Add
MFRI to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| MFRI > SEC Filings for MFRI > Form 10-Q on 8-Jun-2009 | All Recent SEC Filings |
8-Jun-2009
Quarterly Report
The statements contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and certain other information contained elsewhere in this report, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely," and "probable," or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected. These uncertainties include, but are not limited to, competition, international rapid growth, changes in government policies and laws, worldwide economic conditions, government regulation, economic factors, consumer access to capital funds, backlog, financing, internal control, market demand and pricing, , global interest rates, currency exchange rates, labor relations and other risk factors.
RESULTS OF OPERATIONS
Consolidated MFRI, Inc.
MFRI, Inc. ("MFRI", the "Company" or the "Registrant") is engaged in the manufacture and sale of products in three reportable business segments: piping systems, filtration products, and industrial process cooling equipment. The Company website address is www.mfri.com.
Three months ended April 30, 2009 ("current quarter") vs. Three months ended April 30, 2008 ("prior-year quarter")
Record first quarter net sales of $67,579,000 increased 2.4% from $65,981,000 for the prior-year quarter. (See discussion of each business segment below.)
Gross profit of $18,727,000 increased 68.1% from $11,143,000 in the prior-year quarter, and increased to 27.7% of sales in the current quarter from 16.9% of sales in the prior-year quarter. Gross profit in the piping systems business rose to $14,148,000 for the current quarter from $5,460,000 in the prior-year quarter. As of April 30, 2009, the Company had successfully completed over 95% of the production on the India pipeline project. The Company would not expect a project similar to the one in India to be replaced in the 2009 backlog. (See discussion of each business segment below.)
Selling expenses decreased 16.8% to $3,099,000 for the current quarter from $3,726,000 in the prior-year quarter. This was primarily driven by the Industrial Process Cooling Equipment business, which had decreased commission expense from lower sales and a decline in compensation and related expenses due to staff reductions. (See discussion of each business segment below.)
General and administrative expenses increased 39.4% to $8,756,000 for the current quarter from $6,282,000 in the prior-year quarter. The increase was mainly due to increased profit-based management incentive expense. (See discussion of each business segment below.)
Net income rose to a record of $6,006,000 in the current quarter from $423,000 in the prior-year quarter primarily due to increased sales, the reasons summarized above and discussed in more detail below.
Piping Systems Business
Net sales increased 6.4% to $32,627,000 in the current quarter from $30,677,000 in the prior-year quarter, attributed primarily to achieving market traction in the United Arab Emirates ("U.A.E.") and the Gulf Cooperation Council countries. The insulation of pipe for a crude oil pipeline project in India began full production in the third quarter 2008 and contributed to the increase. As of April 30, 2009, the Company had successfully completed over 95% of the production on the India pipeline project. The Company would not expect a project similar to the one in India to be replaced in the backlog in 2009.
Gross profit increased to 43.4% of sales in the current quarter from 17.8% of sales in the prior-year quarter due to production efficiencies in both the domestic and international operations. Gross profit in the U.A.E. improved with the increased volume without corresponding increases in fixed expenses, and from the India pipeline project that began full production in the summer of 2008.
Selling expenses increased to $637,000 in the current quarter from $602,000 for the prior-year quarter. Selling expense as a percentage of sales remained the same at 2.0%. This dollar increase was mainly due to increased commission expense related to higher sales.
General and administrative expenses increased to $3,560,000 or 10.9% of net sales in the current quarter from $1,926,000 or 6.3% of net sales for the prior-year quarter. The increase in general and administrative expenses was primarily due to the increased profit-based management incentive expense, administrative costs at the India facility, and increased staffing in the U.A.E.
Net sales for the current quarter decreased 9.7% to $23,305,000 from $25,817,000 in the prior-year quarter. Sales declines were the result of both lower market demand and increased competition in cartridge filter products.
Gross profit decreased to 11.4% of sales in the current quarter from 12.7% of sales in the prior-year quarter primarily due to the highly competitive marketplace and increased cost of raw materials.
Selling expenses decreased to $1,766,000 in the current quarter from $1,966,000 for the comparable quarter last year. Selling expense as a percentage of sales remained constant at 7.6%. The dollar decrease was primarily due to fewer selling personnel.
General and administrative expenses increased to $1,165,000 or 5.0% of net sales in the current quarter from $1,050,000 or 4.1% of net sales in the prior-year quarter.
Industrial Process Cooling Equipment Business
Net sales of $5,053,000 for the current quarter decreased 44.3% from $9,067,000 for prior-year quarter due to lower demand for products in all market sectors, both domestic and international.
Gross profit decreased to 20.8% of sales from 26.4% of sales in the prior-year quarter primarily due to lower sales volume with which to spread fixed overhead expenses, and to a lesser extent, product mix.
Selling expenses decreased to $696,000 or 13.8% of net sales in the current quarter from $1,157,000 or 12.8% of net sales in the prior-year quarter. This was primarily driven by decreased commission expense from lower sales, and a decline in compensation and related expenses due to workforce reductions.
General and administrative expenses decreased in the current quarter to $849,000 or 16.8% of net sales from $1,275,000 or 14.1% of net sales in the prior-year quarter. The change in spending was a result of reduced outside product development services incurred in the current period, and lower compensation and related expenses due to workforce reductions.
General Corporate and Other
Included in corporate and other activity is a subsidiary, which engages in the sales and installation of HVAC systems, but which was not sufficiently large to constitute a reportable segment. Net sales of $6,594,000 for the current quarter increased from $420,000 in the prior-year quarter. The sales were related to various construction projects that were just starting in the first quarter 2008 and were very active in the first quarter 2009. Due to current customer financing constraints, there are currently very few opportunities to obtain new HVAC business at this time.
General and administrative expenses increased to $3,182,000 in the current quarter from $2,033,000 in the prior-year quarter, and increased as a percentage of total company net sales to 4.7% in the current quarter from 3.1% in the prior-year quarter. The increase was due mainly to increased profit-based management incentive expense, hiring of the Vice President of Human Resources and additional stock compensation expense.
Interest expense increased to $688,000 for the current quarter from $623,000 in the prior-year quarter primarily due to increased borrowings.
Taxes on earnings are based on estimated annual effective rates. The 2.9% effective tax rate at April 30, 2009 was less than the statutory U.S. federal income tax rate, mainly due to the impact of income earned in the U.A.E. which was not subject to any local country tax. During the current quarter, the Company re-evaluated the need for a valuation allowance against deferred tax assets. It was determined that a partial valuation allowance of $844,000 was required, as the Company no longer believes that it is more likely than not, that the research and development credits will be utilized before January 2014.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of April 30, 2009 were $6,503,000 as compared to $2,735,000 at January 31, 2009. The Company's working capital was $62,221,000 at April 30, 2009 compared to $57,984,000 at January 31, 2009. The Company provided $12,261,000 from operations during the first three months of 2009. Compared to January 31, 2009, inventories decreased by $6,307,000 mainly in the filtration products business for orders in production at January 31, 2009 and shipped in the first quarter, and trade receivables decreased by $4,486,000 mainly in the piping systems business.
Net cash used in investing activities for the three months ended April 30, 2009 consisted of $1,955,000 for capital expenditures mainly in the piping systems business. Purchases were primarily for machinery and equipment.
Debt totaled $52,665,000, a decrease of $2,218,000 since the beginning of the current fiscal year. Net cash provided by financing activities was $6,041,000. Stock option activity resulted in $10,000 of cash inflow, which included $3,000 tax benefit of stock options exercised in addition to stock option proceeds of $7,000.
On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan Agreement"). The Loan Agreement was amended and restated on December 15, 2006. Under the terms of the Loan Agreement, which matures on November 13, 2010, the Company can borrow up to $38,000,000, subject to borrowing base and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, and investments, do not permit payment of dividends, and require attainment of certain levels of profitability and cash flows. At April 30, 2009 and January 31, 2009, the Company was in compliance with covenants under the Loan Agreement as defined below. Interest rates generally are based on options selected by the Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At April 30, 2009, the prime rate was 3.25%, and the margins added to the prime rate and the LIBOR rate, which are determined each quarter based on the applicable financial statement ratio, were 0.25 and 1.75 percentage points, respectively. Monthly interest payments were made. As of April 30, 2009, the Company had borrowed $24,172,000 and had $4,019,000 available to it under the revolving line of credit. In addition, $425,000 of availability was used under the Loan Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. The Loan Agreement provides that all payments by the Company's customers are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At April 30, 2009, the amount of restricted cash was $848,000. Cash required for operations is provided by draw-downs on the line of credit.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Revenue Recognition: The Company recognizes revenues including shipping and
handling charges billed to customers, when all the following criteria are met:
(i) persuasive evidence of an arrangement exists, (ii) the seller's price to the
buyer is fixed or determinable, and (iii) collectability is reasonably assured.
All subsidiaries of the Company, except as noted below, recognize revenues upon
shipment or delivery of goods or services when title and risk of loss pass to
customers.
Percentage of completion revenue recognition: All divisions recognize revenues under the above stated revenue recognition policy except for sizable complex contracts that require periodic recognition of income. For these contracts, the Company uses "percentage of completion" accounting method. Under this approach, income
Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for substantially all inventories.
Stock options: Stock compensation expense for employee equity awards are
recognized ratably over the requisite service period of the award. The
Black-Scholes option-pricing model is utilized to estimate the fair value of
awards. Determining the fair value of stock options using the Black-Scholes
model requires judgment, including estimates for (1) risk-free interest rate -
an estimate based on the yield of zero-coupon treasury securities with a
maturity equal to the expected life of the option; (2) expected volatility - an
estimate based on the historical volatility of the Company's Common Stock; and
(3) expected life of the option - an estimate based on historical experience
including the effect of employee terminations. If any of these assumptions
differ significantly from actual, stock-based compensation expense could be
impacted.
Income tax provision: Deferred income taxes have been provided for temporary differences arising from differences in basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary differences have been recorded at the current tax rate. The Company assesses deferred tax assets for realizability at each reporting period.
New accounting pronouncements: In June 2009, the Financial Accounting Standards Board ("FASB") issued "Subsequent Events" ("SFAS 165"). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The effective date of SFAS 165 is interim or annual financial periods ending after June 15, 2009. The Company does not expect the adoption of SFAS 165 to have a material effect on its consolidated financial statements.
In April 2008, FASB issued Staff Position FAS 142-3 ("FSP"), "Determination of the Useful Life of Intangible Assets," to provide guidance for determining the useful life of recognized intangible assets and to improve consistency between the period of expected cash flows used to measure the fair value of a recognized intangible asset and the useful life of the intangible asset as determined under FASB Statement 142, Goodwill and Other Intangible Assets ("SFAS 142"). The FSP requires that an entity consider its own historical experience in renewing or extending similar arrangements. However, the entity must adjust that experience based on entity-specific factors included in SFAS 142. If the company lacks historical experience to consider for similar arrangements, it would consider assumptions that market participants would use about renewal or extension, as adjusted for the entity-specific factors under SFAS 142. The Company adopted FSP FAS 142-3 as of the required effective date of February 1, 2009. The Company expenses costs incurred to renew or extend the term of intangible assets. The Company does not assume the ability to renew any existing intangibles. Adoption of FSP FAS 142-3 did not have a significant effect on the Company's financial statements.
In April 2009, the FASB issued Staff Position SFAS 107-b and APB 28-a. FSP FAS 107-a amends SFAS 107, "Disclosures About Fair Value of Financial Instruments", and FSP APB 28-a amends APBO 28, "Interim Financial Reporting", to require fair value disclosures for interim financial statements. These will be effective for interim periods ending after June 15, 2009. The Company does not expect the adoption of SFAS 107-b to have a material effect on its consolidated financial statements.
In December 2008, the FASB issued "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"). FSP 132(R)-1 requires additional disclosures for plan assets of defined benefit pension or other
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles. SFAS 162 becomes effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The Company does not expect the adoption of SFAS 162 to have a material effect on its consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
|
|