from $1,020,000 for the comparable period in the prior year. The decrease is primarily due to a lower debt balance than the prior year. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents as of July 31, 2004 were $693,000 as compared to $154,000 at January 31, 2004. The Company used $2,249,000 from operations during the first six months. Operating cash flows decreased by $3,822,000 from the same period in the prior year. The cash from investing activities of $1,152,000 mainly resulted from the sale of a building and land to a third party in June 2004. These cash flows, plus borrowings of $1,594,000 from the Company's credit facility, were used to support $635,000 in capital spending. Trade receivables increased $5,822,000 and inventories increased $781,000 from January 31, 2004 due to sales seasonality. Prepaid expenses and other current assets including restricted cash increased $580,000 due to customer payments received on the last day of the month. Other operating assets and liabilities increased $985,000 from January 31, 2004 due to increased commission liability and increased accrued liabilities. Net cash flow from investing activities for the six months ended July 31, 2004 was $1,152,000. Net cash used for investing activities for the six months ended July 31, 2003 was $2,338,000. Proceeds from sale of property and equipment increased $1,320,000 from the prior year. On June 17, 2004, the Company sold one of its buildings located in Winchester, Virginia. The building sold consisted of 66,998 square feet on 10 acres. The Company is leasing from the Buyer approximately 12,000 square feet of the building. There was not a material gain or loss on the sale. Capital expenditures decreased $2,169,000 from the prior year. The prior year's capital additions of $2,804,000 mainly related to the Company's construction of a new building for one of its foreign subsidiaries. Current capital expenditures relate to a new ERP business applications software and equipment purchases. 12
Debt totaled $29,981,000, an increase of $1,456,000 since the beginning of the year. Net cash inflows from financing activities were $1,594,000, consisting of borrowings of $9,061,000 and payments of $7,429,000 and $38,000 used for payments on capitalized lease obligations. The following table summarizes the Company's estimated contractual obligations, excluding the revolving lines of credit at July 31, 2004: <TABLE> <CAPTION> Total 1/31/05 1/31/06 1/31/07 1/31/08 1/31/09 Thereafter - ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- --------------- <S> <C> <C> <C> <C> <C> <C> <C> Mortgages $ 9,227,400 $237,200 $502,800 $ 533,900 $ 567,600 $603,600 $6,782,300 - ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- --------------- Senior Debt 3,500,000 375,000 750,000 750,000 1,625,000 - - - ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- --------------- IRB Payable (1) 5,200,000 2,050,000 - - 3,150,000 - - - ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- --------------- Term Loans 117,700 117,700 - ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- --------------- Capitalized Lease 37,700 29,100 6,000 2,000 - - - Obligations - ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- --------------- Sub Total (2) $18,802,200 $2,809,000 $1,258,000 1,285,900 5,668,600 $603,600 $6,782,300 - ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- --------------- Operating lease Obligations $ 2,070,800 $340,000 $520,000 $426,800 $366,500 $ 53,000 $ 364,500 - ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- --------------- Purchase Committments (3) 8,133,300 7,492,800 551,700 88,800 - - - - ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- --------------- Total 28,286,300 $10,641,800 $2,330,500 $1,801,500 $5,709,100 $656,000 $7,146,800 - ----------------------- -------------- -------------- ------------- ------------- -------------- ------------- --------------- </TABLE> (1) Due to the sale of land and building, the Bond related to the Virginia buildings will be redeemed (paid in full) in the 3rd quarter of 2004, not effecting the Tennessee Bond which expires in 2008 (2) Scheduled maturities, excluding the revolving line of credits (3) Purchase commitments are for purchases made in the normal course of business to meet operational and capital expenditure requirements. Other long term liability of $2,340,000 is composed of accrued pension cost and deferred compensation. The Company's working capital was approximately $22,671,000 at July 31, 2004 compared to approximately $8,759,000 at January 31, 2004. The change is primarily due to the reclassification of $12,000,000 from current debt to long-term debt. The Company's current ratio was 1.8 to 1 and 1.3 to 1 at July 31, 2004 and January 31, 2004, respectively. Debt to total capitalization at July 31, 2004 increased to 52.0% from 51.5% at January 31, 2004. On April 26, 2002, Midwesco Filter borrowed $3,450,000 under two mortgage notes secured by two parcels of real property and improvements owned by Midwesco Filter in Winchester, Virginia. Proceeds from the mortgages, net of a prior mortgage loan, were approximately $2,700,000 and were used to make principal payments to the lenders under the Prior Term Loans and the Bank. On June 17, 2004, Midwesco Filter sold one of its buildings located in Winchester, Virginia. The sold building consisted of 66,998 square feet on 10 acres. The mortgage of $1,088,000 was paid at the closing. The note on the remainder property bears interest at 7.10% with a monthly payment of $23,616 for both principal and interest, and the note's amortization schedule and term are ten years. On September 14, 1995, Midwesco Filter in Winchester, Virginia received $2,050,000 of proceeds of Industrial Revenue Bonds, which mature on August 1, 2007. These bonds are fully secured by bank letters of credit. Due to the sale of land and a building on June 17, 2004, the Company will redeem the bonds in the third quarter of 2004. On July 11, 2002, the Company entered into secured note purchase agreements with certain institutional investors ("Note Purchase Agreements"). Under the terms of the Note Purchase Agreements, the Company entered into a five-year $6,000,000 term loan replacing prior term loans with an aggregate original principal balance of $25,000,000 ("Prior Term Loans"). The outstanding principal balance of the Prior Term Loans at July 11, 2002 was $16,000,000. The Company borrowed 13
$10,000,000 from its new revolving line of credit from another financial institution (described below) to pay down this loan from $16,000,000 to $6,000,000. Interest rates under the Note Purchase Agreements are 12% per annum if the outstanding principal is greater than $5,000,000 or 10% per annum if the outstanding principal is $5,000,000 or less. The Company is scheduled to pay $188,000 in aggregate principal on the last days of March, June, September and December in each year, commencing on September 30, 2002 and ending on June 30, 2007. In addition, the Company is scheduled to make annual prepayments of excess cash flow (as defined in the Note Purchase Agreements). Finally, the Loan Agreement (defined below) and the Note Purchase Agreements permit voluntary prepayments sufficient to reduce the outstanding term loan principal to $5,000,000 subject to certain conditions. The Company met such conditions and made such a prepayment on July 31, 2002. At January 31, 2004 and April 30, 2004, the Company was not in compliance with one covenant under the Note Purchase Agreements. Waivers have been obtained for violation of debt covenants for fiscal periods ending on or prior to April 30, 2004. At July 31, 2004, the Company was in compliance with covenants under the Loan Agreement. On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan Agreement"). Under the terms of the Loan Agreement, which matures on July 10, 2006, the Company can borrow up to $27,000,000, subject to borrowing base and other requirements, under a revolving line of credit. Interest rates generally are based on options selected by the Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At July 31, 2004, the prime rate was 4.25%, and the margins added to the prime rate and the LIBOR rate, which are determined each quarter based on the applicable financial statement ratio, were 1.25 and 3.25 percentage points, respectively. As of July 31, 2004, the Company had borrowed $11,290,000 and had $1,776,000 available to it under the revolving line of credit. In addition, $6,694,000 of availability was used under the Loan Agreement primarily to support letters of credit to guarantee amounts owed for Industrial Revenue Bond borrowings. The Loan Agreement provides that all payments by the Company's customers are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At July 31, 2004, the amount of restricted cash was $1,034,000. Cash required for operations is provided by draw-downs on the line of credit. At January 31, 2004 and April 30, 2004, the Company was not in compliance with covenants under the Loan Agreement. Waivers have been obtained for violation of debt covenants for fiscal periods ending on or prior to April 30, 2004. At July 31, 2004, the Company was in compliance with covenants under the Loan Agreement. ACCOUNTING PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board (FASB) issued a revision to SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." This Statement retains the disclosures previously required by SFAS 132 but adds additional disclosure requirements about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. It also calls for the required information to be provided separately for pension plans and for other postretirement benefit plans. In addition to expanded annual disclosures, the standard improves information available to investors in interim financial statements. SFAS 132R is effective for fiscal years ending after December 15, 2003, and for quarters beginning after December 15, 2003. The adoption of SFAS 132R did not have a material impact on the Company's financial statements, however, required interim disclosures have been reflected in the current financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation requires the recognition of certain guarantees as liabilities at fair market value and is effective for guarantees issued or modified after December 31, 2002. Adoption of the provisions of the Interpretation has not had and will not have a material effect on the financial statements of the Company, based on guarantees in effect on July 31, 2004. 14
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 maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products and use of foreign currency denominated debt in Denmark. The Company also 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 July 31, 2004 or January 31, 2004. The changeover from national currencies to the Euro began on January 1, 2002 and has not materially affected, 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 Company has attempted to mitigate its interest rate risk by maintaining a balance of fixed-rate long-term debt with floating rate debt. Commodity price risk is the possibility of higher or lower costs due to changes in the prices of commodities, such as ferrous alloys (e.g., steel) which we use in the production of piping systems. The Company attempts to mitigate such risks by obtaining price commitments from its commodity suppliers and, when it appears appropriate, purchasing quantities in advance of likely price increases. Item 4. Controls and Procedures As of July 31, 2004, the Company carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls, or in other factors that could significantly affect these controls, subsequent to the date of that evaluation. 15
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 24, 2004. David Unger, Henry M. Mautner, Bradley E. Mautner, 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 against, with respect to each nominee: For Against ---------- ---------- David Unger 3,090,161 11,600 Henry M. Mautner 3,090,161 11,600 Bradley E. Mautner 3,090,161 11,600 Arnold F. Brookstone 2,413,861 687,900 Eugene Miller 2,413,861 687,900 Stephen B. Schwartz 2,413,861 687,900 Dennis Kessler 2,413,861 687,900 At that meeting, the stockholders also voted on and approved the Company's 2004 Stock Incentive Plan which plan replaced the Company's 1993 Stock Option Plan and Amended and Restated 1994 Stock Option Plan, both of which had expired by their terms since the date of the 2003 annual meeting of the stockholders. The following is a tabulation of the votes cast for and against the approval of the Company's 2004 Stock Incentive Plan at the meeting: For Against ---------- ---------- Approval of the Company's 2004 Stock Incentive Plan: 2,226,502 875,259 Item 6. Exhibits and Reports on Form 8-K. Exhibits: (31) Rule 13a - 14(a)/15d - 14(a) Certifications (1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32) Section 1350 Certifications (1) Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 16
SIGNATURES 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 14, 2004 /s/ David Unger -------------------------------------------- David Unger Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) Date: September 14, 2004 /s/ Michael D. Bennett -------------------------------------------- Michael D. Bennett Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer) 17
Exhibit 31.1 I, David Unger, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MFRI, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 14, 2004 /s/ David Unger - --------------------------- David Unger Director and Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)
Exhibit 31.2 I, Michael D. Bennett, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MFRI, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 14, 2004 /s/ Michael D. Bennett - --------------------------- Michael D. Bennett Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer)
Exhibit 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, David Unger, President and Chief Executive Officer (principal executive officer) of MFRI, Inc. (the "Registrant"), certify that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended July 31, 2004 of the Registrant (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ David Unger - ------------------------------ David Unger Director and Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) September 14, 2004 A signed original of this written statement required by Section 906 has been provided to MFRI, Inc. and will be retained by MFRI, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, Michael D. Bennett, Chief Financial Officer (principal financial officer) of MFRI, Inc. (the "Registrant"), certify that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended July 31, 2004 of the Registrant (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Michael D. Bennett - ------------------------------ Michael D. Bennett Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer) September 14, 2004 A signed original of this written statement required by Section 906 has been provided to MFRI, Inc. and will be retained by MFRI, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.