2008 Annual Report
Filter elements for clean air
Heat transfer
equipment
for industrial
process cooling
Energy efficient
heating, ventilation,
and air conditioning
Specialty piping systems
for energy distribution
Midwesco filter wire cage manufacturing
Thermal Care pump reservoir
Perma-Pipe Gulf of Mexico installation
A Midwesco Mechanical project
About MFRI
MFRI is a multi-line company with interests in: specialty piping systems (Perma-Pipe),
custom-designed industrial filtration elements (Midwesco Filter), industrial process
cooling equipment (Thermal Care) and energy efficient heating, ventilation, and air
conditioning (Midwesco Mechanical).
Perma-Pipe is one of the largest U.S.
Midwesco Filter designs and
Thermal Care engineers, designs
manufacturers of specialty piping systems
manufactures filter elements for dust
and manufactures a wide range of heat
for district heating and cooling, secondary
collectors used in air filtration. It offers
transfer equipment, including chillers,
containment and oil and gas gathering
more than 10,000 styles of filter elements
cooling towers and plant circulating
flowlines. District heat and cooling systems
designed to fit almost any baghouse or
systems for cooling industrial processes.
provide efficient energy distribution.
cartridge-type industrial filtration system.
The Company’s cooling products are used
Secondary containment piping systems,
These systems are box-like structures
to optimize manufacturing productivity by
consisting of a product pipe inside a
where particulates, usually from industrial
quickly removing heat from manufacturing
containment pipe, securely transports
and utility sources, are removed from
processes. Chillers and/or cooling towers
hazardous liquids and petroleum products.
exhaust gases while passing through filter
are combined with plant circulating
Oil and gas gathering flowlines are used to
elements. Midwesco Filter makes filter
systems to create plant-wide systems that
transport crude oil from the well head,
elements for both original equipment
account for a large portion of its business.
either on land or on the ocean floor, to the
manufacturers and aftermarket users.
Its principal markets for cooling products
are thermoplastics processing and the
printing industries.
offloading point.
Perma-Pipe’s leak detection and
location systems are sold as part of many
of its piping systems and on a stand-alone
basis, to monitor areas where fluid may
contaminate the environment or damage
equipment and property.
Midwesco Mechanical and
Energy: Providing energy efficient
heating, ventilation, and air conditioning
(HVAC) systems for large commercial,
industrial, and institutional projects.
Dear Fellow Shareholders,
Overall, 2008 was a very good year. The company delivered record results for the year. Sales
were the highest ever at $303 million, up 26.5 percent from last year. Net income of $6.7 million
and income per share of $0.98 (diluted) were also at record levels, in spite of a fourth quarter
non-cash goodwill impairment charge of $2.8 million. This charge was related to the filtration
and industrial process cooling businesses and eliminated all remaining goodwill on the balance
sheet. Without this write down, earnings would have been $8.5 million or $1.24 per share
(diluted).
Contributions to this record setting result were not even across our business segments. The
piping systems business had a terrific year driven by strong domestic activity and very robust
performance in the Middle East, supplemented by project specific revenue in India. The
filtration products business sales grew nicely but operating profit, even before the non-cash
goodwill charge, was lower due to reduced margin from the marketplace and some higher one-
time expenses for relocating a U.S. operation to a more efficient U.S. manufacturing facility.
The industrial process cooling equipment business faced a very difficult fourth quarter as the
markets it serves were deeply impacted by the global recession. Yet, excluding the non-cash
goodwill charge, the group still improved profitability compared to the prior year. The HVAC
business worked actively on project backlog and, via solid execution, delivered a nice profit for
the year.
The Company’s backlog on January 31, 2009 was $108 million, down 24.8 percent from the
prior year but still the second highest in Company history. Part of the backlog decline was due
to the normal progress on specific projects, such as the pipeline in India, and high sales in the
fourth quarter. The Company would not expect a project similar to the India project to be
replaced in the backlog in sequential years. Additionally, the difficult worldwide economic
environment has caused some orders to be postponed or cancelled and has reduced the
opportunities to obtain new work. As a favorable sign, quoting activity in 2009 has been
maintained at a reasonably high level but decision making by customers is slow, most likely due
to general financial constraints and caution on expenditures.
Backlog (In thousands):
Piping Systems
Filtration Products
Industrial Process Cooling Equipment
Corporate and Other
Total
1/31/09
$ 52,385
35,549
3,835
16,051
$ 107,820
1/31/08
$ 65,810
38,161
6,315
33,179
$ 143,465
% Decrease
(20.4%)
(6.8%)
(39.3%)
(51.6%)
(24.8%)
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100%
80%
60%
40%
20%
0%
2008
2007
2006
All(cid:3)Other
Asia
Europe
Middle(cid:3)East
United(cid:3)States
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Filtration Products Segment
Sales of $105 million increased 8.5 percent from the prior year, reflecting stronger sales for all
product lines and a growing electric power generation customer base. Gross margin was $11.4
million or 10.8 percent of sales down from 14.2 percent of sales in 2007 as a result of the highly
competitive marketplace, increasing cost of raw materials and higher cost of production labor at
the Denmark operation.
In order to increase the capacity and efficiency of the domestic pleated products offering, the
operations at the Cicero, Illinois plant were relocated to a modern facility in Bolingbrook, Illinois
in the summer of 2008. Even though the relocation did add materially to our costs in the second
half of the year, this investment should provide important benefits in the long term. Also, in the
fourth quarter, the filtration products business recorded a non-cash goodwill impairment charge
of $1.7 million, bringing the loss from operations in 2008 to $2.9 million.
Industrial Process Cooling Equipment Segment
Markets served by this segment saw significant contraction in the latter part of 2008 and into
2009. Compared to 2007, sales decreased by 12.6 percent to $31.7 million. The sales decrease
was primarily due to lower demand for its products in the plastics, printing and other industrial
markets. Even though demand was reduced, the business improved gross margin to 25.0 percent
of sales from 23.4 percent of sales in 2007.
For the fourth quarter, the business recorded a non-cash goodwill impairment charge of $1.1
million. This brought the loss from operations to $1.8 million, compared to a loss from
operations in 2007 of $1.2 million. Excluding the goodwill charge the loss from operations
would have been $665,000, significantly reduced in comparison to the 2007 loss. This was
accomplished even though the group continued to invest in new product development necessary
for growth and to meet environmental regulations in 2010 and beyond.
Corporate and Other
In December 2006, the Company created a new subsidiary, Midwesco Mechanical and Energy,
Inc. to provide installation of HVAC systems for commercial and industrial buildings in the
Chicago market area. The President of this group, Ed Crylen, is an industry veteran and brings
substantial skills in engineering and sales to this activity. We hope to leverage technology
developed in our other activities to improve the energy and environmental performance of the
projects in which we participate. The business has grown nicely and in 2008 sales increased to
$14.1 million up from $1.8 million last year.
During 2008 and early 2009 we made some important additions to our management team and
Board of Directors. In the spring of 2008, Tim Murphy joined our corporate staff as Vice
President of Human Resources. He brings a deep understanding of management talent
assessment, development and succession planning, as well as how the area of human resources
integrates into the overall business strategy. In the summer of 2008, Mark Foster joined the
company as President of the filtration business segment. His background fits well with the needs
of our Filter group as we focus on improving margins, increasing operating profits and
expanding our international footprint of the business.
Most recently, in 2009, we announced the addition of Michael Gade and Mark Zorko to our
Board. We are extremely pleased to have access to their diverse business experience on our
governance team and look forward to their counsel as we continue to grow the company’s
activities.
Turning to 2009, all the business units are focused on maximizing the results from existing
backlog while adjusting cost structures to the new realities brought on by the uncertain depth and
duration of a global recession. In the most challenging business climate in decades, we are
fortunate to have a strong leadership team to face the challenges ahead.
OUR MISSION
We are committed to provide products and services, in the markets we have chosen, of the
highest quality and that contribute to a cleaner and more energy efficient global economy. We
dedicate ourselves to building a diverse, growing Company that offers its customers, employees
and shareholders a way to benefit from working toward that goal. We will do this while
operating our business with the highest standards of ethics and professionalism and in
compliance with all relevant laws and regulations. Our policies will support the personal growth,
health and well being of all our employees. MFRI management and its employees are committed
to the success of this mission.
We deeply appreciate the hard work of our 1,500 employees around the world and your support
and the confidence you have placed in us as stewards of your investment. We hope you will take
the time to learn more about our Company by visiting our web site www.mfri.com, reading our
10-K report, which is attached to this letter and / or calling us with your questions.
Sincerely,
DAVID UNGER
Chairman and
Chief Executive Officer
BRADLEY E. MAUTNER
President and
Chief Operating Officer
Statements and other information contained in this announcement which can be identified by the use of forward-
looking terminology such as "anticipate," "may," "will," "expect," "continue," "remain," "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 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.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2009
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
to
OR
Commission File No. 0-18370
MFRI, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
7720 N. Lehigh Avenue
Niles, Illinois
(Address of principal executive offices)
36-3922969
(I.R.S. Employer Identification No.)
60714
(Zip Code)
(847) 966-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
Common Stock, $.01 per share The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes / / No / x /
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes / / No / x /
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this FORM 10-K or any amendment to this FORM 10-K. Yes / x / No / /
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer / / Accelerated filer / x / Non-accelerated filer / / Smaller reporting company / /
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of The Exchange Act)
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (the
exclusion of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person
is an affiliate of the registrant) was $75,742,503 based on the closing sale price of $13.39 per share as reported on the NASDAQ
Global Market on July 31, 2008.
The number of shares of the registrant’s common stock outstanding at April 8, 2009 was 6,815,420.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document of the registrant are incorporated herein by reference:
Document
Proxy Statement for the 2009 annual meeting of stockholders.
Part of FORM 10-K
III
FORM 10-K CONTENTS
JANUARY 31, 2009
Item
Part 1
1.
1A.
1B.
2.
3.
4.
Part II
5.
6.
7.
7A.
8.
9.
9A.
9B.
Part III
10.
11.
12.
13.
14.
Part IV
15.
Business .......................................................................................................................................................
Company Profile ....................................................................................................................................
Piping Systems Business .......................................................................................................................
Filtration Products Business ...................................................................................................................
Industrial Process Cooling Equipment Business ....................................................................................
Other Business ........................................................................................................................................
Employees ....................................................................................................................................................
International .................................................................................................................................................
Executive Officers of the Registrant ............................................................................................................
Risk Factors .................................................................................................................................................
Unresolved Staff Comments ........................................................................................................................
Properties .....................................................................................................................................................
Legal Proceedings ........................................................................................................................................
Submission of Matters to a Vote of Security Holders ..................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ......................................................................................................................................................
Selected Financial Data ................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................
Quantitative and Qualitative Disclosures About Market Risk .....................................................................
Financial Statements and Supplementary Data ............................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................
Controls and Procedures ..............................................................................................................................
Other Information ........................................................................................................................................
Directors, Executive Officers and Corporate Governance ...........................................................................
Executive Compensation ..............................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters .........................................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence .............................................
Principal Accountant Fees and Services ......................................................................................................
Exhibits and Financial Statement Schedules ................................................................................................
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting .............
Report of Independent Registered Public Accounting Firm ......................................................................................
Signatures ...................................................................................................................................................................
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(cid:20)
as reasonably practicable after the Company electronically delivers such material to the SEC. These materials can be
found on the website under: Investor’s Center — SEC Filings. The information on the Company’s website is not part of
this annual report on Form 10-K, and is not incorporated into this or any other filings by the Company with the SEC.
Piping Systems Business
Products and Services. The Company engineers, designs, manufactures and sells specialty piping systems and leak
detection and location systems. Piping systems include (i) industrial and secondary containment piping systems for
transporting chemicals, hazardous fluids and petroleum products, (ii) insulated and jacketed district heating and cooling
(“DHC”) piping systems for efficient energy distribution to multiple locations from central energy plants, and (iii) oil and
gas gathering flow lines and long lines for oil and mineral transportation. The Company's leak detection and location
systems are sold as part of many of its piping systems, and on a stand-alone basis to monitor areas where fluid intrusion
may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage
equipment or property.
The Company's piping systems are frequently custom fabricated to job site dimensions and/or incorporate provisions for
thermal expansion due to varying temperatures. This custom fabrication helps to minimize the amount of field labor
required by the installation contractor. Most of the Company's piping systems are produced for underground installations
and, therefore, require trenching, which is done by unaffiliated installation contractors.
Marketing. The customer base for the Company's piping systems products is industrially and geographically diverse. In
the United States (“U.S.”) the Company employs a national sales manager and regional sales managers who use and assist
a network of independent manufacturers' representatives, none of whom sells products that are competitive with the
Company's piping systems. Globally, the Company employs direct sales force as well as an exclusive agent network for
several countries in the Middle and Far East to market and sell products and services.
Patents and Trademarks. The Company owns several patents covering its piping and electronic leak detection systems.
The patents are not material either individually or in the aggregate to the overall business because the Company believes
sales in the business would not be materially reduced if patent protection were not available. The Company owns
numerous trademarks connected with its piping and leak detection systems business including the following: Perma-
Pipe®, Chil-Gard®, Double-Quik®, Escon-A®, FluidWatch®, Galva-Gard®, Poly-Therm®, Pal-AT®, Stereo-Heat®,
LiquidWatch®, PalCom®, Xtru-therm®, Auto-Therm®, Pex-Gard™, and Ultra-Therm®. The Company also owns
United Kingdom trademarks for Poly-Therm®, Perma-Pipe® and Ric-Wil®, Denmark trademark for Ric-Wil®, France
trademark for Perma-Pipe®, Germany trademark for Perma-Pipe® and a Canadian trademark for Ric-Wil®.
Backlog. As of January 31, 2009, the backlog (uncompleted firm orders) amount was $52,385,000, substantially all of
which is expected to be completed in 2009. As of January 31, 2008, the amount of backlog was $65,810,000.
Raw Materials. The basic raw materials used in the production of products are pipes and tubes made of carbon steel,
alloy, copper, ductile iron and plastics and various chemicals such as polyols, isocyanate, urethane resin, polyethylene and
fiberglass, mostly purchased in bulk quantities. The Company believes there are currently adequate supplies or sources of
availability of the needed raw materials.
The sensor cables used in the leak detection and location systems are manufactured to the Company's specifications by
companies regularly engaged in the business of manufacturing such cables. The Company owns patents for some of the
features of its sensor cables. The Company assembles the monitoring component of the leak detection and location
system from standard components purchased from many sources.
Competition. The piping systems business is highly competitive. The Company believes its principal competition in this
segment consists of between ten and twenty major competitors and more small competitors. The Company believes
quality, service, a comprehensive product line and price are the key competitive factors. The Company also believes it
has a more comprehensive line for DHC than any of its competitors. Certain competitors of the Company have greater
financial resources and some have cost advantages as a result of manufacturing a limited range of products.
2
Government Regulation. The demand for the Company's leak detection and location systems and secondary containment
piping systems, a small percentage of the total annual piping sales, is driven by federal and state environmental regulation
with respect to hazardous waste. The Federal Resource Conservation and Recovery Act require, in some cases, that the
storage, handling and transportation of certain fluids through underground pipelines feature secondary containment and
leak detection. The National Emission Standard for Hydrocarbon Airborne Particulates requires reduction of airborne
volatile organic compounds and fugitive emissions. Under this regulation, many major refineries are required to recover
fugitive vapors and dispose of the recovered material in a process sewer system, which then becomes a hazardous
secondary waste system that must be contained. Although there can be no assurances as to the ultimate effects of these
governmental regulations, the Company believes it may increase the demand for its piping systems products.
Filtration Products Business
Products and Services. The Company manufactures and sells a wide variety of filter elements for cartridge collectors and
baghouse air filtration and particulate collection systems. The principal types of industrial air filtration and particulate
collection systems in use are baghouses, cartridge collectors, electrostatic precipitators, scrubbers and mechanical
collectors. This equipment is used to eliminate particulate from the air by passing particulate laden gases through fabric
filters (filter bags) or pleated media filter elements, in the case of baghouses or cartridge collectors, between electrically
charged collector plates, in the case of electrostatic precipitators and contact with liquid reagents (scrubbers). The
Company manufactures filter elements in standard industry sizes, shapes and filtration media and to custom specifications,
maintaining manufacturing standards for more than 10,000 styles of filter elements to suit substantially all industrial
applications. Filter elements are manufactured from industrial yarn, fabric and paper purchased in bulk. Most filter
elements are produced from cellulose, acrylic, fiberglass, polyester, aramid, laminated membranes, or polypropylene
fibers. The Company also manufactures filter elements from more specialized materials, sometimes using special
finishes.
The Company markets numerous filter-related products and accessories used during the installation, operation and
maintenance of cartridge collectors and baghouses, including wire cages used to support filter bags, spring assemblies for
proper tensioning of filter bags and clamps and hanger assemblies for attaching filter elements. In addition, the Company
markets other hardware items used in the operation and maintenance of cartridge collectors and baghouses. The Company
also provides maintenance services, consisting primarily of air filtration system inspection and filter element replacement,
using a network of independent contractors.
Over the past three years, the Company's filtration products business has supplied filter elements to more than 4,000 user
locations. The Company has particular expertise in supplying filter bags for use with electric arc furnaces in the steel
industry. The Company believes its production capacity and quality control procedures make it a leading supplier of filter
bags to large users in the electric power industry. Orders from the electric power industry tend to be substantial in size,
but are usually at lower margins than from other industries.
Marketing. The customer base is industrially and geographically diverse. These products and services are used primarily
by operators of utility and industrial coal-fired boilers, incinerators and cogeneration plants and by producers of metals,
cement, chemicals and other industrial products.
The Company has an integrated sales program for its filtration products business, which consists of field-based sales
personnel, manufacturers' representatives, a telemarketing operation and computer-based customer information systems.
The Company believes the computer-based information systems are instrumental in increasing sales of filter-related
products and accessories and maintenance services, as well as sales of filter elements. The Company’s filtration products
are marketed domestically under the names, Midwesco Filter and TDC Filter Manufacturing.
The Company markets its U.S. manufactured filtration products internationally using domestically based sales resources
to target major users in foreign countries. The Denmark filtration facility markets pleated filter elements throughout
Europe and Asia, primarily to original equipment manufacturers.
Trademarks. The Company owns the following trademarks covering its filtration products: Seamless Tube®, Leak
Seeker®, Prekote®, We Take the Dust Out of Industry®, Pleatkeeper®, Pleat Plus® and EFC®.
3
Backlog. The backlog amount was $35,549,000 at January 31, 2009 and $38,160,800 at January 31, 2008. Certain
customers have placed orders that are deliverable over multiple years. Therefore, approximately $9,109,000 of the
backlog as of January 31, 2009 is not expected to be completed in 2009.
Raw Materials. The basic raw materials used are industrial fibers and media supplied by leading producers of such
materials. The majority of raw materials purchased are woven fiberglass fabric, yarns for manufacturing Seamless Tube®
products and other woven, felted, spun bond, laminated membranes, and cellulose media. Only a limited number of
suppliers are available for some of these materials. The Company believes supplies of all materials are adequate to meet
current demand.
Competition. The filtration products business is highly competitive. In addition, new installations of cartridge collectors
and baghouses are subject to competition from alternative technologies. The Company believes, based on domestic sales,
its principal competitors in this segment consist of approximately five major competitors and at least 50 smaller
competitors, most of which are doing business on a regional or local basis. In Europe, several companies supply filtration
products, and the Company is a relatively small participant in that market. Some of the Company's competitors have
greater financial resources than the Company.
The Company believes quality, service, and price are the most important competitive factors in its filtration products
business. Often, a manufacturer has a competitive advantage when its products have performed successfully for a
particular customer in the past. Additional effort is required by a competitor to market products to such a customer. In
certain applications, the Company's proprietary Seamless Tube® product and customer support provide the Company with
a competitive advantage. Certain competitors may have a competitive advantage with respect to their own proprietary
products and processes, such as specialized fabrics and fabric finishes. In addition, some competitors may have cost
advantages with respect to certain products as a result of lower wage rates and/or greater vertical integration.
Government Regulation. The Company's filtration products business is substantially dependent upon governmental
regulation of air pollution at the federal and state levels. Federal clean air legislation requires compliance with national
primary and secondary ambient air quality standards for specific pollutants, including particulate. The states are primarily
responsible for implementing these standards and, in some cases, have adopted more stringent standards than those issued
by the U.S. Environmental Protection Agency under the Clean Air Act Amendments of 1990 ("Clean Air Act”).
Industrial Process Cooling Equipment Business
Products and Services. The Company engineers, designs, manufactures and sells cooling and temperature control
equipment for industrial applications. The Company believes it manufactures the most complete line of chillers available
in its primary markets. Products include: chillers (portable and central); cooling towers; plant circulating assemblies; hot
water, hot oil, and negative pressure temperature controllers; water treatment equipment; specialty cooling devices for
printing presses and ink management; and replacement parts and various accessories relating to the foregoing products.
The Company's products are used to optimize manufacturing productivity by quickly removing heat from manufacturing
processes and providing accurate temperature control. The Company combines chillers and/or cooling towers with plant
circulating systems to create plant-wide systems that account for a large portion of its business. The Company specializes
in customizing cooling systems and computerized controls according to customer specifications.
The principal markets for the Company’s cooling and temperature control products are thermoplastics processing and the
printing industries. The Company also sells its products to original equipment manufacturers, to other cooling
manufacturers on a private branded basis and to manufacturers in the laser, metallizing, machine tool industries, and
various other industries.
Marketing. Generally, the Company sells its products in the global thermoplastics and printing markets as well as to
other industrial applications that require specialized heat transfer equipment. Domestic thermoplastics processors are the
largest market served by the Company, representing the core of its business. The Company's cooling products are sold
through independent manufacturers' representatives on an exclusive territory basis. Temperature control products are sold
through a network of independent dealers/distributors in major industrial markets.
4
The Company believes the total annual U.S. market for water cooling equipment in the plastics industry is over $100
million, and the Company is one of the three largest suppliers of such equipment to the plastics industry. The Company
believes the plastics industry is a mature industry with growth generally consistent with that of the national economy. The
Company has increased sales to non-plastics industries that require specialized heat transfer equipment, usually sold to
end users as a package by the supplier of the primary equipment, particularly in the laser industry, metallizing industry,
and machine tool industries. The Company believes the size of this market is more than $200 million annually. The
original equipment manufacturer generally distributes products to the end user in these markets.
Trademarks. The Company has registered the trademarks Thermal Care®, AWS® and Applied Web Systems®.
Backlog. As of January 31, 2009, the backlog amount was $3,835,000, substantially all of which is expected to be
completed in 2009. As of January 31, 2008, the amount of backlog was $6,315,000.
Raw Materials. The Company uses prefabricated sheet metal and subassemblies manufactured by both Thermal Care and
outside vendors for temperature controller fabrication. Cooling towers are manufactured using fiberglass and hardware
components purchased from several sources. The Company believes its access to sheet metal, subassemblies, fiberglass
and hardware components is adequate.
Competition. The Company believes there are about 15 competitors selling cooling equipment in the domestic plastics
market. The Company further believes three manufacturers, including the Company, account for approximately 50% of
the domestic plastics cooling equipment market. Many international customers, with relatively small cooling needs, are
able to purchase small refrigeration units (portable chillers), which are manufactured in their respective local markets at
prices below that which the Company can offer due to issues such as freight cost and customs duties. However, such local
manufacturers often lack the technology and products needed for plant-wide cooling systems. The Company believes its
reputation for producing quality plant-wide cooling products results in a significant portion of the Company’s business in
the cooling product area. Temperature control units, which are sold globally, compete with both local and European
manufacturers. The quality, reliability, features and range of temperature control applications addressed by the
Company’s products provide a competitive advantage.
The Company believes quality, service, a comprehensive product line and price are the key competitive factors in its
industrial process cooling equipment business. The Company believes it has a more comprehensive line of cooling
products than any of its competitors. Certain competitors of the Company have cost advantages as a result of
manufacturing in non-union shops and offering a limited range of products. Some of the Company's competitors may
have greater financial resources than the Company.
Government Regulation. The Company does not expect compliance with federal, state and local provisions regulating
the discharge of materials into the environment or otherwise relating to the protection of the environment to have a
material effect on capital expenditures, earnings or the Company’s competitive position. Management is not aware of the
need for any material capital expenditures for environmental control facilities for the foreseeable future. Regulations,
promulgated under the Clean Air Act, prohibit the manufacture and sale of certain refrigerants. The Company does not
use these refrigerants in its products. The Company expects that suitable refrigerants conforming to federal, state and
local laws and regulations will continue to be available to the Company, although no assurances can be given as to the
ultimate effect of the Clean Air Act and related laws on the Company.
Other Business
Corporate and other activity includes activity for the installation of HVAC systems. This activity is not sufficiently large
enough to constitute a reportable segment. During 2008, this subsidiary’s net sales were $14,142,000, 4.7% of
consolidated net sales.
Backlog. At January 31, 2009, the backlog amount for other business was $16,051,000, substantially all of which is
expected to be completed in 2009 and was $33,179,000 at January 31, 2008.
5
Employees
As of February 28, 2009, the Company had 1,501 full-time employees, of whom 51.5% worked outside the U.S.
International
The Company’s international operations as of January 31, 2009 include subsidiaries in four foreign countries on three
continents. The Company’s international operations contributed approximately 30.7% of revenues in 2008 and 20.6% of
revenues in 2007.
Refer to the Business Segment descriptions on pages 1 through 5 above and Note 1 - Description of the Business and
Segment Information in the Notes to Consolidated Financial Statements for additional information on international
activities. International operations are subject to certain risks inherent in conducting business in foreign countries,
including price controls, exchange controls, limitations on participation in local enterprises, nationalization, expropriation
and other governmental action, and changes in currency exchange rates.
The following table set forth information regarding the executive officers of the Company as of April 8, 2009:
Executive Officers of the Registrant
Name
David Unger
Offices and Positions, if any, held with the Company; Age
Director, Chairman of the Board, and Chief Executive Officer
of the Company; Age 74
Bradley E. Mautner
Director, President and Chief Operating Officer of the
Company; Age 53
Michael D. Bennett
Vice President, Chief Financial Officer, Secretary and
Treasurer; Age 64
Timothy P. Murphy
Vice President; Age 59
Fati A. Elgendy
President, Perma-Pipe; Age 60
Billy E. Ervin
Vice President; Age 63
Robert A. Maffei
Vice President; Age 61
John Mark Foster
President, Midwesco Filter; Age 47
Stephen C. Buck
President, Thermal Care; Age 60
Thomas A. Benson
Vice President; Age 55
Edward A. Crylen
President, Midwesco Mechanical and Energy; Age 57
All of the executive officers serve at the discretion of the Board of Directors.
Executive Officer of
the Company or its
Predecessor since
1972
1994
1989
2008
1990
1986
1987
2008
2007
1988
2006
David Unger, Chairman of the Board of Directors and Chief Executive Officer since 1989; President from 1994 until
2004.
Bradley E. Mautner, President and Chief Operating Officer since December 2004; Executive Vice President from
December 2002 to December 2004;Vice President from December 1996 through December 2002; Director since 1995.
Bradley E. Mautner is the son of Henry M. Mautner, a director.
6
Michael D. Bennett, Chief Financial Officer and Vice President since August 1989.
Timothy P. Murphy, Vice President of Human Resources (“HR”) since 2008. Prior to joining the Company, Mr.
Murphy spent 28 years as a business consultant in roles including Principle Partner of Murphy & Hill Consulting,
Managing Director of the Bay Area office of RHR, International and Consultant with YSC, Ltd. Mr. Murphy previously
consulted assignments to the Company from 1985 to 2008.
Fati A. Elgendy, President and Chief Operating Officer of Perma-Pipe since March 1995.
Billy E. Ervin, Vice President, Director of Production of Perma-Pipe since 1986.
Robert A. Maffei, Vice President, Director of Sales and Marketing of Perma-Pipe since August 1996.
John Mark Foster, President of Midwesco Filter since 2008. Mr. Foster previously worked at Saint-Gobain in the areas
of industrial/project engineering and plant management, followed by positions in market management, human resources
and a series of North American and European general management assignments. Saint-Gobain is a Paris, France based
public, multi-national company that provides a wide range of high performance materials and products to industrial
customers worldwide.
Stephen C. Buck, President of Thermal Care since 2007. Mr. Buck joined Thermal Care after a 22 year career most
recently as President - Safety Products Group with Federal Signal Corporation (NYSE: FSS), which manufactures and
markets products to industrial and municipal customers worldwide. Prior to his employment with Federal Signal
Corporation, Mr. Buck held various positions in marketing and management for companies in computer
hardware/software, oil field services and telecommunications.
Thomas A. Benson, Vice President Sales and Marketing of Thermal Care since May 1988.
Edward A. Crylen, President and Chief Operating Officer of Midwesco Mechanical and Energy, since its formation in
December 2006. From 1989 to December 2006, he was President of the Midwesco Mechanical and Energy a division of
Midwesco, Inc. (affiliate) that was primarily owned by two principal stockholders who were also members of
management.
Item 1A. Risk Factors
Competition. The businesses in which the Company is engaged are highly competitive. Many of the competitors are
larger and have more resources than the Company. Many of the Company’s products are also subject to competition from
alternative technologies and alternative products. To the extent the Company relies upon a single source for key
components of several of its products, the Company believes there are alternate sources available for such components;
however, there can be no assurance that the interruption of supplies of such components would not have an adverse effect
on the financial condition of the Company, and that the Company, if required to do so, would be able to negotiate
agreements with alternative sources on acceptable terms.
International rapid growth. Potential international future rapid growth could place a significant strain on management,
operations and financial systems as well as on the Company’s ability to attract and retain competent employees. Future
operating results will depend in part on the Company’s ability to continue to implement and improve operating and
financial controls and management information systems. Failure to effectively manage growth could materially adversely
impact the business, financial conditions and results of operations.
Changes in Government Policies and Laws, Worldwide Economic Conditions. International sales represent an
increasing portion of the Company’s total sales and continued growth and profitability may involve further international
expansion. The Company’s financial results could be affected by changes in trade, monetary and fiscal policies, laws and
regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions
include but are not limited to changes in a country’s or region’s economic or political conditions, trade regulations
affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of
7
intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency
exchange activities, burdensome taxes and tariffs and other trade barriers. International risks and uncertainties, including
changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced
international sales and reduced profitability associated with such sales.
Government regulation. The demand for the Company’s leak detection and location systems and secondary containment
piping systems is driven primarily by government regulation with respect to hazardous waste. Laws such as the Federal
Resource Conservation and Recovery Act and standards such as the National Emission Standard for Hydrocarbon
Airborne Particulates have increased the demand for the Company’s leak detection and location and secondary
containment piping systems. The Company’s filtration products business, to a large extent, is dependent on governmental
regulation of air pollution at the federal and state levels. The Company believes that continuing growth in the sale of
filtration products and services will be materially dependent on continuing enforcement of environmental laws such as the
Clean Air Act. Although changes in such environmental regulations could significantly alter the demand for the
Company’s products and services, the Company does not believe such a change is likely to decrease demand in the
foreseeable future.
Economic Factors. The current economic slowdown and recession in the U.S. and worldwide economies is likely to
further decrease the demand for products and adversely affect sales. Because economic and market conditions vary
within the Company’s business segments, the Company’s future performance by business segment will also vary. In
addition, the Company is exposed to fluctuations in currency exchange rates and commodity prices. Failure to
successfully manage any of these risks could have an adverse impact on the Company’s financial position, results of
operations and cash flows.
Also, the cash surrender value of life insurance policies owned by the Company for the purpose of recovering the costs of
deferred compensation programs for several current officers of the Company is affected by the market value of the
underlying investments. Adverse market conditions may result in a decline in the cash surrender value of these life
insurance policies, which would result in a non-cash expense that would reduce net income.
Customer Access to Capital Funds. Uncertainty about current economic market conditions in the U.S. and globally poses
risks that the Company’s customers may postpone spending for capital improvement and maintenance projects in response
to tighter credit markets or negative financial news which could have a material negative effect on the demand for the
Company’s products.
Backlog. The Company defines backlog as the revenue value in dollars attributed to confirmed customer purchase orders
that have not yet been recognized as revenues. However, by industry practice, orders may be canceled or modified at any
time. When a customer cancels an order, the customer is responsible for all finished goods, all direct and indirect costs
incurred, and also for a reasonable allowance for anticipated profits. No assurance can be given that these amounts will
be received after cancellation. The current backlog also includes contracts which have scheduled shipping dates beyond
the upcoming fiscal year and, as such, only a portion of the current backlog represents expected annual revenues for 2009.
Any cancellation or delay in orders may result in lower than expected revenues.
Financing. If there were an event of default under the Company’s current revolving credit facility, the holders of the
defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. The
Company cannot assure that the assets or cash flow would be sufficient to fully repay amounts due under any of the
financing arrangements, if accelerated upon an event of default, or, that the Company would be able to repay, refinance or
restructure the payments under any such arrangements. Complying with the covenants under the Company’s revolving
credit facility may limit management’s discretion by restricting options such as:
incurring additional debt;
entering into certain transactions with affiliates;
(cid:120)
(cid:120)
(cid:120) making investments or other restricted payments;
paying dividends or make other distributions; and
(cid:120)
creating liens.
(cid:120)
8
Any additional financing the Company may obtain could contain similar or more restrictive covenants. The Company’s
ability to comply with any covenants may be adversely affected by general economic conditions, political decisions,
industry conditions and other events beyond management’s control.
Percentage-of-completion method of accounting. The Company measures and recognizes a portion of revenue and
profits under the percentage-of-completion accounting methodology. This methodology allows revenue and profits to be
recognized proportionally over the life of a contract by comparing the amount of the cost incurred to date against the total
amount of cost expected to be incurred. The effect of revisions to revenue and total estimated cost is recorded when the
amounts are known and can be reasonably estimated. These revisions can occur at any time and could be material. On a
historical basis, management believes that reasonably reliable estimates of the progress towards completion on long term
contracts have been made. However, given the uncertainties associated with these types of contracts, it is possible for
actual cost to vary from estimates previously made, which may result in reductions or reversals of previously recorded
revenue and profits.
Internal Controls. As a public company, the Company is required to comply with the reporting obligations of the
Securities Exchange Act of 1934 and is required to comply with Section 404 of the Sarbanes-Oxley Act (“SOX 404”).
The Company’s failure to prepare and disclose this information in a timely manner could subject it to penalties under
Federal securities laws, expose it to lawsuits and restrict its ability to access financing. If the Company fails to achieve
and maintain the adequacy of internal controls, and the Company, or its auditors, are unable to assert that the Company’s
internal control over financial reporting is effective, the Company could be subject to regulatory sanctions or lose investor
confidence in the accuracy and completeness of the financial reports. In addition, the Company has experienced, and may
experience, incremental costs of compliance with SOX 404.
(cid:3)
Item 1B. Unresolved Staff Comments
None
Item 2.
PROPERTIES
Piping Systems Business
Louisiana
Tennessee
United Arab Emirates
India
Owned Production Facilities and Leased
land
Owned Production Facilities and Office
Space
Leased Production Facilities and Office
Space
Production Facilities on the premises of
Jindal Saw Ltd. Leased Office Space
18,900 square feet
131,800 square feet on approximately 23.5 acres
117,900 square feet on 16 acres
100,000 square feet
Filtration Products Business
Illinois
Virginia
Denmark
South Africa
Bolingbrook - Owned Production
Facilities and Office Space
Cicero – Owned former Production
Facilities and Office Space currently
idle
Owned Production Facilities
Leased Production and Office Space
Owned Production Facilities and Office
Space
Leased Production Facilities and Office
Space
101,500 square feet on 5.5 acres
130,700 square feet on 2.8 acres
97,500 square feet on 5.0 acres
67,000 square feet
69,800 square feet on 3.5 acres
24,800 square feet
9
Industrial Process Cooling Equipment Business
Illinois
Denmark
Owned Production Facilities and Office
Space
Owned Production Facilities and Office
Space
88,000 square feet on 8.1 acres
16,500 square feet
The Company's principal executive offices, which occupy approximately 43,000 square feet of space in Niles, Illinois, are
owned by the Company. The Company believes its properties and equipment are well maintained and in good operating
condition and that productive capacities will generally be adequate for present and currently anticipated needs.
The Company has two significant lease agreements as follows:
(cid:120)
(cid:120)
Production facilities and office space of approximately 117,900 square feet in the United Arab Emirates,
(“U.A.E.”) are leased for the period July 1, 2005 to June 30, 2012.
Production facilities and office space of approximately 67,000 square feet in Virginia are leased through July
31, 2010. The Company has the option to extend the lease term for three years at a rate agreed upon between the
Company and the Lessor.
For further information see Note 6 - Lease Information, in the Notes to Consolidated Financial Statements.
Item 3.
LEGAL PROCEEDINGS
The Company had no pending litigation material to its business.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s fiscal year ends on January 31. Years and balances described as 2008, 2007, 2006, 2005, and 2004 are
the fiscal years ended January 31, 2009, 2008, 2007, 2006, and 2005, respectively.
The Company's Common Stock is traded on the Nasdaq Global Market under the symbol "MFRI". The following table
sets forth, for the periods indicated, the high and low Common Stock sale prices as reported by the Nasdaq Global Market
for 2008 and for 2007.
2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
As of March 15, 2009, there were approximately 76 stockholders of record.
10
$
$
$
$
High
16.73
18.00
13.76
8.79
High
19.94
31.21
27.81
16.74
Low
13.91
11.12
6.60
4.25
Low
17.51
18.40
16.05
10.56
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(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:17)(cid:3)(cid:3)(cid:41)(cid:82)(cid:85)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:86)(cid:72)(cid:72)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:24)(cid:3)(cid:178)(cid:3)(cid:39)(cid:72)(cid:69)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3)
(cid:20)(cid:20)(cid:3)
Neither the Company nor any “affiliated purchaser” as defined in Rule 10b-18 purchased any shares of the Company’s
Common Stock during the period covered by this report. The Company has not made any sale of unregistered securities
during the preceding three years.
The Transfer Agent and Registrar for the Common Shares is Continental Stock Transfer & Trust Company, 17 Battery
Place, New York, New York 10004, (212) 509-4000.
Equity Compensation Plan Information
The following table provides certain information regarding the number of shares of Common Stock to be issued upon
exercise of outstanding options, warrants and rights under the Company’s equity compensation plans and the weighted
average exercise price and number of shares of Common Stock remaining available for issuance under those plans as of
January 31, 2009.
Plan Category
Equity compensation plans
approved by stockholders
Equity compensation plans not
approved by stockholders
Number of shares to be
issued upon exercise of
outstanding options,
warrants and right
Weighted-average exercise
price of outstanding
options, warrants and rights
Number of shares
available for future
issuance under equity
compensation plans
550,092
0
$14.85
N/A
457,464
0
Item 6.
SELECTED FINANCIAL DATA
The following selected financial data for the Company for the years 2008, 2007, 2006, 2005, and 2004 are derived from
the financial statements of the Company. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein in response to
Item 7 and the consolidated financial statements and related notes included herein in response to Item 8.
(In thousands, except per share
information)
Statements of Operations Data:
Net sales
Income from operations
Net income (loss)
Net income (loss) per share – basic
Net income (loss) per share – diluted
Balance Sheet Data:
Total assets
Long-term debt (excluding capital
leases), less current portion
2008
2009
2007
2006
Fiscal Year ended January 31,
2008
2007
2005
2006
2004
2005
$ 303,066
10,792
6,689
0.98
0.98
$
$ 239,487
2,896
(298 )
(0.04 )
(0.04 )
$
$ 213,471
8,942
4,593
0.86
0.82
$
$ 154,587
2,679
531
0.10
0.10
$
$ 145,096
5,177
2,813
0.56
0.54
$
$ 181,148
$ 140,412
$ 121,440
$
88,635
$
85,516
Capitalized leases, less current portion
$
41,763
327
$
19,556
152
$
29,606
238
$
29,715
9
$
26,190
15
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) 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 annual 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
12
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(cid:86)(cid:87)(cid:68)(cid:73)(cid:73)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:76)(cid:83)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:86)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:76)(cid:79)(cid:87)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:82)(cid:73)(cid:73)(cid:86)(cid:72)(cid:87)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:70)(cid:82)(cid:82)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:72)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:75)(cid:68)(cid:71)(cid:3)(cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:79)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:87)(cid:68)(cid:73)(cid:73)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)
(cid:21)(cid:19)(cid:19)(cid:26)(cid:17)
(cid:20)(cid:22)(cid:3)
General and administrative expenses increased 28.0% to $30,818,000 from $24,083,000 in 2007. The increase was
mainly due to increased profit-based management incentive expense, increased bank fees, additional stock compensation
expense partially offset by a decrease in the deferred compensation expense of $495,000.
The Company recognized a $2,788,000 non-cash charge for goodwill impairment, which was recorded as part of
continuing operations. In accordance with the Financial Accounting Standards Board’s Statement of Financial
Accounting Standards (“SFAS”) No. 142 (“SFAS 142”), during the first quarter each year, the Company reviews the
carrying value of goodwill. The evaluation of impairment involved comparing the current fair value of the business to the
carrying value. The Company used a discounted cash flow model to determine the current fair value of its reporting units.
A number of significant assumptions and estimates were involved in the application of the model to forecast operating
cash flows, including markets and market share, sales volumes and prices, costs to produce and working capital changes.
Management considered historical experience and all available information at the time the fair values of its reporting units
were estimated. However, actual fair values that could be realized in a transaction may differ from those used to evaluate
the impairment of goodwill.
The recently completed goodwill impairment assessment followed the fourth quarter 2008 worsening of economic
conditions. These conditions impacted both the risks considered and the calculations made. The assessment considered
uncertainty about current economic market conditions in the U.S. and globally that may pose risks to the Company’s
customer demand. Customers may postpone spending for capital improvement and maintenance projects in response to
tighter credit markets or negative financial news. The distressed financial markets caused the discount rates used in
calculating the present value of estimated future cash flows to be higher than a year ago. These conditions were reflected
in the Company’s goodwill impairment assessment.
As a result, the estimated future cash flows of the filtration products business (whose goodwill was $1,688,000) and the
industrial process cooling equipment business (whose goodwill was $1,100,000) were both lower than when goodwill
impairment testing was done a year ago. All of the Company’s goodwill was deemed impaired and was written off with a
noncash impairment charge.
The Company’s worldwide effective income tax rate for 2008 was 17.0%. The 2008 tax rate decreased as compared to
2007 mainly due to the impact of tax-free foreign income.
Net income rose to $6,689,000 in 2008 from a net loss of $298,000 in 2007 primarily due to increased sales, the reasons
summarized above and discussed in more detail below.
2007 Compared to 2006
Net sales were a record at $239,487,000 in 2007, an increase of 12.2% from $213,471,000 in 2006. Sales increased in the
piping systems and the filtration products businesses while the industrial process cooling business decreased.
Net income for 2007 was sharply down primarily due to the following factors:
Piping Systems:
(cid:120) During the fourth quarter 2007 the U.A.E. facility received a customer contract change to a very large pipeline
project which reduced the project scope as well as net sales and net income. This, along with significant
unplanned cost to finish product significantly reduced net income. Also, overhead additions were made in
marketing, sales and operations to bolster the skills and resources of this rapidly growing unit.
(cid:120) At the New Iberia, Louisiana facility, half the third quarter 2007 was devoted to research and development of a
new product for a major customer application. While progress was made, the effort was not successful and work
on production of other customer orders resumed.
(cid:120) Margin erosion occurred due to higher prices for raw materials, specifically steel and plastic resins, which could
not be passed along to the customers under existing orders.
14
Filtration Products:
(cid:120) The recently acquired factory in South Africa had a manufacturing error which necessitated the rework and
replacement of a sizeable customer order.
(cid:120) High factory labor and warranty costs along with software implementation expenses at the European pleated filter
operation significantly affected results.
(cid:120) Ongoing market pricing pressure in the U.S. and increasing raw materials prices worldwide also reduced margin
in both pleated and bag products.
Industrial Process Cooling:
(cid:120)
(cid:120)
Incurred increased expenses related to unanticipated development and field modification costs for certain
refrigeration equipment previously sold to its customers. The product was temporarily removed from the market
which reduced sales. Product enhancements made in Q3 and Q4, although costly to the Company, were
successful and led to reintroduction of the product to the market.
Significant expenditures were made and continue to be made in new product design and development as well as
engineering staff recruitment.
(cid:120) Gross profit was reduced primarily due to material cost increases which were not completely offset by selling
price increases.
Other significant incremental expenses in 2007 not incurred in 2006:
(cid:120)
(cid:120)
(cid:120)
2007 expenses to comply with SOX 404, were $938,000 compared to $9,000 in 2006.
Start-up expenses of $664,000 for the newly created HVAC subsidiary.
Incremental vacation expense of $422,000 to adjust the accrual for vacation pay to agree with the plan
requirements.
(cid:120) Additional stock compensation expense of $365,800.
(cid:120)
Increase of $726,000 or 32.5% from the prior year in consolidated warranty expense, mainly due to the reasons
previously detailed by business segment.
Because of the above factors and other occurrences, gross profit of $41,249,000 in 2007 decreased 7.1% from
$44,405,000 in 2006. Gross margin for 2007 declined to 17.2% from 20.8% in 2006.
Tax rate for 2007 was 158.3% mainly due to the valuation allowance for state and foreign net operating losses as
described in Income Taxes below.
Piping Systems Business
(In thousands)
Net sales
2008
$ 151,792
2007
$ 104,273
$
2006
82,166
% Increase
2008
45.6 %
2007
26.9 %
Gross profit
As a percentage of net sales
$
37,871
$
18,952
$
16,780
99.8 %
12.9 %
24.9 %
18.2 %
20.4 %
Income from operations
As a percentage of net sales
$
24,037
$
10,623
$
15.8 %
10.2 %
9,568
11.6 %
126.3 %
11.0 %
2008 Compared to 2007
Net sales of $151,792,000 for 2008 increased 45.6% from $104,273,000 in 2007, attributed to achieving the Company’s
market share in the U.A.E., as well as other Gulf Cooperating Council countries such as Qatar, Kuwait, and Bahrain. The
U.A.E. facility’s net sales were $54,454,000 in the current year compared to $22,339,000 in 2007. As of January 31,
2009, the Company had completed over half of the India pipeline contract.
Gross margin as a percent of net sales increased to 24.9% in 2008 from 18.2% in 2007, primarily due to production
efficiencies in both domestic and international operations. Margins in the U.A.E. improved from increased volume
without corresponding increases in fixed expenses.
15
Total selling expense increased to $2,840,000 or 1.9% of net sales in 2008 from $2,297,000 or 2.2% of net sales in 2007.
The dollar increase was mainly due to increased staffing primarily in the U.A.E.
General and administrative expense increased to $10,994,000 or 7.2% of net sales in 2008 from $6,032,000 or 5.8% of net
sales in 2007. The increase was primarily due to the increase in profit-based management incentive expense, additional
administrative costs in the India pipeline project, and increased bank fees offset by a gain in foreign currency exchange.
2007 Compared to 2006
Net sales increased 26.9% to $104,273,000 in 2007 from $82,166,000 in 2006. This increase was primarily driven by
$22,339,000 in 2007 sales at the U.A.E. facility compared to $2,792,000 in sales from the U.A.E. in the prior year,
partially offset by decreased sales to oil and gas customers. At the New Iberia facility, half the 2007 third quarter was
devoted to research and development of a new product for a major customer application. While progress was made, the
effort was not successful. In the middle of October 2007, the New Iberia facility resumed work on production of
customer orders.
Gross margin as a percent of net sales decreased to 18.2% in 2007 from 20.4% in 2006, primarily due to lower sales to oil
and gas customers, which tend to have a higher margin over other customers and the additional product development work
for oil and gas in the third quarter. Gross margin at the U.A.E. facility was lower than the piping systems business’s
average during its first year of rapid growth, driven in part by production of a particularly challenging order for an oil and
gas customer.
Total selling expense increased to $2,297,000 or 2.2% of net sales in 2007 from $1,560,000 or 1.9% of net sales in 2006.
Selling expense in the U.A.E. increased to $750,000 in 2007 from $177,000 in 2006. The increased expense was mainly
due to additional staffing primarily in the U.A.E., and the addition of an international sales manager based in the U.S.
General and administrative expense increased to $6,032,000 or 5.8% of net sales in 2007 from $5,653,000 or 6.9% of net
sales in 2006. The dollar increase in general and administrative expenses was primarily due to increased staffing in the
U.A.E. to support the location’s growth, and increased staffing in the U.S.
Filtration Products Business
The timing of large orders can have a material effect on net sales and gross profit from period to period. Pricing on large
orders was generally extremely competitive and therefore resulted in relatively low gross margins.
The Company’s filtration products business is dependent on government regulation of air quality at the federal and state
levels. The Company believes that growth in the sale of its filtration products and services will be materially dependent
on continued enforcement of environmental laws such as the Clean Air Act. Although there can be no assurance what the
ultimate effect of the Clean Air Act will be on the Company’s filtration products business, the Company believes the
Clean Air Act is likely to have a positive long-term effect on demand for the Company’s filtration products and services.
(In thousands)
Net sales
2008
$ 105,390
2007
97,120
$
2006
86,362
$
% Increase (Decrease)
2007
12.5 %
8.5 %
2008
Gross profit
As a percentage of net sales
(Loss) income from operations
As a percentage of net sales
2008 Compared to 2007
$
11,424
$
13,776
$
16,230
(17.1 %)
(15.1 %)
10.8 %
14.2 %
18.8 %
$
(2,936 )
$
2,220
$
5,274
(232.3 %)
(57.9 %)
(2.8 %)
2.3 %
6.1 %
Net sales increased 8.5% to $105,390,000 in 2008 from $97,120,000 in 2007. This increase was due to the result of
higher unit volume in all product lines, primarily from domestic power generation customers.
16
Gross margin as a percent of net sales decreased to 10.8% in 2008 from 14.2% in 2007, primarily due to the highly
competitive marketplace, increasing cost of raw materials, temporary manufacturing inefficiencies during the relocation to
the Bolingbrook, IL facility and higher cost of production labor at the Denmark facility resulting from increased
headcount.
Selling expense increased to $7,575,000 or 7.2% of net sales in 2008 from $6,873,000 or 7.1% of net sales in 2007. The
increase in selling expense was primarily due to additional selling personnel, and increased travel and advertising
expenses.
General and administrative expenses increased to $5,097,000 or 4.8% of net sales from $4,682,000 or 4.8% of net sales in
2007. The dollar increase was primarily due to the hiring of several new senior managers and increased professional
service expense.
For the fourth quarter and fiscal year ended January 31, 2009, the filtration products business recorded a non-cash
impairment charge of $1,688,000 in connection with the annual assessment of goodwill in accordance with SFAS 142.
See Note 2 in the Notes to Consolidated Financial Statements for details with respect to impairment change incurred
during 2008.
2007 Compared to 2006
Net sales increased 12.5% to $97,120,000 in 2007 from $86,362,000 in 2006. This increase was the result of increased
sales in all product lines and geographic areas, primarily the result of a growing electric power generation customer base.
Gross margin as a percent of net sales decreased to 14.2% in 2007 from 18.8% in 2006, primarily due to the highly
competitive marketplace, increasing cost of raw materials, customer mix and additional post-sale customer support costs,
including rework and replacement of a sizeable customer order produced in the South African facility. The cost of
production labor at the Denmark facility was higher than in prior years.
Selling expense increased to $6,873,000 or 7.1% of net sales in 2007 from $6,541,000 or 7.6% of net sales in 2006. The
dollar increase in selling expense was primarily due to increased commission expense related to higher sales and increased
advertising expense.
General and administrative expenses increased to $4,682,000 or 4.8% of net sales from $4,415,000 or 5.1% of net sales in
2006. The dollar increase was the result of additional staffing in the foreign locations and the ERP software
implementation expenses incurred at the Denmark facility.
Industrial Process Cooling Equipment Business
(In thousands)
Net sales
Gross profit
As a percentage of net sales
(Loss) income from operations
As a percentage of net sales
2008 Compared to 2007
$
$
2008
31,738
$
2007
36,327
$
2006
41,161
7,919
$
8,508
$
11,274
25.0 %
23.4 %
27.4 %
% Decrease
2008
(12.6 %)
2007
(11.7 %)
(6.9 %)
(24.5 %)
$
(1,765 )
$
(1,227 )
$
1,222
(43.8 %)
(200.4 %)
(5.6 %)
(3.4 %)
3.0 %
Net sales decreased 12.6% to $31,738,000 in 2008 from $36,327,000 in 2007. The decrease was primarily due to lower
demand for its products in the global plastic and domestic printing markets.
Gross margin as a percentage of net sales increased to 25.0% in 2008 from 23.4% in 2007, primarily due to significant
reduction in post-sale customer support costs, partially offset by lower sales volume relative to fixed costs.
17
Selling expense decreased to $4,135,000 or 13.0% of net sales in 2008 from $5,100,000 or 14.0% of net sales in 2007.
This was primarily driven by decreased commission expense from lower sales, and a reduction in staffing in the second
half of 2007 and during 2008.
General and administrative expense decreased to $4,449,000 or 14.0% of net sales in 2008 from $4,635,000 or 12.8% of
net sales in 2007. This dollar decrease was primarily due to the gain on the sale of property and staffing reductions,
partially offset by increased new product development engineering expenses.
For the fourth quarter and fiscal year ended January 31, 2009, the industrial process cooling equipment business recorded
a non-cash impairment charge of $1,100,000 in connection with the annual goodwill assessment in accordance with SFAS
142. See Note 2 in the Notes to Consolidated Financial Statements for details with respect to impairment change incurred
during 2008.
2007 Compared to 2006
Net sales decreased 11.7% to $36,327,000 in 2007 from $41,161,000 in 2006. The decrease was primarily due to lower
demand for its products in major market sectors and a temporary halt in sales of a new central chilling product line,
launched in 2005, to resolve some performance issues. The product line was re-launched in the fourth quarter of 2007.
Gross margin as a percentage of net sales decreased to 23.4% in 2007 from 27.4% in 2006, primarily due to material cost
increases, which were not completely offset by selling price increases, lower sales volume over which to spread fixed
manufacturing overhead expenses and field modification costs for a central chilling product line. Manufacturing staff was
reduced by 12% in the fourth quarter 2007 to better balance production expenses with demand.
Selling expense decreased to $5,100,000 or 14.0% of net sales in 2007 from $5,713,000 or 13.9% of net sales in 2006.
The decrease was due to reduced commission expense from lower sales.
General and administrative expense increased to $4,635,000 or 12.8% of net sales in 2007 from $4,339,000 or 10.5% of
net sales in 2006. This increase was primarily due to increased professional costs including employment-related hiring
expenses and engineering consulting fees related to new product development.
General Corporate and Other
2008 Compared to 2007
Net sales increased to $14,146,000 in 2008 from $1,767,000 in 2007. The 2008 and 2007 net sales related to the start-up
of the HVAC systems business.
General corporate expense included interest expense and general and administrative expenses that were not allocated to
the business segments.
General and administrative expense increased 21.8% to $10,278,000 in 2008 from $8,733,000 in 2007, and decreased as a
percentage of consolidated net sales to 3.4% in 2008 from 3.6% in 2007. The dollar increase was mainly due to the
increased profit-based management incentive expense, incremental expenses relating to stock compensation expense of
$241,000, and additional staffing. These expenses were partially offset by decreased deferred compensation expense of
$495,000. The deferred compensation plan was affected by the market value of the underlying investments. Since the
underlying investment declined, the Company’s liability to the employees in the plan decreased.
Interest expense, net of capitalized interest, increased 17.7% to $2,834,000 in 2008 from $2,408,000 in 2007 primarily
due to increased borrowings. Capitalized interest of $152,000 was recorded in 2008 and was attributable to the building
preparations for the relocation of the filtration products business’ Cicero, Illinois operations to Bolingbrook, Illinois which
occurred in the second and third quarters of 2008. The building was purchased in March 2008 for $6,400,000, and
improvements and modifications cost an additional $3,159,000.
18
2007 Compared to 2006
The 2007 net sales of $1,767,000 related to the start-up of the HVAC systems business. The 2006 net sales of $3,782,000
were related to other corporate business.
General and administrative expense increased 20.6% to $8,733,000 in 2007 from $7,242,000 in 2006, and increased as a
percentage of consolidated net sales to 3.6% in 2007 from 3.4% in 2006. The increase was mainly due to incremental
expenses of $929,000 incurred to comply with SOX 404 (including consulting fees) that were not incurred in 2006, the
inclusion of $664,000 of the general and administrative expense from the newly created subsidiary that installs HVAC
systems, and additional stock compensation expense of $365,800 compared to the prior year. These expenses were
partially offset by decreased management incentive expense and deferred compensation expense.
Interest expense decreased 10.0% to $2,408,000 in 2007 from $2,676,000 in 2006. The decrease was primarily due to
reduced borrowings.
INCOME TAXES
The Company’s worldwide effective income tax rates were 17.0%, 158.3%, and 32.0% in 2008, 2007 and 2006,
respectively. The 2008 tax rate decreased as compared to 2007 mainly due to the impact of tax-free foreign income.
As of January 31, 2009, the Company had undistributed earnings of certain foreign subsidiaries for which deferred taxes
have not been provided. The Company intends and has the ability to reinvest these earnings for the foreseeable future
outside the U.S. If these amounts were distributed to the U.S., in the form of dividends or otherwise, the Company would
be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities
on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when
remittance occurs.
During the fourth quarter of 2007, management determined that all of its foreign net operating loss (“NOL”) carryovers
and most of its state NOL carryovers generated through January 31, 2008 were no longer more likely than not realizable.
Additional tax expense of $583,000 or 114.2% of the 2007 rate was recorded to establish a valuation allowance against
those deferred tax assets.
A reconciliation of the effective income tax rate to the U.S. Statutory tax rate is as follows:
Statutory tax rate
Differences in foreign tax rate
Impairment of goodwill
Valuation Allowance for net operating losses
State taxes, net of federal benefit
Research tax credit
Return to provision adjustments
All other, net (benefit) expense
Effective tax rate
2008
34.0 %
(44.3 %)
11.8 %
3.9 %
3.8 %
(1.5 %)
3.5 %)
5.8 %
17.0 %
2007
34.0 %
6.2 %
0 %
114.2 %
24.4 %
(43.7 %)
13.3 %
9.9 %
158.3 %
For further information see Note 7 – Income Taxes in the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of January 31, 2009 were $2,735,000 as compared to $2,665,000 at January 31, 2008. The
Company used $2,165,000 from operations in 2008. Exercise of stock options resulted in proceeds of $83,000 in 2008.
Net sales in 2008 increased $63,579,000 or 26.5% compared to 2007 net sales. The higher sales contributed to the
increased balances in trade accounts receivable, inventories, and trade accounts payable. Compared to January 31, 2008,
trade receivables increased by $21,131,000 primarily due to the piping systems business, of which $14,126,000 was in the
U.A.E and $6,234,000 was in the HVAC business. Inventories increased by $8,297,000 in 2008 primarily due to
increased raw material requirements for scheduled production. Total inventory increased in the U.A.E. by $5,603,000.
19
Prepaid and other current assets increased $5,910,000 in 2008 primarily due to the India pipeline project. Customer
deposits increased $4,121,000 from January 31, 2008, of these deposits, $5,850,000 related to the piping systems business
for orders for which the product is expected to be delivered in the first half of 2009 offset by a decrease in the filtration
products business. At January 31, 2009, the filtration products business had customer deposits of $1,781,000 for orders
for which the product is expected to ship in late 2009 and in 2010.
Net cash used in 2008 investing activities was $18,167,000 mainly comprised of capital expenditures which increased to
$18,464,000 from $5,763,000 in 2007. The filtration products business facility in Cicero, Illinois relocated its operations
in the summer of 2008 to a building purchased for $6,400,000 in Bolingbrook, Illinois in March 2008. Improvements and
modifications were an additional $3,159,000. In 2008, the piping systems business opened a facility located in Mundra,
India with a cost of $5,066,000 for the leasehold improvements and equipment. Other capital expenditures primarily
related to machinery and equipment, building and leasehold improvements, and computer hardware and software
purchases.
The Company estimates that capital expenditures for 2009 will be approximately $5,500,000, of which the Company may
finance capital expenditures through real estate mortgages, equipment financing loans, internally generated funds and its
revolving line of credit.
Debt totaled $54,883,000, an increase of $20,643,000 since the beginning of 2008. Net cash inflows from financing
activity were $130,668,000, primarily to support higher working capital investments. Stock option activity resulted in
$374,000 of total cash flow, which included $457,000 tax expense from stock options exercised in addition to stock option
proceeds of $83,000.
The following table summarizes the Company’s estimated contractual obligations at January 31, 2009.
(In thousands)
Contractual Obligations
Revolving line domestic (1)
Mortgages (2)
Revolving line foreign
Term loans (3)
Subtotal
Capitalized lease obligations
Operating lease obligations (4)
Projected pension contributions (5)
Deferred compensation (6)
Employment agreements (7)
FIN 48 obligations (8)
Purchase commitments
Total
1/31/10
1/31/11
0 $ 23,762 $
Total
$ 23,762 $
21,369
12,082
6,546
1,381
9,980
2,192
$ 63,759 $ 13,553 $ 29,872 $
1,432
1,583
3,095
550
2,811
3,259
2,502
101
884
22
200
1,464
536
29
0
0
22
199
804
240
28
0
0
0
$ 73,888 $ 15,804 $ 31,143 $
Payment Due By:
1/31/12
0 $
1,432
15
483
1,930 $
151
301
273
29
0
0
0
2,684 $
1/31/13 1/31/14
0 $
1,098
15
234
900
15
504
0 $
1,347 $ 1,419 $
0
104
280
28
0
0
0
0
73
291
0
0
0
0
1,759 $ 1,783 $
Thereafter
0
15,126
474
38
15,638
0
65
1,639
2,388
101
884
0
20,715
Notes to Contractual Obligations Table
(1) Interest obligations exclude floating rate interest on debt payable under the domestic revolving line of credit.
Based on the amount of such debt at January 31, 2009, and the weighted average interest rates on that debt at that
date (4.94%), such interest was being incurred at an annual rate of approximately $1,173,300.
(2) Scheduled maturities, including interest.
(3) Term loan obligations exclude floating rate interest on Term Loan with a January 31, 2009 balance of $2,357,000.
Based on the amount of such debt as of January 31, 2009, and the weighted average interest rates on that debt at
that date (5.33%), such interest was being incurred at an annual rate of approximately $125,600.
(4) Minimum contractual amounts, assuming no changes in variable expenses.
(5) Includes expected employer contributions for fiscal year ending January 31, 2010 and estimated future benefit
payments reflecting expected future service.
(6) Non-qualified deferred compensation plan – The Company has deferred compensation agreements with key
employees. Vesting is based on years of service. Life insurance contracts have been purchased which may be
20
used to fund the Company’s obligation under these agreements. Payment estimates have been included, that the
third party administrator calculates in May.
(7) Refer to the Proxy statement for a description of compensation plans for Named Executive Officers.
(8) Refer to Note 7 – Income Taxes in the Notes to Consolidated Financial Statements for a description of the FIN 48
obligations.
Other long term liabilities of $4,609,000 were composed primarily of deferred compensation and accrued pension cost.
The Company’s working capital was $57,984,000 at January 31, 2009 compared to $39,544,000 at January 31, 2008.
This increase was due to the increase in accounts receivable and inventories partially offset by the increase in accounts
payable, accrued management incentive and customer deposits.
The Company’s current ratio increased to 1.8 to 1 at January 31, 2009 from 1.7 to 1.0 at January 31, 2008. Debt to total
capitalization at January 31, 2009 increased to 46.1% from 36.4% at January 31, 2008.
Financing
At January 31, 2009, the Company was in compliance with covenants under the Loan Agreement as defined below.
On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan
Agreement"). The Loan Agreement was amended and restated on December 15, 2006. Under the terms of the Loan
Agreement, which matures on November 13, 2010, the Company can borrow up to $38,000,000, subject to borrowing
base and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, and
investments, do not permit payment of dividends, and require attainment of certain levels of profitability and cash flows.
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 January 31, 2009, the prime rate
was 3.25%, 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 0.25 and 2.25 percentage points, respectively. Monthly interest payments were
made. The average interest rate for the year ending January 31, 2009 was 4.94%. As of January 31, 2009, the Company
had borrowed $23,761,900 and had $50,300 available to it under the revolving line of credit. In addition, $1,232,400 of
availability was used under the Loan Agreement primarily to support letters of credit to guarantee amounts committed for
inventory purchases. 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 January 31, 2009, the
amount of restricted cash was $220,400. Cash required for operations is provided by draw-downs on the line of credit.
The Company also has short-term credit arrangements used by its Denmark and U.A.E. subsidiaries. These credit
arrangements are generally in the form of overdraft facilities at rates competitive in the countries in which the Company
operates. At January 31, 2009, borrowings under these credit arrangements totaled $11,957,000; an additional $2,835,000
remained unused.
On March 4, 2008, the Company borrowed $5,440,000 under a mortgage note secured by the filtration products’
manufacturing facility located in Bolingbrook, Illinois. The 25 year mortgage resets its interest rate every five years
based on a published index. The initial interest rate is 6.54% during the first five years with monthly payments of $36,867
for both principal and interest.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Revenue recognition: The Company recognizes revenues including shipping and handling charges billed to customers,
when all the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the seller’s price to the buyer
is fixed or determinable, and (iii) collectability is reasonably assured. All subsidiaries of the Company, except as noted
below, recognize revenues upon shipment or delivery of goods or services when title and risk of loss pass to customers.
Percentage of completion method revenue recognition: All divisions recognize revenues under the above stated revenue
recognition policy except for sizable complex contracts that require periodic recognition of income. For these contracts,
21
the Company uses the “percentage of completion” accounting method. Under this approach, income is recognized in each
reporting period based on the status of the uncompleted contracts and the current estimates of costs to complete. The
choice of accounting method is made at the time the contract is received based on the expected length and complexity of
the project. The percentage of completion is determined by the relationship of costs incurred to the total estimated costs
of the contract. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract
penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are
recognized in the period in which they are determined. Claims for additional compensation due the Company are
recognized in contract revenues when realization is probable and the amount can be reliably estimated.
Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method
for substantially all inventories.
Assessment of Potential Impairments of Goodwill and Intangible Assets: The Company incurred a fourth quarter and
full year 2008 noncash charge related to the impairment of goodwill of $2,788,000.
In accordance with SFAS142, during the first quarter each year, the Company reviews the carrying value of goodwill.
The evaluation of impairment involved comparing the current fair value of the business to the carrying value. The
Company used a discounted cash flow model to determine the current fair value of its reporting units. A number of
significant assumptions and estimates were involved in the application of the model to forecast operating cash flows,
including markets and market share, sales volumes and prices, costs to produce and working capital changes.
Management considered historical experience and all available information at the time the fair values of its reporting units
were estimated. However, actual fair values that could be realized in a transaction may differ from those used to evaluate
the impairment of goodwill.
The recently completed goodwill impairment assessment followed the fourth quarter 2008 worsening of economic
conditions. These conditions impacted both the risks considered and the calculations made. The assessment considered
uncertainty about current economic market conditions in the U.S. and globally that may pose risks to the Company’s
customer demand. Customers may postpone spending for capital improvement and maintenance projects in response to
tighter credit markets or negative financial news. The distressed financial markets caused the discount rates used in
calculating the present value of estimated future cash flows to be higher than a year ago. These conditions were reflected
in the Company’s goodwill impairment assessment.
As a result, the estimated future cash flows of the filtration products business (whose goodwill was $1,688,000) and the
industrial process cooling equipment business (whose goodwill was $1,100,000) were both lower than when goodwill
impairment testing was done a year ago. All of the Company’s goodwill was deemed impaired and was written off with a
noncash impairment charge.
Income Tax Provision: Deferred income taxes have been provided for temporary differences arising from differences in
basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary differences
have been recorded at the current tax rate. The Company assessed its deferred tax assets for realizability at each reporting
period.
Recently Adopted Accounting Standards: In December 2008, the Financial Accounting Standards Board (“FASB”)
issued FSP 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP 132(R)-1). FSP 132(R)-1
requires additional disclosures for plan assets of defined benefit pension or other postretirement plans. The required
disclosures include a description of the investment policies and strategies, the fair value of each major category of plan
assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in plan assets, and the significant concentrations of risk
within plan assets. FSP 132(R)-1 does not change the accounting treatment for postretirement benefit plans. FSP 132(R)-
1 is effective for the Company for fiscal year 2009.(cid:3)
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure
22
fair value by providing a fair value hierarchy used to classify the source of the information. This statement was effective
for fiscal years beginning after November 15, 2007. On February 14, 2008, the FASB issued FSP FAS No. 157-1
“Application of FASB Statement No. 157 to FASB Statement 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13” (SFAS 157-1) that
amends SFAS 157 to exclude its application for purposes of lease classification or measurement under SFAS 13. On
February 12, 2008, the FASB issued Staff Position Financial Accounting Standard (FSP FAS) No. 157-2 “Effective Date
of FASB Statement No. 157” (FSP 157-2) that amends SFAS 157 to delay the effective date for all non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis to fiscal years beginning after November 15, 2008. The Company adopted the required provisions of
SFAS 157-1 effective January 1, 2008 and there was no material effect on its consolidated financial statements. The
Company has adopted FSP 157-2 to delay the adoption effects related to non-financial assets and does not anticipate there
will be a material effect on its consolidated financial statements. In October 2008, the FASB issued FSP 157-3,
“Determining the Fair Value of a Financial Asset in a Market That Is Not Active.” The FSP was effective upon issuance,
including periods for which financial statements have not been issued. The FSP clarified the application of SFAS 157 in
an inactive market and provided an illustrative example to demonstrate how the fair value of a financial asset is
determined when the market for that financial asset is inactive. The adoption of this FSP FAS 157-3 did not have a
material impact on the Company’s consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible
Assets (“FSP No. FAS 142-3”). FSP No. FAS 142-3 requires companies estimating the useful life of a recognized
intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of
historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted
for SFAS 142’s, Goodwill and Other Intangible Assets, entity-specific factors. FSP No. FAS 142-3 will be effective for
fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact of adoption of
FSP No. FAS 142-3 on its consolidated financial statements. However, the Company does not expect the adoption of FSP
No. FAS 142-3 to have a material effect on its consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not
require adoption until a future date are not expected to have a material impact on the consolidated financial statements
upon adoption.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in foreign currency exchange rates, interest rates and
commodity prices. Foreign currency exchange rate risk is mitigated through maintenance of local production facilities in
the markets served, often (though not always) invoicing customers in the same currency as the source of the products and
use of foreign currency denominated debt in Denmark, U.A.E. and South Africa. At times the Company has attempted to
mitigate its interest rate risk by maintaining a balance of fixed-rate long-term debt and floating-rate debt.
A hypothetical ten percent change in market interest rates over the next year would increase or decrease interest on the
Company's floating rate debt instruments by approximately $78,400.
Commodity price risk is the possibility of higher or lower costs due to changes in the prices of commodities, such as
ferrous alloys which the Company uses 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 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company for each of the three years in the period ended as of January 31,
2009, 2008 and 2007 and the notes thereto are set forth elsewhere herein.
23
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the company’s disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of January 31, 2009. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective as of as of January 31, 2009 to ensure
that information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and
is accumulated and communicated to the issuer’s management, including the principal executive and financial officers, to
allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting: The Company’s management is responsible for
establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Exchange Act. As required by Rule 13a-15(c) under the Exchange Act, MFRI’s management carried out an
evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of its
internal control over financial reporting as of the end of the last fiscal year. The framework on which such evaluation was
based is contained in the report entitled “Internal Control—Integrated Framework” issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO Report”).
The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Based on its assessment, management has concluded that the Company has maintained effective internal control over
financial reporting as of January 31, 2009, based on criteria in the COSO Report.
Change in Internal Controls: There was a material weakness in internal control described in Item 9A of the Company’s
January 31, 2008 10-K filed on April 30, 2008. The Company’s processes, procedures and controls related to the
preparation and review of the quarterly and annual income tax provisions were not deemed effective at October 31, 2007
and January 31, 2008 to ensure that amounts related to the income tax provisions were accurate. This material weakness
resulted in an accounting error, which did not affect the Company's sales, operating expenses, or cash flow. However, the
error did result in the understatement of income taxes, and overstatement of current assets, total assets, and net income for
the interim fiscal period reported at October 31, 2007.
Other than the material weakness noted above, there has been no change in internal control over financial reporting that
occurred during the last fiscal year that has materially affected, or is reasonably likely to materially affect, internal control
over financial reporting except as discussed below.
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting: As noted above, there was a
material weakness in internal control described in Item 9A of the Company’s January 31, 2008 10-K filed on April 30,
2008. Beginning in 2005, the Company engaged a national public accounting, tax and business consulting firm with
affiliates worldwide (the “Tax Advisor”) to assist the Company with calculation and review of its quarterly and annual
income tax provisions and with its income tax compliance. To avoid recurrence of an error such as the one described
above, the Company and Tax Advisor have changed the senior technical resources assigned to the engagement,
implemented tax software, improved income tax accounting documentation, and adjusted the timing of quarterly and
annual income tax accounting work.
24
The actions described above have resulted in strengthened internal controls over financial reporting relating to accounting
for income taxes and have fully remediated the related material weakness that was identified as of January 31, 2008.
Item 9B. OTHER INFORMATION
None
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to this item is incorporated herein by reference to the Company’s definitive proxy statement for
the 2009 annual meeting of stockholders.
Information with respect to executive officers of the Company is included in Item1, Part I hereof under the caption
"Executive Officers of the Registrant".
Item 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated herein by reference to the Company’s definitive proxy statement for
the 2009 annual meeting of stockholders.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information with respect to this item is incorporated herein by reference to the Company’s definitive proxy statement for
the 2009 annual meeting of stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information with respect to this item is incorporated herein by reference to the Company’s definitive proxy statement for
the 2009 annual meeting of stockholders.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this item is incorporated herein by reference to the Company’s definitive proxy statement for
the 2009 annual meeting of stockholders.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
a. List of documents filed as part of this report:
(1) Financial Statements - Consolidated Financial Statements of the Company
Refer to Part II, Item 8 of this report.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
b. Exhibits: The exhibits, as listed in the Exhibit Index included herein, are submitted as a separate section
of this report.
c. The response to this portion of Item 15 is submitted under 15a (2) above.
25
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
MFRI, Inc. and Subsidiaries
We have audited MFRI, Inc. (a Delaware corporation) and Subsidiaries’ (the “Company”) internal control over financial
reporting as of January 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over
Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained in all material respects effective internal control over financial reporting as of
January 31, 2009, based on the criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of the Company as of January 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity, comprehensive income (loss) and cash flows for each of the three years in
the period ended January 31, 2009, and our report dated April 15, 2009, expressed an unqualified opinion on those
financial statements.
Chicago, Illinois
April 15, 2009
/s/ Grant Thornton LLP
26
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
MFRI, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of MFRI, Inc. (a Delaware corporation) and Subsidiaries
(the “Company”) as of January 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’
equity, comprehensive income (loss) and cash flows for each of the three years in the period ended January 31, 2009. Our
audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item
15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of MFRI, Inc. and Subsidiaries as of January 31, 2009 and 2008, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 2009, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set
forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), MFRI, Inc. and Subsidiaries’ internal control over financial reporting as of January 31, 2009, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated April 15, 2009, expressed an unqualified opinion on the effective
operation of internal control over financial reporting.
/s/ Grant Thornton LLP
Chicago, Illinois
April 15, 2009
27
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling expense
General and administrative expense
Impairment of goodwill
Total operating expenses
Income from operations
Income from joint venture
Interest expense, net
Income before income taxes
Income tax expense
Net income (loss)
2008
2007
2006
Fiscal Year Ended January 31,
2009
2008
2007
$ 303,066
244,118
58,948
$ 239,487
198,238
41,249
$ 213,471
169,066
44,405
14,550
30,818
2,788
48,156
10,792
104
2,834
8,062
1,373
14,270
24,083
0
38,353
2,896
23
2,408
511
809
14,530
20,933
0
35,463
8,942
491
2,676
6,757
2,164
$
6,689
$
(298 )
$
4,593
Weighted average number of common shares outstanding – basic
6,797
6,627
5,358
Basic earnings per share:
Net income (loss)
$
0.98
$
(0.04 )
$
0.86
Weighted average number of common shares outstanding – diluted
6,853
6,627
5,600
Diluted earnings per share:
Net income (loss)
$
0.98
$
(0.04 )
$
0.82
See accompanying Notes to Consolidated Financial Statements.
28
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents
Restricted cash
Trade accounts receivable, less allowance for doubtful accounts of $473 in
2008 and $384 in 2007
Inventories, net
Prepaid expenses and other current assets
Costs and estimated earnings in excess of billings on uncompleted contracts
Deferred income taxes
Income taxes receivable
Total current assets
Property, Plant and Equipment, Net
Other Assets:
Deferred tax asset
Cash surrender value of officers' life insurance policies
Deposits
Patents, net of accumulated amortization
Other assets
Goodwill
Total other assets
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable
Current maturities of long-term debt
Commissions and management incentive payable
Customer deposits
Other accrued liabilities
Accrued compensation and payroll taxes
Billings in excess of costs and estimated earnings on uncompleted contracts
Income taxes payable
Total current liabilities
Long-Term Liabilities:
Long-term debt, less current maturities
Deferred compensation liability
Other
Total long-term liabilities
As of January 31,
2009
2008
$
2,735
220
$
2,665
565
59,766
52,291
8,600
2,472
2,171
0
128,255
47,256
2,756
1,677
431
292
481
0
5,637
181,148
27,232
12,793
10,418
8,206
4,947
3,601
2,586
488
70,271
42,090
2,502
2,107
46,699
39,587
43,013
2,490
4,449
2,488
690
95,947
35,401
2,421
1,977
1,153
349
338
2,826
9,064
$ 140,412
$
22,758
14,532
6,294
3,972
3,325
2,970
2,552
0
56,403
19,708
3,243
1,278
24,229
$
$
Stockholders' Equity:
Common stock, $0.01 par value, authorized 50,000 shares 6,815 and 6,787
issued and outstanding in 2008 and 2007, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
See accompanying Notes to Consolidated Financial Statements.
68
46,922
18,923
(1,735 )
64,178
181,148
68
46,551
12,234
927
59,780
$ 140,412
$
29
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Retained
Earnings
8,444
$
4,593
(In thousands)
Balances at January 31, 2006
Shares
5,276
Amount
$
53 $
23,084
Common Stock
Additional
Paid-in
Capital
254
2
1,160
138
945
Net income
Stock options exercised
Stock-based compensation expense
Excess tax benefits from stock
options exercised
Minimum pension liability
adjustment (net of cumulative tax
benefit of $154)
Impact of adoption of FAS 158 (net
of deferred taxes of $338)
Interest rate swap (including a tax
expense of $1)
Unrealized gain on marketable
securities (including a tax benefit
of $87)
Foreign currency translation
adjustment
Balances at January 31, 2007
5,530
55
25,327
13,037
(298)
(505)
1,003
254
10
3
18,322
932
504
1,466
6,787
68
46,551
12,234
6,689
28
83
745
(457)
Net loss
Adoption of FIN 48
Issuance of stock
Stock options exercised
Stock-based compensation expense
Excess tax benefits from stock
options exercised
Interest rate swap
Pension liability adjustment FAS
158 (net of deferred taxes of $483)
Unrealized gain on marketable
securities (including a tax benefit
of $87)
Foreign currency translation
adjustment
Balances at January 31, 2008
Net income
Stock options exercised
Stock-based compensation expense
Tax deficiency from stock options
exercised
Pension liability adjustment FAS
158 (net of deferred taxes of $749)
Foreign currency translation
adjustment
Balances at January 31, 2009
See accompanying Notes to Consolidated Financial Statements.
30
Accumulated
Other
Comprehensive
Income (Loss)
$
229 $
Comprehensive
Income (Loss)
323
4,593
(252)
(16)
184
464
4,973
(298)
2
(71)
(184)
783
232
6,689
(435)
(2, 227)
4,027
252
(716)
(16)
184
464
397
2
(71)
(184)
783
927
(435)
(2,227)
6,815
$
68 $
46,922 $
18,923
$
(1,735) $
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net income (loss)
Adjustments, to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization
Impairment of goodwill
Stock-based compensation expense
Change in cash surrender value of deferred compensation plan
Provisions for uncollectible accounts
(Gain) loss on sales of assets
Income from joint venture
Deferred income taxes
Gain on sale of marketable securities
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued compensation and payroll taxes
Customer deposits
Income taxes receivable
Other assets and liabilities
Net cash used in operating activities
Investing activities:
Purchases of property and equipment
Proceeds from sales of property and equipment
Distributions from joint venture
Proceeds from sales of marketable securities
Acquisitions and investments, net
Net cash used in investing activities
Financing Activities:
Borrowings under revolving, term, mortgage loans, and capitalized leases
Repayments of debt
Net borrowings (repayment)
Payments on capitalized lease obligations
Increase (decrease) in drafts payable
Tax (expense) benefit of stock options exercised
Stock options exercised
Issuance of stock
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents – beginning of year
Cash and cash equivalents – end of year
Supplemental cash flow information:
Cash paid for:
Interest, net of capitalized amounts
Income taxes paid
Fixed assets acquired under capital leases
* Interest paid during the year was $2,885 of which $152 was capitalized.
See accompanying Notes to Consolidated Financial Statements.
31
2008
2007
Fiscal Year Ended January 31,
2009
2008
2006
2007
$
6,689
$
(298 )
$
4,593
5,776
2,788
745
300
114
(108 )
(104 )
(71 )
0
(21,131 )
(8,297 )
(5,910 )
4,995
4,556
4,121
1,174
2,198
(2,165 )
(18,464 )
297
0
0
0
(18,167 )
4,431
0
504
(486 )
15
60
(23 )
(1,913 )
(258 )
(3,878 )
(5,452 )
(1,032 )
1,561
(60 )
(1,482 )
(648 )
1,609
(7,350 )
(5,763 )
149
286
258
0
(5,070 )
130,668
(108,878 )
21,790
(53 )
192
(457 )
83
0
21,555
111,388
(116,625 )
(5,237 )
(208 )
(454 )
1,466
932
18,332
14,831
4,067
0
138
(260 )
(157 )
8
(491 )
89
0
(14,265 )
(12,029 )
521
943
1,989
3,458
41
4,435
(6,920 )
(8,269 )
10
450
0
(279 )
(8,088 )
212,306
(204,833 )
7,473
(8 )
4,815
945
1,160
0
14,385
(1,153 )
70
2,665
2,735
$
(311 )
2,100
565
2,665
$
74
(549 )
1,114
565
2,733 * $
$
$
131
521
2,429
1,011
124
$
$
$
2,642
890
372
$
$
$
$
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED January 31, 2009, 2008 and 2007
(Tabular dollars in thousands, except per share amounts)
Note 1 - Description of the Business and Segment Information
MFRI, Inc. ("MFRI", the “Company”, or the “Registrant”) was incorporated on October 12, 1993. MFRI is engaged in
the manufacture and sale of products in three distinct business segments: piping systems, filtration products and industrial
process cooling equipment.
Fiscal Year: The Company’s fiscal year ends on January 31. Years and balances described as 2008, 2007 and 2006 are
the fiscal years ended January 31, 2009, 2008 and 2007, respectively.
Nature of Business: The piping systems business engineers, designs, manufactures and sells specialty piping systems and
leak detection and location systems. This segment’s specialty piping systems include (i) industrial and secondary
containment piping systems for transporting chemicals, waste streams and petroleum liquids, (ii) insulated and jacketed
district heating and cooling piping systems for efficient energy distribution to multiple locations from central energy
plants, and (iii) oil and gas gathering flow lines and long lines for oil and mineral transportation. The piping systems
business’s leak detection and location systems are sold as part of many of its piping systems products, and on a stand-
alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a
fire hazard, impair essential services or damage equipment or property. The filtration products business manufactures and
sells a wide variety of filter elements for use in industrial air filtration systems and particulate collection systems. Air
filtration systems are used in a wide variety of industries to limit particulate emissions, primarily to comply with
environmental regulations. The filtration products business markets air filtration related products and accessories, and
provides maintenance services, consisting primarily of dust collector inspection, filter cleaning and filter replacement.
The industrial process cooling equipment business engineers, designs, manufactures and sells industrial process cooling
equipment, including chillers, cooling towers, plant circulating systems, and related accessories for use in industrial
process applications. During the fourth quarter 2006, the Company created a new subsidiary that is not sufficiently large
enough to constitute a reportable segment, which engages in the installation of HVAC systems. The Company’s products
are sold both within the U.S. and internationally.
MFRI’s reportable segments are strategic businesses that offer different products and services. Each is managed
separately based on fundamental operating differences. Each strategic business was acquired as a unit and management at
the time of acquisition was retained. The Company evaluates performance based on gross profit and income or loss from
operations.
32
The following is information relevant to the Company's business segments:
Net sales:
Piping Systems
Filtration Products
Industrial Process Cooling Equipment
Corporate and Other
Total Net sales
Gross profit:
Piping Systems
Filtration Products
Industrial Process Cooling Equipment
Corporate and Other
Total Gross profit
Income (loss) from operations:
Piping Systems
Filtration Products
Industrial Process Cooling Equipment
Corporate and Other
Total Income from operations
Income (loss) before income taxes:
Piping Systems
Filtration Products
Industrial Process Cooling Equipment
Corporate and Other
Total Income before income taxes
Segment assets:
Piping Systems
Filtration Products
Industrial Process Cooling Equipment
Corporate and Other
Total Segment assets
Capital expenditures:
Piping Systems
Filtration Products
Industrial Process Cooling Equipment
Corporate and Other
Total Capital expenditures
Depreciation and amortization:
Piping Systems
Filtration Products
Industrial Process Cooling Equipment
Corporate and Other
Total Depreciation and amortization
Impairment of goodwill
Filtration Products
Industrial Process Cooling Equipment
Total Impairment of goodwill
2008
2007
2006
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
151,792
105,390
31,738
14,146
303,066
$ 104,273
97,120
36,327
1,767
$ 239,487
37,871
11,424
7,919
1,734
58,948
24,037
(2,936 )
(1,765 )
(8,544 )
10,792
24,141
(2,936 )
(1,765 )
(11,378 )
8,062
$
$
$
$
$
$
18,952
13,776
8,508
13
41,249
10,623
2,220
(1,227 )
(8,720 )
2,896
10,646
2,220
(1,227 )
(11,128 )
511
87,803
64,865
10,527
17,953
181,148
$
62,075
51,407
14,419
12,511
$ 140,412
6,641
10,925
73
825
18,464
3,210
1,626
368
572
5,776
$
$
$
$
1,688
1,100
2,788
$
$
2,190
2,500
187
886
5,763
2,063
1,459
393
516
4,431
0
0
0
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
82,166
86,362
41,161
3,782
213,471
16,780
16,230
11,274
121
44,405
9,568
5,274
1,222
(7,122 )
8,942
10,059
5,274
1,222
(9,798 )
6,757
44,130
51,886
15,909
9,515
121,440
6,260
972
371
666
8,269
1,848
1,332
413
474
4,067
0
0
0
33
Geographic Information: Net sales are attributed to a geographic area based on the destination of the product shipment.
Long-lived assets are based on the physical location of the assets and consist of property, plant and equipment used in the
generation of revenues in the geographic area.
Net Sales:
United States
U.A.E.
Europe (excluding Germany and Denmark)
India
Qatar
Germany
Bahrain
Kuwait
Mexico, South America, Central America and the Caribbean
Canada
All other Asia
Denmark
Africa
Other
Total Net Sales
Long-Lived Assets:
United States
U.A.E.
India
Denmark
South Africa
Total Long-Lived Assets
2008
2007
2006
$
$
$
$
197,274
29,483
14,473
13,801
11,560
6,857
6,072
5,078
4,879
4,742
3,715
3,585
999
548
303,066
$ 166,424
18,493
24,243
927
3,774
2,746
293
0
6,521
5,350
3,849
4,084
2,029
754
$ 239,487
30,892
6,871
4,363
4,959
171
47,256
$
$
21,601
7,413
0
6,225
162
35,401
$
$
$
$
175,096
2,043
6,030
544
762
4,801
0
446
3,663
5,370
10,803
2,764
734
415
213,471
20,744
7,603
0
5,011
83
33,441
Note 2 - Significant Accounting Policies
Reclassifications: Reclassifications were made to prior-year financial statements to conform to the current-year
presentations.
Use of Estimates: The preparation of financial statements in conformity with generally accepted U.S. accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition: The Company recognizes revenues including shipping and handling charges billed to customers,
when all the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the seller’s price to the buyer
is fixed or determinable, and (iii) collectability is reasonably assured. All subsidiaries of the Company, except as noted
below, recognize revenues upon shipment or delivery of goods or services when title and risk of loss pass to customers.
Percentage of Completion Revenue Recognition: All divisions recognize revenues under the above stated revenue
recognition policy except for sizable complex contracts - that require periodic recognition of income. For these contracts,
the Company uses "percentage of completion" accounting method. Under this approach, income is recognized in each
reporting period based on the status of the uncompleted contracts and the current estimates of costs to complete. The
choice of accounting method is made at the time the contract is received based on the expected length and complexity of
the project. The percentage of completion is determined by the relationship of costs incurred to the total estimated costs
of the contract. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract
penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are
recognized in the period in which they are determined. Claims for additional compensation due the Company are
recognized in contract revenues when realization is probable and the amount can be reliably estimated.
34
Shipping and Handling: Shipping and handling costs are included in cost of goods sold, and the amounts invoiced to
customers relating to shipping and handling are included in net sales.
Operating Cycle: The length of the piping systems business’s contracts vary, but are typically less than one year. The
Company includes in current assets and liabilities amounts realizable and payable in the normal course of contract
completion unless completion of such contracts extends significantly beyond one year. The Company’s other businesses
do not have an operating cycle beyond one year.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its domestic
and foreign subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have
been eliminated.
Translation of Foreign Currency: Assets and liabilities of consolidated foreign subsidiaries are translated into U.S.
dollars at exchange rates in effect at year-end. Revenues and expenses are translated at average exchange rates prevailing
during the year. Gains or losses on foreign currency transactions and the related tax effects are reflected in net income.
The resulting translation adjustments are included in stockholders’ equity as part of accumulated comprehensive income.
Contingencies: The Company is subject to various legal proceedings and claims that arise in the ordinary course of
business, including those involving environmental, tax, product liability and general liability claims. The Company
accrues for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably
estimated. Such accruals are based on developments to date, the Company’s estimates of the outcomes of these matters,
and its experience in contesting, litigating and settling other similar matters. The Company does not currently anticipate
the amount of any ultimate liability with respect to these matters will materially affect the Company’s financial position,
liquidity or future operations.
Cash and Cash Equivalents: All highly liquid investments with a maturity of three months or less when purchased are
considered to be cash equivalents. The balance is primarily cash and cash equivalents at the foreign subsidiaries. The
Company has not experienced any losses as a result of its cash concentration. Consequently, no significant concentration
of credit risk is considered to exist. Accounts payable included drafts payable of $7,349,000 and $7,157,000 as of January
31, 2009, and 2008, respectively.
Restricted Cash: The Loan Agreement requires 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.
Accounts Receivable Collection: The majority of the Company’s accounts receivable are due from geographically
dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customer’s financial
condition, including the availability of credit insurance. Generally, collateral is not required. Accounts receivable are due
within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from
customers net of an allowance for claims and doubtful accounts. The allowance for doubtful accounts was calculated
using a percentage of sales method based upon collection history and an estimate of uncollectible accounts. Management
may exercise its judgment in adjusting the provision as a consequence of known items, such as current economic factors
and credit trends. Accounts receivable adjustments are recorded against the allowance for doubtful accounts.
Concentration of Credit Risk: The Company has a broad customer base doing business in all regions of the U.S. as well
as other areas in the world. The Company maintains foreign credit insurance covering selected foreign sales not secured
by letters of credit or guarantees from parent companies in the U.S. This expense is included in general and
administrative expense in the Consolidated Statements of Operations. In the fiscal year ended January 31, 2009 and 2008,
no customer accounted for 10% or more of net sales.
Other Comprehensive Income (Loss): Other comprehensive income (loss) is defined as the change in equity resulting
from transactions from non-owner sources. Other comprehensive income (loss) consisted of the following: minimum
pension liability, foreign currency translation, unrealized gain on marketable securities and interest rate swap.
Pension Plan: The Winchester facility has a defined benefit plan covering its hourly employees. The benefits are based
on fixed amounts multiplied by years of service of retired participants. The Company engages outside actuaries to
35
calculate its obligations and costs. The funding policy is to contribute such amounts as are necessary to provide for
benefits attributed to service to date and those expected to be earned in the future. The amounts contributed to the plan
are sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of
1974.
Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method
for substantially all inventories. Inventories consist of the following:
Raw materials
Work in process
Finished goods
Subtotal
Less allowances
Inventories, net
2008
41,514
5,398
6,880
53,792
1,501
52,291
$
$
$
$
2007
34,044
4,569
5,756
44,369
1,356
43,013
Long-Lived Assets: Property, plant and equipment are stated at cost. Interest is capitalized in connection with the
construction of facilities and amortized over the asset’s estimated useful life. Interest of $152,000 was capitalized during
2008. Long-lived assets are reviewed for possible impairment whenever events indicate that the carrying amount of such
assets may not be recoverable. If such a review indicates impairment, the carrying amount of such assets is reduced to an
estimated fair value.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from
three to 30 years. Leasehold improvements are depreciated over the remaining life of the lease or its useful life whichever
is shorter. Amortization of assets under capital leases is included in depreciation and amortization.
The Company’s investment in property, plant and equipment is summarized below:
Land, buildings and improvements
Machinery and equipment
Furniture, office equipment and computer systems
Transportation equipment
Subtotal
Less accumulated depreciation and amortization
Property, plant and equipment, net
2008
31,862
41,871
12,004
512
86,249
38,993
47,256
$
$
$
$
2007
23,453
36,107
10,057
198
69,815
34,414
35,401
Assessment of Potential Impairments of Goodwill and Intangible Assets: The Company incurred a fourth quarter and
full year 2008 noncash charge of $2,788,000 related to the impairment of goodwill.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets,” during the first quarter each year the Company reviews the carrying value of goodwill. The evaluation of
impairment involved comparing the current fair value of the business to the carrying value. The Company used a
discounted cash flow model to determine the current fair value of its reporting units. A number of significant assumptions
and estimates were involved in the application of the model to forecast operating cash flows, including markets and
market share, sales volumes and prices, costs to produce and working capital changes. Management considered historical
experience and all available information at the time the fair values of its reporting units were estimated. However, actual
fair values that could be realized in a transaction may differ from those used to evaluate the impairment of goodwill.
The recently completed goodwill impairment assessment followed the fourth quarter 2008 worsening of economic
conditions. These conditions impacted both the risks considered and the calculations made. The assessment considered
uncertainty about current economic market conditions in the U.S. and globally that may pose risks to the Company’s
customer demand. Customers may postpone spending for capital improvement and maintenance projects in response to
tighter credit markets or negative financial news. The distressed financial markets caused the discount rates used in
calculating the present value of estimated future cash flows to be higher than a year ago. These conditions were reflected
in the Company’s goodwill impairment assessment.
36
As a result, the estimated future cash flows of the filtration products business (whose goodwill was $1,688,000) and the
industrial process cooling equipment business (whose goodwill was $1,100,000) were both lower than when goodwill
impairment testing was done a year ago. All of the Company’s goodwill was deemed impaired and was written off with a
noncash impairment charge.
Balance at beginning of year
Foreign currency translation effect
Impairment of goodwill
Balance at end of year
2008
2,826
(38 )
(2,788 )
0
$
$
$
$
2007
2,613
213
0
2,826
Other intangible assets with definite lives: The Company owns several patents covering the features of its piping and
electronic leak detection systems. The patents are not material either individually or in the aggregate to the overall
business because the Company believes sales in the business would not be materially reduced if patent protection were not
available. Patents are capitalized and amortized on a straight-line basis over a period not to exceed the legal lives of the
patents. Gross patents were $2,494,000 and 2,447,000 as of January 31, 2009, and 2008. Accumulated amortization was
$2,202,000 and $2,098,000 as of January 31, 2009, and 2008, respectively. Future amortizations over the next five years
ending January 31 will be $107,000 in 2010, $87,000 in 2011, $35,000 in 2012, $35,000 in 2013, $28,000 in 2014.
Investment in Joint Venture: In April 2002, the piping system business and two unrelated companies formed an equally
owned joint venture to more efficiently market their complementary thermal insulation products and systems for use in
undersea pipeline flow assurance projects worldwide. On June 28, 2007, the piping system business loaned the joint
venture $100,000. The loan and interest were paid in 2008. The Company accounts for its joint venture investment
using the equity method.
Partner distributions from its joint venture
Share of joint venture income
$
$
2008
0
104
2007
286
23
$
$
2006
450
491
$
$
Research: Research and development expenses consist of materials, salaries and related expenses of certain engineering
personnel, and outside services related to product development projects. Research and development costs are expensed as
incurred. Research and development expense was $2,517,000 in 2008, $4,994,000 in 2007, and $4,722,000 in 2006.
Financial Instruments: Gains and losses on hedges of existing assets, or liabilities are marked-to-market and the result is
included within accumulated other comprehensive income in the consolidated financial statements. Gains and losses on
financial instruments that hedge firm future commitments are deferred until the underlying transactions are recognized or
recorded immediately when the transaction is no longer expected to occur. Gains or losses on financial instruments that
do not qualify as hedges under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” are recognized immediately as income or expense.
Income Tax Provision: Income taxes are in accordance with Statement of Financial Accounting Standard No. 109, or
FAS 109, Accounting for Income Taxes, as clarified by FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (“FIN 48”). Deferred income taxes have been provided for temporary differences arising from differences
in basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary differences
have been recorded at the current tax rate. The Company assessed its deferred tax assets for realizability at each reporting
period.
FIN 48 requires that the Company recognize the financial statement benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. For further
information see Note 7 – Income Taxes in the Notes to Consolidated Financial Statements.
Net Income Per Common Share: Earnings per share (“EPS”) are computed by dividing net income by the weighted
average number of common shares outstanding (basic) plus all potentially dilutive common shares outstanding during the
year (diluted). The computation of diluted EPS for the year ended January 31, 2008 excluded 111 stock options due to the
loss for the period.
37
The basic weighted average shares reconcile to diluted weighted average shares as follows:
Basic weighted average number of common shares outstanding
Dilutive effect of stock options
Weighted average number of common shares outstanding assuming
full dilution
Weighted average number of stock options not included in the
computation of diluted EPS of common stock because the option
exercise prices exceeded the average market prices
Expired or canceled options during the year
Stock options with an exercise price below the average stock price
2008
6,797
56
6,853
292
20
258
2007
6,627
0
6,627
143
11
294
2006
5,358
242
5,600
0
25
548
In 2008, a total of 27,650 stock options were exercised. From February 1, 2009 through March 31, 2009, 450 stock
options were exercised.
Stock Options: Stock compensation expense for employee equity awards are recognized ratably over the requisite service
period of the award. The Black-Scholes option-pricing model is utilized to estimate the fair value of awards.
Determining the fair value of stock options using the Black-Scholes model requires judgment, including estimates for (1)
risk-free interest rate – an estimate based on the yield of zero–coupon treasury securities with a maturity equal to the
expected life of the option; (2) expected volatility – an estimate based on the historical volatility of the Company’s
Common Stock; and (3) expected life of the option – an estimate based on historical experience including the effect of
employee terminations. If any of these assumptions differ significantly from actual, stock-based compensation expense
could be impacted.
Fair Value of Financial Instruments: The carrying values of cash and cash equivalents, accounts receivable and
accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying amount of the
Company’s short-term debt, revolving line of credit and long term debt approximate fair value because the majority of the
amounts outstanding accrue interest at variable rates.
New Accounting Pronouncements: In December 2008, the Financial Accounting Standards Board (“FASB”) issued FSP
132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP 132(R)-1). FSP 132(R)-1 requires
additional disclosures for plan assets of defined benefit pension or other postretirement plans. The required disclosures
include a description of the investment policies and strategies, the fair value of each major category of plan assets, the
inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using
significant unobservable inputs on changes in plan assets, and the significant concentrations of risk within plan assets.
FSP 132(R)-1 does not change the accounting treatment for postretirement benefit plans. FSP 132(R)-1 is effective for
the Company for fiscal year 2009.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify the source of the information. This statement was effective
for fiscal years beginning after November 15, 2007. On February 14, 2008, the FASB issued FSP FAS No. 157-1
“Application of FASB Statement No. 157 to FASB Statement 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13” (SFAS 157-1) that
amends SFAS 157 to exclude its application for purposes of lease classification or measurement under SFAS 13. On
February 12, 2008, the FASB issued Staff Position Financial Accounting Standard (FSP FAS) No. 157-2 “Effective Date
of FASB Statement No. 157” (FSP 157-2) that amends SFAS 157 to delay the effective date for all non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis to fiscal years beginning after November 15, 2008. The Company adopted the required provisions of
SFAS 157-1 effective January 1, 2008 and there was no material effect on its consolidated financial statements. The
Company has adopted FSP 157-2 to delay the adoption effects related to non-financial assets and does not anticipate there
will be a material effect on its consolidated financial statements. In October 2008, the FASB issued FSP 157-3,
“Determining the Fair Value of a Financial Asset in a Market That Is Not Active.” The FSP was effective upon issuance,
including periods for which financial statements have not been issued. The FSP clarified the application of SFAS 157 in
38
an inactive market and provided an illustrative example to demonstrate how the fair value of a financial asset is
determined when the market for that financial asset is inactive. The adoption of this FSP FAS 157-3 did not have a
material impact on the Company’s consolidated financial statements.(cid:3)
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible
Assets (“FSP No. FAS 142-3”). FSP No. FAS 142-3 requires companies estimating the useful life of a recognized
intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of
historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted
for SFAS 142’s, Goodwill and Other Intangible Assets, entity-specific factors. FSP No. FAS 142-3 will be effective for
fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact of adoption of
FSP No. FAS 142-3 on its consolidated financial statements. However, the Company does not expect the adoption of FSP
No. FAS 142-3 to have a material effect on its consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not
require adoption until a future date are not expected to have a material impact on the consolidated financial statements
upon adoption.
Note 3 - Retention
Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of
$3,303,000 and $346,100 were included in the balance of trade accounts receivable as of January 31, 2009, and 2008,
respectively.
Retention payable is the amount withheld by the Company until a contract is completed. Retention payables of $300,600
and $11,000 were included in the balance of trade accounts payable as of January 31, 2009, and 2008, respectively.
Note 4 - Costs and Estimated Earnings on Uncompleted Contracts
Costs incurred on uncompleted contracts
Estimated earnings
Earned revenue
Less billings to date
Total
Classified as follows:
Costs and estimated earnings in excess of billings on uncompleted contracts
Billings in excess of costs and estimated earnings on uncompleted contracts
Total
Note 5 - Debt
Debt consisted of the following:
Revolving line domestic
Mortgage notes
Revolving lines foreign
Term loans
Capitalized lease obligations (See Note 6 - Lease Information)
Total debt
Less current maturities
Total long-term debt
2008
43,974
11,059
55,033
55,147
(114 )
$
$
2007
21,541
7,938
29,479
27,582
1,897
2,472
(2,586 )
(114 )
$
$
4,449
(2,552 )
1,897
2008
23,762
12,557
11,957
6,110
497
54,883
12,793
42,090
$
$
2007
8,582
9,296
8,162
7,907
293
34,240
14,532
19,708
$
$
$
$
$
$
39
The following table summarizes the Company’s scheduled maturities at January 31, 2009:
Revolving line domestic
Mortgages
Revolving line foreign
Term loans
Capitalized lease obligations
Total
Total
$ 23,762 $
12,557
11,957
6,110
497
1/31/10
1/31/11
0 $ 23,762 $
660
9,931
2,032
170
698
1,568
2,989
187
$ 54,883 $ 12,793 $ 29,204 $
1/31/12
0 $
747
0
391
140
1,278 $
0 $
1/31/13 1/31/14
0 $
458
0
193
0
651 $
273
0
467
0
740 $
Thereafter
0
9,721
458
38
0
10,217
At January 31, 2009, the Company was in compliance with covenants under the Loan Agreement as defined below.
On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan
Agreement"). The Loan Agreement was amended and restated on December 15, 2006. Under the terms of the Loan
Agreement, which matures on November 13, 2010, the Company can borrow up to $38,000,000, subject to borrowing
base and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, and
investments, do not permit payment of dividends, and require attainment of certain levels of profitability and cash flows.
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 January 31, 2009, the prime rate
was 3.25%, 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 0.25 and 2.25 percentage points, respectively. Monthly interest payments were
made. The average interest rate for the year ending January 31, 2009 was 4.94%.
The Company has two material debt covenants. (1) Consolidated EBITDA for the four consecutive fiscal quarters, (but
excluding any extraordinary gains for such period) plus the amount of any expenses or charges deducted there from for
the applicable period in connection with the closure and write down of the company’s facility in Cicero, Illinois, provided
that the aggregate amount of add-backs to EBITDA as a result of any such charges or expenses shall not exceed
$2,500,000. The company is required to achieve EBITDA of at least $8,000,000 each fiscal quarter. (2) Consolidated
fixed charge coverage at the end of each month is required to be at least 1.0 for the twelve months then ended, unless
collateral availability exceeds amounts borrowed by at least $6,500,000. Fixed charge coverage is a fraction whose
numerator equals EBITDA minus capital expenditures (but excluding capital expenditures separately financed) and minus
cash income taxes, and the denominator equals cash interest expense and loan principal payments (but excluding principal
payments of revolving loans). At January 31, 2009, the Company was in compliance with covenants under the Loan
Agreement.
As of January 31, 2009, the Company had borrowed $23,761,900 and had $50,300 available to it under the revolving line
of credit. In addition, $1,232,400 of availability was used under the Loan Agreement primarily to support letters of credit
to guarantee amounts committed for inventory purchases. 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 January 31, 2009, the amount of restricted cash was $220,400. Cash required for operations is
provided by draw-downs on the line of credit.
The Company guarantees the subsidiaries’ debt including all foreign debt.
Mortgages: On March 4, 2008, the Company borrowed $5,440,000 under a mortgage note secured by the filtration
products manufacturing facility located in Bolingbrook, Illinois. The 25 year mortgage resets its interest rate every five
years based on a published index. The initial interest rate is 6.54% during the first five years with monthly payments of
$36,867 for principal and interest combined.
On January 18, 2008, the Company borrowed $3,675,000 under a mortgage note secured by its manufacturing and office
facility in Niles, Illinois. The loan bears interest at 6.26% with monthly payments of $22,652 for both principal and
interest based on an amortization schedule of 30 years with a balloon payment at the end of the ten-year term.
On December 31, 2005, the Company obtained a loan in the amount of 7,067,000 Danish Kroners (“DKK”)
(approximately $1,122,000 U.S. dollars at the prevailing exchange rate at the time of the transaction) from a Danish bank
40
to partially finance a building addition at its Filtration facility in Denmark. The loan has a term of twenty years. The loan
bears interest at 4.28% with quarterly payments of $23,500 for both principal and interest.
On May 11, 2005, the Company obtained a loan in the amount of 3,241,500 DKK (approximately $536,000 U.S. dollars
at the prevailing exchange rate at the time of the transaction) from a Danish bank to partially finance the building addition.
The loan has a term of twenty years. The loan bears interest at 4.89% with quarterly payments of $10,700 for both
principal and interest.
On July 31, 2002, Perma-Pipe, Inc. borrowed $1,750,000 under a mortgage note secured by its manufacturing facility in
Lebanon, Tennessee. From the proceeds, $1,000,000 was used for a payment of amounts borrowed under the Note
Purchase Agreements with the remaining proceeds used to repay amounts borrowed under the Loan Agreement. The loan
bears interest at 7.75% with monthly payments of $21,001 for both principal and interest, and has a ten year term.
On April 26, 2002, Midwesco Filter borrowed $2,025,000 under a mortgage note secured by its manufacturing facility in
Winchester, Virginia. Proceeds from the mortgage, net of a prior mortgage loan were used to make principal payments to
the lenders under the Prior Term Loans and the bank which was the lender under the Company’s revolving line of credit at
that time. The loan bears interest at 7.10% with a monthly payment of $23,616 for both principal and interest, and has a
ten year term.
On June 1, 1998, the Company obtained a loan in the amount of 4,500,000 DKK (approximately $650,000 U.S. dollars at
the prevailing exchange rate at the time of the transaction) from a Danish bank to partially finance the acquisition of Boe-
Therm A/S (“Boe-Therm”). It is secured by the land and building of Boe-Therm, bears interest at 6.48% and has a term
of twenty years. Another loan in the amount of 850,000 DKK (approximately $134,000 U.S. dollars at the prevailing
exchange rate at the time of the transaction) was obtained on January 1, 1999 to acquire land and a building, bears
interest at 6.1% and has a term of twenty years. The interest rates on both the twenty-year loans are guaranteed for the
first ten years, after which they will be renegotiated based on prevailing market conditions.
Revolving lines foreign: The Company also has short-term credit arrangements used by its Denmark and U.A.E.
subsidiaries. These credit arrangements are generally in the form of overdraft facilities at rates competitive in the
countries in which the Company operates. The interest rate at the Denmark subsidiaries was 6.1% at January 31, 2009,
and the interest rate at the U.A.E subsidiaries was 8.5% at January 31, 2009. At January 31, 2009, borrowings under these
credit arrangements totaled $11,957,000; an additional $2,835,000 remained unused.
Term loans: On November 1, 2008, the filtration products business Bolingbrook location entered into a capital lease in
the amount of $537,400. Proceeds were used to purchase improvements for the facility. The loan bears interest at 7.55%
with a monthly payment of $16,125 for both principal and interest, and has a three year term.
On March 9, 2007, the filtration products business Denmark location obtained a loan in the amount of 1,343,200 Euros
(approximately $1,765,000 U.S. dollars at the prevailing exchange rate at the time of the transaction) from a Danish bank
to finance capital expenditures and other expenses. The loan matures May 2011. The loan bears interest at a floating rate
at January 31, 2009 of 5.00% per annum with monthly principal payments of $35,300.
On August 28, 2007, the Company amended and restated the Term Loan Note to $3,000,000 ("Term Loan"). In March
2005, the Company’s Loan Agreement was amended to add a term loan. Interest rates under the Term Loan 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 January 31, 2009, the prime rate was 3.25% and the Libor rate was
0.5%, 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 0.50 and 2.5 percentage points, respectively. The Company is scheduled to pay
$107,000 of principal on the first days of March, June, September, and December in each year ending on September 30,
2010, with the remaining unpaid principal payable on November 30, 2010.
On August 31, 2006, the Company obtained a loan in the amount of 5,200,000 U.A.E. Dirhams (“AED”) (approximately
$1,416,000 U.S. dollars at the prevailing exchange rate at the time of the transaction) from a U.A.E. bank to finance
capital expenditures. The loan matures January 2012. The loan bears interest at rate between 8.75% and 9.5% per annum
with quarterly principal payments of $93,600.
41
On April 30, 2006, the Company obtained a loan in the amount of 5,500,000 AED (approximately $1,498,000 U.S. dollars
at the prevailing exchange rate at the time of the transaction) from a U.A.E. bank to finance capital expenditures. The
loan matures January 2010. The loan bears interest at Ebor/Libor (5.625%) plus 4% per annum with quarterly principal
payments of $100,000.
On December 30, 2005, Perma-Pipe, Inc. borrowed $900,000 under an equipment loan secured by equipment. The loan
bears interest at 6.23% with monthly payments of $13,400 for both principal and interest, and has a seven year term.
On April 8, 2003, the Company obtained a loan from a Danish bank to purchase equipment and office furniture for a
building for its Filtration facility in Denmark, in the amount of 700,000 Euro, approximately $754,600 U.S. dollars at the
exchange rate prevailing at the time of the transaction. The loan has a term of ten years. The loan bears interest at 6.1%
with quarterly payments of $9,400 for both principal and interest.
Note 6 - Lease Information
The following is an analysis of property under capitalized leases:
Machinery and equipment
Furniture and office equipment
Transportation equipment
Subtotal
Less accumulated amortization
Total
2008
460
478
86
1,024
438
586
$
$
$
$
2007
164
252
67
483
456
27
The piping systems business leases manufacturing and warehouse facilities, land, transportation equipment and office
space under non-cancelable operating leases, which expire beginning 2009 through 2017. The filtration products business
leases approximately 67,000 square feet of production and office space under an operating lease, which began in June
2004 and expires in July 2010. Management expects that these leases will be renewed or replaced by other leases in the
normal course of business.
At January 31, 2009, future minimum annual rental commitments under non-cancelable lease obligations were as follows:
2009
2010
2011
2012
2013
Thereafter
Subtotal
Less Amount representing interest
Future minimum lease payments
$
Operating
Leases
1,464
804
301
104
73
65
2,811
0
2,811
$
Capital
Leases
200
199
151
0
0
0
550
53
497
$
$
Rental expense for operating leases was $2,307,000, $1,690,800 and $1,333,900 in 2008, 2007 and 2006, respectively.
42
Note 7 - Income Taxes
The following is a summary of domestic and foreign income (loss) before income taxes:
Domestic
Foreign
Total
Components of income tax expense (benefit) are as follows:
Current
Federal
Foreign
State and other
Subtotal
Deferred:
Federal
Foreign
State and other
Subtotal
Total
2008
(1,272 )
9,334
8,062
456
1,324
272
2,052
(374 )
(534 )
229
(679 )
1,373
$
$
$
$
2007
1,700
(1,189 )
511
$
$
2006
7,895
(1,138 )
6,757
1,581
86
384
2,051
(1,234 )
(159 )
151
(1,242 )
809
$
$
1,417
197
462
2,076
72
118
(102 )
88
2,164
$
$
$
$
The (deficiency) excess tax benefit related to stock options recorded through equity was ($457,000), $1,466,000, and
$945,000 in 2008, 2007 and 2006, which did not affect net income in 2008, 2007 and 2006. The amounts were recorded
to additional paid-in capital on the consolidated balance sheet and in financing activities on the consolidated statement of
cash flows. The deficiency in 2008 related to removing foreign employee stock option grants from the stock
compensation expense and its associated deferred tax item.
The 2007 income tax expense included a charge for valuation of the net operating loss (“NOL”) carryforwards. During
the fourth quarter of 2007, management determined that all of its foreign NOL carryovers and most of its state NOL
carryovers were no longer more likely than not realizable. Additional tax expense of $583,000 was recorded to establish a
valuation allowance against those deferred tax assets. Management believes that the remainder of its deferred tax assets,
which primarily relate to its profitable domestic operations, are more likely than not to be realized.
The difference between the provision for income taxes and the amount computed by applying the Federal effective rate of
34% was as follows:
Tax expense at federal statutory rate
Foreign rate tax (benefit) expense differential
Impairment on goodwill
Valuation allowance for net operating losses *
State tax expense (benefit), net of federal benefit
Return to provision adjustments
Research tax credit
Other – net
Total
* Valuation allowances against foreign and state net operating loss
benefits:
For current year operating losses
For prior year operating loss carryovers
Total
43
2006
2,297
702
0
0
160
(33 )
(826 )
(136 )
2,164
$
$
$
$
$
$
2008
2,741
(3,573 )
948
404
308
194
(120 )
471
1,373
2008
404
583
987
2007
174
32
0
583
125
68
(223 )
50
809
2007
298
285
583
$
$
$
$
The Company has a Federal operating loss carryforwards of $3,448,000 with a recognized tax benefit of $1,272,000 that
will expire in 2029.
The deferred tax asset for state operating loss carryforwards of $479,000 relates to amounts that expire at various times
from 2009 to 2029. The amount that will expire in 2009 is approximately $10,000. A valuation allowance has been
established for approximately $390,000 of this tax asset based upon an assessment that it is more likely than not that
realization cannot be assured in certain tax jurisdictions.
The Company has a deferred tax asset for foreign operating loss carryforwards of $550,000 that can be carried forward
indefinitely. The Company also has a deferred tax asset for foreign operating loss carryforwards of $597,000 for which a
100% valuation allowance has been established based upon an assessment that it is more likely than not that realization
cannot be assured. The ultimate realization of this tax benefit is dependent upon the generation of sufficient operating
income in the respective tax jurisdictions. This benefit can be carried forward indefinitely.
Components of the deferred income tax asset balances were as follows:
Research tax credit
U.S. federal NOL carryover
Accrued commissions and bonuses
Foreign NOL carryover
Other accruals not yet deducted
Non-qualified deferred compensation
State NOL carryover
FAS 123R stock compensation
Inventory valuation allowance
Accrued pension
Inventory uniform capitalization
Goodwill
Other
Subtotal
Valuation allowance for net operating losses
Net deferred tax asset
Components of deferred income tax liability balances were as follows:
Depreciation
Foreign deferred liability
Prepaid
Total
The classifications in the balance sheet were:
Current assets
Long-term assets
Net deferred tax asset
2008
1,334
1,272
1,207
1,146
980
821
479
445
415
284
133
80
102
8,698
(987 )
7,711
$
$
2007
1,003
0
1,226
299
988
1,161
298
200
472
132
132
166
108
6,185
(583 )
5,602
1,471
300
264
2,035
$
$
162
189
342
693
2,171
3,505
5,676
$
$
2,488
2,421
4,909
$
$
$
$
$
$
In the first quarter of 2007, the Company adopted FIN 48. The total amount of unrecognized tax liability as of February
1, 2007 was approximately $573,700, all of which would impact the effective tax rate if recognized. A decrease of
$504,500 was recorded to retained earnings as of February 1, 2007 upon the adoption of FIN 48. These non-current
income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheet. Included in the total
unrecognized tax liability were estimated accrued interest of $57,300 and penalties of $51,000. The Company’s policy is
to include interest and penalties in income tax expense.
44
The following table summarizes unrecognized tax benefit activity, excluding the related accrual for interest:
Description
Balance at beginning of the year
Increases (decreases) in positions taken in a prior period
Increases in positions taken in a current period
Decreases due to lapse of statute of limitations
Balance at end of the year
2008
704
7
71
(7 )
775
$
$
$
$
2007
574
(8 )
196
(58 )
704
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax
regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require
significant judgment to apply. Generally, tax years back to January 31, 2006 are open for federal and state tax purposes.
In addition, federal and state tax losses generated in years January 31, 2001 through January 31, 2005 are subject to
adjustment on audit, up the amount of loss claimed in those years.
The Company’s management periodically estimates the probable tax obligations of the Company using historical
experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of
tax regulations in the jurisdictions in which the Company transacts business. The judgments and estimates made at a
point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of
regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax
accruals for tax liabilities related to potential changes in judgments and estimates for federal, foreign and state tax issues
are included in current liabilities on the consolidated balance sheet.
Note 8 - Employee Retirement Plans
Pension Plan
The Winchester facility has a defined benefit plan covering its hourly rated employees. The benefits are based on fixed
amounts multiplied by years of service of retired participants. The Company engages outside actuaries to calculate its
obligations and costs. The funding policy is to contribute such amounts as are necessary to provide for benefits attributed
to service to date and those expected to be earned in the future. The amounts contributed to the plan are sufficient to meet
the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974. The Company
may contribute additional amounts at its discretion.
The market related value of plan assets at January 31, 2009 was $3,047,730; 2,866,458 in Vanguard Balanced Index Fund,
$45,036 in Vanguard REIT Index Fund, $136,149 in Fifth Third Banksafe Trust and $88 accrued income. The plans hold
no securities of MFRI, Inc. 100% of the assets are held for benefits under the plan. The target asset allocation was 95% to
100% mutual funds. The investment policy is to invest substantially all funds not needed to pay benefits and investment
expenses for the year, with target asset allocations of 60% equities (plus or minus 10%) and 40% fixed income (plus or
minus 10%), diversified across a variety of sub-asset classes and investment styles, following a flexible asset allocation
approach that will allow the plan to participate in market opportunities as they become available. At January 31, 2009,
95.5% of plan assets were held in mutual funds and the remaining 4.5% was in a money market fund. The expected long-
term rate of return on assets is based on historical long-term rates of equity and fixed income investments and the asset
mix objective of the funds.
Investment market conditions in late 2008 resulted in a negative $946,000 actual return on plan assets as presented below,
which reduced the fair value of plan assets at year end, as is also presented below. As a result, the actuarially calculated
contributions as required under the provisions of the Employment Retirement Income Security Act of 1974 and the
Internal Revenue Code as amended, including the Pension Protection Act of 2006 (PPA) resulted in a contribution of
$302,000 being made during February 2009, to attain funding targets necessary to avoid PPA restrictions on the plan with
respect to benefit increases and payments. While recognizing the 2008 market losses, the Company did not change its 8%
expected return on plan assets used in determining cost and benefit obligations, the return that the Company has assumed
during every profitable and unprofitable investment year since 1991. The plan’s investments are intended to earn long-
term returns to fund long-term obligations, and investment portfolios with asset allocations similar to those of the plan’s
investment policy have attained such returns over several decades. The effects of market conditions and investment losses
45
on the plan’s net periodic benefit and cost amortization of actuarial loss were not material to the Company’s results of
operations or financial position. The February 2009 contribution did not materially affect the Company’s liquidity, nor
are future contributions that may be necessary to maintain funding requirements expected to materially affect the
Company’s liquidity. The Company does not expect the decrease in plan assets to have any impact on the Company’s
future operations.
The following provides a reconciliation of benefit obligations, plan assets and funded status of the plan:
Accumulated benefit obligations:
Vested benefits
Accumulated benefits
Change in benefit obligation:
Benefit obligation – beginning of year
Service cost
Interest cost
Amendments
Actuarial (gain) loss
Benefits paid
Benefit obligation – end of year
Change in plan assets:
Fair value of plan assets – beginning of year
Actual return on plan assets (loss) gain
Company contributions
Benefits paid
Fair value of plan assets – end of year
Funded status
Amounts recognized in accumulated other comprehensive income:
Net loss
Prior service cost
Net amount recognized
The amount of prior service cost and net loss to be amortized in the
following year is $107
2008
2007
3,820
3,933
$
$
3,928
4,030
4,290
125
238
0
(419 )
(131 )
4,103
3,912
(946 )
213
(131 )
3,048
$
$
$
$
3,991
113
222
0
79
(115 )
4,290
3,869
61
97
(115 )
3,912
(1,055 )
$
(378 )
1,530
442
1,972
$
$
721
549
1,270
$
$
$
$
$
$
$
$
$
Weighted-average assumptions used to determine net cost and benefit obligations for years ended January 31:
End of year benefit obligation
Service cost discount rate
Expected return on plan assets
Rate of compensation increase
2008
6.490 %
5.692 %
8.000 %
N/A
2007
5.692 %
5.710 %
8.000 %
N/A
For 2008, the discount rate was based on a Citigroup yield curve of high quality fixed income investments with cash flows
matching the plans' expected benefit payments. The Company determines the expected long-term rate of return on plan
assets by performing a detailed analysis of historical and expected returns based on the strategic asset allocation approved
by the Board of Directors and the underlying return fundamentals of each asset class. The Company’s historical
experience with the pension fund asset performance is also considered.
Components of net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized actuarial loss
Net periodic benefit cost
46
2008
125
238
(309 )
107
27
188
$
$
$
$
2007
114
223
(306 )
107
0
138
Amounts recognized in other comprehensive income:
Net gain (loss)
Obligation
Asset
Reclassify
Prior service cost
Total in other comprehensive income
2008
2007
$
$
419
(1,228 )
$
107
(702 )
$
(79 )
(245 )
107
(217 )
Cash Flows:
Expected employer contributions for fiscal year ending 1/31/2010
Expected employee contributions for fiscal year ending 1/31/2010
Estimated future benefit payments reflecting expected future service for the fiscal year(s) ending:
1/31/2010
1/31/2011
1/31/2012
1/31/2013
1/31/2014
1/31/2015-1/31/2019
$
$
536
0
235
240
273
280
291
1,639
401(k) Plan
The domestic employees of the Company participate in the MFRI, Inc. Employee Savings and Protection Plan, which is
applicable to all employees except certain employees covered by collective bargaining agreement benefits. The plan
allows employee pretax payroll contributions of up to 16% of total compensation. The Company matches 50% of each
participant's contribution, up to a maximum of 3% of each participant’s salary.
Contributions to the 401(k) Plan were $557,100, $608,200, and $385,400 for the years ended January 31, 2009, 2008 and
2007, respectively. In 2007, contributions included $133,800 related to forfeiture allocations for prior years. The
Company estimates that it will contribute $490,000 for the year ending January 31, 2010.
Deferred Compensation Plans
The Company has deferred compensation agreements with key employees. Vesting is based on years of service. Life
insurance contracts have been purchased which may be used to fund the Company’s obligation under these agreements.
The deferred compensation plan was affected by the market value of the underlying investments. Since the underlying
investment declined in 2008, the Company’s deferred compensation expense and liability to the employees in the plan
decreased.
Note 9 - Stock Options
Under the 2004 Stock Option Plan (“Option Plan”), 250,000 shares of common stock are reserved for issuance to
employees of the Company and its affiliates as well as certain advisors and consultants to the Company. In addition,
under the Option Plan, the number of shares that may be issued shall be increased by an additional two percent of the
aggregate number of shares of Common Stock outstanding as of the last day of the most recently completed fiscal year of
the Company, beginning January 31, 2005. Option exercise prices will be no less than fair market value for the common
stock on the date of grant. The options granted under the Option Plan may be either non-qualified options or incentive
options.
Pursuant to the 2001 Independent Directors’ Stock Option Plan, an option to purchase 10,000 shares of common stock is
granted automatically to each director who is not an employee of the Company (an “Independent Director”) on the date
the individual is first elected as an Independent Director. An option to purchase 1,000 shares was granted to each
Independent Director acting on December 31, 2001, and options to purchase 1,000 shares are granted to each Independent
Director upon each date such Independent Director is re-elected as an Independent Director, commencing with the
Company’s annual meeting for the year 2002.
47
Such options vest ratably over four years and are exercisable for up to ten years from the date of grant. To cover the
exercise of vested options, the Company generally issues new shares from its authorized but unissued share pool. The
Company calculates stock compensation expense based on the grant date fair value of the option and recognizes expense
on a straight-line basis over the four-year vesting period of the option.
The fair value of each option award was estimated on the date of grant using the Black-Scholes Merton option-pricing
model that used the assumptions noted in the following table. The principal variable assumptions utilized in valuing
options and the methodology for estimating such model inputs include:
1.
risk-free interest rate - an estimate based on the “Market yield on U.S. Treasury securities at the rate for the
period described in assumption 3 below, quoted on investment basis" for the end of week closest to the stock
option grant date, from the Federal Reserve web site;
2. expected volatility - an estimate based on the historical volatility of MFRI Common Stock’s weekly closing
3.
stock price for the period 1/1/93 to the date of grant; and
expected life of the option - an estimate based on historical experience including the effect of employee
terminations.
1. Risk-free interest rate
2. Expected volatility
3. Expected life in years
4. Dividend yield
2008
2.80% - 3.57 %
60.34% - 63.64 %
5.0
0.0 %
2007
4.26% - 5.16 %
51.72 %
5.0
0.0 %
2006
5.16 %
52.23 %
7.0
0.0 %
The following summarizes the changes in options under the plans as of January 31, 2009:
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Weighted
Average
Exercise Price
13.59
17.30
2.99
23.77
14.85
$
Shares
437
161
(28 )
(20 )
$
550
Options exercisable at year-end
254
Weighted
Average
Remaining
Contractual Term
$
$
$
7.2
5.4
Aggregate
Intrinsic
Value
2,903
55
260
260
Options Exercisable
Range of Exercise
Prices
$2.00-$2.99
$3.00-$3.99
$4.00-$4.99
$7.00-$7.99
$10.00-$10.99
$12.00-$12.99
$13.00-$13.99
$16.00-$16.99
$17.00-$17.99
$26.00-$26.99
$28.00-$28.99
Number
Outstanding at
January 31, 2009
47
68
4
52
87
3
10
1
148
2
128
550
Options Outstanding
Weighted
Average
Remaining
Contractual Life
3.9
3.0
1.0
6.4
7.4
9.3
9.4
9.1
9.4
8.5
8.4
7.2
48
Weighted
Average
Exercise Price
2.160
$
3.120
4.130
7.610
10.075
12.665
13.650
16.115
17.642
26.045
28.990
14.849
$
Number
Outstanding at
January 31, 2009
Weighted
Average
Exercise Price
2.160
3.120
4.130
7.610
10.075
0
0
0
17.740
26.045
28.990
8.910
47 $
68
4
52
42
0
0
0
5
1
35
254 $
The weighted average fair value of options granted during 2008 (net of options surrendered), 2007 and 2006 are estimated
at $16.41, $14.54 and $5.99, per share, respectively, on the date of grant. The total intrinsic value of options exercised
during the years ended January 31, 2008, 2007 and 2006 were $125,000, $3,837,000 and $2,624,000, respectively.
Following is a summary of the Company’s nonvested shares as of January 31, 2009:
Outstanding at beginning of the year
Granted
Vested
Expired or forfeited
Outstanding at end of the year
Nonvested
Stock
Outstanding
212
161
(58 )
(19 )
296
$
Weighted-
Average
Grant Date
Fair Value
22.34
17.30
11.20
24.19
19.95
Based on historical experience the Company expects 93% of these options to vest.
As of January 31, 2009, there was $2,334,400 of total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the Plans. That cost is expected to be recognized over the weighted-average
period of 3.5 years. The stock-based compensation expense for the years ended January 31, 2009, 2008 and 2007 was
$745,000, $504,300 and $138,400, respectively.
Note 10 - Stock Rights
On September 15, 1999, the Company’s Board of Directors declared a dividend of one common stock purchase right (a
“Right”) for each share of MFRI’s common stock outstanding at the close of business on September 22, 1999. The stock
issued after September 22, 1999 and before the redemption or expiration of the Rights is also entitled to one Right for
each such additional share. Each Right entitles the registered holders, under certain circumstances, to purchase from the
Company one share of MFRI’s common stock at $25.00, subject to adjustment. At no time will the Rights have any
voting power.
The Rights may not be exercised until 10 days after a person or group acquires 15% or more of the Company’s common
stock, or announces a tender offer that, if consummated, would result in 15% or more ownership of the Company’s
common stock. Separate Rights certificates will not be issued and the Rights will not be traded separately from the stock
until then. Should an acquirer become the beneficial owner of 15% or more of the Company’s common stock, Rights
holders other than the acquirer would have the right to buy common stock in MFRI, or in the surviving enterprise if MFRI
is acquired, having a value of two times the exercise price then in effect. Also, MFRI’s Board of Directors may exchange
the Rights (other than those of the acquirer which will have become void), in whole or in part, at an exchange ratio of one
share of MFRI common stock (and/or other securities, cash or other assets having equal value) per Right subject to
adjustment. The Rights described in this paragraph and the preceding paragraph shall not apply to an acquisition, merger
or consolidation approved by the Company’s Board of Directors.
The Rights will expire on September 15, 2009, unless exchanged or redeemed prior to that date. The redemption price is
$0.01 per Right. MFRI’s Board of Directors may redeem the Rights by a majority vote at any time prior to the 20th day
following public announcement that a person or group has acquired 15% of MFRI’s common stock. Under certain
circumstances, the decision to redeem requires the concurrence of a majority of the independent directors.
49
Note 11 - Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations:
Net sales
Gross profit
Net income (loss)
Weighted average number of common shares:
Outstanding – basic
Outstanding – diluted
Per share data:
Net income (loss) – basic
Net income (loss) - diluted
Net sales
Gross profit
Net income (loss)
Weighted average number of common shares:
Outstanding – basic
Outstanding – diluted
Per share data:
Net income (loss) – basic
Net income (loss) - diluted
2008
First
Quarter
65,981
11,143
423
Second
Quarter
77,645
15,401
2,405
Third
Quarter
76,817
17,099
4,688
$
$
$
$
$
$
Fourth
Quarter
82,623
15,305
(827 )
$
$
6,787
6,888
6,794
6,882
6,799
6,854
6,808
6,808
$
$
0.06
0.06
$
$
0.35
0.35
$
$
0.69
0.69
$
$
(0.12 )
(0.12 )
2007
First
Quarter
56,954
10,792
1,038
Second
Quarter
58,944
12,277
1,443
Third
Quarter
65,086
11,200
983
$
$
$
$
$
$
Fourth
Quarter
58,503
6,980
(3,762 )
$
$
6,537
6,821
6,611
6,836
6,652
6,880
6,707
6,707
$
$
0.16
0.15
$
$
0.22
0.21
$
$
0.15
0.15
$
$
(0.56 )
(0.56 )
The fourth quarter for 2008 and 2007 had net losses; therefore the diluted earnings per share for the quarters were
identical to the basic earnings per share rather than assuming conversion, exercise, or contingent issuance of securities that
would have an anti-dilutive effect on earnings per share. In the 2008 fourth quarter, the Company recognized a non-cash
$2,788,000 impairment of goodwill which was recorded as part of continuing operations. The goodwill impairment
charge related to the Company’s filtration products and industrial process cooling equipment businesses.
50
Schedule II
MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 2009, 2008 and 2007
Description
Year Ended January 31, 2009:
Allowance for possible losses
in collection of trade
receivables
Year Ended January 31, 2008:
Allowance for possible losses
in collection of trade
receivables
Year Ended January 31, 2007:
Allowance for possible losses
in collection of trade
receivables
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Deductions
from
Reserves
(1)
Charged to
other
accounts
(2)
Balance at
End of
Period
$
384
$
197
$
138
$
30
$
473
$
352
$
198
$
175
$
9
$
384
$
504
$
141
$
340
$
47
$
352
(1) Uncollectible accounts charged off
(2) Primarily related to recoveries from accounts previously charged off and currency translation
51
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: April 15, 2009
MFRI, INC.
/s/ David Unger
David Unger
Chairman of the Board of Directors,
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
DAVID UNGER*
Director, Chairman of the Board of Directors,
and Chief Executive Officer (Principal
Executive Officer)
HENRY M. MAUTNER*
Director
BRADLEY E. MAUTNER*
Director and President
MICHAEL D. BENNETT*
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
ARNOLD F. BROOKSTONE*
Director
EUGENE MILLER*
Director
STEPHEN B. SCHWARTZ*
Director
DENNIS KESSLER*
Director
April 15, 2009
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
*By:
/s/ David Unger
David Unger
Individually and as Attorney in Fact
52
EXHIBIT INDEX
Exhibit No.
Description
3(i) Certificate of Incorporation of MFRI, Inc. [Incorporated by reference to Exhibit 3.3 to Registration
Statement No. 33-70298]
3(ii)* By-Laws of MFRI, Inc. as amended
4 Specimen Common Stock Certificate [Incorporated by reference to Exhibit 4 to Registration Statement
No. 33-70794]
10(a) 1993 Stock Option Plan [Incorporated by reference to Exhibit 10.4 of Registration Statement No. 33-
70794]
10(b) 1994 Stock Option Plan [Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1994 (SEC File No. 0-18370)]
10(c) 2001 Independent Directors Stock Option Plan, as amended [Incorporated by reference to Exhibit
10(d)(5) to the Company’s Schedule filed on May 25, 2001 (SEC File No. 0-18370)]
10(d) Form of Directors Indemnification Agreement Certificate [Incorporated by reference to Exhibit 10.1 to
the Company’s Schedule filed on May 15, 2006 (SEC File No. 001-32530)]
10(e) MFRI 2004 Stock Incentive Plan [Incorporated by reference to Exhibit 10(e) to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 2006 (SEC File No. 0-18370)]
10(f) Loan and Security Agreement between the Company and Fleet Capital Corporation dated July 11, 2002
and the amendments thereto dated October 3, 2002, December 12, 2002, April 30, 2003, October 31,
2003, July 1, 2004 and March 28, 2005. [Incorporated by reference to Exhibit 10(f) to the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 2006 (SEC File No.0-18370)]
10(g) Amended and Restated Loan and Security Agreement between the Company and Bank of America dated
December 15, 2006 and the amendments thereto dated [Incorporated by reference to Exhibit 10.1 to the
Company’s Schedule filed on December 20, 2006 (SEC File No. 001-32530)]
10(h) Code of Conduct [Incorporated by reference to Exhibit 14 of the Company’s Annual Report on Form 10-
K for the fiscal year ended January 31, 2004 (SEC File No. 0-18370)]
10(i)* Sixth Amendment to Amended and Restated Loan and Security Agreement
10(j)* Employment agreement with Fati Elgendy dated February 1, 2007
21* Subsidiaries of MFRI, Inc.
23* Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP
24* Power of Attorney executed by directors and officers of the Company
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
*Filed herewith
53
Officers & Directors
David Unger
Chief Executive Officer and
Chairman of the Board
MFRI, Inc.
Bradley E. Mautner
Director, President and Chief
Operating Officer
MFRI, Inc.
Michael D. Bennett
Vice President, Chief Financial
Officer, Secretary and Treasurer
MFRI, Inc.
Timothy P. Murphy
Vice President – Human
Resources
MFRI,Inc.
Arnold F. Brookstone
Independent Director
Retired Chief Financial &
Planning Officer
Smurfit-Stone Corporation
Eugene Miller
Independent Director
Executive-in-Residence and
Adjunct Professor
Florida Atlantic University
Michael J. Gade
Independent Director
Executive-in-Residence
University of North Texas
Founding Partner of the
Challance Group, LLP
Stephen B. Schwartz
Independent Director
Retired Senior Vice President
IBM Corporation
Dennis Kessler
Independent Director
President, Kessler Mgmt.
Consulting and Former
Co-President of Fel-Pro Inc.
Mark A. Zorko
Independent Director
Chief Financial Officer and
Secretary
Del Global Technologies
Corporation
Henry M. Mautner
Director
MFRI, Inc.
Heating, Ventilation
and Air Conditioning
Systems
Edward A. Crylen
President
Midwesco Mechanical and
Energy, Inc.
Piping Systems
Filtration Products
Industrial Process
Cooling Equipment
Fati A. Elgendy
President
Perma-Pipe, Inc.
Billy E. Ervin
Vice President
Perma-Pipe, Inc.
Robert A. Maffei
Vice President
Perma-Pipe, Inc.
John Carusiello
Vice President
Perma-Pipe, Inc.
Avin Gidwani
Managing Director
PPME FZE
Mark Foster
President
Midwesco Filter Resources, Inc.
Stephen C. Buck
President
Thermal Care, Inc.
Thomas A. Benson
Vice President
Thermal Care, Inc.
Bo Juul Nielsen
Managing Director
BOE-THERM A/S
G. Keith Ogilvie
Senior Vice President
Fabric Filter Products
Midwesco Filter Resources, Inc.
McLeod Stephens
Senior Vice President
Cartridge Filter Products
Midwesco Filter Resources, Inc.
Jorgen B. Poulsen
Managing Director
Nordic Air Filtration A/S
Joe Marcinski
Senior Vice President,
Operations
Midwesco Filter Resources, Inc.
Transfer/Rights Agent
Continental Stock Transfer
& Trust Company
17 Battery Place
New York, NY 10004
Independent Registered
Public Accountants
Annual Meeting
Grant Thornton LLP
175 West Jackson Blvd.
Chicago, IL 60604-2615
The Annual Meeting of Stockholders of MFRI, Inc. will be held at
10:00 a.m., Tuesday, June 23, 2009 at:
The Standard Club
320 South Plymouth Court
Chicago, Illinois
Perma-Pipe submerged piping installation
Thermal Care TC Series Chiller
Midwesco filters
Midwesco Mechanical and Energy
Corporate Headquarters
MFRI, Inc.
7720 North Lehigh Avenue
Niles, Illinois 60714
Phone:
Fax:
Web:
847-966-1000
847-966-8563
www.mfri.com
Offices & Manufacturing Facilities
Perma-Pipe, Inc.
Business Offices
7720 North Lehigh Avenue
Niles, Illinois 60714
Phone:
Fax:
Web:
847-966-2235
847-470-1204
www.permapipe.com
Perma-Pipe, Inc.
Manufacturing Plants
1310 Quarles Drive
Lebanon, Tennessee 37087
Phone:
Fax:
615-444-4910
615-449-3445
5008-11 Curtis Lane
New Iberia, Louisiana 70560
Phone:
Fax:
337-560-9116
337-560-9117
Perma-Pipe Middle East FZE
P.O. Box 4988
Fujairah, U.A.E.
Phone:
Fax:
971-9-228-2540
971-9-228-2541
Midwesco Filter Resources, Inc.
Business Offices & Manufacturing
400 Battaile Drive
Winchester, Virginia 22601
Phone:
Fax:
Web:
540-667-8500
540-504-8051
www.midwescofilter.com
TDC Filter Manufacturing, Inc.
Business Offices & Manufacturing
2 Territorial Court
Bolingbrook, Illinois 60440
Phone:
Fax:
Web:
630-410-6200
630-410-6201
www.tdcfilter.com
Nordic Air Filtration A/S
Business Offices & Manufacturing
Bergenvej 1
DK-4900 Nakskov, Denmark
Phone:
Fax:
Web:
45-5495-1390
45-5495-1363
www.nordic-air-filtration.dk
Nordic Midwesco (Pty) Ltd.
P.O. Box 2006
158 First Avenue, Vosterskroon
Nigel, 1490
South Africa
Phone:
Fax:
Web:
27-11-814-8361
27-11-814-6007
www.nordicmidwesco.co.za
Thermal Care, Inc.
Business Offices & Manufacturing
7720 North Lehigh Avenue
Niles, Illinois 60714
Phone:
Fax:
Web:
847-966-2260
847-966-9358
www.thermalcare.com
Boe-Therm A/S
Business Offices & Manufacturing
Industrivaenget 1
DK-5610 Assens, Denmark
Phone:
Fax:
Web:
45-6471-2375
45-6471-2303
www.boe-therm.dk
Midwesco Mechanical and Energy, Inc.
7720 N. Lehigh Avenue
Niles, Illinois 60714
Phone:
Fax:
847-929-1700
847-966-6549
2008 Annual Report