2011 Annual Report
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. manufacturers of specialty piping
systems for district heating and cooling, secondary containment and oil
and gas gathering flowlines. District heating and cooling systems
provide efficient energy distribution. Secondary containment piping
systems, consisting of a product pipe inside a containment pipe,
securely transports hazardous liquids and petroleum products. Oil and
gas gathering flowlines are used to transport crude oil from the well
head, either on land or on the ocean floor, to the 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 Filter designs and manufactures filter elements for dust
collectors used in air filtration. It offers more than 10,000 styles of filter
elements designed to fit almost any baghouse or cartridge-type industrial
filtration system. These systems are box-like structures where particulates,
usually from industrial and utility sources, are removed from exhaust gases
while passing through filter elements. Midwesco Filter makes filter elements
for both original equipment manufacturers and aftermarket users.
Thermal Care engineers, designs and manufactures a wide range of
heat transfer equipment, including chillers, cooling towers and plant
circulating systems for cooling industrial processes. The Company’s
cooling products are used to optimize manufacturing productivity by
quickly removing heat from manufacturing processes. Chillers and/or
cooling towers are combined with plant circulating systems to create
plant-wide systems that account for a large portion of its business. Its
principal markets for cooling products are thermoplastics processing
and general industry.
Midwesco Mechanical and Energy provides energy efficient heating,
ventilation, and air conditioning (HVAC) systems for large commercial,
industrial, and institutional projects.
In early April, Perma-Pipe inaugurated a new 80,000 square foot state-of-the-art
facility in Dammam, Saudi Arabia. The facility will offer insulated piping products to
serve the Kingdom’s expanded needs for crude oil transportation pipelines, sulfur
pipelines as well as the high growth district cooling and infrastructure opportunities.
The facility is capable of producing insulated and fabricated pipe up to 72” diameter
and will feature Perma-Pipe’s Xtru-Therm automated spray polyurethane insulation
with several jacketing systems including polyethylene, fiberglass and metals. In
addition to manufacturing facilities in the USA, Perma-Pipe also operates facilities in
Canada, UAE and India.
Dear Fellow Shareholders,
As we have communicated all year, much of 2011 was dedicated to refocusing our piping systems, driving a return
to profi tability for fi ltration and improving the profi tability of industrial process cooling. We met those goals.
Looking forward, among our goals for the piping systems unit is to be a signifi cant participant in the rapidly
emerging infrastructure and industrial development needs of the Middle East, with particular emphasis on the
Saudi Arabian market. To that end, in April 2012, Perma-Pipe celebrated a very successful facility opening in
Saudi Arabia. Neither the fourth quarter nor the year’s results were as we had hoped but we believe the stage
is set for improved performance starting mid-2012.
Th e operating loss for 2011 was driven primarily by the unfavorable full year impact of repositioning our piping
systems activities in the Middle East and the absence of large project activity in India, which masks the signifi cant
improvements made by our other business units. Filtration products, industrial process cooling and HVAC were
all profi table with operating profi ts improved by a combined $3.6 million compared to 2010.
2011 Highlights Summary:
• grew net sales 7% to $233.5 million in 2011, from $219 million in 2010
• increased backlog 7% to $83 million from $78 million in 2010
• improved domestic pre-tax income to $5 million from a pre-tax loss of $10 million in 2010
• incurred a foreign pre-tax loss of $10 million in 2011 which included $2.3 million of expensed start-up costs for
the new manufacturing facility in Dammam, Saudi Arabia compared to pre-tax income of $12 million in 2010
• repatriated $3.1 million of foreign earnings but incurred $1.8 million tax expense of which $0.5 million
was paid to a foreign tax authority and $1.3 million off set by foreign tax credits
Geography for Growth
We currently have eleven manufacturing facilities located in:
Denmark (2), U.A.E., India, Canada JV, Saudi Arabia (began
production in April 2012) and the U.S. (5). As you can see
from the charts in 2006, only 18 percent of sales and 26
percent of employees were outside the U.S.; whereas in 2011,
30 percent of sales and 41 percent of employees were
outside the U.S.
Looking Forward
Although disappointed with the 2011 result, we appreciate the eff ort made by the piping systems team during
the past year to build and commission the Saudi factory, which we believe will enable piping systems to return
to more historical levels of profi tability. Turning to 2012, we believe that maintaining our diversifi ed product
mix and geographic reach during the diffi cult economic climate will benefi t our Company. In the fi rst quarter of
2012, new orders in North America and Europe show improvement over prior periods. We will continue to make
strategic investments intended to facilitate growth in the longer term. We believe our enduring values and business
strategies will continue to benefi t our Company.
We deeply appreciate the dedication of our approximately 1,200 employees around the world. We also appreciate
your support and the confi dence you have placed in us by your investment. We hope you will take the time to
learn more about our Company by visiting our website, www.mfri.com, reading our attached 10-K/A report
and/or calling us with your questions.
Sincerely,
David Unger
Chairman and
Chief Executive Offi cer
Bradley E. Mautner
President and
Chief Operating Offi cer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2012
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
Common Stock, $.01 per share
Name of each exchange on which registered
The NASDAQ Stock Market, LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Securities registered pursuant to Section 12(g) of the Act: None
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
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) 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/A. Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting
company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer
Smaller reporting company
Non-accelerated filer
Accelerated filer
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
No
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 $53,878,437 based on the closing sale price of $9.00 per share as reported on the NASDAQ
Global Market on July 31, 2011.
The number of shares of the registrant's common stock outstanding at April 25, 2012 was 6,914,646.
Portions of the proxy statement for the 2012 Annual Meeting of Stockholders are incorporated by reference in Part III.
DOCUMENTS INCORPORATED BY REFERENCE
MFRI, Inc.
FORM 10-K/A
For the fiscal period ended January 31, 2012
TABLE OF CONTENTS
Page
Business
Piping Systems
Filtration Products
Industrial Process Cooling
Employees
International
Executive Officers of the Registrant
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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 Accounting Fees and Services
Exhibits and Financial Statement Schedules
Item
Part I
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.
Report of Independent Registered Public Accounting Firm
Signatures
1
2
3
5
6
6
7
8
10
10
11
11
11
12
12
20
21
21
21
22
22
22
22
22
22
22
23
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EXPLANATORY NOTE
This amendment is being filed to file the Report of Independent Registered Public Accounting Firm ("Audit
Report") for the Company's financial statements as of and for each of the two years ended January 31, 2012. The
Audit Report which was dated April 30, 2012 and included in the Company's Annual Report on Form 10-K for the
year ended January 31, 2012 filed on May 1, 2012 (the "Original Filing") was unsigned as the Company's
Independent Registered Public Accounting Firm ("Auditors") had not completed their audit. Due to a
misunderstanding the Company believed that the audit was completed and that the Audit Report had been signed on
the date of Original Filing and made the Original Filing based on that belief. Included in this filing is the signed
Audit Report, which is dated May 9, 2012. Except for (1) the inclusion of the Audit Report made by this filing, (2)
an amendment of Item 9A Controls and Procedures (3) an immaterial change to the second paragraph of the Income
Taxes of the Management's Discussion and Analysis and in the fourth paragraph of Note 8 - Income taxes; and (4)
an immaterial reclassification within the cash flow from operations section of the Consolidated Statement of Cash
Flows, the Original Filing has not been changed or updated by this filing.
Forward Looking Statements
PART I
Statements in this Form 10-K/A that are not historical facts, so-called "forward-looking statements," are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are
cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in MFRI's
filings with the Securities and Exchange Commission ("SEC"). See "Risk Factors" in Item 1A.
Available Information
The Company files with and furnishes to the SEC, reports including annual meeting materials, annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as amendments thereto. The
Company maintains a website www.mfri.com, where these reports and related materials are available free of charge
as soon as reasonably practicable after the Company electronically delivers such material to the SEC. The
information on the Company's website is not part of this annual report on Form 10-K/A and is not incorporated into
this or any other filings by the Company with the SEC.
Item 1. BUSINESS
MFRI, Inc., collectively with its subsidiaries ("MFRI", the "Company" or the "Registrant"), is engaged in the
manufacture and sale of products in three reportable segments: piping systems, filtration products and industrial
process cooling. Corporate and Other includes the installation of heating, ventilation and air conditioning
("HVAC") systems. This activity is not sufficiently large to constitute a reportable segment. The Company's fiscal
year ends on January 31. Years and balances described as 2011 and 2010 are the fiscal years ended January 31,
2012 and 2011, respectively. In the year ended January 31, 2012, no customer accounted for 10% or more of the
Company's net sales.
1
MFRI, Inc.'s Operating Units
Piping Systems
Filtration Products
Industrial Process
Cooling
Heating, Ventilation
and Air Conditioning
Midwesco Mechanical
Perma-Pipe, Inc.
Niles, IL
New Iberia, LA
Lebanon, TN
Midwesco Filter Resources, Inc. Thermal Care, Inc.
Winchester, VA
Niles, IL
and Energy, Inc.
TDC Filter Manufacturing, Inc. Boe-Therm A/S
Niles, IL
Bolingbrook, IL
Assens, Denmark
Perma-Pipe Middle East FZC
Nordic Air Filtration A/S
Fujarah, United Arab Emirates
Nakskov, Denmark
Perma-Pipe Saudi Arabia, LLC
Dammam, Kingdom of Saudi Arabia
Perma-Pipe India Pvt. Ltd
Gandidham, India
Mumbai, India
Bayou Perma-Pipe Canada, Ltd.
Alberta, Canada
All operating units shown are, directly or indirectly, wholly owned by MFRI except Bayou Perma-Pipe Canada,
Ltd., which is owned 49% by MFRI and 51% by an unrelated party.
Piping Systems
Products and services. The Company engineers, designs, manufactures and sells specialty piping 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 and long lines for oil and mineral transportation. The Company's leak detection
and location systems are sold with 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.
Piping systems frequently custom fabricates to job site dimensions and/or to 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.
Domestic piping systems is seasonal. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") - Piping Systems."
Marketing. The customer base is industrially and geographically diverse. In the United States of America ("U.S."),
the Company employs national 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 a 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.
Recent development. An additional insulated pipe manufacturing plant has been completed in Dammam, Saudi
Arabia to better serve the Gulf Cooperation Council ("GCC") and nearby countries. This new state-of-the-art
manufacturing facility will serve the special requirements of the oil and gas industry as well as the rapidly growing
market for district cooling networks. Perma-Pipe Saudi Arabia, ("PPSA"), will feature Perma-Pipe's Xtru-Therm
automated spray polyurethane insulation and several jacketing systems including polyethylene, metal and fiber
reinforced plastic offering a comprehensive product range. PPSA will also be equipped to custom manufacture pipe
2
spools and a complete range of pre-insulated fittings. The Company had its first sale in April 2012.
Intellectual Property. The Company owns several patents covering its piping and electronic leak detection
systems. The patents are not material either individually or in the aggregate overall because the Company believes
sales would not be materially reduced if patent protection were not available. The Company owns numerous
trademarks connected with its piping and leak detection systems including the following U.S. trademarks:
Perma-Pipe®, Chil-Gard®, Double Quik®, Escon-A®, FluidWatch®, Galva-Gard®, Polytherm®, Pal-AT®,
Stereo-Heat®, LiquidWatch®, PalCom®, Xtru-therm®, Auto-Therm®, Pex-Gard®, Multi-Therm®, Ultra-
Therm®, Cryo-Gard™, Sleeve-Gard™ and Electro-Gard™. The Company also owns a number of trademarks
throughout the world. Some of the Company's more significant trademarks include: Auto-Therm™, Cryo-Gard™,
Electro-Gard™, Pal-at™, Permalert™, Perma-Pipe®, Polytherm®, Ric-Wil®, Sleeve-Gard™ and Xtru-therm®.
Backlog. As of January 31, 2012, the backlog (uncompleted firm orders) was $53.8 million, net of order cancelled
after January 31, 2012 due to technical matters. As of January 31, 2011, the backlog was $46.5 million.
Raw materials. The basic raw materials used in production are pipes and tubes made of carbon steel, alloy, copper,
ductile iron, 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 these 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 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. Piping systems is highly competitive. The Company believes its principal competition 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. Some competitors have greater financial resources and
some have cost advantages as a result of manufacturing a limited range of products.
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
requires, in some cases, that the storage, handling and transportation of 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 such regulations it
may increase the demand for its piping systems products.
Filtration Products
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,
3
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 have 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.
Filtration products have an integrated sales program, 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. 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.
Intellectual Property. 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®. The
trademarks are not material either individually or in the aggregate overall because the Company believes sales
would not be materially reduced if trademark protection were not available.
Backlog. As of January 31, 2012, the backlog was $14.5 million, substantially all of which is expected to be
completed in 2012. As of January 31, 2011, the backlog was $17.2 million.
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 industry is highly competitive. In addition, new installations of cartridge
collectors and baghouses are subject to competition from alternative technologies including electrostatic
precipitators, scrubbers and mechanical collectors described above under Products and Services. The Company
believes, based on domestic sales, that its chief competitors consist of approximately five major and at least 50
smaller businesses, 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 filtration products.
Often, a manufacturer has a competitive advantage when its products have performed successfully for a particular
4
customer in the past. Additional effort is required by a competitor to market products to such a customer. In certain
applications, the Company's believes its proprietary Seamless Tube® product and customer support provide the
Company with a competitive advantage. Some 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 products as a result of lower wage rates and/or greater
vertical integration.
Government regulation. The sale of filtration products is 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 ("EPA") under the Clean Air Act Amendments of 1990
("Clean Air Act"). In addition, the EPA issued its own fine particle pollution standards in 1997 and 2006.
Industrial Process Cooling
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 and
various other industries.
Marketing. 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 industrial process cooling, 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.
The Company believes the total annual U.S. market for water cooling equipment in the plastics industry was more
than $100 million on a pre-recession basis 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 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, metalizing and machine tool industries. The Company believes the size of this
market was more than $200 million annually prior to the current recession. The original equipment manufacturer
distributes products to the end user in these markets.
Intellectual Property. The Company has registered the trademarks Thermal Care®, AWS® and Applied Web
Systems®.
Backlog. As of January 31, 2012, the backlog was $6.4 million, all of which is expected to be completed in 2012.
As of January 31, 2011, the backlog was $4.3 million.
Raw materials. The Company uses prefabricated sheet metal and subassemblies manufactured by both Thermal
5
Care and outside vendors for chillers and temperature control 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 to meet demands.
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
industrial process cooling. The Company believes it has a more comprehensive line of cooling products than any of
its competitors. Certain competitors 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 those 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.
Employees
As of February 29, 2012, the Company had 1,198 full-time employees, of whom 40.7% worked outside the U.S.
International
The Company's international operations as of January 31, 2012 include subsidiaries and a joint venture in five
foreign countries on three continents. The Company's international operations contributed approximately 15.7% of
revenue in 2011, 27.6% of revenue in 2010.
Refer to the Business descriptions on pages 1 through 5 above and Note 1 - Business and segment information in
the Notes to Consolidated Financial Statements for additional information on international activities. International
operations are subject to 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive officers of the Company as of April 15, 2012:
Name
David Unger
Offices and positions, if any, held with the Company; age
Director, Chairman of the Board and Chief Executive Officer; Age 77
Bradley E. Mautner Director, President and Chief Operating Officer; Age 56
Michael D. Bennett Vice President, Chief Financial Officer, Secretary and Treasurer; Age 68
Timothy P. Murphy Vice President of Human Resources; Age 62
Fati A. Elgendy
President and Chief Operating Officer of Perma-Pipe; Age 63
Robert A. Maffei
Vice President, Perma-Pipe; Age 64
John Mark Foster
President, Midwesco Filter; Age 50
Stephen C. Buck
President, Thermal Care; Age 63
Edward A. Crylen
President and Chief Operating Officer of Midwesco Mechanical and
Energy; Age 60
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
1987
2008
2007
2006
David Unger, Chairman of the Board 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
1994.
Michael D. Bennett, Chief Financial Officer and Vice President since August 1989.
Timothy P. Murphy, Vice President of Human Resources since May 2008. Prior to joining the Company, Mr.
Murphy spent 28 years as a business consultant in roles including Principal Partner of Murphy & Hill Consulting,
Managing Director of the Bay Area office of RHR, International and Consultant with YSC, Ltd. Mr. Murphy
previously consulted to the Company from 1985 to 2008.
Fati A. Elgendy, President and Chief Operating Officer of Perma-Pipe since March 1995.
Robert A. Maffei, Vice President, Director of Sales and Marketing of Perma-Pipe since August 1996.
John Mark Foster, President of Midwesco Filter since August, 2008. Mr. Foster previously worked at Saint-
Gobain (PAR: SGO) 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.
Stephen C. Buck, President of Thermal Care since October, 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
7
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.
Edward A. Crylen, President and Chief Operating Officer of Midwesco Mechanical and Energy, since its
formation in December 2006.
Item 1A. RISK FACTORS
The Company's business, financial condition, results of operations and cash flows are subject to various risks,
including, but not limited to those set forth below, which could cause actual results to vary materially from recent
results or from anticipated future results. These risk factors should be considered together with information
included elsewhere in this Annual Report on Form 10-K/A.
Economic factors. In the latest recession, the economy experienced a severe and prolonged downturn which
adversely impacted all of the Company's businesses, directly or indirectly. Downturns in such general economic
conditions can significantly affect the business of our customers, which in turn affects demand, volumes, pricing,
and operating margins for our services and products. Many of customers and suppliers felt the impact of the
economic downturn. A downturn in one or more of our significant markets could have a material adverse effect on
the Company's business, results of operations or financial condition. Because economic and market conditions vary
within the Company's segments, the Company's performance by 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.
Customer access to capital funds. Uncertainty about current economic market conditions 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. The adverse effect of the recent credit availability experienced by the Emirate of Dubai has
significantly decelerated construction activity both in the U.A.E. and across other GCC countries, negatively
impacting sales volume at the U.A.E. facility.
Rapid growth of business. Expansion may result in unanticipated adverse consequences, including significant
strain on management, operations and financial systems as well as on the Company's ability to attract and retain
competent employees. In the future, we may seek to grow our business by investing in new or existing facilities,
making acquisitions, entering into partnerships and joint ventures, or constructing new facilities, which could entail
a number of additional risks, including:
•
•
•
•
•
•
•
strain on working capital;
diversion of management from other activities which could impair the operation of existing businesses;
failure to successfully integrate the acquired businesses or facilities into existing operations;
inability to maintain key pre-acquisition business relationships;
loss of key personnel of the acquired business or facility;
exposure to unanticipated liabilities; and
failure to realize efficiencies, synergies and cost savings.
As a result of these and other factors, including the general economic risk, the Company may not be able to realize
the expected benefits from any recent or future acquisitions, new facility developments, partnerships, joint ventures
or other investments.
Changes in government policies and laws, worldwide economic conditions. International sales represent a
significant 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
8
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 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. Demand for the Company's leak detection and location 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. Filtration products, 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.
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 transactions with affiliates;
·
·
· making investments or other restricted payments;
paying dividends or make other distributions; and
·
creating liens.
·
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.
Competition. The businesses in which the Company is engaged are highly competitive. Many of the competitors
are larger and have more resources. Additionally, 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. In periods of declining demand, the
Company's fixed cost structure may limit ability to cut costs, which may be a competitive disadvantage to firms
with lower cost structures, or may result in reduced operating margins and operating losses.
Backlog. The Company defines backlog as the revenue value in dollars resulting from confirmed customer
purchase orders that have not yet been recognized as revenue. However, by industry practice, orders may be
canceled or modified at any time. If 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 recovered after cancellation. Any cancellation or delay in orders may result in
lower than expected revenue.
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
9
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.
Regulatory and legal requirements. As a public company, the Company is required to comply with the reporting
obligations of the Securities Exchange Act of 1934. Keeping informed of and in compliance with, changing laws,
regulations and standards relating to corporate governance, public disclosure and accounting standards, including
the Sarbanes-Oxley Act, Dodd-Frank Act, as well as new and proposed SEC regulations and accounting standards,
has required an increased amount of management attention and external resources. Compliance with such
requirements may result in increased general and administrative expenses and an increased allocation of
management time and attention to compliance activities.
Item 1B. UNRESOLVED STAFF COMMENTS - None.
Item 2. PROPERTIES
Piping Systems
Illinois
Louisiana
Tennessee
Canada
India
Owned production facilities and office space
Owned production facilities and leased land
Owned production facilities and office space
Joint venture owned production facilities and
office space
Leased production facilities, office space and
land
Kingdom of
Saudi Arabia Owned production facilities and leased land
Leased office space and land for production
United Arab
facilities
Emirates
Filtration Products
16,800 square feet
18,900 square feet
131,800 square feet on approximately 23.5 acres
87,160 square feet on approximately 128 acres
34,900 square feet on approximately 4.5 acres
89,000 square feet on approximately 19 acres
119,300 square feet on approximately 18 acres
Illinois
101,500 square feet on 5.5 acres
Bolingbrook - owned production facilities and office space
Cicero - owned production facilities and office space currently idle 130,700 square feet on 2.8 acres
Virginia
Denmark
Owned production facilities
Leased production facilities and office space
Owned production facilities and office space
Industrial Process Cooling
97,500 square feet on 5.0 acres
67,000 square feet
69,800 square feet on 3.5 acres
Illinois
Denmark
Owned production facilities and office space
Owned production facilities and office space
87,600 square feet on 8.1 acres
16,500 square feet
The Company's principal executive offices, which occupy approximately 23,400 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 be adequate for present and currently anticipated
needs.
10
The Company has three significant lease agreements as follows:
• Land in the Kingdom of Saudi Arabia is leased through 2030 and 2031.
• Office space of approximately 119,300 square feet and land for production facilities in the U.A.E. leased until
June 30, 2030.
• Production facilities and office space of approximately 67,000 square feet in Virginia are leased through July 31,
2012 and July 31, 2013, respectively.
For further information, see Note 6 - Lease information in the Notes to Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS - The Company had no material pending litigation.
Item 4. MINE SAFETY DISCLOSURES - Not applicable.
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 2011 and 2010 are the fiscal years
ended January 31, 2012 and 2011 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 2011 and 2010.
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$13.06
10.21
9.47
7.51
7.21
6.95
8.76
11.00
Low
$9.57
6.96
6.51
6.43
6.16
5.86
6.25
7.68
As of March 15, 2012, there were 74 stockholders of record and other additional shareholders for whom securities
firms acted as nominees.
The Company has never declared or paid a cash dividend and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. Management presently intends to retain all available funds for the
development of the business and for use as working capital. Future dividend policy will depend upon the
Company's earnings, capital requirements, financial condition and other relevant factors. The Company's line of
credit agreement does not permit the payment of dividends. For further information, see Note 5 - Debt in the Notes
to Consolidated Financial Statements.
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.
11
Equity Compensation Plan Information
The following table provides 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, 2012.
Plan Category
Equity compensation plans approved
by stockholders
Number of shares to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise
price of outstanding
options, warrants and
rights
Number of shares
available for future
issuance under equity
compensation plans
842,966
$11.48
503,435
ITEM 6. SELECTED FINANCIAL DATA - Not applicable.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained under the caption MD&A and other information contained elsewhere in this annual report,
which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue,"
"remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely" and
"probable" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended and are subject to the safe harbors created thereby. These
statements should be considered as subject to the many risks and uncertainties that exist in the Company's
operations and business environment. Such risks and uncertainties could cause actual results to differ materially
from those projected as a result of many factors, including but not limited to those under the heading Item 1A. Risk
Factors.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Backlog ($ in thousands):
Piping Systems
Filtration Products
Industrial Process Cooling
Corporate and Other
Total
*net of order cancelled after January 31, 2012 due to technical matters
12
2011
$53,769 *
14,473
6,431
8,539
$83,212
2010
$46,452
17,178
4,332
9,751
$77,713
MFRI, Inc. is engaged in the manufacture and sale of products in three reportable segments: piping systems,
filtration products and industrial process cooling. Piping systems' domestic sales and earnings are seasonal,
typically lower during the fourth and first quarters due to unfavorable weather for construction over much of North
America and are correspondingly higher during the second and third quarters. The Company website address is
www.mfri.com.
The analysis presented below and discussed in more detail throughout the MD&A was organized to provide
instructive information for understanding the business going forward. However, this discussion should be read in
conjunction with the consolidated financial statements in Item 8 of this report, including the notes thereto. An
overview of the segment results is provided in Note 1 - Business and segment information to the consolidated
financial statements in Item 8 of this report.
Critical accounting policies and estimates
MD&A discusses the consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Management believes that judgments and estimates related to the following critical accounting policies could
materially affect the consolidated financial statements:
• Revenue recognition
• Percentage of completion revenue recognition
•
•
• Equity-based compensation
• Fair value of financial instruments
Inventory
Income taxes
In the fourth quarter of 2011, there were no changes in the above critical accounting policies.
In the latest recession, the economy experienced a severe and prolonged downturn which adversely impacted all of
the Company's businesses, directly or indirectly. Although improvement is expected, the timing of economic
recovery in the markets we serve remains uncertain. Because economic and market conditions vary within the
Company's segments, the Company's future performance by segment will also vary. Should current economic
conditions continue, or a further downturn in one or more of our significant markets, the Company could experience
a period of declining net sales, which could adversely impact the Company's results of operations.
Correction of immaterial errors
In the fourth quarter of 2011, management discovered prior period tax errors related mainly to transfer pricing .
The cumulative adjustment for the tax errors covering the period from February 1, 2007 to January 31, 2011, was
approximately $315 thousand. The adjustment applicable to the fourth quarter of 2010 was approximately $135
thousand and the adjustment applicable to prior years (February 2007 - January 2010) totaled approximately $180
thousand. Pursuant to the guidance of SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, the Company
concluded that the errors were not material to any of its prior period financial statements. However, in accordance
with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the
Current Year Financial Statements, the prior period financial statements were revised. Prior period amounts stated
in this Form 10-K/A have been revised to facilitate comparability between current and prior year periods. For
further information, see Note 7 Correction of immaterial errors - in the Notes to Consolidated Financial Statements.
13
2011 Compared to 2010
Net sales were $233.5 million in 2011, an increase of 7% from $219 million in 2010. Sales increased in filtration
products, industrial process cooling and HVAC. Piping systems' sales declined due to reduced activity at the U.A.E.
facility and no large project related revenue at the India facility.
Gross profit of $36 million in 2011 decreased 18% from $44 million in 2010. Gross margin was 16% compared to
20% in 2010. Gross profit increased significantly in filtration products, industrial process cooling and HVAC due
to increased sales volume and margin improvements. Piping systems' gross profit decreased considerably to $14.4
million in 2011 from $27.3 million in 2010 due to lower volume at the U.A.E. facility and no large project related
activity at the India facility. In the second quarter, piping systems also incurred a one-time extended service claim
of approximately $0.6 million.
General and administrative expenses decreased 6% to $26.3 million from $28 million. The reduction was mainly
due to lower profit-based management incentive compensation expense, lower stock compensation expense and
lower legal expenses partially offset by start-up costs for piping systems' new facility in Saudi Arabia.
Selling expenses increased 11% to $15.1 million from $13.6 million. A change in piping systems' domestic sales
commission program resulted in increased sales commission expense, additional sales in industrial process cooling
led to higher commission expense and higher healthcare costs were partially offset by reduced costs from closing
the facility in South Africa recorded in 2010.
The Company's worldwide effective income tax rates, ("ETR"), for 2011 and 2010 were (0.3)% and (67.0)%,
respectively. For additional information, see the Income Tax section of the MD&A and see Note 8 - Income taxes
in the Notes to the Financial Statements.
Net loss was $5 million compared to net income of $4.4 million in 2010. This change is mainly the result of lower
volume at the U.A.E. facility and no large project related activity at the India facility. Furthermore piping systems
incurred expenses of $1.0 million for the fourth quarter and $2.3 million for 2011 relating to the new start-up
facility in Saudi Arabia.
Piping Systems
The adverse effect of the credit crisis experienced by the Emirate of Dubai has significantly decelerated
construction activity both in the U.A.E. and across other GCC countries, negatively impacting sales volume at the
U.A.E. facility.
The manufacturing facility in Dammam, Saudi Arabia is production ready and staff has been recruited and trained.
Initial customer orders have been received, technical submittals are awaiting approval and procurement of raw
materials is currently underway. Expenses of $1.0 million for the fourth quarter and $2.3 million for 2011 relating
to this new start-up facility were recorded to cost of goods sold, general and administrative and selling expenses.
Piping systems' domestic sales and earnings are seasonal, typically lower during the fourth and first quarters due to
unfavorable weather for construction over much of North America and are correspondingly higher during the
second and third quarters.
14
($ in thousands)
Net sales
Gross profit
Percentage of net sales
Income from operations
Percentage of net sales
2011
$96,977
2010
$104,559
% (Decrease)
(7)%
14,382
15%
1,115
1%
27,303
26%
13,831
13%
(47)%
(92)%
Despite significant sales drops in the Middle East and India, net sales of $97 million decreased only 7% from
$104.6 million, in the prior-year due to reduced activity at the U.A.E. facility and no large project related revenue at
the India facility, partially offset by a rise in domestic oil and gas product sales.
Gross margin decreased to 15% of net sales from 26% of net sales in the prior-year due to lower volume at the
U.A.E. facility and no large project related activity at the India facility. In the second quarter, piping systems
incurred a one-time extended service claim of approximately $0.6 million.
General and administrative expense decreased to $9 million or 9.5% of net sales in 2011 from $10 million or 9.9%
of net sales in 2010. The reduction in general and administrative expenses was due to lower profit based
management incentive compensation, legal expenses and reduced staffing at the U.A.E. location, partially offset by
increased healthcare costs.
Selling expense increased to $4 million or 4% of net sales in 2011 from $3 million or 3% of net sales in 2010. This
increase was due to a change in the domestic sales commission program, which resulted in higher sales commission
expense in the period.
Filtration Products
The timing of large orders can have a material effect on net sales and gross profit from period to period. Pricing on
large orders was extremely competitive and therefore resulted in relatively low gross margins in all periods.
Filtration products is dependent on government regulation of air quality at the federal and state levels. The
Company believes that growth in the sale of its filtration products and services will be materially dependent on
continued enforcement of environmental laws such as the Clean Air Act. Although there can be no assurance what
the ultimate effect of the Clean Air Act will be on filtration products, the Company believes the Clean Air Act is
likely to have a positive long-term effect on demand for the Company's filtration products and services.
($ in thousands)
Net sales
Gross profit
Percentage of net sales
Income (loss) from operations
Percentage of net sales
2011
$93,705
2010
$85,133
% Increase
10%
12,466
13%
10,394
12 %
614
0.7%
(1,335)
(1.6)%
20%
146%
Net sales increased 10% to $94 million in 2011 from $85 million in 2010 due to improving business conditions in
filtration products. New pricing models are being used in an effort to shift the mix of products sold and improve
overall profitability.
Gross margin increased to 13% of net sales from 12% of net sales in 2010 primarily due to cost containment efforts
15
and improved product mix.
In July 2010, the Company announced that the facility in South Africa would close in the third quarter. Expenses
related to the closing were approximately $577 thousand. In 2010, these expenses were included in cost of goods
sold, general and administrative and selling expenses.
General and administrative expenses increased to $5 million from $4.8 million and as a percentage of net sales
decreased to 5.3% from 5.6% in 2010. The dollar increase was due to additional staffing, foreign exchange
currency loss and an increase in bad debt expense partially offset by closing costs related to the facility in South
Africa.
Selling expenses remained level at $6.9 million. Additional staffing and higher advertising expenses were offset by
the 2010 closing of the South Africa facility. Selling expenses as a percentage of net sales decreased to 7.3% in
2011 from 8.2% of net sales in 2010.
Industrial Process Cooling
($ in thousands)
Net sales
Gross profit
Percentage of net sales
Income from operations
Percentage of net sales
2011
$32,112
2010
$26,220
% Increase
22%
8,541
27%
810
2.5%
7,044
27%
295
1.1%
21%
175%
Net sales of $32 million increased 22% from $26 million in 2010 due to improving business conditions in the
domestic plastic and industrial market sectors.
Gross profit increased 21% to $8.5 million from $7 million in 2010. Gross margin remained constant as a
percentage of net sales.
General and administrative expenses increased to $3.6 million from $3.2 million in 2010 and decreased as a
percentage of net sales to 11% from 12% in 2010 due to the effect of higher sales. The change in spending was a
result of restoring compensation to levels before wage reductions implemented during the economic downturn,
increased profit based management incentive compensation expense related to improved performance, additional
staffing and increased professional expenses including legal costs.
Selling expenses increased to $4.2 million in 2011 from $3.5 million in 2010 primarily driven by an increase in
commission expense due to higher sales, restoring compensation to levels before wage reductions implemented
during the economic downturn and higher healthcare costs. Selling expenses as a percentage of net sales decreased
to 13% from 13.5% of net sales in 2010 due to the effect of higher sales.
Corporate and Other
Net sales of $10.7 million in 2011 increased from $2.7 million in 2010 due to increased construction activity.
Corporate expenses include interest expense and general and administrative expenses that are not allocated to the
segments. General and administrative expenses decreased 11% to $8.5 million or 3.7% of net sales from $9.6
million or 4.4% of net sales in 2010. The decrease was due to lower profit-based management incentive and stock
compensation expense.
Interest expense increased to $2.2 million from $1.9 million in 2010 primarily due to higher borrowings and interest
16
rates. Interest income increased to $728 thousand from $676 thousand due to higher cash balances held overseas in
piping systems.
INCOME TAXES
The Company's worldwide ETRs were (0.3)% and (67.0)% in 2011 and 2010, respectively. The ETR in the periods
presented was the result of the mix of income earned in multiple tax jurisdictions with various income tax rates.
Income earned in the U.A.E. is not subject to any local country income tax. The ETR in 2011 was less than the
statutory U.S. federal income tax rate, due to foreign losses and repatriation of foreign earnings. The ETR in 2010
was less than the statutory U.S. federal income tax rate, mainly due to the large portion of income earned in the
U.A.E.
The January 31, 2012 computation of the projected annual tax rate has been significantly impacted by the loss in the
U.A.E. for which no tax benefit can be provided. The Company recorded $1.8 million in tax expense associated
with the $3.1 million repatriation of foreign earnings that occurred in July 2011. These foreign earnings were
previously considered to be indefinitely reinvested outside the United States. The repatriation was a one-time
nonrecurring event. The Company has not provided Federal tax on unremitted earnings of its international
subsidiaries. A deferred tax asset of $1.3 million has been established for U.S. foreign tax credits attributed to
repatriated foreign earnings, resulting in a net tax of $0.5 million. The excess foreign tax credits are subject to a
ten-year carryforward and will expire in 2022.
During 2011, the Company reevaluated the need for a valuation allowance against deferred tax assets and
determined that no reserve was needed. As of January 31, 2011 and January 31, 2012, no valuation allowance was
deemed necessary on all domestic deferred tax assets except for certain state net operating losses, ("NOL"). The
Company believes that it will be more likely than not that the research and development credits will be utilized
within the next five years; therefore, the Company has released the valuation allowance of $0.8 million for the $1.3
million research and development credits established in 2009. Another contributing factor to the unusual ETR is the
valuation allowance set up on the NOL in Saudi Arabia. The Company does not record a tax benefit for its start-up
entities.
As of January 31, 2012, the Company had undistributed earnings of 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.
A reconciliation of the ETR to the U.S. Statutory tax rate is as follows:
Statutory tax rate
Differences in foreign tax rate
Foreign tax credit
Research tax credit and release of valuation allowance
Repatriation
Valuation allowance for foreign and state NOLs
Nontaxable income from the Canadian joint venture
State taxes, net of federal benefit
All other, net expense
Effective income tax rate
2011
34.0 %
(28.8)%
26.2 %
19.1 %
(36.4)%
(10.1)%
10.7 %
(8.4)%
(6.6)%
(0.3)%
2010
34.0 %
(60.7)%
— %
— %
— %
(20.8)%
(12.8)%
(16.6)%
9.9 %
(67.0)%
For further information, see Note 8 - Income taxes in the Notes to Consolidated Financial Statements.
17
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of January 31, 2012 were $4.2 million as compared to $16.7 million at January 31,
2011. The decrease was primarily for the new facility in Saudi Arabia. The Company's working capital was $43
million at January 31, 2012 compared to $59 million at January 31, 2011. Cash used in operations in 2011 was $0.2
million compared to cash provided by operations of $8.7 million at January 31, 2011.
In July 2011, the Company recorded a one-time $1.8 million tax expense associated with a $3.1 million repatriation
of foreign earnings. This tax expense included a payment of $0.5 million to the foreign tax authority and an accrual
of $1.3 million U.S. tax on foreign source income. No cash will be paid for this tax in the U.S. since the Company
has a net operating loss carryforward for federal income taxes. The Company does not intend to repatriate
remaining unremitted foreign earnings and anticipates reinvesting these earnings overseas to fund current working
capital requirements and expansion in foreign markets. If the Company repatriates unremitted foreign earnings, it
will have negative tax implications.
Net cash used in investing activities in 2011 included $10 million for capital expenditures, primarily for machinery
and equipment in piping systems of which $6.6 million was related to the new plant in Saudi Arabia. The Company
estimates that capital expenditures for 2012 will be approximately $8 million, of which the Company may finance
capital expenditures through real estate mortgages, equipment financing loans, internally generated funds and its
revolving line of credit. The majority of such expenditures relates to foreign growth within piping systems.
Debt totaled $37.4 million at January 31, 2012, a decrease of $2 million since January 31, 2011. Net cash used by
financing activities was $1.9 million. Other long-term liabilities of $5.1 million were composed primarily of
accrued pension cost and deferred compensation.
The following table summarizes the Company's estimated contractual obligations at January 31, 2012.
($ 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)
Uncertain tax position obligations (8)
Total
$18,252
17,699
1,986
5,396
43,333
2,133
11,871
3,979
5,686
101
945
Year Ending January 31,
2013
2014
2015
2016
2017 Thereafter
$— $18,252
1,156
673
1,436
3,265
518
2,148
705
571
—
—
926
75
1,886
21,139
465
1,765
308
105
—
—
$—
929
75
340
1,344
406
1,504
325
105
—
—
$—
928
75
62
1,065
385
1,306
343
105
—
—
$—
927
75
62
1,064
359
1,242
347
52
—
—
$—
12,833
1,013
1,610
15,456
—
3,906
1,951
4,748
101
945
Total
$68,048
$7,207
$23,782
$3,684
$3,204
$3,064
$27,107
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, 2012, and the weighted average interest rate of 3.51% on that
debt, such interest was being incurred at an annual rate of approximately $0.8 million.
(2) Scheduled maturities, including interest.
(3) Term loan obligations exclude floating rate interest on term loan with a January 31, 2012 balance of $1.1
million. Based on the amount of such debt as of January 31, 2012, and the weighted average interest rate of
3.34% on that debt, such interest was being incurred at an annual rate of approximately $42 thousand.
(4) Minimum contractual amounts, assuming no changes in variable expenses.
(5) Includes expected employer contributions for fiscal year ending January 31, 2012 and estimated future benefit
18
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
used to fund the Company's obligation under these agreements. Payment estimates calculated by the third party
administrator, have been included.
(7) Refer to the proxy statement for a description of compensation plans for Named Executive Officers.
(8) Refer to Note 8 - Income taxes in the Notes to Consolidated Financial Statements for a description of the
uncertain tax position obligations.
Financing
On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution
("Loan Agreement"). Under the terms of the Loan Agreement as amended, which matures on November 30, 2013,
the Company can borrow up to $38 million, subject to borrowing base and other requirements, under a revolving
asset-based line of credit. The Loan Agreement covenants restrict debt, liens, investments, do not permit payment
of dividends, and require attainment of levels of profitability and cash flows. At January 31, 2012, the Company
was in compliance with all covenants under the Loan Agreement. Interest rates 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, 2012, the prime rate was 3.25%, the LIBOR rate was 0.375%, 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 0.5 and 2.75 percentage points, respectively. Monthly interest payments were made
during the years ended January 31, 2012 and 2011. As of January 31, 2012, the Company had borrowed $18.3
million and had $6.9 million available to it under the revolving line of credit. In addition, $0.2 million 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 domestic receipts 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,
2012, the amount of such restricted cash was $1.7 million. Cash required for operations is provided by draw-downs
on the line of credit.
The Company also has credit arrangements used by its Denmark and U.A.E. subsidiaries. These credit
arrangements are in the form of overdraft facilities at rates competitive in the countries in which the Company
operates. At January 31, 2012, borrowings under these credit arrangements totaled $1.5 million; an additional $3.8
million remained unused.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The Company's significant accounting policies are discussed in the notes to the consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K/A. The application of certain of these policies requires
significant judgments or a historical based estimation process that can affect the results of operations and financial
position of the Company as well as the related footnote disclosures. The Company bases its estimates on historical
experience and other assumptions that it believes are reasonable. If actual amounts ultimately differ from previous
estimates, the revisions are included in the Company's results of operations for the period in which the actual
amounts become known.
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, 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
19
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 all inventories.
Income taxes. Deferred income taxes have been provided for temporary differences arising from differences in the
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 assesses its deferred tax assets for realizability
at each reporting period.
The Company recognizes 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.
Equity-based compensation. Stock compensation expense for employee equity awards is 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.
Fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable and
accounts payable are based upon reasonable estimates of their fair value due to their short-term nature. The
carrying value of the cash surrender value of life insurance policies approximated fair value and was based on the
market value of the underlying investments, which may increase or decrease due to fluctuations in the overall
financial markets. 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.
The Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing
interest rates under the revolving credit agreement. Any differences paid or received on the interest rate swap
agreements are recognized as adjustments to interest expense over the life of the swap, thereby adjusting the
effective interest rate on the underlying obligation.
Reclassifications. Reclassifications were made to prior-year financial statements to conform to the current-year
presentations as required.
New accounting pronouncements. See "Financial Statements - Notes to Consolidated Financial Statements," Note
2 - "New accounting pronouncements," for information regarding new accounting pronouncements.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not
applicable.
20
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company for each of the two years in the periods ended as of January
31, 2012 and 2011 and the notes thereto are set forth elsewhere herein.
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, 2012. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, due to a material weakness in internal control over financial reporting described
below in Management's Report on Internal Control Over Financial Reporting, the Company's disclosure controls
and procedures were not effective as of January 31, 2012.
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 not maintained effective internal control
over financial reporting as of January 31, 2012, based on criteria in the COSO Report.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely basis.
The Company's processes, procedures and controls related to the preparation, review and filing of its Annual Report
on Form 10-K ("10-K") were not effective at January 31, 2012 to ensure that its Independent Registered Public
Accounting Firm ("Auditors") had completed its audit work and signed its Report and Consent prior to filing the
10-K. This material weakness resulted in filing a 10-K prior to the Auditors' completion of their work as well as
without the signed Auditors Report and Consent, due to a misunderstanding. This material weakness did not result
in any other material adjustments to the Registrant's financial statements, notes thereto, or other disclosures in the
10-K.
Change in Internal Controls. Other than the material weakness noted above, there has been no change in internal
control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, internal control over financial reporting.
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting: Beginning with the
filing of this Annual Report on Form 10-K/A, the Company has adopted a procedure that requires the Auditors
signed Report and Consent, or such other report that is required for filing any report with the SEC to be in hand
21
prior to such filing. The Company also intends to increase senior management's direction and review of the 10-K
reporting process to ensure compliance with existing Company internal controls. We anticipate the actions
described above and resulting improvements in controls will strengthen the Company's processes, procedures and
controls related to the preparation, review and filing of such reports, and will address the related material weakness
that we identified as of January 31, 2012.
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 2012 annual meeting of stockholders.
Information with respect to executive officers of the Company is included in Item 1, 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 2012 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 2012 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 2012 annual meeting of stockholders.
Item 14.
PRINCIPAL ACCOUNTANTING FEES AND SERVICES
Information with respect to this item is incorporated herein by reference to the Company's definitive proxy
statement for the 2012 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.
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
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, 2012 and 2011, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the two years ended
January 31, 2012. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements 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. The Company is not
required to have, nor were we engaged to perform an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, 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, 2012 and 2011, and the results of its
operations and its cash flows for each of the two years ended January 31, 2012, in conformity with accounting
principles generally accepted in the United States of America.
Chicago, Illinois
May 9, 2012
/s/ GRANT THORNTON LLP
23
January 31,
2012
2011
$233,496
197,203
36,293
$218,598
174,140
44,458
26,252
15,132
41,384
27,926
13,634
41,560
(5,091)
2,898
1,558
1,437
(4,970)
983
1,261
2,620
17
(1,755)
$(4,987)
$4,375
6,878
6,878
6,842
6,850
$(0.73)
$0.64
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Operating expenses:
General and administrative expense
Selling expense
Total operating expenses
(Loss) income from operations
Income from joint venture
Interest expense, net
(Loss) income before income taxes
Income tax expense (benefit)
Net (loss) income
Weighted average number of common shares outstanding
Basic
Diluted
(Loss) earnings per share
Basic and diluted
See accompanying Notes to Consolidated Financial Statements.
24
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Trade accounts receivable, less allowance for doubtful accounts of $235 at January 31,
2012 and $346 at January 31, 2011
Inventories, net
Prepaid expenses and other current assets
Deferred tax assets - current
Costs and estimated earnings in excess of billings on uncompleted contracts
Income tax receivable
Total current assets
Property, plant and equipment, net of accumulated depreciation
Other assets
Deferred tax assets - long-term
Note receivable from joint venture
Investment in joint venture
Cash surrender value of deferred compensation plan
Other assets
Patents, net of accumulated amortization
Total other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable
Commissions and management incentives payable
Accrued compensation and payroll taxes
Other accrued liabilities
Current maturities of long-term debt
Customers' deposits
Billings in excess of costs and estimated earnings on uncompleted contracts
Income tax payable
Total current liabilities
Long-term liabilities
Long-term debt, less current maturities
Deferred compensation liabilities
Other long-term liabilities
Total long-term liabilities
Stockholders' equity
January 31,
2012
2011
$4,209
1,854
28,109
39,968
3,973
1,946
2,375
—
82,434
47,842
10,967
4,195
4,636
2,782
3,860
331
26,771
$157,047
$20,020
4,722
4,571
2,610
2,736
2,432
1,978
417
39,486
34,682
5,686
5,074
45,442
$16,718
984
36,634
35,509
4,575
2,389
2,055
204
99,068
43,655
8,470
4,270
3,078
2,869
1,605
260
20,552
$163,275
$19,296
6,867
4,332
3,166
3,082
1,913
1,597
—
40,253
36,192
5,138
3,638
44,968
Common stock, $.01 par value, authorized 50,000 shares; 6,913 issued and outstanding at
69
69
January 31, 2012 and 6,851 issued and outstanding at January 31, 2011
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.
25
49,828
22,802
(580)
72,119
$157,047
49,003
27,789
1,193
78,054
$163,275
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(LOSS)
($ in thousands)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
Balances at January 31, 2010
$68
$48,061
$23,414
$814
$72,357
Net income
4,375
4,375
Stock options exercised
1
Stock-based compensation expense
Excess tax benefit from stock
options exercised
Interest Rate Swap (net of taxes of
$43)
Pension liability adjustment (net of
taxes of $525)
Foreign currency translation
adjustment
45
895
2
(334)
203
510
(334)
203
510
4,375
46
895
2
(334)
203
510
Balances at January 31, 2011
$69
$49,003
$27,789
$1,193
$4,754
$78,054
Net loss
(4,987)
(4,987)
(4,987)
Stock options exercised
—
Stock-based compensation expense
Excess tax expense from stock
options exercised
Interest Rate Swap (net of tax
benefit of $120)
Pension liability adjustment (net of
taxes of $1,119)
Foreign currency translation
adjustment
210
621
(6)
Balances at January 31, 2012
$69
$49,828
$22,802
210
621
(6)
139
(970)
(942)
$72,119
139
(970)
(942)
($580)
139
(970)
(942)
($6,760)
Common stock shares
Balance beginning of year
Stock options exercised
Balance end of year
2011
6,851,471
61,300
6,912,771
2010
6,836,433
15,038
6,851,471
See accompanying Notes to Consolidated Financial Statements.
26
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
Operating activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash flows (used in) provided by
operating activities
Depreciation and amortization
Deferred tax benefit
Income from joint venture
Stock-based compensation expense
Cash surrender value of deferred compensation plan
Loss on sale of fixed assets
Changes in operating assets and liabilities
Accounts payable
Accrued compensation and payroll taxes
Inventories
Customers' deposits
Income taxes receivable and payable
Prepaid expenses and other current assets
Accounts receivable, net
Other assets and liabilities
Net cash (used in) provided by operating activities
Investing activities
Additions to property, plant and equipment
Proceeds from sales of property and equipment
Net cash used in investing activities
Financing activities
Borrowings
Payment of debt
(Decrease) increase in drafts payable
Payment on capitalized lease obligations
Stock options exercised
Tax benefit of stock options exercised
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period
Supplemental cash flow information
Cash paid for
Interest expense
Income taxes paid, net of refunds
See accompanying Notes to Consolidated Financial Statements.
27
January 31,
2012
2011
$(4,987)
$4,375
5,582
(989)
(1,558)
621
86
115
1,308
(1,852)
(4,593)
520
8
(234)
8,075
(2,292)
(190)
(10,086)
18
(10,068)
195,363
(196,671)
(475)
(293)
210
—
(1,866)
(385)
(12,509)
16,718
4,209
6,070
(3,752)
(983)
895
(377)
69
4,820
(2,583)
1,706
(1,607)
1,214
(1,408)
(488)
763
8,714
(4,030)
96
(3,934)
151,258
(148,904)
1,166
(198)
45
2
3,369
502
8,651
8,067
16,718
$2,117
431
$1,992
1,108
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED January 31, 2012 and 2011
(Tabular dollars in thousands, except per share data)
Note 1 - Business and segment information
MFRI, Inc. ("MFRI", the "Company", or the "Registrant") was incorporated in Delaware on October 12, 1993.
MFRI is engaged in the manufacture and sale of products in three distinct segments: piping systems, filtration
products and industrial process cooling.
Fiscal year. The Company's fiscal year ends on January 31. Years and balances described as 2011 and 2010 are the
fiscal years ended January 31, 2012 and 2011, respectively.
Nature of business. Piping systems engineers, designs, manufactures and sells specialty piping 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 and long lines for oil and mineral transportation. Piping systems' 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. Filtration products 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. Filtration products markets air filtration related products and accessories, and provides maintenance
services, consisting primarily of dust collector inspection, filter cleaning and filter replacement. Industrial process
cooling designs, manufactures and sells industrial process cooling, including chillers, cooling towers, plant
circulating systems, and related accessories for use in industrial process applications. Corporate and Other includes
the installation of HVAC systems, that is not sufficiently large to constitute a reportable segment. 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.
28
Segment information was as follows:
Net sales
Piping Systems
Filtration Products
Industrial Process Cooling
Corporate and Other
Total net sales
Gross profit (loss)
Piping Systems
Filtration Products
Industrial Process Cooling
Corporate and Other
Total gross profit
Income (loss) from operations
Piping Systems
Filtration Products
Industrial Process Cooling
Corporate and Other
Total (loss) income from operations
Income (loss) before income taxes
Piping Systems
Filtration Products
Industrial Process Cooling
Corporate and Other
Total (loss) income before income taxes
Segment assets
Piping Systems
Filtration Products
Industrial Process Cooling
Corporate and Other
Total segment assets
Capital expenditures
Piping Systems
Filtration Products
Industrial Process Cooling
Corporate and Other
Total capital expenditures
Depreciation and amortization
Piping Systems
Filtration Products
Industrial Process Cooling
Corporate and Other
Total depreciation and amortization
29
2011
2010
$96,977
93,705
32,112
10,702
$233,496
$104,559
85,133
26,220
2,686
$218,598
$14,382
12,466
8,541
904
$36,293
$1,115
614
810
(7,630)
$(5,091)
$2,673
614
810
(9,067)
$(4,970)
$27,303
10,394
7,044
(283)
$44,458
$13,831
(1,335)
295
(9,893)
$2,898
$14,814
(1,335)
295
(11,154)
$2,620
$74,717
$77,371
55,095
10,810
16,425
56,427
10,545
18,932
$157,047
$163,275
$8,396
1,449
51
190
$2,578
1,218
34
200
$10,086
$4,030
$3,076
1,734
154
618
$3,401
1,822
167
680
$5,582
$6,070
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
Mexico, South America, Central America and the Caribbean
Europe
Middle East
Canada
All other Asia
India
Africa
Other
Total net sales
Long-lived assets
United States
Middle East
Denmark
India
Total long-lived assets
Note 2 - Significant accounting policies
2011
2010
$163,104
22,370
20,815
12,721
6,894
3,513
2,259
385
1,435
$233,496
$30,366
11,417
4,623
1,436
$47,842
$144,336
3,336
17,286
31,927
6,936
3,809
9,772
817
379
$218,598
$31,375
6,050
4,585
1,645
$43,655
Use of estimates. The preparation of financial statements in conformity with U.S. generally accepted 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 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.
30
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.
Sales tax. Sales tax is reported on a net basis in the consolidated financial statements.
Operating cycle. The length of piping systems 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.
Correction of immaterial errors. Prior year amounts were revised to reflect the out-of-period correction for tax
errors. For further information, see Note 7 - Correction of immaterial errors in the Notes to Consolidated Financial
Statements.
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
other 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. Cash and cash equivalents were $4.2 million and $16.7 million as of January
31, 2012 and 2011, respectively. 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 $3.3 million and
$3.8 million as of January 31, 2012 and 2011, respectively.
Restricted cash. The Loan Agreement provides that all domestic receipts 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, 2012, the amount of
such restricted cash was $1.7 million. At January 31, 2012, $0.2 million of restricted cash was held by a foreign
subsidiary.
Accounts receivable. 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. In the U.S. collateral is not generally required. In the
U.A.E., letters of credit are obtained for substantially all orders. 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 is 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
31
factors and credit trends. Past due trade accounts receivable balances are written off when the Company's collection
efforts have been unsuccessful in collecting the amount due. 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. In the fiscal years ended January 31, 2012 and 2011, no customer accounted for
10% or more of the Company's net sales.
Accumulated other comprehensive (loss) income. Represents the change in equity from non-owner transactions
and consisted of foreign currency translation, minimum pension liability and an interest rate swap.
Equity adjustment foreign currency
Minimum pension liability, gross
Interest rate swap, gross
Subtotal excluding tax effect
Tax effect of Minimum pension liability
Tax effect of interest rate swap
Total other comprehensive (loss) income
2011
$1,442
(2,945)
(316)
(1,819)
1,119
120
($580)
2010
$2,384
(1,381)
(291)
712
524
(43)
$1,193
Pension plan. The Winchester filtration hourly rated employees are covered by a defined benefit plan. 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.
Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out
method for all inventories.
Raw materials
Work in process
Finished goods
Subtotal
Less allowances
Inventories, net
2011
$33,166
2,927
4,715
40,808
840
$39,968
2010
$29,780
1,963
4,940
36,683
1,174
$35,509
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. 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.
Depreciation expense was approximately $5.4 million in 2011 and $5.9 million in 2010.
32
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
2011
$36,565
50,066
12,682
465
99,778
51,936
$47,842
2010
$33,460
46,138
13,229
486
93,313
49,658
$43,655
Other intangible assets with definite lives. The Company owns several patents including those covering features of
its piping and electronic leak detection systems. The patents are not material either individually or in the aggregate
overall because the Company believes sales 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. The Company expenses costs incurred to renew or extend the term of intangible assets. Gross patents were
$2.5 million and $2.4 million as of January 31, 2012 and 2011, respectively. Accumulated amortization was
approximately $2.20 million and $2.17 million as of January 31, 2012 and 2011, respectively. Future amortizations
over the next five years ending January 31 will be $49,300 in 2012, $46,000 in 2013, $43,400 in 2014, $36,300 in
2015, $26,500 in 2016, and $129,600 thereafter.
Investment in joint venture. In October 2009, the Company invested $5.9 million, which consisted of $2.0 million
for a 49% interest and $3.9 million for a note receivable, in a Canadian joint venture with The Bayou Companies,
Inc., a subsidiary of Insituform Technologies, Inc. The joint venture completed an acquisition of Garneau, Inc's
pipe coating and insulation facility and associated assets located in Camrose, Alberta, Canada, which provides the
Company the opportunity to participate in the growing oil sands market.
The Company accounts for the investment in joint venture using the equity method. The financial results included
in the Company's consolidated financial statements.
Share of income from joint venture
The following information summarizes the joint venture financial data as of January 31:
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Equity
Revenue
Gross profit
Income from continuing operations
Net income
2011
$1,558
2010
$983
2011
$14,381
14,259
3,449
15,403
9,789
29,010
7,565
5,137
$3,189
2010
$9,676
12,633
2,616
13,034
7,657
22,164
5,685
3,718
$2,032
Research and development. Research and development expenses consist of materials, salaries and related expenses
of engineering personnel and outside services for product development projects. Research and development costs
are expensed as incurred. Research and development expense was $2.1 million in 2011 and $1.8 million in 2010.
Income taxes. Deferred income taxes have been provided for temporary differences arising from differences in the
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 assesses its deferred tax assets for realizability
33
at each reporting period.
The Company recognizes 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 8 - Income taxes in the Notes to Consolidated Financial Statements.
Net (loss) income per common share. Earnings per share ("EPS") are computed by dividing net (loss) income by
the weighted average number of common shares outstanding (basic) plus all potentially dilutive common shares
outstanding during the year (diluted).
Basic weighted average number of common shares outstanding
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
2011
6,878
—
6,878
653
28
190
2010
6,842
8
6,850
385
50
441
In 2011, a total of $61,300 stock options were exercised.
Equity-based compensation. Stock compensation expense for employee equity awards is 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.
The Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing
interest rates under the revolving credit agreement. Any differences paid or received on the interest rate swap
agreements are recognized as adjustments to interest expense over the life of the swap, thereby adjusting the
effective interest rate on the underlying obligation.
Reclassifications. Reclassifications were made to prior-year financial statements to conform to the current-year
presentations.
New accounting pronouncements. In September 2011, the Financial Accounting Standards Board, ("FASB") issued
new guidance which requires additional disclosures about an employer's participating in multi-employer pension
plans. The new guidance is effective for annual periods ending after December 15, 2011. The Company's adoption
of this new guidance did not have a material impact on the Company's consolidated financial statements.
In June 2011, FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive
34
Income ("Update 2011-05"). Update 2011-05 allows the option of presenting the total of comprehensive income,
the components of net income and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements, removing the option to present
the components of other comprehensive income as part of the statement of stockholders' equity. The guidance does
not change the components that are recognized in net income or other comprehensive income. The amended
guidance is effective for interim and annual periods beginning after December 15, 2011, and is applied
retrospectively. The Company is evaluating its presentation options under this ASU; however these changes are not
expected to impact the consolidated financial statements other than the change in presentation.
Other accounting guidance that has been issued 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
$0.6 million and $2.2 million were included in the balance of trade accounts receivable as of January 31, 2012 and
2011, respectively.
Retention payable is the amount withheld by the Company until a contract is completed. Retention payables of $0.4
million and $0.2 million were included in the balance of trade accounts payable as of January 31, 2012 and 2011,
respectively.
Note 4 - Costs and estimated earnings on uncompleted contracts
Costs incurred on uncompleted contracts
Estimated earnings
Earned revenue
Less billings to date
Total
Balance sheet classification
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
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
35
2011
$61,938
11,550
73,488
73,091
$397
$2,375
(1,978)
$397
2011
$18,252
11,012
1,526
4,797
1,831
37,418
2,736
$34,682
2010
$40,039
6,668
46,707
46,249
$458
$2,055
(1,597)
$458
2010
$18,252
11,864
2,180
6,562
416
39,274
3,082
$36,192
The following table summarizes the Company's scheduled maturities at January 31,:
Revolving line domestic
Mortgages
Revolving line foreign
Term loans
Capitalized lease obligations
Total
Total
$18,252
11,012
1,526
4,797
1,831
$37,418
2013
2014
$— $18,252
281
499
—
589
1,749
1,237
379
411
$20,661
$2,736
2015
$—
298
—
263
345
$906
2016
$—
315
—
—
349
$664
2017 Thereafter
$—
$—
9,286
333
937
—
1,548
—
—
347
$11,771
$680
On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution
("Loan Agreement"). Under the terms of the Loan Agreement as amended, which matures on November 30, 2013,
the Company can borrow up to $38 million, subject to borrowing base and other requirements, under a revolving
asset-based line of credit. The Loan Agreement covenants restrict debt, liens, investments, do not permit payment
of dividends, and require attainment of levels of profitability and cash flows. At January 31, 2012, the Company
was in compliance with all covenants under the Loan Agreement. Interest rates 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, 2012, the prime rate was 3.25%, the LIBOR rate was 0.375%, 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 0.5 and 2.75 percentage points, respectively. Monthly interest payments were made
during the years ended January 31, 2012 and 2011. As of January 31, 2012, the Company had borrowed $18.3
million and had $6.9 million available to it under the revolving line of credit. In addition, $0.2 million 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 domestic receipts 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,
2012, the amount of such restricted cash was $1.7 million. Cash required for operations is provided by draw-downs
on the line of credit. The weighted average interest rates based on the domestic revolving line balance at January
31, 2012 and 2011, were 3.51% and 3.16%, respectively.
The Company guarantees the subsidiaries' debt including all foreign debt.
Mortgages. On July 10, 2010, the Company obtained a loan in the amount of 4,649,000 Danish Kroners ("DKK")
(approximately $850 thousand U.S. dollars at the prevailing exchange rate on transaction date) from a Danish bank
under a mortgage note secured by its industrial process cooling manufacturing facility in Denmark. The loan has an
interest rate of 3.29%, quarterly payments of approximately $16 thousand for both principal and interest and
matures July 2030.
On March 4, 2008, the Company borrowed $5.4 million under a mortgage note secured by the filtration products
manufacturing facility located in Bolingbrook, Illinois and matures March 2033. 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 $37 thousand for principal and interest combined.
On January 18, 2008, the Company borrowed $3.7 million 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 $23 thousand for both
principal and interest based on an amortization schedule of 30 years with a balloon payment at maturity in January
2018.
On December 31, 2005, the Company obtained a loan in the amount of 7,067,000 DKK (approximately $1.1
million U.S. dollars at the prevailing exchange rate on the transaction date) from a Danish bank to partially finance
a building addition at the filtration products manufacturing facility in Denmark. The loan bears interest at 4.28%
with quarterly payments of $23 thousand for both principal and interest and matures December 2025.
On May 11, 2005, the Company obtained a loan in the amount of 3,241,500 DKK (approximately $536 thousand
36
U.S. dollars at the prevailing exchange rate on the transaction date) from a Danish bank to partially finance the
building addition. The loan bears interest at 4.89% with quarterly payments of $11 thousand for both principal and
interest and matures May 2025.
On July 31, 2002, Perma-Pipe, Inc. borrowed $1.8 million under a mortgage note secured by its manufacturing
facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest
at 7.75% with monthly payments of $21 thousand for both principal and interest and matures July 2012
On April 26, 2002, Midwesco Filter borrowed $2.0 million 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
payments under the Term Loan (defined below). The loan bears interest at 7.10% with a monthly payment of $24
thousand for both principal and interest and matures April 2012.
Revolving lines foreign. The Company also has credit arrangements used by its Denmark and U.A.E. subsidiaries.
These credit arrangements are 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 4.9% January 31, 2012, and the interest rate
at the U.A.E subsidiaries was 6.0% at January 31, 2012. At January 31, 2012, borrowings under these credit
arrangements totaled $1.5 million; an additional $3.8 million remained unused.
Term loans. On May 14, 2010, Perma-Pipe, Inc. borrowed $1.0 million under an equipment loan secured by
equipment. The loan bears interest at 5.8393% with monthly payments of $24 thousand for both principal and
interest and matures May 2014.
The Company purchased insurance on the lives of key executive officers. As beneficiary, the Company receives the
cash surrender value if the policy is terminated and, upon death of the insured, receives all benefits payable. Cash
surrender value of life insurance is reported in long term assets on the balance sheet. On April 27, 2010, the
Company obtained a loan with no maturity date in the amount of $2.0 million collateralized by the cash surrender
value of the policies. The loans carry interest at a rate of 4.25% and require interest only payments annually. At
January 31, 2012, the balance was $1.5 million.
On August 28, 2007, the Company amended and restated the Term Loan Note to $3.0 million ("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, 2012, the prime rate was 3.25%, the LIBOR rate was 0.375% 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 0.75
and 3 percentage points, respectively. The Company is scheduled to pay $107 thousand of principal on the first
days of March, June, September and December in each year, with the remaining unpaid principal payable on
November 30, 2013. The weighted average interest rates based on this loan at January 31, 2012 and 2011, were
3.34% and 2.92%, respectively
On December 30, 2005, Perma-Pipe, Inc. borrowed $0.9 million under an equipment loan secured by equipment.
The loan bears interest at 6.23% with monthly payments of $13 thousand for both principal and interest and matures
December 2012.
On April 8, 2003, the Company obtained a loan from a Danish bank to purchase equipment and office furniture for
a building for the filtration products' facility in Denmark, in the amount of 700,000 Euros, approximately $0.8
million U.S. dollars at the exchange rate prevailing on the transaction date. The loan bears interest at 6.1% with
quarterly payments of $9 thousand for both principal and interest and matures April 2013.
Capital leases. On January 31, 2012, Perma-Pipe, Inc. borrowed $1.2 million under an equipment loan secured by
equipment. The loan bears interest at 6.6966% with monthly payments of $24 thousand for both principal and
interest and matures January 2017.
On July 1, 2011, filtration products' Denmark location obtained a capital lease in the amount of 2,180,827 DKK
37
(approximately $387 thousand U.S. dollars at the prevailing exchange rate on the transaction date) from a Danish
bank to finance capital expenditures. The loan bears interest at a fixed rate of 6.372% per annum with monthly
principal payments of $6 thousand, and quarterly interest payments and matures June 2016.
Between 2009 and 2011, the Company obtained several capital leases totaling $273 thousand to finance capital
computer equipment. The interest rate for these capital leases range from 3.7935% to 5.763% per annum with
monthly principal and interest payments of $9 thousand and matures between October 2013 and May 2014.
During 2011, piping systems obtained several capital leases totaling 3,129,000 Indian Rupees (approximately $57
thousand U.S. dollars at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The
interest rate for these capital leases range from 14.4% to 17.8% per annum with monthly principal and interest
payments of $2.5 thousand and mature in 2014.
On April 23, 2010, filtration products' Denmark location obtained a capital lease in the amount of 952,600 DKK
(approximately $170 thousand U.S. dollars at the prevailing exchange rate on the transaction date) from a Danish
bank to finance capital expenditures. The loan bears interest at a fixed rate of 5.00% per annum with monthly
principal payments of $2.5 thousand, and quarterly interest payments and matures April 2015.
Note 6 - Lease information
Property under capitalized leases
Machinery and equipment
Furniture and office equipment
Transportation equipment
Computer equipment
Subtotal
Less accumulated amortization
Total
Fixed assets acquired under capital leases
Fixed assets acquired in previous years now under capital leases
2011
$1,956
—
63
208
2,227
241
$1,986
$917
$845
2010
$512
225
48
154
939
263
$676
$300
$0
Piping systems leases manufacturing and warehouse facilities, land, transportation equipment and office space
under non-cancelable operating leases, which expire beginning 2012 through 2034. Filtration products leases
approximately 67,000 square feet of production and office space under an operating lease, which began in June
2004 and expires in 2012 and 2013.
At January 31, 2012, future minimum annual rental commitments under non-cancelable lease obligations were as
follows:
2013
2014
2015
2016
2017
Thereafter
Subtotal
Less Amount representing interest
Future minimum lease payments
38
Operating
Leases
Capital
Leases
$2,148
1,765
1,504
1,306
1,242
3,906
11,871
—
$11,871
$518
465
406
385
359
—
2,133
302
$1,831
Rental expense for operating leases was $2.5 million and $2.2 million in 2011 and 2010, respectively.
Note 7 - Correction of immaterial errors
In the fourth quarter of 2011, management discovered prior period tax accounting errors. The cumulative
adjustment for the tax errors covering the period from February 1, 2007 to January 31, 2011, was approximately
$315 thousand. The adjustment applicable to the fourth quarter of 2010 was approximately $135 thousand and the
adjustment applicable to prior years (February 2007 - January 2010) totaled approximately $180 thousand.
Pursuant to the guidance of Staff Accounting Bulletin ("SAB") No. 99, Materiality, the Company concluded that the
errors were not material to any of its prior period financial statements. Although the errors were immaterial to prior
periods, the prior period financial statements were revised, in accordance with SAB No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, due to
the significance of the out-of-period correction.
A reconciliation of the effects of the adjustments to the previously reported balance sheet at January 31, 2011
follows:
($ in thousands)
Other long-term liabilities
Total long-term liabilities
Additional paid in Capital
Retained earnings
Total stockholders' equity
As Reported
$3,271
44,601
49,055
28,104
78,421
Adjustment
$367
367
(52)
(315)
(367)
As Adjusted
$3,638
44,968
49,003
27,789
78,054
A reconciliation of the effects of the adjustments to the previously reported statement of operation for the year
ending January 31, 2011 follows:
($ in thousands)
Income tax benefit
Net Income
As Reported
Adjustment
As Adjusted
($1,890)
4,510
$135
(135)
($1,755)
4,375
A reconciliation of the effects of the adjustments to the previously reported statement of cash flows for the year
ending January 31, 2011 follows:
($ in thousands)
Net Income
Deferred tax benefit
Net cash provided by operating activities
Tax expense (benefit) of stock options exercised
Net cash provided by financing activities
As Reported
$4,510
(3,914)
8,687
29
3,396
Adjustment
($135)
162
27
(27)
(27)
As Adjusted
$4,375
(3,752)
8,714
2
3,369
A reconciliation of the effects of the adjustments to the previously reported statement of shareholders equity for the
year ending January 31, 2011 follows:
($ in thousands)
Net Income
Retained earnings
Tax expense (benefit) of stock options exercised
Additional paid in Capital
Total comprehensive income
As Reported
$4,510
28,104
29
49,055
4,889
Adjustment
($135)
(315)
(27)
(52)
(135)
As Adjusted
$4,375
27,789
2
49,003
4,754
39
A reconciliation of the effects of the adjustments to the previously reported statement of shareholders equity for the
year ending January 31, 2010 follows:
($ in thousands)
Additional paid in Capital
Retained earnings
Total comprehensive income
Note 8 - Income taxes
Income (loss) before income taxes
Domestic
Foreign
Total
Components of income tax expense (benefit)
Current
Federal
Foreign
State and other
Subtotal
Deferred
Federal
Foreign
State and other
Subtotal
Total
As Reported
$48,086
23,594
7,220
Adjustment
($25)
(180)
(180)
As Adjusted
$48,061
23,414
7,040
2011
$4,517
(9,487)
$(4,970)
2010
$(9,805)
12,425
$2,620
$183
627
253
1,063
(880)
(273)
107
(1,046)
$17
$(94)
1,880
48
1,834
(3,510)
155
(234)
(3,589)
$(1,755)
The excess tax (expense) benefit related to stock options recorded through equity and did not affect net (loss)
income was ($5) thousand and $2 thousand in 2011 and 2010, respectively. The amounts were recorded to
additional paid-in capital on the consolidated balance sheets and in operating activities in 2011 and financing
activities in 2010 on the consolidated statement of cash flows.
The determination of the consolidated provision for income taxes, deferred tax assets and liabilities, and the related
valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in
foreign jurisdictions, the Company is required to calculate and provide for estimated income tax expense for each of
the tax jurisdictions. The process of calculating income taxes involves estimating current tax obligations and
exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax
assets. Changes in the estimated level of annual pre-tax income, in tax laws, and resulting from tax audits can
affect the overall ETR, which impacts the level of income tax expense and net income. Judgments and estimates
related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ
materially from projections.
The 2011 and 2010 ETRs have been impacted by the mix of the U.A.E. (loss) earnings versus total (loss) earnings
because the U.A.E. is not subject to any local country income tax. The ETR was less than the statutory U.S. federal
income tax rate, mainly due to the large portion of loss and repatriation of foreign earnings in 2011 and income
earned in 2010 in the U.A.E. Another contributing factor to the unusual ETR is the valuation allowance set up on
the NOL in Saudi Arabia. The Company does not record a tax benefit for its start-up entities.
The Company recorded a $1.8 million tax expense associated with the $3.1 million repatriation of foreign earnings
that occurred in July 2011. These foreign earnings were previously considered to be indefinitely reinvested outside
40
the United States. The repatriation was a one-time nonrecurring event. The Company has not provided Federal tax
on unremitted earnings of its international subsidiaries. The Company anticipates that unremitted earnings will be
reinvested overseas to fund current working capital requirements and expansion in foreign markets. Accordingly, a
provision for income tax expense in excess of foreign jurisdiction income tax requirements relative to such
unremitted earnings has not been provided in the accompanying financial statements. A deferred tax asset of $1.3
million has been established for U.S. foreign tax credits attributed to repatriated foreign earnings, resulting in a net
tax of $0.5 million. The excess foreign tax credits are subject to a ten-year carryforward and will expire in 2022.
Several valuation allowances impacted the ETRs. In 2011, the Company released a valuation allowance of $0.8
million established in 2009 for a portion of the research and development credits. In 2010, the Company closed its
operations in South Africa and released intercompany liabilities. Related income was offset by an existing NOL for
which a prior valuation allowance had been previously provided. This release of liabilities increased the federal
NOL in 2010.
The difference between the provision for income taxes and the amount computed by applying the Federal ETR of
34% was as follows:
Tax expense at federal statutory rate
Differences in foreign tax rate
Foreign tax credit
Research tax credit and release of valuation allowance
Repatriation
Valuation allowance for foreign and state NOLs
Nontaxable income from the Canadian joint venture
State taxes, net of federal benefit
All other, net expense
Total
Valuation allowances against foreign and state NOL benefits
For current year NOL
For prior year NOL carryovers
Total
2011
($1,690)
1,429
(1,300)
(951)
1,810
611
(530)
308
330
$17
$611
601
$1,212
2010
$890
(1,590)
—
—
—
(673)
(334)
(436)
388
($1,755)
($673)
1,274
$601
The Company has a Federal operating loss carryforward of $11 million with a recognized tax benefit of $3.7 million
that will begin to expire in the year ending January 31, 2030. At January 31, 2012, no valuation allowance was
deemed necessary on all domestic deferred tax assets except for certain state NOLs. The Company periodically
reviews the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates, evaluates future
sources of taxable income and tax planning strategies and may make further adjustments based on management's
outlook for continued profits in each jurisdiction.
The deferred tax asset for state NOL carryforwards of $921 thousand relates to amounts that expire at various times
from 2012 to 2030. The amount that expired in 2011 is approximately $3 thousand. A valuation allowance has
been established for approximately $333 thousand of this tax asset based upon an assessment that it is more likely
than not that realization cannot be assured in these tax jurisdictions.
The Company has a deferred tax asset for foreign NOL carryforwards of $2.7 million that can be carried forward
indefinitely and does not have a valuation allowance recorded against it. The ultimate realization of this tax benefit
is dependent upon the generation of sufficient operating income in the foreign tax jurisdictions.
As of January 31, 2012, the Company had undistributed earnings of foreign subsidiaries for which deferred taxes
have not been provided. The Company intends and has the opportunities 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
41
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. The most significant foreign entity, which has
undistributed earnings is Perma-Pipe Middle East, FZC in the U.A.E., where cumulative undistributed earnings as
of January 31, 2012 were $19 million.
Components of the deferred income tax asset
U.S. Federal NOL carryforward
Non-qualified deferred compensation
Research tax credit
Foreign NOL carryover
Foreign tax credit
Stock compensation
Other accruals not yet deducted
State NOL carryover
Accrued commissions and incentives
Accrued pension
Inventory valuation allowance
Other
Inventory uniform capitalization
Goodwill
Subtotal
Valuation allowance for net operating losses
Valuation allowance for research tax credit
Total deferred tax assets, net of valuation allowances
Components of the deferred income tax liability
Depreciation
Accrued pension
Prepaid
Total deferred tax liabilities
2011
$3,728
1,968
1,858
2,726
1,300
1,243
1,233
921
691
578
300
224
128
1
16,899
(1,934)
—
$14,965
$1,733
—
319
$2,052
2010
$5,707
1,780
1,721
1,120
—
1,050
1,373
933
776
—
401
162
111
6
15,140
(601)
(814)
$13,725
$2,029
566
271
$2,866
Deferred income tax, net
$12,913
$10,859
Balance sheet classification
Current assets
Long-term assets
Total deferred tax assets, net of valuation allowances
$1,946
10,967
$12,913
$2,389
8,470
$10,859
The following table summarizes unrecognized tax benefit activity, excluding the related accrual for interest and
penalties:
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
42
2011
$1,202
(52)
89
(26)
$1,213
2010
$1,009
—
333
(140)
$1,202
Included in the total unrecognized tax liability at January 31, 2012 were estimated accrued interest of $82 thousand
and penalties of $82 thousand and at January 31, 2011, accrued interest and penalties were $91 thousand and $90
thousand, respectively. These non-current income tax liabilities are recorded in other long-term liabilities in the
consolidated balance sheet. The Company's policy is to include interest and penalties in income tax expense. At
January 31, 2012, the Company did not anticipate any significant adjustments to its unrecognized tax benefits
caused by the settlement of the ongoing tax examinations detailed above, or other factors, within the next twelve
months. Included in the balance at January 31, 2012 were amounts offset by deferred taxes (i.e., temporary
differences) or amounts that could be offset by refunds in other taxing jurisdictions (i.e., corollary adjustments).
Thus, $1.2 million of the amount accrued at January 31, 2012 and 2011 would impact the ETR, if reversed.
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. Tax years back to January 31, 2009 are open for federal and state tax
purposes. In addition, federal and state tax years January 31, 2004 through January 31, 2008 are subject to
adjustment on audit, up to the amount of research tax credit generated 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 9 - Retirement plans
Pension plan
The Winchester filtration hourly rated employees are covered by a defined benefit plan. 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.
Asset allocation
Plan assets
Vanguard balanced index fund
Vanguard inflation protected fund
Fifth Third Banksafe Trust
Vanguard REIT index fund
Total at January 31, 2012
Market
Value
$5,007
268
117
110
$5,502
The plans hold no securities of MFRI, Inc. 100% of the assets are held for benefits under the plan. The fair value of
the major categories of the pension plans' investments are presented below. The FASB has established a fair value
hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained
from independent sources (observable inputs) and (2) an entity's own assumptions about market participant
assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair
value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active
markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The
three levels of the fair value hierarchy are described below:
43
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated
by observable market data by correlation or other means.
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
Level 1 market value of plan assets
Equity securities
U.S. bond market
High-quality inflation-indexed bonds issued by the U.S. Treasury and government
agencies as well as domestic corporations
Real estate securities
Subtotal
Level 2 significant other observable inputs
Money market fund
Total
2011
$3,018
1,968
268
110
5,364
138
$5,502
2010
$2,830
1,837
229
97
4,993
96
$5,089
At January 31, 2012, 54.9% of plan assets were held in mutual funds, 40.6% were held in bond funds and the
remaining 2.5% was in a money market fund. The target asset allocation was 95% to 100% mutual funds. The
investment policy is to invest 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. 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 2011 resulted in $342 thousand actual return on plan assets as presented below,
which increased the fair value of plan assets at year end. 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. Future contributions that may be necessary to
maintain funding requirements are not expected to materially affect the Company's liquidity.
44
Reconciliation of benefit obligations, plan assets and funded status of plan
Accumulated benefit obligations
Vested benefits
Accumulated benefits
2011
2010
$6,576
$7,186
$4,823
$4,931
Change in benefit obligation
Benefit obligation - beginning of year
Service cost
Interest cost
Actuarial 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 gain
Company contributions
Benefits paid
Fair value of plan assets - end of year
$5,570
126
313
1,380
(203)
$7,186
$5,089
342
274
(203)
$5,502
$4,814
118
280
210
(162)
$5,260
$4,250
684
317
(162)
$5,089
Unfunded status
$(1,684)
$(171)
Balance sheet classification
Prepaid expenses and other current assets
Other assets
Other long-term liabilities
Net amount recognized
Amounts recognized in accumulated other comprehensive income
Unrecognized actuarial (gain)/loss
Unamortized prior service cost
Net amount recognized
$305
1,261
(3,250)
$(1,684)
$2,623
322
$2,945
$315
1,209
(1,695)
$(171)
$931
449
$1,380
The amount of unamortized prior service cost and net loss to be amortized in the year ended January 31, 2013 is $127
thousand.
Weighted-average assumptions used to determine net cost and benefit obligations
End of year benefit obligation
Service cost discount rate
Expected return on plan assets
Rate of compensation increase
2011
4.250%
5.780%
8.000%
N/A
2010
5.780%
5.980%
8.000%
N/A
The discount rate was based on a Citigroup pension discount 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.
45
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
Amounts recognized in other comprehensive income
Actuarial loss on obligation
Amendments
Actual return on plan assets gain
Reclassify prior service cost
Total in other comprehensive income
Cash flows
Expected employer contributions for 2012 [fiscal year ending 1/31/2013]
Expected employee contributions for 2012 [fiscal year ending 1/31/2013]
Estimated future benefit payments reflecting expected future service for the fiscal
year(s) ending January 31,:
2013
2014
2015
2016
2017
2018 - 2022
401(k) plan
2011
$126
313
(405)
127
62
$223
2011
$(1,380)
—
(1)
127
$(1,254)
2010
$118
280
(342)
132
65
$253
2010
$(210)
—
406
132
$328
400
—
305
308
325
343
347
1,951
The domestic employees of the Company participate in the MFRI, Inc. Employee Savings and Protection Plan,
which is applicable to all employees except 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 $558 thousand and $436 thousand for the years ended January 31, 2012 and
2011, respectively.
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.
Multi-employer plans
The Company contributes to a multi-employer plan for certain collective bargaining U.S. employees and for foreign
employees according to their countries requirements. The risks of participating in this multi-employer plan are
different from a single employer plan in the following aspects:
• Assets contributed to the multi-employer by one employer may be used to provide benefits to employees of
other participating employers.
46
•
•
If a participating employer ceases contributing to the plan, the unfunded obligations of the plan may be
inherited by the remaining participating employers
If the Company chooses to stop participating in the multi-employer plan, the Company may be required to
pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company has assessed and determined that the multi-employer plans to which it contributes is not significant
to the Company's consolidated financial statements. The Company does not expect to incur a withdrawal liability
or expect to significantly increase its contribution over the remainder of the contract period. The Company made
contributions to the bargaining unit supported multi-employer pension plan resulting in expense of approximately
$2.5 million and $2.3 million for the years ended January 31, 2012 and 2011, respectively.
Note 10 - 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 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.
Under the 2009 Independent Directors' Stock Option Plan, 100,000 shares of common stock are reserved for
issuance to Directors of the Company. In addition, the number of shares that may be issued shall be increased May
1, 2010 and each May 1 thereafter until May 1, 2019, pursuant to the terms of this Plan shall be increased by the
number equal to 0.35% of the aggregate number of shares of common stock outstanding as of the last day of the
most recently ended fiscal year of the Company. Pursuant to the 2009 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 June 23, 2009, 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 2009.
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 issues new shares from its authorized but unissued share pool. The
Company calculates all 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
stock price for the period 1/1/93 to the date of grant; and
3. 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
47
2011
1.54%-5.13%
2010
1.88%-5.16%
51.72%-66.82% 51.72%-66.82%
5 to 7
—
4.9 to 7
—
The following summarizes the activity related to options outstanding under the plans for the years ended January
31, 2011 and 2012:
Weighted
average exercise
price
$13.20
Weighted average
remaining
contractual term
7.2
Options
680
Aggregate
intrinsic value
$379
Outstanding at January 31, 2010
Granted
Exercised
Expired or forfeited
Outstanding at January 31, 2011
162
(15)
(50)
777
Options exercisable at January 31, 2011
408
Granted
Exercised
Expired or forfeited
Outstanding at January 31, 2012
Options exercisable at January 31, 2012
155
(61)
(28)
843
470
6.10
3.00
13.63
11.88
7.68
3.42
19.29
11.48
$14.37
84
2,241
1,000
240
430
$217
6.9
5.4
6.9
5.7
Range of exercise prices
Options
outstanding
Weighted average
remaining
contractual life
Weighted
average exercise
price
Options
exercisable
Weighted average
exercise price
$2.00-$2.99
6.00-6.99
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
Outstanding at January 31, 2012
19
312
201
70
3
10
1
122
3
102
843
1
7.9
8
4.4
6.3
6.4
6.1
6.4
5.5
4.4
6.9
$2.1674
6.4589
7.6650
10.0750
12.6650
13.6500
16.1150
17.6436
26.0450
28.9900
$11.4781
19
122
50
70
2
7
1
94
3
102
470
$2.1674
6.5676
7.6150
10.0750
12.6650
13.6500
16.1150
17.6462
26.0450
28.9900
$14.3714
The weighted average fair value of options granted, net of options surrendered, during 2011 and 2010 are estimated
at $3.84 and $3.40, per share, respectively, on the date of grant.
Unvested options outstanding
Outstanding at beginning of the year
Granted
Vested
Expired or forfeited
Outstanding at end of the year
Options
369
155
(149)
(2)
373
Weighted-average
grant date fair value
$9.98
7.68
12.99
8.34
$7.84
Aggregate
intrinsic value
$1,241
$212
Based on historical experience the Company expects 85% of these options to vest.
As of January 31, 2012, there was $1.0 million of unrecognized compensation cost related to unvested stock options
48
granted under the plans. That cost is expected to be recognized over the weighted-average period of 2.4 years. The
stock-based compensation expense for the years ended January 31, 2012 and 2011 was $0.6 million and $0.9
million, respectively.
Note 11 - Stock rights
On September 15, 2009, the Company entered into the Amendment ("Amendment") to Rights Agreement dated as
of September 15, 1999. Among other things, the Amendment extends the term of the Rights Agreement until
September 15, 2019 and amends definitions to include positions in derivative instruments related to the Company's
common stock as constituting beneficial ownership of such stock.
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, 2019, 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.
Note 12 - Interest expense, net
Interest expense
Interest income
Interest expense, net
Note 13 - Fair value of financial instruments
2011
$2,165
(728)
$1,437
2010
$1,937
(676)
$1,261
At January 31, 2012, one interest rate swap agreement was in effect with a notional value of $9 million that matures
November, 2013. The swap agreement, which reduces the exposure to market risks from changing interest rates,
exchanges the variable rate to fixed interest rate payments of 2.23% plus LIBOR margin. The exchange-traded
swap is valued on a recurring basis using quoted market prices and was classified within Level 2 of the fair value
hierarchy because the exchange is not deemed to be an active market. The derivative of $316 thousand was
classified as a long-term liability on the balance sheet.
49
Note 14 - Subsequent event
At January 31, 2012, the Company was in compliance with all debt covenants under our Loan Agreements.
Subsequent to January 31, 2012, the Company was not in compliance with the Fixed Charge Coverage Ratio
covenant for the period ended March 31, 2012. Prior to filing these statements, the Company has received a waiver
and amendment to adjust the covenants to levels which the Company has complied without interruption and which
the Company believes continues to be attainable for the next 12 months.
50
Schedule II
MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 2012 and 2011
Balance at
beginning of
period
Charged to
costs and
expenses
Deductions
from reserves
(1)
Charged to
other accounts
(2)
Balance at
end of period
Year Ended January 31, 2012
Allowance for possible losses in
collection of trade receivables
Year Ended January 31, 2011
Allowance for possible losses in
collection of trade receivables
346
63
20
(154)
235
$379
$86
$212
$93
$346
(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
MFRI, INC.
Date:
May 9, 2012 /s/ David Unger
David Unger
Chairman of the Board of Directors, and
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)
BRADLEY E. MAUTNER* Director, President and Chief Operating Officer
MICHAEL D. BENNETT* Vice President, Chief Financial Officer, Secretary and
Treasurer (Principal Financial and Accounting Officer)
DENNIS KESSLER*
Director
ARNOLD F.
BROOKSTONE*
Director
EUGENE MILLER*
Director
STEPHEN B. SCHWARTZ* Director
MICHAEL J. GADE*
Director
MARK A. ZORKO*
Director
*By:
/s/ David Unger
David Unger
Individually and as Attorney in Fact
May 9, 2012
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
52
EXHIBIT INDEX
Exhibit No.
3(i)
3(ii)
4
4(a)
10(b)
10(c)
10(d)
Description
Certificate of Incorporation of MFRI, Inc. [Incorporated by reference to Exhibit 3.3 to Registration
Statement No. 33-70298]
By-Laws of MFRI, Inc. amended and restated [Incorporated by reference to Exhibit 3.1 filed on July
27, 2009]
Specimen Common Stock Certificate [Incorporated by reference to Exhibit 4 to Registration
Statement No. 33-70794]
2010 Rights Agreement as amended [Incorporated by reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K filed on September 17, 2009]
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]
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]
Form of Directors Indemnification Agreement Certificate [Incorporated by reference to Exhibit
10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2006
filed on May 15, 2006]
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, 2004]
10(f) Amended and Restated Loan and Security Agreement between the Company and Bank of America
dated December 15, 2006 [Incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on December 20, 2006]
Code of Conduct [Incorporated by reference to Exhibit 14 of the Company's Annual Report on
Form 10-K/A for the fiscal year ended January 31, 2004]
Thirteenth Amendment to Amended and Restated Loan and Security Agreement
Employment agreement with Fati Elgendy dated February 1, 2007 [Incorporated by reference to
DEF14A Schedule filed on May 29, 2008]
2009 Non-Employee Directors Stock Option Plan [Incorporated by reference to Exhibit 10(k) to
the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2010]
Subsidiaries of MFRI, Inc. [Incorporated by reference to Exhibit 21 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 2012]
Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP
Power of Attorney executed by directors and officers of the Company [Incorporated by reference
to Exhibit 24 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31,
2012]
Rule 13a - 14(a)/15d - 14(a) Certifications
10(g)
10(h)
10(i)
10(j)
21
23*
24
31*
32*
(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
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
101.INS* XBRL Instance
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation
101.DEF* XBRL Taxonomy Extension Definition
101.LAB* XBRL Taxonomy Extension Labels
101.PRE* XBRL Taxonomy Extension Presentation
*Filed herewith
53
[This page intentionally left blank]
Officers & Directors
David Unger
Chief Executive Officer and
Chairman of the Board
MFRI, Inc.
Dennis Kessler
Lead Independent Director
President, Kessler Mgmt.
Consulting and Former
Co-President of Fel-Pro Inc.
Stephen B. Schwartz
Independent Director
Retired Senior Vice President
IBM Corporation
Bradley E. Mautner
Director, President and
Chief Operating Officer
MFRI, Inc.
Arnold F. Brookstone
Independent Director
Retired Chief Financial &
Planning Officer
Smurfit-Stone Corporation
Mark A. Zorko
Independent Director
Chief Financial Officer and Secretary
Del Global Technologies Corporation
Piping Systems
Filtration Products
Mark Foster
President
Midwesco Filter Resources, Inc.
André Radley Grundahl
Managing Director
Nordic Air Filtration A/S
Dhananjay Maslekar
General Manager
Fabric Filter Products
Midwesco Filter Resources, Inc.
Fati A. Elgendy
President
Perma-Pipe, Inc.
John Carusiello
Vice President
Perma-Pipe, Inc.
Robert A. Maffei
Vice President
Perma-Pipe, Inc.
Brian Pollack
Vice President
Perma-Pipe, Inc.
Avin Gidwani
President
PPME, PPSA, PPIL
Michael D. Bennett
Vice President, Chief Financial Officer,
Secretary and Treasurer
MFRI, Inc.
Timothy P. Murphy
Vice President – Human Resources
MFRI, Inc.
Michael J. Gade
Independent Director
Executive-in-Residence
University of North Texas
Founding Partner of the
Challance Group, LLP
Eugene Miller
Independent Director
Executive-in-Residence and
Adjunct Professor
Florida Atlantic University
Industrial Process
Cooling
Heating, Ventilation
& Air Conditioning
Edward A. Crylen
President
Midwesco Mechanical and Energy, Inc.
Stephen C. Buck
President
Thermal Care, Inc.
Kim Lauridsen
Managing Director
BOE-THERM A/S
Thomas A. Benson
Vice President
Thermal Care, Inc.
Transfer/Rights Agent
Continental Stock Transfer
& Trust Company
17 Battery Place
New York, NY 10004
Independent Registered
Public Accountants
Grant Thornton LLP
175 West Jackson Blvd.
Chicago, IL 60604-2615
Annual Meeting
The Annual Meeting of Stockholders
of MFRI, Inc. will be held at:
10:00 a.m., Thursday, June 28, 2012
At:
Hilton Rosemont Chicago O’Hare
5550 North River Road
Rosemont, Illinois 60018
Corporate Headquarters
MFRI, Inc.
7720 North Lehigh Avenue
Niles, Illinois 60714
Phone: 847-966-1000
Fax:
847-966-8563
www.mfri.com
Offices & Manufacturing Facilities
Perma-Pipe, Inc.
Business Offices
7720 North Lehigh Avenue
Niles, Illinois 60714
Phone: 847-966-2235
www.permapipe.com
Perma-Pipe, Inc.
Manufacturing Plants
1310 Quarles Drive
Lebanon, Tennessee 37087
Phone: 615-444-4910
Perma-Pipe, Oil & Gas
5008-11 Curtis Lane
New Iberia, Louisiana 70560
Phone: 337-560-9116
Perma-Pipe Middle East FZC
P.O. Box 4988
Fujairah, U.A.E.
Phone: 971-9-228-2540
www.permapipe.ae
Perma-Pipe India Ltd.
804, Palm Spring Centre
Malad Link Road
Malad (W), Mumbai 400 064
Phone: 91-22-4003-6007
www.permapipe.in
Perma-Pipe Saudi Arabia, LLC
Dammam Industrial City – 2
Al Madinah Al Munawarah Road
Dammam, Kingdom of Saudi Arabia
Phone: 966-3-812-3039
www.permapipe.com.sa
BAYOU PERMA-PIPE CANADA, LTD.
Sales Office
Suite 104, 221 18th Street SE
Calgary, AB T2E 6J5
Phone: 403-264-4880
www.bayoupermapipe.com
Manufacturing Plant
5233 39th Street
Camrose, AB T4V 4R5
Phone: 780-672-2345
Midwesco Filter Resources, Inc.
385 Battaile Drive
Winchester, Virginia 22601
TDC Filter Manufacturing, Inc.
2 Territorial Court
Bolingbrook, Illinois 60440
Phone: 540-667-8500
www.midwescofilter.com
Phone: 630-410-6200
www.tdcfilter.com
Nordic Air Filtration A/S
Bergenvej 1
DK-4900 Nakskov, Denmark
Phone: 45-5495-1390
www.nordic-air-filtration.dk
Thermal Care, Inc.
7720 North Lehigh Avenue
Niles, Illinois 60714
Phone: 847-966-2260
www.thermalcare.com
Boe-Therm A/S
Industrivaenget 1
DK-5610 Assens, Denmark
Phone: 45-6471-2375
www.boe-therm.dk
Midwesco Mechanical and Energy, Inc.
7720 N. Lehigh Avenue
Niles, Illinois 60714
Phone: 847-929-1700
Midwesco Filter Resources manufactures filter bags for
the capture of dry particulate from dust laden air
streams. As represented in this picture, the company
specializes in filtration products used in applications up
to 500°F in industries such as Metals, Power Generation,
and Mineral Production.
Thermal Care is an industry leader in the sale of central
chilling systems to the plastics industry. Our most
popular central chiller, the TC Series, sets us apart from
the competition by offering the energy efficient Turbocor
centrifugal compressor. It is not unusual for customers to
see savings of 30% or more on their energy bills with the
TC Series chiller. Beyond the energy savings, customers
appreciate the small footprint, quiet operation, remote
diagnostics, and low maintenance this chiller provides.
PermAlert is a leading manufacturer and supplier of
electronic liquid leak detection and location systems,
which can be configured to provide continuous line
and/or discreet point monitoring. PermAlert provides
leak detection for various applications including data
centers, web hosting facilities, fuel systems and
preinsulated piping systems.
Midwesco Mechanical and Energy
Attention to detail, energy efficient design and
safety are important elements of every project.