Perma-Pipe International Holdings, Inc. - Annual Report: 2012 (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, 2012

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 if 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) 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 o No x

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 the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" 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) 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 $53,878,437 based on the closing sale price of $9.00 per share as reported on the NASDAQ Global Market on July 31, 2011.

The number of shares of the registrant's common stock outstanding at April 25, 2012 was 6,914,646.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the 2012 Annual Meeting of Stockholders are incorporated by reference in Part III.

MFRI, Inc.

FORM 10-K

For the fiscal period ended January 31, 2012

TABLE OF CONTENTS



Item		Page
Part I
1.	Business	1
	Piping Systems	2
	Filtration Products	3
	Industrial Process Cooling	4
	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.	Mine Safety Disclosures	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	21
8.	Financial Statements and Supplementary Data	22
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22
9A.	Controls and Procedures	22
9B.	Other Information	22

Part III
10.	Directors, Executive Officers and Corporate Governance	23
11.	Executive Compensation	23
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	23
13.	Certain Relationships and Related Transactions and Director Independence	23
14.	Principal Accounting Fees and Services	23

Part IV
15.	Exhibits and Financial Statement Schedules	23

Report of Independent Registered Public Accounting Firm		24
Signatures		52

PART I

Forward Looking Statements

Statements in this Form 10-K that are not historical facts, so-called "forward-looking statements," are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in MFRI's filings with the Securities and Exchange Commission ("SEC"). See "Risk Factors" in Item 1A.

Available Information

The Company files with and furnishes to the SEC, reports including annual meeting materials, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as amendments thereto. The Company maintains a website www.mfri.com, where these reports and related materials are available free of charge as soon as reasonably practicable after the Company electronically delivers such material to the SEC. The information on the Company's website is not part of this annual report on Form 10-K and is not incorporated into this or any other filings by the Company with the SEC.

Item 1. BUSINESS

MFRI, Inc., collectively with its subsidiaries ("MFRI", the "Company" or the "Registrant"), is engaged in the manufacture and sale of products in three reportable segments: piping systems, filtration products and industrial process cooling. 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 2011 and 2010 are the fiscal years ended January 31, 2012 and 2011, respectively. In the year ended January 31, 2012, no customer accounted for 10% or more of the Company's net sales.

MFRI, Inc.'s Operating Units



Piping Systems	Filtration Products	Industrial Process Cooling	Heating, Ventilation and Air Conditioning
Perma-Pipe, Inc.	Midwesco Filter Resources, Inc.	Thermal Care, Inc.	Midwesco Mechanical
Niles, IL	Winchester, VA	Niles, IL	and Energy, Inc.
New Iberia, LA	TDC Filter Manufacturing, Inc.	Boe-Therm A/S	Niles, IL
Lebanon, TN	Bolingbrook, IL	Assens, Denmark
Perma-Pipe Middle East FZC	Nordic Air Filtration A/S
Fujarah, United Arab Emirates	Nakskov, Denmark
Perma-Pipe Saudi Arabia, LLC
Dammam, Kingdom of Saudi Arabia
Perma-Pipe India Pvt. Ltd
Gandidham, India
Mumbai, India
Bayou Perma-Pipe Canada, Ltd.
Alberta, Canada

All operating units 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.

Piping Systems

Products and services. The Company engineers, designs, manufactures and sells specialty piping and leak detection and location systems. Piping systems include (i) industrial and secondary containment piping systems for

transporting chemicals, hazardous fluids and petroleum products, (ii) insulated and jacketed district heating and cooling ("DHC") piping systems for efficient energy distribution to multiple locations from central energy plants 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.

Piping systems frequently custom fabricates 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.

Domestic piping systems is seasonal. See "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") - Piping Systems."

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 has been completed 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 had its first sale in April 2012.

Intellectual Property. The Company owns several patents covering its piping and electronic leak detection systems. The patents are not material either individually or in the aggregate overall because the Company believes sales would not be materially reduced if patent protection were not available. The Company owns numerous trademarks connected with its piping and leak detection systems including the following U.S. trademarks:

Perma-Pipe®, Chil-Gard®, Double Quik®, Escon-A®, FluidWatch®, Galva-Gard®, Polytherm®, Pal-AT®, Stereo-Heat®, LiquidWatch®, PalCom®, Xtru-therm®, Auto-Therm®, Pex-Gard®, Multi-Therm®, Ultra-Therm®, Cryo-Gard™, Sleeve-Gard™ and Electro-Gard™. The Company also owns a number of trademarks throughout the world. Some of the Company's more significant trademarks include: Auto-Therm™, Cryo-Gard™, Electro-Gard™, Pal-at™, Permalert™, Perma-Pipe®, Polytherm®, Ric-Wil®, Sleeve-Gard™ and Xtru-therm®.

Backlog. As of January 31, 2012, the backlog (uncompleted firm orders) was $53.8 million, net of order cancelled after January 31, 2012 due to technical matters. As of January 31, 2011, the backlog was $46.5 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 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. Piping systems is highly competitive. The Company believes its principal competition consists of between ten and twenty major competitors and more small competitors. The Company believes quality, service, a

comprehensive product line and price are the key competitive factors. The Company also believes it has a more comprehensive line for DHC than any of its competitors. Some competitors 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 such regulations 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 principal types of industrial air filtration and particulate collection systems in use are baghouses, cartridge collectors, electrostatic precipitators, scrubbers and mechanical collectors. This equipment is used to eliminate 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 have 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.

Filtration products have an integrated sales program, 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. 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.

Intellectual Property. 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®. The trademarks are not material either individually or in the aggregate overall because the Company believes sales would not be materially reduced if trademark protection were not available.

Backlog. As of January 31, 2012, the backlog was $14.5 million, substantially all of which is expected to be completed in 2012. As of January 31, 2011, the backlog was $17.2 million.

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 chief competitors consist of approximately five major and at least 50 smaller businesses, 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 filtration products. 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 believes its 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 sale of filtration products 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

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 principal 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 industrial process cooling, 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.

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

Backlog. As of January 31, 2012, the backlog was $6.4 million, all of which is expected to be completed in 2012. As of January 31, 2011, the backlog was $4.3 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 industrial process cooling. The Company believes it has a more comprehensive line of cooling products than any of its competitors. Certain competitors 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 29, 2012, the Company had 1,198 full-time employees, of whom 40.7% worked outside the U.S.

International

The Company's international operations as of January 31, 2012 include subsidiaries and a joint venture in five foreign countries on three continents. The Company's international operations contributed approximately 15.7% of revenue in 2011, 27.6% of revenue in 2010.

Refer to the Business 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 sets forth information regarding the executive officers of the Company as of April 15, 2012:



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; Age 77	1972

Bradley E. Mautner	Director, President and Chief Operating Officer; Age 56	1994

Michael D. Bennett	Vice President, Chief Financial Officer, Secretary and Treasurer; Age 68	1989

Timothy P. Murphy	Vice President of Human Resources; Age 62	2008

Fati A. Elgendy	President and Chief Operating Officer of Perma-Pipe; Age 63	1990

Robert A. Maffei	Vice President, Perma-Pipe; Age 64	1987

John Mark Foster	President, Midwesco Filter; Age 50	2008

Stephen C. Buck	President, Thermal Care; Age 63	2007

Edward A. Crylen	President and Chief Operating Officer of Midwesco Mechanical and Energy; Age 60	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.

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

Timothy P. Murphy, Vice President of Human Resources 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.

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. In the latest recession, the economy experienced a severe and prolonged downturn which adversely impacted all of the Company's businesses, directly or indirectly. Downturns in such general economic conditions can significantly affect the business of our customers, which in turn affects demand, volumes, pricing, and operating margins for our services and products. Many of customers and suppliers felt the impact of the economic downturn. A downturn in one or more of our significant markets could have a material adverse effect on the Company's business, results of operations or financial condition. Because economic and market conditions vary within the Company's segments, the Company's performance by 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 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 recent credit availability 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.

Rapid growth of business. Expansion may result in unanticipated adverse consequences, including significant strain on management, operations and financial systems as well as on the Company's ability to attract and retain competent employees. In the future, we may seek to grow our business by investing in new or existing facilities, making acquisitions, entering into partnerships and joint ventures, or constructing new facilities, which could entail

a number of additional risks, including:


•	strain on working capital;


•	diversion of management from other activities which could impair the operation of existing businesses;


•	failure to successfully integrate the acquired businesses or facilities into existing operations;


•	inability to maintain key pre-acquisition business relationships;


•	loss of key personnel of the acquired business or facility;


•	exposure to unanticipated liabilities; and


•	failure to realize efficiencies, synergies and cost savings.

As a result of these and other factors, including the general economic risk, the Company may not be able to realize the expected benefits from any recent or future acquisitions, new facility developments, partnerships, joint ventures or other investments.

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. Filtration products, 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. 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. In periods of declining demand, the Company's fixed cost structure may limit ability to cut costs, which may be a competitive disadvantage to firms with lower cost structures, or may result in reduced operating margins and operating losses.

Backlog. The Company defines backlog as the revenue value in dollars resulting from confirmed customer purchase orders that have not yet been recognized as revenue. However, by industry practice, orders may be canceled or modified at any time. If a customer cancels an order, the customer is responsible for all finished goods, all direct and indirect costs incurred and also for a reasonable allowance for anticipated profits. No assurance can be given that these amounts will be recovered after cancellation. Any cancellation or delay in orders may result in lower than expected revenue.

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



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	34,900 square feet on approximately 4.5 acres
Kingdom of Saudi Arabia	Owned production facilities and leased land	89,000 square feet on approximately 19 acres
United Arab Emirates	Leased office space and land for production facilities	119,300 square feet on approximately 18 acres

Filtration Products



Illinois	Bolingbrook - owned production facilities and office space	101,500 square feet on 5.5 acres
	Cicero - owned 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 facilities 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



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 three significant lease agreements as follows:


•	Land in the Kingdom of Saudi Arabia is leased through 2030 and 2031.


•	Office space of approximately 119,300 square feet and land for production facilities in the U.A.E. leased until June 30, 2030.


•	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 material pending litigation.

Item 4. MINE SAFETY DISCLOSURES - Not applicable.

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 2011 and 2010 are the fiscal years ended January 31, 2012 and 2011 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 2011 and 2010.



	High	Low
2011
First Quarter	$13.06	$9.57
Second Quarter	10.21	6.96
Third Quarter	9.47	6.51
Fourth Quarter	7.51	6.43
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

As of March 15, 2012, there were 74 stockholders of record and other additional shareholders for whom securities firms acted as nominees.

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, 2012.



Plan Category	Number of shares to be issued upon exercise of outstanding options, warrants and rights	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	842,966	$11.48	503,435

ITEM 6. SELECTED FINANCIAL DATA - Not applicable.


Item 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained under the caption MD&A 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):	2011		2010
Piping Systems	$53,769	*	$46,452
Filtration Products	14,473		17,178
Industrial Process Cooling	6,431		4,332
Corporate and Other	8,539		9,751
Total	$83,212		$77,713

*net of order cancelled after January 31, 2012 due to technical matters

MFRI, Inc. is engaged in the manufacture and sale of products in three reportable segments: piping systems, filtration products and industrial process cooling. 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 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 2011, there were no changes in the above critical accounting policies.

In the latest recession, the economy experienced a severe and prolonged downturn which adversely impacted all of the Company's businesses, directly or indirectly. Although improvement is expected, the timing of economic recovery in the markets we serve remains uncertain. Because economic and market conditions vary within the Company's segments, the Company's future performance by segment will also vary. Should current economic conditions continue, or a further downturn in one or more of our significant markets, the Company could experience a period of declining net sales, which could adversely impact the Company's results of operations.

Correction of immaterial errors

In the fourth quarter of 2011, management discovered prior period tax errors related mainly to transfer pricing . The cumulative adjustment for the tax errors covering the period from February 1, 2007 to January 31, 2011, was approximately $315 thousand. The adjustment applicable to the fourth quarter of 2010 was approximately $135 thousand and the adjustment applicable to prior years (February 2007 - January 2010) totaled approximately $180 thousand. Pursuant to the guidance of SEC Staff Accounting Bulletin ("SAB") No. 99, Materiality, the Company concluded that the errors were not material to any of its prior period financial statements. However, in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, the prior period financial statements were revised. Prior period amounts stated in this Form 10-K have been revised to facilitate comparability between current and prior year periods. For further information, see Note 7 Correction of immaterial errors - in the Notes to Consolidated Financial Statements.

2011 Compared to 2010

Net sales were $233.5 million in 2011, an increase of 7% from $219 million in 2010. Sales increased in filtration products, industrial process cooling and HVAC. Piping systems' sales declined due to reduced activity at the U.A.E. facility and no large project related revenue at the India facility.

Gross profit of $36 million in 2011 decreased 18% from $44 million in 2010. Gross margin was 16% compared to 20% in 2010. Gross profit increased significantly in filtration products, industrial process cooling and HVAC due to increased sales volume and margin improvements. Piping systems' gross profit decreased considerably to $14.4 million in 2011 from $27.3 million in 2010 due to lower volume at the U.A.E. facility and no large project related activity at the India facility. In the second quarter, piping systems also incurred a one-time extended service claim of approximately $0.6 million.

General and administrative expenses decreased 6% to $26.3 million from $28 million. The reduction was mainly due to lower profit-based management incentive compensation expense, lower stock compensation expense and lower legal expenses partially offset by start-up costs for piping systems' new facility in Saudi Arabia.

Selling expenses increased 11% to $15.1 million from $13.6 million. A change in piping systems' domestic sales commission program resulted in increased sales commission expense, additional sales in industrial process cooling led to higher commission expense and higher healthcare costs were partially offset by reduced costs from closing the facility in South Africa recorded in 2010.

The Company's worldwide effective income tax rates, ("ETR"), for 2011 and 2010 were (0.3)% and (67.0)%, respectively. For additional information, see the Income Tax section of the MD&A and see Note 8 - Income taxes in the Notes to the Financial Statements.

Net loss was $5 million compared to net income of $4.4 million in 2010. This change is mainly the result of lower volume at the U.A.E. facility and no large project related activity at the India facility. Furthermore piping systems incurred expenses of $1.0 million for the fourth quarter and $2.3 million for 2011 relating to the new start-up facility in Saudi Arabia.

Piping Systems

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.

The manufacturing facility in Dammam, Saudi Arabia is production ready and staff has been recruited and trained. Initial customer orders have been received, technical submittals are awaiting approval and procurement of raw materials is currently underway. Expenses of $1.0 million for the fourth quarter and $2.3 million for 2011 relating to this new start-up facility were recorded to cost of goods sold, general and administrative and selling expenses.

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.



($ in thousands)	2011		2010		% (Decrease)
Net sales	$96,977		$104,559		(7	)%

Gross profit	14,382		27,303		(47	)%
Percentage of net sales	15	%	26	%

Income from operations	1,115		13,831		(92	)%
Percentage of net sales	1	%	13	%

Despite significant sales drops in the Middle East and India, net sales of $97 million decreased only 7% from $104.6 million, in the prior-year due to reduced activity at the U.A.E. facility and no large project related revenue at the India facility, partially offset by a rise in domestic oil and gas product sales.

Gross margin decreased to 15% of net sales from 26% of net sales in the prior-year due to lower volume at the U.A.E. facility and no large project related activity at the India facility. In the second quarter, piping systems incurred a one-time extended service claim of approximately $0.6 million.

General and administrative expense decreased to $9 million or 9.5% of net sales in 2011 from $10 million or 9.9% of net sales in 2010. The reduction in general and administrative expenses was due to lower profit based management incentive compensation, legal expenses and reduced staffing at the U.A.E. location, partially offset by increased healthcare costs.

Selling expense increased to $4 million or 4% of net sales in 2011 from $3 million or 3% of net sales in 2010. This increase was due to a change in the domestic sales commission program, which resulted in higher sales commission expense in the period.

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.

Filtration products 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 filtration products, 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.



($ in thousands)	2011		2010		% Increase
Net sales	$93,705		$85,133		10	%

Gross profit	12,466		10,394		20	%
Percentage of net sales	13	%	12	%

Income (loss) from operations	614		(1,335)		146	%
Percentage of net sales	0.7	%	(1.6	)%

Net sales increased 10% to $94 million in 2011 from $85 million in 2010 due to improving business conditions in filtration products. New pricing models are being used in an effort to shift the mix of products sold and improve overall profitability.

Gross margin increased to 13% of net sales from 12% of net sales in 2010 primarily due to cost containment efforts and improved product mix.

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. In 2010, these expenses were included in cost of goods sold, general and administrative and selling expenses.

General and administrative expenses increased to $5 million from $4.8 million and as a percentage of net sales decreased to 5.3% from 5.6% in 2010. The dollar increase was due to additional staffing, foreign exchange currency loss and an increase in bad debt expense partially offset by closing costs related to the facility in South Africa.

Selling expenses remained level at $6.9 million. Additional staffing and higher advertising expenses were offset by the 2010 closing of the South Africa facility. Selling expenses as a percentage of net sales decreased to 7.3% in 2011 from 8.2% of net sales in 2010.

Industrial Process Cooling



($ in thousands)	2011		2010		% Increase
Net sales	$32,112		$26,220		22	%

Gross profit	8,541		7,044		21	%
Percentage of net sales	27	%	27	%

Income from operations	810		295		175	%
Percentage of net sales	2.5	%	1.1	%

Net sales of $32 million increased 22% from $26 million in 2010 due to improving business conditions in the domestic plastic and industrial market sectors.

Gross profit increased 21% to $8.5 million from $7 million in 2010. Gross margin remained constant as a percentage of net sales.

General and administrative expenses increased to $3.6 million from $3.2 million in 2010 and decreased as a percentage of net sales to 11% from 12% in 2010 due to the effect of higher sales. The change in spending was a result of restoring compensation to levels before wage reductions implemented during the economic downturn, increased profit based management incentive compensation expense related to improved performance, additional staffing and increased professional expenses including legal costs.

Selling expenses increased to $4.2 million in 2011 from $3.5 million in 2010 primarily driven by an increase in commission expense due to higher sales, restoring compensation to levels before wage reductions implemented during the economic downturn and higher healthcare costs. Selling expenses as a percentage of net sales decreased to 13% from 13.5% of net sales in 2010 due to the effect of higher sales.

Corporate and Other

Net sales of $10.7 million in 2011 increased from $2.7 million in 2010 due to increased construction activity.

Corporate expenses include interest expense and general and administrative expenses that are not allocated to the segments. General and administrative expenses decreased 11% to $8.5 million or 3.7% of net sales from $9.6 million or 4.4% of net sales in 2010. The decrease was due to lower profit-based management incentive and stock compensation expense.

Interest expense increased to $2.2 million from $1.9 million in 2010 primarily due to higher borrowings and interest rates. Interest income increased to $728 thousand from $676 thousand due to higher cash balances held overseas in piping systems.

INCOME TAXES

The Company's worldwide ETRs were (0.3)% and (67.0)% in 2011 and 2010, respectively. The ETR 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 ETR in 2011 was less than the statutory U.S. federal income tax rate, due to foreign losses and repatriation of foreign earnings. The ETR in 2010 was less than the statutory U.S. federal income tax rate, mainly due to the large portion of income earned in the U.A.E.

The January 31, 2012 computation of the projected annual tax rate has been significantly impacted by the loss in the U.A.E. for which no tax benefit can be provided. The Company recorded $1.8 million in tax expense associated with the $3.1 million repatriation of foreign earnings that occurred in July 2011. These foreign earnings were

previously considered to be indefinitely reinvested outside the United States. The repatriation was a one-time nonrecurring event. The Company has not provided Federal tax on unremitted earnings of its international subsidiaries. A deferred tax asset of $1.3 million has been established for U.S. foreign tax credits attributed to repatriated foreign earnings. The excess foreign tax credits are subject to a ten-year carryforward and will expire in 2022.

During 2011, the Company reevaluated the need for a valuation allowance against deferred tax assets and determined that no reserve was needed. As of January 31, 2011 and January 31, 2012, no valuation allowance was deemed necessary on all domestic deferred tax assets except for certain state net operating losses, ("NOL"). The Company believes that it will be more likely than not that the research and development credits will be utilized within the next five years; therefore, the Company has released the valuation allowance of $0.8 million for the $1.3 million research and development credits established in 2009. Another contributing factor to the unusual ETR is the valuation allowance set up on the NOL in Saudi Arabia. The Company does not record a tax benefit for its start-up entities.

As of January 31, 2012, 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 ETR to the U.S. Statutory tax rate is as follows:



	2011		2010
Statutory tax rate	34.0	%	34.0	%
Differences in foreign tax rate	(28.8	)%	(60.7	)%
Foreign tax credit	26.2	%	—	%
Research tax credit and release of valuation allowance	19.1	%	—	%
Repatriation	(36.4	)%	—	%
Valuation allowance for foreign and state NOLs	(10.1	)%	(20.8	)%
Nontaxable income from the Canadian joint venture	10.7	%	(12.8	)%
State taxes, net of federal benefit	(8.4	)%	(16.6	)%
All other, net expense	(6.6	)%	9.9	%
Effective income tax rate	(0.3	)%	(67.0	)%

For further information, see Note 8 - Income Taxes in the Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents as of January 31, 2012 were $4.2 million as compared to $16.7 million at January 31, 2011. The decrease was primarily for the new facility in Saudi Arabia. The Company's working capital was $43 million at January 31, 2012 compared to $59 million at January 31, 2011. Cash used in operations in 2011 was $0.2 million compared to cash provided by operations of $8.7 million at January 31, 2011.

In July 2011, the Company recorded a one-time $1.8 million tax expense associated with a $3.1 million repatriation of foreign earnings. This tax expense included a payment of $0.5 million to the foreign tax authority and an accrual of $1.3 million U.S. tax on foreign source income. No cash will be paid for this tax in the U.S. since the Company has a net operating loss carryforward for federal income taxes. The Company does not intend to repatriate remaining unremitted foreign earnings and anticipates reinvesting these earnings overseas to fund current working capital requirements and expansion in foreign markets. If the Company repatriates unremitted foreign earnings, it will have negative tax implications.

Net cash used in investing activities in 2011 included $10 million for capital expenditures, primarily for machinery and equipment in piping systems of which $6.6 million was related to the new plant in Saudi Arabia. The Company estimates that capital expenditures for 2012 will be approximately $8 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 piping systems.

Debt totaled $37.4 million at January 31, 2012, a decrease of $2 million since January 31, 2011. Net cash used by financing activities was $1.9 million. Other long-term liabilities of $5.1 million were composed primarily of accrued pension cost and deferred compensation.

The following table summarizes the Company's estimated contractual obligations at January 31, 2012.



($ in thousands)		Year Ending January 31,
Contractual obligations	Total	2013		2014	2015		2016		2017		Thereafter
Revolving line domestic (1)	$18,252		$—	$18,252		$—		$—		$—		$—
Mortgages (2)	17,699	1,156		926	929		928		927		12,833
Revolving line foreign	1,986	673		75	75		75		75		1,013
Term loans (3)	5,396	1,436		1,886	340		62		62		1,610
Subtotal	43,333	3,265		21,139	1,344		1,065		1,064		15,456
Capitalized lease obligations	2,133	518		465	406		385		359		—
Operating lease obligations (4)	11,871	2,148		1,765	1,504		1,306		1,242		3,906
Projected pension contributions (5)	3,979	705		308	325		343		347		1,951
Deferred compensation (6)	5,686	571		105	105		105		52		4,748
Employment agreements (7)	101	—		—	—		—		—		101
Uncertain tax position obligations (8)	945	—		—	—		—		—		945
Total	$68,048	$7,207		$23,782	$3,684		$3,204		$3,064		$27,107

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, 2012, and the weighted average interest rate of 3.51% on that debt, such interest was being incurred at an annual rate of approximately $0.8 million.


(2)	Scheduled maturities, including interest.


(3)	Term loan obligations exclude floating rate interest on term loan with a January 31, 2012 balance of $1.1 million. Based on the amount of such debt as of January 31, 2012, and the weighted average interest rate of 3.34% on that debt, such interest was being incurred at an annual rate of approximately $42 thousand.


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

Financing

of dividends, and require attainment of levels of profitability and cash flows. At January 31, 2012, 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, 2012, 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 2.75 percentage points, respectively. Monthly interest payments were made during the years ended January 31, 2012 and 2011. As of January 31, 2012, the Company had borrowed $18.3 million and had $6.9 million available to it under the revolving line of credit. In addition, $0.2 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 domestic receipts 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, 2012, the amount of such restricted cash was $1.7 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, 2012, borrowings under these credit arrangements totaled $1.5 million; an additional $3.8 million remained unused.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The Company's significant accounting policies are discussed in the notes to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The application of certain of these policies requires significant judgments or a historical based estimation process that can affect the results of operations and financial position of the Company as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts ultimately differ from previous estimates, the revisions are included in the Company's results of operations for the period in which the actual amounts become known.

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.

Income taxes. Deferred income taxes have been provided for temporary differences arising from differences in the basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary differences have been recorded at the current tax rate. The Company assesses its deferred tax assets for realizability at each reporting period.

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.

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

New accounting pronouncements. See "Financial Statements - Notes to Consolidated Financial Statements," Note 2 - "New accounting pronouncements," for information regarding new accounting pronouncements.


Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company for each of the two years in the periods ended as of January 31, 2012 and 2011 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, 2012. 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 January 31, 2012 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, 2012, 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