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MPR > SEC Filings for MPR > Form 10-K on 21-Mar-2013All Recent SEC Filings

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Form 10-K for MET PRO CORP


21-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:

Forward-Looking Statements; Factors That May Affect Future Results:

Our prospects are subject to certain uncertainties and risk. This Annual Report on Form 10-K also contains certain forward-looking statements within the meaning of the Federal Securities Laws. These forward-looking statements may be identified by words describing our belief or expectation, such as where we say that we "believe", "expect" or "anticipate", or where we characterize something in a manner in which there is an express or implicit reference to the future, such as "non-recurring" or "unusual," or where we express that our view is based upon the "current status" of a given matter, or upon facts as we know them as of the date of the statement. The content and/or context of other statements that we make may indicate that the statement is "forward-looking". We claim the "safe harbor" provided by The Private Securities Reform Act of 1995 for all forward-looking statements.

Results may differ materially from our current results and actual results could differ materially from those suggested in the forward-looking statements as a result of certain risk factors and other one-time events. Please refer to other important factors disclosed previously and from time to time in Met-Pro's other filings with the Securities and Exchange Commission.

The following discussion also should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K, together with the above "Forward-Looking Statements; Factors That May Affect Future Results" and aforementioned Item 1A. "Risk Factors".

Results of Operations:

The following table sets forth for the periods indicated the percentage of total net sales that such items represent in the consolidated statements of income.

                                                           Years ended January 31,
                                                        2013         2012         2011
Net sales                                              100.0 %      100.0 %      100.0 %
Cost of goods sold                                      65.6 %       64.7 %       63.7 %
Gross profit                                            34.4 %       35.3 %       36.3 %

Selling expenses                                        10.8 %       12.0 %       13.1 %
General and administrative expenses                     12.8 %       12.7 %       13.1 %
Total selling, general and administrative expenses      23.6 %       24.7 %       26.2 %

Income from operations                                  10.8 %       10.6 %       10.1 %

Interest expense                                         (.2 %)       (.2 %)       (.2 %)
Other income                                              .2 %         .4 %         .4 %
Income before taxes                                     10.8 %       10.8 %       10.3 %
Provision for taxes                                      3.5 %        3.7 %        3.4 %
Net income                                               7.3 %        7.1 %        6.9 %

FYE 2013 versus FYE 2012:

Net sales for the fiscal year ended January 31, 2013 were $109.9 million compared with $100.2 million for the fiscal year ended January 31, 2012, an increase of $9.8 million or 9.8%.

Sales in the Product Recovery/Pollution Control Technologies reporting segment were $49.1 million, or $5.5 million higher than the $43.6 million of sales for the fiscal year ended January 31, 2012, an increase of 12.6%. This sales increase in the current fiscal year was driven by higher sales in the (i) Strobic Air business unit, attributable to a $3.5 million order booked in the prior fiscal year and shipped in the current fiscal year and (ii) Met-Pro Environmental Air Solutions business units, primarily attributable to the Bio-Reaction product line.


Index

Sales in the Fluid Handling Technologies reporting segment totaled $37.7 million, or $4.4 million higher than the $33.3 million of sales for the fiscal year ended January 31, 2012, an increase of 13.3%.The fiscal year ended January 31, 2013 benefited from a $6.0 million Fybroc export order that was shipped and invoiced within the fiscal year, as compared to a $3.7 million Fybroc export order that was substantially shipped and invoiced in the fiscal year ended January 31, 2012.

Sales in the Mefiag Filtration Technologies reporting segment totaled $13.0 million, essentially flat with sales for the year ended January 31, 2012, resulting from a sales increase in our North America and China operations, offset by a sales decrease in our European operation attributable to unfavorable foreign exchange translation compared with the prior year. The industrial markets serviced by this reporting segment are primarily comprised of the automotive and housing industries.

Sales in the Filtration/Purification Technologies segment were $10.2 million, or $0.2 million lower than the $10.4 million of sales for the fiscal year ended January 31, 2012, a decrease of 1.7%. This decrease was due to lower demand in the Keystone Filter and Pristine Water Solutions businesses compared with the same period last year, as a result of price competition and continued weakness in the markets serviced by these business units.

Foreign sales were $30.6 million for the fiscal year ended January 31, 2013, compared with $28.0 million for the same period last year, an increase of $2.6 million or 9.5%. This increase was primarily attributable to a foreign sales increase of 17.0% in the Fluid Handling Technologies reporting segment due to the aforementioned Fybroc export order and a 15.4% increase in the Product Recovery/Pollution Control Technologies reporting segment.

Income from operations for the fiscal year ended January 31, 2013 was $11.9 million compared with $10.6 million for the fiscal year ended January 31, 2012, an increase of $1.3 million or 12.1%.

Income from operations in the Product Recovery/Pollution Control Technologies reporting segment was $1.0 million, or $0.2 million lower than the $1.2 million for the fiscal year ended January 31, 2012, a decrease of 13.7%. The decrease in income from operations in this reporting segment was primarily related to three large contracts in the Met-Pro Environmental Air Solutions business unit which, although contributing $2.7 million in revenue, were at an aggregate break even gross profit, and higher general and administrative expense. These adverse factors offset the higher gross profit margins in the Strobic Air business unit and Bio-Reaction brand compared with the same period last year.

Income from operations in the Fluid Handling Technologies reporting segment totaled $10.0 million, or $1.8 million higher than the $8.2 million for the fiscal year ended January 31, 2012, an increase of 21.1%. The increase in income from operations resulted from a 13.3% increase in sales, as well as higher gross profit margins within this reporting segment.

Income from operations in the Mefiag Filtration Technologies reporting segment totaled $0.8 million, essentially flat with the comparable fiscal year period.

Income from operations in the Filtration/Purification Technologies segment was $0.1 million, or $0.3 million lower than the $0.4 million for the fiscal year ended January 31, 2012, a decrease of 79.9%.The decrease in income from operations was primarily related to lower gross margins in the Pristine Water Solutions business unit, attributable to competitive pricing pressures in the municipal markets serviced by this business unit.

Net income for the fiscal year ended January 31, 2013 was $8.0 million compared with $7.1 million for the fiscal year ended January 31, 2012, an increase of $0.9 million or 12.8%.

Gross profit margin for the fiscal year ended January 31, 2013 was 34.4% compared with 35.3% for the prior fiscal year. The gross profit margin in our Product Recovery/Pollution Control Technologies and Mefiag Filtration Technologies reporting segments as well as Filtration/Purification Technologies segment were lower as compared with the same period last year, which offset higher gross profit margins in our Fluid Handling Technologies reporting segment as compared with the same period last year.

Selling expense was $11.8 million for the fiscal year ended January 31, 2013 compared with $12.0 million for the prior fiscal year, a decrease of $0.2 million. The decrease in selling expense was primarily attributable to lower payroll expense partially offset by increased advertising in the current year period compared to the prior year period. Selling expense as a percentage of net sales was 10.8% for the fiscal year ended January 31, 2013 compared with 12.0% for the same period last year.

General and administrative expense was $14.1 million for the fiscal year ended January 31, 2013, compared with $12.8 million in the prior fiscal year, an increase of $1.3 million. This increase was due primarily to: (i) healthcare and pension expenses which were $0.9 million higher in the current year period compared with the same period last year and (ii) costs of approximately $0.7 million related to separation expenses, which included salary continuation, stock option modification and transition expenses, associated with the Company's change in its Chief Financial Officer, compared with $0.3 million of severance expense in the prior year period. General and administrative expense as a percentage of net sales was 12.8% for the fiscal year ended January 31, 2013, compared with 12.7% for the prior fiscal year.


Index

Interest expense was approximately $0.2 million for each of the fiscal years ended January 31, 2013 and 2012.

Other income was $0.2 million for the fiscal year ended January 31, 2013, compared with $0.4 million in the prior fiscal year, a decrease of $0.2 million. The decrease in other income was primarily attributable to higher gains on foreign currency exchange in the prior year period compared to the current year period.

The effective tax rates for the fiscal years ended January 31, 2013 and 2012 were 32.2% and 34.1%, respectively. The decrease in the effective tax rate from the previous year was primarily the result of a one-time benefit attributable to deductible stock compensation expense resulting from a change in the status of outstanding stock options.

FYE 2012 versus FYE 2011:

Net sales for the fiscal year ended January 31, 2012 were $100.2 million compared with $88.9 million for the fiscal year ended January 31, 2011, an increase of $11.3 million or 12.7%.

Sales in the Product Recovery/Pollution Control Technologies reporting segment were $43.6 million, or $2.2 million higher than the $41.4 million of sales for the fiscal year ended January 31, 2011, an increase of 5.2%. The sales increase was due primarily to higher sales for all product brands within the Met-Pro Environmental Air Solutions business unit, partially offset by lower sales for our Strobic Air systems that we attribute to, among other factors, elongated delivery schedules of booked orders, delays in the timing of customer orders for large projects and reduced construction in the pharmaceutical, university and other industries that purchase Strobic Air's products.

Sales in the Fluid Handling Technologies reporting segment totaled $33.3 million, or $5.8 million higher than the $27.5 million of sales for the fiscal year ended January 31, 2011, an increase of 21.0%. The sales increase was due to higher sales for all product brands within this reporting segment. A large percentage of the $5.8 million increase over the previous year was attributable to the shipment of the $2.4 million balance of a $3.7 million order for Fybroc brand pumps that was announced on October 12, 2010.

Sales in the Mefiag Filtration Technologies reporting segment totaled $12.9 million, or $3.0 million higher than the $9.9 million of sales for the year ended January 31, 2011, an increase of 30.8%. The sales increase in the Mefiag Filtration Technologies reporting segment was due to an increase in sales across all Mefiag product lines which we attribute to an apparent improvement in the industrial markets serviced by this reporting segment which are primarily the automotive and housing industries.

Sales in the Filtration/Purification Technologies segment were $10.4 million, or $0.3 million higher than the $10.1 million of sales for the fiscal year ended January 31, 2011, an increase of 3.3%. This increase in sales was due primarily to increased demand in our Keystone Filter business unit partially offset by decreased demand in our Pristine Water Solutions business unit as a result of price competition, inclement weather in certain geographic areas and continued weakness in the municipal markets serviced by this business unit.

Foreign sales were $28.0 million for the fiscal year ended January 31, 2012, compared with $22.4 million for the same period last year, an increase of 24.9%. Compared with the prior fiscal year, foreign sales increased 42.1% in the Fluid Handling Technologies reporting segment, 40.8% in the Mefiag Filtration Technologies reporting segment and 29.1% in the Filtration/Purification Technologies segment, offset by a decrease of 5.3% in the Product Recovery/Pollution Control Technologies reporting segment.

Income from operations for the fiscal year ended January 31, 2012 was $10.6 million compared with $9.0 million for the fiscal year ended January 31, 2011, an increase of $1.6 million or 18.1%.

Income from operations in the Product Recovery/Pollution Control Technologies reporting segment was $1.2 million, or $0.8 million lower than the $2.0 million for the fiscal year ended January 31, 2011, a decrease of 41.4%. The decrease in income from operations in this reporting segment was primarily related to the following: (i) lower sales for our Strobic Air systems, (ii) lower gross profit margins experienced amongst all product brands within this reporting segment due primarily to product mix, increases in material cost and competitive pricing pressures and (iii) severance expense of approximately $0.3 million recognized in the Company's second quarter ended July 31, 2011 as a result of the Company offering a voluntary employee early retirement program.


Index

Income from operations in the Fluid Handling Technologies reporting segment totaled $8.2 million, or $2.3 million higher than the $5.9 million for the fiscal year ended January 31, 2011, an increase of 38.7%. The increase in income from operations resulted from a 21.0% increase in sales and higher gross profit margins within this reporting segment.

Income from operations in the Mefiag Filtration Technologies reporting segment totaled $0.8 million, or $0.4 million higher than the $0.4 million for the fiscal year ended January 31, 2011, an increase of 94.3%. The increase in income from operations in the Mefiag Filtration Technologies reporting segment resulted from a 30.8% increase in sales, partially offset by lower gross profit margins.

Income from operations in the Filtration/Purification Technologies segment was $0.4 million, or $0.2 million lower than the $0.6 million for the fiscal year ended January 31, 2011, a decrease of 34.3%. The decrease in income from operations was related to decreased sales and lower gross margins in our Pristine Water Solutions business unit. The lower gross margins experienced in our Pristine Water Solutions business unit was due primarily to increases in material cost and competitive pricing pressures.

Net income for the fiscal year ended January 31, 2012 was $7.1 million compared with $6.1 million for the fiscal year ended January 31, 2011, an increase of $1.0 million or 16.2%.

Gross profit margin for the fiscal year ended January 31, 2012 was 35.3% compared with 36.3% for the prior fiscal year. The gross profit margin in our Product Recovery/Pollution Control Technologies and Mefiag Filtration Technologies reporting segments as well as the Filtration/Purification Technologies segment were lower as compared with the same period last year, partially offset by higher gross profit margins in our Fluid Handling Technologies reporting segment as compared with the same period last year.

Selling expense was $12.0 million for the fiscal year ended January 31, 2012 compared with $11.7 million for the prior fiscal year. The slight increase in selling expense was primarily due to higher payroll expenses, web and print advertising and exhibitions. Selling expense as a percentage of net sales was 12.0% for the fiscal year ended January 31, 2012 compared with 13.1% for the same period last year.

General and administrative expense was $12.8 million for the fiscal year ended January 31, 2012, compared with $11.6 million in the prior fiscal year, an increase of $1.2 million. The increase in general and administrative expense was primarily related to (i) higher payroll expenses, (ii) severance expense of approximately $0.3 million recognized in the Company's second quarter ended July 31, 2011 as a result of the Company offering a voluntary employee early retirement program and (iii) higher personnel acquisition expenses. General and administrative expense as a percentage of net sales was 12.7% for the fiscal year ended January 31, 2012, compared with 13.1% for the prior fiscal year.

Interest expense was approximately $0.2 million for each of the fiscal years ended January 31, 2012 and 2011.

Other income was $0.4 million for each of the fiscal years ended January 31, 2012 and 2011. The increase in other income primarily related to a gain on foreign currency exchange.

The effective tax rates for the fiscal years ended January 31, 2012 and 2011 were 34.1% and 32.7%, respectively. The increase in the effective tax rate of 1.4% from the previous year was due primarily to an increase in stock option tax expense resulting from a reduction in the exercising of non-qualified stock options from the previous year, as well as due to a reevaluation of the Company's FASB ASC Topic 740 accrual.

Liquidity and Capital Resources:

The Company's principal sources of liquidity are cash flows from operations, borrowings under existing lines of credit and access to credit markets. The Company's principal uses of cash are operating expenses, capital expenditures, working capital requirements, dividends and debt service. Management expects that the Company's current cash and cash equivalent balances, cash generated from operations and unused borrowing capacity will be sufficient to support the Company's planned operating and capital requirements for the foreseeable future and at least the next twelve months.


Index

The Company's cash and cash equivalents were $33.3 million on January 31, 2013 compared with $34.6 million on January 31, 2012, a decrease of $1.3 million. The decrease in the Company's cash and cash equivalents is primarily the net result of quarterly cash dividend payments aggregating to $4.2 million, investment in property and equipment of $2.0 million and payments on debt totaling $0.9 million, partially offset by the positive cash flows provided by operating activities of $5.3 million.

The Company's cash flows from operating activities are also influenced, in part, by the timing of shipments and negotiated standard payment terms, including retention associated with major projects, as well as other factors including changes in inventories and accounts receivable balances.

Cash flows provided by operating activities during the fiscal year ended January 31, 2013 amounted to $5.3 million compared with $9.0 million in the prior year fiscal period, a decrease of $3.7 million. The decrease in cash flows from operating activities, as compared with the same period last year, was due principally to the following: (i) a decrease in accounts payable and accrued expenses of $1.4 million compared with an increase in accounts payable and accrued expenses of $3.1 million for the same period last year, or a period-to-period cash outflow of $4.5 million and (ii) a decrease in customers' advances of $1.8 million compared with an increase in customers' advances of $2.3 million for the same period last year, or a period-to-period cash outflow of $4.1 million. These cash outflows were partially offset by the following: (i) a decrease in inventories of $0.1 million compared with an increase in inventories of $2.5 million for the same period last year, or a period-to-period cash inflow of $2.5 million, (ii) a decrease in accrued pension retirement benefits of $1.3 million compared with a decrease in accrued pension benefits of $2.7 million for the same period last year, or a period-to-period cash inflow of $1.4 million, (iii) net income increasing by $0.9 million from the same period last year and (iv) an increase in accounts receivable of $1.4 million compared with an increase in accounts receivable of $2.2 million in the same period last year, or a period-to-period cash inflow of $0.8 million.

Cash flows used in investing activities during the fiscal year ended January 31, 2013 amounted to $1.8 million compared with cash flows used in investing activities of $2.6 million for the same period last year, a decrease of $0.8 million. The decrease in cash flows used in investing activities is due to proceeds from maturities of investments of $1.3 million compared with proceeds from maturities of investments of $0.5 million for the same period last year, or a period-to-period cash inflow of $0.8 million.

Financing activities during the fiscal year ended January 31, 2013 utilized $4.8 million of available resources, compared with $4.2 million utilized during the prior year period. The increase in cash utilized amounting to $0.6 million is principally due to increases in payments for dividends and debt, somewhat offset by lower borrowings under the Company's Mefiag B.V. subsidiary's line of credit, compared with the same period last year.

The Board of Directors declared quarterly dividends of $0.071 per share payable on March 16, 2012, June 15, 2012 and September 14, 2012 to shareholders of record at the close of business on March 2, 2012, June 1, 2012 and August 31, 2012, respectively. The Board of Directors declared a quarterly dividend of $0.0725 per share payable on December 17, 2012 and March 15, 2013 to shareholders of record at the close of business on December 3, 2012 and March 1, 2013, respectively.

The Company and its subsidiaries have access to $4.4 million of uncommitted, unsecured domestic and foreign lines of credit, subject to terms thereof, of which $0.8 million has been committed for standby letters of credit as of January 31, 2013.

The existing domestic credit agreements include two financial covenants: a liability/tangible net worth ratio and a fixed charge coverage ratio. At January 31, 2013, we were in compliance with both financial covenants. The required liability/tangible net worth ratio, which measures total liabilities to tangible net worth, is a maximum of 1.20 times. At January 31, 2013 and 2012, our liability/tangible net worth ratio using this measure was 0.42 times and 0.52 times, respectively. The required fixed charge coverage ratio, which is an adjusted earnings measure as defined by our facility, compared with the aggregate of interest expense, debt service, dividends and capital expenditures, is a ratio of at least 1.05 times. At January 31, 2013 and 2012, our fixed charge coverage ratio using this measure was 1.70 times and 1.54 times, respectively.

Our debt instruments contain customary event of default provisions, which allow the lenders the option of accelerating all obligations upon the occurrence of certain events. In addition, the majority of our debt instruments contain a cross default provision, whereby a default on one debt obligation of the Company in excess of a specified amount, also would be considered a default under the terms of another debt instrument. As of January 31, 2013, we were in compliance with all such provisions.

As of January 31, 2013, approximately $1.6 million of the Company's cash and cash equivalents were held by certain non-U.S. subsidiaries, as well as being denominated in foreign currencies. The repatriation of cash and cash equivalent balances from non-U.S. subsidiaries could have adverse tax consequences; however, such cash and cash equivalent balances are generally available, without legal restrictions, to fund ordinary business operations at the local level. Deferred income taxes have not been provided on the unremitted earnings of such non-U.S. subsidiaries because it is management's intention to reinvest such earnings in non-U.S. subsidiaries for the foreseeable future.


Index

Management is not aware of any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in a material increase or decrease in our liquidity or an increase in liquidity beyond the historical rate of increase. In addition, other than items discussed, there are no known material trends, favorable or unfavorable, in our capital resources and no expected material changes in the mix and relative cost of such resources.

The Company accounts for its defined benefit plans in accordance with FASB ASC Topic 715, "Compensation - Retirement Benefits". ASC Topic 715 requires that we recognize the overfunded or underfunded status of our pension plans (the "Plans") as an asset or liability in the consolidated balance sheets, with changes in the funded status recognized through other comprehensive income in the year in which they occur. ASC Topic 715 also requires us to measure the funded status of the Plans as of the year end consolidated balance sheets date. We froze the accrual of future benefits for our salaried and non-union hourly employees effective as of December 31, 2006, and for our union hourly employees effective as of December 31, 2008. As of January 31, 2013, our unfunded pension liability was approximately $8.9 million, and we expect to contribute approximately $1.2 million to the pension plans during the fiscal year ending January 31, 2014.

As part of our commitment to the future, the Company expended $2.2 million and $2.5 million on research and development in the fiscal years ended January 31, 2013 and 2012, respectively.

The Company will continue to invest in new product development to maintain and enhance its competitive position in the markets in which we participate. Capital expenditures will be made to support operations and expand our capacity to meet market demands. The Company intends to finance capital expenditures in the coming year through cash flows from operations and will secure third party financing, when deemed appropriate.

Off-Balance Sheet Arrangements:

We have no off-balance sheet arrangements, as defined in Item 303 of Regulation S-K, that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures that are material to investors.

Contractual Obligations:

 The following table summarizes the Company's contractual cash obligations as of
January 31, 2013 by required payment periods:

                                                                                                               Total
                                                                                                            Contractual
    Payments Due By        Long-Term        Purchase       Operating      Interest          Pension             Cash
. . .
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