Attached files
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 quarter ended: October 31, 2011
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-07763
MET-PRO CORPORATION
(Exact name of registrant as specified in its charter)
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Pennsylvania
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23-1683282
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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160 Cassell Road, P.O. Box 144
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Harleysville, Pennsylvania
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19438
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (215) 723-6751
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 [ ]
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 [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of December 8, 2011 the Registrant had 14,659,545 Common Shares, par value of $.10 per share, issued and outstanding.
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PART I – FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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as of October 31, 2011 and January 31, 2011
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2
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for the nine-month and three-month periods ended October 31, 2011 and 2010
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3
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for the nine-month periods ended October 31, 2011 and 2010
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4
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for the nine-month periods ended October 31, 2011 and 2010
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5
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6
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19
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | |
| Item 3. | Qualitative and Quantitative Disclosures about Market Risk | 29 | |
| Item 4. | Controls and Procedures | 29 | |
| PART II – OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 30 | |
| Item 1A. | Risk Factors | 30 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 31 | |
| Item 3. | Defaults Upon Senior Securities | 31 | |
| Item 4. | Removed and Reserved | 31 | |
| Item 5. | Other Information | 31 | |
| Item 6. | 32 | ||
| SIGNATURES | 33 | ||
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PART I – FINANCIAL INFORMATION
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Item 1. Financial Statements
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October 31,
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January 31,
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ASSETS
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2011
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2011
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Current assets
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(unaudited)
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Cash and cash equivalents
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$32,674,159
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$32,400,814
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Short-term investments
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764,061
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497,155
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Accounts receivable, net of allowance for
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doubtful accounts of approximately
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$498,000 and $444,000, respectively
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16,134,931
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15,311,322
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Inventories
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17,653,829
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15,474,430
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Prepaid expenses, deposits and other current assets
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1,667,011
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1,578,176
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Deferred income taxes
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85,342
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84,155
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Total current assets
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68,979,333
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65,346,052
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Property, plant and equipment, net
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20,178,001
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19,863,031
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Goodwill
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20,798,913
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20,798,913
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Other assets
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2,367,577
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2,038,332
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Total assets
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$112,323,824
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$108,046,328
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities
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Current portion of debt
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$639,950
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$532,540
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Accounts payable
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6,484,748
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4,864,724
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Accrued salaries, wages and benefits
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1,620,519
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1,650,314
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Other accrued expenses
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2,765,020
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2,286,043
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Dividend payable
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1,040,828
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967,445
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Customers’ advances
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3,357,674
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907,107
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Total current liabilities
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15,908,739
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11,208,173
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Long-term debt
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2,773,613
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3,011,988
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Accrued pension retirement benefits
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3,806,208
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6,553,262
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Other non-current liabilities
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55,842
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54,195
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Deferred income taxes
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2,716,481
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2,745,786
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Total liabilities
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25,260,883
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23,573,404
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Shareholders’ equity
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Common shares, $.10 par value; 36,000,000 shares
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authorized, 15,928,679 shares issued, of which
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1,269,134 and 1,270,417 shares were reacquired
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and held in treasury at the respective dates
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1,592,868
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1,592,868
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Additional paid-in capital
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3,989,227
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3,448,249
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Retained earnings
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95,121,987
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93,113,247
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Accumulated other comprehensive loss
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(3,159,968
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)
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(3,201,767
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)
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Treasury shares, at cost
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(10,481,173
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)
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(10,479,673
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)
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Total shareholders’ equity
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87,062,941
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84,472,924
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Total liabilities and shareholders’ equity
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$112,323,824
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$108,046,328
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See accompanying notes to consolidated financial statements.
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(unaudited)
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Nine Months Ended
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Three Months Ended
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October 31,
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October 31,
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2011
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2010
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2011
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2010
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Net sales
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$71,764,377
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$65,098,637
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$25,245,131
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$21,384,674
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Cost of goods sold
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46,234,343
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41,478,910
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15,910,283
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13,589,638
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Gross profit
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25,530,034
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23,619,727
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9,334,848
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7,795,036
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Operating expenses
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Selling
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8,784,207
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8,549,038
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2,944,019
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2,849,221
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General and administrative
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9,437,146
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8,478,717
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3,387,617
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2,763,913
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18,221,353
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17,027,755
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6,331,636
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5,613,134
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Income from operations
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7,308,681
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6,591,972
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3,003,212
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2,181,902
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Interest expense
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(145,862
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)
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(159,887
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)
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(47,153
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)
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(50,201
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)
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Other income, net
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389,647
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208,834
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198,317
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18,601
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Income before taxes
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7,552,466
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6,640,919
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3,154,376
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2,150,302
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Provision for taxes
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2,567,839
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2,257,912
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1,072,490
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731,103
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Net income
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$4,984,627
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$4,383,007
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$2,081,886
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$1,419,199
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Earnings per share, basic (1)
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$.34
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$.30
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$.14
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$.10
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Earnings per share, diluted (2)
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$.34
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$.30
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$.14
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$.10
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Cash dividend per share – declared (3)
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$.203
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$.186
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$.071
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$.066
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Cash dividend per share – paid (3)
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$.198
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$.180
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$.066
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$.060
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(1)
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Basic earnings per share are based upon the weighted average number of shares outstanding of 14,659,402 and 14,621,802 for the nine-month periods ended October 31, 2011 and 2010, respectively, and 14,659,383 and 14,620,439 for the three-month periods ended October 31, 2011 and 2010, respectively.
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(2)
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Diluted earnings per share are based upon the weighted average number of shares outstanding of 14,788,493 and 14,717,084 for the nine-month periods ended October 31, 2011 and 2010, respectively, and 14,799,814 and 14,711,056 for the three-month periods ended October 31, 2011 and 2010, respectively.
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(3)
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The Board of Directors declared a quarterly dividend of $.071 per share payable on December 16, 2011 to shareholders of record at the close of business on December 2, 2011. The Board of Directors declared quarterly dividends of $.066 per share payable on December 17, 2010, March 17, 2011, June 15, 2011 and September 15, 2011 to shareholders of record at the close of business on December 3, 2010, March 3, 2011, June 1, 2011 and September 1, 2011, respectively. The Board of Directors declared quarterly dividends of $.06 per share payable on March 12, 2010, June 11, 2010 and September 15, 2010 to shareholders of record at the close of business on February 26, 2010, May 28, 2010 and September 1, 2010, respectively.
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See accompanying notes to consolidated financial statements.
(unaudited)
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Accumulated
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Additional
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Other
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Common
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Paid-in
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Retained
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Comprehensive
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Treasury
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Shares
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Capital
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Earnings
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Income/(Loss)
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Shares
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Total
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Balances, January 31, 2011
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$1,592,868
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$3,448,249
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$93,113,247
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($3,201,767
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)
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($10,479,673
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)
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$84,472,924
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Comprehensive income:
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Net income
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-
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-
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4,984,627
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-
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-
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Foreign currency translation
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adjustment
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-
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-
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-
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80,375
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-
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Interest rate swap,
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net of tax of $22,656
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-
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-
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-
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(38,576
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)
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-
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Total comprehensive income
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5,026,426
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Dividends
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-
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-
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(2,975,887
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)
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-
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-
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(2,975,887
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)
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Stock-based compensation
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-
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539,478
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-
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-
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-
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539,478
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Stock option transactions
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-
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1,500
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-
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-
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41,300
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42,800
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Purchase of 3,717 treasury shares
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-
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-
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-
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-
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(42,800
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)
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(42,800
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)
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Balances, October 31, 2011
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$1,592,868
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$3,989,227
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$95,121,987
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($3,159,968
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)
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($10,481,173
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)
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$87,062,941
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Accumulated
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||||||||||||
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Additional
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Other
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Common
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Paid-in
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Retained
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Comprehensive
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Treasury
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Shares
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Capital
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Earnings
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Income/(Loss)
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Shares
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Total
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Balances, January 31, 2010
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$1,592,868
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$2,988,950
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$90,662,820
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($3,679,641
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)
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($10,587,413
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)
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$80,977,584
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Comprehensive income:
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Net income
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-
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-
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4,383,007
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-
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-
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|||||||
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Foreign currency translation
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||||||||||||
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adjustment
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-
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-
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-
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(6,615
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)
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-
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||||||
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Interest rate swap,
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net of tax of $43,318
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-
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-
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-
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(73,757
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)
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-
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||||||
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Total comprehensive income
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4,302,635
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Dividends
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-
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-
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(2,721,259
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)
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-
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-
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(2,721,259
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)
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Stock-based compensation
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-
|
484,416
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-
|
-
|
-
|
484,416
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||||||
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Stock option transactions
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-
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(133,034
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)
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-
|
-
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680,266
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547,232
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|||||
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Purchase of 62,735 treasury shares
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-
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-
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-
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-
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(660,019
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)
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(660,019
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)
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Balances, October 31, 2010
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$1,592,868
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$3,340,332
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$92,324,568
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($3,760,013
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)
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($10,567,166
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)
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$82,930,589
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See accompanying notes to consolidated financial statements.
(unaudited)
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Nine Months Ended
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October 31,
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2011
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2010
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Cash flows from operating activities
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Net income
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$4,984,627
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$4,383,007
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Adjustments to reconcile net income to net
cash provided by operating activities:
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Depreciation and amortization
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1,433,018
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1,344,262
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||||
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Deferred income taxes
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(4,646
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)
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(1,809
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)
|
||
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(Gain) on sale of property and equipment, net
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(26,003
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)
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(13,236
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)
|
||
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Stock-based compensation
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539,478
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484,416
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||||
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Allowance for doubtful accounts
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53,654
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(31,473
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)
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Changes in operating assets and liabilities:
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||||||
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Accounts receivable
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(839,188
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)
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364,097
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|||
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Inventories
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(2,138,267
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)
|
214,319
|
|||
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Prepaid expenses, deposits and other assets
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(246,406
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)
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(269,599
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)
|
||
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Accounts payable and accrued expenses
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2,028,062
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1,839,376
|
||||
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Customers’ advances
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2,451,901
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(324,249
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)
|
|||
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Accrued pension retirement benefits
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(2,747,053
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)
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(33,569
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)
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Other non-current liabilities
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1,647
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1,647
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||||
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Net cash provided by operating activities
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5,490,824
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7,957,189
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||||
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Cash flows from investing activities
|
||||||
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Proceeds from sale of property and equipment
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33,848
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36,037
|
||||
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Acquisitions of property and equipment
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(1,636,866
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)
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(1,128,403
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)
|
||
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Purchases of investments
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(1,010,534
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)
|
(497,155
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)
|
||
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Proceeds from maturities of investments
|
497,155
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240,893
|
||||
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Payment for acquisition of business
|
-
|
(955,268
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)
|
|||
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Net cash used in investing activities
|
(2,116,397
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)
|
(2,303,896
|
)
|
||
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Cash flows from financing activities
|
||||||
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Proceeds from new borrowing
|
426,802
|
189,074
|
||||
|
Reduction of debt
|
(625,413
|
)
|
(584,864
|
)
|
||
|
Exercises of stock options
|
42,800
|
547,232
|
||||
|
Payments of dividends
|
(2,902,505
|
)
|
(2,631,441
|
)
|
||
|
Purchases of treasury shares
|
(42,800
|
)
|
(660,019
|
)
|
||
|
Net cash used in financing activities
|
(3,101,116
|
)
|
(3,140,018
|
)
|
||
|
Effect of exchange rate changes on cash
|
34
|
38,386
|
||||
|
Net increase in cash and cash equivalents
|
273,345
|
2,551,661
|
||||
|
Cash and cash equivalents at February 1
|
32,400,814
|
30,662,104
|
||||
|
Cash and cash equivalents at October 31
|
$32,674,159
|
$33,213,765
|
||||
|
See accompanying notes to consolidated financial statements.
|
||||||
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated financial statements include the accounts of Met-Pro Corporation (“Met-Pro” or the “Company”) and its direct and indirect wholly-owned subsidiaries: Mefiag B.V., Met-Pro Product Recovery/Pollution Control Technologies Inc., Strobic Air Corporation, MPC Inc., Pristine Water Solutions Inc., Mefiag (Guangzhou) Filter Systems Ltd., Met-Pro (Hong Kong) Company Limited, Met-Pro Industrial Services, Inc., Bio-Reaction Industries Inc., Met-Pro Holdings LLC and Met-Pro Chile Limitada. Significant intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the financial position of the Company as of October 31, 2011 and the results of operations for the nine-month and three-month periods ended October 31, 2011 and 2010, and changes in shareholders’ equity and cash flows for the nine-month periods then ended. The results of operations for the nine-month and three-month periods ended October 31, 2011 and 2010 are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended January 31, 2011. In addition, the January 31, 2011 Balance Sheet data, presented herein, was derived from the audited consolidated financial statements, but does not include all disclosures required by United States Generally Accepted Accounting Principles (“U.S. GAAP”).
Recent Accounting Pronouncements:
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, “Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force”, an amendment of ASC Topic 605, “Revenue Recognition”. ASU No. 2009-13 provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. ASU No. 2009-13 was effective for the Company in this fiscal year beginning February 1, 2011. The adoption of this update to ASU No. 2009-13 did not have a material impact on our financial position, results of operations or cash flows.
In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”. This update provides amendments to Subtopic 820-10 that requires new disclosures on 1) the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and reasons for the transfers and 2) in the reconciliation for Level 3 fair value measurements, the separate presentation of information about purchases, sales, issuances and settlements. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this update to ASC Topic 820 did not have a material impact on our financial position, results of operations or cash flows.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The amendments in this update are the result of the work of the FASB and the International Accounting Standards Board (“IASB”) to develop common requirements for measuring fair value and for disclosing information about fair value measurements. The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments clarify that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy in order to increase the comparability of disclosures between reporting entities applying U.S. GAAP and those applying IFRSs. Additionally, the amendments expand the disclosures for fair value measurements categorized within Level 3 where a reporting entity will need to include the valuation processes used and the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the requirements in ASC Topic 820. The amendments in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. The adoption of this update will not have a material impact on our financial position, results of operations or cash flows.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The amendments in this update eliminate the current option to report other comprehensive income and its components in the statements of shareholders’ equity. Instead, an entity will be required to present either a single continuous statement of net income and other comprehensive income or in two separate, but consecutive statements. The amendments in this update are to be applied retrospectively and are effective for interim and annual periods beginning after December 15, 2011. The new guidance will be effective for the Company beginning February 1, 2012 and will have presentation changes only.
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment”. The amendments in this update allow an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on its qualitative assessment, an entity concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU No. 2011-08 is effective for annual reporting periods beginning after December 15, 2011, with early adoption permitted. The Company plans to adopt ASU No. 2011-08 during the fiscal fourth quarter ended January 31, 2012. The Company does not expect such adoption will have a material impact on our financial position, results of operations or cash flows.
NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents:
Cash and cash equivalents at October 31, 2011 and January 31, 2011 amounted to $32,674,159 and $32,400,814, respectively. The cash and cash equivalents balance at October 31, 2011 was comprised of the following: (i) cash amounting to $7,957,437 and (ii) cash equivalents consisting of money market funds amounting to $24,716,722. The Company evaluates the creditworthiness of the financial institutions and financial instruments in which it invests and places its cash deposits and temporary cash investments with financial institutions, that at times, may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. At October 31, 2011, the Company’s cash and cash equivalents were held at 20 financial institutions.
Short-term investments:
Short-term investments at October 31, 2011 and January 31, 2011 amounted to $764,061 and $497,155, respectively, and were comprised of certificates of deposit with twelve month maturity dates. The Company evaluates the creditworthiness of the financial institutions and the financial instruments in which it invests.
Long-term investments:
Long-term investments at October 31, 2011 and January 31, 2011 amounted to $494,537 and $248,063, respectively, which are reported in other assets on the consolidated balance sheets. The long-term investments at October 31, 2011 were comprised of two certificates of deposit with fourteen and fifteen month maturity dates. The Company evaluates the creditworthiness of the financial institutions and the financial instruments in which it invests.
Debt:
The estimated fair value and carrying amount of debt were as follows:
|
October 31,
|
January 31, | |||||
|
2011
|
2011
|
|||||
|
Estimated fair value
|
$3,840,838
|
$3,858,888
|
||||
|
Carrying amount
|
3,413,563
|
3,544,528
|
||||
Valuations for debt are determined based on borrowing rates currently available to the Company for loans with similar terms and maturities.
The Company uses an interest rate swap (see Note 8) to minimize its exposure to fluctuations in interest rates. The interest rate differential to be paid or received under these agreements is recognized over the term of the loan and is included in interest expense.
The Company’s financial instruments are not held for trading purposes.
Fair value measurements:
ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
The following table summarizes the basis used to measure the Company’s financial assets (liabilities) at fair value on a recurring basis in the consolidated balance sheets at October 31, 2011 and January 31, 2011:
|
Quoted Prices
|
|||||||
|
in Active
|
|||||||
|
Markets for
|
Significant
|
Significant
|
|||||
|
Identical
|
Observable
|
Unobservable
|
|||||
|
Balance at
|
Assets
|
Inputs
|
Inputs
|
||||
|
October 31, 2011
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||
|
Cash and cash equivalents
|
$32,674,159
|
$32,674,159
|
$-
|
$-
|
|||
|
Short-term investments
|
764,061
|
764,061
|
-
|
-
|
|||
|
Long-term investments
|
494,537
|
494,537
|
-
|
-
|
|||
|
Cash surrender value - life insurance policies
|
1,062,571
|
-
|
1,062,571
|
-
|
|||
|
Interest rate swap agreement
|
(335,540
|
)
|
-
|
(335,540
|
)
|
-
|
|
|
$34,659,788
|
$33,932,757
|
$727,031
|
$-
|
|
Quoted Prices
|
|||||||
|
in Active
|
|||||||
|
Markets for
|
Significant
|
Significant
|
|||||
|
Identical
|
Observable
|
Unobservable
|
|||||
|
Balance at
|
Assets
|
Inputs
|
Inputs
|
||||
|
January 31, 2011
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||
|
Cash and cash equivalents
|
$32,400,814
|
$32,400,814
|
$-
|
$-
|
|||
|
Short-term investments
|
497,155
|
497,155
|
-
|
-
|
|||
|
Long-term investments
|
248,063
|
248,063
|
-
|
-
|
|||
|
Cash surrender value - life insurance policies
|
912,417
|
-
|
912,417
|
-
|
|||
|
Interest rate swap agreement
|
(274,308
|
)
|
-
|
(274,308
|
)
|
-
|
|
|
$33,784,141
|
$33,146,032
|
$638,109
|
$-
|
There were no transfers of assets or liabilities between Level 1 and Level 2 in the nine-month period ended October 31, 2011 or the fiscal year ended January 31, 2011.
The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The Company’s cash surrender value of life insurance policies (which are reported in other assets on the consolidated balance sheets) and the interest rate swap agreement are valued using Level 2 measurements.
NOTE 3 – EARNINGS PER SHARE COMPUTATIONS
Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding and potentially dilutive shares. The dilutive effect of employee stock options is included in the computation of diluted earnings per share. The dilutive effect of stock options is calculated using the treasury stock method and expected proceeds upon exercise of the stock options. The following table summarizes the shares used in computing basic and diluted net income per common share:
|
Nine Months Ended
October 31,
|
Three Months Ended
October 31,
|
||||||
|
2011
|
2010
|
2011
|
2010
|
||||
|
Numerator:
|
|||||||
|
Net income
|
$4,984,627
|
$4,383,007
|
$2,081,886
|
$1,419,199
|
|||
|
Denominator:
|
|||||||
|
Weighted average common shares outstanding during
the period for basic computation
|
14,659,402
|
14,621,802
|
14,659,383
|
14,620,439
|
|||
|
Dilutive effect of stock-based compensation plans
|
129,091
|
95,282
|
140,431
|
90,617
|
|||
|
Weighted average common shares outstanding during
the period for diluted computation
|
14,788,493
|
14,717,084
|
14,799,814
|
14,711,056
|
|||
|
Earnings per share, basic
|
$.34
|
$.30
|
$.14
|
$.10
|
|||
| Earnings per share, diluted |
$.34
|
$.30
|
$.14
|
$.10
|
|||
For the nine and three months ended October 31, 2011, employee stock options to purchase 1,086,929 common shares were excluded from the calculations of diluted earnings per share as the calculated proceeds from the options exercised were greater than the market price of the Company’s common shares at October 31, 2011. For the nine and three months ended October 31, 2010, employee stock options to purchase 361,800 common shares were excluded from the calculations of diluted earnings per share as the calculated proceeds from the options exercised were greater than the average market price of the Company’s common shares at October 31, 2010.
NOTE 4 – STOCK-BASED COMPENSATION
The Company grants equity awards to its senior executives and non-employee Directors, typically in December of each year. Historically, this has consisted of stock option awards. In December 2010, the Company’s Board of Directors approved a change in practice to begin awarding non-employee Directors restricted stock units (“RSUs”).
Restricted Stock Units:
On December 17, 2010, the Company awarded an aggregate of 12,315 RSUs to its five non-employee Directors. Each RSU entitles the grantee to receive, from the Company, one common share at the one year anniversary vesting date in accordance with the terms of the award agreement. The award agreements provide for accelerated vesting in certain instances such as a “change in control” or death, and for pro-rata vesting in the event of a non-cause departure from the Board of Directors prior to the one year anniversary of the award. The weighted average grant fair value per unit for awards granted on December 17, 2010 was $12.18 (which is the average of the high and low price of the Company’s common shares as quoted on the NYSE that day). As of October 31, 2011, there was $37,499 of unrecognized compensation expense for these RSUs. Prior to December 17, 2010, the Company had never granted any RSUs.
The following table summarizes RSU transactions for the nine-month period ended October 31, 2011:
|
Units
|
||
|
Non-vested at February 1, 2011
|
12,315
|
|
|
Granted
|
-
|
|
|
Vested
|
-
|
|
|
Forfeited
|
-
|
|
|
Non-vested at October 31, 2011
|
12,315
|
Stock options:
On December 17, 2010, December 11, 2009, and December 3, 2008, the Company issued 125,448, 236,083 and 206,600 stock options, respectively, with one-third exercisable one year from the grant date and the remaining two-thirds vesting two and three years from grant date, respectively. The December 2010 awards were made to the Company’s senior executives; the awards in the prior two years were made to the Company’s senior executives as well as the Company’s non-employee Directors. In the event of a “change of control”, any unvested options shall become immediately exercisable. Typically, the duration of options is for up to ten years from the date of grant, subject to earlier termination under various conditions. The fair value of options that we grant is amortized into compensation expense on a straight-line basis over their respective vesting period, net of estimated forfeitures. We estimate the fair value of options as of the grant date using the Black-Scholes option valuation model. The per share fair value weighted-averages at the date of grant for stock options granted in the month of December during the fiscal years ended January 31, 2011, 2010 and 2009 were $3.95, $3.26 and $3.41 per option, respectively.
The application of this valuation model relies on the following assumptions that are judgmental and sensitive in the determination of the compensation expense:
|
Nine Months Ended
|
|||
|
October 31,
|
|||
|
|
2011
|
2010
|
|
|
Expected term (years)
|
-
|
5.0
|
|
|
Risk-free interest rate
|
-
|
1.90% - 3.53%
|
|
|
Expected volatility
|
-
|
29% - 45%
|
|
|
Dividend yield
|
-
|
1.88% - 2.48%
|
|
Historical information was the principal basis for the selection of the expected term and dividend yield. The expected volatility is based on a weighted-average combination of historical and implied volatilities over a time period that approximates the expected term of the option. The risk-free interest rate was selected based upon the U.S. Treasury Bill rates in effect at the time of grant for the expected term of the option.
The following table summarizes stock option transactions for the nine-month period ended October 31, 2011:
|
Weighted
|
||||||
|
Weighted
|
Average
|
|||||
|
Average
|
Remaining
|
Aggregate
|
||||
|
Shares
|
Exercise Price
|
Life (years)
|
Intrinsic Value
|
|||
|
Options:
|
||||||
|
Outstanding at February 1, 2011
|
1,274,204
|
$10.1942
|
6.29
|
|||
|
Granted
|
-
|
-
|
||||
|
Forfeited
|
-
|
-
|
||||
|
Expired
|
(26,000
|
)
|
11.7500
|
|||
|
Exercised
|
(5,000
|
)
|
8.5600
|
|||
|
Outstanding at October 31, 2011
|
1,243,204
|
$10.1683
|
5.69
|
$324,693
|
||
|
Exercisable at October 31, 2011
|
921,358
|
$9.9011
|
4.76
|
$324,693
|
||
There were 5,000 options exercised during the nine-month period ended October 31, 2011 and 83,561 options exercised during the nine-month period ended October 31, 2010.
The following table summarizes information about the options outstanding and options exercisable as of October 31, 2011:
|
|
Options Outstanding
|
Options Exercisable
|
||||||||||
|
Weighted Average
|
||||||||||||
|
Remaining
|
Weighted Average
|
Weighted Average
|
||||||||||
|
Shares
|
Life (years)
|
Exercise Price
|
Shares
|
Exercise Price
|
||||||||
|
Range of prices:
|
||||||||||||
|
$5.50 – 6.99
|
39,825
|
0.82
|
$5.5328
|
39,825
|
$5.5328
|
|||||||
|
$7.00 – 8.99
|
116,450
|
3.32
|
7.4110
|
116,450
|
7.4110
|
|||||||
|
$9.00 – 9.99
|
470,344
|
5.52
|
9.4848
|
326,949
|
9.3948
|
|||||||
|
$10.00 – 10.99
|
155,337
|
5.01
|
10.8975
|
155,337
|
10.8975
|
|||||||
|
$11.00 – 11.99
|
335,800
|
6.36
|
11.5426
|
282,797
|
11.5796
|
|||||||
|
$12.00 – 12.99
|
125,448
|
9.14
|
12.1800
|
0
|
0
|
|||||||
|
1,243,204
|
5.69
|
$10.1683
|
921,358
|
$9.9011
|
||||||||
As of October 31, 2011, there was $651,301 (excludes an unrecognized compensation cost of $37,499 related to RSUs) of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. The cost is expected to be recognized over a weighted-average period of 1.1 years.
NOTE 5 – INVENTORIES
Inventories consisted of the following:
|
October 31,
|
January 31,
|
||
| 2011 | 2011 | ||
|
Raw materials
|
$12,048,145
|
$11,639,410
|
|
|
Work in progress
|
3,175,810
|
1,914,412
|
|
|
Finished goods
|
2,429,874
|
1,920,608
|
|
|
$17,653,829
|
$15,474,430
|
NOTE 6 – SUPPLEMENTAL CASH FLOW INFORMATION
Net cash flows from operating activities reflect cash payments for interest and income taxes as follows:
|
Nine Months Ended
|
|||||
|
October 31,
|
|||||
|
2011
|
2010
|
||||
|
Cash paid during the period for:
|
|||||
|
Interest
|
$146,586
|
$159,288
|
|||
|
Income taxes
|
1,822,681
|
1,549,286
|
|||
NOTE 7 – INCOME TAXES
In its interim financial statements the Company follows the guidance in FASB ASC Topic 270, “Interim Reporting”, and FASB ASC Topic 740, “Income Taxes”, whereby the Company utilizes the expected annual effective tax rate in determining its income tax provisions for the period. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applies ASC Topic 740 to all tax positions for which the statute of limitations remains open.
As of the fiscal year ended January 31, 2011, the Company evaluated its position with regard to state, federal and foreign tax matters and concluded that the Company did not have an unrecognized tax benefit. As of October 31, 2011, the Company re-evaluated its position with regard to current state, federal and foreign tax matters and has determined that there have been no changes in tax position since the fiscal year ended January 31, 2011.
The Company and its subsidiaries are subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company and its subsidiaries are no longer subject to U.S. federal or non-U.S. income tax examinations by tax authorities for the tax years before 2008.
NOTE 8 – DEBT
The Company and its subsidiaries have domestic and foreign uncommitted, unsecured lines of credit totaling $4,415,770 which can be used for working capital. Of the total lines of credit available, the foreign unsecured line of credit totals $415,770, or 300,000 Euro. As of October 31, 2011 and January 31, 2011, the Company had zero outstanding borrowings from its domestic line of credit. The Company’s Mefiag B.V. subsidiary’s line of credit, which is with a bank in The Netherlands, had outstanding borrowings of $200,110, or 144,390 Euro, as of October 31, 2011 and zero as of January 31, 2011.
Short-term and long-term debt consisted of the following:
|
October 31,
|
January 31,
|
||
|
2011
|
2011
|
||
|
Bond payable, bank, payable in quarterly installments of
|
|||
|
$58,460, plus interest at a rate equal to the greater of
|
|||
|
(i) 16 basis points below the ninety day LIBOR rate
|
|||
|
or (ii) 250 basis points (effective interest rate of 2.50%
|
|||
|
at October 31, 2011), maturing April, 2021, collateralized
|
|||
|
by the Telford, PA building
|
$2,221,497
|
$2,396,878
|
|
|
Note payable, bank, payable in quarterly installments of
|
|||
|
$34,647, or 25,000 Euro, plus interest at a fixed rate of 3.82%,
|
|||
|
maturing January, 2016, collateralized by
|
|||
|
the Heerenveen, Netherlands building
|
589,008
|
684,600
|
|
|
Equipment note, payable in monthly installments of
|
|||
|
$13,482, no interest, maturing March 2012
|
67,408
|
188,742
|
|
|
Line of credit, $200,110, or 144,390 Euro, payable upon
|
|||
|
demand, plus interest at a rate of 70 basis points over
|
|||
|
the thirty day EURIBOR rate (effective interest rate of
|
|||
|
2.07% at October 31, 2011)
|
200,110
|
-
|
|
|
3,078,023
|
3,270,220
|
||
|
Less current portion
|
639,950
|
532,540
|
|
|
2,438,073
|
2,737,680
|
||
|
Fair market value of interest rate swap liability
|
335,540
|
274,308
|
|
|
Long-term portion
|
$2,773,613
|
$3,011,988
|
One of the notes payable and the bond payable are subject to certain covenants, including maintenance of prescribed amounts of leverage and fixed charge coverage ratios. As of October 31, 2011, the Company is in compliance with all applicable covenants.
The Company has an interest rate swap agreement to hedge against the potential impact on earnings from increases in market interest rates. Effective April 3, 2006, the Company entered into a fifteen-year interest rate swap agreement for a notional amount equal to the balance on the bond payable maturing April 2021. The Company swapped the ninety-day LIBOR for a fixed rate of 4.87%. As of October 31, 2011, the effective fixed interest rate was 7.12% as a result of the swap agreement plus the interest rate floor provision of 250 basis points. The interest rate swap agreement is accounted for as a cash flow hedge that qualifies for treatment under the short-cut method of measuring effectiveness in accordance with FASB ASC Topic 815, “Derivatives and Hedging”. There was no hedge ineffectiveness as of October 31, 2011. The fair value of the interest rate swap agreement resulted in a decrease in equity of $211,390 (net of tax) as of October 31, 2011 and a decrease in equity of $172,814 (net of tax) as of January 31, 2011. The change in the fair value of the interest rate swap agreement resulted in a $38,576 (net of
tax) equity decrease from the fiscal year ended January 31, 2011. These results are recorded in the accumulated other comprehensive loss section of shareholders’ equity.
The bank has issued and has outstanding standby letters of credit to customers totaling $1,354,834 as of October 31, 2011, which have expiration dates during the fiscal years ending January 31, 2012 and 2013 in the amounts of $117,075 and $1,237,759, respectively.
Maturities of short-term and long-term debt are as follows:
|
As of
|
|
|
October 31,
|
|
|
2012
|
$639,950
|
|
2013
|
372,428
|
|
2014
|
372,428
|
|
2015
|
372,428
|
|
2016
|
268,496
|
|
Thereafter
|
1,052,293
|
|
$3,078,023
|
NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consisted of the following:
|
October 31,
|
January 31,
|
|||
|
2011
|
2011
|
|||
|
Interest rate swap, net of tax
|
($211,390
|
)
|
($172,814
|
)
|
|
Foreign currency translation adjustment
|
1,118,498
|
1,038,123
|
||
|
Minimum pension liability adjustment, net of tax
|
(4,067,076
|
)
|
(4,067,076
|
)
|
|
($3,159,968
|
)
|
($3,201,767
|
)
|
NOTE 10 – OTHER INCOME, NET
Other income, net consisted of the following:
|
Nine Months Ended
|
Three Months Ended
|
||||||||||
|
October 31,
|
October 31,
|
||||||||||
|
2011
|
2010
|
2011
|
2010
|
||||||||
|
Interest income
|
$139,241
|
$167,024
|
$47,330
|
$60,248
|
|||||||
|
Other miscellaneous income (expense)
|
250,406
|
41,810
|
150,987
|
(41,647
|
)
|
||||||
|
$389,647
|
$208,834
|
$198,317
|
$18,601
|
||||||||
NOTE 11 – EMPLOYEE BENEFIT PLANS
The Company has several defined benefit pension plans covering eligible employees in the United States. In the third quarter ended October 31, 2006, the Company amended its defined benefit pension plans to freeze the accrual of future benefits for all its salaried and non-union hourly employees effective on December 31, 2006. Effective December 31, 2008, the Company amended its defined benefit pension plan to freeze the accrual of future benefits for union hourly employees. The net periodic pension income and cost is based on estimated values provided by our independent actuary.
The following table provides the components of net periodic pension (income) cost:
|
Nine Months Ended
|
Three Months Ended
|
||||||||||
|
October 31,
|
October 31,
|
||||||||||
|
2011
|
2010
|
2011
|
2010
|
||||||||
|
Service cost
|
$154,284
|
$158,625
|
$51,442
|
$76,792
|
|||||||
|
Interest cost
|
841,128
|
838,505
|
280,364
|
293,181
|
|||||||
|
Expected return on plan assets
|
(1,051,462
|
)
|
(758,266
|
)
|
(350,481
|
)
|
(258,987
|
) | |||
|
Recognized net actuarial loss
|
157,386
|
182,730
|
52,443
|
70,745
|
|||||||
|
Net periodic benefit cost
|
$101,336
|
$421,594
|
$33,768
|
$181,731
|
|||||||
The Company contributed $2,974,850 to the pension plans during the nine-month period ended October 31, 2011 and expects to make an additional contribution of $23,561 during the three-month period ending January 31, 2012.
NOTE 12 – BUSINESS SEGMENT DATA
The segment discussion outlined below represents the adjusted segment structure as determined by management in accordance with FASB ASC Topic 280, “Segment Reporting”.
As reported in the Company’s Annual Report on Form 10-K as of January 31, 2011, the Company has five operating segments which are aggregated into three reportable segments: Product Recovery/Pollution Control Technologies, Fluid Handling Technologies and Mefiag Filtration Technologies, and one other segment (Filtration/Purification Technologies). The Filtration/Purification Technologies segment is comprised of two operating segments that do not meet the criteria for aggregation outlined in ASC Topic 280-10-50-12. The Company’s analysis is that ASC Topic 280-10-50-12 permits the aggregation of operating segments if, individually, each operating segment does not meet any of the following quantitative thresholds: (i) reported revenue is 10% or more of combined revenue of all reported operating segments, (ii) the absolute amount of reported profit or loss is 10% or more of the greater, in absolute amounts, of either the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss, and (iii) its assets are 10% or more of the combined assets of all operating segments. As of the fiscal quarter ended October 31, 2011, none of the operating segments included in the Filtration/Purification Technologies segment met these criteria, and at least 75% of total consolidated revenue was included in the Product Recovery/Pollution Control Technologies, Fluid Handling Technologies and Mefiag Filtration Technologies reporting segments; therefore, the Company determined the aggregation of these operating segments into this other segment was appropriate under ASC Topic 280-10-50-12.
The Company expects, based upon the current financial performance of its business units, the segmentation reporting will continue to be presented in future periods using the three reportable segments and the one other segment.
The following is a description of each segment:
Product Recovery/Pollution Control Technologies: This reportable segment consists of one operating segment that manufactures products for the purification of air or liquids. Many of these products are custom designed and engineered to solve a customer’s product recovery or pollution control issues. The products are sold worldwide
through Company sales personnel and a network of manufacturer’s representatives. This reporting segment is comprised of the following business units: Met-Pro Environmental Air Solutions (the combination of the Duall, Systems, Flex-Kleen, Met-Pro Industrial Services and Bio-Reaction Industries product brands), Met-Pro Product Recovery/Pollution Control Technologies Inc. and Strobic Air Corporation.
Fluid Handling Technologies: This reportable segment consists of one operating segment that manufactures high quality centrifugal pumps that are suitable for difficult applications including the pumping of acids, brines, caustics, bleaches, seawater, high temperature liquids and a wide variety of waste liquids. A variety of pump configurations make these products adaptable to almost any pumping application. These products are sold worldwide through an extensive network of distributors. This reporting segment is comprised of the Met-Pro Global Pump Solutions (the combination of the Dean Pump, Fybroc and Sethco product brands) business unit.
Mefiag Filtration Technologies: This reportable segment consists of one operating segment that produces filter systems using horizontal disc technology for tough, corrosive applications in the plating, metal finishing and printing industries. These products are sold worldwide through Company sales personnel and a network of distributors. This reporting segment is comprised of the Mefiag, Mefiag B.V. and Mefiag (Guangzhou) Filter Systems Ltd. business units.
Filtration/Purification Technologies: This other segment consists of two operating segments that produce the following products: cartridges and filter housings, filtration products for difficult industrial air and liquid applications, and proprietary chemicals for the treatment of municipal drinking water systems and boiler and cooling tower systems. This other segment is comprised of the Keystone Filter and Pristine Water Solutions Inc. operating segments.
The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies. The Company evaluates the performance of these segments based on many factors including sales, sales trends, margins and operating performance.
No significant intercompany revenue is realized in these reporting segments. Interest income and expense are not included in the measure of segment profit reviewed by management. Income taxes are also not included in the measure of segment operating profit reviewed by management.
The financial segmentation information, adjusted as a result of the ASC Topic 280 aggregation criteria, is shown below:
|
Nine Months Ended
|
Three Months Ended
|
||||||||
|
October 31,
|
October 31,
|
||||||||
|
2011
|
2010
|
2011
|
2010
|
||||||
|
Net sales
|
|
||||||||
|
Product Recovery/Pollution Control Technologies
|
$29,851,166
|
$29,924,788
|
$11,893,296
|
$9,204,381
|
|||||
|
Fluid Handling Technologies
|
24,307,152
|
20,070,626
|
7,346,897
|
7,031,096
|
|||||
|
Mefiag Filtration Technologies
|
9,630,925
|
7,421,375
|
3,286,624
|
2,478,656
|
|||||
|
Filtration/Purification Technologies
|
7,975,134
|
7,681,848
|
2,718,314
|
2,670,541
|
|||||
|
$71,764,377
|
$65,098,637
|
$25,245,131
|
$21,384,674
|
||||||
|
Income from operations
|
|||||||||
|
Product Recovery/Pollution Control Technologies
|
$534,986
|
$1,483,092
|
$1,064,314
|
$324,695
|
|||||
|
Fluid Handling Technologies
|
5,890,077
|
4,166,526
|
1,747,678
|
1,563,262
|
|||||
|
Mefiag Filtration Technologies
|
517,572
|
459,248
|
127,022
|
89,283
|
|||||
|
Filtration/Purification Technologies
|
366,046
|
483,106
|
64,198
|
204,662
|
|||||
|
$7,308,681
|
$6,591,972
|
$3,003,212
|
$2,181,902
|
||||||
|
October 31,
|
|
January 31,
|
|||||||
|
2011
|
2010
|
||||||||
|
Identifiable assets
|
|
|
|||||||
|
Product Recovery/Pollution Control Technologies
|
$35,446,058
|
$34,003,251
|
|||||||
|
Fluid Handling Technologies
|
18,855,469
|
18,114,257
|
|||||||
|
Mefiag Filtration Technologies
|
14,476,332
|
12,814,143
|
|||||||
|
Filtration/Purification Technologies
|
8,376,056
|
8,369,385
|
|||||||
|
77,153,915
|
73,301,036
|
||||||||
|
Corporate
|
35,169,909
|
34,745,292
|
|||||||
|
$112,323,824
|
$108,046,328
|
||||||||
NOTE 13 – CONTINGENCIES
Beginning in 2002, the Company began to be named in asbestos-related lawsuits filed against a large number of industrial companies including, in particular, those in the pump and fluid handling industries. In management’s opinion, the complaints typically have been vague, general and speculative, alleging that the Company, along with the numerous other defendants, sold unidentified asbestos-containing products and engaged in other related actions which caused injuries (including death) and loss to the plaintiffs. Counsel has advised that more recent cases typically allege more serious claims of mesothelioma. The Company believes that it has meritorious defenses to the cases which have been filed and that none of its products were a cause of any injury or loss to any of the plaintiffs. The Company’s insurers have hired attorneys who, together with the Company, are vigorously defending these cases. The Company has been dismissed from or settled a large number of these cases. The sum total of all payments through December 8, 2011 to settle these cases involving asbestos-related claims was $675,000, all of which have been paid by the Company’s insurers including legal expenses, except for corporate counsel expenses, with an average cost per settled claim, excluding legal fees, of approximately $32,000. As of December 8, 2011, the date of the filing of this Report, there were a total of 137 cases pending against the Company (with New York, Pennsylvania and West Virginia having the largest number of cases and being the most active jurisdictions), as compared with 93 cases that were pending as of March 17, 2011, the date which our Annual Report on Form 10-K for the fiscal year ended January 31, 2011 was filed with the Securities and Exchange Commission. During the current fiscal year commencing February 1, 2011 through December 8, 2011, 68 new cases were filed against the Company, and the Company was dismissed from 18 cases and settled two cases. Most of the pending cases have not advanced beyond the early stages of discovery, although a number of cases are on schedules leading to, or are scheduled for trial. On April 27, 2011, a liquidation order was entered against Atlantic Mutual Insurance Company, who had been providing defense and indemnity to the Company, and its affiliate, Centennial Insurance Company, who provided umbrella coverage to the Company. It appears that our remaining insurers have assumed the share of the defense and indemnity obligations that Atlantic Mutual Insurance Company had agreed to assume, and despite the liquidation of Atlantic Mutual Insurance Company and Centennial Insurance Company, the Company believes that its insurance coverage is adequate for the cases currently pending against the Company and for the foreseeable future, assuming a continuation of the current volume, nature of cases and settlement amounts; however, the Company has no control over the number and nature of cases that are filed against it, nor as to the financial health of its insurers or their position as to coverage. The Company also presently believes that none of the pending cases will have a material adverse impact upon the Company’s results of operations, liquidity or financial condition.
At any given time, the Company is typically also party to a small number of other legal proceedings arising in the ordinary course of business. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based upon the present information, including the Company’s assessment of the facts of each particular claim as well as accruals, the Company believes that no pending proceeding will have a material adverse impact upon the Company’s results of operations, liquidity, or financial condition.
NOTE 14 – ACCOUNTANTS’ 10-Q REVIEW
Marcum LLP, the Company’s independent registered public accountants, performed a limited review of the financial information included herein. Their report on such review accompanies this filing.
To the Audit Committee of the Board of Directors
and Shareholders of Met-Pro Corporation
We have reviewed the accompanying consolidated balance sheet of Met-Pro Corporation and its wholly-owned subsidiaries as of October 31, 2011, and the related consolidated statements of income for the nine-month and three-month periods ended October 31, 2011 and 2010, and the consolidated statements of shareholders’ equity and cash flows for the nine-month periods ended October 31, 2011 and 2010. These financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Met-Pro Corporation and its wholly-owned subsidiaries as of January 31, 2011, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 17, 2011, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 31, 2011 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.
/s/ Marcum LLP
Marcum LLP
Bala Cynwyd, Pennsylvania
December 8, 2011
19
The following table sets forth, for the nine-month and three-month periods indicated, certain financial information derived from the Company’s consolidated statements of income expressed as a percentage of net sales.
|
Nine Months Ended
|
Three Months Ended
|
||||||||
|
October 31,
|
October 31,
|
||||||||
|
2011
|
2010
|
2011
|
2010
|
||||||
|
Net sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|
|
Cost of goods sold
|
64.4
|
%
|
63.7
|
%
|
63.0
|
%
|
63.6
|
%
|
|
|
Gross profit
|
35.6
|
%
|
36.3
|
%
|
37.0
|
%
|
36.4
|
%
|
|
|
Selling expenses
|
12.2
|
%
|
13.1
|
%
|
11.7
|
%
|
13.3
|
%
|
|
|
General and administrative expenses
|
13.2
|
%
|
13.1
|
%
|
13.4
|
%
|
12.9
|
%
|
|
|
Income from operations
|
10.2
|
%
|
10.1
|
%
|
11.9
|
%
|
10.2
|
%
|
|
|
Interest expense
|
(0.2
|
%)
|
(0.2
|
%)
|
(0.2
|
%)
|
(0.2
|
%)
|
|
|
Other income, net
|
0.5
|
%
|
0.3
|
%
|
0.8
|
%
|
0.1
|
%
|
|
|
Income before taxes
|
10.5
|
%
|
10.2
|
%
|
12.5
|
%
|
10.1
|
%
|
|
|
Provision for taxes
|
3.6
|
%
|
3.5
|
%
|
4.2
|
%
|
3.5
|
%
|
|
|
Net income
|
6.9
|
%
|
6.7
|
%
|
8.3
|
%
|
6.6
|
%
|
|
Nine Months Ended October 31, 2011 vs. Nine Months Ended October 31, 2010:
Net sales for the nine-month period ended October 31, 2011 were $71,764,377 compared with $65,098,637 for the nine-month period ended October 31, 2010, an increase of $6,665,740 or 10.2%.
Sales in the Product Recovery/Pollution Control Technologies reporting segment were $29,851,166 or $73,622 lower than the $29,924,788 of sales for the nine-month period ended October 31, 2010, a decrease of 0.2%. The slight sales decrease in the Product Recovery/Pollution Control Technologies reporting segment was due principally to lower sales for our Strobic Air systems, attributable to the varying delivery schedules of booked orders as well as from the lagging effect of delays in the timing of customer orders for large projects, partially offset by an increase in sales for all product brands within the Met-Pro Environmental Air Solutions business unit.
Sales in the Fluid Handling Technologies reporting segment totaled $24,307,152, or $4,236,526 higher than the $20,070,626 of sales for the nine-month period ended October 31, 2010, an increase of 21.1%. Sales in the Fluid Handling Technologies reporting segment were higher as compared with the same period last year due to higher sales for all the product brands within this reporting segment. The largest percentage of the sales increase in this reporting segment is attributable to the shipment of the $2.4 million balance of a $3.7 million order for Fybroc brand pumps that was announced on October 12, 2010.
Sales in the Mefiag Filtration Technologies reporting segment were $9,630,925, or $2,209,550 higher than the $7,421,375 of sales for the nine-month period ended October 31, 2010, an increase of 29.8%. The sales increase in the Mefiag Filtration Technologies reporting segment was due to an increase in sales across all Mefiag product lines which we attribute to an apparent improvement in the economic environment of the industrial markets serviced by this reporting segment which are primarily the automotive and housing industries.
Sales in the Filtration/Purification Technologies segment were $7,975,134, or $293,286 higher than the $7,681,848 of sales for the nine-month period ended October 31, 2010, an increase of 3.8%. This increase was due primarily to increased demand in our Keystone Filter business unit partially offset by decreased demand in our Pristine Water
20
MET-PRO CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
Solutions business unit as a result of inclement weather as well as continued weakness in the municipal markets served by this business unit.
The Company’s backlog of orders totaled $28,641,981 and $21,169,085 as of October 31, 2011 and 2010, respectively. The rate of the Company’s bookings of new orders varies from period to period. Orders have varying delivery schedules, and as of any particular date, the Company’s backlog may not be predictive of actual revenues for any succeeding specific period, in part due to potential customer requested delays in delivery of which the extent and duration may vary widely from period to period. We have also observed a trend over the last several years where larger projects are more frequently booked and shipped in the same quarter in which we received the customer’s purchase order due to improved project execution and shorter lead times, resulting in such projects not appearing in publicly disclosed annual or quarterly backlog figures. Additionally, the Company’s customers typically have the right to cancel a given order, although the Company has historically experienced a very low rate of cancellation. The Company expects a majority of the backlog that existed as of October 31, 2011 will be shipped during the current fiscal year.
Income from operations for the nine-month period ended October 31, 2011 was $7,308,681 compared with $6,591,972 for the nine-month period ended October 31, 2010, an increase of $716,709 or 10.9%.
Income from operations in the Product Recovery/Pollution Control Technologies reporting segment was $534,986, or $948,106 lower than the $1,483,092 for the nine-month period ended October 31, 2010, a decrease of 63.9%. The decrease in income from operations in the Product Recovery/Pollution Control Technologies reporting segment was primarily related to the following: (i) lower sales for our Strobic Air laboratory fume hood exhaust systems, (ii) lower gross profit margins experienced amongst all product brands within this reporting segment due primarily to product mix, increases in material cost and competitive pricing pressures and (iii) severance expense of approximately $300,000 recognized in the Company’s second quarter ended July 31, 2011 as a result of the Company offering a voluntary employee early retirement program.
Income from operations in the Fluid Handling Technologies reporting segment totaled $5,890,077, or $1,723,551 higher than the $4,166,526 for the nine-month period ended October 31, 2010, an increase of 41.4%. The increase in income from operations in the Fluid Handling Technologies reporting segment was principally related to increased sales, as well as higher gross profit margins, within this reporting segment.
Income from operations in the Mefiag Filtration Technologies reporting segment totaled $517,572, or $58,324 higher than the income of $459,248 for the nine-month period ended October 31, 2010, an increase of 12.7%. The increase in income from operations in the Mefiag Filtration Technologies reporting segment resulted from a 29.8% increase in sales, partially offset by lower gross profit margins.
Income from operations in the Filtration/Purification Technologies segment was $366,046 or $117,060 lower than the $483,106 for the nine-month period ended October 31, 2010, a decrease of 24.2%. The decrease in income from operations was related to decreased sales and lower gross margins in our Pristine Water Solutions business unit. The lower gross margins experienced in our Pristine Water Solutions business unit was due primarily to product mix, increases in material cost and competitive pricing pressures.
Net income for the nine-month period ended October 31, 2011 was $4,984,627 compared with $4,383,007 for the nine-month period ended October 31, 2010, an increase of $601,620 or 13.7%.
The gross profit margin for the nine-month period ended October 31, 2011 was 35.6% compared with 36.3% for the nine-month period ended October 31, 2010. The gross profit margin in our Product Recovery/Pollution Control Technologies and Mefiag Filtration Technologies reporting segments as well as the Filtration/Purification Technologies segment all had lower gross profit margins as compared with the same period last year, partially offset by higher gross profit margins in our Fluid Handling Technologies reporting segment as compared with the same period last year.
Selling expense was $8,784,207 for the nine-month period ended October 31, 2011 compared with $8,549,038 for the same period last year, an increase of $235,169. The increase in selling expense was primarily due to higher
21
MET-PRO CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
payroll expenses. Selling expense as a percentage of net sales was 12.2% for the nine-month period ended October 31, 2011 compared with 13.1% for the same period last year.
General and administrative expense was $9,437,146 for the nine-month period ended October 31, 2011 compared with $8,478,717 for the same period last year, an increase of $958,429. The increase in general and administrative expense was primarily related to (i) higher payroll expenses, (ii) severance expense of approximately $300,000 recognized in the Company’s second quarter ended July 31, 2011 as a result of the Company offering a voluntary employee early retirement program, (iii) higher personnel acquisition expenses and (iv) higher management incentive accruals. General and administrative expense as a percentage of net sales was 13.2% for the nine-month period ended October 31, 2011, compared with 13.1% for the same period last year.
Interest expense was $145,862 for the nine-month period ended October 31, 2011, compared with $159,887 for the same period in the prior year, a decrease of $14,025. This slight decrease was due principally to the reduction of debt.
Other income, net, was $389,647 for the nine-month period ended October 31, 2011 compared with $208,834 for the same period in the prior year, an increase of $180,813. The increase in other income, net, primarily related to a gain on currency exchange.
The effective tax rates for both the nine-month periods ended October 31, 2011 and 2010 were 34.0%. Our analysis of our current tax position led us to continue using 34.0% as our effective tax rate for the third quarter of fiscal year 2012. We will continue to analyze our tax position in future quarters, and could increase or decrease our effective tax rate depending upon our analysis at that time.
Three Months Ended October 31, 2011 vs. Three Months Ended October 31, 2010:
Net sales for the three-month period ended October 31, 2011 were $25,245,131 compared with $21,384,674 for the three-month period ended October 31, 2010, an increase of $3,860,457 or 18.1%.
Sales in the Product Recovery/Pollution Control Technologies reporting segment were $11,893,296 compared with $9,204,381 for the three-month period ended October 31, 2010, an increase of $2,688,915 or 29.2%. The sales increase in the Product Recovery/Pollution Control Technologies reporting segment was due to higher sales for all product brands within this reporting segment as compared to the same quarter last year.
Sales in the Fluid Handling Technologies reporting segment were $7,346,897 compared with $7,031,096 for the three-month period ended October 31, 2010, an increase of $315,801 or 4.5%. The sales increase in the Fluid Handling Technologies reporting segment was due to an increase in demand for all product brands within this reporting segment.
Sales in the Mefiag Filtration Technologies reporting segment were $3,286,624 or $807,968 higher than the $2,478,656 of sales for the three-month period ended October 31, 2010, an increase of 32.6%. The sales increase in the Mefiag Filtration Technologies reporting segment was due to an increase in sales across all Mefiag product lines which we attribute to an apparent improvement in the economic environment of the industrial markets serviced by this reporting segment which are primarily the automotive and housing industries.
Sales in the Filtration/Purification Technologies segment were $2,718,314 compared with $2,670,541 for the three-month period ended October 31, 2010, an increase of $47,773 or 1.8%. The sales increase was due primarily to increased demand in our Keystone Filter business unit, partially offset by decreased demand in our Pristine Water Solutions business unit.
Income from operations for the three-month period ended October 31, 2011 was $3,003,212 compared with $2,181,902 for the three-month period ended October 31, 2010, an increase of $821,310 or 37.6%.
Income from operations in the Product Recovery/Pollution Control Technologies reporting segment was $1,064,314, or $739,619 higher than the $324,695 for the three-month period ended October 31, 2010, an increase of 227.8%.
22
MET-PRO CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
The increase in income from operations in the Product Recovery/Pollution Control Technologies reporting segment was due to a 29.2% increase in sales as well as higher gross profit margins in our Met-Pro Environmental Air Solutions business unit, partially offset by lower gross profit margins in our Strobic Air business unit as compared to the same quarter last year.
Income from operations in the Fluid Handling Technologies reporting segment totaled $1,747,678, or $184,416 higher than the $1,563,262 for the three-month period ended October 31, 2010, an increase of 11.8%. The increase in income from operations in the Fluid Handling Technologies reporting segment was primarily related to the increase in sales and higher gross profit margins within this reporting segment.
Income from operations in the Mefiag Filtration Technologies reporting segment totaled $127,022, or $37,739 higher than the $89,283 for the three-month period ended October 31, 2010, an increase of 42.3%. The increase in income from operations in the Mefiag Filtration Technologies reporting segment was due primarily to a 32.6% increase in sales partially offset by lower gross profit margins within this reporting segment.
Income from operations in the Filtration/Purification Technologies segment was $64,198 or $140,464 lower than the $204,662 for the three-month period ended October 31, 2010, a decrease of 68.6%. The decrease in income from operations was primarily related to lower gross profit margins for both the Keystone Filter and Pristine Water Solutions business units.
Net income for the three-month period ended October 31, 2011 was $2,081,886 compared with $1,419,199 for the three-month period ended October 31, 2010, an increase of $662,687 or 46.7%.
The gross profit margin for the three-month period ended October 31, 2011 was 37.0% versus 36.4% for the three-month period ended October 31, 2010. The gross profit margins in our Product Recovery/Pollution Control Technologies and Fluid Handling Technologies reporting segments were higher than the same period last year with the Mefiag Filtration Technologies reporting segment as well as the Filtration/Purification Technologies segment both having lower gross profit margins than the same period last year.
Selling expense was $2,944,019 for the three-month period ended October 31, 2011, an increase of $94,798 compared with the same period last year. The increase in selling expense was primarily due to higher payroll expenses. As a percentage of net sales, selling expenses were 11.7% for the three-month period ended October 31, 2011 compared with 13.3% for the three-month period ended October 31, 2010.
General and administrative expense was $3,387,617 for the three-month period ended October 31, 2011, an increase of $623,704 compared with the same period last year. The increase in general and administrative expense was due primarily to (i) higher payroll expenses, (ii) higher personnel acquisition expenses and (iii) higher management incentive accruals. General and administrative expense as a percentage of net sales was 13.4% for the three-month period ended October 31, 2011, compared with 12.9% of net sales for the same period last year.
Interest expense was $47,153 for the three-month period ended October 31, 2011 compared with $50,201 for the same period in the prior year, a decrease of $3,048.
Other income, net, was $198,317 for the three-month period ended October 31, 2011 compared with $18,601 for the same period in the prior year, an increase of $179,716. The increase in other income, net, primarily related to a gain on currency exchange.
The effective tax rates for both the three-month periods ended October 31, 2011 and 2010 were 34.0%. Our analysis of our current tax position led us to continue using 34.0% as our effective tax rate for the third quarter of the fiscal year 2012. We will continue to analyze our tax position in future quarters, and could increase or decrease our effective tax rate depending upon our analysis at that time.
23
MET-PRO CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
Liquidity:
The Company’s cash and cash equivalents were $32,674,159 on October 31, 2011 compared with $32,400,814 on January 31, 2011, an increase of $273,345. The increase in the Company’s cash and cash equivalents is primarily the net result of positive cash flows provided by operating activities of $5,490,824, proceeds from maturities of investments of $497,155 and proceeds from new borrowings amounting to $426,802, offset by quarterly cash dividend payments amounting to $2,902,505, investment in property and equipment of $1,636,866, the purchases of investments amounting to $1,010,534 and payments on debt totaling $625,413. The Company’s cash flows from operating activities are also influenced, in part, by the timing of shipments and negotiated standard payment terms, including retention associated with major projects, as well as other factors including changes in inventories and accounts receivable balances.
Accounts receivable (net) totaled $16,134,931 on October 31, 2011 compared with $15,311,322 on January 31, 2011, which represents an increase of $823,609. This increase in accounts receivable is reflective of the higher sales for the three and nine-months ended October 31, 2011. In addition to changes in sales volume, the timing and size of shipments and retainage on contracts, especially in the Product Recovery/Pollution Control Technologies reporting segment, will, among other factors, influence accounts receivable balances at any given point in time. We endeavor to closely monitor payments and developments which may signal possible customer credit issues. We currently have not identified any potential material impact on our liquidity resulting from customer credit issues.
Inventories totaled $17,653,829 on October 31, 2011 compared with $15,474,430 on January 31, 2011, an increase of $2,179,399. Inventory balances fluctuate depending on sales, market demand and the timing and size of shipments, especially when major systems and contracts are involved. We have been reducing our inventory where possible.
Current liabilities amounted to $15,908,739 on October 31, 2011, compared with $11,208,173 on January 31, 2011, an increase of $4,700,566. This increase is due primarily to increases in customers’ advances, accounts payable, and other accrued expenses.
As of October 31, 2011 and January 31, 2011, working capital was $53,070,594 and $54,137,879, respectively, and the current ratio was 4.3 and 5.8, respectively.
We expect that our major source of funding for normalized operations during the fiscal year 2012 and the immediate future thereafter will be our operating cash flow and cash, cash equivalents, and short-term investments. We believe we have sufficient liquidity for the next several years to fund, at anticipated levels of growth, operations, research and development, capital expenditures, scheduled debt repayments and dividend payments.
The Company and its subsidiaries also have access to $4.4 million uncommitted, unsecured lines of credit, subject to terms thereof. If market conditions are favorable, the Company may seek to enter into negotiations with its bank group prior to the expiration date to renew and extend these credit arrangements.
The existing domestic credit agreements include two financial covenants: a liability/tangible net worth ratio and a fixed charge coverage ratio. At October 31, 2011, we were in compliance with both financial covenants. The required liability/tangible net worth ratio, which measures total liabilities to tangible net worth, is a maximum of 1.20 times. At October 31, 2011 and January 31, 2011, our liability/tangible net worth ratio using this measure was 0.39 times for both periods. The required fixed charge coverage ratio, which is an adjusted earnings measure as defined by our credit facility, compared with the aggregate of interest expense, debt service, dividends and capital expenditures, is a ratio of no less than 1.05 times. At October 31, 2011 and January 31, 2011, our fixed charge coverage ratio using this measure was 1.50 times and 1.43 times, respectively.
Our debt instruments contain customary event of default provisions, which allow the lenders the option of accelerating all obligations upon the occurrence of certain events. In addition, the majority of our debt instruments contain a cross default provision, whereby a default on one debt obligation of the Company in excess of a specified amount, also would be considered a default under the terms of another debt instrument. As of October 31, 2011, we were in compliance with all such provisions.
24
MET-PRO CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
Management is not aware of any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in a material increase or decrease in our liquidity or an increase in liquidity beyond the historical rate of increase. In addition, other than items discussed, there are no known material trends, favorable or unfavorable, in our capital resources and no expected material changes in the mix and relative cost of such resources.
Capital Resources and Requirements:
Cash flows provided by operating activities during the nine-month period ended October 31, 2011 amounted to $5,490,824 compared with $7,957,189 in the nine-month period ended October 31, 2010, a decrease of $2,466,365. The decrease in cash flows from operating activities, as compared with the same period last year, was due principally to the following: (i) a decrease in accrued pension retirement benefits of $2,747,053 compared with a decrease in accrued pension retirement benefits of $33,569 for the same period last year, or a period-to-period cash outflow of $2,713,484, (ii) an increase in inventories of $2,138,267 compared with a decrease in inventories of $214,319 for the same period last year, or a period-to-period cash outflow of $2,352,586 and (iii) an increase in accounts receivable of $839,188 compared with a decrease in accounts receivable of $364,097 for the same period last year, or a negative impact on cash flow of $1,203,285. The previously listed cash outflows were partially offset by the following: (i) an increase in customers’ advances of $2,451,901 compared with a decrease in customers’ advances of $324,249 for the same period last year, or a period-to-period cash inflow of $2,776,150, (ii) an increase in accounts payable and accrued expenses of $2,028,062 compared with an increase in accounts payable and accrued expenses of $1,839,376, or a positive impact on cash flow of $188,686 and (iii) net income increasing $601,620 from the same period last year as well as adjustments for non-cash charges of depreciation and amortization, stock-based compensation and allowance for doubtful accounts increasing $88,756, $55,062 and $85,127, respectfully, from the same period last year.
Cash flows used in investing activities during the nine-month period ended October 31, 2011 amounted to $2,116,397 compared with cash flows used in investing activities of $2,303,896 for the nine-month period ended October 31, 2010, a decrease of $187,499. The decrease in cash flows used in investing activities is principally due to the following: (i) the acquisition of assets of Bio-Reaction Industries, LLC for a purchase price of $955,268 taking place in the prior year and (ii) the proceeds from maturities of investments of $497,155 compared with proceeds from maturities of investments of $240,893 for the same period last year, or a period-to-period cash inflow of $256,262 which were partially offset by (i) purchase of investments of $1,010,534 compared with purchase of investments of $497,155 for the same period last year, or a period-to-period cash outflow of $513,379 and (ii) routine purchases of property and equipment of $1,636,866 compared with purchases of property and equipment of $1,128,403 for the same period last year, or a period-to-period cash outflow of $508,463.
Consistent with past practices, the Company intends to continue to invest in new product development programs and to make capital expenditures required to support the ongoing operations during the coming fiscal year. The Company expects to finance all routine capital expenditure requirements through cash flows generated from operations.
Financing activities during the nine-month period ended October 31, 2011 utilized $3,101,116 of available resources, compared with $3,140,018 utilized during the nine-month period ended October 31, 2010. The decrease in cash utilized amounting to $38,902 is principally due to the decrease in purchase of treasury shares and the increase in proceeds received from the Company’s Mefiag B.V. subsidiary’s line of credit partially offset by the decrease in exercises of stock options, and increases in payments of dividends and debt payments.
The Board of Directors declared quarterly dividends of $.066 per share payable on December 17, 2010, March 17, 2011, June 15, 2011 and September 15, 2011 to shareholders of record at the close of business on December 3, 2010, March 3, 2011, June 1, 2011 and September 1, 2011. On October 19, 2011 the Board of Directors declared and increased the quarterly dividend by 8%, to $0.071 per share, payable on December 16, 2011 to shareholders of record at the close of business on December 2, 2011.
25
MET-PRO CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
Critical Accounting Policies and Estimates:
Management’s Discussion and Analysis of Financial Position and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition:
The Company recognizes revenues from product sales or services provided when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured. FASB ASC Topic 605, “Revenue Recognition”, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with FASB ASC Topic 605.
Depreciation and Amortization:
Property, plant and equipment, intangible and certain other long-lived assets are depreciated and amortized over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Goodwill:
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment”. The amendments in this update allow the Company the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on its qualitative assessment, the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. Quantitative impairment testing involves significant judgment in estimating projections of fair value generated through future performance of each of the reporting units, which comprise our operating segments. In calculating the fair value of the reporting units using the present value of estimated future cash flows method, we rely on a number of assumptions including sales and related gross margin projections, operating margins, anticipated working capital requirements and market rate of returns used in discounting projected cash flows. These assumptions are based upon market and industry forecasts, our business plans and historical data. Inherent uncertainties exist in determining and applying such factors. The discount rate used in the projection of fair value represents a weighted average cost of capital available to the Company. ASU No. 2011-08 is effective for annual reporting periods beginning after December 15, 2011, with early adoption permitted. The Company plans to adopt ASU No. 2011-08 during the fiscal fourth quarter ended January 31, 2012. The Company does not expect such adoption will have a material impact on our financial position, results of operations or cash flows.
During the fiscal year ended January 31, 2011, we performed an impairment analysis in accordance with FASB ASC Topic 350-20, “Goodwill” on each of the Company’s reporting units that carry goodwill on their balance sheets. In each case, the fair value exceeded the carrying amount, including goodwill, by a significant amount, except for Flex-Kleen which represents 53.5% of the total Company-wide goodwill. For Flex-Kleen, the carrying value as of January 31, 2011 and 2010 amounted to $9.1 million and $9.5 million, respectively. The fair value of Flex-Kleen as of January 31, 2011 and 2010 totaled $12.3 million and $12.1 million, respectively. As a result, the fair value exceeded the carrying amount, including goodwill, by $3.2 million and $2.6 million at January 31, 2011 and 2010, respectively. Therefore, as of January 31, 2011, Flex-Kleen’s goodwill was not impaired.
26
MET-PRO CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
Flex-Kleen, which initially performed well after being acquired in 1998, thereafter had several years of declining performance which we attributed primarily to a general weakness in its served markets, followed by improved performance in the fiscal years ended January 31, 2007, 2008 and 2009. In the fiscal years ended January 31, 2007, 2008 and 2009, actual results exceeded the projected results used in our impairment model. During the fiscal year ended January 31, 2010, Flex-Kleen’s net sales and operating profit were below the projections in our impairment model, which we believe was a reflection of the downturn in global business and economic conditions during this period of time and was not due to any new development specific to Flex-Kleen. In the fiscal year ended January 31, 2011 Flex-Kleen’s net sales were below the projections but operating profit was slightly above the projections in our impairment model. Our impairment model requires that Flex-Kleen’s sales and operating profit improve during each of the next several fiscal years in order for us to avoid a potential impairment charge.
Because of market conditions and/or potential changes in strategy and product portfolio, it is possible that forecasts used to support asset carrying values may change in the future, which could result in non-cash charges that would adversely affect our results of operations and financial condition. Based on current projections, a one percent decrease in revenue growth, a one percent decrease in gross margin or a one percent increase in the weighted average cost of capital would reduce the fair value for Flex-Kleen by $1.9 million, $1.1 million, and $1.0 million, respectively. Additionally, the Company cannot predict the occurrence of unknown events that might adversely affect the reportable value of its goodwill.
Pension Obligations:
The determination of our obligation and expense for pension benefits is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 13 of the January 31, 2011 consolidated financial statements included in Form 10-K and include, among others, the discount rate and the expected long-term rate of return on plan assets. In accordance with generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our recognized expense and recorded obligation in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension obligations and our future expense.
Cautionary Statement Concerning Forward-Looking Statements:
Our prospects are subject to certain uncertainties and risk. This Quarterly Report on Form 10-Q also contains certain forward-looking statements within the meaning of the Federal Securities Laws. These forward-looking statements may be identified by words describing our belief or expectation, such as where we say that we “believe”, “expect” or “anticipate”, or where we characterize something in a manner in which there is an express or implicit reference to the future, such as “non-recurring” or “unusual,” or where we express that our view is based upon the “current status” of a given matter, or upon facts as we know them as of the date of the statement. The content and/or context of other statements that we make may indicate that the statement is “forward-looking”. We claim the “safe harbor” provided by The Private Securities Reform Act of 1995 for all forward-looking statements.
Results may differ materially from our current results and actual results could differ materially from those suggested in the forward-looking statements as a result of certain risk factors, including but not limited to those set forth below, other one time events, other important factors disclosed previously and from time to time in Met-Pro’s other filings with the Securities and Exchange Commission.
The following important factors, along with those discussed elsewhere in this Quarterly Report on Form 10-Q, could affect our future financial condition and results of operations, and could cause our future financial condition and results of operations to differ materially from those expressed in our SEC filings and in our forward-looking statements:
|
·
|
the write-down of goodwill, as a result of the determination that the acquired business is impaired. As of January 31, 2011, the most recent date of the required annual testing for goodwill impairment, Flex-Kleen was the only one of our reporting units that carries goodwill where the fair value of the unit did not exceed
|
27
MET-PRO CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
|
|
the carrying value, including goodwill, by a significant amount. Flex-Kleen, which initially performed well after being acquired by Met-Pro, thereafter had several years of declining performance which we attributed primarily to a general weakness in its served markets, followed by improved performance in the fiscal years ended January 31, 2007, 2008 and 2009. During the fiscal year ended January 31, 2010, Flex-Kleen’s net sales and operating profit were below the projections in our impairment model, which we believe was a reflection of the downturn in global business and economic conditions during this period of time and was not due to any new development specific to Flex-Kleen. In the fiscal year ended January 31, 2011, Flex-Kleen’s net sales were below that which is required by our impairment model, while the fiscal year 2011 operating profit was slightly higher than the amount which is required by our impairment model. During the fiscal year ended January 31, 2011, we performed an impairment analysis of the $11.1 million of goodwill that the Company carries for Flex-Kleen and concluded that no impairment had occurred. Our impairment model requires that Flex-Kleen’s sales and operating profit improve during each of the next several fiscal years in order for us to avoid a potential impairment charge. For the nine-month period ended October 31, 2011, the annualized projection for net sales and operating profit for Flex-Kleen currently exceeds the projections used in our annual impairment model for the fiscal year ended January 31, 2012 and we anticipate that Flex-Kleen’s performance during the fiscal year ending January 31, 2012 will be sufficient to avoid an impairment charge. During the current fiscal year and in particular during the three months ended October 31, 2011, there has been a decline in sales and profitability of our Pristine Water Solutions business unit that we attribute to a number of factors including raw material price increases, weaknesses in Pristine’s principal market, the municipal market, and wet weather conditions. We carry $3.3 million of goodwill relating to Pristine and at this time we are not able to state whether or not we will be required to write off any of Pristine’s goodwill when we do the annual impairment test during the fourth fiscal quarter. Our projections are forward-looking statements where the actual results may not be as we presently anticipate;
|
|
·
|
materially adverse changes in economic conditions (i) in the markets served by us or (ii) in significant customers of ours;
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|
·
|
material changes in available technology;
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·
|
adverse developments in the asbestos cases that have been filed against the Company, including without limitation the exhaustion of insurance coverage, the imposition of punitive damages, the insolvency or liquidation of our insurance carriers, or other adverse developments in the availability of insurance coverage. On April 27, 2011, a liquidation order was entered against Atlantic Mutual Insurance Company, who had been providing defense and indemnity to the Company, and its affiliate, Centennial Insurance Company, who provided umbrella coverage to the Company. It appears that our remaining insurers have assumed the share of the defense and indemnity obligations that Atlantic Mutual Insurance Company had agreed to assume, and despite the liquidation of Atlantic Mutual Insurance Company and Centennial Insurance Company, the Company believes that its insurance coverage is adequate for the cases currently pending against the Company and for the foreseeable future, assuming a continuation of the current volume, nature of cases and settlement amounts; however, the Company has no control over the number and nature of cases that are filed against it, nor as to the financial health of its insurers or their position as to coverage;
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|
·
|
changes in accounting rules promulgated by regulatory agencies, including the SEC, which could result in an impact on earnings;
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|
·
|
the cost of compliance with Sarbanes-Oxley and other applicable legal and listing requirements, and the unanticipated possibility that Met-Pro may not meet these requirements;
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|
·
|
weaknesses in our internal control over financial reporting, which either alone or combined with actions by our employees intended to circumvent our internal control over financial reporting, to violate our policies, or to commit fraud or other bad acts, could lead to incorrect reporting of financial results. We believe that our internal control over financial reporting as of October 31, 2011 is effective; however, there are limits to any control system and we cannot give absolute assurance that our internal control is effective or that financial statement misstatements will not occur or that policy violations and/or fraud within the Company will not occur;
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|
·
|
unexpected results in our product development activities;
|
|
·
|
loss of key customers;
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28
MET-PRO CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
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·
|
changes in product mix, increases in the cost of materials, commoditization, price competition, and other similar changes in our markets, with adverse effect on margins;
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|
·
|
changes in our existing management;
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|
·
|
exchange rate fluctuations;
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|
·
|
changes in federal laws, state laws and regulations;
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|
·
|
lower than anticipated return on investments in the Company’s defined benefit plans, which could affect the amount of the Company’s pension liabilities;
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|
·
|
the assertion of claims that the Company’s products, including products produced by companies acquired by the Company, infringe third party patents or have caused injury, loss or damage;
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|
·
|
the effect of acquisitions and other strategic ventures;
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·
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failure to properly quote and/or execute customer orders, including misspecifications, design, engineering or production errors;
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|
·
|
customer-directed delays in the completion, or shipment, of purchase orders. In particular, sales of larger projects sold by our Product Recovery/Pollution Control Technologies reporting segment may vary materially from period-to-period in part due to customer-directed delays in the completion, or shipment, of an order, even though we may be in a position to complete the order or we may be ready to ship it and we have incurred expense in producing the order;
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·
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unanticipated problems related to international sales;
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·
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challenges in the implementation of a new enterprise resource planning (ERP) system; and/or
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·
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failure in execution of acquisition strategy.
|
We are exposed to certain market risks, including changes in interest rates. There have been no significant changes in our exposure to market risks since January 31, 2011. Refer to “Item 7A. Quantitative and Qualitative Disclosure About Market Risks” of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2011 for additional information.
As of the end of the period covered by this report, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the Company’s disclosure controls and procedures related to the recording, processing, summarizing and reporting of information in the Company’s periodic reports that it files with the SEC. These disclosure controls and procedures have been designed by the Company to ensure that (a) material information relating to the Company, including its consolidated subsidiaries, is accumulated and made known to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, by other employees of the Company and its subsidiaries as appropriate to allow timely decisions regarding required disclosure, and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake, or because of intentional acts designed to circumvent controls.
Accordingly, as of October 31, 2011 the Chief Executive Officer and Chief Financial Officer of the Company concluded that the Company’s disclosure controls and procedures were effective to accomplish their objectives and there were no significant changes in disclosure controls and procedures during the quarter ended October 31, 2011. The Company continually strives to improve its disclosure controls and procedures to enhance the quality of its financial reporting and to maintain dynamic systems that change as conditions warrant.
Certain of the statements made in this Item 1 (and elsewhere in this Report) are “forward-looking” statements which are subject to the considerations set forth in “Cautionary Statement Regarding Forward-Looking Statements” located in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Report, and we refer you to these considerations.
Beginning in 2002, the Company began to be named in asbestos-related lawsuits filed against a large number of industrial companies including, in particular, those in the pump and fluid handling industries. In management’s opinion, the complaints typically have been vague, general and speculative, alleging that the Company, along with the numerous other defendants, sold unidentified asbestos-containing products and engaged in other related actions which caused injuries (including death) and loss to the plaintiffs. Counsel has advised that more recent cases typically allege more serious claims of mesothelioma. The Company believes that it has meritorious defenses to the cases which have been filed and that none of its products were a cause of any injury or loss to any of the plaintiffs. The Company’s insurers have hired attorneys who, together with the Company, are vigorously defending these cases. The Company has been dismissed from or settled a large number of these cases. The sum total of all payments through December 8, 2011 to settle these cases involving asbestos-related claims was $675,000, all of which have been paid by the Company’s insurers including legal expenses, except for corporate counsel expenses, with an average cost per settled claim, excluding legal fees, of approximately $32,000. As of December 8, 2011, the date of the filing of this Report, there were a total of 137 cases pending against the Company (with New York, Pennsylvania and West Virginia having the largest number of cases and being the most active jurisdictions), as compared with 93 cases that were pending as of March 17, 2011, the date which our Annual Report on Form 10-K for the fiscal year ended January 31, 2011 was filed with the Securities and Exchange Commission. During the current fiscal year commencing February 1, 2011 through December 8, 2011, 68 new cases were filed against the Company, and the Company was dismissed from 18 cases and settled two cases. Most of the pending cases have not advanced beyond the early stages of discovery, although a number of cases are on schedules leading to, or are scheduled for trial. On April 27, 2011, a liquidation order was entered against Atlantic Mutual Insurance Company, who had been providing defense and indemnity to the Company, and its affiliate, Centennial Insurance Company, who provided umbrella coverage to the Company. It appears that our remaining insurers have assumed the share of the defense and indemnity obligations that Atlantic Mutual Insurance Company had agreed to assume, and despite the liquidation of Atlantic Mutual Insurance Company and Centennial Insurance Company, the Company believes that its insurance coverage is adequate for the cases currently pending against the Company and for the foreseeable future, assuming a continuation of the current volume, nature of cases and settlement amounts; however, the Company has no control over the number and nature of cases that are filed against it, nor as to the financial health of its insurers or their position as to coverage. The Company also presently believes that none of the pending cases will have a material adverse impact upon the Company’s results of operations, liquidity or financial condition.
At any given time, the Company is typically also party to a small number of other legal proceedings arising in the ordinary course of business. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based upon the present information, including the Company’s assessment of the facts of each particular claim as well as accruals, the Company believes that no pending proceeding will have a material adverse impact upon the Company’s results of operations, liquidity, or financial condition.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2011 as filed with the Securities and Exchange Commission on March 17, 2011, which could materially affect our business, financial condition, financial results or future performance. Additionally, we refer you to Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cautionary Statement Concerning Forward-Looking Statements” of this report, and in particular the first item as to the potential write-down of goodwill for our Flex-Kleen business unit.
|
(a)
|
During the third quarter ended October 31, 2011, we did not sell any of our equity securities that were not registered under the Securities Act of 1933.
|
|
(b)
|
Not applicable.
|
|
(c)
|
The following table summarizes Met-Pro’s purchases of its Common Shares for the quarter ended October 31, 2011:
|
Issuer Purchases of
Equity Securities
|
Period
|
Total
Number of Shares
Purchased
|
Average
Price Paid
Per Share
|
Total
Number of
Shares
Purchased
As Part of
Publicly
Announced
Plans or
Programs
|
Maximum
Number of
Shares
That May
Yet be
Purchased
Under the
Plan or
Programs
|
(1)
|
||||
|
August 1-31, 2011
|
-
|
$ -
|
-
|
183,640
|
|||||
|
September 1-30, 2011
|
-
|
-
|
-
|
183,640
|
|||||
|
October 1-31, 2011
|
-
|
-
|
-
|
183,640
|
|||||
|
Total
|
-
|
$ -
|
-
|
183,640
|
|
(1)
|
On November 3, 2008, our Board of Directors authorized a Common Share repurchase program that was publicly announced on November 5, 2008, for up to 300,000 shares. The program has no fixed expiration date.
|
None.
Not applicable.
None.
|
(a)
|
Exhibits Required by Item 601 of Regulation S-K
|
|||
|
Exhibit No.
|
Description
|
|||
|
(10)(cj)
|
||||
|
(10)(ck)
|
||||
|
Corporation Salaried Employee Stock Ownership
|
||||
|
Plan*
|
||||
|
(10)(cl)
|
||||
|
Executive Retirement Plan Trust Agreement*
|
||||
|
(10)(cm)
|
||||
|
Supplemental Executive Retirement Plan Trust Agreement*
|
||||
|
(10)(cn)
|
||||
|
Agreement*
|
||||
|
(31.1)
|
||||
|
Pursuant to Section 302 of the
|
||||
|
Sarbanes-Oxley Act of 2002*
|
||||
|
(31.2)
|
||||
|
Pursuant to Section 302 of the
|
||||
|
Sarbanes-Oxley Act of 2002*
|
||||
|
(32.1)
|
||||
|
Pursuant to 18 U.S.C. Section 1350, as adopted
|
||||
|
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002*
|
||||
|
(32.2)
|
||||
|
Pursuant to 18 U.S.C. Section 1350, as adopted
|
||||
|
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002*
|
||||
|
(101.INS)
|
XBRL Instance*
|
|||
|
(101.SCH)
|
XBRL Taxonomy Extension Schema*
|
|||
|
(101.CAL)
|
XBRL Taxonomy Extension Calculation*
|
|||
|
(101.LAB)
|
XBRL Taxonomy Extension Labels*
|
|||
|
(101.PRE)
|
XBRL Taxonomy Extension Presentation*
|
|||
|
(101.DEF)
|
XBRL Taxonomy Extension Definition*
|
|||
|
* Filed herewith.
|
||||
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.
|
Met-Pro Corporation
|
||
|
(Registrant)
|
||
|
December 8, 2011
|
/s/ Raymond J. De Hont
|
|
|
Raymond J. De Hont
|
||
|
Chairman, Chief Executive Officer
|
||
|
and President
|
||
|
December 8, 2011
|
/s/ Gary J. Morgan
|
|
|
Gary J. Morgan
|
||
|
Senior Vice President of Finance,
|
||
|
Secretary and Treasurer, Chief
|
||
|
Financial Officer, Chief Accounting
|
||
|
Officer and Director
|
||
33
|
|