2013 Annual Report
MFRI is a multi-line company with interests
in specialty piping systems (Perma-Pipe)
and custom-designed industrial filtration
elements (Midwesco Filter).
Perma-Pipe is one of the largest U.S.
Midwesco Filter Resources designs
manufacturers of specialty piping
and manufactures value-added
systems for district heating and
industrial air filtration solutions for
cooling, secondary containment and
dust collectors, baghouses and air
oil and gas gathering flowlines.
inlet houses on a worldwide basis.
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
These systems are box-like
structures containing filter elements
which remove particulates from
exhaust gases or circulating air.
Major markets served include power
generation, metals, minerals and
general industry.
gathering flowlines are used to
There are more than 10,000 styles of
transport crude oil from the well
filter elements designed to fit
head, either on land or on the ocean
almost any baghouse, cartridge type
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.
industrial filtration system or gas
turbine air inlet system. Midwesco
Filter makes filter elements for both
original equipment manufacturers
and aftermarket users.
Dear Fellow Shareholders:
Fiscal 2013 was an extraordinarily successful year for our Company. Net sales from continuing
operations rose 34%, and net income from continuing operations was $13 million compared to a
$21 million loss in fiscal 2012. Net income including discontinued operations was $21 million
and reflected the benefits of the various portfolio composition changes we made during the year,
most notably the sale of substantially all of the assets of Thermal Care, Inc. We divested that
business in April at an attractive price to focus our resources on developing the two continuing
segments of our business – Piping Systems and Filtration Products.
Piping Systems
In the mid-2000’s we began our Middle East expansion by establishing operations in the United
Arab Emirates to serve the rapidly growing marketplace for district cooling systems in Dubai and
the rest of the region. We enjoyed significant success and have become a major supplier of these
products to many mega-projects in the Gulf Cooperation Council countries (Qatar, Kuwait,
Oman, the UAE, Bahrain, and Saudi Arabia). Although demand later softened in the UAE, we
saw that ambitious growth opportunities were developing in other regional Middle East markets,
and in 2011 we set the goal of becoming a significant participant in Saudi Arabia’s rapidly
emerging infrastructure and industrial development. In fiscal 2013, we reaped the initial benefits
of that strategy. Our major Piping Systems projects in both Saudi Arabia and the UAE – which
include expanding the Grand Mosque in Mecca and the King Abdul-Aziz International Airport in
Jeddah along with a major sulfur line in Abu Dhabi – were key drivers of our strong top- and
bottom-line results, helping to make 2013 a stand-out year. These results illustrate our ability to
capitalize on the investments we made in the Middle East to serve the region’s rapid growth. In
addition, some significant domestic oil and gas projects serving the offshore market in the Gulf
of Mexico contributed to Piping Systems’ outstanding performance.
In fiscal 2014, we expect our current large Middle East Piping Systems projects to continue to
make important contributions to our performance, although not at as great a level as in 2013,
when customer timing led to unusually high shipments from a compressed delivery schedule.
Although the projects’ execution was reflected in a lower backlog at year-end 2013 compared to
year-end 2012, we are encouraged by the many new bidding opportunities we are seeing in the
Middle East, as well as in other parts of the world. We are currently pursuing several significant
prospects. The ultimate timing of such opportunities is difficult to predict and they do take
considerable time to develop. However, they are diverse in nature and geography, which is good
for the business and highlights the many capabilities of Perma-Pipe.
Filtration Products
Despite continuing difficult conditions in the domestic fabric filter market, we succeeded in
improving the operations and productivity of our Filtration Products business in 2013. The many
expense controls we implemented enabled us to maintain this segment’s gross margin for the
year– a critical step in its turnaround. Even with certain one-time expenses in the fourth quarter,
the segment reduced its operating loss by 45% for 2013 on 13.6% lower sales. We are moving in
the right direction, with plenty of work ahead in the coming quarters to return to a satisfactory
level of performance.
We expect our Filtration Products business to continue its improvement in operations and
productivity in 2014 and are positioning ourselves to capitalize on demand outside the U.S. by
establishing operations in the Middle East and increasing our sales presence in Asia. The factory
in the UAE should be in production later this summer and allow us to more effectively serve the
growing gas turbine power generation market and eventually the dust collection market as well.
Board Composition
In April 2014, we welcomed Jerome Walker to our board of directors and announced that Arnold
Brookstone and Stephen Schwartz will not stand for re-election at our annual meeting in June.
Jerry is executive vice president of global solutions at Dresser-Rand Group Inc., a NYSE-listed
company and one of the largest suppliers of custom-engineered rotating equipment solutions to
the worldwide oil, gas, petrochemical, and process industries. His work in larger public
companies, coupled with his broad experience in energy markets and in various international
locations, makes him an outstanding addition as we strive to expand MFRI’s capabilities and
footprint.
Arnie and Steve have served on MFRI’s board since 1990 and 1995, respectively. We are truly
grateful for the experience, judgment and wise counsel they consistently shared with us over the
years. They were instrumental in helping us navigate the growth, changes and challenges that
occur over time, and we wish both of them all the best.
Going forward, our strengthened balance sheet and improved liquidity provide an excellent
foundation for the many initiatives we are pursuing. We will continue to make strategic
investments intended to facilitate growth in the longer term, and, although there will be some
transitional periods, we firmly believe this is a winning strategy for our company. We appreciate
the confidence of our customers, the support of our shareholders, and the vital contributions of
our employees.
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, 2014
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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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.
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule
12b-2 of the Exchange Act. (Check one): Large accelerated filer
reporting company
Non-accelerated filer
Accelerated filer
Smaller
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (the exclusion of
the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant) was $67,524,506 based on the closing sale price of $10.84 per share as reported on the NASDAQ
Global Market on July 31, 2013.
The number of shares of the registrant's common stock outstanding at April 7, 2014 was 7,173,037.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2014 Annual Meeting of Stockholders are incorporated by reference in Part III.
MFRI, Inc.
FORM 10-K
For the fiscal period ended January 31, 2014
TABLE OF CONTENTS
Item
Part I
1.
1A.
1B.
2.
3.
4.
Part II
5.
6.
7.
7A.
8.
9.
9A.
9B.
Part III
10.
11.
12.
13.
14.
Part IV
15.
Business
Piping Systems
Filtration Products
Employees
International
Executive Officers of the Registrant
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Report of Independent Registered Public Accounting Firm
Signatures
Page
1
1
3
4
4
5
5
8
8
8
9
9
10
10
17
17
17
17
18
18
18
18
18
18
19
20
52
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 two reportable segments: Piping Systems and Filtration Products. The Company's fiscal
year ends on January 31. Years and balances described as 2013 and 2012 are the fiscal years ended
January 31, 2014 and 2013, respectively. In the year ended January 31, 2014, one customer accounted for 10.6% of
the Company's net sales.
MFRI, Inc.'s Operating Units
Piping Systems
Filtration Products
Perma-Pipe, Inc.
Niles, IL
New Iberia, LA
Lebanon, TN
Perma-Pipe Middle East FZC
Midwesco Filter Resources, Inc.
Winchester, VA
TDC Filter Manufacturing, Inc.
Bolingbrook, IL
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.
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,
1
(iii) subsea oil and gas gathering flow and (iv) above ground long lines for oil and mineral transportation. The leak
detection and location systems are sold with some of its piping systems and also 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 engineers and custom fabricates to job site dimensions and incorporates 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.
The Piping Systems segment is based on large discrete projects, and 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.
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®, Electro-Gard® and Sulphur-Therm™. 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®.
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 and 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
2
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, Filtration Products 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
under the name Nordic Filtration throughout Europe, Asia and the Middle East, primarily to original equipment
manufacturers.
Intellectual property. The Company owns the following trademarks covering 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.
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
3
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. End
users' success in securing delay in implementing required regulation reduces demand for fabric products.
Employees
As of February 28, 2014, the Company had 1,013 full-time employees, of whom 55% worked outside the U.S.
International
The Company's international operations as of January 31, 2014 include subsidiaries and a joint venture in five
foreign countries on three continents. The Company's international operations contributed approximately 49.6% of
revenue in 2013 and 24.1% of revenue in 2012.
Refer to the Business descriptions on pages 1 through 4 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.
4
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive officers of the Company as of April 1, 2014:
Name
Bradley E. Mautner Director, President and Chief Executive Officer; Age 58
Offices and positions, if any, held with the Company; age
Karl J. Schmidt
Vice President and Chief Financial Officer; Age 60
Wayne Bosch
Vice President, Chief Human Resources Officer; Age 57
Fati A. Elgendy
President and Chief Operating Officer, Perma-Pipe; Age 65
Stephen C. Buck
President, Midwesco Filter; Age 65
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
2013
1990
2007
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 in 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.
Wayne Bosch, Appointed Vice President and Chief Human Resources Officer December 2013. From 2010 to
2012, Mr. Bosch was Vice President of Human Resources at Pactiv, a $4 billion global manufacturer and distributor
of food packaging products. Prior to Pactiv, he lead the human resource activities at the North American segment of
Barilla America, a $6.3 billion global pasta, sauces and bakery manufacturer and was the Chief Human Resources
Officer for water filtration leader Culligan International.
Fati A. Elgendy, President and Chief Operating Officer of Perma-Pipe since March 1995.
Stephen C. Buck, President of Midwesco Filter since May 2013. President of Thermal Care, a subsidiary of the
Company whose assets were sold in April 2013, from October 2007 to April 2013.
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. If the economy experienced a severe and prolonged downturn it could adversely impact 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. 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
5
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.
Project Cycles. As the Piping Systems segment is based on large discrete projects, operating results could be
negatively impacted in the future as a result of large swings in variations in levels of production.
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 continuing decrease in federal and state spending on projects using the Company's
products has significantly decelerated government funded construction activity in the U.S., negatively impacting
sales volume at the Company's domestic facilities.
Risks related to international business. International sales represent a significant and increasing portion of the
Company's total sales. During 2013, the Company's international sales increased from 24.1% to 49.6% and
includes sales to one customer for 10.6%. The Company anticipates growth and profitability may involve
maintaining current international sales and 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 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 facilities, 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.
6
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. In periods of declining demand, the Company's fixed cost
structure may limit ability to cut costs, which may be a competitive disadvantage compared to firms with lower cost
structures, or may result in reduced operating margins and operating losses.
Suppliers. 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.
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.
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.
Percentage-of-completion revenue recognition. All divisions recognize revenues under the 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 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.
7
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, as amended ("Exchange Act"). 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 Principal properties at January 31, 2014:
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
30,000 square feet on approximately 8 acres
131,800 square feet on approximately 23.5 acres
87,160 square feet on approximately 128 acres
33,700 square feet on approximately 4.5 acres
91,000 square feet on approximately 21 acres
Leased office space and production facilities on
leased land
156,800 square feet on approximately 24 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
6,000 square feet
Leased office space
69,800 square feet on 3.5 acres
Owned production facilities and office space
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 United Arab Emirates, ("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 6,000 square feet in Virginia is leased through August 31, 2015.
For further information, see Note 7 - Lease information, in the Notes to Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS - The Company had no material pending litigation.
8
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 2013 and 2012 are the fiscal years
ended January 31, 2014 and 2013, 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 2013 and 2012.
Fiscal 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$7.55
11.39
12.08
16.45
8.14
7.38
7.00
6.14
$6.02
6.99
9.87
11.19
7.00
6.75
5.34
4.82
As of March 17, 2014, there were 65 stockholders of record and other additional stockholders 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 "Financing" in Item 7 and
Note 6 - 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.
9
Equity Compensation Plan Information
The following table provides information regarding the number of shares of Common Stock that may 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, 2014.
Number of shares to be
issued upon exercise of
outstanding options,
warrants and rights
(a)(1)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)(1)
Number of shares
remaining available for
future issuance under
equity compensation
plans (excluding shares
reflected in column (a))
(c)
775,775
$11.69
805,821
Plan Category
Equity compensation plans approved
by stockholders
(1) The amounts shown in columns (a) and (b) of the above table do not include 28,891 outstanding deferred stock
units granted under the Company's Deferred Stock Purchase Plan and the 2013 Omnibus Stock Incentive Plan as
amended June 14, 2013 ("Omnibus Plan").
On June 20, 2013, the stockholders approved the Omnibus Plan and on July 30, 2013, the Company filed a Form S-8
registration statement to register 750,000 shares under the Omnibus Plan. In conjunction with the approval of the
Omnibus Plan, no further awards may be granted under the Company's 2009 Non-Employee Directors Stock Option
Plan. No award will be granted under the Omnibus Plan after June 13, 2023.
ITEM 6. SELECTED FINANCIAL DATA - Not applicable.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained under the caption MD&A and other information contained elsewhere in this Annual
Report on Form 10-K, which can be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes,"
"plans," "likely" and "probable" or the negative thereof or other variations thereon or comparable terminology,
constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act and are subject to the safe harbors created thereby. These
statements should be considered as subject to the many risks and uncertainties that exist in the Company's
operations and business environment. Such risks and uncertainties could cause actual results to differ materially
from those projected as a result of many factors, including, but not limited to, those under the heading Item 1A.
Risk Factors.
10
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Backlog ($ in thousands):
Piping Systems *
Filtration Products **
Total
* approximately 100% is expected to be completed in 2014
**approximately 78% is expected to be completed in 2014.
January 31,
2014
$60,555
22,938
$83,493
2013
$89,508
25,834
$115,342
MFRI, Inc. is engaged in the manufacture and sale of products in two reportable segments: Piping Systems and
Filtration Products. As the Piping Systems segment is based on large discrete projects, revenues can be subject to
large swings in both geographies and reporting periods.
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 and the
risk factors contained herein. An overview of the segment results is provided in Note 1 - Business and segment
information, in the Notes to Consolidated Financial Statements.
On April 30, 2013, the Company sold most of the domestic assets of its subsidiary Thermal Care, Inc. to a
subsidiary of IPEG, Inc. for $16.3 million cash, of which $1.1 million is held in escrow until May 1, 2014. The
acquiring company has signed a three-year lease for the office space and production facilities occupied by Thermal
Care. These operations were previously reported as Industrial Process Cooling. On June 26, 2013, the Company
sold substantially all of the assets of the HVAC business previously included in Corporate and Other. In October
2013, the Company decided to sell its remaining industrial process business in Denmark. This business was sold on
February 28, 2014 and was previously reported as Industrial Process Cooling. These businesses are reported as
discontinued operations in the consolidated financial statements and the notes to consolidated financial statements
have been revised to conform to the current year reporting. Income from discontinued operations net of tax was
$8.2 million and $2.3 million for the years ended January 31, 2014 and 2013, respectively.
2013 Compared to 2012
Net sales were $226.8 million in 2013, an increase of 34% from $168.8 million in 2012. Piping Systems sales
increased 77% or $68.8 million compared to the prior-year due to sales growth in Saudi Arabia and the U.A.E. for
major projects, such as expanding the Grand Mosque in Mecca and the King Abdul-Aziz International Airport in
Jeddah, and a significant domestic oil and gas project. Filtration Products sales decreased by $10.7 million due
primarily to reduced domestic demand for fabric filter bag products.
Gross profit increased 90% to $52.2 million in 2013 from $27.5 million in 2012 mainly due to the sales increase in
Piping Systems. Filtration Products' gross profit decreased 14.6% to $10.5 million in 2013 from $12.5 million in
2012 resulting from the decline in sales.
11
Operating expenses increased 7.8% to $39.1 million from $36.3 million. Improved performance led to increased
incentive compensation expense partially offset by reduced health insurance costs. In 2012, there 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.
The Company's worldwide effective income tax rates on continuing operations for 2013 and 2012 were negative
4.0% and negative 132.4%, respectively. In the fourth quarter of 2012, the Company recorded a full valuation
allowance on domestic deferred tax assets. This resulted in a $13.9 million non-cash charge. For additional
information, see the Income Tax section of the MD&A and see Note 8 - Income taxes, in the Notes to Consolidated
Financial Statements.
Net income rose to $21.0 million in 2013 compared to a net loss of $18.5 million in 2012 due to the asset sale of
Thermal Care, Inc., the previously mentioned improvement in gross profit primarily related to Piping Systems and
the full valuation allowance on domestic deferred tax assets recorded in 2012.
Piping Systems
As the Piping Systems segment is based on large discrete projects, revenues can be subject to large swings in both
geographies and reporting periods.
($ in thousands)
Net sales
Gross profit
Percentage of net sales
Income from operations
Percentage of net sales
2013
$158,422
2012 % Increase
76.7%
$89,664
43,273
27%
24,213
15.3%
17,020
19%
3,452
3.8%
154.2%
601%
Net sales of $158.4 million increased 77% from $89.7 million in the prior-year. The increase is attributed to sales
growth in Saudi Arabia and the U.A.E., for major projects, such as expanding the Grand Mosque in Mecca and the
King Abdul-Aziz International Airport in Jeddah, and a significant domestic oil and gas project. In the fiscal year
ended January 31, 2014, one customer accounted for 10.6% of the Company's net sales. In the fiscal year ended
January 31, 2013, no customer accounted for 10.0% or more of the Company's net sales.
Gross margin increased to 27% of net sales from 19% of net sales in the prior-year. Gross profit more than doubled
due to higher volumes produced at the Middle East facilities and the domestic oil and gas products.
General and administrative expenses decreased as a percentage of net sales to 8.8% in 2013 from 10.9% in the
prior-year. The dollar increase to $14.0 million in 2013 from $9.8 million in 2012 was related to incentive
compensation expense associated with improved earnings partially offset by reduced health insurance costs.
Selling expenses decreased as a percentage of net sales to 3.2% in 2013 from 4.2% in the prior-year. The dollar
increase to $5.1 million from $3.8 million was due to additional staffing in the Middle East.
Filtration Products
The timing of large orders can have a material effect on net sales and gross profit from period to period. Pricing on
large orders was extremely competitive and therefore resulted in relatively low gross margins in all periods.
Filtration Products' demand is partially impacted by government regulation of air quality at the federal and state
levels. The Company believes that growth in the sale of its filtration products and services will be materially
dependent on continued enforcement of environmental laws such as the Clean Air Act. Although there can be no
12
assurance what the ultimate effect of the Clean Air Act will be on filtration products, the Company believes the
Clean Air Act is likely to have a positive long-term effect on demand for the Company's filtration products and
services.
($ in thousands)
Net sales
Gross profit
Percentage of net sales
(Loss) income from operations
Percentage of net sales
2013
$68,413
2012 % Decrease
(13.6)%
$79,143
8,942
13.1 %
(1,629)
(2.4)%
10,474
13.3 %
(2,962)
(3.7)%
(14.6)%
(45.0)%
Net sales decreased 13.6% to $68.4 million in 2013 from $79.1 million in 2012. Sales declines were the result of
lower market demand for domestic fabric filter bag products due to significant decreases in coal fire power
generation and steel industries' demand. Gross margin decreased slightly to 13.1% of net sales in 2013 from 13.3%
of net sales in 2012. In the fourth quarter, Filtration Products recorded a $0.6 million inventory reserve for slow-
moving and obsolete materials. Gross profit decreased 14.6% to $8.9 million in 2013 from $10.5 million in the
prior-year due to lower sales volume offset by the aforementioned product mix. In response to lower demand for
fabric filter bags, the Company has reduced its workforce. Over the past year, the Company has implemented many
initiatives to resize the fabric filter business and lower manufacturing costs in all plants. The Company continues to
expand its geographic market coverage and improve its margin through expense controls to strengthen this segment.
General and administrative expense decreased to $4.6 million, or 6.8% of net sales, in 2013 from $6.5 million, or
8.2% of net sales, in 2012. The decrease was due to reduced health insurance costs and staffing reductions. This
decrease was partially offset by a one-time pension expense resulting from the freezing of the defined benefit
pension plan. In the fourth quarter of 2012, Filtration Products recorded a $1.5 million impairment on fixed assets
relating to its idle manufacturing facility located in Cicero, Illinois.
Selling expense decreased to $5.9 million in 2013 from $6.9 million in 2012 due to reduction in staff. As a
percentage of net sales, selling expense decreased to 8.7% in 2013 from 8.8% in 2012.
Corporate
Corporate expenses include interest expense and general and administrative expenses that are not allocated to the
segments. General and administrative expenses increased 2% to $9.5 million in 2013 from $9.3 million in 2012.
As a percentage of sales, it decreased to 4.2% from 5.5%. The spending increased in incentive compensation
expense in connection with improved earnings partially offset by reduced health insurance costs.
Interest expense decreased to $1.9 million in 2013 from $2.0 million in 2012 due to a reduction in borrowings
relative to the prior-year.
INCOME TAXES
The Company's worldwide effective tax rates ("ETR") were negative 4.0% and negative 132.4% in 2013 and 2012,
respectively. The ETR in 2013 was less than the statutory U.S. federal income tax rate, mainly due to the mix of the
U.A.E. earnings (loss) versus total earnings (loss) because the U.A.E. is not subject to any local country income tax.
Additionally, the ETR in 2013 is impacted by the $1.2 million release of the full valuation allowance related to the
Company's deferred tax assets in Saudi Arabia. As a result of two quarters of positive operating income as well as
management's expectations of this subsidiary's profitability for the fiscal year 2013, the Company believes the
second quarter of 2013 was the appropriate time to release the valuation allowance. The ETR in 2012 was less than
the statutory U.S. federal income tax rate, primarily due to the full valuation allowance of $13.9 million recorded on
the domestic deferred tax assets.
13
As of January 31, 2014, 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
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
2013
34.0 %
2012
34.0 %
— % (144.4)%
(10.8)%
— %
(9.1)%
(24.8)%
0.7 %
— %
0.5 %
— %
(6.8)%
(9.8)%
5.2 %
(1.5)%
2.7 %
(1.6)%
(0.3)%
(4.4)%
(4.0)% (132.4)%
For further information, see Note 8 - Income taxes, in the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of January 31, 2014 were $13.4 million, compared to $7.0 million at
January 31, 2013. At January 31, 2014, $0.2 million was held in the U.S. and $13.2 million was held in the foreign
subsidiaries. The Company's working capital was $47.6 million at January 31, 2014 compared to $35.1 million at
January 31, 2013. Piping Systems' net sales increased 77% from the prior-year, causing the Saudi Arabian
subsidiary's accounts receivable to increase $19.6 million. Cash provided by operations in 2013 was $6.4 million
compared to $5.3 million in 2012. The Company does not believe that it will be necessary to repatriate equity held
outside of the U.S.
Net cash provided by investing activities in 2013 was $12.4 million. On April 30, 2013, the Company completed an
asset sale of Thermal Care, Inc., a subsidiary, for $16.3 million cash, of which $1.1 million is held in escrow until
May 1, 2014. This subsidiary and others included in discontinued operations did not have a significant impact on
cashflow. The proceeds from the sale paid down a portion of the debt under the Loan Agreement (as defined
below). The Company estimates that capital expenditures for 2014 will be approximately $7.4 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.
Debt totaled $31.7 million at January 31, 2014, a decrease of $9.2 million since January 31, 2013. Net cash used in
financing activities was $11.7 million. For additional information, see Note 6 - Debt, in the Notes to Consolidated
Financial Statements. Other long-term liabilities of $2.2 million were composed primarily of accrued pension cost
and deferred compensation.
14
The following table summarizes the Company's estimated contractual obligations at January 31, 2014.
($ in thousands)
Contractual obligations
Revolving line domestic (1)
Mortgages (2)
Revolving line foreign (3)
Term loans (4)
Subtotal
Capitalized lease obligations
Operating lease obligations (5)
Projected pension contributions (6)
Deferred compensation (7)
Employment agreements (8)
Contractual obligations of
discontinued operations (8)
Uncertain tax position obligations (10)
Total
$6,951
15,045
5,363
6,524
33,883
2,288
9,199
3,665
6,698
101
45
189
Year Ending January 31,
2015
$—
895
5,363
2,257
8,515
705
2,211
335
189
—
45
—
2016
2017
$— $6,951
894
—
1,881
2,775
724
1,567
348
6,509
—
—
—
892
—
1,760
9,603
678
1,378
345
—
—
—
—
2018
$—
4,054
—
626
4,680
157
1,274
366
—
—
—
—
2019 Thereafter
$—
618
—
—
618
24
1,243
364
—
—
—
—
$—
7,692
—
—
7,692
—
1,526
1,907
—
101
—
189
Total
$56,068
$12,000
$11,923
$12,004
$6,477
$2,249
$11,415
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, 2014, and the weighted average interest rate of 3.86% on that
debt, such interest was being incurred at an annual rate of approximately $0.4 million.
(2) Scheduled maturities, including interest.
(3) Scheduled maturities of foreign revolver line, including interest.
(4) Term loan obligations exclude floating rate interest on term loan with a January 31, 2014 balance of
$0.2 million. Based on the amount of such debt as of January 31, 2014, and the weighted average interest rate
of 4.21% on that debt, such interest was being incurred at an annual rate of approximately $17 thousand.
(5) Minimum contractual amounts, assuming no changes in variable expenses.
(6) Includes estimated future benefit payments.
(7) Non-qualified deferred compensation plan - The Company has a Supplemental Retirement and Deferred
Compensation Plan ("Supplemental Plan"), pursuant to which key employees deferred compensation. Refer to
Note 9 - Retirement plans, in the Notes to Consolidated Financial Statements.
(8) Refer to the proxy statement for a description of compensation plans for Named Executive Officers.
(9) Included payments for other liabilities.
(10) Refer to Note 8 - Income taxes, in the Notes to Consolidated Financial Statements for a description of the
uncertain tax position obligations.
Financing
On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution (as
amended, "Loan Agreement"). Under the terms of the Loan Agreement, which matures on November 30, 2016, the
Company can borrow up to $25.0 million, subject to borrowing base and other requirements, under a revolving line
of credit. The Loan Agreement covenants restrict debt, liens, and certain investments, do not permit payment of
dividends, and require attainment of specific levels of profitability and cash flows when reaching certain levels of
availability. At January 31, 2014, 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 of 0.25 in effect plus
prime rate; and/or (b) a margin of 2.25 in effect plus the LIBOR rate for the corresponding interest period. As of
January 31, 2014, the Company had borrowed $7.0 million at prime and LIBOR rates and had $13.0 million
available to it under the revolving line of credit. In addition, $0.1 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
15
be used to pay the debt under the Loan Agreement. At January 31, 2014, the amount of such restricted cash was
$0.05 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. The credit arrangement covenant requires a minimum
tangible net worth to be maintained. At January 31, 2014, the Company was in compliance with the covenants
under the credit arrangement. Interest rates are 4.0% per annum below National Bank of Fujairah Base Rate,
minimum 3.5% per annum and Emirates Inter Bank Offered Rate (EIBOR) plus 3.50% per annum. The Company's
interest rates range from 3.5% to 6.0%. At January 31, 2014, the Company can borrow under these credit
arrangements $20.5 million. The Company borrowed $5.4 million and had $15.5 million available under these
credit arrangements.
On April 27, 2010, the Company obtained a loan with no maturity date in the amount of $2.0 million, collateralized
by the cash surrender value of insurance policies on the lives of key executive officers. The loans carried interest at
a rate of 4.25% and required interest only payments annually. At January 31, 2013, the balance was $1.8 million. In
2013, the loan was paid in full.
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.
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.
16
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.
New accounting pronouncements. See Recent accounting pronouncements in Note 2 - Significant accounting
policies, 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, 2014 and 2013 and the notes thereto are set forth as an exhibit hereto.
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 Exchange Act as of
January 31, 2014. 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, 2014 to ensure that information
required to be disclosed in the reports that are filed or submitted under the Exchange Act 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
17
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, 2014, based on criteria in the COSO Report.
OTHER INFORMATION - On April 10, 2014, the Board of Directors terminated the
Item 9B.
Supplemental Plan and the Deferred Stock Purchase Plan. Refer to Note 9 - Retirement plans, in the Notes to
Consolidated Financial Statements
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 2014 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 2014 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 2014 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 2014 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 2014 annual meeting of stockholders.
18
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.
19
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, 2014 and 2013, and the related consolidated statement of operations, comprehensive
income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended January 31, 2014.
Our audits of the basic 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 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. We were not engaged to perform an audit of the
Company’s 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, 2014 and 2013, and the results of their operations
and their cash flows for each of the two years in the period ended January 31, 2014 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
Chicago, Illinois
April 15, 2014
20
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
Income (loss) from operations
Income from joint venture
Interest expense, net
Income (loss) from continuing operations before income taxes
Income tax (benefit) expense
Income (loss) from continuing operations
Income from discontinued operations, net of tax
Net income (loss)
Weighted average common shares outstanding
Basic
Diluted
Earnings (loss) per share from continuing operations
Basic
Diluted
Earnings per share from discontinued operations
Basic
Diluted
Earnings (loss) per share
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
Note: Earnings per share calculations could be impacted by rounding.
21
Twelve months ended
January 31,
2014
2013
$226,835
174,620
52,215
$168,807
141,313
27,494
28,116
11,016
39,132
25,580
10,734
36,314
13,083
(8,820)
528
1,386
1,311
12,300
1,498
(8,932)
(493)
11,825
12,793
(20,757)
8,234
2,272
$21,027
($18,485)
7,028
7,096
$1.82
$1.80
$1.17
$1.16
$2.99
$2.96
6,922
6,922
($3.00)
($3.00)
$0.33
$0.33
($2.67)
($2.67)
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net income (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 income (loss)
See accompanying Notes to Consolidated Financial Statements.
Twelve months ended
January 31,
2014
2013
$21,027
($18,485)
(1,268)
682
151
(435)
(251)
112
(6)
(145)
$20,592
($18,630)
22
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 $194 at January 31,
2014 and $290 at January 31, 2013
Inventories, net
Assets held for sale
Prepaid expenses and other current assets
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 on life insurance policies
Other assets
Assets held for sale long-term
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
Liabilities held for sale
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
Liabilities held for sale long-term
Other long-term liabilities
Total long-term liabilities
Stockholders' equity
January 31,
2014
2013
$13,395
439
45,659
33,547
1,223
5,353
1,476
101,092
42,541
1,667
4,659
6,550
3,110
2,363
914
373
19,636
$163,269
$15,276
9,235
5,254
8,274
7,372
527
1,842
2,222
889
2,593
53,484
23,469
6,509
968
2,203
33,149
$7,034
725
23,278
37,529
10,218
3,932
1,630
84,346
45,582
1,358
5,200
6,022
2,946
2,408
1,253
373
19,560
$149,488
$18,740
2,723
4,361
5,384
7,030
7,531
1,735
985
687
34
49,210
35,579
5,670
1,485
3,289
46,023
Common stock, $.01 par value, authorized 50,000 shares; 7,169 issued and outstanding
January 31, 2014 and 6,924 issued and outstanding January 31, 2013
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
72
52,144
25,580
(1,160)
76,636
$163,269
69
50,358
4,553
(725)
54,255
$149,488
See accompanying Notes to Consolidated Financial Statements.
23
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
($ in thousands, except share data)
Total stockholders' equity at January 31, 2012
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, 2013
Net income
Stock options exercised
Stock-based compensation expense
Deferred shares issued
Interest rate swap
Pension liability adjustment
Foreign currency translation adjustment
Tax benefit on above items
Total stockholders' equity at January 31, 2014
Common
Stock
Additional
Paid-in
Capital
$69
$49,828
Retained
Earnings
$23,038
Accumulated
Other
Comprehensive
Income (Loss)
($580)
Total
Stockholders'
Equity
$72,355
(18,485)
—
35
484
11
$69
$50,358
$4,553
21,027
3
1,585
196
5
$72
$52,144
$25,580
(18,485)
35
484
11
97
466
(263)
(445)
$54,255
21,027
1,588
196
5
151
966
(1,269)
(283)
$76,636
97
466
(263)
(445)
($725)
151
966
(1,269)
(283)
($1,160)
Common stock shares
Balance beginning of year
Shares issued
Balance end of year
2013
6,924,084
244,453
7,168,537
2012
6,912,771
11,313
6,924,084
See accompanying Notes to Consolidated Financial Statements.
24
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash flows provided by operating
activities
Depreciation and amortization
Gain on disposal of discontinued operations
Impairment on fixed assets
Deferred tax (benefit) expense
Income from joint venture
Stock-based compensation expense
Cash surrender value on life insurance policies
Provision on uncollectible accounts
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
Costs and estimated earnings in excess of billings on uncompleted contracts
Notes receivable
Other assets and liabilities
Net cash provided by operating activities
Investing activities
Net proceeds from sale of discontinued operations
Capital expenditures
Loan to joint venture
Proceeds from sales of property and equipment
Net cash provided by (used in) investing activities
Financing activities
Proceeds from debt
Payments of debt on revolving lines of credit
Payments of other debt
Decrease in drafts payable
Payments on capitalized lease obligations
Stock options exercised and deferred shares issued
Tax benefit of stock options exercised
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period
Supplemental cash flow information
Interest paid
Income taxes paid
Fixed assets acquired under capital leases
Funds held in escrow related to the sale of Thermal Care, Inc. assets
See accompanying Notes to Consolidated Financial Statements.
25
Twelve months
ended January 31,
2014
2013
$21,027 ($18,485)
5,785
(11,449)
—
(3,190)
(528)
196
(164)
419
328
(4,438)
6,026
8,608
(198)
2,564
(619)
(18,592)
1,110
331
(816)
6,400
15,172
(2,761)
—
16
12,427
83,530
(85,490)
(7,643)
(3,125)
(603)
1,592
—
(11,739)
(727)
6,361
7,034
$13,395
$1,958
409
107
1,125
5,806
—
1,520
12,594
(1,386)
484
(163)
114
64
2,908
(844)
(2,080)
5,138
(384)
563
204
34
—
(740)
5,347
—
(5,360)
(989)
95
(6,254)
194,035
(185,659)
(4,025)
(8)
(591)
35
11
3,798
(66)
2,825
4,209
$7,034
$2,314
200
569
—
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED January 31, 2014 and 2013
(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 two distinct segments: Piping Systems and Filtration
Products.
Fiscal year. The Company's fiscal year ends on January 31. Years and balances described as 2013 and 2012 are the
fiscal years ended January 31, 2014 and 2013, 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.
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.
In the fiscal year ended January 31, 2014, one customer in Piping Systems accounted for 10.6% of the Company's
net sales. In the fiscal year ended January 31, 2013, no customer accounted for 10.0% or more of the Company's
net sales. At January 31, 2014, one customer in Piping Systems accounted for 24.5% of accounts receivable.
26
2013
2012
$158,422
68,413
$226,835
$89,664
79,143
$168,807
$43,273
8,942
$52,215
$24,213
(1,629)
(9,501)
$13,083
$17,020
10,474
$27,494
$3,452
(2,962)
(9,310)
$(8,820)
$109,154
41,765
12,350
$163,269
$83,944
52,958
12,586
$149,488
$2,425
294
42
$2,761
$3,489
1,729
567
$5,785
$495
1,966
(1,150)
$1,311
$4,206
995
159
$5,360
$3,344
1,750
712
$5,806
$226
2,239
(967)
$1,498
$0
$1,520
Segment information was as follows:
Net sales
Piping Systems
Filtration Products
Total net sales
Gross profit
Piping Systems
Filtration Products
Total gross profit
Income (loss) from operations
Piping Systems
Filtration Products
Corporate
Total income (loss) from operations
Segment assets
Piping Systems
Filtration Products
Corporate
Total segment assets
Capital expenditures
Piping Systems
Filtration Products
Corporate
Total capital expenditures
Depreciation and amortization
Piping Systems
Filtration Products
Corporate
Total depreciation and amortization
Interest expense, net
Piping Systems
Filtration Products
Corporate
Total interest expense, net
Impairment of fixed assets
Filtration Products
27
Geographic information. Net sales are attributed to a geographic area based on the destination of the product
shipment. Sales to foreign customers was 57% in 2013 compared to 30% in 2012. 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
2013
2012
$97,311
94,500
14,933
7,591
773
6,915
4,812
$226,835
$25,260
12,751
4,020
510
$42,541
$104,830
24,631
16,324
9,771
6,317
2,317
4,617
$168,807
$26,952
13,204
4,445
981
$45,582
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.
Revenue recognition. The Company recognizes revenues including shipping and handling charges billed to
customers, when all the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the seller's
price to the buyer is fixed or determinable, and (iii) collectability is reasonably assured. All subsidiaries of the
Company, except as noted below, recognize revenues upon shipment or delivery of goods or services when title and
risk of loss pass to customers.
Percentage of completion revenue recognition. All divisions recognize revenues under the above stated revenue
recognition policy except for sizable complex contracts that require periodic recognition of income. For these
contracts, the Company uses the "percentage of completion" accounting method. Under this approach, income is
recognized in each reporting period based on the status of the uncompleted contracts and the current estimates of
costs to complete. The choice of accounting method is made at the time the contract is received based on the
expected length and complexity of the project. The percentage of completion is determined by the relationship of
costs incurred to the total estimated costs of the contract. Provisions are made for estimated losses on uncompleted
contracts in the period in which such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty provisions and final contract settlements, may
result in revisions to costs and income. Such revisions are recognized in the period in which they are determined.
Claims for additional compensation due the Company are recognized in contract revenues when realization is
probable and the amount can be reliably estimated.
Shipping and handling. Shipping and handling costs are included in cost of sales, and the amounts invoiced to
customers relating to shipping and handling are included in net sales.
28
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.
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 (loss).
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 $13.4 million and $7.0 million as of
January 31, 2014 and 2013, 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 $0.2 million and
$3.3 million as of January 31, 2014 and 2013, 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, 2014, the amount of
such restricted cash was $0.05 million and $0.4 million of restricted cash was held by a foreign subsidiary. 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. and Saudi Arabia, letters of credit are obtained for substantially all material 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 year ended January 31, 2014, one customer in Piping Systems
29
accounted for 10.6% of the Company's net sales. In the fiscal year ended January 31, 2013, no customer accounted
for 10.0% or more of the Company's net sales. At January 31, 2014, one customer in Piping Systems accounted for
24.5% of accounts receivable.
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
2013
($90)
(1,513)
(68)
(1,671)
12
482
17
($1,160)
2012
$1,179
(2,479)
(219)
(1,519)
12
765
17
($725)
Pension plan. The defined benefit plan that covered Winchester filtration hourly rated employees was frozen on
June 30, 2013. 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. 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. In the fourth quarter, Filtration Products recorded an additional $0.6 million inventory
reserve for slow moving and obsolete materials.
Raw materials
Work in process
Finished goods
Subtotal
Less allowances
Inventories, net
2013
$27,330
2,855
4,311
34,496
949
$33,547
2012
$31,820
2,333
4,051
38,204
675
$37,529
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 2013 and in 2012.
30
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
2013
$36,535
50,793
9,723
206
97,257
54,716
$42,541
2012
$36,572
49,919
11,065
189
97,745
52,163
$45,582
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, 2014. In 2013, management performed the required impairment
analysis on the idle facility to determine if its carrying value was recoverable. Management determined that the
carrying value of the idle facility was fully recoverable. For 2012, 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 as of January 31, 2014 and 2013. Accumulated amortization was approximately $2.23 million and
$2.18 million as of January 31, 2014 and 2013, respectively. Future amortizations over the next five years ending
January 31 will be $48,900 in 2014, $45,700 in 2015, $41,900 in 2016, $38,800 in 2017, $28,800 in 2018, and
$168,400 thereafter.
Investment in joint venture. In October 2009, the Company invested $5.9 million, which consisted of $2.0 million
for a 49% interest and $3.9 million for a note receivable, in a Canadian joint venture with The Bayou Companies,
Inc., a subsidiary of 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 $1.0 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
2013
$528
2012
$1,386
31
The following information summarizes the joint venture financial data:
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Equity
Revenue
Gross profit
Income from continuing operations
Net income
2013
$13,034
17,093
2,921
14,837
12,369
29,110
4,748
2,619
1,078
2012
$14,058
19,442
2,703
18,274
12,523
30,448
7,211
3,380
2,680
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 approximately $0.7 million in 2013 and
$2.2 million in 2012.
Income taxes. Deferred income taxes have been provided for temporary differences arising from differences in the
basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary
differences have been recorded at the current tax rate. The Company assesses its deferred tax assets for realizability
at each reporting period.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant
tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more
likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. For further
information, see Note 8 - Income taxes in the Notes to Consolidated Financial Statements.
Net income (loss) per common share. Earnings per share ("EPS") are computed by dividing net income (loss) by
the weighted average number of common shares outstanding (basic). The year 2013 had net earnings. The year
2012 had net losses therefore, the diluted loss per share was 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
2013
7,028
68
7,096
2012
6,922
—
6,922
201
783
(73)
575
(36)
186
Equity-based compensation. The Company issues various types of stock-based awards to employees and directors:
restricted stock, deferred stock and stock options. Compensation expense associated with restricted and deferred
stock is based on the fair value of the common stock on the date of grant. Stock compensation expense for stock
options 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
32
of zero-coupon treasury securities with a maturity equal to the expected life of the option; (2) expected volatility -
an estimate based on the historical volatility of the Company's Common Stock; and (3) expected life of the option -
an estimate based on historical experience including the effect of employee terminations. If any of these
assumptions differ significantly from actual, stock-based compensation expense could be impacted.
Fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable and
accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying amount of
the Company's short-term debt, revolving line of credit and long-term debt approximate fair value because the
majority of the amounts outstanding accrue interest at variable rates.
The Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing
interest rates under the revolving credit agreement. Any differences paid or received on the interest rate swap
agreements are recognized as adjustments to interest expense over the life of the swap, thereby adjusting the
effective interest rate on the underlying obligation.
Reclassifications. Reclassifications were made to prior-year financial statements to conform to the current-year
presentations.
Recent accounting pronouncements. In 2013, the Financial Accounting Standards Board ("FASB") issued new
accounting guidance clarifying the accounting for the release of a cumulative translation adjustment into net income
when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial
interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The new
standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December
15, 2013. The Company does not anticipate that this adoption will have a significant impact on the financial
position, results of operations, or cash flows.
In September 2013, the Department of Treasury and Internal Revenue Service issued the final tangible property
regulations on the capitalization of costs incurred for acquisitions, maintenance and improvements. The final
regulations are effective for taxable years beginning on or after January 1, 2014. Early adoption is permissible for
taxable years beginning on or after January 1, 2012. The Company is evaluating the effects of final regulations on
its operating results and financial position.
The Company evaluated recent accounting pronouncements and does not expect them to have a material impact on
the consolidated financial statements.
Note 3 - Discontinued operations
On April 30, 2013, the Company sold most of the domestic assets of its subsidiary Thermal Care, Inc. to a
subsidiary of IPEG, Inc. for $16.3 million cash, of which $1.1 million is held in escrow until May 1, 2014 and
included in other assets on the consolidated balance sheet. On June 26, 2013, the Company sold substantially all of
the assets of the HVAC business previously included in Corporate and Other. In October 2013, the Company
decided to sell its remaining industrial process business in Denmark. This business was sold on February 28, 2014.
From October 2013 until it was sold, the business was operational and selling product. These businesses are
reported as discontinued operations in the consolidated financial statements and the notes to consolidated financial
statements have been revised to conform to the current year reporting. The January 31, 2013 Balance Sheet has
been revised to reflect the separate amounts for assets and liabilities that were sold. Income from discontinued
operations net of tax was $8.2 million and $2.3 million for the years ended January 31, 2014 and 2013, respectively.
33
Results of the discontinued operations were as follows:
Net sales
Gain on disposal of discontinued operations
(Loss) income from discontinued operations
Income from discontinued operations before income taxes
Income tax expense (benefit)
Income from discontinued operations, net of tax
2013
$14,063
2012
$43,210
$11,082
(28)
11,054
2,820
$8,234
$—
1,237
1,237
(1,035)
$2,272
Components of assets and liabilities from discontinued operations consist of the following:
Current assets
Cash and cash equivalents
Trade accounts receivable, net
Inventories, net
Other assets
Total current assets from discontinued operations
Property, plant and equipment, net of accumulated depreciation
Non-Current assets
Other assets
Total noncurrent assets from discontinued operations
Total assets from discontinued operations
Current liabilities
Trade accounts payable, accrued expenses and other
Current maturities of long-term debt
Total current liabilities from discontinued operations
Long-term liabilities
Total liabilities from discontinued operations
2013
2012
$1
595
593
34
1,223
551
363
914
$2,688
$492
35
527
968
$1,495
$1
4,564
4,804
849
10,218
819
434
1,253
$12,290
$7,496
35
7,531
1,485
$9,016
Note 4 - Retention
Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of
$5.0 million and $1.1 million were included in the balance of trade accounts receivable as of January 31, 2014 and
2013, respectively.
Retention payable is the amount withheld by the Company until a contract is completed. There was no retention
payables at January 31, 2014 and $0.4 million was included in the balance of trade accounts payable at
January 31, 2013.
34
Note 5 - 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 6 - Debt
Revolving line domestic
Mortgage notes
Revolving lines foreign
Term loans
Capitalized lease obligations (See Note 7 - Lease information)
Total debt
Less current maturities
Total long-term debt
2013
$52,064
18,915
70,979
71,725
($746)
$1,476
(2,222)
($746)
2012
$39,556
13,861
53,417
52,772
$645
$1,630
(985)
$645
2013
$6,951
11,172
5,059
6,494
2,067
31,743
8,274
$23,469
2012
$13,989
11,540
2,242
10,608
2,584
40,963
5,384
$35,579
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
$6,951
11,172
5,059
6,494
2,067
$31,743
2015
$—
380
5,059
2,241
594
$8,274
2017
2016
$— $6,951
410
395
—
—
1,757
1,874
647
648
$9,765
$2,917
2018
$—
3,590
—
622
154
$4,366
2019 Thereafter
$—
$—
6,023
374
0
—
—
0
—
24
$6,023
$398
On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution (as
amended, "Loan Agreement"). Under the terms of the Loan Agreement, which matures on November 30, 2016, the
Company can borrow up to $25.0 million, subject to borrowing base and other requirements, under a revolving line
of credit. The Company granted a continuing lien upon the Company’s assets. The Loan Agreement covenants
restrict debt, liens, and certain investments, do not permit payment of dividends, and require attainment of specific
levels of profitability and cash flows. At January 31, 2014, 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 of 0.25 in effect plus prime rate; and/or (b) a margin of 2.25 in effect plus the LIBOR rate for the
corresponding interest period. At January 31, 2014, these rates were 3.5% and 2.5%, respectively. As of
January 31, 2014, the Company had borrowed $7.0 million at prime and LIBOR rates and had $13.0 million
available to it under the revolving line of credit. In addition, $0.1 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, 2014, the amount of such restricted cash was
$0.05 million. Cash required for operations is provided by draw-downs on the line of credit.
35
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. The lines are secured by certain equipment, certain
assets, such as accounts receivable and inventory, and a guarantee by the Company. The credit arrangement
covenant requires a minimum tangible net worth to be maintained. At January 31, 2014, the Company was in
compliance with the covenant under the credit arrangement. Interest rates are 4.0% per annum below National
Bank of Fujairah Base Rate, minimum 3.5% per annum and Emirates Inter Bank Offered Rate (EIBOR) plus 3.5%
per annum. The Company's interest rates range from 3.5% to 6.0% at January 31, 2014. At January 31, 2014, the
Company can borrow under these credit arrangements $20.5 million. The Company borrowed $5.1 million and had
$15.5 million available under these credit arrangements.
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 2.0% per annum and shall be subject to
ceiling of 18.0% and a floor of 4.5%.
On March 27, 2012, the Company obtained a loan in the amount of 7.9 million Danish Kroners ("DKK")
(approximately $1.4 million U.S. dollars at the prevailing exchange rate on the 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 2.2%, monthly payments of approximately $7.5 thousand for both principal and interest and matures
March 2032.
On March 4, 2008, the Company borrowed $5.4 million under a mortgage note secured by the Filtration Products
manufacturing facility located in Bolingbrook, Illinois that matures March 2033. The 25 year mortgage resets its
interest rate every five years based on a published index. The interest rate is 4.04% with monthly payments of
$30 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 6.3% 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 $3.0 million ("Term
Loan"). This secured promissory note is one of the term loan notes referred to in, and is issued pursuant to, the
Loan Agreement and is entitled to all of the benefits and security of the Loan Agreement. 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, 2014, the prime rate
was 3.25%, the LIBOR rate was 0.25% and the margin added to the prime rate, which is determined each quarter
based on the applicable financial statement ratio, was 0.50 percentage points. The Company is scheduled to pay
$107 thousand of principal on the first days of March and June. 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, 2014 and
2013 were 4.21% and 4.24%, respectively.
On December 10, 2012, the Company obtained a loan in the amount of 1.4 million 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. The loan is secured by equipment. The interest rate at
36
January 31, 2014 was 3.7%. 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 0.4 million Dirhams
(approximately $115 thousand U.S. dollars at the exchange rate prevailing on the transaction date). The loan bears
interest at 3.4% with monthly payments of $5 thousand for both principal and interest and matures between January
and March of 2015.
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 is secured by the
equipment and office furniture purchased and bears interest at 5.5% with quarterly payments of approximately
$408 thousand for both principal and interest and matures April, 2017.
On May 14, 2010, Perma-Pipe, Inc. borrowed $1.0 million under an equipment loan secured by equipment. The
loan bears interest at 5.8% with monthly payments of $24 thousand for both principal and interest and matures May
2014.
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 0.7 million Euros (approximately
$0.8 million U.S. dollars at the exchange rate prevailing on the transaction date). The loan is secured by the
equipment and office furniture purchased and bears interest at 6.1% with quarterly payments of $9 thousand for
both principal and interest and matures April 2014.
Capital leases. On November 28, 2013, Filtration Products' Denmark location obtained a capital lease in the amount
of 0.5 million DKK (approximately $79 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 3.7% per annum
with monthly principal and interest payments of $2 thousand and matures December 2018.
On July 13, 2012, Filtration Products' Denmark location obtained a capital lease in the amount of 1.5 million DKK
(approximately $0.3 million 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 5.2% per annum with monthly principal
and interest payments of $4 thousand and matures August 2017.
On May 1, 2012, Piping Systems and Filtration Products borrowed $1.1 million under an equipment loan secured
by equipment. The loan bears interest at 6.5% with monthly payments of $21 thousand for both principal and
interest and matures June 2017.
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 2.2 million DKK
(approximately $0.4 million 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 6.4% per annum with monthly principal
and interest payments of $6 thousand and matures June 2016.
Between 2011 and 2012, the Company obtained several capital leases totaling $81 thousand to finance capital
computer equipment. The interest rate for these capital leases range from 3.8% to 4.6% per annum with monthly
principal and interest payments of $3 thousand and matures between June 2014 and May 2015.
In 2011 and 2013, Piping Systems obtained several capital leases totaling 3.1 million Indian Rupees (approximately
$57 thousand U.S. dollars at the prevailing exchange rate on the transaction date) to finance vehicle equipment.
37
The interest rate for these capital leases range from 12.8% to 17.8% per annum with monthly principal and interest
payments of $1 thousand and matures in 2014 and 2016.
On April 23, 2010, Filtration Products' Denmark location obtained a capital lease in the amount of 1.0 million DKK
(approximately $0.2 million 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 9.7% per annum with monthly principal
and interest payments of $2.5 thousand, and matures June 2015.
Note 7 - Lease information
Property under capitalized leases
Machinery and equipment
Transportation equipment
Computer equipment
Subtotal
Less accumulated amortization
Total
2013
$3,328
31
92
3,451
871
$2,580
2012
$3,325
42
92
3,459
546
$2,913
Fixed assets acquired under capital leases
$107
$569
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 6,000 square feet in Virginia is leased through August 31, 2015.
At January 31, 2014, future minimum annual rental commitments under non-cancelable lease obligations were as
follows:
2014
2015
2016
2017
2018
Thereafter
Subtotal
Less Amount representing interest
Future minimum lease payments
Operating
Leases
Capital
Leases
$2,211
1,567
1,378
1,274
1,243
1,526
9,199
$9,199
$705
724
678
157
24
—
2,288
221
$2,067
Rental expense for operating leases was $1.4 million and $2.1 million in 2013 and 2012, respectively.
Note 8 - Income taxes
Income (loss) from continuing operations
Domestic
Foreign
Total
38
2013
($7,485)
19,785
$12,300
2012
($6,719)
(2,213)
($8,932)
Components of income tax (benefit) expense
Current
Federal
Foreign
State and other
Subtotal
Deferred
Federal
Foreign
State and other
Subtotal
Total
($245)
3,024
(82)
2,697
(2,715)
(475)
—
(3,190)
$(493)
($964)
229
(34)
(769)
12,545
466
(417)
12,594
$11,825
The excess tax benefit related to stock options recorded through equity was $11 thousand in 2012 and did not affect
net loss. The amounts were recorded to additional paid-in capital on the consolidated balance sheets and in
financing activities 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 2013 was less than the statutory U.S. federal income tax rate, mainly due to the mix of the U.A.E.
earnings (loss) versus total earnings (loss) because the U.A.E. is not subject to any local country income tax.
Additionally, the ETR in 2013 is impacted by the $1.2 million release of the full valuation allowance related to the
Company's deferred tax assets in Saudi Arabia. As a result of two quarters of positive operating income as well as
management's expectations of this subsidiary's profitability for the fiscal year 2013, the Company believes the
second quarter of 2013 was the appropriate time to release the valuation allowance. The ETR in 2012 was less than
the statutory U.S. federal income tax rate, primarily due to the full valuation allowance of $13.9 million recorded on
the domestic deferred tax assets.
39
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
Valuation allowance for foreign NOLs
Nontaxable income from the Canadian joint venture
State taxes, net of federal benefit
All other, net expense
Total
2013
$4,182
—
—
(3,049)
—
—
(1,209)
(179)
(192)
(46)
($493)
2012
($3,037)
12,975
972
823
(67)
(46)
613
(471)
(247)
310
$11,825
The Company has a Federal operating loss carryforward of $9.1 million that will begin to expire in the year ending
January 31, 2030.
The deferred tax asset, ("DTA") for state NOL carryforwards of $1.2 million relates to amounts that expire at
various times from 2014 to 2031. The amount that expired in 2013 is approximately $2 thousand.
The Company has a DTA for foreign NOL carryforwards of $0.5 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 $0.5 million for its subsidiary in Saudi Arabia that can be carried forward indefinitely and
does not have a 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, 2014, 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 2012, 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 recorded a full
valuation allowance against the net domestic DTA discretely during the fourth quarter of 2012.
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.
40
As of January 31, 2014, 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, 2014 were $22 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
Long-term assets
Current liabilities
Total deferred tax assets, net of valuation allowances
2013
$2,298
2,358
1,965
1,004
1,294
1,162
581
1,173
814
182
413
217
102
13,563
(11,591)
$1,972
2012
$3,680
2,092
1,964
612
1,297
1,417
1,086
1,066
837
428
306
94
132
15,011
(12,960)
$2,051
$963
231
$1,194
$1,040
340
$1,380
$778
$671
$1,667
889
$778
$1,358
687
$671
The following table summarizes UTP activity, excluding the related accrual for interest and penalties:
Balance at beginning of the year
Increases 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
2013
$1,373
—
11
(26)
$1,358
2012
$1,213
30
200
(70)
$1,373
Included in the total UTP liability at January 31, 2014 were estimated accrued interest of $18 thousand and penalties
of $25 thousand and at January 31, 2013, accrued interest was $81 thousand and penalties were $66 thousand.
41
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, 2014, 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, 2014 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, 2014 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. The IRS began an audit of the fiscal year ended January 31, 2012 in the third
quarter of 2013. Tax years back to January 31, 2011 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 9 - Retirement plans
Pension plan
The defined benefit plan that covered Winchester filtration hourly rated employees was frozen on June 30, 2013 per
the third Amendment to the Plan dated May 15, 2013. Per the third amendment, the accrued benefit of each
participant was frozen as of the freeze date and no further benefits shall accrue with respect to any service or hours
of service after the freeze date. The benefits are based on fixed amounts multiplied by years of service of
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. 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.
Asset allocation
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
42
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
2013
$3,340
2,453
0
149
5,942
2012
$3,343
2,183
279
126
5,931
409
$6,351
134
$6,065
At January 31, 2014, plan assets were held 50% in equity, 37% in debt, 2% in real estate securities and 11% in
other. The investment policy is to invest all funds not needed to pay benefits and investment expenses for the year,
with target asset allocations of 55% equities (with a range of 40% - 65%), 25% fixed income (with a range of 20%
- 35%) and 20% Alternative Investments (with a range of 15% - 25%), 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 2013 resulted in $531 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.
43
Reconciliation of benefit obligations, plan assets and funded status of plan
Accumulated benefit obligations
Vested benefits
Accumulated benefits
2013
2012
$6,243
$6,827
$6,650
$7,240
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
$7,240
78
293
(539)
(245)
$6,827
$6,065
531
0
(245)
$6,351
$7,186
171
299
(113)
(303)
$7,240
$5,502
574
292
(303)
$6,065
$(476)
$(1,175)
$335
1,038
(1,849)
$(476)
$328
1,304
(2,807)
$(1,175)
$1,513
0
$1,513
$2,206
273
$2,479
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
2013
4.50%
4.50%
8.00%
N/A
2012
4.00%
4.25%
8.00%
N/A
*4.00% prior to the re-measurement on June 30, 2013 due to the plan freeze and 4.50% after the re-measurement.
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.
44
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized actuarial loss
Curtailment cost
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)
Other comprehensive income is also affected by the tax effect of the valuation allowance
recorded on the domestic deferred tax assets.
Cash flows
Expected employer contributions for the fiscal year ending January 31, 2015
Expected employee contributions for the fiscal year ending January 31, 2015
Estimated future benefit payments reflecting expected future service for the fiscal year(s)
ending January 31,:
2015
2016
2017
2018
2019
2020 - 2024
401(k) plan
2013
$78
293
(483)
21
105
252
$266
$539
153
21
$713
2012
$171
299
(444)
50
173
0
$249
$113
303
50
$466
$0
—
335
348
345
366
364
$1,907
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. For employees covered by
the Winchester Bargaining Unit Savings Plan, the Company matches 15% of each participant's contribution, up to a
maximum of 6% of each participant's salary.
Contributions to the 401(k) plan were $430 thousand and $560 thousand for the years ended January 31, 2014 and
2013, respectively.
Deferred compensation plan
The Company has a Supplemental Retirement and Deferred Compensation Plan ("Supplemental Plan"), pursuant to
which key employees deferred compensation. 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 separation from service. Distributions can be lump sum or annual payments over a
specified number of years based on elections made when the participant enters the plan.
45
Deferred compensation liability
Current
Long-term
Total
Deferred compensation expense
2013
$189
6,509
$6,698
2012
$163
5,670
$5,833
$519
$484
On April 10, 2014, the Company's Board of Directors terminated the Supplemental Plan and its Deferred Stock
Purchase Plan, adopted on December 5, 2012 (collectively, the "Plans"), effective April 10, 2014 ("Termination
Date"). No additional contributions will be made by the Company or participants under the Plans after the
Termination Date. All funds and Company stock remaining in participant accounts will be distributed not later than
24 months after the Termination Date. As of the Termination Date, the Company was obligated to deliver 28,891
shares of Company common stock under the Deferred Stock Purchase 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.
Plan Name
EIN
Plan #
Funded
Zone
Status
FIP/RP
Status
Pending/
Implemented
Contribution
2013
2012
Surcharge
Imposed
Collective
Bargaining
Expiration Date
Northern Illinois Pension Plan
362663798
001 Green
Pipe Fitters Retirement Fund, Local 597 626105084
001 Green
Plumbers & Pipefitters Local 572
Pension Fund
626102837
001 Green
No
No
No
$—
275
192
$7 No
102 No
250 No
6/1/2014
6/1/2014
3/31/2016
Plans for which financial information is not publicly available outside MFRI's financial statements
$350
N/A
N/A
N/A
Denmark
N/A
$353 N/A
Note 10 - Stock options
On June 20, 2013, the stockholders approved the 2013 Omnibus Stock Incentive Plan ("Omnibus Plan"). Under the
Omnibus Plan, 350,000 shares of common stock are reserved for issuance to employees, officers, and directors of,
and other individuals providing bona fide services to or for, the Company and its affiliates. In addition, on January
31, 2014 and each January 31 thereafter until January 31, 2023, the aggregate number of shares that may be issued
with respect to Awards pursuant to the terms of this Plan will be increased by the number equal to 2% of the
aggregate amount of common stock outstanding as of such date, provided, however, the maximum number of
additional shares that may be issued pursuant to this sentence will not exceed 400,000. The Omnibus Plan permits
46
the granting of stock options (including incentive stock options qualifying under Code section 422 and nonstatutory
stock options), stock appreciation rights, restricted or unrestricted stock awards, restricted stock units, performance
awards, deferred stock awards, other stock-based awards, or any combination of the foregoing. Awards will be
valued at the Company's closing stock price on the date of grant.
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 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 expected life ; 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
2013
.74%-2.82%
2012
.74%-3.57%
42.12%-65.54% 53.90%-66.82%
4.9 to 5.7
—
4.9 to 5.7
—
The following summarizes the activity related to options outstanding under all plans for the years ended January 31,
2013 and 2014:
Outstanding at January 31, 2012
Granted
Exercised
Expired or forfeited
Outstanding at January 31, 2013
Options exercisable at January 31, 2013
Granted
Exercised
Expired or forfeited
Outstanding at January 31, 2014
Options exercisable at January 31, 2014
Weighted
average exercise
price
$11.48
Weighted average
remaining
contractual term
6.9
Options
843
Aggregate
intrinsic value
$430
173
(11)
(36)
969
586
103
(223)
(73)
776
513
6.78
3.10
10.47
10.77
$13.30
10.55
7.11
11.90
11.69
$13.43
46
40
37
1,082
3,859
$2,226
6.6
5.3
6.1
4.8
The weighted average fair value of options granted, net of options surrendered, during 2013 and 2012 are estimated
at $4.78 and $3.31, per share, respectively, on the date of grant.
47
Unvested options outstanding
Outstanding at beginning of year
Granted
Vested
Expired or forfeited
Outstanding at January 31, 2014
Options
383
103
(184)
(39)
263
Weighted-average
grant date fair value
$6.91
10.55
Aggregate
intrinsic value
$4
7.05
$8.31
$1,633
Based on historical experience the Company expects 85% of these options to vest.
As of January 31, 2014, there was $0.9 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 2.4 years. The
stock-based compensation expense for the years ended January 31, 2014 and 2013 was $0.2 million and
$0.5 million, respectively.
Deferred stock
On December 5, 2012, the Company adopted the Deferred Stock Purchase Plan. Under the Deferred Stock
Purchase Plan, 200,000 shares of common stock are reserved for issuance. Each deferred stock constitutes an
unfunded and unsecured promise by the Company to deliver one share of common stock (or the equivalent value
thereof in cash or property at the Company's election). In addition, directors may elect to receive, in lieu of annual
retainer and committee chair fees and at the time these fees would otherwise be payable, fully vested deferred stock
with an initial value equal to the amount based on the fair market value of common stock at the date of grant. Tier I
and Tier II executive officers of the Company, as defined in the Compensation Committee Charter of the Company
may elect to receive, in lieu of a portion of his annual incentive compensation not to exceed 50% of such bonus
payable for a given year, a deferred stock award. Deferred stock is payable following the separation from the
Company for non-employee directors. To the extent that a payment is required to be delayed for six months in
order to comply with Section 409A, as determined by the Corporation, such payment amount shall be paid as soon
as administratively practicable after the end of the six month period starting on the date of the Tier I and Tier II
executive officer's “separation from service” under Section 409A. Refer to "Deferred compensation plan" in Note 9
- Retirement plans, in the Notes to Consolidated Financial Statements
In June 2013 under the Omnibus Plan described above, the Company granted deferred stock units to each non-
employee director at the time of the annual meeting of stockholders equal to the result of dividing $30,000 by the
fair market value of the common stock on the date of grant. The stock will be distributed to the directors upon their
separation from service.
As of January 31, 2014, there were approximately 28,891 deferred stock units outstanding included in restricted
stock activity below.
Restricted stock
In June 2013 under the Omnibus Plan described above, the Company granted restricted stock to Tier I and Tier II
executive officers. The restricted stock vest ratably over two years. Until restricted stock becomes vested and
nonforfeitable, it may not be sold, assigned, transferred, pledged, hypothecated or disposed of in any way (whether
by operation of law or otherwise), except by will or the laws of descent and distribution, and shall not be subject to
execution, attachment or similar process. The Company issues new shares from its authorized but unissued share
pool. The Company calculates restricted stock compensation expense based on the grant date fair value and
recognizes expense on a straight-line basis over the two-year vesting period. The following table summarizes
restricted stock activity for the year ended January 31, 2014:
48
Outstanding at beginning of year
Granted
Issued
Forfeited
Outstanding at January 31, 2014
Restricted
shares
—
52
(21)
(2)
29
Weighted
average
exercise price
$—
11.24
Aggregate
intrinsic value
$—
11.25
$14.52
$419
As of January 31, 2014, there was $0.2 million of unrecognized compensation cost related to unvested restricted
stock granted under the plans. That cost is expected to be recognized over the weighted-average period of 1.6
years. The restricted stock-based compensation expense for the year ended January 31, 2014 was $0.1 million.
Note 11 - Stock rights
On September 15, 2009, the Company entered into the Amendment ("Amendment") to Rights Agreement dated as
of September 15, 1999. Among other things, the Amendment extends the term of the Rights Agreement until
September 15, 2019 and amends definitions to include positions in derivative instruments related to the Company's
common stock as constituting beneficial ownership of such stock.
On September 15, 1999, the Company's Board of Directors declared a dividend of one common stock purchase
right (a "Right") for each share of MFRI's common stock outstanding at the close of business on September 22,
1999. The stock issued after September 22, 1999 and before the redemption or expiration of the Rights is also
entitled to one Right for each such additional share. Each Right entitles the registered holders, under certain
circumstances, to purchase from the Company one share of MFRI's common stock at $25, subject to adjustment. At
no time will the Rights have any voting power.
The Rights may not be exercised until 10 days after a person or group acquires 15% or more of the Company's
common stock, or announces a tender offer that, if consummated, would result in 15% or more ownership of the
Company's common stock. Separate Rights certificates will not be issued and the Rights will not be traded
separately from the stock until then. Should an acquirer become the beneficial owner of 15% or more of the
Company's common stock, Rights holders other than the acquirer would have the right to buy common stock in
MFRI, or in the surviving enterprise if MFRI is acquired, having a value of two times the exercise price then in
effect. Also, MFRI's Board of Directors may exchange the Rights (other than those of the acquirer which will have
become void), in whole or in part, at an exchange ratio of one share of MFRI common stock (and/or other
securities, cash or other assets having equal value) per Right subject to adjustment. The Rights described in this
paragraph and the preceding paragraph shall not apply to an acquisition, merger or consolidation approved by the
Company's Board of Directors.
The Rights will expire on September 15, 2019, unless exchanged or redeemed prior to that date. The redemption
price is $0.01 per Right. MFRI's Board of Directors may redeem the Rights by a majority vote at any time prior to
the 20th day following public announcement that a person or group has acquired 15% of MFRI's common stock.
Under certain circumstances, the decision to redeem requires the concurrence of a majority of the independent
directors.
Note 12 - Interest expense, net
Interest expense
Interest income
Interest expense, net
2013
$1,855
(544)
$1,311
2012
$2,009
(511)
$1,498
49
Note 13 - Fair value of financial instruments
At January 31, 2014, an interest rate swap agreement that relates to a mortgage note in Denmark was in effect with
a notional value of $1.3 million that matures December 2021. The swap agreement, which reduces the exposure to
market risks from changing interest rates, exchanges the variable rate to fixed interest rate payments of 2.47%. The
exchange-traded swap is valued on a recurring basis using quoted market prices and was classified within Level 2
of the fair value hierarchy which includes significant other observable inputs because the exchange is not deemed
an active market. The swap agreement is a fair value hedge. The derivative mark to market of $68 thousand was
included in other long-term liabilities on the consolidated balance sheet. The interest rate swap agreement in effect
at January 31, 2013 with a notional value of $9 million was terminated in June 2013.
Note 14 - Subsequent events
The Company has evaluated the period after the balance sheet date up through April 15, 2014, which is the date that
the consolidated financial statements were issued, and determined that other than noted below, there were no
subsequent events or transactions that required recognition or disclosure in the consolidated financial statements.
In October 2013, the Company decided to sell its remaining industrial process business in Denmark. This business
was sold on February 28, 2014. This business is reported as discontinued operations in the consolidated financial
statements and the notes to consolidated financial statements have been revised to conform to the current year
reporting.
On April 10, 2014, the Company's Board of Directors terminated the Plans effective the Termination Date. No
additional contributions will be made by the Company or participants under the Plans after the Termination Date.
All funds and Company stock remaining in participant accounts will be distributed not later than 24 months after
the Termination Date.
50
Schedule II
MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 2014 and 2013
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, 2014
Allowance for possible losses in
collection of trade receivables
Year Ended January 31, 2013
Allowance for possible losses in
collection of trade receivables
$290
$128
$228
$4
$194
$204
$151
$81
$16
$290
(1) Uncollectible accounts charged off
(2) Primarily related to recoveries from accounts previously charged off and currency translation
51
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
MFRI, INC.
Date:
April 15, 2014 /s/ Bradley E. Mautner
Bradley E. Mautner
Director, President 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, President 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
STEPHEN B. SCHWARTZ*
Director
MICHAEL J. GADE*
MARK A. ZORKO*
DAVID S. BARRIE*
Director
Director
Director
JEROME T. WALKER*
Director
*By:
/s/ Bradley E. Mautner
Bradley E. Mautner
Individually and as Attorney in Fact
April 15, 2014
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EXHIBIT INDEX
The exhibits listed below are filed herewith except the exhibits described below as incorporated by reference. Exhibits not
filed herewith are incorporated by reference to such exhibits filed by the Company under the location set forth under the
caption “Description and Location” below. The Commission file number for our Exchange Act filings referenced below is
0-18370.
Exhibit No. Description and Location
3(i) Certificate of Incorporation of MFRI, Inc. [Incorporated by reference to Exhibit 3.3 to Registration Statement
No. 33-70298]
3(ii) Second Amended and Restated By-Laws of MFRI, Inc. [Incorporated by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K filed on February 4, 2013]
4(a) Specimen Common Stock Certificate [Incorporated by reference to Exhibit 4 to Registration Statement No.
33-70794]
4(b) Rights Agreement [Incorporated by reference to Exhibit [4.1] of the Company's [Current Report
on Form 8-K filed on September 24, 1999]
4(c) Amendment to Rights Agreement [Incorporated by reference to Exhibit 4.1 of the Company's Current Report
10(b)
10(c)
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, [Incorporated by reference to Exhibit (d)(5) to the Company's
Schedule TO filed on May 25, 2001]
10(d) Form of Directors Indemnification Agreement [Incorporated by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 2006 filed on May 15, 2006]
10(e) MFRI 2004 Stock Incentive Plan [Incorporated by reference to Exhibit 10(e) to the Company's Annual Report
on Form 10-K/A for the fiscal year ended January 31, 2004 filed on June 1, 2004]
10(f) Second Amended and Restated Loan and Security Agreement between the Company and Bank of America
dated April 30, 2012 [Incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form
10-Q filed on June 11, 2012]
10(g) First Amendment to Second Amended and Restated Loan and Security Agreement between the Company and
Bank of America dated June 8,2012
10(h) Second Amendment to Second Amended and Restated Loan and Security Agreement between the Company
and Bank of America dated October 12, 2012
10(i) Third Amendment to Second Amended and Restated Loan and Security Agreement between the Company and
Bank of America dated March 15,2013
10(j) Fourth Amendment to Second Amended and Restated Loan and Security Agreement between the Company
and Bank of America dated April 25, 2013 [Incorporated by reference to Exhibit 10(1) to the Company's
Annual Report on Form 10-K filed for the fiscal year ended January 31, 2013 on May 2, 2013]
10(k) Fifth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and
Bank of America dated June 7, 2013 [Incorporated by reference to Exhibit 10(l)to the Company's Quarterly
Report on Form10-Q filed on September 12, 2013]
10(l) Sixth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and
Bank of America dated July 29, 2013 [Incorporated by reference to Exhibit 10(m) to the Company's Quarterly
Report on Form 10-Q filed on September 12, 2013]
10(m) 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 filed on June 1, 2004]
10(n) Employment agreement with Fati Elgendy dated November 12, 2007 [Incorporated by reference to DEF14A
filed on May 29, 2008]
10(o) First Amendment to Employment Agreement with Fati Elgendy dated March 19, 2014
10(p)
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 filed on April 19, 2010]
10(q) 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]
10(r)
2013 Omnibus Stock Incentive Plan as Amended June 14, 2013 [Incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on June 14, 2013]
21 Subsidiaries of MFRI, Inc.
23 Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP
53
24 Power of Attorney executed by directors and officers of the Company
31 Rule 13a - 14(a)/15d - 14(a) Certifications
(1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
Section 1350 Certifications
(1) Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(2) Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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
54
Exhibit 21
SUBSIDIARIES OF REGISTRANT
7720 Lehigh Property, LLC (Illinois corporation)
Boe-Therm A/S (Denmark) - sold February 28, 2014
MFRI Holdings (B.V.I) Ltd (British Virgin Islands)
MFRI Luxembourg S.A. (Luxembourg)
Midwesco Filter Cicero, LLC (Illinois corporation)
Midwesco Filter Resources, Denmark A/S (Denmark)
Midwesco Filter Resources, Inc. (Delaware corporation)
MN Niles, Inc. (Delaware corporation)
Nordic Air Filtration A/S (Denmark)
Perma-Pipe, Inc. (Delaware corporation)
Perma-Pipe Canada, Inc. (Delaware corporation)
Perma-Pipe India Pvt. Ltd. (India)
Perma-Pipe International Co. LLC (Delaware corporation)
Perma-Pipe Middle East FZC (United Arab Emirates)
Perma-Pipe Oil Field Services LLC (United Arab Emirates)
Perma-Pipe Saudi Arabia, LLC
TDC Filter Manufacturing, Inc. (Delaware corporation)
TC Niles, Inc. (Delaware corporation)
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated April 15, 2014, with respect to the consolidated financial statements and
the related financial statement schedule included in the Annual Report of MFRI, Inc. and Subsidiaries on
Form 10-K for the year ended January 31, 2014. We hereby consent to the incorporation by reference of
said report in Registration Statements of MFRI, Inc. and Subsidiaries on Forms
effective August 13, 1997; File No. 333-44787, effective January 23, 1998; and File No. 333-139432,
(File No. 333-08767, effective July 25, 1996; File No.
effective December 18, 2006) and on Forms
333-121526, effective December 22, 2004; File No. 333-130517, effective December 20, 2005; File No.
333-182144, effective June 15, 2012; File No. 333-186055, effective January 16, 2013, and File No.
333-190241, effective July 30, 2013).
(File No. 333-21951,
Chicago, Illinois
April 15, 2014
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or
both, of MFRI, INC., a Delaware corporation (the "Company"), does hereby constitute and appoint
DAVID UNGER, BRADLEY E. MAUTNER and KARL J. SCHMIDT, with full power to each of them
to act alone, as the true and lawful attorneys and agents of the undersigned, with full power of substitution
and resubstitution to each of said attorneys to execute, file or deliver any and all instruments and to do all
acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to
comply with the Securities Exchange Act of 1934, as amended, and any requirements or regulations of the
Securities and Exchange Commission in respect thereof, in connection with the Company's filing of an
annual report on Form 10-K for the Company's fiscal year 2013, including specifically, but without
limitation of the general authority hereby granted, the power and authority to sign his name as a director
or officer, or both, of the Company, as indicated below opposite his signature, to the Form 10-K, and any
amendment thereto; and each of the undersigned does hereby fully ratify and confirm all that said
attorneys and agents, or any of them, or the substitute of any of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of this 10th
day of April, 2014.
/s/ Bradley E. Mautner
Bradley E. Mautner, Director, President and Chief
Executive Officer (Principal Executive Officer)
/s/ Dennis Kessler
Dennis Kessler, Director
/s/ Karl J. Schmidt
Karl J. Schmidt, Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
/s/ Arnold F. Brookstone
Arnold F. Brookstone, Director
/s/ David Unger
David Unger, Director and Chairman of the Board of
Directors
/s/ Stephen B. Schwartz
Stephen B. Schwartz, Director
/s/ Michael J. Gade
Michael J. Gade, Director
/s/ Mark A. Zorko
Mark A. Zorko, Director
/s/ David S. Barrie
David S. Barrie, Director
/s/ Jerome T. Walker
Jerome T. Walker, Director
Exhibit 31.1
CERTIFICATION
I, Bradley E. Mautner, certify that:
1. I have reviewed this annual report on Form 10-K of MFRI, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: April 15, 2014
/s/ Bradley E. Mautner
Bradley E. Mautner
Director and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
I, Karl J. Schmidt, certify that:
1. I have reviewed this annual report on Form 10-K of MFRI, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: April 15, 2014
/s/ Karl J. Schmidt
Karl J.Schmidt
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32
Certification of Principal Executive Officers
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
The undersigned in their capacities as Chief Executive Officer and Chief Financial Officer of MFRI, Inc. (the
“Registrant'), certify that, to the best of their knowledge, based upon a review of the Annual Report on Form 10-K
for the period ended January 31, 2014 of the Registrant, (the “Report”):
(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Registrant.
/s/ Bradley E. Mautner
Bradley E. Mautner
Director and Chief Executive Officer
(Principal Executive Officer)
April 15, 2014
/s/ Karl J. Schmidt
Karl J. Schmidt
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
April 15, 2014
A signed original of this written statement required by Section 906 has been provided by MFRI, Inc. and will be
retained by MFRI, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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.
Wayne M. Bosch
Vice President Chief Human Resources
Officer
MFRI, Inc.
Dennis Kessler
Lead Independent Director
President, Kessler Management
Consulting and Former
Co-President of Fel-Pro Inc.
David S. Barrie
Independent Director
Principal of Barrie International, LLC
Arnold F. Brookstone
Independent Director
Retired Chief Financial &
Planning Officer
Smurfit-Stone Corporation
Michael J. Gade
Independent Director
Executive-in-Residence
University of North Texas
Founding Partner of the
Challance Group, LLP
Stephen B. Schwartz
Independent Director
Retired Senior Vice President
IBM Corporation
Jerome T. Walker
Independent Director
Executive Vice President – Global
Solutions, Dresser-Rand Group, Inc.
Mark A. Zorko
Independent Director
Former Chief Financial Officer
Steel Excel, Inc.
Piping Systems
Filtration Products
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
Stephen C. Buck
President
Midwesco Filter Resources, Inc.
André Radley Grundahl
Managing Director
Nordic Air Filtration, A/S
James M. Hoffman
Vice President and Controller
Midwesco Filter Resources, Inc.
Dhananjay Maslekar
Vice President Operations
Midwesco Filter Resources, Inc.
Thomas F. Walker
Vice President Sales and Marketing
Midwesco Filter Resources, Inc.
Transfer/Rights Agent
Continental Stock Transfer
& Trust Company
17 Battery Place
New York, NY 10004
Independent Registered
Public Accountants
Annual Meeting
Grant Thornton LLP
175 West Jackson Blvd.
Chicago, IL 60604-2615
The Annual Meeting of Stockholders of MFRI, Inc. will be held at
10:00 a.m., Thursday, June 17, 2014 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
Fax:
847-966-8563
Web: www.mfri.com
Offices & Manufacturing Facilities
Midwesco Filter Resources, Inc.
Business Offices and Manufacturing
385 Battaile Drive
Winchester, Virginia 22601
Phone: 540-667-8500
Web: www.midwescofilter.com
TDC Filter Manufacturing, Inc.
Business Offices and Manufacturing
2 Territorial Court
Bolingbrook, Illinois 60440
Phone: 630-410-6277
Web: www.tdcfilter.com
Nordic Air Filtration A/S
Business Offices and Manufacturing
Bergenvej 1
DK-4900 Nakskov, Denmark
Phone: 45-5495-1390
Web: www.nordic-air-filtration.dk
Perma-Pipe, Inc.
Business Offices
7720 N. Lehigh Avenue
Niles, IL 60714
Phone: 847-966-2235
Web: www.permapipe.com
Perma-Pipe, Inc.
Manufacturing Plant
1310 Quarles Drive
Lebanon, Tennessee 37087
Phone: 615-444-4910
Perma-Pipe, Oil & Gas
Manufacturing Plant
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
Perma-Pipe India Pvt. Ltd.
Unit No 305, 3rd Floor,
B-Wing, KNOX Plaza, Mind Space Area,
Malad (West), Mumbai,
India. Pin - 400-064
Phone: +91-98-3399-4957
Perma-Pipe Saudi Arabia, LLC
Dammam Industrial City - 2
Al Madinah Al Munawarah Road
Dammam, Kingdom of Saudi Arabia
Phone: 966-3-812-9555