10-Q 1 mfri2014q310q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

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

For the quarterly period ended October 31, 2014
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)
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 website, 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 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 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). Yes o No x
On December 5, 2014, there were 7,290,576 shares of the registrant's common stock outstanding.

MFRI, Inc.
FORM 10-Q
For the fiscal quarter ended October 31, 2014
TABLE OF CONTENTS

Item |  | Page
Part I | Financial Information |
1. | Financial Statements |
| Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2014 and 2013 | 1
| Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended October 31, 2014 and 2013 | 2
| Consolidated Balance Sheets as of October 31, 2014 and January 31, 201 4 | 3
| Consolidated Statements of Stockholders' Equity as of October 31, 2014 and January 31, 2014 | 4
| Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2014 and 2013 | 5
| Notes to Consolidated Financial Statements | 6
2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13
4. | Controls and Procedures | 17
Part II | Other Information |
6. | Exhibits | 18
Signatures | 19

PART I FINANCIAL INFORMATION
Item 1. Financial Statements
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)

| Three Months Ended October 31, |  | Nine Months Ended October 31,
| 2014 |  | 2013 |  |  | 2014 |  | 2013 |
Net sales |  | $43,819 |  |  | $57,967 |  |  |  | $156,713 |  |  | $173,460 |
Cost of sales | 37,098 |  | 41,080 |  |  | 123,458 |  | 130,423 |
Gross profit | 6,721 |  | 16,887 |  |  | 33,255 |  | 43,037 |
Operating expenses |  |  |  |  |
General and administrative expenses | 5,291 |  | 7,550 |  |  | 19,421 | 20,760 |
Selling expenses | 2,666 |  | 2,550 |  |  | 7,566 | 8,184 |
Total operating expenses | 7,957 |  | 10,100 |  |  | 26,987 |  | 28,944 |
(Loss) income from operations | (1,236 | ) | 6,787 |  |  | 6,268 |  | 14,093 |
Income from joint venture | 903 |  | 715 |  |  | 1,114 |  | 248 |
Interest expense, net | 293 |  | 276 |  |  | 793 |  | 1,082 |
(Loss) income from continuing operations before income taxes | (626 | ) | 7,226 |  |  | 6,589 |  | 13,259 |
Income tax expense (benefit) | 11 | 64 |  |  | 1,553 |  | (99 | )
(Loss) income from continuing operations | (637 | ) | 7,162 |  |  | 5,036 |  | 13,358 |
Income (loss) from discontinued operations, net of tax | 265 | 226 |  |  | (217 | ) | 9,510 |
Net (loss) income |  | ($372 | ) |  | $7,388 |  |  |  | $4,819 |  | $22,868
Weighted average common shares outstanding |  |  |  |  |
Basic | 7,290 |  | 7,068 |  |  | 7,238 |  | 6,995 |
Diluted | 7,290 |  | 7,163 |  |  | 7,337 |  | 7,041 |
(Loss) earnings per share from continuing operations |  |  |  |  |
Basic | ($0.09) |  | $1.01 |  |  | $0.70 | $1.91
Diluted | ($0.09) |  | $1.00 |  |  | $0.69 | $1.90
Earnings (loss) per share from discontinued operations |  |  |  |  |
Basic | $0.04 |  | $0.03 |  |  | ($0.03) |  | $1.36 |
Diluted | $0.04 |  | $0.03 |  |  | ($0.03) | $1.35
(Loss) earnings per share |  |  |  |  |
Basic | ($0.05) |  | $1.05 |  |  |  | $0.67 |  |  | $3.27 |
Diluted | ($0.05) |  | $1.03 |  |  | $0.66 |  | $3.25 |

See accompanying notes to consolidated financial statements.
Note: Earnings per share calculations could be impacted by rounding.
1

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
(In thousands)

| Three Months Ended October 31, |  | Nine Months Ended October 31,
| 2014 |  | 2013 |  |  | 2014 |  | 2013 |
Net (loss) income |  | ($372 | ) |  | $7,388 |  |  |  | $4,819 |  |  | $22,868 |
Other comprehensive (loss) income |  |  |  |  |
Foreign currency translation adjustments, net of tax | (484 | ) | (58 | ) |  | (654 | ) | (778 | )
Interest rate swap, net of tax | (8 | ) | (4 | ) |  | (30 | ) | 155 |
Other comprehensive loss | (492 | ) | (62 | ) |  | (684 | ) | (623 | )
Comprehensive (loss) income |  | ($864 | ) |  | $7,326 |  |  |  | $4,135 |  |  | $22,245 |

See accompanying notes to consolidated financial statements.
2

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In thousands except per share data) | October 31, 2014 |  | January 31, 2014 |
ASSETS | Unaudited |  |
Current assets |  |
Cash and cash equivalents |  | $14,416 |  |  | $13,395 |
Restricted cash | 429 |  | 439 |
Trade accounts receivable, less allowance for doubtful accounts of $177 at October 31, 2014 and $194 at January 31, 2014 | 40,975 |  | 45,659 |
Inventories, net | 30,957 |  | 33,547 |
Assets held for sale | — |  | 1,223 |
Prepaid expenses and other current assets | 4,833 |  | 5,353 |
Costs and estimated earnings in excess of billings on uncompleted contracts | 2,535 |  | 1,476 |
Total current assets | 94,145 |  | 101,092 |
Property, plant and equipment, net of accumulated depreciation | 42,279 |  | 42,541 |
Long-term assets |  |
Deferred tax assets | 1,279 |  | 1,667 |
Note receivable | 4,442 |  | 4,659 |
Investment in joint venture | 7,669 |  | 6,550 |
Cash surrender value on life insurance policies | 3,263 |  | 3,110 |
Other assets | 2,530 |  | 2,363 |
Assets held for sale long-term | — |  | 914 |
Patents, net of accumulated amortization | 396 |  | 373 |
Total long-term assets | 19,579 |  | 19,636 |
Total assets |  | $156,003 |  |  | $163,269 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |
Current liabilities |  |
Trade accounts payable |  | $11,425 |  |  | $15,276 |
Accrued compensation and payroll taxes | 5,471 |  | 5,254 |
Commissions and management incentives payable | 5,646 |  | 9,235 |
Current maturities of long-term debt | 4,539 |  | 8,274 |
Customers' deposits | 7,788 |  | 7,372 |
Liabilities held for sale | — |  | 527 |
Billings in excess of costs and estimated earnings on uncompleted contracts | 683 |  | 2,222 |
Other accrued liabilities | 2,122 |  | 1,840 |
Deferred tax liabilities | 920 |  | 889 |
Income taxes payable | 1,271 |  | 2,593 |
Total current liabilities | 39,865 |  | 53,482 |
Long-term liabilities |  |
Long-term debt, less current maturities | 26,102 |  | 23,469 |
Deferred compensation liabilities | 6,718 |  | 6,509 |
Liabilities held for sale long-term | — |  | 968 |
Other long-term liabilities | 2,215 |  | 2,203 |
Total long-term liabilities | 35,035 |  | 33,149 |
Stockholders' equity |  |
Common stock, $.01 par value, authorized 50,000 shares; 7,291 issued and outstanding at October 31, 2014 and 7,169 issued and outstanding at January 31, 2014 | 73 |  | 72 |
Additional paid-in capital | 52,474 |  | 52,144 |
Retained earnings | 30,401 |  | 25,582 |
Accumulated other comprehensive loss | (1,845 | ) | (1,160 | )
Total stockholders' equity | 81,103 |  | 76,638 |
Total liabilities and stockholders' equity |  | $156,003 |  |  | $163,269 |

See accompanying notes to consolidated financial statements.
3

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

($ in thousands, except share data) |  | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity
Common Stock
Total stockholders' equity at January 31, 2013 | $69 | $50,358 | $4,553 | ($725) | $54,255
Net income |  |  | 21,027 |  |  | 21,027 |
Stock options exercised | 3 |  | 1,585 |  |  |  | 1,588 |
Stock-based compensation expense |  | 196 |  |  |  | 196 |
Shares issued |  | 5 |  |  |  | 5 |
Interest rate swap |  |  |  | 151 |  | 151 |
Pension liability adjustment |  |  |  | 966 |  | 966 |
Foreign currency translation adjustments |  |  | 2 |  | (1,269 | ) | (1,267 | )
Tax benefit on above items |  |  |  | (283 | ) | (283 | )
Total stockholders' equity at January 31, 2014 | $72 | $52,144 | $25,582 | ($1,160) | $76,638
Net income |  |  |  | $4,819 |  |  | 4,819 |
Stock options exercised | 1 |  | 329 |  |  |  | 330 |
Stock-based compensation benefit |  | (57 | ) |  |  | (57 | )
Shares issued |  | 58 |  |  |  | 58 |
Interest rate swap |  |  |  | (40 | ) | (40 | )
Foreign currency translation adjustments |  |  |  | (653 | ) | (653 | )
Tax benefit on above items |  |  |  | 8 |  | 8 |
Total stockholders' equity at October 31, 2014 | $73 | $52,474 | $30,401 | ($1,845) | $81,103

Shares | 2014 |  | 2013 |  |
Balances at beginning of year | 7,168,537 |  | 6,924,084 |  |
Shares issued | 122,039 |  | 244,453 |  |
Balances at October 31, 2014 | 7,290,576 |  | 7,168,537 |  |

4

MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands) | Nine Months Ended October 31,
| 2014 |  | 2013 |
Operating activities |  |
Net income |  | $4,819 |  |  | $22,868 |
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities |  |
Depreciation and amortization | 4,299 |  | 4,465 |
Loss (gain) on disposal of discontinued operations | 283 |  | (10,111 | )
Deferred tax expense | 420 |  | 93 |
Stock-based compensation (benefit) expense | (57 | ) | 95 |
Income from joint venture | (1,114 | ) | (248 | )
Cash surrender value on life insurance policies | (153 | ) | (131 | )
Loss on disposal of fixed assets | 4 |  | 305 |
Provision on uncollectible accounts | (592 | ) | (114 | )
Changes in operating assets and liabilities |  |
Accounts receivable | 5,108 |  | (24,049 | )
Inventories | 2,434 |  | 3,044 |
Costs and estimated earnings in excess of billings on uncompleted contracts | (2,598 | ) | 1,227 |
Accounts payable | (4,494 | ) | (7,052 | )
Accrued compensation and payroll taxes | (3,309 | ) | 4,329 |
Customers' deposits | 416 |  | 1,669 |
Income taxes receivable and payable | (1,311 | ) | 2,220 |
Prepaid expenses and other current assets | 805 |  | (3,736 | )
Other assets and liabilities | 107 |  | (6,204 | )
Net cash provided by (used in) operating activities | 5,067 |  | (11,330 | )
Investing activities |  |
Net proceeds from sale of discontinued operations | — |  | 16,378 |
Capital expenditures | (4,208 | ) | (1,817 | )
Proceeds from sales of property and equipment | 8 |  | 8 |
Net cash (used in) provided by investing activities | (4,200 | ) | 14,569 |
Financing activities |  |
Proceeds from debt | 62,876 |  | 76,633 |
Payments of debt on revolving lines of credit | (61,053 | ) | (70,446 | )
Payments of other debt | (2,059 | ) | (6,817 | )
Increase (decrease) in drafts payable | 722 |  | (118 | )
Payments on capitalized lease obligations | (573 | ) | (453 | )
Stock options exercised and restricted shares issued | 388 |  | 911 |
Net cash provided by (used in) financing activities | 301 |  | (290 | )
Effect of exchange rate changes on cash and cash equivalents | (147 | ) | 538 |
Net increase in cash and cash equivalents | 1,021 |  | 3,487 |
Cash and cash equivalents - beginning of period | 13,395 |  | 7,035 |
Cash and cash equivalents - end of period |  | $14,416 |  |  | $10,522 |
Supplemental cash flow information |  |
Interest paid |  | $1,165 |  |  | $1,694 |
Income taxes paid | 2,503 |  | 396 |
Fixed assets acquired under capital leases | 614 |  | 20 |
Funds held in escrow related to the sale of Thermal Care, Inc. assets | 61 |  | 1,125 |

See accompanying notes to consolidated financial statements.
5

MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
OCTOBER 31, 2014
(Tabular amounts presented in thousands, except per share amounts)

1. | Basis of presentation. The interim consolidated financial statements of MFRI, Inc. and subsidiaries ("MFRI," "Company," or "Registrant") are unaudited, but include all adjustments which the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2014 is derived from the audited consolidated balance sheet as of that date. The results of operations for any interim period are not necessarily indicative of future or annual results. Interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2014 and 2013 are for the nine months ended October 31, 2014 and 2013, respectively.

2. | Business segment reporting. The Company has two reportable segments: Piping Systems which engineers, designs, manufactures and sells specialty piping, leak detection and location systems, and Filtration Products, which manufactures custom-designed industrial filtration products to remove particulates from air and other gas streams.

For the three months ended October 31, 2014 and 2013, respectively, no customer accounted for 10% of the Company's consolidated net sales. For the nine months ended October 31, 2014, one customer in Piping Systems accounted for 12.6% of the Company's consolidated net sales, and no customer accounted for 10% of the Company's consolidated net sales for the nine months ended October 31, 2013.
At October 31, 2014, one customer in Piping Systems accounted for 33% of accounts receivable. At January 31, 2014, one customer in Piping Systems accounted for 24% of accounts receivable.

| Three Months Ended October 31, |  | Nine Months Ended October 31,
| 2014 |  | 2013 |  |  | 2014 |  | 2013 |
Net sales |  |  |  |  |
Piping Systems |  | $26,540 |  |  | $42,289 |  |  |  | $102,683 |  |  | $121,825 |
Filtration Products | 17,279 |  | 15,678 |  |  | 54,030 |  | 51,635 |
Total | 43,819 |  |  | $57,967 |  |  |  | $156,713 |  |  | $173,460 |
Gross profit |  |  |  |  |
Piping Systems |  | $4,609 |  |  | $14,726 |  |  |  | $25,913 |  |  | $35,760 |
Filtration Products | 2,112 |  | 2,161 |  |  | 7,342 |  | 7,277 |
Total |  | $6,721 |  |  | $16,887 |  |  |  | $33,255 |  |  | $43,037 |
Income (loss) from operations |  |  |  |  |
Piping Systems |  | $1,096 |  |  | $9,403 |  |  |  | $12,896 |  |  | $21,276 |
Filtration Products | (726 | ) | (486 | ) |  | (1,300 | ) | (468 | )
Corporate | (1,606 | ) | (2,130 | ) |  | (5,328 | ) | (6,715 | )
Total |  | ($1,236 | ) |  | $6,787 |  |  |  | $6,268 |  |  | $14,093 |

Prior to 2014, the Company did not allocate certain general administrative costs, including costs related to payroll processing and information systems, to its operating segments and instead included these costs and variances in corporate expenses. In 2014, the Company began allocating these costs and variances to its operating segments.
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3. | Discontinued operations. On April 30, 2013, the Company sold most of the domestic assets of its industrial process cooling subsidiary Thermal Care, Inc. to a subsidiary of IPEG, Inc. for $16.4 million cash. On June 26, 2013, the Company sold substantially all of the assets of the HVAC business previously included in Corporate. In October 2013, the Company decided to sell its remaining industrial process cooling business in Denmark. This business was sold on February 28, 2014. From October 2013 until the date of sale, the business was operational and selling product. These businesses are reported as discontinued operations in the consolidated financial statements, and the notes to consolidated financial statements have been revised to conform to the current year reporting. The $317 thousand of tax expense for the nine months ended October 31, 2014 relates to the reversal of deferred tax assets on the books of the Denmark subsidiary upon the sale of that subsidiary. Results of the discontinued operations for the three and nine months ended October 31, 2014 and 2013 were as follows:

| Three Months Ended October 31, | Nine Months Ended October 31,
| 2014 |  | 2013 |  | 2014 |  | 2013 |
Net sales |  | $— |  |  | $874 |  |  | $176 |  |  | $13,049 |
Gain (loss) on disposal of discontinued operations |  | $295 |  |  | ($12 | ) |  | $283 |  |  | $9,750 |
(Loss) income from discontinued operations | (5 | ) | (551 | ) | (183 | ) | 1,627 |
Income (loss) from discontinued operations before income taxes | 290 |  | (563 | ) | 100 |  | 11,377 |
Income tax expense (benefit) | 25 |  | (789 | ) | 317 |  | 1,867 |
Income (loss) from discontinued operations, net of tax |  | $265 |  |  | $226 |  |  | ($217 | ) |  | $9,510 |

4. | Income taxes. Income tax expense (or benefit) for each year is allocated to continuing operations, discontinued operations, extraordinary items, other comprehensive income, and other charges or credits recorded directly to stockholders’ equity. This allocation is commonly referred to as an intra-period tax allocation, as outlined in ASC 740, Income Taxes ("ASC 740"). When considering intra-period tax allocations, a company also should consider the accounting for income taxes in interim periods. ASC 740-20-45-7 requires that the tax effect of pretax income from continuing operations be determined without regard to the tax effects of items not included in continuing operations. This is commonly referred to as the "incremental approach", where the tax provision is generally calculated for continuing operations without regard to other items.

ASC 740 also includes an exception to the general principle of intra-period tax allocation discussed above. This exception requires that all items (e.g., extraordinary items, discontinued operations, including items charged or credited directly to other comprehensive income) be considered in determining the amount of tax benefit that results from a loss from continuing operations. That is, when a company has a current period loss from continuing operations, management must consider income recorded in other categories in determining the tax benefit that is allocated to continuing operations.
The exception in ASC 740 applies in all situations in which there is a loss from continuing operations and income from other items outside of continuing operations. This would include situations in which a company has recorded a full valuation allowance at the beginning and end of the period, and the overall tax provision for the year is zero (i.e., a benefit would be recognized in continuing operations even though the loss from continuing operations does not provide a current year incremental tax benefit). The ASC 740 exception, however, only relates to the allocation of the current year tax provision (which may be zero) and does not change a company’s overall tax provision. While intra-period tax allocation in general does not change the overall tax provision, it may result in a gross-up of the individual components, thereby changing the amount of tax provision included in each category.
The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and
7

exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Income earned in the United Arab Emirates ("U.A.E.") is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.
Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and the Company's effective tax rate in the future. On September 19, 2013, the U.S. Department of Treasury finalized tangible property regulations and reissued in proposed form the regulations addressing accounting for the disposal of components of tangible property. These proposed regulations generally apply to taxable years beginning in 2014, with the option for early adoption. Because changes in tax law are accounted for in the period of enactment, certain provisions of the legislation could impact the Company’s classification of its deferred tax assets and liabilities on the balance sheet but are not expected to have a material effect on the Company’s effective tax rate. The adoption of the regulations is expected to primarily affect timing and is not likely to have a material impact on the financial statements.
The Company periodically reviews the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates and may make further adjustments based on management's outlook for continued profits in each jurisdiction.
The Company's consolidated effective tax rate ("ETR") from continuing operations was 23.6% and (0.7)% for the nine months ended October 31, 2014 and 2013, respectively. The change in the ETR for the two periods relates to the mix of income earned in zero rate jurisdictions, a valuation allowance release in Saudi Arabia in the prior-year period, and the benefit of the gain in discontinued operations allocated to continuing operations in the prior-year period. Royalty income will be included as Subpart F income (subject to the limitation for current earnings and profits) due to the expiration of IRC Section 954(c)(6). This additional income has no impact on the overall tax recorded for the nine months ended October 31, 2014 due to the full valuation allowance maintained in the U.S. In October 2014, the Company did a one-time repatriation of foreign earnings of $0.8 million. 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.
The Company files income tax returns in U.S. federal and state jurisdictions. In July 2014, the Company received a notice from the Internal Revenue Service that they had concluded the tax audit for the years ended January 31, 2012 and 2013. No changes were made to the reported tax. As of October 31, 2014, open tax years in federal and some state jurisdictions date back to 2011. In addition, federal and state tax years January 31, 2002 through January 31, 2011 are subject to adjustment on audit, up to the amount of research tax credits generated in those years. The Company has net operating loss carryforwards expiring in various years beginning January 31, 2030. Additionally, the Company files income tax returns in Denmark, India and Saudi Arabia. As of October 31, 2014, open tax years in foreign jurisdictions vary from three to seven years from the date of filing the income tax returns.

5. | Other intangible assets with definite lives. The Company owns several patents, including those covering features of its piping and electronic leak detection systems. Patents are capitalized and amortized on a straight-line basis over a period not to exceed the legal lives of the patents. The Company expenses costs incurred to renew or extend the term of intangible assets. Gross patents were $2.66 million and $2.60 million as of October 31, 2014 and January 31, 2014, respectively. Accumulated amortization was approximately $2.27 million and $2.23 million as of October 31, 2014 and January 31, 2014, respectively. Future amortizations over the next five years ending January 31 will be $13,550 in 2015, $51,000 in 2016, $47,200 in 2017, $44,150 in 2018, $35,200 in 2019, and $205,200 thereafter.

8

| Three Months Ended October 31, | Nine Months Ended October 31,
| 2014 |  | 2013 |  | 2014 |  | 2013 |
Patent amortization expense |  | $13 |  |  | $12 |  |  | $38 |  |  | $38 |

6. | Investment in joint venture. In October 2009, the Company invested $5.9 million, which consisted of $2 million for a 49% interest and $3.9 million for a note receivable, in a Canadian joint venture with The Bayou Companies, Inc., a subsidiary of Aegion Corporation. The joint venture operates in Camrose, Alberta, Canada, which provides the Company the opportunity to participate in the growing oil sands market.

The Company accounts for the investment in the joint venture using the equity method. The financial results are included in the Company's consolidated financial statements.

| Nine Months Ended October 31,
| 2014 |  | 2013 |
Income from joint venture | 1,114 |  | 248 |

The following information summarizes the joint venture financial data as of October 31, 2014 and January 31, 2014, respectively:

| October 31, 2014 |  | January 31, 2014 |
Current assets | $14,451 | $13,034
Noncurrent assets | 16,085 |  | 17,093 |
Current liabilities | 4,184 |  | 2,921 |
Noncurrent liabilities | 11,923 |  | 14,837 |
Equity | 14,429 |  | 12,369 |

| Nine Months Ended October 31,
| 2014 |  | 2013 |
Revenue |  | $28,666 |  |  | $19,913 |
Gross profit | 5,426 |  | 3,157 |
Income from continuing operations | 3,820 |  | 1,570 |
Net income | 2,268 |  | 516 |

7. | Stock-based compensation. The Company has stock-based compensation awards that can be granted to eligible employees, officers or directors.

| Three Months Ended October 31, | Nine Months Ended October 31,
| 2014 |  | 2013 |  | 2014 |  | 2013 |
Stock-based compensation expense (benefit) |  | $74 |  |  | ($2 | ) |  | ($217 | ) |  | $55 |
Restricted stock based compensation expense |  | $16 |  |  | $62 |  |  | $123 |  |  | $288 |

Stock-based compensation was a benefit year-to-date due to cancellations. Most of these cancellations related to former employees from the discontinued operations.
9

Options
The fair value of the outstanding option awards was estimated on the grant dates using the Black-Scholes option pricing model.

| Nine Months Ended October 31,
Fair value assumptions | 2014 | 2013
Expected volatility | 40.88% - 59.39% | 49.65% - 65.54%
Risk free interest rate | .74% - 1.77% | .74% - 2.82%
Dividend yield | none | none
Expected life | 4.9 - 5.1 years | 4.9 - 5.7 years

Option activity | Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term in Years | Aggregate Intrinsic Value
Outstanding at January 31, 2014 | 776 |  |  | $11.69 |  | 6.1 |  | $3,859 |
Granted | 97 |  | 12.41 |  |  |
Exercised | (45 | ) | 7.27 |  |  | 155 |
Expired or forfeited | (61 | ) | 19.35 |  |  |
Outstanding end of period | 767 |  | 11.45 |  | 6.0 | 857 |
Exercisable end of period | 520 |  |  | $12.09 |  | 4.7 |  | $676 |

Unvested option activity | Unvested Options Outstanding | Weighted Average Exercise Price Per Share | Aggregate Intrinsic Value
Outstanding at January 31, 2014 | 263 |  |  | $8.31 |  |  | $1,633 |
Granted | 97 |  | 12.41 |  |
Vested | (102 | ) |  |
Expired or forfeited | (11 | ) | 8.36 |  |
Outstanding end of period | 247 |  |  | $10.10 |  |  | $180 |

As of October 31, 2014, there was $0.9 million of total unrecognized compensation expense related to unvested stock options. The expense is expected to be recognized over a period of 2.6 years.
Restricted stock
In June 2014 under the Company's 2013 Omnibus Plan, the Company granted deferred stock units to each non-employee director at the time of the annual meeting of stockholders equal to the result of dividing $30,000 by the fair market value of the common stock on the date of grant. The stock will be distributed to the directors upon their separation from service. During the second quarter of 2014, two board members retired and 7,580 shares of common stock were issued to them.
In June 2014 under the 2013 Omnibus Plan, the Company granted restricted stock to Tier I and Tier II executive officers. A portion of the restricted stock vests in annual installments over two years, a portion vests in annual installments over three years and a portion vests in three years based on performance. Until restricted stock becomes vested and nonforfeitable, it may not be sold, assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation of law or otherwise), except by will or the laws of descent and distribution,
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and is not subject to execution, attachment or similar process. The Company issues new shares from its authorized but unissued share pool. The Company calculates restricted stock compensation expense based on the grant date fair value and recognizes expense on a straight-line basis over the vesting period.
The following table summarizes restricted stock activity for the year:

Restricted stock activity | Shares Outstanding | Weighted Average Exercise Price Per Share | Aggregate Intrinsic Value
Outstanding at January 31, 2014 | 29 |  |  | $14.52 |  |  | $419 |
Granted | 84 |  | 12.41 |  |
Issued | (80 | ) |  |
Outstanding end of period | 33 |  |  | $9.12 |  |  | $305 |

As of October 31, 2014, there was $0.5 million of unrecognized compensation expense related to unvested restricted stock granted under the plans. The cost is expected to be recognized over the weighted-average period of 2.0 years.

8. | Earnings per share.

| Three Months Ended October 31, | Nine Months Ended October 31,
| 2014 |  | 2013 |  | 2014 |  | 2013 |
Basic weighted average common shares outstanding | 7,290 |  | 7,068 |  | 7,238 |  | 6,995 |
Dilutive effect of equity incentive plans | — |  | 95 |  | 99 |  | 46 |
Weighted average common shares outstanding assuming full dilution | 7,290 |  | 7,163 |  | 7,337 |  | 7,041 |
Stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares | 346 |  | 216 |  | 257 |  | 362 |
Stock options with an exercise price below the average market price | 421 |  | 665 |  | 510 |  | 519 |

9. | Interest expense, net.

| Three Months Ended October 31, | Nine Months Ended October 31,
| 2014 |  | 2013 |  | 2014 |  | 2013 |
Interest expense |  | $432 |  |  | $409 |  |  | $1,175 |  |  | $1,504 |
Interest income | (139 | ) | (133 | ) | (382 | ) | (422 | )
Interest expense, net |  | $293 |  |  | $276 |  |  | $793 |  |  | $1,082 |

10. | Debt. Debt totaled $30.6 million at October 31, 2014, a net decrease of $1.1 million since January 31, 2014.

On September 24, 2014, the Company entered into a Credit and Security Agreement with a financial institution ("Credit Agreement"). Under the terms of the Credit Agreement, which matures on September 24, 2019, the Company can borrow up to $25 million, subject to borrowing base availability from secured domestic assets and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, and investments, and require attainment of specific levels of profitability and cash flows. At October 31, 2014,
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the Company was in compliance with all covenants under the Credit Agreement. Interest rates vary based on the average availability in the preceding fiscal quarter and are: (a) a margin in effect plus a base rate, if below certain availability limits; or (b) a margin in effect plus the Eurodollar rate for the corresponding interest period. As of October 31, 2014, the Company had borrowed $10.8 million at 3.25% and 1.68% and had $9.5 million available to it under the revolving line of credit. In addition, $0.1 million of availability was used under the Credit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. Cash required for operations is provided by draw downs on the line of credit. The Credit Agreement replaces a secured loan agreement with a bank originally signed July 11, 2002, as amended, which provided a revolving line of credit up to $25.0 million ("Prior Loan Agreement"). The outstanding amount under the Prior Loan Agreement was paid off in full. The Company believes that the new Credit Agreement will provide it with lower overall costs and improved flexibility for investments in and loans to foreign subsidiaries.
Revolving lines foreign. The Company also has credit arrangements used by its Danish and Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The credit arrangements covenants requires a minimum tangible net worth to be maintained. At October 31, 2014, the Company was in compliance with the covenants under the credit arrangements. Interest rates are as follows: 4.00% per annum below National Bank of Fujairah Base Rate, minimum 3.50% per annum and Emirates Inter Bank Offered Rate (EIBOR) plus 3.50% per annum. The Company's interest rates range from 3.5% to 6%. At October 31, 2014, borrowings under these credit arrangements totaled $1.5 million; an additional $24.9 million remained unused.

11. | Fair value of financial instruments. At October 31, 2014, an interest rate swap agreement that relates to a mortgage note in Denmark was in effect with a notional value of $1.3 million that matures December 2021. The swap agreement, which reduces the exposure to market risks from changing interest rates, exchanges the variable rate to fixed interest rate payments of 2.47%. The exchange traded swap is valued on a recurring basis using quoted market prices and was classified within Level 2 of the fair value hierarchy, which includes significant other observable inputs because the exchange is not deemed an active market. The derivative mark to market was $0.1 million as of October 31, 2014 and January 31, 2014. This was included in other long-term liabilities on the consolidated balance sheets.

12. | Recent accounting pronouncements. In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This new standard provides for a single comprehensive model and supersedes most current revenue recognition guidance, including industry specific guidance, and provides for enhanced disclosure requirements. The objective of the new guidance is to improve the consistency, comparability and usefulness to users of financial statements. ASU 2014-09 provides for two implementation methods (1) full retrospective application to each prior period or (2) modified retrospective application with the cumulative effect as of the date of adoption. The Company is in the process of evaluating the new pronouncement which is effective for annual reporting periods beginning after December 15, 2016, and early application is not permitted.

In April 2014, the FASB issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required. This guidance is effective for the Company beginning February 1, 2015. The guidance applies prospectively to new disposals and new classifications of disposal groups held for sale after the effective date. The Company is currently assessing the impact, if any, the guidance will have upon adoption.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
The statements contained under the caption MD&A and other information contained elsewhere in this quarterly 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 included in the Company's latest Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Consolidated MFRI, Inc.
MFRI, Inc. is engaged in the manufacture and sale of products in two reportable segments: Piping Systems and Filtration Products. The Company website is www.mfri.com.
This discussion should be read in conjunction with the consolidated financial statements, including the notes thereto, contained elsewhere in this report. An overview of the segment results is provided in "Notes to Consolidated Financial Statements, Note 2 Business segment reporting" contained in Item 1 of this report.
For the three months ended October 31, 2014 and 2013, respectively, no customer accounted for 10% of the Company's consolidated net sales. For the nine months ended October 31, 2014, one customer in Piping Systems accounted for 12.6% of the Company's consolidated net sales, and no customer accounted for 10% of the Company's consolidated net sales for the nine months ended October 31, 2013.
At October 31, 2014, one customer in Piping Systems accounted for 33% of accounts receivable. At January 31, 2014, one customer in Piping Systems accounted for 24% of accounts receivable.
Three months ended October 31, 2014 ("current quarter") vs. Three months ended October 31, 2013 ("prior-year quarter")
Net sales decreased 24% to $43.8 million in the current quarter, from $58.0 million in the prior-year quarter. Filtration Products sales increased 10% or by $1.6 million, due to a large domestic original equipment manufacturer ("OEM") order. Piping Systems sales decreased 37% or $15.7 million compared to the prior-year quarter due to lower volume in Saudi Arabia and the United Arab Emirates ("U.A.E."). The first phases of major projects expanding the Grand Mosque in Mecca and the King Abdul-Aziz International Airport in Jeddah are largely complete.
Gross profit decreased to $6.7 million in the current quarter from $16.9 million in the prior-year quarter, mainly due to the sales volume decrease in Piping Systems. The gross margin decrease to 15.3% of net sales in the current quarter from 29.1% in the prior-year quarter was also impacted by Filtration Products customer mix and costs associated with the introduction of new products.
Operating expenses decreased to $8.0 million in the current quarter from $10.1 million in the prior-year quarter due to lower management incentive compensation expense, professional expenses and bank fee expenses. Operating expenses as a percent of net sales increased to 18.2% from 17.4%.
Third quarter net loss was $0.4 million compared to net income of $7.4 million in the prior-year quarter. The decrease was due to the lower sales volume and gross profit in Piping Systems.
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Nine months ended October 31, 2014 ("YTD") vs. Nine months ended October 31, 2013 ("prior-year YTD")
YTD net sales decreased 10% to $156.7 million from $173.5 million for the prior-year YTD. Filtration Products sales increased 5% due to a large domestic OEM order. Piping Systems sales decreased 16% or $19.1 million compared to the prior-year YTD due to lower volume related to the aforementioned projects being largely complete in Saudi Arabia and the U.A.E. offset by an increase in domestic oil and gas projects.
Gross profit decreased to $33.3 million from $43.0 million in the prior-year YTD. The gross margin decreased to 21.2% of net sales YTD from 24.8% in the prior-year YTD.
Operating expenses decreased to $27.0 million from $28.9 million in the prior-year YTD mainly due to lower management incentive and deferred compensation expenses and a decrease in stock compensation expense that resulted in a benefit in the current year. Operating expenses as a percent of net sales increased to 17.2% from 16.7%.
Pretax income from continuing operations was $6.6 million versus $13.3 million in the prior-year YTD. Factors contributing to the results were a profitable performance by the Canadian joint venture and lower interest expense.
The Company's YTD consolidated effective tax rate from continuing operations was 23.6%, which was affected primarily by income earned overseas in lower tax jurisdictions.
Net income was $4.8 million compared to $22.9 million in the prior-year YTD. The prior-year YTD included the sale of most of Thermal Care's domestic assets and higher taxes in the current year.
Piping Systems
As the Piping Systems segment is based on large discrete projects, revenues can be subject to large swings in both geographies and reporting periods.

| Three Months Ended October 31, |  | Nine Months Ended October 31,
($ in thousands) | 2014 |  | % |  | 2013 |  | % |  | % Decrease |  | 2014 | % |  | 2013 | % |  | % Decrease
Net sales | $26,540 |  | $42,289 |  | (37)% |  | $102,683 |  | $121,825 |  | (16)%
Gross profit | 4,609 |  | 17 | % | 14,726 |  | 35 | % | (69)% |  | 25,913 | 25 | % | 35,760 | 29 | % | (28)%
Income from operations | 1,096 |  | 4 | % | 9,403 |  | 22 | % | (88)% |  | 12,896 | 13 | % | 21,276 | 17 | % | (39)%

Current quarter vs. prior-year quarter
Net sales decreased 37% to $26.5 million in the current quarter from $42.3 million in the prior-year quarter. The decrease was attributed to lower global and domestic volume.
Gross margin decreased to 17% of net sales in the current quarter from 35% of net sales in the prior-year quarter. Gross profit decreased due to the lower volume related to the aforementioned projects being largely complete in the Middle East. Operating expenses decreased to $3.5 million from $5.3 million due to lower management incentive compensation expense and bank fee expense.
YTD vs. prior-year YTD
YTD net sales decreased 16% to $102.7 million from $121.8 million in the prior-year YTD. The decrease was attributed to lower volume related to the aforementioned projects being largely complete in Saudi Arabia and the U.A.E. offset by an increase in domestic oil and gas projects.
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Gross margin decreased to 25% of net sales YTD from 29% of net sales in the prior-year YTD. Gross profit decreased due to the lower volume produced at the Saudi Arabian and U.A.E. piping facilities, partially offset by the domestic oil and gas projects.
Operating expense decreased to $13.0 million from $14.5 million in the prior-year YTD mainly due to lower management incentive compensation expense due to lower earnings in the period and lower bank fees. Operating expenses as a percent of net sales increased to 13% from 12% in the prior-year YTD.
Filtration Products

| Three Months Ended October 31, |  | Nine Months Ended October 31,
($ in thousands) | 2014 |  | % |  | 2013 |  | % |  | % Increase (Decrease) |  | 2014 |  | % |  | 2013 |  | % |  | % Increase (Decrease)
Net sales | $17,279 |  | $15,678 |  | 10% |  | $54,030 |  | $51,635 |  | 5%
Gross profit | 2,112 |  | 12 | % | 2,161 |  | 14 | % | (2)% |  | 7,342 | 13.6 | % | 7,277 | 14.1 | % | 1%
Income from operations | (726 | ) | (4 | )% | (486 | ) | (3 | )% | (49)% |  | (1,300 | ) | (2 | )% | (468 | ) | (1 | )% | (178)%

Current quarter vs. prior-year quarter
Net sales increased 10% to $17.3 million in the current quarter from $15.7 million in the prior-year quarter. Sales rose due to a large domestic OEM order. Gross profit decreased to $2.1 million from $2.2 million. Gross margin decreased to 12% in the current quarter from 14% in the prior-year quarter due to customer mix and costs associated with the introduction of new products. The Company continues to expand its geographic market coverage and improve its margin through expense controls to strengthen this segment.
Operating expenses increased to $2.8 million in the current quarter from $2.6 million in the prior-year quarter. Increased sales staffing, promotional activities and the addition of allocated expenses previously carried as corporate expenses contributed to the net increase in expenses. At the end of the third quarter, actions were taken to reduce selling costs in the fabric filter bag business.
YTD vs. prior-year YTD
YTD net sales increased 5% to $54.0 million from $51.6 million in the prior-year YTD. Sales rose due to a large domestic OEM order. Gross profit remained constant at $7.3 million. Gross margin declined to 13.6% YTD from 14.1% in the prior-year YTD due to customer mix and costs associated with the introduction of new products. Over the past year, the Company has implemented many initiatives to resize the fabric filter business and lower manufacturing costs in all plants. The Company continues to expand its geographic market coverage and improve its margin through expense controls to strengthen this segment.
YTD operating expenses increased to $8.6 million from $7.7 million in the prior-year YTD. Increased sales staffing, promotional activities, travel and the addition of allocated expenses previously carried as corporate expenses contributed to the net increase in expenses. The prior-year YTD also included a foreign exchange gain. At the end of the third quarter, actions were taken to reduce selling costs in the fabric filter bag business.
Corporate
Current quarter vs. prior-year quarter
Corporate operating expenses include general and administrative expenses that are not allocated to the segments. General and administrative expenses decreased to $1.6 million in the current quarter from $2.1 million in the prior-year quarter. This decrease was due to lower management incentive and deferred compensation expenses, partially offset by increased stock compensation expense.
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Net interest expense remained constant at $0.3 million.
YTD vs. prior-year YTD
YTD general and administrative expenses decreased to $5.3 million from $6.7 million in the prior-year YTD due to lower management incentive and deferred compensation expenses and a decrease in stock compensation expense that resulted in a benefit in the current year. The stock compensation benefit is related to the cancellation of stock options from former employees from the discontinued operations. The decrease in general and administrative expenses was also due to rental income related to the space occupied by the divested operations. The prior-year YTD included a $0.1 million loss on an interest rate swap.
YTD net interest expense was $0.8 million versus $1.1 million in the prior-year YTD, due to a reduction in interest rates and lower borrowing volume on the domestic borrowings relative to the prior-year YTD.
INCOME TAXES
The Company's consolidated effective tax rate from continuing operations was 23.6% for the nine months ended October 31, 2014, which was affected primarily by income earned overseas in lower tax jurisdictions and the impact of the full valuation allowance maintained against domestic deferred tax assets. Royalty income will be included as Subpart F income (subject to the limitation for current earnings and profits) due to the expiration of IRC Section 954(c)(6). This additional income has no impact on the overall tax recorded due to the full valuation allowance maintained in the U.S. The Company remains in an NOL carryforward position. For additional information, see "Notes to Consolidated Financial Statements, Note 4 Income taxes".
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of October 31, 2014 were $14.4 million compared to $13.4 million at January 31, 2014. At October 31, 2014, $0.5 million was held in the U.S. and $13.9 million was held at the foreign subsidiaries. The Company's working capital was $54.3 million on October 31, 2014 compared to $47.6 million on January 31, 2014. Net cash provided by operating activities during the first nine months of 2014 was $5.1 million compared to $11.3 million of net cash used during the first nine months of 2013.
In October, the Company did a one-time repatriation of foreign earnings of $0.8 million. 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. The Company does not believe that it will be necessary to repatriate investments in subsidiaries held outside of the U.S.
Net cash used in investing activities for the nine months ended October 31, 2014 was $4.2 million.
Debt totaled $30.6 million at October 31, 2014, a net decrease of $1.1 million compared to the beginning of the current fiscal year. Debt decreased $10.3 million from October 31, 2013. Stockholders' equity increased to $81.1 million at October 31, 2014 from $77.5 million at October 31, 2013. The leverage ratio of debt/equity was 0.38 at October 31, 2014 compared to 0.53 at October 31, 2013. For additional information, see "Notes to Consolidated Financial Statements, Note 10 Debt" contained in Item 1 of this report. Net cash provided by financing activities was $0.3 million for the nine months ended October 31, 2014.
On September 24, 2014, the Company entered into a Credit and Security Agreement with a financial institution ("Credit Agreement"). Under the terms of the Credit Agreement, which matures on September 24, 2019, the Company can borrow up to $25 million, subject to borrowing base availability from secured domestic assets and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, and investments, and require attainment of specific levels of profitability and cash flows. At October 31, 2014, the Company was in compliance with all covenants under the Credit Agreement. Interest rates vary based on the
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average availability in the preceding fiscal quarter and are: (a) a margin in effect plus a base rate, if below certain availability limits; or (b) a margin in effect plus the Eurodollar rate for the corresponding interest period. As of October 31, 2014, the Company had borrowed $10.8 million at 3.25% and 1.68% and had $9.5 million available to it under the revolving line of credit. In addition, $0.1 million of availability was used under the Credit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. Cash required for operations is provided by draw downs on the line of credit. The Credit Agreement replaces a secured loan agreement with a bank originally signed July 11, 2002, as amended, which provided a revolving line of credit up to $25.0 million ("Prior Loan Agreement"). The outstanding amount under the Prior Loan Agreement was paid off in full. The Company believes that the new Credit Agreement will provide it with lower overall costs and improved flexibility for investments in and loans to foreign subsidiaries.
Revolving lines foreign. The Company also has credit arrangements used by its Danish and Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The credit arrangement covenant requires a minimum tangible net worth to be maintained. At October 31, 2014, the Company was in compliance with the covenants under the credit arrangements. Interest rates are as follows: 4.00% per annum below National Bank of Fujairah Base Rate, minimum 3.50% per annum and Emirates Inter Bank Offered Rate (EIBOR) plus 3.50% per annum. The Company's interest rates range from 3.5% to 6%. At October 31, 2014, borrowings under these credit arrangements totaled $1.5 million; an additional $24.9 million remained unused.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended January 31, 2014 contained in the Company's most recent annual report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments and different amounts could be reported using different assumptions and estimates.
Item 4. 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 October 31, 2014. 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 October 31, 2014 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.
There has been no change in internal control over financial reporting during the quarter ended October 31, 2014 that has materially affected or is reasonably likely to materially affect, internal control over financial reporting.
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PART II OTHER INFORMATION
Item 6. Exhibits

10 |  | Credit and Security Agreement with BMO HARRIS BANK N.A. dated September 24, 2014
31 |  | Rule 13a - 14(a)/15d - 14(a) Certifications (1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 |  | Section 1350 Certifications (Chief Executive Officer and Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
101.INS |  | XBRL Instance
101.SCH |  | XBRL Taxonomy Extension Schema
101.CAL |  | XBRL Taxonomy Extension Calculation
101.DEF |  | XBRL Taxonomy Extension Definition
101.LAB |  | XBRL Taxonomy Extension Labels
101.PRE |  | XBRL Taxonomy Extension Presentation

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MFRI, INC.

Date: | December 9, 2014 | /s/ Bradley E. Mautner
|  | Bradley E. Mautner
|  | Director, President and
|  | Chief Executive Officer
|  | (Principal Executive Officer)
Date: | December 9, 2014 | /s/ Karl J. Schmidt
|  | Karl J. Schmidt
|  | Vice President and Chief Financial Officer
|  | (Principal Financial and Accounting Officer)

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