Perma-Pipe International Holdings, Inc. Annual Report 2012

FY2012 Annual Report · Perma-Pipe International Holdings, Inc.

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2012 Annual Report

MFRI is a multi-line company with interests in specialty piping
systems (Perma-Pipe), custom-designed industrial filtration
elements (Midwesco Filter), 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.

Midwesco Mechanical and Energy: Providing energy efficient
heating, ventilation, and air conditioning (HVAC) systems for
large commercial, industrial, and institutional projects.

Dear Fellow Shareholders,

A quick look at our 2012 results would indicate an extremely poor outcome but we encourage you to
start your review by reading Note 13 – Subsequent Events, on page 50 of the enclosed 10-K. It is
there we briefly describe the recent sale of our Thermal Care subsidiary and our forward focus on
filtration and piping systems. During the first quarter of 2013, we will recognize the gain on that
transaction coupled with the benefits of shipping product from the substantial backlog in our Piping
Systems segment. In the fourth quarter of 2012, the Company recorded a full valuation allowance on
domestic deferred tax assets. This resulted in a $12.5 million non-cash charge. The Company also
recorded a non-cash $1.5 million asset impairment charge, together making up $2.03 of the loss per
share in 2012. Before non-cash charges described above, the net loss was $4.5 million compared to
net loss of $5 million in 2011.

It is important to note that in 2012 the Company increased gross profit 5% on 9% fewer sales than
the prior year. We will continue our focus on operational efficiency and asset utilization during
2013. The improvement to our balance sheet and liquidity from the Thermal Care transaction
provides the financial strength we need to pursue our growth strategies in filtration and piping. We
believe these and other factors set the stage for a very different and improved 2013.

Piping Systems

We fully expected that after our Saudi pipe plant inauguration in April 2012 that order flow and
subsequent production would positively contribute to our results. That did not happen as anticipated
due to customer driven delays but we ultimately succeeded by securing orders later in the year and
into 2013. Among the orders received, two landmark projects are the Grand Mosque expansion in
Mecca and the King Abdul-Aziz International airport in Jeddah, Saudi Arabia. The substantial
backlog growth now transitions that operation from its “startup” phase to a fully operational business.
Backlog in Piping Systems grew 66% to approximately $90 Million by January 31, 2013, providing a
strong sales foundation for 2013.

Filtration Products

The Filtration segment experienced continued softness in 2012 sales particularly driven by reduced
demand for fabric filters serving coal fired power generation and the steel industry. Steel is a
cyclical industry and we remained well positioned to take advantage of any recovery as the US
economy starts to grow again. Electricity generation from coal has dropped significantly due to
environmental compliance requirements and as natural gas supply and price makes it more attractive
for energy producers. Yet, it still represents over one-third of US power supply and we believe
pending environmental regulation will at some point support investment in upgrades of filtration
systems. Our fabric filters are well suited for that mission. In the meantime, we are taking many
steps to right size that part of the business to meet expected demand while improving profitability
and cash utilization. Furthermore, we are well positioned to supply filter elements for gas turbine
power plants, compressor stations and many other industrial dust collection systems.

Management Succession

At the end of our fiscal year management transitions occurred stemming from our very deliberate
multi-year effort to ensure a smooth continuation of leadership for the organization. Bradley
Mautner, the President succeeded the longtime CEO, David Unger who continues as Chairman of the
Board. Our shared vision, integrity and unwavering commitment to customer needs are values we
will carry forward. Our goal is to build on the platform we have developed together in order to
improve results and shareholder value.

In addition, we welcomed a new CFO, Karl Schmidt to our management team. Karl joins the
organization succeeding our longtime CFO, Michael Bennett. Michael has seen us through from our
initial IPO in 1989 through the many changes to our Company over the past 24 years. He has been a
steady hand and we appreciate his contributions and support. Karl brings to us a wealth of
experience in manufacturing and international activities, which are increasingly important to the
Company. His larger company experiences will serve us well as we pursue our growth initiatives.

We deeply appreciate the dedication of our approximately 1,200 employees around the world. We
also appreciate your support and the confidence 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 report and/or calling us with your questions.

Sincerely,

DAVID UNGER
Chairman

BRADLEY E. MAUTNER
President and Chief Executive Officer

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2013
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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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

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.

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
filer

Smaller reporting company

Accelerated filer

Non-accelerated

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

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 $41,911,558 based on the closing sale price of $6.99 per share as reported on the NASDAQ
Global Market on July 31, 2012.

The number of shares of the registrant's common stock outstanding at April 22, 2013 was 6,931,959.

Portions of the proxy statement for the 2013 Annual Meeting of Stockholders are incorporated by reference in Part III.

DOCUMENTS INCORPORATED BY REFERENCE

MFRI, Inc.

FORM 10-K

For the fiscal period ended January 31, 2013

TABLE OF CONTENTS

Item
Part I
1.

1A.
1B.
2.
3.
4.

Part II

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

7A.

Quantitative and Qualitative Disclosures About Market Risk

9A.

9B.

Part III
10.
11.

12.
13.
14.

Part IV
15.

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

Report of Independent Registered Public Accounting Firm
Signatures

Page

1
2
3
5
6
6
7
8
10
10
11
11

22
22

22
22
22

23
53

Forward Looking Statements

PART I

Statements in this Form 10-K 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 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", "Company" or "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 2012 and 2011 are the fiscal years ended January 31, 2013 and 2012, respectively.
In the year ended January 31, 2013, no customer accounted for 10% or more of the Company's net sales.

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

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.

Recent development. On April 26, 2013, the Company announced the signing of a definitive agreement to sell the
domestic assets of its subsidiary Thermal Care, Inc. to IPEG, Inc. The transaction closed on April 30, 2013. The
Company included Thermal Care, Inc. in its consolidated results of the industrial processing cooling segment in
continuing operations as of January 31, 2013 since the decision to sell the assets occurred after that time.
Disposition of Thermal Care, Inc. will enable MFRI, Inc. to focus on its two principal segments: piping systems and

filtration products. For further information, see Note 13 - Subsequent events, in the Notes to Consolidated
Financial Statements

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 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 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."

Customers. 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. Piping systems spent two years investing in Saudi Arabia. In April 2012, the Company
opened a new factory in Dammam, Saudi Arabia, which produces the insulated pipe, spools and fittings with
important support from the United Arab Emirates ("U.A.E.") factory. On November 23, 2012, the Company
announced receipt of several orders for the Saudi facility totaling over $23 million to supply engineered and
insulated piping products for the chilled water distribution system utilized for a major expansion of the Grand
Mosque in Mecca, Kingdom of Saudi Arabia. In addition, on February 5, 2013 the Company announced that its
Perma-Pipe Saudi Arabia subsidiary received additional orders exceeding $27 million for the first phase of the
district cooling system expansion project at King Abdul-Aziz International airport in Jeddah, Saudi Arabia. These
orders and others received since, bring the total of major project work in Saudi Arabia to over $50 million.

The Grand Mosque expansion is one of the most prestigious projects in the Muslim world. The expansion project
adds an area of about 1.8 million square meters (445 acres) to the current Mosque. The additional space will
accommodate over 2 million pilgrims at one time compared to the current structure which is limited to 620,000
pilgrims. The project also comprises a number of new hotels, residential buildings, commercial centers and public
facilities, as well as permanent housing for the people residing in the area. Chilled water flowing through Perma-
Pipe's Poly-therm™ insulated piping systems will be used for air conditioning throughout the complex.

The King Abdul-Aziz International Airport is one of the largest projects in the recent history of the Kingdom of
Saudi Arabia. The passenger terminal complex comprises an area over 6.7 million square feet (622,000 square
meters) with 46 gates and 96 boarding bridges, including double deck access for the A380 Airbus. The total
facilities span over 25,000 acres (100 square kilometers) including the chilled water distribution system, utility
plants, utility tunnel, plant nursery, and a transportation center with integrated rail station.

We believe these orders represent a validation of the Company's strategy to expand its footprint to the rapidly
developing Saudi market. Delivery on these orders is expected to be mostly completed during 2013.

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, 2013, the backlog (See "Risk Factors" in Item 1A for definition) was $89.5 million. As
of January 31, 2012, the backlog was $53.8 million.

Raw materials. 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 systems
from components purchased from many sources.

Competition. Piping systems is highly competitive and 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 key competitive factors. The Company also believes it has a more
comprehensive line for DHC than any competitor. Some competitors have greater financial resources and 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 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 particulates from the air by passing
particulate laden gases through fabric filters (filter bags) or pleated media filter elements, in the case of baghouses
or cartridge collectors, between electrically charged collector plates, in the case of electrostatic precipitators and
contact with liquid reagents (scrubbers). The Company manufactures filter elements in standard industry sizes,
shapes and filtration media and to custom specifications, maintaining manufacturing standards for more than 10,000
styles of filter elements to suit substantially all industrial applications. Filter elements are manufactured from
industrial yarn, fabric and paper purchased in bulk. Most filter elements are produced from cellulose, acrylic,

fiberglass, polyester, aramid, laminated membranes, or polypropylene fibers. The Company also manufactures
filter elements from more specialized materials, sometimes using special finishes.

The Company markets numerous filter related products and accessories used during the installation, operation and
maintenance of cartridge collectors and baghouses, including wire cages used to support filter bags, spring
assemblies for proper tensioning of filter bags and clamps and hanger assemblies for attaching filter elements. In
addition, the Company markets 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 other industries.

Customers. 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, 2013, the backlog was $25.8 million, of which approximately 45% is expected to be
completed in 2013. As of January 31, 2012, the backlog was $14.5 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

customer in the past. Additional effort is required by a competitor to market products to such a customer. In certain
applications, the Company 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 influenced by governmental regulation of air pollution at
the federal and state levels. The regulatory standards are implemented by each state individually. Emission
standards are continually becoming more stringent and this drives the requirements for product performance.

Industrial Process Cooling

Recent developments. On April 26, 2013, the Company announced the signing of a definitive agreement to sell the
domestic assets of its subsidiary Thermal Care, Inc. to IPEG, Inc. The transaction closed on April 30, 2013.
Disposition of Thermal Care, Inc. will enable MFRI, Inc. to focus on its two principal segments: piping systems and
filtration products. For further information, see Note 13 - Subsequent events, in the Notes to Consolidated
Financial Statements.

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.

Customers. 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, metallizing 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, 2013, the backlog was $4.7 million, all of which is expected to be completed in 2013.
As of January 31, 2012, the backlog was $6.4 million.

Raw materials. The Company uses prefabricated sheet metal and subassemblies manufactured by both Thermal
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 28, 2013, the Company had 1,212 full-time employees, of whom 50% worked outside the U.S.

International

The Company's international operations as of January 31, 2013 include subsidiaries and a joint venture in five
foreign countries on three continents. The Company's international operations contributed approximately 24.1% of
revenue in 2012 and 15.7% of revenue in 2011.

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.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information regarding the executive officers of the Company as of April 1, 2013:

Name
Bradley E. Mautner Director, President and Chief Executive Officer; Age 57

Offices and positions, if any, held with the Company; age

Karl J. Schmidt

Vice President and Chief Financial Officer; Age 59

Michael D. Bennett Vice President, Secretary and Treasurer; Age 68

Timothy P. Murphy Vice President of Human Resources; Age 63

Fati A. Elgendy

President and Chief Operating Officer, Perma-Pipe; Age 64

Robert A. Maffei

Vice President, Perma-Pipe; Age 65

John Mark Foster

President, Midwesco Filter; Age 51

Stephen C. Buck

President, Thermal Care; Age 64

Edward A. Crylen

President and Chief Operating Officer, Midwesco Mechanical and
Energy; Age 61

All of the executive officers serve at the discretion of the Board of Directors.

Executive officer of
the Company or its
predecessor since
1994

2013

1989

2008

1990

1987

2008

2007

2006

Bradley E. Mautner, Chief Executive Officer since February 2013. President since December 2004; Chief
Operating Officer from December 2004 to January 2013; Executive Vice President from December 2002 to
December 2004;Vice President from December 1996 through December 2002; Director since 1994.

Karl J. Schmidt, Appointed Vice President and Chief Financial Officer January 2013. From 2010 to 2012, Mr.
Schmidt served as the Chief Financial Officer of Atkore International (previously Tyco Electrical and Metal
Products), a manufacturer of steel pipe and tube products, electrical conduits, cable, and cable management
systems. From 2002 to 2009, Mr. Schmidt served as the Executive Vice President and Chief Financial Officer of
Sauer-Danfoss, Inc., a global manufacturer of hydraulic, electrical, and electronic components and solutions for off-
road vehicles.

Michael D. Bennett, Vice President, Secretary and Treasurer since August 1989. Chief Financial Officer from
August 1989 to October 2012.

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.

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.

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, volume, pricing,
and operating margin for our services and products. Many of our 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 flow.

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 continuing decrease in federal and state spending has significantly
decelerated government funding construction activity in the U.S., negatively impacting sales volume at the
Company's domestic facilities.

Attracting and retaining senior management and key personnel. The Company's ability to meet strategic and
financial goals will depend to a significant extent on the continued contributions of senior management. Future
success will also depend in large part on the ability to identify, attract, motivate, effectively utilize and retain highly
qualified managerial, sales and marketing and technical personnel. The loss of senior management or other key
personnel or the inability to identify, attract and retain qualified personnel in the future could make it more difficult
to manage the business and could adversely affect operations and financial results.

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, the Company may seek to grow 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 and 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
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, are 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 making 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 revenue recognition. The Company measures and recognizes a portion of revenue and
profits under the percentage-of-completion accounting methodology. This methodology allows revenue and profits
to be recognized proportionally over the life of a contract by comparing the amount of the cost incurred to date
against the total amount of cost expected to be incurred. The effect of revisions to revenue and total estimated cost
is recorded when the amounts are known and can be reasonably estimated. These revisions can occur at any time
and could be material. On a historical basis, management believes that reasonably reliable estimates of the progress
towards completion on long-term contracts have been made. However, given the uncertainties associated with these
types of contracts, it is possible for actual cost to vary from estimates previously made, which may result in
reductions or reversals of previously recorded revenue and profits.

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

Kingdom of
Saudi Arabia
United Arab
Emirates

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
Owned production facilities on leased land

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

33,700 square feet on approximately 1 acre

89,000 square feet on approximately 19 acres

Leased office space and production facilities on
leased land

119,300 square feet on approximately 18 acres

Filtration Products

Illinois

Virginia

Denmark

Bolingbrook - owned production facilities and office space
101,500 square feet on 5.5 acres
Cicero - owned production facilities and office space, currently idle 130,700 square feet on 2.8 acres
97,500 square feet on 5.0 acres
Owned production facilities
12,000 square feet
Leased office space
69,800 square feet on 3.5 acres
Owned production facilities and office space

Industrial Process Cooling

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.

The Company has several significant operating lease agreements as follows:

• Nine acres of land in the Kingdom of Saudi Arabia is leased through 2030 and an additional ten acres of land is

leased through 2031.

• Land for production facilities in the U.A.E of approximately 80,200 square feet is leased until June 30, 2030.

Office space and land for production facilities of approximately 37,700 square feet in the U.A.E. is leased until
July 2032.

• Office space of approximately 12,000 square feet in Virginia is leased through July 31, 2013.

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 2012 and 2011 are the fiscal years
ended January 31, 2013 and 2012, 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 2012 and 2011.

2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$8.14
7.38
7.00
6.14

13.06
10.21
9.47
7.51

$7.00
6.75
5.34
4.82

9.57
6.96
6.51
6.43

As of March 15, 2013, there were 71 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.

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, 2013.

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

969,328

$10.77

572,587

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

January 31,
2013
$89,508
25,834
4,665
28,176
$148,183

2012
$53,769
14,473
6,431
8,539
$83,212

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, in the Notes to
Consolidated Financial Statements.

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. The adverse effect of the continuing decrease in federal and
state spending has significantly decelerated government funding construction activity in the U.S., negatively
impacting sales volume at the Company's domestic facilities. Because economic and market conditions vary within
the Company's segments, the Company's future performance by segment will vary. Should current economic
conditions continue, or a further downturn occur 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.

On April 26, 2013, the Company announced the signing of a definitive agreement to sell the domestic assets of its
subsidiary Thermal Care, Inc. to IPEG, Inc. The transaction closed on April 30, 2013. Disposition of Thermal
Care, Inc. will enable MFRI, Inc. to focus on its two principal segments: piping systems and filtration products. For
further information, see Note 13 - Subsequent events, in the Notes to Consolidated Financial Statements.

2012 Compared to 2011

Net sales were $212 million in 2012, a decrease of 9% from $233.5 million in 2011. Reduced market demand for
fabric filters led to a decrease of $14.6 million in filtration products. Piping systems sales decreased $7.3 million
driven by a decline in U.S. sales in the second and third quarters partially offset by an increase in sales in the

Middle East. Corporate and other decreased by $4.6 million partly due to customer decisions to extend project
completion dates. Industrial process cooling sales increased $5 million as order intake continued to improve.

Despite the decrease in sales, gross margin improved by 2 percentage points to 18% of net sales compared to 16%
of net sales in 2011. Gross profit of $38.1 million in 2012 increased 5% from $36.3 million in 2011. Gross profit
increased significantly in piping systems due to higher volume delivered by the U.A.E. facility and strong sales in
industrial process cooling while filtration products gross profit decreased due to lower demand.

Operating expenses increased 9.6% to $45.4 million from $41.4 million. The primary increase was a non-cash
$1.5 million charge to recognize the impairment of fixed assets in filtration products related to its idle
manufacturing facility located in Cicero, Illinois. Strategic consulting, audit and tax consulting increased a total of
$1.5 million. Start-up costs of $0.9 million for the Saudi Arabia facility were also included. Industrial process
cooling added staff and had increased management incentive compensation expense related to improved
performance.

The Company's worldwide effective income tax rates for 2012 and 2011 were (140.2)% and (0.3)%, respectively.
In the fourth quarter of 2012, the Company recorded a full valuation allowance on domestic deferred tax assets.
This resulted in a $12.5 million non-cash charge. For additional information, see the Income Tax section of the
MD&A and see Note 7 - Income taxes, in the Notes to Consolidated Financial Statements.

Before non-cash charges described above, the net loss was $4.5 million compared to net loss of $5 million in 2011.
Increased professional costs and filtration products' decrease in gross profit contributed to the increased loss. This
was partially offset by piping systems' increase in gross profit.

Piping Systems

The manufacturing facility in Dammam, Saudi Arabia opened in April 2012. Expenses aggregating $2.9 million for
2012 relating to this 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. Additionally because piping systems is based on large discrete projects, revenues can be
subject to large swings in both geography and reporting period.

($ in thousands)
Net sales

Gross profit
Percentage of net sales

Income from operations
Percentage of net sales

2012
$89,664

2011
$96,977

% (Decrease)
Increase
(7.5)%

17,020

19%

14,410
15%

3,452

3.8%

1,143
1.2%

18.1 %

202 %

Net sales of $90 million decreased 7.5% from $97 million, in the prior-year attributed to a decrease in sales of
domestic district heating and cooling products ("DHC") and the prior-year included large domestic oil and gas
projects. In 2012, sales increased in the U.A.E.

Gross margin increased to 19% of net sales from 15% of net sales in the prior-year. Gross profit increased due to
higher volume produced at the U.A.E. facility.

General and administrative expense increased to $9.8 million or 10.9% of net sales in 2012 from $9.2 million or
9.3% of net sales in 2011. This increase is related to operational start-up costs for the Saudi Arabia facility.

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

(Loss) income from operations
Percentage of net sales

2012
$79,143

2011 % Decrease
(15.5)%

$93,705

10,474
13.2 %

(2,962)
(3.7)%

12,466
13.3%

614
0.7%

(16.0)%

(582.4)%

Net sales decreased 15.5% to $79.1 million in 2012 from $93.7 million in 2011. Sales declines were the result of
lower market demand across most filtration products.

Gross margin decreased slightly to 13.2% of net sales from 13.3% of net sales in 2011. Gross profit decreased
16.0% to $10.5 million from $12.5 million in the prior-year due to lower sales volume.

General and administrative expenses and selling expenses remained consistent. In the fourth quarter, filtration
product's recorded a $1.5 million impairment on fixed assets relating to its idle manufacturing facility located in
Cicero, Illinois.

Industrial Process Cooling

The Company included Thermal Care, Inc. in its consolidated results of the industrial processing cooling segment in
continuing operations as of January 31, 2013 since the decision to sell the assets occurred after that time. In future
periods Industrial process cooling will be accounted for as a discontinued operation.

($ in thousands)
Net sales

Gross profit
Percentage of net sales

Income from operations
Percentage of net sales

2012
$37,131

2011 % Increase
16%

$32,112

10,240
27.6%

1,954
5.3%

8,541
27%

810
2.5%

20%

141%

Net sales of $37 million increased 16% from $32 million in 2011 due to improving business conditions in the North
American plastic and industrial market sectors. Gross profit increased 20% to $10.2 million from $8.5 million in
2011. Gross margin slightly increased as a percentage of net sales.

General and administrative expenses increased to $3.8 million from $3.6 million in 2011 and decreased as a
percentage of net sales to 10% from 11% in 2011 due to the effect of higher sales. The change in spending was a
result of additional staffing, professional costs and increased management incentive compensation expense related
to improved performance partially offset by lower legal costs.

Selling expenses increased to $4.5 million in 2012 from $4.2 million in 2011 due to higher commission expense as
a result of additional sales, increased staffing after the 2011 first quarter and additional advertising expenses.
Selling expenses as a percentage of net sales decreased to 12% from 13% of net sales in 2011 due to the effect of
higher sales.

Corporate and Other

Net sales of $6.1 million in 2012 decreased from $10.7 million in 2011, due to HVAC customers decisions to
extend project completion dates.

Corporate expenses include interest expense and general and administrative expenses that are not allocated to the
segments. General and administrative expenses increased 19% to $10.1 million or 4.8% of net sales from $8.5
million or 3.7% of net sales in 2011. The spending was due to increased expenses of $1.5 million for audit, tax
consulting and other professional service expenses.

Interest expense increased to $2.3 million from $2.2 million in 2011. Interest income decreased to $511 thousand
from $728 thousand due to less interest income earned overseas by piping systems as this cash was primarily
deployed for the construction of the Saudi Arabia facility.

INCOME TAXES

The Company's worldwide effective tax rates ("ETR") were (140.2)% and (0.3)% in 2012 and 2011, respectively.
The ETR in the periods presented was the result of the mix of income earned / losses incurred 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 2012 was less than the statutory U.S. federal income tax rate, mainly due to the full valuation
allowance of $12.5 million recorded on the domestic deferred tax assets. The ETR in 2011 was less than the
statutory U.S. federal income tax rate, due to foreign losses and repatriation of foreign earnings.

As of January 31, 2013, 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
Valuation allowance for domestic deferred tax assets
Valuation allowance for state deferred tax assets
Differences in foreign tax rate
Foreign tax credit
Research tax credit
Repatriation
Valuation allowance for foreign NOLs
Nontaxable income from the Canadian joint venture
State taxes, net of federal benefit
All other, net expense
Effective income tax rate

2012
34.0 %
(149.0)%
(13.9)%
(10.9)%
0.9 %
1.2 %
— %
(8.0)%
6.1 %
2.8 %
(3.4)%
(140.2)%

2011
34.0 %
— %
(1.1)%
(28.8)%
26.2 %
19.1 %
(36.4)%
(9.0)%
10.7 %
(8.4)%
(6.6)%
(0.3)%

For further information, see Note 7 - Income taxes, in the Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents as of January 31, 2013 were $7 million as compared to $4.2 million at January 31, 2012.
Cash and cash equivalents were primarily held at the foreign subsidiaries. The Company's working capital was
$35.1 million at January 31, 2013 compared to $43 million at January 31, 2012. Cash provided by operations in
2012 was $5.3 million compared to cash used in operations of $0.2 million in 2011. The Company does not believe
that it will be necessary to repatriate cash held outside of the U.S.

Net cash used in investing activities in 2012 included $5.4 million for capital expenditures, primarily for machinery
and equipment in piping systems of which $2.7 million was related to the new plant in Saudi Arabia. The Company
estimates that capital expenditures for 2013 will be approximately $5 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 piping systems. In February 2012, the
Company lent $1 million to its Canadian joint venture to be used mainly for capital expenditures.

Debt totaled $42 million at January 31, 2013, an increase of $4.6 million since January 31, 2012. Net cash provided
by financing activities was $3.8 million. For additional information, see Note 5 - Debt, in the Notes to
Consolidated Financial Statements. Other long-term liabilities of $3.7 million were composed primarily of accrued
pension cost and deferred compensation.

The following table summarizes the Company's estimated contractual obligations at January 31, 2013.

($ 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

$13,989

18,602

2,968

11,162

46,721

2,944

9,649

4,041

5,833

101

517

Year Ending January 31,

2014

$—

1,043

1,885

2,847

5,775

756

1,779

628

163

—

2015

$—

1,041

2,400

3,497

703

1,428

337

163

—

2016

2017

2018 Thereafter

$— $13,989

1,040

1,803

2,899

686

1,286

351

163

—

1,039

1,792

16,876

659

1,247

356

103

—

$—

4,004

411

4,471

140

1,197

380

—

$—

10,435

859

1,909

13,203

—

2,712

1,989

5,202

101

517

Total

$69,806

$9,101

$6,128

$5,385

$19,241

$6,227

$23,724

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, 2013, and the weighted average interest rate of 3.57% on that
debt, such interest was being incurred at an annual rate of approximately $673 thousand.

(2) Scheduled maturities, including interest.
(3) Term loan obligations exclude floating rate interest on term loan with a January 31, 2013 balance of

$0.6 million. Based on the amount of such debt as of January 31, 2013, and the weighted average interest rate
of 4.24% on that debt, such interest was being incurred at an annual rate of approximately $36 thousand.

(4) Minimum contractual amounts, assuming no changes in variable expenses.
(5) Includes expected employer contributions for fiscal year ending January 31, 2014 and estimated future benefit

payments reflecting expected future service.

(6) Non-qualified deferred compensation plan - The Company has deferred compensation agreements with key
employees. Vesting based on years of service. Life insurance contracts have been purchased which may be
used to fund the Company's obligation under these agreements. Includes payment estimates calculated by third
party administrator.

(7) Refer to the proxy statement for a description of compensation plans for Named Executive Officers.
(8) Refer to Note 7 - Income taxes, in the Notes to Consolidated Financial Statements for a description of the

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, the Company can borrow up to $38
million, subject to borrowing base and other requirements, under a revolving asset-based line of credit. The third
amendment to the loan agreement executed March 15, 2013 extended the maturity date of the loan from November
30, 2013 to November 30, 2016. 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, 2013, 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, 2013, the prime rate was 3.25%, the LIBOR rate
was 0.25%, and the margins added to the prime rate and the LIBOR rate, which are determined each quarter based
on the applicable financial statement ratio, were 0.5 and 2.75 percentage points, respectively. Monthly interest
payments were made during the years ended January 31, 2013 and 2012. As of January 31, 2013, the Company had
borrowed $14 million and had $4.8 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
18

in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At
January 31, 2013, the amount of such restricted cash was $0.1 million. Cash required for operations is provided by
draw-downs on the line of credit.

On August 28, 2007, the Company amended and restated the Term Loan Note to $3.0 million ("Term Loan"). The
Company is scheduled to pay $107 thousand of principal on the first days of March, June, and September, with the
remaining unpaid principal payable on November 30, 2013. The third amendment to the loan agreement allows for
an additional term loan of $2.5 million less $0.6 million, the amount outstanding on this loan, in 2013, subject to
attaining certain performance levels.

On April 10, 2012, the Company obtained a loan from a U.A.E. bank to purchase equipment and office furniture for
a building for the piping system's facility in Saudi Arabia, in the amount of 22.2 million Dirhams, approximately
$5.9 million U.S. dollars at the exchange rate prevailing on the transaction date. The loan bears interest at 5.5%
with quarterly payments of approximately $408 thousand for both principal and interest and matures April 2017.

The Company also has credit arrangements used by its Danish and Middle Eastern subsidiaries. These credit
arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in
which the Company operates. At January 31, 2013, borrowings under these credit arrangements totaled
$2.5 million; an additional $2.9 million remained unused.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The Company's significant accounting policies are discussed in the Notes to Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K. 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 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 to 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.

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 Note 2 - Recent accounting pronouncements, in the Notes to Consolidated
Financial Statements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not

applicable.

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, 2013 and 2012 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, 2013. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and procedures were effective as of January 31,
2013 to ensure that information required to be disclosed in the reports that are filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified

in the SEC's rules and forms and is accumulated and communicated to the issuer's management, including the
principal executive and financial officers, to allow timely decisions regarding required disclosure.

Management's Report on Internal Control Over Financial Reporting. The Company's management is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule
13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the Exchange Act, MFRI's management
carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of its internal control over financial reporting as of the end of the last fiscal year. The framework on
which such evaluation was based is contained in the report entitled "Internal Control-Integrated Framework" issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO Report").

The Company's system of internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that the Company has maintained effective internal control
over financial reporting as of January 31, 2013, based on criteria in the COSO Report.

Changes in Internal Controls: There was a material weakness in internal control described in Item 9A of the
Company's January 31, 2012 10-K/A filed on May 9, 2012. 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 deemed 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 did not result in
any material adjustments to the Registrant's financial statements, notes thereto, or other disclosures in the 10-K.

In addition, the Company's processes, procedures and controls related to the preparation, review and filing of its
Quarterly Report on Form 10-Q ("10-Q") were not effective at July 31, 2012 to ensure that contracts and significant
adjustments outside the normal course of business had been properly approved, reviewed and reported in the
Consolidated Interim Financial Statements. These material weaknesses did not result in a material adjustment to
the Registrant's financial statements, notes thereto, or other disclosures in the 10-Q.

Other than the controls implemented to address the material weaknesses noted above, there has been no change in
internal control over financial reporting during the year ended January 31, 2013 that has materially affected or is
reasonably likely to materially affect, internal control over financial reporting except as discussed below.

Remediation Plan for the Material Weaknesses in Internal Controls over Financial Reporting: The Company
increased senior management's direction and review of filings to ensure compliance with the Company's internal
controls. Beginning with the filing of the Annual Report on Form 10-K/A filed on May 9, 2012, the Company
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 prior to such filing.

Upon discovering the material weaknesses related to contracts and significant adjustments outside the normal
course of business being properly adhered to, the Company immediately took steps to implement formal operating
policies regarding approval, communication and reporting of contracts and significant adjustments outside the
normal course of business, and controls to ensure that such policies have been followed.

On January 30, 2013, the Board of Directors of the Company appointed Karl J. Schmidt to serve as the Company's
Vice President and Chief Financial Officer.

We believe 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 weaknesses that were identified as of January 31, 2012 and July 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 2013 annual meeting of stockholders.

Information with respect to executive officers of the Company is included in Part I Item 1, 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 2013 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 2013 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 2013 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 2013 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.

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, 2013 and 2012, and the related consolidated statements of
operations, comprehensive loss, stockholders’ equity and cash flows for each of the two years ended January
31, 2013. Our audits of the consolidated financial statements included the financial statement schedule listed
in the index appearing under Item 15(a)(2). These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 audits 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 consolidated 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, 2013 and 2012, and the results of their
operations and their cash flows for each of the two years in the period ended January 31, 2013, in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth therein.

Chicago, Illinois
May 2, 2013

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT 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 from operations

Income from joint venture

Interest expense, net
Loss before income taxes

Income tax expense

Net loss

Weighted average number of common shares outstanding

Basic and diluted

Loss per share

Basic and diluted

See accompanying Notes to Consolidated Financial Statements.

January 31,
2013

2012

$212,018
173,911
38,107

$233,496
197,175
36,321

30,178
15,194
45,372

26,252
15,132
41,384

(7,265)

(5,063)

1,386

1,558

1,816
(7,695)

1,437
(4,942)

10,790

($18,485)

($4,959)

6,922

6,878

($2.67)

($0.72)

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(In thousands)

Net loss

Other comprehensive income (loss)

Currency translation adjustments, net of tax
Minimum pension liability adjustment, net of tax
Interest rate swap, net of tax

Other comprehensive loss

Comprehensive loss

See accompanying Notes to Consolidated Financial Statements.

January 31,

2013

2012

($18,485)

($4,959)

(251)
112
(6)
(145)

(942)
(969)
138
(1,773)

($18,630)

($6,732)

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 $352 at January

31, 2013 and $235 at January 31, 2012

Inventories, net
Prepaid expenses and other current assets
Deferred tax assets - current
Costs and estimated earnings in excess of billings on uncompleted contracts

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
Current maturities of long-term debt
Customers' deposits
Other accrued liabilities
Billings in excess of costs and estimated earnings on uncompleted contracts
Deferred tax liabilities - current
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

Common stock, $.01 par value, authorized 50,000 shares; 6,924 issued and outstanding

January 31, 2013 and 6,913 issued and outstanding January 31, 2012

Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss

Total stockholders' equity

Total liabilities and stockholders' equity

See accompanying Notes to Consolidated Financial Statements.

January 31,

2013

2012

$7,035
725

27,842
42,333
4,476
—
1,935
84,346
46,401

1,766
5,200
6,022
2,946
2,425
373
18,732
$149,479

$22,905
3,368
5,112
5,419
7,571
2,524
1,572
696
34
49,201

36,603
5,670
3,750
46,023

$4,209
1,854

28,109
40,204
3,973
1,946
2,375
82,670
47,842

10,967
4,195
4,636
2,782
3,860
331
26,771
$157,283

$20,020
4,722
4,571
2,736
2,432
2,610
1,978
—
417
39,486

34,682
5,686
5,074
45,442

$69
50,358
4,553
(725)
54,255
$149,479

$69
49,828
23,038
(580)
72,355
$157,283

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

($ in thousands, except share data)
Total stockholders' equity at January 31, 2011

Net loss
Stock options exercised
Stock-based compensation
Excess tax benefit from stock options

exercised

Interest Rate Swap
Pension liability adjustment
Foreign currency translation adjustment
Tax benefit on above items
Total stockholders' equity at January 31, 2012

Net loss
Stock options exercised
Stock-based compensation expense
Excess tax expense from stock options

exercised

Interest Rate Swap
Pension liability adjustment
Foreign currency translation adjustment
Tax benefit on above items
Total stockholders' equity at January 31, 2013

Common
Stock

Additional
Paid-in
Capital

$69

$49,003

Retained
Earnings
$27,997

Accumulated
Other
Comprehensive
Income (Loss)
$1,193

Total
Stockholders'
Equity

$78,262

(4,959)

—

210
621

(6)

$69

$49,828

$23,038

(18,485)

—

35
484

$69

$50,358

$4,553

(4,959)
210
621

(6)
61
(1,563)
(942)
671
$72,355

(18,485)
35
484

11
97
466
(263)
(445)
$54,255

61
(1,563)
(942)
671
($580)

97
466
(263)
(445)
($725)

Common stock shares
Balance beginning of year
Stock options exercised
Balance end of year

2012
6,912,771
11,313
6,924,084

2011
6,851,471
61,300
6,912,771

See accompanying Notes to Consolidated Financial Statements.

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

($ in thousands)
Operating activities

Net loss

Adjustments to reconcile net loss to net cash flows provided by (used in) operating

activities

Depreciation and amortization

Impairment on fixed assets

Deferred tax expense (benefit)

Income from joint venture

Stock-based compensation expense

Cash surrender value of deferred compensation plan

Loss on disposal 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

Costs and estimated earnings in excess of billings on uncompleted contracts

Other assets and liabilities

Net cash provided by (used in) operating activities

Investing activities

Additions to property, plant and equipment

Loan to joint venture

Proceeds from sales of property and equipment

Net cash used in investing activities

Financing activities

Borrowings

Payment of debt

Decrease in drafts payable

Payment on capitalized lease obligations

Stock options exercised

Tax benefit of stock options exercised

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period

Supplemental cash flow information

Cash paid for
Interest
Income taxes

See accompanying Notes to Consolidated Financial Statements.

January 31,

2013

2012

($18,485)

($4,959)

5,806

1,520

11,849
(1,386)
484
(163)
64

2,908
(844)
(2,080)
5,139
(384)
563

318

5,348

(5,360)
(989)
95
(6,254)

194,035
(189,684)
(8)
(591)
35

3,798

(66)

2,826

4,209
$7,035

5,582

—
(989)
(1,558)
621

115

1,308
(1,852)
(4,683)
520

8
(234)
8,075

62
(2,292)
(190)

(10,086)
—

18
(10,068)

195,363
(196,671)
(475)
(293)
210

—
(1,866)

(385)

(12,509)
16,718
$4,209

$2,314
200

$2,117
439

MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED January 31, 2013 and 2012
(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 2012 and 2011 are the
fiscal years ended January 31, 2013 and 2012, 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, hazardous fluids and petroleum products, (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 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. 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.

Segment information was as follows:

Net sales

Piping Systems

Filtration Products

Industrial Process Cooling

Corporate and Other
Total net sales
Gross profit

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 from operations
Income (loss) before income taxes

Piping Systems

Filtration Products

Industrial Process Cooling

Corporate and Other

Total loss 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
Impairment of fixed assets

Filtration Products

2012

2011

$89,664

79,143

37,131

6,080
$212,018

$96,977

93,705

32,112

10,702
$233,496

$17,020

$14,410

10,474

10,240

373

12,466

8,541

904

$38,107

$36,321

$3,452
(2,962)
1,954
(9,709)
$(7,265)

$4,838
(2,962)
1,954
(11,525)
$(7,695)

$1,143

614

810
(7,630)
$(5,063)

$2,701

614

810
(9,067)
$(4,942)

$83,944

$74,953

52,958

11,451

1,126

55,095

10,810

16,425

$149,479

$157,283

$4,206

995

$8,396

1,449

190

$5,360

$10,086

$3,344

1,750
120

592

$5,806

$1,520

$3,076

1,734
154

618

$5,582

Geographic information. Net sales are attributed to a geographic area based on the destination of the product
shipment. Sales to foreign customers was 33% in 2012 compared to 30% in 2011. 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
Middle East
Europe
Canada
India
Other Americas
Other
Total net sales

Long-lived assets
United States
Middle East
Denmark
India
Total long-lived assets

2012

2011

$142,454
24,631
19,386
11,183
6,318
3,053
4,993
$212,018

$163,104
12,721
20,815
6,894
2,259
22,370
5,333
$233,496

$27,151
13,204
5,065
981
$46,401

$30,366
11,417
4,623
1,436
$47,842

Note 2 - Significant accounting policies

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.

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.

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.

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. In the second quarter of 2012, management discovered prior period inventory
errors. The cumulative adjustment for the inventory errors covering the period from February 1, 2006 to
January 31, 2012, was approximately $236 thousand. The adjustment applicable to the fourth quarter of 2011 was
approximately $28 thousand, no adjustment to the first three quarters of 2011 and the adjustment applicable to prior
years (February 2006 - January 2011) totaled approximately $208 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, 2012
follows:

Inventories, net
Total current assets
Total assets
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity

As Reported
$39,968
82,434
157,047
22,802
72,119
157,047

Adjustment

$236
236
236
236
236
236

As Adjusted
$40,204
82,670
157,283
23,038
72,355
157,283

A reconciliation of the effects of the adjustments to the previously reported statement of operations for the year
ending January 31, 2012 follows:

Cost of sales
Gross profit
Loss from operations
Loss before income taxes
Net loss

As Reported
$197,203
36,293
(5,091)
(4,970)
(4,987)

Adjustment

($28)
28
28
28
28

As Adjusted
$197,175
36,321
(5,063)
(4,942)
(4,959)

A reconciliation of the effects of the adjustments to the previously reported statement of cash flows for the year
ending January 31, 2012 follows:

Net loss
Inventories

As Reported

Adjustment

As Adjusted

($4,987)
(4,655)

$28
(28)

($4,959)
(4,683)

A reconciliation of the effects of the adjustments to the previously reported statement of stockholders' equity for the
year ending January 31, 2012 follows:

Net loss
Retained earnings
Total comprehensive loss

As Reported

Adjustment

As Adjusted

($4,987)
22,802
(6,760)

$28
236
28

($4,959)
23,038
(6,732)

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 $7 million and $4.2 million as of January
31, 2013 and 2012, 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 as of
January 31, 2013 and 2012, 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, 2013, the amount of
such restricted cash was $0.1 million and $0.6 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
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, 2013 and 2012, no customer accounted for
10% or more of the Company's net sales.

Accumulated other comprehensive loss. Represents the change in equity from non-owner transactions and
consisted of foreign currency translation, minimum pension liability and interest rate swaps.

Equity adjustment foreign currency
Minimum pension liability, gross
Interest rate swap, gross

Subtotal excluding tax effect
Tax effect of foreign exchange
Tax effect of minimum pension liability
Tax effect of interest rate swap

Total other comprehensive loss

2012
$1,179
(2,479)
(219)
(1,519)
12
765
17
($725)

2011
$1,442
(2,945)
(316)
(1,819)
—
1,119
120
($580)

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

2012
$35,145
3,506
4,476
43,127
794
$42,333

2011
$33,402
2,927
4,715
41,044
840
$40,204

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 $5.8 million in 2012 and $5.6 million in 2011.

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

2012
$37,573
51,809
13,153
198
102,733
56,332
$46,401

2011
$36,565
50,066
12,682
465
99,778
51,936
$47,842

Impairment of long-lived assets. The Company evaluates long-lived assets (including intangible assets) for
impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset
may not be recoverable. An asset is considered impaired if its carrying amount exceeds the undiscounted future net
cash flow the asset is expected to generate.

The Company has an idle facility in Cicero, Illinois that has not yet been sold and does not meet the criteria to be
presented as held for sale as of January 31, 2013. In 2012, management performed the required impairment
analysis on the idle facility to determine if its carrying value was recoverable. Management identified recent sales
data for similar facilities for sale in the area and analyzed the expected cash flows from different sales scenarios and
determined that the carrying value of the idle facility was not fully recoverable. For 2012, management recorded an
impairment loss of $1.5 million, to adjust the idle facility to its estimated recoverable amount.

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
$2.6 million and $2.5 million as of January 31, 2013 and 2012, respectively. Accumulated amortization was
approximately $2.18 million and $2.20 million as of January 31, 2013 and 2012, respectively. Future amortizations
over the next five years ending January 31 will be $49,200 in 2014, $44,600 in 2015, $41,400 in 2016, $37,500 in
2017, $34,400 in 2018, and $165,600 thereafter.

Investment in joint venture. In October 2009, the Company invested $5.9 million, which consisted of $2 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 Aegion Corporation. 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. In February 2012, the Company loaned $1 million to its
Canadian joint venture to be used for capital expenditures.

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

2012
$1,386

2011
$1,558

2012
$14,058
19,442
2,703
18,274
12,524
30,448
7,211
3,380
$2,680

2011
$14,381
14,259
3,449
15,403
9,789
29,010
7,565
5,137
$3,189

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 $2.2 million in 2012 and 2011.

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.

Net loss per common share. Earnings per share ("EPS") are computed by dividing net loss by the weighted
average number of common shares outstanding (basic). The years 2012 and 2011 had net losses; therefore, the
diluted loss per share were identical to the basic loss per share rather than assuming conversion, exercise, or
contingent issuance of securities that would have an anti-dilutive effect on earnings per share.

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

Canceled options during the year
Stock options with an exercise price below the average stock price

2012
6,922
—
6,922

2011
6,878
—
6,878

783

653

(36)
186

(28)
190

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.

Reclassifications. Reclassifications were made to prior-year financial statements to conform to the current-year
presentations.

Recent accounting pronouncements. The Company evaluated recent accounting pronouncements and do not
expect them to have a material impact on the consolidated financial statements.

Note 3 - Retention

Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of
$1.6 million and $0.6 million were included in the balance of trade accounts receivable as of January 31, 2013 and
2012, respectively.

Retention payable is the amount withheld by the Company until a contract is completed. Retention payables of
$0.5 million and $0.4 million were included in the balance of trade accounts payable as of January 31, 2013 and
2012, respectively.

Note 4 - Costs and estimated earnings on uncompleted contracts

Costs incurred on uncompleted contracts
Estimated earnings
Earned revenue
Less billings to date
Costs in excess of billings, net

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

Costs in excess of billings, net

Note 5 - 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

2012
$71,382
16,215
87,597
87,234
$363

2011
$61,938
11,550
73,488
73,091
$397

$1,935
(1,572)
$363

$2,375
(1,978)
$397

2012
$13,989
12,312
2,529
10,608
2,584
42,022
5,419
$36,603

2011
$18,252
11,012
1,526
4,797
1,831
37,418
2,736
$34,682

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
$13,989
12,312
2,529
10,608
2,584
$42,022

2014
$—
357
1,726
2,729
607
$5,419

2015
$—
370
—
2,302
593
$3,265

2016
2017
$— $13,989
408
389
—
—
1,706
1,715
630
616
$16,733
$2,720

2018 Thereafter
$—
$—
7,190
3,598
803
—
1,828
328
—
138
$9,821
$4,064

payment of dividends, and require attainment of levels of profitability and cash flows. At January 31, 2013, 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, 2013, the prime rate was 3.25%, the LIBOR rate
was 0.25%, and the margins added to the prime rate and the LIBOR rate, which are determined each quarter based
on the applicable financial statement ratio, were 0.5 and 2.75 percentage points, respectively. Monthly interest
payments were made during the years ended January 31, 2013 and 2012. As of January 31, 2013, the Company had
borrowed $14 million and had $4.8 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, 2013, the amount of such restricted cash was $0.1 million. Cash required for operations is provided by
draw-downs on the line of credit.

Revolving lines foreign. The Company also has credit arrangements used by its Danish and Middle Eastern
subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates
competitive in the countries in which the Company operates. At January 31, 2013, borrowings under these credit
arrangements totaled $2.5 million; an additional $2.9 million remained unused.

The Company guarantees the subsidiaries' debt including all foreign debt.

Mortgages. On June 19, 2012, 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 4.5% with monthly payments of $13 thousand for both principal and interest and matures
July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the
prime rate provided the applicable interest rate shall not adjust more than 2% per annum, and shall be subject to
ceiling of 18% and a floor of 4.5%.

On March 27, 2012, the Company obtained a loan in the amount of 7,927,000 Danish Kroners ("DKK")
(approximately $1.4 million U.S. dollars at the prevailing exchange rate on transaction date) from a Danish bank
under a mortgage note secured by its filtration products manufacturing facility in Denmark. The loan has an
interest rate of 2.21%, monthly payments of approximately $7.5 thousand for both principal and interest and
matures March 2032.

On July 10, 2010, the Company obtained a loan in the amount of 4,649,000 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 million under a mortgage note secured by the filtration
products manufacturing facility located in Bolingbrook, Illinois and matures March 2033. The 25 mortgage resets
its interest rate every five years based on a published index. The initial interest rate is 6.54% 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 thirty years with a balloon payment at maturity in
January 2018.

Term loans. On August 28, 2007, the Company amended and restated the Term Loan Note to $3 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, 2013, the prime rate was 3.25%, the LIBOR rate was 0.375% and the margin added to the prime rate ,
which is determined each quarter based on the applicable financial statement ratio, was 0.75 percentage points. The

Company is scheduled to pay $107 thousand of principal on the first days of March, June, and September, with the
remaining unpaid principal payable on November 30, 2013. The third amendment to the loan agreement allows for
an additional term loan of $2.5 million less $0.6 million, the amount outstanding on this loan, in 2013 subject to
attaining certain performance levels. The weighted average interest rates based on this loan at January 31, 2013 and
2012, were 4.24% and 3.34%, respectively.

On December 10, 2012, the Company obtained a loan in the amount of 1,360,000 Euros (approximately
$1.8 million U.S. dollars at the prevailing exchange rate on transaction date) from a Danish bank by its filtration
products manufacturing facility in Denmark. Interest rate at January 31, 2013 was 3.69%. The loan has a variable
interest rate plus margin, quarterly payments of approximately $108 thousand for both principal and interest and
matures December 2017.

Between November 25, 2012 and year end the Company obtained a loan in the amount of 423 thousand Dirhams,
approximately $115 thousand U.S. dollars at the exchange rate prevailing on the transaction date. The loan bears
interest at 3.39% with monthly payments of $5 thousand for both principal and interest and matures between
January and March of 2015.

On May 14, 2010, Perma-Pipe, Inc. borrowed $1 million under an equipment loan secured by equipment. The loan
bears interest at 5.84% 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 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, 2013, the balance was $1.8 million.

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
$800 thousand 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 2014.

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 6.7% 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
(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 6.37% 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 3.8% to 5.8% 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% 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
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

2012
$3,325
42
92
3,459
546
$2,913

$569

2011
$1,956
63
208
2,227
241
$1,986

$917
$845

The Company has several significant operating lease agreements as follows:
• Nine acres of land in the Kingdom of Saudi Arabia is leased through 2030 and an additional ten acres of land is

leased through 2031.

• Land for production facilities in the U.A.E of approximately 80,200 square feet is leased until June 30, 2030.

Office space and land for production facilities of approximately 37,700 square feet in the U.A.E. is leased until
July 2032.

• Office space of approximately 12,000 square feet in Virginia is leased through July 31, 2013.

At January 31, 2013, 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

Operating
Leases

Capital
Leases

$1,779
1,428
1,286
1,247
1,197
2,712
9,649

$9,649

$756
703
686
659
140
—
2,944
360
$2,584

Rental expense for operating leases was $2.1 million and $2.5 million in 2012 and 2011, respectively.

Note 7 - Income taxes

(Loss) income 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

2012
($5,273)
(2,422)
($7,695)

2011
$4,517
(9,459)
($4,942)

($1,255)
229
(33)
(1,059)

11,816
413
(380)
11,849
$10,790

$183
627
253
1,063

(880)
(273)
107
(1,046)
$17

The excess tax benefit (expense) related to stock options recorded through equity and did not affect net loss was $11
thousand benefit and $6 thousand expense in 2012 and 2011, respectively. The amounts were recorded to additional
paid-in capital on the consolidated balance sheets and in financing activities in 2012 and operating activities in 2011
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 ETR in 2012 was less than the statutory U.S. federal income tax rate, mainly due to the full valuation
allowance of $12.5 million recorded on the domestic deferred tax assets. The 2012 and 2011 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 in 2011 was less than the statutory U.S. federal income tax rate, primarily
due to foreign losses and repatriation of foreign earnings. Another contributing factor for both years 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. This facility began production in 2012.

The difference between the provision for income taxes and the amount computed by applying the Federal ETR of
34% was as follows:

Tax benefit at federal statutory rate
Domestic valuation allowance
Valuation allowance for state NOLs
Differences in foreign tax rate
Foreign tax credit
Research tax credit
Repatriation
Valuation allowance for foreign NOLs
Nontaxable income from the Canadian joint venture
State taxes, net of federal benefit
All other, net expense
Total

2012
($2,616)
11,464
1,066
842
(67)
(91)
—
613
(471)
(216)
266
$10,790

2011
($1,690)
—
52
1,429
(1,300)
(951)
1,810
559
(530)
308
330
$17

The Company has a Federal operating loss carryforward of $12.4 million that will begin to expire in the year
ending January 31, 2030.

The deferred tax asset, ("DTA") for state NOL carryforwards of $1.1 million relates to amounts that expire at
various times from 2013 to 2031. The amount that expired in 2012 is approximately $14 thousand.

The Company has a DTA for foreign NOL carryforwards of $1 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. The Company has a DTA
foreign NOL carryforwards of $1.2 million for its start-up subsidiary in Saudi Arabia which has a full valuation
allowance recorded against it.

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

For the year ending January 31, 2013, the Company has determined that there is not greater than 50% likelihood
that all of the domestic DTAs will be realized based on the available evidence. The Company recorded a full
valuation allowance against the remaining domestic net DTAs as of January 31, 2013 net of uncertain tax positions
("UTP").

In the prior year and the first three quarters of the current period, the Company relied heavily on Subpart F income
as a future source of taxable income to support their conclusion that the domestic deferred tax assets were more-
likely-than-not realizable. During the fourth quarter, legislation was passed which extended the provisions of IRC
954(c)(6). Because of this, the Company will not have Subpart F income related to royalty payments and can no
longer rely on Subpart F income as a future source of taxable income during the periods that IRC 954(c)(6) is in
effect. Accordingly, the Company has recorded a full valuation allowance against the net domestic DTA discretely
during the fourth quarter.

The Company has not provided for 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 was established in 2011 for U.S. foreign

tax credits attributed to repatriated foreign earnings. The excess foreign tax credits are subject to a ten-year
carryforward and will expire in January 31, 2022.

As of January 31, 2013, 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
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, 2013 were $17 million.

Components of deferred income tax assets
U.S. Federal NOL carryforward
Non-qualified deferred compensation
Research tax credit
Foreign NOL carryforward
Foreign tax credit
Stock compensation
Other accruals not yet deducted
State NOL carryforward
Accrued commissions and incentives
Accrued pension
Inventory valuation allowance
Other
Inventory uniform capitalization
Deferred tax assets, gross
Valuation allowance
Total deferred tax assets, net of valuation allowances

Components of the deferred income tax liability
Depreciation
Prepaid
Total deferred tax liabilities

Deferred tax asset, net

Balance sheet classification
Current assets
Long-term assets
Current liabilities
Total deferred tax assets, net of valuation allowances

2012
$3,680
2,092
1,964
2,241
1,297
1,417
1,077
1,066
837
428
306
94
132
16,631
(14,180)
$2,451

2011
$3,728
1,968
1,858
2,726
1,300
1,243
1,233
921
691
578
300
225
128
16,899
(1,934)
$14,965

$1,041
340
$1,381

$1,733
319
$2,052

$1,070

$12,913

$0
1,766
$696
$1,070

$1,946
10,967
$0
$12,913

The following table summarizes UTP 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

2012
$1,213
30
200
(70)
$1,373

2011
$1,202
(52)
89
(26)
$1,213

Included in the total UTP liability at January 31, 2013 were estimated accrued interest of $81 thousand and
penalties of $66 thousand and at January 31, 2012, accrued interest and penalties were $82 thousand each. 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, 2013, 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, 2013 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, $1.4 million of the amount accrued at
January 31, 2013 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, 2010 are open for federal and state tax
purposes. In addition, federal and state tax years January 31, 2002 through January 31, 2009 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 8 - 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, 2013

Market
Value
$5,554
279
106
126
$6,065

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:

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

2012
$3,343
2,183

279
126
5,931

2011
$3,018
1,968

268
110
5,364

134
$6,065

138
$5,502

At January 31, 2013, plan assets were held 55% in mutual funds, 41% in bond funds, 2% in real estate securities
and 2% 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 2012 resulted in $574 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.

Reconciliation of benefit obligations, plan assets and funded status of plan
Accumulated benefit obligations
Vested benefits
Accumulated benefits

2012

2011

$6,650
$7,240

$6,576
$7,186

Change in benefit obligation
Benefit obligation - beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Benefit obligation - end of year

Change in plan assets
Fair value of plan assets - beginning of year
Actual gain on plan assets
Company contributions
Benefits paid
Fair value of plan assets - end of year

Unfunded status

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 loss
Unamortized prior service cost
Net amount recognized

$7,186
171
299
(113)
(303)
$7,240

$5,502
574
292
(303)
$6,065

$5,570
126
313
1,380
(203)
$7,186

$5,089
342
274
(203)
$5,502

$(1,175)

$(1,684)

$328
1,304
(2,807)
$(1,175)

$305
1,261
(3,250)
$(1,684)

$2,206
273
$2,479

$2,623
322
$2,945

The amount of unamortized prior service cost and net loss to be amortized in the year ended January 31, 2014 is
$50 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

2012
4.00%
4.25%
8.00%
N/A

2011
4.25%
5.78%
8.00%
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.

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 gain (loss) on obligation
Actual gain (loss) on plan assets
Reclassify prior service cost
Total in other comprehensive income (loss)

Cash flows
Expected employer contributions for 2013 [fiscal year ending 1/31/2014]
Expected employee contributions for 2013 [fiscal year ending 1/31/2014]
Estimated future benefit payments reflecting expected future service for the fiscal year(s)
ending January 31,:
2014
2015
2016
2017
2018
2019 - 2023

401(k) plan

2012
$171
299
(444)
50
173
$249

$113
303
50
$466

2011
$126
313
(405)
127
62
$223

$(1,380)
(1)
127
$(1,254)

$300
—

328
337
351
356
380
$1,989

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 $560 thousand and $558 thousand for the years ended January 31, 2013 and
2012, respectively.

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. Participants receive distributions from the plan at the later of age 65 or six months after termination of
employment. Distributions can be lump sum or annual payments over a specified number of years based on
elections made when the participant enters the plan.

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 plans by one employer may be used to provide benefits to

employees of other participating employers.

•

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 are 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 plans resulting in expense of approximately
$1.9 million and $2.6 million for the years ended January 31, 2013 and 2012, respectively.

Note 9 - Stock options

Under the 2004 Stock Option Plan ("Option Plan"), 250,000 shares of common stock are reserved for issuance to
employees of the Company and its affiliates as well as 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 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
1,000shares 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 website;

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

2012
.74%-3.57%

2011
1.54%-5.13%
53.90%-66.82% 51.72%-66.82%
4.9 to 5.7
—

4.9 to 5.7
—

The following summarizes the activity related to options outstanding under the plans for the years ended January
31, 2012 and 2013:

Outstanding at January 31, 2011

Granted
Exercised
Expired or forfeited
Outstanding at January 31, 2012

Options exercisable at January 31, 2012

Granted
Exercised
Expired or forfeited
Outstanding at January 31, 2013

Options exercisable at January 31, 2013

Weighted
average exercise
price
$11.88

Weighted average
remaining
contractual term
6.9

Options
777

Aggregate
intrinsic value
$2,241

155
(61)
(28)
843

470

173
(11)
(36)
969

586

7.68
3.42
19.29
11.48

$14.37

6.78
3.10
10.47
10.77

$13.30

240

430

217

$37

6.9

5.7

6.6

5.3

The weighted average fair value of options granted, net of options surrendered, during 2012 and 2011 are estimated
at $3.31 and $3.84, per share, respectively, on the date of grant.

Unvested options outstanding
Outstanding at beginning of year
Granted
Vested
Expired or forfeited
Outstanding at end of year

Options
373
173
(152)
(11)
383

Weighted-average
grant date fair value
$7.84
6.78

Aggregate
intrinsic value
$212

7.06
$6.91

Based on historical experience the Company expects 85% of these options to vest.

As of January 31, 2013, there was $1 million of unrecognized compensation cost related to unvested stock options
granted under the plans. That cost is expected to be recognized over the weighted-average period of 2.5 years. The
stock-based compensation expense for the years ended January 31, 2013 and 2012 was $0.5 million and
$0.6 million, respectively.

Note 10 - 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, 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 11 - Interest expense, net

Interest expense
Interest income
Interest expense, net

Note 12 - Fair value of financial instruments

2012
$2,327
(511)
$1,816

2011
$2,165
(728)
$1,437

At January 31, 2013, interest rate swap agreements were in effect with a notional value of $9 million that matures
November 30, 2013 and a value of $1.3 million that matures December 2021. The swap agreements, 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 and 2.47%, respectively. The exchange-traded swaps are valued on a recurring basis
using quoted market prices and classified within Level 2 of the fair value hierarchy because the exchange is not
deemed to be an active market. The derivative mark to market of $219 thousand was classified as a long-term
liability on the balance sheet.

Note 13 - Subsequent events

Sale of assets. Subsequent to the year-end, on April 26, 2013, the Company announced the signing of a definitive
agreement to sell most of the domestic assets of its subsidiary Thermal Care, Inc. to a subsidiary of IPEG, Inc. The
transaction closed April 30, 2013. 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.

Upon closing the Company transferred the applicable assets, liabilities and employees of the business to a
subsidiary of IPEG, Inc. The acquiring company has signed a leased for the current office space and production
facilities Thermal Care currently occupies. The Company estimates that the taxable gain will be approximately

$11.6 million and based on that estimate approximately $3 million of the valuation allowance recorded on the
domestic DTAs will be reversed and taken into income in the first quarter of 2013.

Disposition of Thermal Care, Inc. will enable MFRI, Inc. to focus on its two principal segments: piping systems and
filtration products. The Company included Thermal Care, Inc. in its consolidated results of the industrial
processing cooling segment in continuing operations as of January 31, 2013 since the decision to sell the assets
occurred after that time. In future periods industrial process cooling will be reported as a discontinued operation.

Bank amendments. The third amendment to the loan agreement executed March 15, 2013 extended the maturity
date of the loan from November 30, 2013 to November 30, 2016. The fixed charge coverage ratio covenant
beginning February 1, 2013 will be calculated on a domestic consolidated basis instead of a world-wide
consolidated basis. The fourth amendment to the loan agreement executed April 25,2013 changed the excess
availability required for the periods ended February and March 31, 2013 and approved the sale of Thermal Care
assets.

Schedule II

MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 2013 and 2012

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, 2013
Allowance for possible losses in
collection of trade receivables

Year Ended January 31, 2012
Allowance for possible losses in
collection of trade receivables

$235

$181

$81

$17

$352

$346

$63

$20

$(154)

$235

(1) Uncollectible accounts charged off
(2) Primarily related to recoveries from accounts previously charged off and currency translation

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 2, 2013 /s/ Bradley E. Mautner

Bradley E. Mautner
Director 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.

BRADLEY E. MAUTNER*

Director and Chief Executive Officer (Principal
Executive Officer)

KARL J. SCHMIDT*

Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)

DAVID UNGER*

Director and Chairman of the Board of Directors

DENNIS KESSLER*

Director

ARNOLD F. BROOKSTONE*

Director

EUGENE MILLER*

Director

STEPHEN B. SCHWARTZ*

Director

MICHAEL J. GADE*

MARK A. ZORKO*

DAVID S. BARRIE*

Director

*By:

/s/ Bradley E. Mautner
Bradley E. Mautner

Individually and as Attorney in Fact

May 2, 2013

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EXHIBIT INDEX

Exhibit No.
3(i)

3(ii)

0.004

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

10(f)

10(g)

10(i)

10(j)

Annual Report on Form 10-K for the fiscal year ended January 31, 2004]
Second 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]
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]

10(k) Deferred Stock Purchase Plan [Incorporated by reference to Exhibit 4.1 to the Company's

Registration Statement on Forms S-8 File No. 333-186055, effective January 16, 2013]
Fourth Amendment to Second Amended and Restated Loan and Security Agreement dated
April 25, 2013
Subsidiaries of MFRI, Inc.
Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP
Power of Attorney executed by directors and officers of the Company
Rule 13a - 14(a)/15d - 14(a) Certifications

10(l)*

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

Officers & Directors

David Unger
Chairman of the Board
MFRI, Inc.

Bradley E. Mautner
Director, President and
Chief Executive Officer
MFRI, Inc.

Karl J. Schmidt
Vice President and
Chief Financial Officer
MFRI, Inc.

Michael D. Bennett
Vice President 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

Dennis Kessler
Lead Independent Director
President, Kessler Management
Consulting and Former
Co-President of Fel-Pro Inc.

Eugene Miller
Independent Director
Executive-in-Residence and
Adjunct Professor
Florida Atlantic University

David S. Barrie
Independent Director
Principal of Barrie International, LLC

Stephen B. Schwartz
Independent Director
Retired Senior Vice President
IBM Corporation

Arnold F. Brookstone
Independent Director
Retired Chief Financial &
Planning Officer
Smurfit-Stone Corporation

Mark A. Zorko
Independent Director
Former Chief Financial Officer
Steel Excel, Inc.

Piping Systems

Filtration Products

Other

Stephen C. Buck
President
Midwesco Filter Resources, Inc.

Kim Lauridsen
Managing Director
BOE-THERM A/S

André Radley Grundahl
Group Vice President of
Sales and Business Development
Midwesco Filter Resources, Inc.

Dhananjay Maslekar
Group Vice President of Operations
Midwesco Filter Resources, Inc.

Edward A. Crylen
President
Midwesco Mechanical and Energy, 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

Transfer/Rights Agent

Continental Stock Transfer
& Trust Company
17 Battery Place
New York, NY 10004

Independent Registered
Public Accountants

Annual Meeting

Grant Thornton LLP
175 West Jackson Blvd.
Chicago, IL 60604-2615

The Annual Meeting of Stockholders of MFRI, Inc.
will be held at
10:00 a.m., Thursday, June 20, 2013 at:

Hilton Rosemont Chicago O’Hare
5550 North River Road
Rosemont, Illinois 60018

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Corporate Headquarters
MFRI, Inc.
7720 North Lehigh Avenue
Niles, Illinois 60714

Phone: 847-966-1000
847-966-8563
Fax:
www.mfri.com
Web:

Offices & Manufacturing Facilities

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

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

Midwesco Filter Resources, Inc.

TDC Filter Manufacturing, Inc.

Nordic Air Filtration A/S

385 Battaile Drive
Winchester, Virginia 22601

Phone: 540-667-8500
www.midwescofilter.com

2 Territorial Court
Bolingbrook, Illinois 60440

Phone: 630-410-6200
www.tdcfilter.com

Bergenvej 1
DK-4900 Nakskov, Denmark

Phone: 45-5495-1390
www.nordic-air-filtration.dk

Midwesco Mechanical and Energy, Inc.

7720 N. Lehigh Avenue
Niles, Illinois 60714

Phone: 847-929-1700