PART I
Forward Looking Statements
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
As of
January 31, 2016
, MFRI, Inc., collectively with its subsidiaries ("MFRI", "Company" or "Registrant"), is engaged in the manufacture and sale of products in
one
reportable segment: Piping Systems. As described below, prior to January 29, 2016, the Company was also engaged in the manufacture and sale of products in the Filtration Products segment. The Company's fiscal year ends on January 31. Years and balances described as
2015 and 2014
are the fiscal years ended
January 31, 2016 and 2015
, respectively.
In January 2016, the Company took a series of actions designed to refocus its business portfolio and cost structure to enhance the Company’s overall performance. These actions included the sale of MFRI’s domestic and international filtration businesses, including TDC Filter Manufacturing, Inc., Nordic Air Filtration, A/S and related assets, and the planned sale of the domestic fabric filter business in Winchester, Virginia. The sales follow a competitive bidding process that MFRI initiated as part of this program.
In addition to paying down debt, the sale of the filtration business will give the Company the opportunity to focus resources on new Piping Systems growth opportunities such as the recent acquisition of 100% ownership of Bayou Perma-Pipe Canada, Ltd. ("BPPC"), which the Company believes creates a strong platform to diversify and expand Perma-Pipe Inc’s ("Perma-Pipe") business into new markets and geographies.
In connection with its strategic repositioning, the Company:
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On January 29, 2016, sold certain assets and liabilities of its TDC Filter business based in Bolingbrook, Illinois for approximately $11 million, subject to certain post-closing adjustments, to the Industrial Air division of CLARCOR, a NYSE-listed company based in Franklin, Tennessee. CLARCOR is a leading diversified marketer and manufacturer of mobile, industrial and environmental filtration products. As a part of this program, MFRI plans to sell the 100,000 square foot TDC manufacturing and office facility in Bolingbrook, Illinois.
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On January 29, 2016, sold its Nordic Air Filtration, Denmark and Nordic Air Filtration, Middle East businesses, for approximately $11 million, on a debt/cash free basis, subject to certain post-closing adjustments, to Hengst Holding GmbH. Hengst is a leading specialist in filtration and filtration management and an international development partner and OEM supplier for all major automobile manufacturers.
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Is reorganizing the Company’s corporate staff and reducing expenses to reflect its new strategic focus and structure. The restructuring is expected to yield annualized savings of approximately $1.2 million.
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At
January 31, 2016
, one customer accounted for
10.3%
of the Company's net sales. At
January 31, 2015
, one customer accounted for
17.2%
of the Company's net sales.
Two customers accounted for
46.4%
of accounts receivable at
January 31, 2016
, and one customer accounted for
37.4%
of accounts receivable at
January 31, 2015
. As of April 1, 2016, these customers have paid
40.4%
of their receivables outstanding at
January 31, 2016
.
MFRI, Inc.'s Operating Units
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Perma-Pipe, Inc.
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Niles, IL
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New Iberia, LA
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Lebanon, TN
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Perma-Pipe Middle East FZC
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Fujarah, United Arab Emirates
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Perma-Pipe Saudi Arabia, LLC
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Dammam, Kingdom of Saudi Arabia
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Bayou Perma-Pipe Canada, Ltd.
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Camrose, Alberta, Canada
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Perma-Pipe India Pvt. Ltd
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Gandidham, India
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All operating units shown are, directly or indirectly, wholly owned by MFRI except BPPC, which was owned 49% by MFRI and 51% by an unrelated party until February 4, 2016 when MFRI purchased the remaining shares and became the sole owner.
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, (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 the responsibility of the general contractor, and 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."
Recent developments.
On December 31, 2015, MFRI entered into a purchase agreement with its joint venture partner Aegion Corporation to acquire 100% ownership of BPPC, a coating and insulation company in Camrose, Alberta, which acquisition closed on February 4, 2016. MFRI had owned a 49% interest in BPPC since 2009, when the joint venture was formed with Aegion to serve the oil and gas industry in Western Canada.
The purchase price was approximately $9.6 million in cash and debt at closing and is subject to certain post-closing adjustments.
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. 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®, Sleeve-Gard®, Permalert®, Pal-AT®, Perma-Pipe®, Polytherm®, Ric-Wil®, 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 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.
Prior to January 29, 2016, the Company manufactured and sold 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 manufactured 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 were manufactured from industrial yarn, fabric and paper purchased in bulk. Most filter elements were produced from cellulose, acrylic, fiberglass, polyester, aramid, laminated membranes, or polypropylene fibers. The Company also manufactured filter elements from more specialized materials, sometimes using special finishes.
The Company marketed 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 marketed hardware items used in the operation and maintenance of cartridge collectors and baghouses. The Company also provided maintenance services, consisting primarily of air filtration system inspection and filter element replacement, using a network of independent contractors. The Company had particular expertise in supplying filter bags for use with electric arc furnaces in the steel industry. Over the past three years, Filtration Products supplied filter elements to more than 4,000 user locations.
Customers.
The customer base was 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 were marketed domestically under the names Midwesco Filter and TDC Filter Manufacturing. The Company marketed its U.S. manufactured Filtration Products internationally using domestically based sales resources to target major users in foreign countries. The Denmark filtration facility marketed pleated filter elements under the name Nordic Filtration throughout Europe, Asia and the Middle East, primarily to original equipment manufacturers.
Employees
As of
January 31, 2016
, the Company had
998
employees, of whom
51%
worked outside the U.S.
International
The Company's international operations as of
January 31, 2016
include subsidiaries and a joint venture in four foreign countries on two continents. The Company's international operations contributed approximately
48.4%
of revenue in
2015
and
43.7%
of revenue in
2014
.
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive officers of the Company as of April 1, 2016:
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Name
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Offices and positions, if any, held with the Company; age
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Executive officer of the Company or its predecessor since
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Bradley E. Mautner
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Director, President and Chief Executive Officer; Age 60
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1994
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Karl J. Schmidt
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Vice President and Chief Financial Officer; Age 62
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2013
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Wayne Bosch
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Vice President, Chief Human Resources Officer; Age 59
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2013
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Fati A. Elgendy
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President and Chief Operating Officer, Perma-Pipe; Age 67
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1990
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All of the executive officers serve at the discretion of the Board of Directors.
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 in 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 led 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.
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 vary within the Company's segment, the Company's performance 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.
Since Piping Systems is based on large discrete projects, operating results could be negatively impacted in the future as a result of large variations in the level of market demand
in both geographies and reporting periods.
Customer access to capital funds.
Uncertainty about 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.
Crude oil and natural gas prices are volatile, and the substantial and extended decline in commodity prices has had, and may continue to have, a material and adverse effect on demand and pricing in the Company's business.
Prices for crude oil and natural gas fluctuate widely. Among the factors that can or could cause these price fluctuations are:
• the level of consumer demand;
• domestic and worldwide supplies of crude oil and natural gas;
• domestic and international drilling activity;
• the actions of other crude oil exporting nations and the Organization of Petroleum Exporting Countries;
• worldwide economic and political conditions, including political instability or armed conflict in oil and gas producing regions; and
• the price and availability of, and demand for, competing energy sources, including alternative energy sources.
Beginning in the fourth quarter of 2014 and continuing through 2015 and into 2016, crude oil prices have substantially declined. In addition, natural gas prices began to decline substantially in the second quarter of 2014, and such declines continued during 2015 and into 2016. The above described factors and the volatility of commodity prices make it difficult to predict future crude oil and natural gas prices. As a result, the Company cannot predict how long these lower prices will continue, and there can be no assurance that the prices for crude oil and natural gas will not decline further. Additionally, the decline in oil prices has had budgetary impact on the governments of key Gulf Cooperation Council ("GCC") countries, delaying or canceling major planned infrastructure projects unrelated to oil and gas production. It is impossible to predict when and in what volume these planned projects will be implemented. The GCC is a political and economic alliance of six Middle Eastern countries—Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman. Now that the Company's focus is only on Piping Systems, the Company is more concentrated, and these risk factors could potentially have a greater effect on the Company.
Risks related to international business
.
International sales represent a significant portion of the Company's total sales. During 2015, the Company's international sales increased from
43.7%
to
48.4%
. The Company's anticipated growth and profitability may require maintaining current international sales volume and may necessitate 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. In addition these risks can include extraordinarily delayed collections of accounts receivable. Because the Company conducts a significant portion of its business activities in the Middle East, the political and economic events of the countries that comprise the GCC can have a material effect on the Company’s business.
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:
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incurring additional debt;
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entering into transactions with affiliates;
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making investments or other restricted payments;
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paying dividends or making other distributions; and
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Any additional financing the Company may obtain could contain similar or more restrictive covenants. The Company's ability to comply with any covenants may be adversely affected by general economic conditions, political decisions, industry conditions and other events beyond management's control.
Competition.
The business in which the Company is engaged is highly competitive. Many of the competitors are larger and have more resources than the Company. 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 normally 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, 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 the 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:
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strain on working capital;
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diversion of management from other activities, which could impair the operation of existing businesses;
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failure to successfully integrate the acquired businesses or facilities into existing operations;
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inability to maintain key pre-acquisition business relationships;
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loss of key personnel of the acquired business or facility;
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•
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exposure to unanticipated liabilities; and
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failure to realize efficiencies, synergies and cost savings.
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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 domestic 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 or 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.
Income Taxes.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates. The Company is a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of earnings for the current fiscal year were earned by foreign subsidiaries. In addition to providing for U.S. income taxes on earnings from the U.S., the Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S. If certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
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 has resulted in increased general and administrative expenses and an increased allocation of management time and attention to compliance activities.
Effective internal control over financial reporting.
As a public reporting company, the Company is in a continuing process of developing, establishing, and maintaining internal controls and procedures . Management is required to report on internal controls over financial reporting under Section 404 Sarbanes-Oxley Act of 2002. If the Company fails to achieve and maintain adequate internal controls, management would not be able to conclude on an ongoing basis that the Company has effective internal controls over financial reporting in accordance with Section 404. If the Company does not remediate the material weaknesses described in Item 9A, or if other material weaknesses are identified in the future , the reported financial results of the Company could be materially misstated or could subsequently require restatement, which would require additional financial and management resources, and the market
price of our stock could decline.
Item 1B. UNRESOLVED STAFF COMMENTS -
None.
Item 2. PROPERTIES Principal properties at
January 31, 2016
:
Piping Systems
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Illinois
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Owned production facilities and office space
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16,800 square feet
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Louisiana
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Owned production facilities and leased land
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30,000 square feet on approximately 6 acres
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Tennessee
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Owned production facilities and office space
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131,800 square feet on approximately 23.5 acres
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Canada
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Joint venture owned production facilities and office space
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87,160 square feet on approximately 128 acres
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India
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Leased production facilities, office space and land
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33,700 square feet on approximately 1.2 acres
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Kingdom of Saudi Arabia
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Owned production facilities on leased land
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91,000 square feet on approximately 11 acres
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United Arab Emirates
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Leased office space and production facilities on leased land
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108,300 square feet on approximately 23 acres
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Filtration Products
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Illinois
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Bolingbrook - owned production facilities and office space, currently idle
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101,500 square feet on 5.5 acres
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Cicero - owned production facilities and office space, currently idle
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130,700 square feet on 2.8 acres
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Virginia
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Owned production facilities
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97,500 square feet on 5.0 acres
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Leased office space
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6,000 square feet
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The Company's principal executive offices, which occupy approximately 23,400 square feet of space in Niles, Illinois, are owned by the Company. This property is currently held for sale. In anticipation of this sale, the Company signed a lease in September 2015 for new office space currently under construction. The Company anticipates that it will begin occupying the new headquarters in the second quarter of 2016. The Company believes its properties and equipment are well maintained and in good operating condition and that production capacities will be adequate for present and currently anticipated needs.
The Company has several significant operating lease agreements as follows:
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Nine acres of land in the Kingdom of Saudi Arabia is leased through 2030.
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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 21,500 square feet in the U.A.E. is leased until July 2032.
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For further information, see Note 8 - Lease information,
in the Notes to Consolidated Financial Statements
.
Item 3. LEGAL PROCEEDINGS -
The Company had no material pending litigation.
Item 4. MINE SAFETY DISCLOSURES -
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
January 31, 2016 and 2015
(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
. As of January 31, 2016, MFRI is engaged in the manufacture and sale of products in
one
distinct segment: Piping Systems. As described below, prior to January 29, 2016, the Company was also engaged in the manufacture and sale of products in the Filtration Products segment.
Fiscal year.
The Company's fiscal year ends on January 31. Years and balances described as
2015 and 2014
are the fiscal years ended
January 31, 2016 and 2015
, 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.
Prior to January 29, 2016, the Company had a Filtration Products segment. This business is reported as discontinued operations in the consolidated financial statements and the notes to consolidated financial statements have been restated to conform to the current year reporting of this business. For further information, see Note 4 - Discontinued operations,
in the Notes to Consolidated Financial Statements
.
Segment information was as follows:
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2015
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2014
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Net sales
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Piping Systems
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$122,696
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$126,923
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Gross profit
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Piping Systems
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$26,741
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$30,774
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Income (loss) from operations
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Piping Systems
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$10,537
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$12,740
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Corporate
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(7,659)
|
(6,893)
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Total income from operations
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$2,878
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$5,847
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Segment assets
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Piping Systems
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$112,161
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$99,065
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Corporate
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10,229
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7,533
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Total segment assets
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$122,390
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$106,598
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Capital expenditures
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Piping Systems
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$4,762
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$3,953
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Corporate
|
289
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485
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Total capital expenditures
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$5,051
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$4,438
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Depreciation and amortization
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|
|
Piping Systems
|
$3,735
|
$3,635
|
Corporate
|
469
|
552
|
Total depreciation and amortization
|
$4,204
|
$4,187
|
Geographic information.
Net sales are attributed to a geographic area based on the destination of the product shipment. Sales to foreign customers was
52%
in
2015
compared to
50%
in
2014
. 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.
|
|
|
|
|
2015
|
2014
|
Net sales
|
|
|
United States
|
$58,707
|
$64,063
|
Middle East
|
60,749
|
50,430
|
Europe
|
73
|
372
|
Canada
|
2,581
|
3,248
|
India
|
372
|
5,099
|
Other Americas
|
72
|
3,657
|
Other
|
142
|
54
|
Total net sales
|
$122,696
|
$126,923
|
|
|
|
Property, plant and equipment, net of accumulated depreciation
|
|
|
United States
|
$13,822
|
$12,166
|
Middle East
|
11,211
|
11,608
|
India
|
367
|
391
|
Total
|
$25,400
|
$24,165
|
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) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and (iv) 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 domestic 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.
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.
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. The Company accounts for the investment in joint venture using the equity method.
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 weighted 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
$16.6 million
and
$9.9 million
as of
January 31, 2016 and 2015
, respectively. At
January 31, 2016
,
$0.2 million
was held in the U.S. and
$16.4 million
was held in the foreign subsidiaries.
Accounts payable included drafts payable of
$0.3 million
and
$0.6 million
as of
January 31, 2016 and 2015
, respectively.
Restricted cash.
Restricted cash held by a foreign subsidiary were
$2.3 million
and
$0.4 million
as of
January 31, 2016 and 2015
, respectively.
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 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 maintains its U.S. cash in bank deposit accounts at financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC"). Cash balances may exceed FDIC limits. The Company has not experienced any losses in such accounts. The Company has a broad customer base doing business in all regions of the U.S. as well as other areas in the world. At
January 31, 2016
, one customer accounted for
10.3%
of the Company's net sales. At
January 31, 2015
, one customer accounted for
17.2%
of the Company's net sales.
Two customers accounted for
46.4%
of accounts receivable at
January 31, 2016
,
and
and one customer accounted for
37.4%
of accounts receivable at
January 31, 2015
. As of April 1, 2016, these customers have paid
40.4%
of their receivables outstanding at
January 31, 2016
.
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.
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
Equity adjustment foreign currency
|
|
($2,208
|
)
|
|
($1,722
|
)
|
Minimum pension liability, gross
|
(2,303)
|
(3,124)
|
Marketable security, gross
|
118
|
0
|
Interest rate swap, gross
|
0
|
(119)
|
Subtotal excluding tax effect
|
(4,393)
|
(4,965)
|
Tax effect of foreign exchange
|
(69)
|
(74)
|
Tax effect of minimum pension liability
|
482
|
481
|
Tax effect of interest rate swap
|
0
|
28
|
Total other comprehensive loss
|
($3,980)
|
($4,530)
|
Inventories.
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories.
|
|
|
|
|
2015
|
2014
|
Raw materials
|
$15,291
|
$13,150
|
Work in process
|
1,168
|
887
|
Finished goods
|
722
|
715
|
Subtotal
|
17,181
|
14,752
|
Less allowances
|
1,556
|
1,067
|
Inventories, net
|
$15,625
|
$13,685
|
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
$4.2 million
in
2015
and in
2014
.
|
|
|
|
|
2015
|
2014
|
Land, buildings and improvements
|
$14,758
|
$13,704
|
Machinery and equipment
|
41,534
|
38,509
|
Furniture, office equipment and computer systems
|
5,632
|
5,945
|
Transportation equipment
|
40
|
43
|
Subtotal
|
61,964
|
58,201
|
Less accumulated depreciation and amortization
|
36,564
|
34,036
|
Property, plant and equipment, net
|
$25,400
|
$24,165
|
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. There was no impairment of long-lived assets in continuing operations as of January 31, 2016 and January 31, 2015.
The Company's headquarters' building in Niles, Illinois is reported as held for sale at
January 31, 2016
. There are no indications of impairment related to this asset.
Other intangible assets with definite lives.
The Company owns several patents including those covering features of its piping and electronic leak detection systems. Patents are capitalized and amortized on a straight-line basis over a period not to exceed the legal lives of the patents. The Company expenses costs incurred to renew or extend the term of intangible assets. Gross patents were
$2.6 million
and
$2.7 million
as of
January 31, 2016 and 2015
, respectively. Accumulated amortization was approximately
$2.3 million
and
$2.3 million
as of
January 31, 2016 and 2015
, respectively. Future amortizations over the next five years ending January 31 will be
$42,900
in
2016
,
$39,900
in
2017
,
$30,900
in
2018
,
$27,900
in
2019
,
$21,700
in
2020
, and
$88,207
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 operates in Camrose, Alberta, Canada. During the first six months of 2015, the Company received
$1.9 million
in principal repayments on the note receivable.
On December 31, 2015, MFRI entered into a purchase agreement with its joint venture partner Aegion Corporation to acquire 100% ownership of BPPC, which acquisition closed on
February 4, 2016
. The purchase price was approximately
$9.6 million
in cash and debt at closing and is subject to certain post-closing adjustments.
The Company accounts for the investment in joint venture using the equity method. The financial results are included in the Company's consolidated financial statements.
|
|
|
|
|
2015
|
2014
|
Share of income from joint venture
|
$602
|
$1,960
|
The following information summarizes the joint venture financial data:
|
|
|
|
|
2015
|
2014
|
Current assets
|
$8,274
|
$13,820
|
Noncurrent assets
|
12,284
|
14,023
|
Current liabilities
|
2,438
|
4,499
|
Noncurrent liabilities
|
3,908
|
9,013
|
Equity
|
14,212
|
14,331
|
Revenue
|
22,228
|
40,397
|
Gross profit
|
3,465
|
8,451
|
Income from continuing operations
|
1,938
|
6,397
|
Net income
|
1,228
|
4,000
|
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
$1.1 million
in
2015
and
$1.2 million
in
2014
.
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 and liabilities 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 9 - Income taxes
in the Notes to Consolidated Financial Statements
.
Net loss per common share.
Earnings per share ("EPS") are computed by dividing net loss by the weighted average number of common shares outstanding (basic). The years 2014 and
2015
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. The years 2014 and
2015
had earnings from continuing operations. The EPS from continuing are computed by dividing income by the weighted average number of common shares outstanding (basic). The dilutive shares are in the following table:
|
|
|
|
|
|
Basic weighted average number of common shares outstanding
|
2015
|
|
2014
|
|
Basic weighted average number of common shares outstanding
|
7,280
|
|
7,251
|
|
Dilutive effect of stock options, deferred stock and restricted stock units
|
91
|
|
73
|
|
Weighted average number of common shares outstanding assuming full dilution
|
7,371
|
|
7,324
|
|
|
|
|
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
|
710
|
|
261
|
|
Canceled options during the year
|
(77
|
)
|
(64
|
)
|
Stock options with an exercise price below the average stock price
|
10
|
|
503
|
|
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 option 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 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 holds a marketable equity security of approximately
$0.1 million
at
January 31, 2016
, which it classifies as available-for-sale and recorded in other non-current assets on the Consolidated Balance Sheet. This security is carried at estimated fair value with unrealized gains and losses reflected in Accumulated Other Comprehensive Income and classified as Level 1 in the fair value hierarchy. The assessment for impairment of marketable equity securities as available-for sale is based on established financial methodologies, including quoted market prices for publicly traded securities. If the Company determines that a loss in the value of the investment is other than temporary, any such losses are recorded in other expense (income), net.
Reclassifications.
Reclassifications were made to prior-year financial statements to conform to the current-year presentations.
Recent accounting pronouncements
. In 2016, the Financial Accounting Standards Board ("FASB") issued new guidance related accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is evaluating the impact of adopting this new accounting guidance on the consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). This ASU requires entities to recognize assets and liabilities for most leases on their balance sheets. It also requires additional qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that this standard will have on the consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The ASU requires entities to classify deferred tax liabilities and assets as noncurrent in a classified statement of financial position. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The adoption of this guidance by the Company did not have a material impact on the Company's consolidated financial statements.
In 2015, the FASB issued new guidance related to business combinations. The new guidance requires that adjustments made to provisional amounts recognized in a business combination be recorded in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is evaluating the impact, if any, of adopting this new accounting guidance on the consolidated financial statements.
In April 2015, the FASB issued authoritative guidance to simplify the balance sheet presentation of debt issuance costs. Under the new guidance, debt issuance costs will be presented as a reduction of the carrying amount of the debt liability. The guidance is effective for the Company beginning February 1, 2016 and will be applied retrospectively for all periods presented. As of January 31, 2016, the Company had
$0.2 million
of deferred debt issuance costs. The Company does not expect adoption of this guidance to have a material impact on the Company's financial statements.
In August 2014, the Financial Accounting Standards Board, ("FASB"), issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have an impact on the Company’s consolidated financial statements.
In May 2014, the FASB, issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This new standard provides for a single comprehensive model and supersedes most current revenue recognition guidance, including industry specific guidance, and provides for enhanced disclosure requirements. The objective of the new guidance is to improve the consistency, comparability and usefulness to users of financial statements. On April 1, 2015, FASB decided to defer the effective date of the new revenue standard by one year. As a result, public entities would apply the new revenue standard for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU 2014-09 provides for two implementation methods (1) full retrospective application to each prior period or (2) modified retrospective application with the cumulative effect as of the date of adoption. Early application is not permitted. The Company is evaluating the financial statement impacts of the guidance in this ASU and determining which transition method will be utilized.
The Company evaluated other recent accounting pronouncements and does not expect them to have a material impact on the consolidated financial statements.
Note 3 - Correction of immaterial errors.
In the fourth quarter of 2015, management discovered prior period inventory errors relating to excess and obsolete inventory. The cumulative adjustment for the inventory errors covering the period from February 1, 2013 to
January 31, 2015
was approximately
$0.9 million
. The adjustment applicable to the fourth quarter of 2013 was approximately
$1.0 million
, no adjustment to the first three quarters of 2013. The
$0.1 million
adjustment was applicable to the fourth quarter of 2014, and no adjustment was applicable to the first three quarters of 2015.
Pursuant to the guidance of Staff Accounting Bulletin ("SAB") No. 99,
Materiality,
the Company concluded that the errors were not material to any of its prior period financial statements. Although the errors were immaterial to prior
periods, the prior period financial statements were revised, in accordance with SAB No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
, due to the significance of the out-of-period correction.
A reconciliation of the effects of the adjustments to the previously reported balance sheet at
January 31, 2015
follows:
|
|
|
|
|
|
|
|
|
As Reported
|
Adjustment
|
As Adjusted
|
Inventories, net
|
$14,613
|
($928)
|
$13,685
|
Prepaid expenses and other current assets
|
2,345
|
|
205
|
|
2,550
|
|
Total current assets
|
110,427
|
|
(723
|
)
|
109,704
|
|
Total assets
|
148,797
|
|
(723
|
)
|
148,074
|
|
Retained earnings
|
25,325
|
|
(723
|
)
|
24,602
|
|
Total stockholders' equity
|
73,523
|
|
(723
|
)
|
72,800
|
|
Total liabilities and stockholders' equity
|
148,797
|
|
(723
|
)
|
148,074
|
|
A reconciliation of the effects of the adjustments to the previously reported statement of operations for the year
ending January 31, 2015 follows:
|
|
|
|
|
|
|
|
|
As Reported
|
Adjustment
|
As Adjusted
|
Cost of sales
|
$96,247
|
($98)
|
$96,149
|
Gross profit
|
30,676
|
|
98
|
|
30,774
|
|
General and administrative expense
|
19,179
|
|
23
|
|
19,202
|
|
Total operating expenses
|
24,904
|
|
23
|
|
24,927
|
|
Income from operations
|
5,772
|
|
75
|
|
5,847
|
|
Income from continuing operations before income taxes
|
7,213
|
|
75
|
|
7,288
|
|
Income from continuing operations
|
4,162
|
|
75
|
|
4,237
|
|
Net loss
|
(256
|
)
|
75
|
|
(181
|
)
|
A reconciliation of the effects of the adjustments to the previously reported statement of cash flows for the year ending January 31, 2015 follows:
|
|
|
|
|
|
|
|
|
As Reported
|
Adjustment
|
As Adjusted
|
Net loss
|
($256)
|
$75
|
($181)
|
Inventories, net
|
3,348
|
|
(98
|
)
|
3,250
|
|
Prepaid expenses and other current assets
|
977
|
|
23
|
|
1,000
|
|
A reconciliation of the effects of the adjustments to the previously reported statement of stockholders' equity for the year ending January 31, 2015 follows:
|
|
|
|
|
|
|
|
|
As Reported
|
Adjustment
|
As Adjusted
|
Net loss
|
($256)
|
$75
|
($181)
|
Retained earnings
|
25,325
|
|
(723
|
)
|
24,602
|
|
Total comprehensive loss
|
(3,626
|
)
|
75
|
|
(3,551
|
)
|
A reconciliation of the effects of the adjustments to the previously reported statement of stockholders' equity for the year ending January 31, 2014 follows:
|
|
|
|
|
|
|
|
|
As Reported
|
Adjustment
|
As Adjusted
|
Retained earnings
|
$25,580
|
($797)
|
$24,783
|
Stockholders' Equity
|
76,636
|
|
(797
|
)
|
75,839
|
|
Note 4 - Discontinued operations
On
January 29, 2016
, the Company sold certain assets and liabilities of its TDC Filter business based in Bolingbrook, Illinois to the Industrial Air division of CLARCOR, a NYSE-listed company based in Franklin, Tennesse. On January 29, 2016, the Company also sold its Nordic Air Filtration, Denmark and Nordic Air Filtration, Middle East businesses to Hengst Holding GmbH. The purchase price of these Illinois and international filtration businesses was
$22.0 million
, including cash proceeds of
$18.4 million
, of which
$1.9 million
is held in escrow until July 2017. The remaining domestic fabric filter business, which is included in held for sale, is operational and selling product as of
January 31, 2016
. 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. There was
$0.1 million
of tax expense for the period ended
January 31, 2016
. Loss from discontinued operations net of tax was
$6.0 million
and
$4.4 million
for the years ended
January 31, 2016 and 2015
, respectively.
Impairment.
The Company evaluates assets for impairment whenever events or changes in circumstances indicate that the carrying amount 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. In the fourth quarter, Filtration Product's recorded a
$6.5 million
impairment expense relating to the Virginia facility
Results of the discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
Net sales
|
|
$64,975
|
|
|
$68,110
|
|
|
|
|
Gain on disposal of discontinued operations
|
|
$8,099
|
|
|
$188
|
|
Impairment expense from discontinued operations
|
(6,480
|
)
|
—
|
|
Loss from discontinued operations
|
(7,569
|
)
|
(4,282
|
)
|
Loss from discontinued operations before income taxes
|
(5,950
|
)
|
(4,094
|
)
|
Income tax expense
|
94
|
|
324
|
|
Loss from discontinued operations, net of tax
|
|
($6,044
|
)
|
|
($4,418
|
)
|
|
|
|
Components of assets, and liabilities from discontinued operations consist of the following:
|
|
|
|
|
|
|
|
|
January 31,
|
|
2016
|
2015
|
Current assets
|
|
|
Cash and cash equivalents
|
|
$5
|
|
|
$608
|
|
Trade accounts receivable, net
|
5,720
|
|
7,516
|
|
Inventories, net
|
2,000
|
|
15,157
|
|
Other assets
|
349
|
|
2,003
|
|
Property, plant and equipment, net of accumulated depreciation
|
6,456
|
|
14,477
|
|
Non-current assets
|
1,203
|
|
1,715
|
|
Total assets from discontinued operations
|
|
$15,733
|
|
|
$41,476
|
|
|
|
|
Current liabilities
|
|
|
Trade accounts payable, accrued expenses and other
|
|
$7,514
|
|
|
$10,016
|
|
Current maturities of long-term debt
|
5,322
|
|
806
|
|
Long-term liabilities
|
2,629
|
|
10,557
|
|
Total liabilities from discontinued operations
|
15,465
|
|
21,379
|
|
Cashflows from discontinued operations:
|
|
|
|
|
|
|
|
|
January 31,
|
|
2016
|
2015
|
Net cash used in discontinued operating activities
|
|
($7,113
|
)
|
|
($2,629
|
)
|
Net cash provided by (used in) discontinued investing activities
|
17,026
|
|
(1,425
|
)
|
Net cash (used in) provided by discontinued financing activities
|
(3,025
|
)
|
4,219
|
|
Note 5 - Retention
Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of
$2.8 million
and
$5.7 million
were included in the balance of trade accounts receivable as of
January 31, 2016 and 2015
, respectively. Retention receivable of
$3.2 million
was included in the balance of other long-term assets as of
January 31, 2016
due to the long-term nature of the receivables.
Note 6 - Costs and estimated earnings on uncompleted contracts
|
|
|
|
|
2015
|
2014
|
Costs incurred on uncompleted contracts
|
$78,843
|
$66,547
|
Estimated earnings
|
46,359
|
31,082
|
Earned revenue
|
125,202
|
97,629
|
Less billings to date
|
123,915
|
97,610
|
Costs in excess of billings, net
|
$1,287
|
$19
|
Balance sheet classification
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
$2,463
|
$700
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
(1,176)
|
(681)
|
Costs in excess of billings, net
|
$1,287
|
$19
|
Note 7 - Debt
|
|
|
|
|
|
|
2015
|
|
2014
|
|
Revolving line domestic
|
$5,237
|
$11,353
|
Mortgage notes
|
1,443
|
|
1,530
|
|
Revolving lines foreign
|
8,131
|
|
2,774
|
|
Term loans
|
246
|
|
1,808
|
|
Capitalized lease obligations
|
442
|
|
1,060
|
|
Total debt
|
15,499
|
|
18,525
|
|
Less current maturities
|
14,006
|
|
16,170
|
|
Total long-term debt
|
$1,493
|
$2,355
|
The following table summarizes the Company's scheduled maturities at January 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Revolving line domestic
|
$5,237
|
|
$5,237
|
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
Mortgages
|
1,443
|
97
|
102
|
107
|
112
|
117
|
908
|
Revolving line foreign
|
8,131
|
8,131
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Term loans
|
246
|
165
|
81
|
—
|
|
—
|
|
—
|
|
—
|
|
Capitalized lease obligations
|
442
|
376
|
66
|
—
|
|
—
|
|
—
|
|
—
|
|
Total
|
$15,499
|
$14,006
|
$249
|
$107
|
$112
|
$117
|
$908
|
On September 24, 2014, the Company entered into a credit and security agreement with a financial institution (as amended, "Credit Agreement"). Under the terms of the Credit Agreement, which matures on
September 24, 2019
, the Company can borrow up to
$25.0 million
, subject to borrowing base and other requirements, under a revolving line of credit. The Credit Agreement covenants restrict debt, liens, and certain investments, and
require attainment of specific levels of profitability and cash flows when reaching certain levels of availability
. Interest rates are based on options selected by the Company as follows:
(a) a margin in effect plus a base rate, if below certain availability limits; or (b) a margin in effect plus the Eurodollar rate for the corresponding interest period.
At
January 31, 2016
, the Company was in compliance with all covenants under the Credit Agreement. The domestic revolving line balance as of January 31, 2015 and
January 31, 2016
was included as a current liability on the consolidated balance sheets.
At
January 31, 2016
, the Company had borrowed
$5.2 million
at
3.25%
and 1.5% and had
$8.3 million
available to it under the revolving line of credit. In addition,
$0.3 million
of availability was used under the Credit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. Cash required for operations is provided by draw-downs on the line of credit.
On February 29, 2016, the Company reduced the amount that can be borrowed under the Credit Agreement to
$15.0 million
.
Revolving lines foreign.
The Company also has credit arrangements used by its 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.
Some credit arrangement covenants requires a minimum tangible net worth to be maintained
. At
January 31, 2016
, 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, 2016
. At
January 31, 2016
, the Company can borrow
$43.8 million
under these credit arrangements. The Company borrowed
$8.1 million
and had
$28.7 million
available under these credit arrangements as of
January 31, 2016
. In addition,
$7.0 million
of availability was used to support letters of credit to guarantee amounts committed for inventory purchases.
The Company has a revolving line for
50 million Saudi Riyal
(approximately
$13.3 million
U.S. dollars at the prevailing exchange rate on the transaction date) from a Saudi Arabian bank. The loan has an interest rate of approximately
6%
and matures
September 2016
.
The Company has a revolving line for
40 million Dirhams
(approximately
$10.9 million
U.S. dollars at the prevailing exchange rate on the transaction date) from a bank in the U.A.E. The loan has an interest rate of approximately
6%
and matures
June 2016
.
The Company has a revolving line for
71.6 million Dirhams
(approximately
$19.5 million
U.S. dollars at the prevailing exchange rate on the transaction date) from a bank in the U.A.E. The loan has an interest rate of approximately
6%
and matures
November 2016
.
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 that 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 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. This mortgage is reported in liabilities of discontinued operations.
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
. This mortgage is reported in current liabilities held for sale.
Term loans.
Between March 2015 and September 2015, the Company obtained loans in the amount of
1.3 million Dirhams
(approximately
$341 thousand
U.S. dollars at the exchange rate prevailing on the transaction dates). The loans bear interest at
5.0%
and 6.0% with monthly payments of
$17 thousand
for both principal and interest and mature between
April 1, 2017
and
October 31, 2017
.
Capital leases.
On
May 1, 2012
, Piping Systems borrowed
$0.4 million
under an equipment loan secured by equipment. The loan bears interest at
6.5%
with monthly payments of
$8 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
.
In 2013 and 2014, Piping Systems obtained two capital leases totaling
1.5 million Indian Rupees
(approximately
$24 thousand
U.S. dollars at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rates for these capital leases range from
12.8%
to
18.2%
per annum with monthly principal and interest payments of
$1 thousand
, and the leases mature in 2016 and 2017.
Note 8 - Lease information
|
|
|
|
|
|
Property under capitalized leases
|
2.015
|
|
2.014
|
|
Machinery and equipment
|
$1,747
|
$1,803
|
Transportation equipment
|
22
|
|
24
|
|
Computer equipment
|
—
|
|
92
|
|
Subtotal
|
1,769
|
|
1,919
|
|
Less accumulated amortization
|
726
|
|
691
|
|
Total
|
$1,043
|
$1,228
|
The Company has several significant operating lease agreements as follows:
|
|
•
|
Nine acres of land in the Kingdom of Saudi Arabia is leased through 2030.
|
|
|
•
|
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 21,500 square feet in the U.A.E. is leased until July 2032.
|
The Company leases its administrative offices in the U.A.E. from a partnership in which a Company employee is a partner. Total rent paid to the partnership was
$0.3 million
in
2015 and 2014
, respectively.
At
January 31, 2016
, future minimum annual rental commitments under non-cancelable lease obligations were as follows:
|
|
|
|
|
|
|
Operating Leases
|
Capital Leases
|
2016
|
$1,944
|
$1,386
|
2017
|
1,640
|
|
67
|
|
2018
|
1,378
|
|
—
|
|
2019
|
1,311
|
|
—
|
|
2020
|
1,327
|
|
—
|
|
Thereafter
|
10,066
|
|
—
|
|
Subtotal
|
17,666
|
|
1,453
|
|
Less Amount representing interest
|
|
22
|
|
Future minimum lease payments
|
$17,666
|
$1,431
|
Rental expense for operating leases was
$0.7 million
and
$0.8 million
in
2015 and 2014
, respectively.
Note 9 - Income taxes
|
|
|
|
|
|
Income (loss) from continuing operations
|
2015
|
|
2014
|
|
Domestic
|
($2,066)
|
$1,968
|
Foreign
|
5,076
|
|
5,320
|
|
Total
|
$3,010
|
$7,288
|
|
|
|
|
|
|
Components of income tax expense (benefit)
|
2015
|
|
2014
|
|
Current
|
|
|
Federal
|
$12
|
$49
|
Foreign
|
1,541
|
|
1,851
|
|
State and other
|
71
|
|
(80
|
)
|
Subtotal
|
1,624
|
|
1,820
|
|
Deferred
|
|
|
Federal
|
—
|
|
—
|
|
Foreign
|
(249
|
)
|
1,231
|
|
State and other
|
—
|
|
—
|
|
Subtotal
|
(249
|
)
|
1,231
|
|
Total
|
$1,375
|
$3,051
|
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 effective tax rate ("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.
ETR in 2015 was higher than the statutory U.S. federal income tax rate, mainly due to the impact of the full valuation allowance maintained against domestic deferred tax assets and the recognition of foreign earnings
resulting from the dispositions of certain foreign operations. The Company remains in an NOL carryforward position.
During the fourth quarter of 2015, the Company sold its foreign filtration operations, the gain from which was taxable in the U.S. As such, the Company no longer considers the earnings of the remaining Denmark subsidiary permanently reinvested. Therefore, the Company has recorded a deferred tax liability of
$0.2 million
related to the U.S. federal and state income taxes on approximately
$0.7 million
of undistributed earnings.
The Company has not provided Federal tax on remaining unremitted earnings of its Middle East subsidiaries. The Company does not believe that it will be necessary to repatriate earnings from these subsidiaries. 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 could 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.
During the fourth quarter of 2014, the Company concluded that not all of the undistributed earnings of Perma-Pipe India Ltd, will remain permanently reinvested outside the U.S. and are available for use in the U.S. or in entities in other foreign countries. As such, the Company recorded a deferred tax liability of
$0.2 million
and
$0.9 million
for the periods ending January 31, 2016 and 2015, respectively, related to the U.S. federal and state income taxes and foreign withholding taxes on approximately
$2.8 million
and
$4.2 million
of undistributed earnings. The decrease in deferred tax liability primarily relates to a
$2.0 million
dividend paid during January 2016 along with a decrease in accumulated earnings and profits. Future earnings related to this subsidiary are not deemed permanently reinvested. No U.S. cash tax payments will be made upon distribution of these foreign earnings as long as the Company has sufficient tax attributes in the U.S. to reduce the cash tax consequences of potential repatriation.
The difference between the provision for income taxes and the amount computed by applying the Federal ETR of 34% was as follows:
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
Tax benefit at federal statutory rate
|
$1,023
|
$2,478
|
Permanent differences management fee allocation
|
619
|
|
1,946
|
|
Domestic valuation allowance
|
804
|
|
—
|
|
Permanent differences other
|
214
|
|
(540
|
)
|
Valuation allowance for state NOLs
|
88
|
|
(318
|
)
|
Differences in foreign tax rate
|
(780
|
)
|
(291
|
)
|
Foreign tax credit
|
(761
|
)
|
(793
|
)
|
Domestic deferred tax true ups
|
(346
|
)
|
—
|
|
Research tax credit
|
(54
|
)
|
(29
|
)
|
Repatriation
|
821
|
|
1,530
|
|
Valuation allowance for foreign NOLs
|
32
|
|
35
|
|
Nontaxable income from the Canadian joint venture
|
(205
|
)
|
(666
|
)
|
State taxes, net of federal benefit
|
(58
|
)
|
(131
|
)
|
All other, net expense
|
(22
|
)
|
(170
|
)
|
Total
|
|
$1,375
|
|
|
$3,051
|
|
The Company has a Federal operating loss carryforward of
$11.5 million
that will begin to expire in the year ending
January 31, 2030
. In addition, there are suspended excess tax benefits of
$0.3 million
.
The deferred tax asset ("DTA") for state NOL carryforwards of
$1.4 million
relates to amounts that
expire at various times from 2016 to 2031
. The amount that expired in
2015
is approximately
$1 thousand
.
The Company has a DTA foreign NOL carryforward of
$0.1 million
for its subsidiary in Saudi Arabia 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 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, 2016
, the Company has determined that there is not a 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").
The Company continues to have a valuation allowance on its domestic DTAs since domestic losses continue to be generated.
The Company has a deferred tax asset of
$2.9 million
for U.S. foreign tax credits attributed to repatriated foreign earnings. The excess foreign tax credits are subject to a ten-year carryforward and will expire in
January 31, 2022
. As of January 31, 2016, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately
$40.4 million
of undistributed earnings of foreign subsidiaries indefinitely reinvested outside of the U.S., mainly in the Middle East.
|
|
|
|
|
|
Components of deferred income tax assets
|
2015
|
|
2014
|
|
U.S. Federal NOL carryforward
|
$3,044
|
$3,156
|
Non-qualified deferred compensation
|
2,382
|
|
2,363
|
|
Research tax credit
|
2,057
|
|
2,032
|
|
Foreign NOL carryforward
|
231
|
|
483
|
|
Foreign tax credit
|
2,861
|
|
2,088
|
|
Stock compensation
|
1,061
|
|
1,033
|
|
Other accruals not yet deducted
|
438
|
|
901
|
|
State NOL carryforward
|
1,419
|
|
1,291
|
|
Accrued commissions and incentives
|
723
|
|
584
|
|
Accrued pension
|
—
|
|
735
|
|
Inventory valuation allowance
|
73
|
|
430
|
|
Other
|
106
|
|
561
|
|
Inventory uniform capitalization
|
10
|
|
94
|
|
Deferred tax assets, gross
|
14,405
|
|
15,751
|
|
Valuation allowance
|
(13,333
|
)
|
(14,201
|
)
|
Total deferred tax assets, net of valuation allowances
|
$1,072
|
$1,550
|
|
|
|
Components of the deferred income tax liability
|
|
|
Depreciation
|
$633
|
$851
|
Foreign subsidiaries unremitted earnings
|
412
|
|
863
|
|
Prepaid
|
88
|
|
310
|
|
Total deferred tax liabilities
|
$1,133
|
$2,024
|
|
|
|
Deferred tax liability, net
|
$(61)
|
$(474)
|
|
|
|
Balance sheet classification
|
|
|
Long-term assets
|
$99
|
$260
|
Long-term liability
|
160
|
|
734
|
|
Total deferred tax liabilities, net of valuation allowances
|
$(61)
|
$(474)
|
The following table summarizes UTP activity, excluding the related accrual for interest and penalties:
|
|
|
|
|
|
|
2.015
|
|
2.014
|
|
Balance at beginning of the year
|
$1,288
|
$1,358
|
Increases in positions taken in a prior period
|
11
|
|
17
|
|
Increases in positions taken in a current period
|
14
|
|
—
|
|
Decreases due to lapse of statute of limitations
|
—
|
|
(42
|
)
|
Decreases due to settlements
|
—
|
|
(45
|
)
|
Balance at end of the year
|
$1,313
|
$1,288
|
Included in the total UTP liability at
January 31, 2016
were estimated accrued interest of
$28 thousand
and penalties of
$17 thousand
and at
January 31, 2015
, accrued interest was
$17 thousand
and penalties were
$15 thousand
. 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, 2016
, the Company did not anticipate any significant adjustments to its unrecognized tax benefits within the next twelve months. Included in the balance at
January 31, 2016
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,
$1.3 million
of the amount accrued at
January 31, 2016
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. In July 2014, the Company received a notice from the Internal Revenue Service that it had concluded the tax audit for the years ended January 31, 2012 and 2013.
No changes were made to the reported tax
. 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 10 - 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 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
|
2015
|
|
2014
|
Equity securities
|
$3,062
|
$3,795
|
U.S. bond market
|
2,168
|
2,033
|
Subtotal
|
5,230
|
5,828
|
Level 2 significant other observable inputs
|
|
|
Money market fund
|
$351
|
$340
|
Equity securities
|
302
|
0
|
Subtotal
|
653
|
340
|
Total
|
5,883
|
|
6,168
|
|
|
|
At
January 31, 2016
, plan assets were held
61%
in equity,
31%
in debt and
8%
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 52% equities (with a range of 40% - 65%), 30% fixed income (with a range of 20% - 35%) and 18% 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
2015
resulted in
$25 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, which is the return that the Company has assumed during every profitable and unprofitable investment year since 1991. The plan's investments are intended to earn long-term returns to fund long-term obligations, and investment portfolios with asset allocations similar to those of the plan's investment policy have attained such returns over several decades. Future contributions that may be necessary to maintain funding requirements are not expected to materially affect the Company's liquidity.
|
|
|
|
|
|
Reconciliation of benefit obligations, plan assets and funded status of plan
|
2015
|
|
2014
|
|
Accumulated benefit obligations
|
|
|
Vested benefits
|
$6,587
|
$7,626
|
Accumulated benefits
|
$7,020
|
$8,129
|
|
|
|
Change in benefit obligation
|
|
|
Benefit obligation - beginning of year
|
$8,129
|
$6,827
|
Service cost
|
—
|
|
—
|
|
Interest cost
|
266
|
|
299
|
|
Actuarial (gain) loss
|
(1,115
|
)
|
1,249
|
|
Benefits paid
|
(260
|
)
|
(246
|
)
|
Benefit obligation - end of year
|
$7,020
|
$8,129
|
|
|
|
Change in plan assets
|
|
|
Fair value of plan assets - beginning of year
|
$6,168
|
$6,351
|
Actual (gain) loss on plan assets
|
(25
|
)
|
63
|
|
Benefits paid
|
(260
|
)
|
(246
|
)
|
Fair value of plan assets - end of year
|
$5,883
|
$6,168
|
|
|
|
Unfunded status
|
$(1,137)
|
$(1,961)
|
|
|
|
Balance sheet classification
|
|
|
Current assets
|
$326
|
$352
|
Other assets
|
1,166
|
|
1,163
|
|
Other long-term liabilities
|
(2,629
|
)
|
(3,476
|
)
|
Net amount recognized
|
$(1,137)
|
$(1,961)
|
|
|
|
Amounts recognized in accumulated other comprehensive loss
|
|
|
Unrecognized actuarial loss
|
$2,303
|
$3,124
|
Net amount recognized
|
$2,303
|
$3,124
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net cost and benefit obligations
|
2015
|
|
2014
|
|
End of year benefit obligation
|
4.05
|
%
|
3.35
|
%
|
Service cost discount rate
|
4.50
|
%
|
4.50
|
%
|
Expected return on plan assets
|
8.00
|
%
|
8.00
|
%
|
Rate of compensation increase
|
N/A
|
|
N/A
|
|
The discount rate was based on a Citigroup pension discount curve of high quality fixed income investments with cash flows matching the plans' expected benefit payments. The Company determines the expected long-term rate of return on plan assets by performing a detailed analysis of historical and expected returns based on the strategic asset allocation approved by the Board of Directors and the underlying return fundamentals of each asset class. The Company's historical experience with the pension fund asset performance is also considered.
|
|
|
|
Components of net periodic benefit cost
|
2015
|
2014
|
Service cost
|
$0
|
$0
|
Interest cost
|
266
|
299
|
Expected return on plan assets
|
(479)
|
(494)
|
Recognized actuarial loss
|
210
|
69
|
Net periodic benefit (income) cost
|
($3)
|
($126)
|
|
|
|
|
|
|
Amounts recognized in other comprehensive income
|
|
|
Actuarial gain (loss) on obligation
|
$1,115
|
$(1,249)
|
Actual (loss) gain on plan assets
|
(294
|
)
|
(362
|
)
|
Total in other comprehensive income (loss)
|
$821
|
$(1,611)
|
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, 2016
|
|
|
$—
|
|
Expected employee contributions for the fiscal year ending January 31, 2016
|
|
—
|
|
Estimated future benefit payments reflecting expected future service for the fiscal year(s) ending January 31,:
|
|
|
2017
|
|
326
|
|
2018
|
|
349
|
|
2019
|
|
348
|
|
2020
|
|
363
|
|
2021
|
|
363
|
|
2022 - 2026
|
|
$1,841
|
401(k) plan
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
3.5%
of each participant's salary.
Contributions to the 401(k) plan were
$558 thousand
and
$439 thousand
for the years ended
January 31, 2016 and 2015
, respectively.
Deferred compensation plan
The Company had a Supplemental Retirement and Deferred Compensation Plan ("Supplemental Plan"), pursuant to which key employees deferred compensation. Participants receive distributions from the plan at the later of age 65 or six months after separation from service. Life insurance contracts have been purchased and may be used to fund the Company's obligation under these agreements.
|
|
|
|
|
|
Deferred compensation liability
|
2015
|
|
2014
|
|
Current
|
$6,167
|
$213
|
Long-term
|
495
|
|
6,560
|
|
Total
|
$6,662
|
$6,773
|
|
|
|
Deferred compensation expense
|
$36
|
$270
|
On April 10,
2014
,
the Company's Boar
d
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
.
T
he Company is obligated to deliver
9,991
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. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Zone Status
|
FIP/RP Status Pending/Implemented
|
Contribution
|
|
|
Plan Name
|
EIN
|
Plan #
|
2015
|
2014
|
Surcharge Imposed
|
Collective Bargaining Expiration Date
|
Plumbers & Pipefitters Local 572 Pension Fund
|
626102837
|
001
|
Green
|
No
|
233
|
|
236
|
|
No
|
3/31/2019
|
Note 11 - Stock-based compensation
The Company has stock-based compensation awards that can be granted to eligible employees, officers or directors.
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
Stock-based compensation expense (benefit)
|
|
$116
|
|
|
($114
|
)
|
Restricted stock based compensation expense
|
|
$470
|
|
|
$82
|
|
Stock-based compensation was a benefit year-to-date due to cancellations. A majority of these cancellations related to former employees from the discontinued operations.
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 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.
|
|
|
|
|
|
|
|
|
|
2.015
|
|
2.014
|
|
1.
|
Risk-free interest rate
|
.74%-1.77%
|
|
.74%-1.77%
|
|
2.
|
Expected volatility
|
40.88%-57.02%
|
|
40.88%-59.39%
|
|
3.
|
Expected life in years
|
5.0 to 5.1
|
|
4.9 to 5.1
|
|
4.
|
Dividend yield
|
—
|
|
—
|
|
The following summarizes the activity related to options outstanding under all plans for the years ended January
31,
2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted average exercise price
|
|
Weighted average remaining contractual term
|
Aggregate intrinsic value
|
|
Outstanding at January 31, 2014
|
776
|
|
$11.69
|
6.1
|
$3,859
|
|
|
|
|
|
Granted
|
97
|
|
12.41
|
|
|
|
Exercised
|
(45
|
)
|
7.27
|
|
|
194
|
|
Expired or forfeited
|
(64
|
)
|
18.92
|
|
|
|
Outstanding at January 31, 2015
|
764
|
|
11.45
|
|
5.7
|
—
|
|
|
|
|
|
|
Options exercisable at January 31, 2015
|
532
|
|
$12.04
|
4.5
|
—
|
|
|
|
|
|
|
Granted
|
51
|
|
6.38
|
|
|
|
Exercised
|
(18
|
)
|
6.48
|
|
|
3
|
|
Expired or forfeited
|
(77
|
)
|
9.93
|
|
|
|
Outstanding at January 31, 2016
|
720
|
|
11.38
|
|
5.1
|
34
|
|
|
|
|
|
|
Options exercisable at January 31, 2016
|
554
|
|
$11.94
|
4.2
|
$30
|
The weighted average fair value of options granted, net of options surrendered, during
2015 and 2014
are estimated at
$2.54
and
$4.73
, per share, respectively, on the date of grant.
|
|
|
|
|
|
|
Unvested options outstanding
|
Options
|
|
Weighted-average grant date fair value
|
|
Aggregate intrinsic value
|
Outstanding at January 31, 2015
|
232
|
|
$10.11
|
$0
|
Granted
|
51
|
|
6.38
|
|
|
Vested
|
(92
|
)
|
|
|
Expired or forfeited
|
(25
|
)
|
9.65
|
|
|
Outstanding at January 31, 2016
|
166
|
|
$9.51
|
$3
|
Based on historical experience the Company expects
85%
of these options to vest.
As of
January 31, 2016
, there was
$0.5 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
2.1
years.
Deferred stock
On April 10, 2014, the Company's Board of Directors terminated the Deferred Stock Purchase Plan, adopted on
December 5, 2012
, effective April 10, 2014 ("Termination Date"). No additional contributions will be made by the Company or participants under the Plan after the Termination Date. All Company stock remaining in participant accounts was required to be distributed not later than 24 months after the Termination Date, accordingly the Company delivered
9,991
shares of Company common stock under this Plan in April 2016. Refer to "Deferred compensation plan" in Note 9 - Retirement plans,
in the Notes to Consolidated Financial Statements
In June 2015 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
$40,000
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, 2016
, there were approximately
77,293
deferred stock units outstanding included in restricted stock activity below.
Restricted stock
In June 2015 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
three 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 treasury stock or 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 vesting period. The following table summarizes restricted stock activity for the years ended
January 31, 2016 and 2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
Restricted shares
|
|
Weighted average grant price
|
|
Aggregate intrinsic value
|
|
Outstanding at January 31, 2014
|
50
|
|
|
$14.52
|
|
|
$719
|
|
Granted
|
54
|
|
12.41
|
|
|
Issued
|
(15
|
)
|
|
|
Forfeited
|
(3
|
)
|
11.25
|
|
|
Outstanding at January 31, 2015
|
86
|
|
|
$14.52
|
|
|
$1,242
|
|
|
|
|
|
Granted
|
108
|
|
6.38
|
|
|
Issued
|
(26
|
)
|
|
|
Forfeited
|
(5
|
)
|
6.38
|
|
|
Outstanding at January 31, 2016
|
163
|
|
|
$6.40
|
|
|
$1,040
|
|
As of
January 31, 2016
, there was
$0.6 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
2.3 years
.
Note 12 - Treasury stock / share repurchase program.
On
February 5, 2015
, the Company's Board of Directors approved a share repurchase program, which authorizes the Company to use up to
$2 million
for the purchase of its outstanding shares of common stock. Share repurchases were permitted to be executed through open market or privately negotiated transactions on or prior to
December 31, 2015
.
The following table sets forth information with respect to repurchases by the Company of its shares of common stock during 2015:
|
|
|
|
Period
|
Total number of shares purchased (in thousands)
|
Average price paid per share
|
February
|
28
|
$6.64
|
March
|
17
|
6.27
|
April to December
|
—
|
—
|
Note 13 - 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 14 - Interest expense, net
|
|
|
|
|
|
|
2015
|
|
2.014
|
|
Interest expense
|
$950
|
$1,045
|
Interest income
|
(480
|
)
|
(526
|
)
|
Interest expense, net
|
$470
|
$519
|
Note 15 - Subsequent events
As previously discussed, MFRI, through its wholly owned subsidiary Perma-Pipe Canada, Inc., acquired 100% ownership of BPPC, a coating and insulation company located in Alberta, Canada. The Company had owned a 49% interest in BPPC since 2009. On
February 4, 2016
,
the remaining 51% interest in BPPC was acquired from a subsidiary of Aegion Corporation for consideration of approximately $9.6 million in cash and debt
.