Item 1. BUSINESS
Company Profile
MFRI, Inc. ("MFRI" or the "Company") is a holding company which has subsidiaries
engaged in the manufacture and sale of products in three distinct business
segments: filtration products, piping systems and industrial process cooling
equipment.
The Company's filtration products business (the "Filtration Products Business")
is conducted by Midwesco Filter Resources, Inc. ("Midwesco Filter"). Perma-Pipe,
Inc. ("Perma-Pipe") conducts the piping systems business (the "Piping Systems
Business"). The industrial process cooling equipment business (the "Industrial
Process Cooling Equipment Business") is conducted by Thermal Care, Inc.
("Thermal Care"). Midwesco Filter, Perma-Pipe and Thermal Care are wholly owned
subsidiaries of MFRI. As used herein, unless the context otherwise requires, the
term "Company" includes MFRI and its subsidiaries, Midwesco Filter, Perma-Pipe,
Thermal Care, and their respective predecessors and subsidiaries.
Midwesco Filter manufactures and sells a wide variety of filter elements for air
filtration and particulate collection systems. Air filtration systems are used
in many industries in the United States and abroad to limit particulate
emissions, primarily to comply with environmental regulations. Midwesco Filter
markets air-filtration-related products and accessories, and provides
maintenance services, consisting primarily of dust collector inspection, filter
cleaning and filter replacement.
Perma-Pipe engineers, designs, manufactures and sells specialty piping systems
and leak detection and location systems. Perma-Pipe's specialty piping systems
include (i) industrial and secondary containment piping systems for transporting
chemicals, waste streams and petroleum liquids, (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 lines and long lines for oil and mineral transportation. Perma-Pipe's leak
detection and location systems are sold as part of many of its piping systems
products 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.
Thermal Care engineers, designs and manufactures industrial process cooling
equipment, including liquid chillers, mold temperature controllers, cooling
towers, plant circulating systems, and related accessories for use in industrial
process applications.
Additional information with respect to the Company's lines of business is
included in the following discussions of the separate business segments and in
the financial statements and related notes thereto.
Filtration Products Business
Air Filtration and Particulate Collection Systems. Air filtration and
particulate collection systems have been used for over 55 years in many
industrial applications. However, the enactment of federal and state legislation
and related regulations and enforcement have increased the demand for
air-filtration and particulate-collection systems by requiring industry to meet
primary and secondary ambient air quality standards for specific pollutants,
including particulate. In certain manufacturing applications, particulate
collection systems are an integral part of the production process. Examples of
such applications include the production of cement, carbon black and industrial
absorbents.
The principal types of industrial air filtration and particulate collection
systems in use today are baghouses, cartridge collectors, electrostatic
precipitators, scrubbers and mechanical collectors. The type of technology most
suitable for a particular application is a function of such factors as the
ability of the system to meet applicable regulations, initial investment,
operating costs and the parameters of the process, including operating
temperatures, chemical constituents present, size of particulate and pressure
differential.
Cartridge collectors and baghouses are typically box-like structures, which
operate in a manner similar to a vacuum cleaner. They can contain a single
filter element or an array of several thousand cylindrical or envelope filter
elements (as short as two feet or as long as 30 feet) within a housing, which is
sealed to prevent the particulate from escaping. Exhaust gases are passed
through the filtration elements, and the particulate is captured on the media of
the filter element. The particulate is removed from the filter element by such
methods as mechanical shaking, reverse air flow or compressed air pulse.
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Cartridge collectors and baghouses are generally used with utility and
industrial boilers, cogeneration plants and incinerators and in the chemicals,
cement, asphalt, metals, grain and foundry industries, as well as air intake
filters for gas turbines.
Because air pollution control equipment represents a substantial capital
investment, such systems usually remain in service for the entire life of the
plant in which they are installed. A baghouse can last up to 30 years and is
typically rebagged six to eight times during its useful life. The useful life of
a cartridge collector is 10 to 20 years, with five to ten cartridge changes
during its useful life. Although reliable industry statistics do not exist, the
Company believes there are more than 26,000 locations in the United States
presently using baghouses and/or cartridge collectors, many of which have
multiple pieces of such equipment.
Products and Services. The Company manufactures and sells a wide variety of
filter elements for cartridge collectors and baghouse air filtration and
particulate collection systems. Cartridge collectors and baghouses are used in
many industries in the United States and abroad to limit particulate emissions,
primarily to comply with environmental regulations. The Company manufactures
filter elements in standard industry sizes, shapes and filtration media and to
custom specifications, maintaining manufacturing standards for more than 10,000
styles of filter elements to suit substantially all industrial applications.
Filter elements are manufactured from industrial yarn, fabric and papers
purchased in bulk. Most filter elements are produced from cellulose, acrylic,
fiberglass, polyester, aramid or polypropylene fibers. The Company also
manufactures filter elements from more specialized materials, sometimes using
special finishes.
The Company markets numerous filter-related products and accessories used during
the installation, operation and maintenance of cartridge collectors and
baghouses, including wire cages used to support filter bags, spring assemblies
for proper tensioning of filter bags and clamps and hanger assemblies for
attaching filter elements. In addition, the Company markets other hardware items
used in the operation and maintenance of cartridge collectors and baghouses.
These include sonic horns to supplement the removal of particulate from filter
bags and cartridge collectors and baghouse parts such as door gaskets, shaker
bars, tube sheets, dampers, solenoid valves, timer boards, conveyors and
airlocks. The Company currently manufactures wire cages and purchases all other
filter-related products and accessories for resale. The Company also provides
maintenance services, consisting primarily of air-filtration system inspection
and filter element replacement, using a network of independent contractors. The
sale of filter-related products and accessories, collector inspection,
maintenance services and leak detection account for approximately 13% of the net
sales of the Company's filtration products and services.
Over the past three years, the Company's Filtration Products Business has served
more than 4,000 user locations. The Company has particular expertise in
supplying filter bags for use with electric arc furnaces in the steel industry.
The Company believes its production capacity and quality control procedures make
it a leading supplier of filter bags to large users in the electric power
industry. Orders from that industry tend to be substantial in size, but are
usually at reduced margins. In the fiscal year ended January 31, 2004, no
customer accounted for 10% or more of net sales of the Company's filtration
products and services.
Marketing. The customer base for the Company's filtration products and services
is industrially and geographically diverse. These products and services are used
primarily by operators of utility and industrial coal-fired boilers,
incinerators and cogeneration plants and by producers of metals, cement,
chemicals and other industrial products.
The Company has an integrated sales program for its Filtration Products
Business, which consists of field-based sales personnel, manufacturers'
representatives, a telemarketing operation and computer-based customer
information systems containing data on nearly 18,000 user locations. These
systems enable the Company's sales force to access customer information
classified by industry, equipment type, operational data and the Company's
quotation and sales history. The systems also provide reminders to telemarketing
personnel of the next scheduled customer contact date, as well as the name and
position title of the customer contact. The Company believes the computer-based
information systems are instrumental in increasing sales of filter-related
products and accessories and maintenance services, as well as sales of filter
elements.
The Company markets its U.S. manufactured filtration products internationally
using domestically based sales resources to target major users in foreign
countries. Export sales, which were approximately 8% of the domestic filtration
company's product sales during the year ended January 31, 2004, were about the
same level as the previous year. Nordic Air Filtration A/S ("Nordic Air"), a
wholly owned subsidiary of the Company located in Nakskov, Denmark, manufactures
and markets pleated filter elements throughout Europe and Asia, primarily to
original equipment manufacturers.
Trademarks. The Company owns the following trademarks covering its filtration
products: Seamless Tube(R), Leak Seeker(R), Prekote(R), We Take the Dust Out of
Industry (R), Pleatkeeper(R), Pleat Plus(R) and EFC(R).
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Backlog. As of January 31, 2004, the dollar amount of backlog (uncompleted firm
orders) for filtration products was $14,499,000. As of January 31, 2003, the
amount of backlog was $11,781,000. A customer has placed an order that is
deliverable over multiple years. Therefore, approximately $4,200,000 of the
backlog as of January 31, 2004 is not expected to be completed in 2004.
Raw Materials and Manufacturing. The basic raw materials used in the manufacture
of the Company's filtration products are industrial fibers and media supplied by
leading producers of such materials. The majority of raw materials purchased are
woven fiberglass fabric, yarns for manufacturing Seamless Tube(R) products and
other woven, felted, spun bond and cellulose media. Only a limited number of
suppliers are available for some of these materials. From time to time, any of
these materials could be in short supply, adversely affecting the Company's
business. The Company believes that supplies of all materials are adequate to
meet current demand. The Company's inventory includes substantial quantities of
various types of media because lead times from suppliers are frequently longer
than the delivery times required by customers. Nevertheless, the Company has
implemented an aggressive program to limit inventory to the minimum levels
compatible with meeting customer needs.
The manufacturing processes for filtration products include proprietary
computer-controlled systems for measuring, cutting, pleating, tubing and marking
media. The Company also operates specialized knitting machines and proprietary
fabric stabilization equipment to produce the Seamless Tube(R) product. Skilled
sewing machine operators perform the finish assembly work on each filter bag
using both standard sewing equipment and specialized machines developed by or
for the Company. The manufacturing process for pleated filter elements involves
the assembly of metal and, sometimes, plastic end components, filtration media
and support hardware.
The Company maintains a quality assurance program involving statistical process
control techniques for examination of raw materials, work in progress and
finished goods. Certain orders for particularly critical applications receive
100% quality inspection.
Competition. The Filtration Products Business is highly competitive. In
addition, new installations of cartridge collectors and baghouses are subject to
competition from alternative technologies. The Company believes that, based on
domestic sales, BHA Group, Inc.; the Menardi division of Beacon Industrial
Group; W.L. Gore & Associates, Inc. and the Company are the leading suppliers of
filter elements, parts and accessories for baghouses. The Company believes that
Donaldson Company, Inc.; Farr Company; Clarcor, Inc. and the Company are the
leading suppliers of filter elements for cartridge collectors. There are at
least 50 smaller competitors, most of which are doing business on a regional or
local basis. In Europe, several companies supply filtration products and Nordic
Air is a relatively small participant in that market. Some of the Company's
competitors have greater financial resources than the Company.
The Company believes price, service and quality are the most important
competitive factors in its Filtration Products Business. Often, a manufacturer
has a competitive advantage when its products have performed successfully for a
particular customer in the past. Additional effort is required by a competitor
to market products to such a customer. In certain applications, the Company's
proprietary Seamless Tube(R) product and customer support provide the Company
with a competitive advantage. Certain competitors of the Company may have a
competitive advantage because of proprietary products and processes, such as
specialized fabrics and fabric finishes. In addition, some competitors may have
cost advantages with respect to certain products as a result of lower wage rates
and/or greater vertical integration.
Government Regulation. The Company's Filtration Products Business is
substantially dependent upon governmental regulation of air pollution at the
federal and state levels. Federal clean air legislation requires compliance with
national primary and secondary ambient air quality standards for specific
pollutants, including particulate. The states are primarily responsible for
implementing these standards and, in some cases, have adopted more stringent
standards than those issued by the U.S. Environmental Protection Agency ("U.S.
EPA") under the Clean Air Act Amendments of 1990 ("Clean Air Act Amendments").
Although the Company can provide no assurances about what ultimate effect, if
any, the Clean Air Act Amendments will have on the Filtration Products Business,
the Company believes the Clean Air Act Amendments are likely to have a positive
long-term effect on demand for its filtration products and services. The U.S.
Supreme Court decision upholding the right of the U.S. EPA to reduce the minimum
size of particulates regulated by the National Air Quality Standard from 10
microns to 2.5 microns could have a significant positive effect on demand for
the Company's filtration products in future years.
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Piping Systems Business
Products and Services. The Company engineers, designs and manufactures specialty
piping systems and leak detection and location systems. The Company'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 lines and long lines for oil and mineral
transportation. The Company's leak detection and location systems are sold as
part of many of its piping systems, and, on a stand-alone basis, to monitor
areas where fluid intrusion may contaminate the environment, endanger personal
safety, cause a fire hazard, impair essential services or damage equipment or
property.
The Company's industrial and secondary containment piping systems, manufactured
in a wide variety of piping materials, are generally used for the handling of
chemicals, hazardous liquids and petroleum products. Industrial piping systems
often feature special materials, heat tracing, leak detection and special
fabrication. Secondary containment piping systems consist of service pipes
housed within outer containment pipes, which are designed to contain any leaks
from the service pipes. Each system is designed to provide economical and
efficient secondary containment protection that will meet all governmental
environmental regulations.
The Company's district heating and cooling (DHC) piping systems are designed to
transport steam, hot water and chilled water to provide efficient energy
distribution to multiple locations from a central energy plant. These piping
systems consist of a carrier pipe made of steel, ductile iron, copper or
fiberglass; insulation made of mineral wool, calcium silicate or polyurethane
foam; and an outer conduit or jacket of steel, fiberglass reinforced polyester
resin, polyethylene or PVC. The Company manufactures several types of piping
systems using different materials, each designed to withstand certain levels of
temperature and pressure.
The Company's oil and gas flow lines are designed to transport crude oil or
natural gas from the well head, either on land or on the ocean floor, to the
gathering point. Long lines for oil and mineral transportation are used for
solution mining and long line transportation of heated hydrocarbons or other
substances. These piping systems consist of a carrier pipe made of steel,
usually supplied by the customer; insulation made of polyurethane; jackets made
of high density polyurethane, polyethylene or polypropylene and sometimes a
steel outer pipe, also usually supplied by the customer.
The Company's leak detection and location systems consist of a sensor cable
attached to a microprocessor, which uses proprietary software. The system sends
pulse signals through the sensor cable, which is positioned in the area to be
monitored (e.g., along a pipeline in the ground or in a sub floor), and employs
a patented digital mapping technique to plot pulse reflections to continuously
monitor the sensor cable for anomalies. The system is able to detect one to
three feet of wetted cable in a monitored cable string of up to fifteen miles in
length and is able to determine the location of the wetted cable within five
feet. Once wetted cable is detected, the microprocessor uses the software to
indicate the location of the leak. The Company offers a variety of cables
specific to different environments. The Company's leak detection and location
systems can sense the difference between water and petroleum products and can
detect and locate multiple leaks. With respect to these capabilities, the
Company believes that its systems are superior to systems manufactured by other
companies. Once in place, the Company's leak detection and location system can
be monitored off-site because the system can communicate with computers through
telephone or internet connections. The Company's leak detection and location
systems are being used to monitor fueling systems at airports, including those
located in Denver, Colorado; Atlanta, Georgia; and Frankfurt and Hamburg,
Germany. They are also used in facilities used for mission-critical operations
such as those operated by web hosts, application service providers, internet
service providers, and in many clean rooms, including such facilities operated
by IBM, Intel and Motorola. The Company believes that, in the United States, it
is the only major supplier of the above-referenced types of specialty piping
systems that manufactures its own leak detection and location systems.
The Company's piping systems are frequently custom-fabricated to job site
dimensions and/or incorporate provisions for thermal expansion due to varying
temperatures. This custom fabrication helps to minimize the amount of field
labor required by the installation contractor. Most of the Company's piping
systems are produced for underground installations and, therefore, require
trenching, which is done by unaffiliated installation contractors. Generally,
sales of the Company's piping systems tend to be lower during the winter months,
due to weather constraints over much of the country. In the fiscal year ended
January 31, 2004, no single customer accounted for more than 10% of the net
sales of the Company's piping systems.
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The Company's leak detection and location systems and its secondary containment
piping systems are used primarily by operators of military and commercial
airport fueling systems, oil refineries, pharmaceutical companies, chemical
companies, and in museums, dry storage areas, and tunnels. They are also used
for water detection by internet service providers, application service
providers, and web hosts, as well as financial, telecommunication and other
electronic service companies. The Company's district heating and cooling systems
are used primarily at prisons, housing developments, military bases,
cogeneration plants, hospitals, industrial locations and college campuses. The
Company believes many district heating and cooling systems in place are 30 to 50
years old and ready for replacement. Replacement of district heating and cooling
systems is often motivated by the increased cost of operating older systems due
to leakage and/or heat loss. The primary users of the Company's insulated flow
lines are the major oil companies, gas companies and other providers of mineral
resources.
Marketing. The customer base for the Company's piping systems products is
industrially and geographically diverse. The Company employs a national sales
manager and regional sales managers who use and assist a network of
approximately 80 independent manufacturers' representatives, none of whom sells
products that are competitive with the Company's piping systems.
Patents, Trademarks and Approvals. The Company owns several patents covering the
features of its piping and electronic leak detection systems, which expire
commencing in 2006. In addition, the Company's leak detection system is listed
by Underwriters Laboratories and the U.S. EPA and is approved by Factory Mutual
and the Federal Communications Commission. The Company is also approved as a
supplier of underground district heating systems under the federal government
guide specifications for such systems. The Company owns numerous trademarks
connected with its piping systems business. In addition to Perma-Pipe(R), the
Company owns other trademarks for its piping and leak detection systems
including the following: Chil-Gard(R), Double-Pipe(R), Double-Quik(R),
Escon-A(R), Ferro-Shield(R), FluidWatch(R), Galva-Gard(R), Hi Gard(R),
Poly-Therm(R), Pal-AT(R), Ric-Wil(R), Ric-Wil Dual Gard(R), Stereo-Heat(R),
Safe-T-Gard(R), Therm-O-Seal(R), Uniline(R), LiquidWatch(R), TankWatch(R),
PalCom(R), Xtru-therm(R), Ultra-Pipe(R), PEX-GARD(R), and ULTRA-THERM(R). The
Company also owns United Kingdom trademarks for Poly-Therm(R), Perma-Pipe(R) and
Ric-Wil(R), and a Canadian trademark for Ric-Wil(R).
Backlog. As of January 31, 2004, the dollar amount of backlog (uncompleted firm
orders) for piping and leak detection systems was $16,635,000, substantially all
of which is expected to be completed in 2004. As of January 31, 2003, the amount
of backlog was $15,063,000.
Raw Materials and Manufacturing. The basic raw materials used in the production
of the Company's piping systems products are pipes and tubes made of carbon
steel, alloy and plastics and various chemicals such as polyols, isocyanate,
polyester resin, polyethylene and fiberglass, mostly purchased in bulk
quantities. We believe that we currently have adequate supplies or sources of
availability of the raw materials necessary to meet our needs. However, there
are risks and uncertainties with respect to the supply of certain of these raw
materials that could impact their availability in sufficient quantities to meet
our needs. In particular, the price of steel and alloy tube has risen rapidly
during the early months of 2004 perhaps reflecting growing shortages in supply.
The sensor cables used in the Company's leak detection and location systems are
manufactured to the Company's specifications by companies regularly engaged in
the business of 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 system from standard components
purchased from many sources. The Company's proprietary software is installed in
the system on a read-only memory chip.
The Company's manufacturing processes for its piping systems include equipment
and techniques to fabricate piping systems from a wide variety of materials,
including carbon steel, alloy and copper piping, and engineered thermoplastics
and fiberglass-reinforced polyesters and epoxies. The Company uses
computer-controlled machinery for electric plasma metal cutting, filament
winding, pipe coating, insulation foam and protective jacket application, pipe
bending, pipe cutting and pipe welding. The Company employs skilled workers for
carbon steel and alloy welding to various code requirements. The Company is
authorized to apply the American Society of Mechanical Engineers code symbol
stamps for unfired pressure vessels and pressure piping. The Company's inventory
includes bulk resins, chemicals and various types of pipe, tube, insulation,
pipe fittings and other components used in its products. The Company maintains a
quality assurance program involving lead worker sign-off of each piece at each
workstation, statistical process control, and nondestructive testing protocols.
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Competition. The piping system products business is highly competitive. The
Company believes its competition in the district heating and cooling market
consists of two other national companies, Rovanco Piping Systems, Inc. and
Thermacor Process, Inc., as well as numerous regional competitors. The Company's
secondary containment piping systems face several competitors including
Asahi/America and GF Plastics Systems. The Company's oil and gas gathering flow
lines face worldwide competition, including Bredero-Price, a subsidiary of Shaw
Industries, Inc.; CRP of UK; Soctherm of Italy, Soccoreal of Argentina; and
Logstor Rohr of Denmark. In addition to factory-fabricated systems of the type
sold by the Company, the Company competes with district heating and cooling
systems and secondary containment systems manufactured on the job site by
contractors and sellers of component parts of systems. Products competitive with
the Company's leak detection and location systems include: (1) cable-based
systems manufactured by the TraceTek by Raychem, a Division of Tyco Thermal
Controls LLC a subsidiary of Tyco Industries and RLE Technologies; (2) linear
gaseous detector systems manufactured by Tracer Technologies and Arizona
Instrument Corp.; and (3) probe systems manufactured by Veeder Root and
Pneumecator, as well as several other competitors that provide probe systems for
the service station and hydrocarbon leak detection industries.
The Company believes that price, quality, service and a comprehensive product
line are the key competitive factors in the Company's Piping Systems Business.
The Company believes it has a more comprehensive line of piping systems products
than any of its competitors. Certain competitors of the Company have cost
advantages as a result of manufacturing a limited range of products. Some of the
Company's competitors have greater financial resources than the Company.
Government Regulation. The demand for the Company's leak detection and location
systems and secondary containment piping systems is driven primarily 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 certain 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 they may increase the demand for its piping systems products.
Industrial Process Cooling Equipment Business
Products and Services. The Company engineers, designs and manufactures coolers
for industrial purposes. The Company's cooling products include: (i) chillers
(portable and central); (ii) cooling towers; (iii) plant circulating assemblies;
(iv) hot water, hot oil, and negative pressure temperature controllers;
(v) water treatment equipment and various other accessories; (vi) specialty
cooling devices for printing presses and ink management; and (vii) replacement
parts and accessories relating to the foregoing products. The Company's cooling
products are used to optimize manufacturing productivity by quickly removing
heat from manufacturing processes. The Company combines chillers and/or cooling
towers with plant circulating systems to create plant-wide systems that account
for a large portion of its business. The Company specializes in customizing
cooling systems and their computerized controls according to customer
specifications.
The principal markets for the Company's cooling products are thermoplastics
processing and the printing industries. The Company also sells its products to
original equipment manufacturers, to other cooling manufacturers on a private
branded basis and to manufacturers in the laser, metallizing, and machine tool
industries.
Chillers. Chillers are refrigeration units designed to provide cool water to a
process for the purpose of removing heat from the process and transferring that
heat to an area where it can be dissipated. This heat is either dissipated using
air (air-cooled chillers) or water (water-cooled chillers). Water-cooled
chillers use a cooling tower to transfer the heat from the chiller using water
and then releasing the heat to the atmosphere.
The Company believes it manufactures the most complete line of chillers
available in its primary markets. The Company's line of portable chillers is
available from 1/2 horsepower to 40 horsepower. It incorporates a microprocessor
capable of computer communications to standard industry protocols. While
portable chillers are considered to be a commodity product by many customers,
the Company believes that its units enable it to provide the customer with
quality, features, customization and other benefits at a competitive price.
Central chillers are used for plant-wide cooling and, while some models
incorporate their own pump and tank, most are sold with separate pumping systems
that are usually attached to reservoirs. These chillers are distinguished by the
manner in which the compressor (refrigerant pump) and the evaporator (heat
exchanger water-to-refrigerant) are used in the chiller. These chillers also use
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unique programmed logic controllers capable of handling either the chillers only
or they can be programmed to handle the entire plant cooling system based on
customer-plant demand. The Company believes that the ability to offer these
chiller systems provides it with a unique, total cooling approach concept sales
advantage. The Company's central chillers are available from 20 horsepower to
400 horsepower.
Cooling Towers. A cooling tower is essentially a cabinet with heat transfer fill
media in which water flows down across the fill while air is pulled up through
the fill. Cooling takes place by evaporation. Cooling towers are located
outdoors and are designed to provide water at a temperature of approximately
85(Degree)F to remove heat from water-cooled chillers, air compressors,
hydraulic oil heat exchangers and other processes that can effectively be cooled
in this manner.
The Company markets two lines of cooling towers. The FT fiberglass tower line
was introduced in 1984 and at the time was the first fiberglass cooling tower
line to be sold in the United States. The cabinets for these towers are imported
from China and are available in sizes ranging from 15 to 120 tons. (One tower
ton equals 15,000 BTU's/hour of heat removal.) The FC fiberglass tower line is
designed and engineered by the Company and is manufactured in the U.S.A. The FC
line is available from 100 to 240 tons.
Plant Circulating Systems. The Company manufactures and markets a variety of
tanks in various sizes with pumps and piping arrangements that use alarms and
other electrical options. Thus, the Company can provide a plant circulating
system which is unique and customized to meet the individual customer's needs.
These plant circulating systems are used as an integral part of central tower
and chiller systems. These tanks are available in mild steel, stainless steel,
fiberglass reinforced polyester and polyethylene.
Temperature Control Units. Most of the Company's temperature control units are
used by injection molders of plastic parts and by printing companies. They are
designed to remove heat from the molds for the purpose of improving part
quality. More than 90% of the temperature control units sold in the industry are
water units, while the remaining units use oil as the heat transfer medium.
Boe-Therm A/S ("Boe-Therm"), a wholly owned Danish subsidiary of the Company,
manufactures a complete line of temperature control units, including oil units
and negative pressure units. The Company markets Boe-Therm's oil and negative
pressure units under its own name.
Water Treatment Equipment and Accessories. Sold as an accessory to cooling tower
systems, water treatment equipment must be used to protect the equipment that is
being cooled. The Company sells units manufactured to its specifications by a
supplier that provides all the equipment and chemicals needed to properly treat
the water. While a relatively small part of the Company's business, this
arrangement allows the Company to offer a complete system to its cooling
products customers. In addition, the Company provides other items to complement
a system, principally heat exchangers, special valves, and "radiator type"
coolers. These items are purchased from suppliers and usually drop-shipped
directly to customers.
Ink Products. Ink products are products sold specifically for the proper
temperature control and distribution of the ink and cooling solutions used by
printing companies. These include printers of large newspapers, magazines,
forms, etc.
Parts. The Company strives to fill parts orders within 24 hours and sells parts
at competitive margins in order to serve existing customers and to enhance new
equipment sales.
Marketing. In general, the Company sells its cooling products in the domestic
and international thermoplastics and printing markets as well as to
manufacturers of digital video discs ("DVDs") and other non-plastics industries
that require specialized heat transfer equipment.
Domestic thermoplastics processors are the largest market served by the Company,
representing the core of its business.
There are approximately 8,000 companies processing plastic products in the
United States, primarily using injection molding, extrusion, and blow molding
machinery. The Company believes the total U.S. market for water cooling
equipment in the plastics industry is over $100 million annually, and that the
Company is one of the three largest suppliers of such equipment to the plastics
industry. The Company believes that the plastics industry is a mature industry
with growth generally consistent with that of the national economy. Due to the
high plastics content in many major consumer items, such as cars and appliances,
this industry experiences cyclical economic activity. The Company believes that
it is recognized in the domestic plastics market as a quality equipment
manufacturer and that it will be able to maintain current market share, with
potential to increase its market share through product development. The
Company's cooling products are sold through independent manufacturers'
representatives on an exclusive-territory basis. Seventeen agencies are
responsible for covering the United States and are supported by four regional
managers employed by the Company.
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Sales of the Company's cooling products outside the United States have mainly
been in Latin America. Some international sales have been obtained elsewhere as
a result of the assembly of complete worldwide PET (plastic bottle) plants by
multinational companies. The Company believes that it has a significant
opportunity for growth due to the high quality of its equipment and the fact
that it offers complete system design. Many United States competitors do not
provide equipment outside the U.S. and, while European competitors sell
equipment in Latin America, the Company believes that they lack system design
capabilities and have a significant freight disadvantage. The Company markets
its cooling products through a combination of manufacturers' representatives,
distributors and consultants managed by regional managers, reporting to a
National Sales and Marketing Manager.
The Company has increased sales to non-plastics industries that require
specialized heat transfer equipment, usually sold to end users as a package by
the supplier of the primary equipment, particularly in the laser industry,
metallizing industry, and machine tool industry. The Company believes that the
size of this market is more than $200 million annually. The original equipment
manufacturer generally distributes products to the end user in these markets.
Trademarks. The Company has registered the trademarks Thermal Care(R), AWS(R)
and Applied Web Systems(R).
Backlog. As of January 31, 2004, the dollar amount of backlog (uncompleted firm
orders) for industrial process cooling equipment was $3,825,000, substantially
all of which is expected to be completed in 2004. As of January 31, 2003, the
amount of backlog was $3,521,000.
Raw Materials and Manufacturing. The Company's domestic production and inventory
storage facility occupies approximately 88,000 square feet. The plant layout is
designed to facilitate movement through multiple work centers. The Company uses
an enterprise resource planning system installed in 2001 to support its sales,
manufacturing production, inventory, customer relations and accounting
operations. The status of a customer order at any given moment can be determined
through the system.
The Company uses prefabricated sheet metal and subassemblies manufactured by
both Thermal Care and outside vendors for temperature controller fabrication.
The production line is self-contained to reduce handling required to assemble,
wire, test, and crate the units for shipment.
FT towers up to 120 tons in capacity are assembled to finished goods inventory,
which allows the Company to meet quick delivery requirements. FT cooling towers
are manufactured using fiberglass and hardware components purchased from a
Chinese manufacturer, which is the Company's sole source for such products. The
wet deck is cut from bulk fill material and installed inside the tower.
Customer-specified options can be added at any time.
We believe that the Company s access to sheet metal, subassemblies, fiberglass
and hardware components is adequate.
The FC towers are designed and engineered by the Company. Two different cabinet
sizes of the FC tower account for eight different model variations. All FC
cooling towers are assembled at the Company's Niles facility.
The Company assembles all plant circulating systems by fabricating the steel to
meet the size requirements and adding purchased components to meet customers'
specifications. Electrical control boxes assembled in the electrical panel shop
are then added to the tank and hardwired to all electrical components. The
interior of the steel tanks are coated with an immersion service epoxy and the
exterior is painted in a spray booth. The Company also sells a fiberglass tank
for nonferrous applications.
Portable chillers are assembled utilizing components both manufactured by the
Company and supplied by outside vendors. Portable chillers are assembled using
refrigeration components, a non-corrosive tank, hose, and pre-painted sheet
metal. Many of the components used in these chillers are fabricated as
subassemblies and held in inventory. Once the water and refrigeration components
have been assembled, the unit is moved to the electrical department for the
addition of control subassemblies and wiring. The chillers are then evacuated,
charged with refrigerant and tested under fully loaded conditions. The final
production step is to clean, insulate, label, and crate the chiller for
shipment.
Central chillers are manufactured to customer specifications. Many of the
components are purchased to the job requirements and production is planned so
that subassemblies are completed to coincide with the work center movements.
8
After mechanical and electrical assembly, the chiller is evacuated, charged with
refrigerant and tested at full and partial load conditions. The equipment is
then insulated and prepared for painting. The final production step is to
complete the quality control inspection and prepare the unit for shipment.
Competition. The Company believes that there are about 15 competitors selling
cooling equipment in the domestic plastics market. The Company further believes
that three manufacturers, including the Company, collectively share
approximately 60% of the domestic plastics cooling equipment market. Many
international customers, with relatively small cooling needs, are able to
purchase small refrigeration units (portable chillers) that are manufactured in
their respective local markets at prices below that which the Company can offer
due to issues such as freight cost and customs duties. However, such local
manufacturers often lack the technology and products needed for plant-wide
cooling systems. The Company believes that its reputation for producing quality
plant-wide cooling products results in a significant portion of the Company's
business in this area.
The Company believes that price, quality, service and a comprehensive product
line are the key competitive factors in its Industrial Process Cooling Equipment
Business. The Company believes that it has a more comprehensive line of cooling
products than any of its competitors. Certain competitors of the Company have
cost advantages as a result of manufacturing in non-union shops and offering a
limited range of products. Some of the Company's competitors may have greater
financial resources than the Company.
Government Regulation. The Company does not expect compliance with federal,
state and local provisions regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment to have a
material effect on capital expenditures, earnings or the Company s competitive
position. Management is not aware of the need for any material capital
expenditures for environmental control facilities for the foreseeable future.
Regulations, promulgated under the Federal Clean Air Act, prohibit the
manufacture and sale of certain refrigerants. The Company does not use these
refrigerants in its products. The Company expects that suitable refrigerants
conforming to federal, state and local laws and regulations will continue to be
available to the Company, although no assurances can be given as to the ultimate
effect of the Clean Air Act and related laws on the Company.
Employees
As of March 31, 2004, the Company had 674 full-time employees, 73 of whom were
engaged in sales and marketing, 179 of whom were engaged in management,
engineering and administration, and the remainder of 422 was engaged in
production. Hourly production employees of the Company's Filtration Products
Business in Winchester, Virginia are covered by a collective bargaining
agreement with the International United Automobile, Aerospace & Agricultural
Implement Workers of America, which expires in October 2006. Most of the
production employees of the Company's Industrial Process Cooling Equipment
Business are represented by two unions, the United Association of Journeymen and
Apprentices of the Plumbing and Pipefitting Industry of the United States
(UAJAPPI) and the International Brotherhood of Electrical Workers Union (IBEW).
The collective bargaining agreement for UAJAPPI is scheduled to expire on June
1, 2004, but will automatically continue to be in effect until terminated. The
collective bargaining agreement for IBEW expires on May 31, 2004. The collective
bargaining agreement of the Piping Systems Business in Lebanon, Tennessee, with
the Metal Trades Division of UAJAPPI expires in March 2007.
9
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers of
the Company as of March 31, 2004:
Executive Officer of the
Company or its
Age Position Predecessors Since
-------------------- ------- ----------------------------------------- ------------------------
David Unger 69 Chairman of the Board of Directors, 1972
President and Chief Executive Officer
Henry M. Mautner 77 Vice Chairman of the Board of Directors 1972
Bradley E. Mautner 48 Executive Vice President and Director 1994
Gene K. Ogilvie 64 Vice President 1969
Fati A. Elgendy 55 Vice President 1990
Don Gruenberg 61 Vice President 1980
Michael D. Bennett 59 Vice President, Chief Financial Officer, 1989
Secretary and Treasurer
Thomas A. Benson 50 Vice President 1988
Billy E. Ervin 58 Vice President 1986
Robert A. Maffei 55 Vice President 1987
Herbert J. Sturm 53 Vice President 1977
All of the officers serve at the discretion of the Board of Directors.
David Unger has been employed by the Company and its predecessors in various
executive and administrative capacities since 1958, served as President of
Midwesco, Inc. from 1972 through January 1994 and was Vice President from
February 1994 through December 1996. He was a director of Midwesco, Inc. from
1972 through December 1996, and served that company in various executive and
administrative capacities from 1958 until the consummation of the merger of
Midwesco, Inc. into MFRI, Inc. (the "Midwesco Merger"). He is a director of the
company formed to succeed to the non-Thermal Care businesses of Midwesco, Inc.
Henry M. Mautner has been employed by the Company and its predecessors in
various executive capacities since 1972, served as chairman of Midwesco, Inc.,
from 1972 through December 1996, and served that company in various executive
and administrative capacities from 1949 until the consummation of the Midwesco
Merger. Since the consummation of the Midwesco Merger, he has served as the
chairman of the company formed to succeed to the non-Thermal Care businesses of
Midwesco, Inc. Mr. Mautner is the father of Bradley E. Mautner.
Bradley E. Mautner has served as Executive Vice President of the Company since
December 2002, was Vice President of the Company from December 1996 to December
2002 and has been a director of the Company since 1995. From 1994 to the
consummation of the Midwesco Merger, he served as President of Midwesco, Inc.
and since December 30, 1996 he has served as President of the company formed to
succeed to the non-Thermal Care businesses of Midwesco, Inc. Bradley E. Mautner
is the son of Henry M. Mautner.
Gene K. Ogilvie has been employed by the Company and its predecessors in various
executive capacities since 1969. He has been general manager of Midwesco Filter
or its predecessor since 1980 and President and Chief Operating Officer of
Midwesco Filter since 1989. From 1982 until the consummation of the Midwesco
Merger, he served as Vice President of Midwesco, Inc.
Fati A. Elgendy, who has been associated with the Company and its predecessors
since 1978, was Vice President, Director of Sales of the Perma-Pipe Division of
Midwesco, Inc. from 1990 to 1991. In 1991, he became Executive Vice President of
the Perma-Pipe Division, a position he continued to hold after the acquisition
by the Company to form Perma-Pipe. In March 1995, Mr. Elgendy became President
and Chief Operating Officer of Perma-Pipe.
10
Don Gruenberg has been employed by the Company and its predecessors in various
executive capacities since 1974, with the exception of a period in 1979-1980. He
has been general manager of Thermal Care or its predecessor since 1980, and was
named President and Chief Operating Officer of Thermal Care in 1988. He has been
a Vice President and director of the Company since December 1996.
Michael D. Bennett has served as the Chief Financial Officer and Vice President
of the Company and its predecessors since August 1989.
Thomas A. Benson has served as Vice President Sales and Marketing of Thermal
Care since May 1988.
Billy E. Ervin has been Vice President, Director of Production of Perma-Pipe
since 1986.
Robert A. Maffei has been Vice President, Director of Sales and Marketing of
Perma-Pipe since August 1996. He had served as Vice President, Director of
Engineering of Perma-Pipe since 1987 and was an employee of Midwesco, Inc. from
1986 until the acquisition of Perma-Pipe by the Company in 1994.
Herbert J. Sturm has served the Company since 1975 in various executive
capacities including Vice President, Materials and Marketing Services of
Midwesco Filter.
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