Perma-Pipe International Holdings, Inc. - Annual Report: 2011 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2011

Commission File No. 0-18370

MFRI, Inc.

(Exact name of registrant as specified in its charter)



Delaware	36-3922969
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7720 N. Lehigh Avenue, Niles, Illinois	60714
(Address of principal executive offices)	(Zip Code)

(847) 966-1000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Name of each exchange on which registered
Common Stock, $.01 per share	The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this FORM 10-K or any amendment to this FORM 10-K. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of The Exchange Act) Yes o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (the exclusion of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant) was $34,981,103 based on the closing sale price of $6.30 per share as reported on the NASDAQ Global Market on July 31, 2010.

The number of shares of the registrant's common stock outstanding at March 31, 2011 was 6,854,646.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the 2010 Annual Meeting of Stockholders are incorporated by reference in Part III.

MFRI, Inc.

FORM 10-K

For the fiscal period ended January 31, 2011

TABLE OF CONTENTS



Item		Page
Part I
1.	Business	1
	Piping Systems Business	2
	Filtration Products Business	3
	Industrial Process Cooling Equipment Business	5
	Employees	6
	International	6
	Executive Officers of the Registrant	7
1A.	Risk Factors	8
1B.	Unresolved Staff Comments	10
2.	Properties	10
3.	Legal Proceedings	11
4.	RESERVED	11

Part II
5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
6.	Selected Financial Data	13
7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
7A.	Quantitative and Qualitative Disclosures About Market Risk	23
8.	Financial Statements and Supplementary Data	24
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	24
9A.	Controls and Procedures	24
9B.	Other Information	24

Part III
10.	Directors, Executive Officers and Corporate Governance	25
11.	Executive Compensation	25
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	25
13.	Certain Relationships and Related Transactions, and Director Independence	25
14.	Principal Accountant Fees and Services	25

Part IV
15.	Exhibits and Financial Statement Schedules	25

Report of Independent Registered Public Accounting Firm		26
Signatures		54

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.

Item 1. BUSINESS

MFRI, Inc., collectively with its subsidiaries (“MFRI”, the “Company” or the “Registrant”), is engaged in the manufacture and sale of products in three distinct business segments: piping systems, filtration products and industrial process cooling equipment. Corporate and other includes the installation of heating, ventilation and air conditioning (“HVAC”) systems. This activity is not sufficiently large to constitute a reportable segment. The Company's fiscal year ends on January 31. Years and balances described as 2010 and 2009 are the fiscal years ended January 31, 2011 and 2010, respectively. In the year ended January 31, 2011, no customer accounted for 10% or more of the Company's net sales.

Information with respect to the Company's business segments is included in the following discussions of the separate business segments and in the financial statements and related notes thereto.

MFRI, Inc.'s Operating Units

All subsidiaries shown are, directly or indirectly, wholly owned by MFRI except Bayou Perma-Pipe Canada, Ltd., which is owned 49% by MFRI and 51% by an unrelated party.

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.

Piping Systems

Products and Services. The Company engineers, designs, manufactures and sells specialty piping 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, and (iii) oil and gas gathering flow and long lines for oil and mineral transportation. The Company's 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.

The Company's piping systems are frequently custom fabricated to job site dimensions and/or to 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.

The Company's piping systems business is seasonal. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Piping Systems Business."

Marketing. The customer base is industrially and geographically diverse. In the United States of America (“U.S.”), the Company employs national and regional sales managers who use and assist a network of independent manufacturers' representatives, none of whom sells products that are competitive with the Company's piping systems. Globally, the Company employs a direct sales force as well as an exclusive agent network for several countries in the Middle and Far East to market and sell products and services.

Recent Development. An additional insulated pipe manufacturing plant is being established in Dammam, Saudi Arabia to better serve the Gulf Cooperation Council (“GCC”), and nearby countries. This new state-of-the-art manufacturing facility will serve the special requirements of the oil and gas industry as well as the rapidly growing market for district cooling networks. Perma-Pipe Saudi Arabia, (“PPSA”), will feature Perma-Pipe's Xtru-Therm automated spray polyurethane insulation and several jacketing systems including polyethylene, metal and fiber reinforced plastic offering a comprehensive product range. PPSA will also be equipped to custom manufacture pipe spools and a complete range of pre-insulated fittings. The Company has received an industrial license and the required commercial registration and expects the plant to be fully operational in 2011.

Patents and Trademarks. The Company owns several patents covering its piping and electronic leak detection systems. The patents are not material either individually or in the aggregate to the overall business because the Company believes sales in the business would not be materially reduced if patent protection were not available. The Company owns numerous trademarks connected with its piping and leak detection systems business including the following: 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®, and Ultra-Therm®. The Company also owns a Canadian trademarks for Ric-Wil®, Perma-Pipe™, and Pal-at™, a Denmark trademark for Ric-Wil®, France trademark for Perma-Pipe®, German trademark for Perma-Pipe®, Oman trademarks for Perma-Pipe®, Pal-At® and Xtru-therm®, Kuwait trademarks for Perma-Pipe®, Pal-At® and Xtru-therm®, Saudi Arabia trademarks for Perma-Pipe® and Xtru-therm®, Singapore trademarks for Perma-Pipe®, Pal-At® and Xtru-therm®, India trademarks for Perma-Pipe™, Pal-At™ and Xtru-therm™, Australia trademark for

Ric-Wil® and Pal-at™, and United Kingdom trademarks for Polytherm®, Perma-Pipe® and Ric-Wil®, Hong Kong trademarks for Perma-Pipe®, Pal-At®, Xtru-therm® and Ric-Wil®.

Backlog. As of January 31, 2011, the backlog (uncompleted firm orders) was $46.5 million, substantially all of which is expected to be completed in 2011. As of January 31, 2010, the backlog was $48.8 million.

Raw Materials. The 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 or 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 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.

Competition. The piping systems business is highly competitive. The Company believes its principal competition in this segment consists of between ten and twenty major competitors and more small competitors. The Company believes quality, service, a comprehensive product line and price are the key competitive factors. The Company also believes it has a more comprehensive line for DHC than any of its competitors. Some competitors of the Company have greater financial resources and some have 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 it may increase the demand for its piping systems products.

Filtration Products

Products and Services. The Company manufactures and sells a wide variety of filter elements for cartridge collectors and baghouse air filtration and particulate collection systems. The principle 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 particulate from the air by passing particulate laden gases through fabric filters (filter bags) or pleated media filter elements, in the case of baghouses or cartridge collectors, between electrically charged collector plates, in the case of electrostatic precipitators and contact with liquid reagents (scrubbers). The Company manufactures filter elements in standard industry sizes, shapes and filtration media and to custom specifications, maintaining manufacturing standards for more than 10,000 styles of filter elements to suit substantially all industrial applications. Filter elements are manufactured from industrial yarn, fabric and paper purchased in bulk. Most filter elements are produced from cellulose, acrylic, fiberglass, polyester, aramid, laminated membranes, or polypropylene fibers. The Company also manufactures filter elements from more specialized materials, sometimes using special finishes.

The Company markets numerous filter related products and accessories used during the installation, operation and maintenance of cartridge collectors and baghouses, including wire cages used to support filter bags, spring assemblies for proper tensioning of filter bags and clamps and hanger assemblies for attaching filter elements. In addition, the Company markets other hardware items used in the operation and maintenance of cartridge collectors and baghouses. The Company also provides maintenance services, consisting primarily of air filtration system

inspection and filter element replacement, using a network of independent contractors.

Over the past three years, the Company's filtration products business has supplied filter elements to more than 4,000 user locations. The Company has particular expertise in supplying filter bags for use with electric arc furnaces in the steel industry. The Company believes its production capacity and quality control procedures make it a leading supplier of filter bags to large users in the electric power industry. Orders from the electric power industry tend to be substantial in size, but are usually at lower margins than from other industries.

Marketing. The customer base is industrially and geographically diverse. These products and services are used primarily by operators of utility and industrial coal-fired boilers, incinerators and cogeneration plants and by producers of metals, cement, chemicals and other industrial products.

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. 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's filtration products are marketed domestically under the names, Midwesco Filter and TDC Filter Manufacturing.

The Company markets its U.S. manufactured filtration products internationally using domestically based sales resources to target major users in foreign countries. The Denmark filtration facility markets pleated filter elements throughout Europe and Asia, primarily to original equipment manufacturers.

Trademarks. The Company owns the following trademarks covering its filtration products: Seamless Tube®, Leak Seeker®, Prekote®, We Take the Dust Out of Industry®, Pleatkeeper®, Pleat Plus® and EFC®.

Backlog. As of January 31, 2011, the backlog was $19.9 million, substantially all of which is expected to be completed in 2011. As of January 31, 2010, the backlog was $21.4 million. Customers had until recently been delaying their purchase decisions in response to the economic climate; however, new infrastructure project spending continues to be at reduced levels.

Raw Materials. The basic raw materials used are industrial fibers and media supplied by leading producers of such materials. The majority of raw materials purchased are woven fiberglass fabric, yarns for manufacturing Seamless Tube® products and other woven, felted, spun bond, laminated membranes, and cellulose media. Only a limited number of suppliers are available for some of these materials. The Company believes supplies of all materials are adequate to meet current demand.

Competition. The filtration products industry is highly competitive. In addition, new installations of cartridge collectors and baghouses are subject to competition from alternative technologies including electrostatic precipitators, scrubbers, and mechanical collectors described above under Products and Services. The Company believes, based on domestic sales, that its principle competitors in this segment consist of approximately five major competitors and 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 the Company is a relatively small participant in that market. Some of the Company's competitors have greater financial resources than the Company.

The Company believes quality, service, and price are the most important competitive factors in 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® product and customer support provide the Company with a competitive advantage. Some competitors may have a competitive advantage with respect to their own proprietary products and processes, such as specialized fabrics and fabric finishes. In addition, some competitors may have cost advantages with respect to products as a result of lower wage rates and/or greater vertical integration.

Government Regulation. The Company's filtration products business is 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 ("EPA") under the Clean Air Act Amendments of 1990 (“Clean Air Act”). In addition, the EPA issued its own fine particle pollution standards in 1997 and 2006.

Industrial Process Cooling Equipment

Products and Services. The Company engineers, designs, manufactures and sells cooling and temperature control equipment for industrial applications. The Company believes it manufactures the most complete line of chillers available in its primary markets. Products include: chillers (portable and central); cooling towers; plant circulating assemblies; hot water, hot oil, and negative pressure temperature controllers; water treatment equipment; specialty cooling devices for printing presses and ink management; and replacement parts and various accessories relating to the foregoing products. The Company's products are used to optimize manufacturing productivity by quickly removing heat from manufacturing processes and providing accurate temperature control. 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 computerized controls according to customer specifications.

The principle markets for the Company's cooling and temperature control 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, machine tool, and various other industries.

Marketing. The Company sells its products in the global thermoplastics and printing markets as well as to other industrial applications that require specialized heat transfer equipment. Domestic thermoplastics processors are the largest market served by the Company, representing the core of its business. The Company's cooling products are sold through independent manufacturers' representatives on an exclusive territory basis. Temperature control products are sold through a network of independent dealers/distributors in major industrial markets.

The Company believes the total annual U.S. market for water cooling equipment in the plastics industry was more than $100 million on a pre-recession basis, and the Company is one of the three largest suppliers of such equipment to the plastics industry. The Company believes the plastics industry is a mature industry with growth consistent with that of the national economy. 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, metalizing, and machine tool industries. The Company believes the size of this market was more than $200 million annually prior to the current recession. The original equipment manufacturer distributes products to the end user in these markets.

Trademarks. The Company has registered the trademarks Thermal Care®, AWS® and Applied Web Systems®.

Backlog. As of January 31, 2011, the backlog was $4.3 million, substantially all of which is expected to be completed in 2011. As of January 31, 2010, the backlog was $2.4 million.

Raw Materials. The Company uses prefabricated sheet metal and subassemblies manufactured by both Thermal Care and outside vendors for chillers and temperature control fabrication. Cooling towers are manufactured using fiberglass and hardware components purchased from several sources. The Company believes its access to sheet metal, subassemblies, fiberglass and hardware components is adequate to meet demands.

Competition. The Company believes there are about 15 competitors selling cooling equipment in the domestic plastics market. The Company further believes three manufacturers, including the Company, account for approximately 50% of the domestic plastics cooling equipment market. Many international customers, with relatively small cooling needs, are able to purchase small refrigeration units (portable chillers), which 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 its reputation for producing quality plant wide cooling products results in a significant portion of the Company's business in the cooling product area. Temperature control units, which are sold globally, compete with both local and European manufacturers. The quality, reliability, features and range of temperature control applications addressed by the Company's products provide a competitive advantage.

The Company believes quality, service, a comprehensive product line and price are the key competitive factors in its industrial process cooling equipment business. The Company believes 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 Clean Air Act, prohibit the manufacture and sale of certain refrigerants. The Company does not use those 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 February 28, 2011, the Company had 1,123 full-time employees, of whom 38.1% worked outside the U.S.

International

The Company's international operations as of January 31, 2011 include subsidiaries and a joint venture in five foreign countries on three continents. The Company's international operations contributed approximately 27.6% of revenue in 2010, 29.0% of revenue in 2009, and 30.7% of revenue in 2008.

Refer to the Business Segment descriptions on pages 1 through 5 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 set forth information regarding the executive officers of the Company as of March 15, 2011:



Name	Offices and Positions, if any, held with the Company; Age	Executive Officer of the Company or its Predecessor since
David Unger	Director, Chairman of the Board, and Chief Executive Officer of the Company; Age 76	1972

Bradley E. Mautner	Director, President and Chief Operating Officer of the Company; Age 55	1994

Michael D. Bennett	Vice President, Chief Financial Officer, Secretary and Treasurer; Age 66	1989

Timothy P. Murphy	Vice President; Age 61	2008

Fati A. Elgendy	President, Perma-Pipe; Age 62	1990

Robert A. Maffei	Vice President, Perma-Pipe; Age 63	1987

John Mark Foster	President, Midwesco Filter; Age 49	2008

Stephen C. Buck	President, Thermal Care; Age 62	2007

Edward A. Crylen	President, Midwesco Mechanical and Energy; Age 59	2006

All of the executive officers serve at the discretion of the Board of Directors.

David Unger, Chairman of the Board and Chief Executive Officer since 1989; President from 1994 until 2004.

Bradley E. Mautner, President and Chief Operating Officer since December 2004; Executive Vice President from December 2002 to December 2004;Vice President from December 1996 through December 2002; Director since 1994. Bradley E. Mautner is the son of Henry M. Mautner, a director.

Michael D. Bennett, Chief Financial Officer and Vice President since August 1989.

Timothy P. Murphy, Vice President of Human Resources (“HR”) since May 2008. Prior to joining the Company, Mr. Murphy spent 28 years as a business consultant in roles including Principal Partner of Murphy & Hill Consulting, Managing Director of the Bay Area office of RHR, International and Consultant with YSC, Ltd. Mr. Murphy previously consulted to the Company from 1985 to 2008.

Fati A. Elgendy, President and Chief Operating Officer of Perma-Pipe since March 1995.

Robert A. Maffei, Vice President, Director of Sales and Marketing of Perma-Pipe since August 1996.

John Mark Foster, President of Midwesco Filter since August, 2008. Mr. Foster previously worked at Saint-Gobain (PAR: SGO) in the areas of industrial/project engineering and plant management, followed by positions in market management, human resources and a series of North American and European general management assignments.

Stephen C. Buck, President of Thermal Care since October, 2007. Mr. Buck joined Thermal Care after a 22 year career most recently as President - Safety Products Group with Federal Signal Corporation (NYSE: FSS), which manufactures and markets products to industrial and municipal customers worldwide. Prior to his employment with Federal Signal Corporation, Mr. Buck held various positions in marketing and management for companies in computer hardware/software, oil field services and telecommunications.

Edward A. Crylen, President and Chief Operating Officer of Midwesco Mechanical and Energy, since its formation in December 2006. From 1989 to December 2006, he was President of the Midwesco Mechanical and Energy, division of Midwesco, Inc. (affiliate) that was primarily owned by two principal stockholders who were also members of management.

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. All of the Company's businesses, directly or indirectly, serve markets that continue to be adversely impacted by the continuing global economic climate. Although the economy appears to be improving, the timing of economic recovery in the markets we serve remains uncertain. A further 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 business segments, the Company's future performance by business segment will also vary. In addition, the Company is exposed to fluctuations in currency exchange rates and commodity prices. Failure to successfully manage any of these risks could have an adverse impact on the Company's financial position, results of operations and cash flows.

Customer Access to Capital Funds. Uncertainty about current economic market conditions in the U.S. and globally 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 adverse effect of the credit availability experienced by the Emirate of Dubai has significantly decelerated construction activity both in the United Arab Emirates (“U.A.E.”) and across other GCC countries, negatively impacting sales volume at the U.A.E. facility.

International rapid growth. Potential international future rapid growth could place a significant strain on management, operations and financial systems as well as on the Company's ability to attract and retain competent employees. Future operating results depend on the Company's ability to continue to implement and improve operating and financial controls and management information systems. Failure to effectively manage growth could materially adversely impact the business, financial conditions and results of operations.

Changes in Government Policies and Laws, Worldwide Economic Conditions. International sales represent a significant portion of the Company's total sales and continued growth and profitability may involve further international expansion. The Company's financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non U.S. governments, agencies and similar organizations. These conditions include, but are not limited, to changes in a country's or region's economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced international sales and reduced profitability associated with such sales.

Government regulation. Demand for the Company's leak detection and location and secondary containment piping systems is driven primarily by government regulation with respect to hazardous waste. Laws such as the Federal

Resource Conservation and Recovery Act and standards such as the National Emission Standard for Hydrocarbon Airborne Particulates have increased the demand for the Company's leak detection and location and secondary containment piping systems. The Company's filtration products business, to a large extent, is dependent on governmental regulation of air pollution at the federal and state levels. The Company believes that continuing growth in the sale of filtration products and services will be materially dependent on continuing enforcement of environmental laws such as the Clean Air Act. Although changes in such environmental regulations could significantly alter the demand for the Company's products and services, the Company does not believe such a change is likely to decrease demand in the foreseeable future.

Financing. If there were an event of default under the Company's current revolving credit facility, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. The Company cannot assure that the assets or cash flow would be sufficient to fully repay amounts due under any of the financing arrangements, if accelerated upon an event of default, or, that the Company would be able to repay, refinance or restructure the payments under any such arrangements. Complying with the covenants under the Company's revolving credit facility may limit management's discretion by restricting options such as:

· incurring additional debt;

· entering into transactions with affiliates;

· making investments or other restricted payments;

· paying dividends or make other distributions; and

· creating liens.

Any additional financing the Company may obtain could contain similar or more restrictive covenants. The Company's ability to comply with any covenants may be adversely affected by general economic conditions, political decisions, industry conditions and other events beyond management's control.

Competition. The businesses in which the Company is engaged are 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. 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 attributed to confirmed customer purchase orders that have not yet been recognized as revenues. However, by industry practice, orders may be canceled or modified at any time. When a customer cancels an order, the customer is responsible for all finished goods, all direct and indirect costs incurred, and also for a reasonable allowance for anticipated profits. No assurance can be given that these amounts will be recovered after cancellation. Any cancellation or delay in orders may result in lower than expected revenues.

Percentage-of-completion method of accounting. The Company measures and recognizes a portion of revenue and profits under the percentage-of-completion accounting methodology. This methodology allows revenue and profits to be recognized proportionally over the life of a contract by comparing the amount of the cost incurred to date against the total amount of cost expected to be incurred. The effect of revisions to revenue and total estimated cost is recorded when the amounts are known and can be reasonably estimated. These revisions can occur at any time and could be material. On a historical basis, management believes that reasonably reliable estimates of the progress towards completion on long-term contracts have been made. However, given the uncertainties associated with these types of contracts, it is possible for actual cost to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits.

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. Keeping informed of, and in compliance with, changing laws,

regulations and standards relating to corporate governance, public disclosure and accounting standards, including the Sarbanes-Oxley Act, Dodd-Frank Act, as well as new and proposed SEC regulations and accounting standards, has required an increased amount of management attention and external resources. Compliance with such requirements may result in increased general and administrative expenses and an increased allocation of management time and attention to compliance activities.

Item 1B. UNRESOLVED STAFF COMMENTS

None

Item 2. PROPERTIES

Piping Systems Business



Illinois	Owned production facilities and office space	16,800 square feet
Louisiana	Owned production facilities and leased land	18,900 square feet
Tennessee	Owned production facilities and office space	131,800 square feet on approximately 23.5 acres
Canada	Joint venture owned production facilities and office space	87,160 square feet on approximately 128 acres
India	Leased production facilities, office space and land	227,390 square feet
United Arab Emirates	Leased office space and land for production facilities	117,900 square feet on 16 acres
Saudi Arabia	Planned production facilities on leased land	88,960 square feet

Filtration Products Business



Illinois	Bolingbrook - owned production facilities and office space	101,500 square feet on 5.5 acres
	Cicero - owned former production facilities and office space currently idle	130,700 square feet on 2.8 acres
Virginia	Owned production facilities	97,500 square feet on 5.0 acres
	Leased production and office space	67,000 square feet
Denmark	Owned production facilities and office space	69,800 square feet on 3.5 acres

Industrial Process Cooling Equipment Business



Illinois	Owned production facilities and office space	87,600 square feet on 8.1 acres
Denmark	Owned production facilities and office space	16,500 square feet

The Company's principal executive offices, which occupy approximately 23,400 square feet of space in Niles, Illinois, are owned by the Company. The Company believes its properties and equipment are well maintained and in good operating condition and, that productive capacities will be adequate for present and currently anticipated needs.

The Company has four significant lease agreements as follows:


•	Planned production facilities and land of approximately 88,960 square feet in the Kingdom of Saudi Arabia is leased through 2030.


•	Office Space and land for production facilities of approximately 117,900 square feet in the U.A.E. leased until June 30, 2012.


•	Production facilities, office space and land of approximately 227,390 square feet in India are leased through October, 2012 and December, 2012, respectively.


•	Production facilities and office space of approximately 67,000 square feet in Virginia are leased through July 31, 2012 and July 31, 2013, respectively.

For further information, see Note 6 - Lease Information, in the Notes to Consolidated Financial Statements.

Item 3. LEGAL PROCEEDINGS

The Company had no pending litigation material to its business.

Item 4. RESERVED

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company's fiscal year ends on January 31. Years and balances described as 2010, 2009, 2008, 2007, and 2006 are the fiscal years ended January 31, 2011, 2010, 2009, 2008, and 2007, respectively.

The Company's Common Stock is traded on the Nasdaq Global Market under the symbol “MFRI”. The following table sets forth, for the periods indicated, the high and low Common Stock sale prices as reported by the Nasdaq Global Market for 2010 and for 2009.



	High	Low
2010
First Quarter	$7.21	$6.16
Second Quarter	6.95	5.86
Third Quarter	8.76	6.25
Fourth Quarter	11.00	7.68
2009
First Quarter	6.43	4.85
Second Quarter	8.04	5.45
Third Quarter	7.43	6.00
Fourth Quarter	7.32	6.38

As of March 15, 2011, there were 73 stockholders of record.

STOCK PRICE PERFORMANCE GRAPH

The Stock Price Performance Graph compares the yearly dollar change in the Company's cumulative total stockholder return on its Common Stock with the cumulative total returns of the Nasdaq Composite Index (the “Nasdaq Index”), the Russell 2000 Index and the S&P Smallcap 600 Index. The Company has selected these indices because they include companies with similar market capitalizations to the Company, as the most appropriate comparisons because the Company has three distinctly different business segments and no industry “peer” group is comparable to the Company. The comparison assumes $100.00 investments on January 31, 2006 in the Company's

Common Stock, the Nasdaq Index, the Russell 2000 Index, and the S&P Smallcap 600 Index and further assumes reinvestment of dividends.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among MFRI, Inc., the NASDAQ Composite Index,

the S&P Smallcap 600 Index and the Russell 2000 Index

*$100 invested on 1/31/06 in stock or index, including reinvestment of dividends.



Fiscal year ending January 31,	2006	2007	2008	2009	2010	2011
MFRI, Inc.	$100.00	$315.70	$264.13	$81.82	$112.73	$180.08
NASDAQ Composite	100.00	109.00	107.06	66.17	96.82	122.57
S&P Smallcap 600	100.00	108.41	100.73	63.73	88.56	115.95
Russell 2000	100.00	110.44	99.63	62.92	86.72	113.92

The Company has never declared or paid a cash dividend and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Management presently intends to retain all available funds for the development of the business and for use as working capital. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other relevant factors. The Company's line of credit agreement does not permit the payment of dividends. For further information, see Note 5 - Debt in the Notes to Consolidated Financial Statements.

Neither the Company nor any “affiliated purchaser” as defined in Rule 10b-18 purchased any shares of the Company's Common Stock during the period covered by this report. The Company has not made any sale of unregistered securities during the preceding three years.

The Transfer Agent and Registrar for the Common Shares is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004, (212) 509-4000.

Equity Compensation Plan Information

The following table provides information regarding the number of shares of Common Stock to be issued upon exercise of outstanding options, warrants and rights under the Company's equity compensation plans and the weighted average exercise price and number of shares of Common Stock remaining available for issuance under those plans as of January 31, 2011.



Plan Category	Number of shares to be issued upon exercise of outstanding options, warrants and right	Weighted-average exercise price of outstanding options, warrants and rights	Number of shares available for future issuance under equity compensation plans
Equity compensation plans approved by stockholders	777,441	$11.88	479,157

Item 6. SELECTED FINANCIAL DATA

The following selected financial data for the Company for the years 2010, 2009, 2008, 2007, and 2006 are derived from the financial statements of the Company. The information set forth below should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” included herein in response to Item 7 and the consolidated financial statements and related notes included herein in response to Item 8.



Referenced as	2010	2009	2008	2007		2006
			January 31,
(In thousands, except per share data)	2011	2010	2009	2008		2007
Statements of Operations Data
Net sales	$218,598	$230,381	$303,066	$239,487		$213,471
Income from operations	2,898	7,197	10,792	2,896		8,942
Net income (loss)	4,510	4,671	6,689	(298	)	4,593
Net income (loss) per share - basic	0.66	0.68	0.98	(0.04	)	0.86
Net income (loss) per share - diluted	0.66	0.68	0.98	(0.04	)	0.82

Balance Sheet Data
Total assets	$163,275	$150,547	$181,148	$140,412		$121,440
Long-term debt (excluding capital leases), less current portion	36,009	33,877	41,763	19,556		29,606
Capital leases, less current portion	183	195	327	152		238

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS (“MD&A”) OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” and other information contained elsewhere in this annual report, which can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “continue,” “remains,” “intend,” “aim,” “should,” “prospects,” “could,” “future,” “potential,” “believes,” “plans,” “likely” and “probable” or the negative thereof or other variations thereon or comparable terminology, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including but not limited to those under the heading Item 1A. Risk Factors.

CONSOLIDATED RESULTS OF OPERATIONS



Consolidated Backlog (In thousands):	1/31/2011	1/31/2010
Piping Systems	$46,452	$48,770
Filtration Products	19,935	21,400
Industrial Process Cooling Equipment	4,332	2,380
Corporate and Other	9,751	790
Total	$80,470	$73,340

MFRI, Inc. is engaged in the manufacture and sale of products in three reportable business segments: piping systems, filtration products, and industrial process cooling equipment. Piping systems' domestic sales and earnings are seasonal, typically lower during the fourth and first quarters due to unfavorable weather for construction over much of North America, and are correspondingly higher during the second and third quarters. The Company website address is www.mfri.com.

The analysis presented below and discussed in more detail throughout the MD&A was organized to provide instructive information for understanding the business going forward. However, this discussion should be read in conjunction with the consolidated financial statements in Item 8 of this report, including the notes thereto. An overview of the segment results is provided in Note 1 - Business and Segment Information to the consolidated financial statements in Item 8 of this report.

Critical Accounting Policies and Estimates

MD&A discusses the audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Management believes that judgments and estimates related to the following critical accounting policies could materially affect the consolidated financial statements:


•	Revenue recognition


•	Percentage of completion revenue recognition


•	Inventory


•	Income taxes


•	Equity-based compensation


•	Fair value of financial instruments

In the fourth quarter of 2010, there were no changes in the above critical accounting policies.

All of the Company's businesses directly or indirectly serve markets that were adversely impacted by recent global economic conditions. Although improvement is expected, the timing of economic recovery in the markets we serve remains uncertain. A further 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 business segments, the Company's future performance by business segment will also vary. Should the current credit crisis and general economic recession continue, the Company could continue to experience a period of declining net sales, which could adversely impact the Company's results of operations. The adverse effect of the credit crisis experienced by the Emirate of Dubai has significantly decelerated construction activity both in the U.A.E. and across other GCC countries, negatively impacting sales volume at the U.A.E. facility.

2010 Compared to 2009

Net sales were $218.6 million in 2010, a decrease of 5.1% from $230.4 million in 2009. Year-to-date sales increased in the industrial process cooling and filtration products businesses while decreasing in the piping systems business. HVAC activity decreased in the current year; however, the backlog in 2010 increased to $9.8 million.

Gross profit of $44.5 million in 2010 decreased 14.4% from $51.9 million in 2009. Gross margin was 20.3% compared to 22.5% in 2009. Virtually the entire gross profit decline occurred in the piping systems, which decreased to $27.3 million in 2010 from $38.0 million in 2009. The decrease in gross profit was attributed primarily to lower volume of the piping systems business in the U.A.E and a significant decrease in sales associated with the completion of the India pipeline project. The filtration products and industrial process cooling businesses each experienced an increase in their gross profits for the period, primarily due to increased sales volume, margin improvements and benefits from previous expense reduction initiatives.

General and administrative expenses decreased 12.0% to $27.9 million from $31.7 million. The reduction was mainly due to lower profit-based management incentive compensation expense, lower legal expenses, and reduced foreign exchange loss in the current year partially offset by an increase in deferred compensation expense.

Selling expenses increased 4.6% to $13.6 million from $13.0 million. Commission expense increased in the filtration products and industrial process cooling businesses, and trade show activity was higher in the piping systems business.

The Company's worldwide effective income tax rates for 2010 and 2009 were (72.1)% and 12.0%, respectively. For additional information, see the Income Tax section of the MD&A and see Note 7 - Income Taxes in the Notes to the Financial Statements.

Net income was level at $4.5 million. The fourth quarter produced a net loss of $1.5 million significantly better than the net loss of $5.8 million in the comparable prior-year's quarter. The filtration products and industrial process cooling businesses and the piping systems joint venture drove this improvement. Another factor was the look-through rules of Subpart F passive income which expired December 31, 2009, and then were retroactively extended in December 2010. In the second quarter, the Company had recorded $0.3 million in tax expense related to passive income that was reversed in the fourth quarter.

2009 Compared to 2008

Net sales were $230.4 million in 2009, a decrease of 24.0% from $303.1 million in 2008, with decreased sales in the piping systems business, the filtration products business and the industrial process cooling business. This decrease was most pronounced in the fourth quarter. The 2009 fourth quarter compared to prior-year's quarter decreased 40.6%, with all segments and geographies down. In the piping systems business, district heating and cooling as well as oil and gas products experienced softer market conditions. Other contributing factors were the completion of the India pipeline project in the third quarter 2009 and the dramatically weaker market conditions in Dubai. The HVAC business also showed decreased sales as construction decisions for new projects have been deferred.

Gross profit of $51.9 million decreased 11.9% from $58.9 million. Gross margin rose to 22.5% from 19.5%.

General and administrative expenses increased 2.9% to $31.7 million from $30.8 million. The increase was mainly due to increased legal fees associated with collection activities in the U.A.E., foreign exchange loss, increased deferred compensation expense and increased stock compensation expense.

Selling expenses decreased 10.5% to $13.0 million from $14.6 million. This decrease was primarily driven by the industrial process cooling equipment business and the filtration product business, which had decreased commission expense from lower sales and a decline in compensation and related expenses due to staff reductions.

The Company's worldwide effective income tax rates for 2009 and 2008 were 12.0% and 17.0%, respectively.

Net income was $4.7 million in 2009, down from net income of $6.7 million in 2008 primarily due to decreased sales, the reasons summarized above and those discussed in more detail below. The fourth quarter produced a net loss of $5.8 million compared to a net loss of $0.8 million in the prior-year's quarter. The net loss in the fourth quarter of 2009 was higher than the same period in 2008 due to lower sales in all segments and compressed margins due to competitive factors.

Piping Systems

Piping systems' domestic sales and earnings are seasonal, typically lower during the fourth and first quarters due to unfavorable weather for construction over much of North America, and are correspondingly higher during the second and third quarters.



							% (Decrease) Increase
(In thousands)	2010		2009		2008		2010		2009
Net sales	$104,559		$111,665		$151,792		(6.4	)%	(26.4	)%

Gross profit	27,303		37,974		37,871		(28.1	)%	0.3	%
Percentage of net sales	26.1	%	34.0	%	24.9	%

Income from operations	13,831		22,399		24,037		(38.3	)%	(6.8	)%
Percentage of net sales	13.2	%	20.1	%	15.8	%

2010 Compared to 2009

Despite significant sales drops in the Middle East and India, net sales of $104.6 million decreased only 6.4% from $111.7 million, in the prior-year, attributed primarily to a rise in sales in both domestic heating and cooling, and oil and gas products. The insulation of pipe for a crude oil pipeline project in India began full production in the third quarter 2008 and contributed to the increase in sales of $11.3 million in 2009 when the Company had successfully completed the production on the India pipeline project. Significantly smaller India pipeline sales followed in 2010.

Gross margin decreased to 26.1% of net sales from 34.0% of net sales in the prior-year attributed primarily to

the reduced volume in the U.A.E. and the significantly lower sales associated with the India pipeline project in the current year.

General and administrative expense decreased to $10.3 million or 9.9% of net sales in 2010 from $12.8 million or 11.4% of net sales in 2009. This decrease was primarily due to less profit-based management incentive expense, lower legal fees, and staff reductions in the U.A.E.

Selling expense increased to $3.1 million or 3.0% of net sales in 2010 from $2.8 million or 2.5% of net sales in

2009. The increase was mainly due to advertising and trade show activities, partially offset by a decrease in commission expense.

2009 Compared to 2008

Net sales of $111.7 million decreased 26.4% from $151.8 million, attributed primarily to a drop in sales in both international and domestic heating and cooling, as well as oil and gas products due to the economic slowdown both in the U.S. and in the U.A.E. The insulation of pipe for a crude oil pipeline project in India began full production in the third quarter 2008 and contributed to sales in 2009. As of October 31, 2009, the Company had completed the India pipeline project, and has received additional orders for at least 150 kilometers (93 miles), which began in May of 2010.

The adverse effect of the credit crisis experienced by the Emirate of Dubai has significantly decelerated construction activity both in the U.A.E. and across other GCC countries, negatively impacting sales volume at the U.A.E. facility.

Gross margin as a percent of net sales increased to 34.0% in 2009 from 24.9% in 2008, primarily due to production efficiencies in the international operations and the favorable adjustment of cost estimates associated with the completion of the India pipeline project. Gross profit in the U.A.E. also improved due to decreased raw material costs.

General and administrative expense increased to $12.8 million or 11.4% of net sales in 2009 from $11.0 million or 7.2% of net sales in 2008. The increase in general and administrative expenses was primarily due to increased legal fees associated with collection activities in the U.A.E., increased profit-based management incentive expense and foreign exchange loss.

Selling expense remained level at $2.8 million in 2009. As a percentage of sale, selling expenses decreased to 2.5% of net sales in 2009 from 1.9% of net sales in 2008.

Filtration Products

The timing of large orders can have a material effect on net sales and gross profit from period to period. Pricing on large orders was extremely competitive and therefore resulted in relatively low gross margins in all periods.

The Company's filtration products business is dependent on government regulation of air quality at the federal and state levels. The Company believes that growth in the sale of its filtration products and services will be materially dependent on continued enforcement of environmental laws such as the Clean Air Act. Although there can be no assurance what the ultimate effect of the Clean Air Act will be on the Company's filtration products business, the Company believes the Clean Air Act is likely to have a positive long-term effect on demand for the Company's filtration products and services.



							% Increase (Decrease)
(In thousands)	2010		2009		2008		2010		2009
Net sales	$85,133		$80,819		$105,390		5.3	%	(23.3	)%

Gross profit	10,394		6,733		11,424		54.4	%	(41.1	)%
Percentage of net sales	12.2	%	8.3	%	10.8	%

Loss from operations	(1,335)		(5,290)		(2,936)		74.8	%	(80.2	)%
Percentage of net sales	(1.6	)%	(6.5	)%	(2.8	)%

2010 Compared to 2009

Net sales increased 5.3% to $85.1 million in 2010 from $80.8 million in 2009. Improving business conditions in filtration markets led to increased sales.

Gross margin increased to 12.2% of net sales from 8.3% of net sales in 2009 primarily due to cost containment efforts, improved product mix and the benefit of higher volume leveraged against reduced fixed costs.

In July 2010, the Company announced that the facility in South Africa would close in the third quarter. Expenses

related to the closing were approximately $577 thousand. These expenses are included in cost of goods sold, general and administrative and selling expenses.

General and administrative expenses decreased to $4.8 million or 5.6% of net sales from $5.2 million or 6.4% of net sales in 2009. The decrease is mainly driven by lower foreign exchange loss in 2010 and lower professional expenses partially offset by closing costs related to the facility in South Africa.

Selling expenses increased to $7.0 million from $6.8 million in 2009 primarily as a result of higher commissions for external agents and additional advertising costs. Selling expenses as a percentage of net sales decreased to 8.2% in 2010 from 8.5% of net sales in 2009.

2009 Compared to 2008

Net sales decreased 23.3% to $80.8 million in 2009 from $105.4 million in 2008. Sales declines were the result of lower market demand across all filtration products. Customers delayed their purchases and curtailing infrastructure projects in response to the economic climate.

Gross margin as a percent of net sales decreased to 8.3% in 2009 from 10.8% in 2008, primarily due to the lower pricing driven by excess capacity in the filter bag markets.

General and administrative expenses increased to $5.2 million or 6.4% of net sales from $5.1 million or 4.8% of net sales in 2008. The increase was primarily due to additional professional costs, higher bank fees, and foreign currency exchange loss. These factors were partially offset by personnel reductions.

Selling expense decreased to $6.8 million in 2009 from $7.6 million in 2008. The dollar decrease in selling expense was primarily due to fewer selling personnel, decreased commission expense related to lower sales and decreased advertising expense. Selling expenses as a percentage of net sales increased to 8.5% from 7.2% in the prior-year due to the effect of lower sales.

Industrial Process Cooling Equipment



							% Increase (Decrease)
(In thousands)	2010		2009		2008		2010		2009
Net sales	$26,220		$21,818		$31,738		20.2	%	(31.3	)%

Gross profit	7,044		4,977		7,919		41.5	%	(37.2	)%
Percentage of net sales	26.9	%	22.8	%	25.0	%

Income (loss) from operations	295		(1,935)		(1,765)		115.2	%	(9.6	)%
Percentage of net sales	1.1	%	(8.9	)%	(5.6	)%

2010 Compared to 2009

Net sales of $26.2 million increased 20.2% from $21.8 million in 2009 due to improving business conditions in the

plastic and industrial market sectors.

Gross margin increased to 26.9% of net sales in 2010 from 22.8% of net sales in 2009 primarily due to product mix, lower warranty costs and higher sales volume to spread fixed overhead expenses.

General and administrative expenses decreased to $3.2 million or 12.3% of net sales from $3.5 million or 16.2%

of net sales in 2009. The change in spending was a result of lower compensation expenses and fewer professional expenses partially offset by increased incentive compensation expense.

Selling expenses increased to $3.5 million in 2010 from $3.4 million in 2009. This was primarily driven by higher commission expense due to the increase in net sales partially offset by salary reductions and staff reductions. Selling expense as a percentage of net sales decreased to 13.5% from 15.5% of net sales in 2009.

2009 Compared to 2008

Net sales decreased 31.3% to $21.8 million in 2009 from $31.7 million in 2008. The decrease was primarily due to lower demand for products in all market sectors.

Gross margin decreased to 22.8% in 2009 from 25.0% in 2008, primarily due to lower sales volume and an unfavorable product mix.

General and administrative expense decreased to $3.5 million in 2009 from $4.4 million in 2008. The change in spending was the result of reduced outside product development services and lower compensation and related expenses due to workforce reductions. General and administrative expenses as a percentage of net sales increased to 16.2% from 14.0% in the prior-year due to the effect of lower sales.

Selling expense decreased to $3.4 million in 2009 from $4.1 million in 2009. This was primarily driven by decreased commission expense from lower sales, and a decline in compensation and related expenses due to workforce reductions. Selling expense as a percentage of net sales increased to 15.5% from 13.0% in the prior-year due to the effect of lower sales.

Corporate and Other

2010 Compared to 2009

Net sales of $2.7 million in 2010 decreased from $16.1 million in 2009 due to decreased construction activity. During 2009, the Company worked off existing backlog. New construction has been adversely affected by the current economy. In 2010, the Company obtained new orders for approximately $11.3 million.

General and administrative expenses decreased 5.9% to $9.6 million from $10.2 million in 2009. The decrease was due mainly to lower profit-based management incentive compensation expense, lower SOX404 compliance expense and decreased stock compensation expense partially offset by increased deferred compensation expense. General and administrative expenses as a percentage of consolidated net sales remained the same in 2009 and 2010.

Interest expense decreased to $1.9 million from $2.1 million in 2009 primarily due to lower borrowings and interest rates. Interest income increased to $0.7 million from $0.2 million due to interest earned overseas in the piping systems business.

2009 Compared to 2008

Net sales increased to $16.1 million in 2009 from $14.1 million in 2008 related to the HVAC systems business.

General and administrative expense decreased 0.4% to $10.2 million in 2009 from $10.3 million in 2008, but increased as a percentage of consolidated net sales to 4.4% in 2009 from 3.4% in 2008. The dollar decrease was

due mainly to lower profit-based management incentive expense and lower expenses incurred to comply with SOX404, partially offset by increased deferred compensation expense, increased stock compensation expense, and hiring.

Interest expense decreased 32.5% to $1.9 million in 2009 from $2.8 million, net of capitalized interest, in 2008 primarily due to decreased borrowings and lower interest rates.

INCOME TAXES

The Company's worldwide effective income tax rates were (72.2)%, 12.0%, and 17.0% in 2010, 2009, and 2008, respectively. The effective tax rate in the periods presented was the result of the mix of income earned in multiple tax jurisdictions with various income tax rates. Income earned in the U.A.E. is not subject to any local country income tax. The effective tax rates in 2010 and 2009 were less than the statutory U.S. federal income tax rate, mainly due to the large portion of income earned in the U.A.E.

Several valuation allowances impacted the effective tax rates. In 2010, the Company closed its operations in South Africa and released intercompany liabilities. Related income was offset by existing NOLs for which a prior valuation allowance had been previously provided. This release of liabilities increased the federal NOL. During 2009, the Company established a partial valuation allowance of $0.8 million for the $1.3 million research and development credits, as the Company no longer believed that it was more likely than not that a portion of the research and development credits would be utilized within the next five years.

During 2010, the Company reevaluated the need for a valuation allowance against deferred tax assets and determined that no additional reserve was needed. As of January 31, 2010 and January 31, 2011, no valuation allowance was deemed necessary on the federal NOL. For additional information, see Note 7 - Income Taxes in the Notes to the Financial Statements.

As of January 31, 2011, the Company had undistributed earnings of foreign subsidiaries for which deferred taxes have not been provided. The Company intends and has the ability to reinvest these earnings for the foreseeable future outside the U.S. If these amounts were distributed to the U.S., in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

A reconciliation of the effective income tax rate to the U.S. Statutory tax rate is as follows:



	2010		2009
Statutory tax rate	34.0	%	34.0	%
Differences in foreign tax rate	(60.7	)%	(54.9	)%
Valuation allowance for foreign and state NOLs	(20.8	)%	5.4	%
State taxes, net of federal benefit	(16.6	)%	1.7	%
Nontaxable income from the Canadian joint venture	(12.8	)%	(0.9	)%
Cash Surrender Value of deferred compensation plan	(4.9	)%	(0.3	)%
All other, net expense	9.6	%	12.9	%
Research tax credit, net of valuation allowance	—	%	14.1	%
Effective tax rate	(72.2	)%	12.0	%

For further information, see Note 7 - Income Taxes in the Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents as of January 31, 2011 were $16.7 million as compared to $8.1 million at January 31, 2010. The Company's working capital was $58.8 million at January 31, 2011 compared to $53.3 million at

January 31, 2010. Cash provided by operations in 2010 was $8.7 million compared to $34.6 million at January 31, 2010. Compared to January 31, 2010 trade accounts payable increased $4.8 million, primarily due to the purchase of inventory for production in the filtration business.

Net cash used in investing activities in 2010 included $3.9 million for capital expenditures, primarily for machinery and equipment in the piping systems business. The Company estimates that capital expenditures for 2011 will be approximately $13.9 million, of which the Company may finance capital expenditures through real estate mortgages, equipment financing loans, internally generated funds and its revolving line of credit. The majority of such expenditures relates to foreign growth within the piping systems business.

Debt totaled $39.3 million at January 31, 2011, an increase of $2.1 million since January 31, 2010. Net cash provided by financing activities was $3.4 million. Other long-term liabilities of $3.3 million were composed primarily of deferred compensation and accrued pension cost.

The following table summarizes the Company's estimated contractual obligations at January 31, 2011.



(In thousands)		January 31,
Contractual Obligations	Total	2012	2013	2014	2015	2016	Thereafter
Revolving line domestic (1)	$18,252	$0	$0	$18,252	$0	$0	$0
Mortgages (2)	19,266	1,458	1,160	932	935	934	13,847
Revolving line foreign	2,412	710	1,312	15	15	15	345
Term loans (3)	7,365	1,723	1,493	1,787	184	89	2,089
Subtotal	47,295	3,891	3,965	20,986	1,134	1,038	16,281
Capitalized lease obligations	460	254	102	45	31	28	—
Operating lease obligations (4)	6,500	1,534	1,119	555	366	247	2,679
Projected pension contributions (5)	3,855	590	318	328	347	361	1,911
Deferred compensation (6)	5,138	109	531	99	99	99	4,201
Employment agreements (7)	101	—	—	—	—	—	101
Uncertain tax position obligations (8)	1,016	—	—	—	—	—	1,016
Total	$64,365	$6,378	$6,035	$22,013	$1,977	$1,773	$26,189

Notes to Contractual Obligations Table

(1) Interest obligations exclude floating rate interest on debt payable under the domestic revolving line of credit. Based on the amount of such debt at January 31, 2011, and the weighted average interest rates of 3.16% on that debt at that date, such interest was being incurred at an annual rate of approximately $0.6 million.

(2) Scheduled maturities, including interest.

(3) Term loan obligations exclude floating rate interest on term loan with a January 31, 2011 balance of $1.5 million. Based on the amount of such debt as of January 31, 2011, and the weighted average interest rates of 2.92% on that debt at that date, such interest was being incurred at an annual rate of approximately $49,421.

(4) Minimum contractual amounts, assuming no changes in variable expenses.

(5) Includes expected employer contributions for fiscal year ending January 31, 2012 and estimated future benefit payments reflecting expected future service.

(6) Non-qualified deferred compensation plan - The Company has deferred compensation agreements with key employees. Vesting is based on years of service. Life insurance contracts have been purchased which may be used to fund the Company's obligation under these agreements. Payment estimates calculated by the third party administrator, have been included.

(7) Refer to the proxy statement for a description of compensation plans for Named Executive Officers.

(8) Refer to Note 7 - Income Taxes in the Notes to Consolidated Financial Statements for a description of the uncertain tax position obligations.

Financing

On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan Agreement"). Under the terms of the Loan Agreement as amended, which matures on November 30, 2013, the Company can borrow up to $38.0 million, subject to borrowing base and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, investments, do not permit payment of dividends, and require attainment of certain levels of profitability and cash flows. At January 31, 2011, the Company was in compliance with all covenants under the Loan Agreement. Interest rates are based on options selected by the Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At January 31, 2011, the prime rate was 3.25%, the LIBOR rate was 0.375%, and the margins added to the prime rate and the LIBOR rate, which are determined each quarter based on the applicable financial statement ratio, were 0.5 and 2.25 percentage points, respectively. Monthly interest payments were made during the years ended January 31, 2011 and 2010. As of January 31, 2011, the Company had borrowed $18.3 million and had $7.0 million available to it under the revolving line of credit. In addition, $0.1 million of availability was used under the Loan Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. The Loan Agreement provides that all payments by the Company's customers are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At January 31, 2011, the amount of such restricted cash was $1.0 million. Cash required for operations is provided by draw-downs on the line of credit.

The Company also has credit arrangements used by its Denmark and U.A.E. subsidiaries. These credit arrangements are in the form of overdraft facilities at rates competitive in the countries in which the Company operates. At January 31, 2011, borrowings under these credit arrangements totaled $2.2 million; an additional $7.5 million remained unused.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Reclassifications. Reclassifications were made to prior-year financial statements to conform to the current-year presentations.

Revenue recognition. The Company recognizes revenues including shipping and handling charges billed to customers, when all the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the seller's price to the buyer is fixed or determinable, and (iii) collectability is reasonably assured. All subsidiaries of the Company, except as noted below, recognize revenues upon shipment or delivery of goods or services when title and risk of loss pass to customers.

Percentage of completion method revenue recognition. All divisions recognize revenues under the above stated revenue recognition policy except for sizable complex contracts that require periodic recognition of income. For these contracts, the Company uses the "percentage of completion" accounting method. Under this approach, income is recognized in each reporting period based on the status of the uncompleted contracts and the current estimates of costs to complete. The choice of accounting method is made at the time the contract is received based on the expected length and complexity of the project. The percentage of completion is determined by the relationship of costs incurred to the total estimated costs of the contract. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. Claims for additional compensation due the Company are recognized in contract revenues when realization is probable and the amount can be reliably estimated.

Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories.

differences have been recorded at the current tax rate. The Company assesses its deferred tax assets for realizability at each reporting period.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Equity-based compensation. Stock compensation expense for employee equity awards is recognized ratably over the requisite service period of the award. The Black-Scholes option-pricing model is utilized to estimate the fair value of awards. Determining the fair value of stock options using the Black-Scholes model requires judgment, including estimates for (1) risk-free interest rate - an estimate based on the yield of zero-coupon treasury securities with a maturity equal to the expected life of the option; (2) expected volatility - an estimate based on the historical volatility of the Company's Common Stock; and (3) expected life of the option - an estimate based on historical experience including the effect of employee terminations.

Fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are based upon reasonable estimates of their fair value due to their short-term nature. The carrying value of the cash surrender value of life insurance policies approximated fair value and was based on the market value of the underlying investments, which may increase or decrease due to fluctuations in the overall financial markets. The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable rates.

The Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing interest rates under the revolving credit agreement. Any differences paid or received on the interest rate swap agreements are recognized as adjustments to interest expense over the life of the swap, thereby adjusting the effective interest rate on the underlying obligation.

New accounting pronouncements. See “Financial Statements - Notes to Condensed Consolidated Financial Statements,” Note 2 - “New Accounting Pronouncements,” for information regarding new accounting pronouncements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk associated with changes in foreign currency exchange rates, interest rates and commodity prices. Foreign currency exchange rate risk is mitigated through maintenance of local production facilities in the markets served, often, though not always, invoicing customers in the same currency as the source of the products and use of foreign currency denominated debt in Denmark, India, and the U.A.E. At times, the Company has attempted to mitigate interest rate risk by maintaining a balance of fixed and floating rate debt.

The Company may enter into an interest rate swap agreement from time to time to reduce its exposure to market risks from changing interest rates under the revolving credit agreement. Under the terms of swap agreements, the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to the notional principal amount. Any differences paid or received on the interest rate swap agreements are recognized as adjustments to interest expense over the life of the swap, thereby adjusting the effective interest rate on the underlying obligation. Financial instruments are not held or issued for trading purposes.

At January 31, 2011 one interest rate swap agreement was in effect with a notional value of $9.0 million maturing in 2013. The swap agreement, which reduces the exposure to market risks from changing interest rates, exchanges the variable rate to fixed interest rate payments of 2.23% plus LIBOR margin. For additional information, see Note 12 - Fair Value of Financial Instruments in the Notes to Consolidated Financial Statements.

A hypothetical ten percent change in market interest rates over the next year would increase or decrease interest on the Company's floating rate debt instruments by approximately $17,800.

Commodity price risk is the possibility of higher or lower costs due to changes in the prices of commodities, such as ferrous alloys which the Company uses in the production of piping systems. The Company attempts to mitigate such risks by obtaining price commitments from its commodity suppliers and, when it appears appropriate, purchasing quantities in advance of likely price increases.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company for each of the three years in the periods ended as of January 31, 2011, 2010 and 2009 and the notes thereto are set forth elsewhere herein.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of January 31, 2011. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of as of January 31, 2011 to ensure that information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and is accumulated and communicated to the issuer's management, including the principal executive and financial officers, to allow timely decisions regarding required disclosure.

Management's Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the Exchange Act, MFRI's management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of the end of the last fiscal year. The framework on which such evaluation was based is contained in the report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Report”).

The Company's system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that the Company has maintained effective internal control over financial reporting as of January 31, 2011, based on criteria in the COSO Report.

Change in Internal Controls. There has been no change in internal control over financial reporting that occurred during the last fiscal year that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

Item 9B. OTHER INFORMATION

None

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE