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EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - MET PRO CORPmpr10q20120430ex321.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - MET PRO CORPmpr10q20120430ex311.htm
EX-32.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - MET PRO CORPmpr10q20120430ex322.htm
EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - MET PRO CORPmpr10q20120430ex312.htm
 



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: April 30, 2012
 
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)

Pennsylvania
 
23-1683282
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
160 Cassell Road, P.O. Box 144
   
  Harleysville, Pennsylvania
 
19438
(Address of principal executive offices)
 
(Zip Code)

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 June 7, 2012 the Registrant had 14,678,628 Common Shares, par value of $.10 per share, issued and outstanding.



 
 

 
MET-PRO CORPORATION AND SUBSIDIARIES

 
 
PART I – FINANCIAL INFORMATION
 
       
   Item 1.
   
       
   
   
as of April 30, 2012 and January 31, 2012
2
   
   
for the three-month periods ended April 30, 2012 and 2011
3
   
   
for the three-month periods ended April 30, 2012 and 2011
4
   
   
for the three-month periods ended April 30, 2012 and 2011
5
   
   
for the three-month periods ended April 30, 2012 and 2011
6
 
7
 
16
       
   Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
       
   Item 3.   Qualitative and Quantitative Disclosures about Market Risk 23
       
   Item 4.   Controls and Procedures 23
       
       
PART II – OTHER INFORMATION  
       
   Item 1.   Legal Proceedings 24
       
   Item 1A.   Risk Factors   25
       
   Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds  25
       
   Item 3.   Defaults Upon Senior Securities  25
       
   Item 4.    25
       
   Item 5.   Other Information  25
       
   Item 6.    26
       
       
SIGNATURES 27
 
 
 
 
 
 
 
 
 
 


 
 
1


CONSOLIDATED BALANCE SHEETS
 
PART I – FINANCIAL INFORMATION
       
         
Item 1.  Financial Statements
       
         
 
April 30,
 
January 31,
 
ASSETS
2012
 
2012
 
Current assets
(unaudited)
 
 
 
      Cash and cash equivalents
$33,718,966
 
$34,581,394
 
      Short-term investments
1,019,315
 
764,061
 
      Accounts receivable, net of allowance for
       
         doubtful accounts of approximately
       
         $452,000 and $491,000, respectively
15,273,701
 
17,373,121
 
      Inventories
19,239,814
 
17,847,143
 
      Prepaid expenses, deposits and other current assets
1,531,508
 
1,683,486
 
      Deferred income taxes
186,742
 
186,329
 
Total current assets
70,970,046
 
72,435,534
 
Property, plant and equipment, net
19,368,319
 
19,322,436
 
Goodwill
20,798,913
 
20,798,913
 
Other assets
2,718,549
 
2,952,332
 
Total assets
$113,855,827
 
$115,509,215
 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY
       
Current liabilities
       
      Current portion of debt
$366,232
 
$657,216
 
      Accounts payable
6,658,848
 
7,684,739
 
      Accrued salaries, wages and benefits
1,664,358
 
1,827,603
 
      Other accrued expenses
2,701,824
 
2,357,929
 
      Dividend payable
1,043,373
 
1,042,297
 
      Customers’ advances
2,196,911
 
3,232,600
 
Total current liabilities
14,631,546
 
16,802,384
 
Long-term debt
2,575,564
 
2,687,971
 
Accrued pension retirement benefits
10,680,616
 
10,618,047
 
Other non-current liabilities
56,941
 
56,391
 
Deferred income taxes
1,322,781
 
1,522,451
 
Total liabilities
29,267,448
 
31,687,244
 
         
Commitments and contingencies         
Shareholders’ equity
       
      Common shares, $.10 par value; 36,000,000 shares
       
          authorized, 15,928,679 shares issued, of which
       
          1,250,051 shares were reacquired and held in
       
          treasury at both dates
1,592,868
 
1,592,868
 
      Additional paid-in capital
4,500,136
 
4,058,735
 
      Retained earnings
96,444,203
 
96,228,764
 
      Accumulated other comprehensive loss
(7,609,315
)
(7,718,883
)
      Treasury shares, at cost
(10,339,513
)
(10,339,513
)
Total shareholders’ equity
84,588,379
 
83,821,971
 
Total liabilities and shareholders’ equity
$113,855,827
 
$115,509,215
 
See accompanying notes to consolidated financial statements.
       
 

 
 
2


CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 
Three Months Ended
 
April 30,
 
2012
 
2011
 
         
Net sales
$25,207,061
 
$23,429,903
 
Cost of goods sold
16,256,535
 
15,371,698
 
Gross profit
8,950,526
 
8,058,205
 
 
       
Operating expenses
       
Selling
3,059,581
 
2,916,126
 
General and administrative
4,144,089
 
3,059,103
 
Total selling, general and administrative
7,203,670
 
5,975,229
 
Income from operations
1,746,856
 
2,082,976
 
         
Interest expense
(42,535
)
(48,801
)
Other income
45,925
 
105,986
 
Income before taxes
1,750,246
 
2,140,161
 
         
Provision for taxes
491,548
 
727,654
 
Net income
$1,258,698
 
$1,412,507
 
Earnings per share, basic
$.09
 
$.10
 
         
Earnings per share, diluted
$.09
 
$.10
 
         
Cash dividend per share – declared
$.071
 
$.066
 
         
Cash dividend per share – paid
$.071
 
$.066
 

See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
3


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 
Three Months Ended
 
April 30,
 
2012
 
2011
 
         
Net income
$1,258,698
 
$1,412,507
 
Other comprehensive income, net of tax:
       
Foreign currency translation adjustment
93,485
 
468,020
 
Interest rate swap, net of tax of ($9,446) and $152, respectively
16,083
 
(259
)
Other comprehensive income, net of tax
109,568
 
467,761
 
Total comprehensive income
$1,368,266
 
$1,880,268
 

See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
4


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)


       
Accumulated
     
   
Additional
 
Other
     
 
Common
Paid-in
Retained
Comprehensive
Treasury
   
 
Shares
Capital
Earnings
Income/(Loss)
Shares
Total
 
Balances, January 31, 2012
$1,592,868
   
$4,058,735
   
$96,228,764
 
($7,718,883
($10,339,513
$83,821,971
 
                         
Net income
-
 
-
 
1,258,698
 
-
 
-
 
1,258,698
 
Other comprehensive income, net of tax
-
 
-
 
-
 
109,568
 
-
 
109,568
 
Dividends
-
 
-
 
(1,043,259
-
 
-
 
(1,043,259
)
Stock-based compensation
-
 
441,401
 
-
 
-
 
-
 
441,401
 
Balances, April 30, 2012
$1,592,868
   
$4,500,136
   
$96,444,203
 
($7,609,315
($10,339,513
$84,588,379
 

       
Accumulated
     
   
Additional
 
Other
     
 
Common
Paid-in
Retained
Comprehensive
Treasury
   
 
Shares
Capital
Earnings
Income/(Loss)
Shares
Total
 
Balances, January 31, 2011
$1,592,868
   
$3,448,249
    
$93,113,247
 
($3,201,767
($10,479,673
)  
$84,472,924
 
                         
Net income
-
 
-
 
1,412,507
 
-
 
-
 
1,412,507
 
Other comprehensive income, net of tax
-
 
-
 
-
 
467,761
 
-
 
467,761
 
Dividends
-
 
-
 
(967,529
-
 
-
 
(967,529
)
Stock-based compensation
-
 
179,826
 
-
 
-
 
-
 
179,826
 
Stock option transactions
-
 
1,500
 
-
 
-
 
41,300
 
42,800
 
Purchase of 3,717 treasury shares
-
 
-
 
-
 
-
 
(42,800
)
(42,800
)
Balances, April 30, 2011
$1,592,868
   
$3,629,575
   
$93,558,225
  
($2,734,006
($10,481,173
)  
$85,565,489
 

See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
5


CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
             
     
Three Months Ended
 
     
April 30,
 
     
2012
 
2011
 
Cash flows from operating activities
           
   Net income
   
$1,258,698
 
$1,412,507
 
   Adjustments to reconcile net income to net
           
           cash provided by (used in) operating activities:
           
       Depreciation and amortization
   
487,599
 
481,932
 
       Stock-based compensation
   
441,401
 
179,826
 
       Deferred income taxes
   
(209,278
)
(606
)
       Loss on sales of property and equipment, net
   
1,080
 
-
 
       Allowance for doubtful accounts
   
(38,862
)
19,215
 
       Change in operating assets and liabilities:
           
           Accounts receivable
   
2,171,197
 
(1,636,920
)
           Inventories
   
(1,361,633
)
(388,008
)
           Prepaid expenses, deposits and other assets
   
123,755
 
(38,705
)
           Accounts payable and accrued expenses
   
(862,836
)
687,771
 
           Customers’ advances
   
(1,036,453
)
(52,906
)
           Accrued pension retirement benefits
   
62,569
 
(2,776,476
)
           Other non-current liabilities
   
549
 
549
 
Net cash provided by (used in) operating activities
   
1,037,786
 
(2,111,821
)
Cash flows from investing activities
           
   Acquisitions of property and equipment
   
(474,884
)
(235,679
)
   Purchase of investments
   
(763,264
)
-
 
   Proceeds from maturities of investments
   
756,073
 
-
 
Net cash used in investing activities
   
(482,075
)
(235,679
)
Cash flows from financing activities
           
   Proceeds from new borrowings
   
-
 
407,731
 
   Repayment of debt
   
(387,451
)
(123,023
)
   Exercise of stock options
   
-
 
42,800
 
   Payment of dividends
   
(1,042,183
)
(967,445
)
   Purchase of treasury shares
   
-
 
(42,800
)
Net cash used in financing activities
   
(1,429,634
)
(682,737
)
Effect of exchange rate changes on cash
   
11,495
 
(4,268
)
Net decrease in cash and cash equivalents
   
(862,428
)
(3,034,505
)
             
Cash and cash equivalents at February 1
   
34,581,394
 
32,400,814
 
Cash and cash equivalents at April 30
   
$33,718,966
 
$29,366,309
 
         
Supplemental disclosure of cash flow information:
       
   Cash paid for interest
$43,436
 
$49,030
 
   Cash paid for income taxes
370,703
 
228,584
 
         
See accompanying notes to consolidated financial statements.
       
 
 
 
 
 
 
 
 
6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (unaudited)
 
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation:

The accompanying unaudited 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. All significant intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts disclosed in the financial statements and accompanying notes.  Estimates, by their nature, are based on judgment and available information.  Actual results could differ materially from those estimates.

Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include valuation of accounts receivable, goodwill, intangible assets, other long-lived assets, legal contingencies and assumptions used in the calculations of income taxes.

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. All adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the financial position of the Company as of April 30, 2012 and the results of operations for the three-month periods ended April 30, 2012 and 2011, and changes in shareholders’ equity and cash flows for the three-month periods then ended have been included. The results of operations for the three-month period ended April 30, 2012 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/A for the year ended January 31, 2012.  In addition, the January 31, 2012 Balance Sheet data, presented herein, was derived from the audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.

Recent Accounting Pronouncements:

In May 2011, the FASB issued Accounting Standards Update (“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 did not have a material impact on the Company’s financial position, results of operations or cash flows.

 
 
 
 
 
 
 
7

MET-PRO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(unaudited)
 
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 became effective for the Company beginning February 1, 2012 and resulted in 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 and interim reporting periods beginning after December 15, 2011.  The adoption of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.


NOTE 2 – FAIR VALUE DISCLOSURES

Cash and cash equivalents:

Cash and cash equivalents at April 30, 2012 and January 31, 2012 amounted to $33,718,966 and $34,581,394, respectively. The cash and cash equivalents balance at April 30, 2012 was comprised of the following: (i) cash amounting to $10,850,326 and (ii) cash equivalents consisting of money market funds amounting to $22,868,640.  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 April 30, 2012, the Company’s cash and cash equivalents were held at 20 financial institutions.

Short-term investments:

Short-term investments at April 30, 2012 and January 31, 2012 amounted to $1,019,315 and $764,061, respectively.  The short-term investment balance at April 30, 2012 was comprised of four certificates of deposit with twelve month maturity dates. The short-term investment balance at January 31, 2012 was comprised of two certificates of deposit with nine month maturity dates and one certificate of deposit with a twelve month maturity date.  The Company evaluates the creditworthiness of the financial institutions and the financial instruments in which it invests.

Long-term investments:

Long-term investments at April 30, 2012 and January 31, 2012 amounted to $246,473 and $494,537, respectively, which are reported in other assets on the consolidated balance sheets.  The long-term investment balance at April 30, 2012 was comprised of one certificate of deposit with a fifteen month maturity date.  The long-term investment balance at January 31, 2012 was 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.
 
 
 
 
 

 
 
 
 
8

MET-PRO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(unaudited)
 
Debt:

The estimated fair value and carrying amount of debt were as follows:

   
April 30,
  January 31,
   
2012
   
2012
 
Fair value
 
$3,347,885
   
$3,747,061
 
Carrying amount
 
2,941,796
   
3,345,187
 
 
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 7) 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 tables summarize the basis used to measure the Company’s financial assets (liabilities) at fair value on a recurring basis in the consolidated balance sheets.
 
     
Quoted Prices
       
     
in Active
       
     
Markets for
 
Significant
 
Significant
     
Identical
 
Observable
 
Unobservable
 
Balance at
 
Assets
 
Inputs
 
Inputs
 
April 30, 2012
 
 (Level 1)
 
(Level 2)
 
 (Level 3)
Cash and cash equivalents
$33,718,966
 
$33,718,966
 
$-
 
$-
Short-term investments
1,019,315
 
1,019,315
 
-
 
-
Long-term investments
246,473
 
246,473
 
-
 
-
Cash surrender value -  life insurance policies
1,124,930
 
-
 
1,124,930
 
-
Interest rate swap agreement
(340,757
)
-
 
(340,757
)
-
 
$35,768,927
 
$34,984,754
 
$784,173
 
$-
 
 
 
 
 
 
 
 
 
 
 
 
9

MET-PRO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(unaudited)
 
               
     
Quoted Prices
       
     
in Active
       
     
Markets for
 
Significant
 
Significant
     
Identical
 
Observable
 
Unobservable
 
Balance at
 
Assets
 
Inputs
 
Inputs
 
January 31, 2012
 
 (Level 1)
 
(Level 2)
 
 (Level 3)
Cash and cash equivalents
$34,581,394
 
$34,581,394
 
$-
 
$-
Short-term investments
764,061
 
764,061
 
-
 
-
Long-term investments
494,537
 
494,537
 
-
 
-
Cash surrender value -  life insurance policies
1,089,989
 
-
 
1,089,989
 
-
Interest rate swap agreement
(366,286
)
-
 
(366,286
)
-
 
$36,563,695
 
$35,839,992
 
$723,703
 
$-
 
There were no transfers of assets or liabilities between Level 1 and Level 2 in the three-month period ended April 30, 2012 or the fiscal year ended January 31, 2012.

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 and awards of restricted stock units are 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:

   
Three Months Ended
April 30,
     
2012
   
2011
Numerator:
         
 
Net income
  
$1,258,698
   
$1,412,507
Denominator:
         
 
Weighted average common shares outstanding during the period for basic
    computation
 
14,678,628
   
14,659,117
 
Dilutive effect of stock-based compensation plans
 
66,198
   
182,603
 
Weighted average common shares outstanding during the period for diluted
    computation
 
14,744,826
   
14,841,720
           
Earnings per share, basic
 
$.09
   
$.10
Earnings per share, diluted
 
$.09
   
$.10
 
For the three months ended April 30, 2012 and 2011, employee stock options to purchase 669,009 and 125,448 common shares respectively, were excluded from the calculations of diluted earnings per share as the calculated proceeds from the options' exercises were greater than the market price of the Company's common shares during these periods.
 
 

 
10

MET-PRO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(unaudited)

NOTE 4 – STOCK-BASED COMPENSATION

Stock options:

On April 2, 2012 and February 27, 2012, the Company issued 54,628 and 97,299, 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 April 2012 and February 2012 awards were made to the Company’s senior executives.  In the event of a “change of control”, certain unvested options may 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 April 2012 and February 2012, were $3.18 and $2.96,  respectively.
 
The following table summarizes stock option transactions for the three-month period ended April 30, 2012:

         
Weighted
 
       
Weighted
Average
 
       
Average
Remaining
Aggregate
   
Shares
 
Exercise Price
Life (years)
Intrinsic Value
Options:
         
 
Outstanding at February 1, 2012
1,223,292
 
$10.2437
5.52
 
 
Granted
151,924
 
10.0514
   
 
Forfeited
(2,201
)
12.1800
   
 
Expired
(9,956
)
5.5476
   
 
Exercised
-
 
-
   
 
Outstanding at April 30, 2012
1,363,059
 
$10.2534
5.58
$575,367
             
 
Exercisable at April 30, 2012
1,075,225
 
$10.1895
4.65
$546,962

The aggregate intrinsic value of options exercised during the three-month period ended April 30, 2011 was $14,775.  The intrinsic value of stock options is the amount by which the market price of the stock on a given date, such as at the end of the period or on the day of exercise, exceeded the market price of stock on the date of grant.
 
In connection with the Separation Agreement between the Company and its former Chief Financial Officer, the Company agreed to accelerate the vesting date and extend the exercise date of certain stock options.  This was considered a stock option modification resulting in additional stock compensation expense of approximately $250,000, which was recorded in the three-month period ended April 30, 2012.

 
NOTE 5 – INVENTORIES

Inventories consisted of the following:
 
 
April 30,
2012
 
 January 31,
2012
Raw materials
$13,081,496
 
$12,673,210
Work in progress
3,453,168
 
2,808,747
Finished goods
2,705,150
 
2,365,186
 
$19,239,814
 
$17,847,143
 
 

 
11

MET-PRO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(unaudited)
 
NOTE 6 – INCOME TAXES

The Company utilizes the expected annual effective tax rate in determining its income tax provisions for interim periods.  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.

As of the fiscal year ended January 31, 2012, the Company had an unrecognized tax benefit of $49,000 to account for state tax matters in the United States as a result of changes in tax positions with relevant tax authorities.  As of April 30, 2012, the Company filed returns with the relevant state tax authorities upon which the $49,000 unrecognized tax benefit was determined and has concluded that it did not have an unrecognized tax benefit as of April 30, 2012.

A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:

 
2012
 
Balance at February 1, 2012
$49,000
 
Increases in tax positions for prior years
-
 
Decreases in tax positions for prior years
(49,000
)
Increases in tax positions for current year
-
 
Balance at April 30, 2012
$-
 

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 years before 2008.


NOTE 7 – DEBT

The Company and its subsidiaries have domestic and foreign uncommitted, unsecured lines of credit totaling $4,397,170 which can be used for working capital, of which $1,250,155 has been committed to standby letters of credit as of April 30, 2012.  The standby letters of credit have expiration dates during the fiscal years ending January 31, 2013 and 2014 in the amounts of $1,239,155 and $11,000, respectively. Of the total lines of credit available, the foreign unsecured line of credit totals $397,170 (300,000 Euro).  As of April 30, 2012 and January 31, 2012 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 zero as of April 30, 2012 and $265,581, or 202,997 Euro, as of January 31, 2012.

The Company’s long-term debt is subject to certain covenants, including maintenance of prescribed amounts of leverage and fixed charge coverage ratios.  The Company was in compliance with all applicable covenants as of April 30, 2012.

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 April 30, 2012, the effective interest rate was 6.79% 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.  There was no hedge ineffectiveness as of April 30, 2012.  The fair value of the interest rate swap agreement resulted in a decrease in equity of $214,677 (net of tax) as of April 30, 2012 and a decrease in
 
 
 
 
 
 
 
 
12

MET-PRO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(unaudited)
 
equity of $230,760 (net of tax) as of January 31, 2012.  These results are recorded in the accumulated other comprehensive loss section of shareholders’ equity.
 

NOTE 8 – EMPLOYEE BENEFIT PLANS

The Company has several defined benefit pension plans covering eligible employees in the United States.  Effective December 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 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 cost is based on estimated values provided by the Company’s independent actuary.

The following table provides the components of net periodic pension (income) cost:

 
Three Months Ended
April 30,
 
 
 2012
 
 2011
 
Service cost
$56,035
 
$51,400
 
Interest cost
272,218
 
280,400
 
Expected return on plan assets
(304,822
)
(350,500
)
Recognized net actuarial loss
109,991
 
52,500
 
Net periodic pension cost
$133,422
 
$33,800
 

The Company elected to contribute $63,561 to its pension and defined contribution plans during the three-month period ended April 30, 2012.  The Company expects to make an additional contribution of $1,610,683 during the nine-month period ending January 31, 2013.


NOTE 9 – BUSINESS SEGMENT DATA

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 meet the criteria for aggregation.

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 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 Company follows the practice of allocating general corporate expenses, including depreciation and amortization expense, among the reporting segments.




 

 
13

MET-PRO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(unaudited)
 
The financial segmentation information is presented in the following table:
     
 
Three Months Ended
April 30,
 
2012
 
2011
 
Net sales
 
 
 
 
Product Recovery/Pollution Control Technologies
$10,500,840
 
$8,331,972
 
Fluid Handling Technologies
 9,400,199
 
 9,553,104
 
Mefiag Filtration Technologies
 2,852,166
 
 3,139,917
 
Filtration/Purification Technologies
2,453,856
 
2,404,910
 
 
$25,207,061
 
$23,429,903
 
           
Income (loss) from operations
       
Product Recovery/Pollution Control Technologies
($443,062
)
($480,285
)
Fluid Handling Technologies
 2,384,370
 
 2,240,696
 
Mefiag Filtration Technologies
(72,088
)
221,472
 
Filtration/Purification Technologies
(122,364
)
101,093
 
 
$1,746,856
 
$2,082,976
 

 
 
April 30,
 
January 31,
 
 
2012
 
2012
 
Identifiable assets
 
 
 
 
Product Recovery/Pollution Control Technologies
$34,977,794
 
$36,444,763
 
Fluid Handling Technologies
19,136,649
 
19,290,035
 
Mefiag Filtration Technologies
15,086,547
 
14,017,572
 
Filtration/Purification Technologies
8,985,779
   
8,368,652
 
 
78,186,769
 
78,121,022
 
Corporate
35,669,058
 
37,388,193
 
 
$113,855,827
 
$115,509,215
 


 

 






 


 
 

 

 




 
14

MET-PRO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(unaudited)
 
NOTE 10 – CONTINGENCIES AND COMMITTMENTS

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 April 30, 2012 to settle cases involving asbestos-related claims was $675,000, all of which has 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 $25,000.
 
Based upon the most recent information available to the Company regarding such claims, there were a total of 134 cases pending against the Company as of April 30, 2012 (with Connecticut, New York, Pennsylvania and West Virginia having the largest number of cases), as compared with approximately 130 cases that were pending as of March 22, 2012.  Subsequent to January 31, 2012, twelve new cases were filed against the Company, and the Company was dismissed from thirteen cases and settled zero 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. 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 11 – 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 April 30, 2012, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the three-month periods ended April 30, 2012 and 2011.  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, 2012, 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 22, 2012, 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, 2012 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
June 8, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

Cautionary Statement Concerning Forward-Looking Statements:

Our prospects are subject to certain uncertainties and risk.  In addition to the other information set forth in this report, you should carefully consider the factors which could materially affect our business, financial condition, financial results or future performance, as discussed in Part I, “Item 1A. Risk Factors” and Part II, “Item 7. Forward-Looking Statements; Factors That May Affect Future Results” in our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2012.  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, other one time events, other important factors disclosed previously and from time to time in the Company's other filings with the Securities and Exchange Commission.
 
Introduction:
 
The following discussion and analysis, should be read in conjunction with Item 1 Financial Statements of this Quarterly Report on Form 10-Q,  in addition to Item 8 “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K/A for the fiscal year ended January 31, 2012.

Results of Operations:

The following table sets forth, for the three-month period indicated, certain financial information derived from the Company’s consolidated statements of income expressed as a percentage of net sales.
 
   
Three Months Ended
 
   
April 30,
 
    2012   2011   
           
Net sales
 
100.0%
 
100.0%
 
Cost of goods sold
 
64.5%
 
65.6%
 
Gross profit
 
35.5%
 
34.4%
 
           
Selling expenses
 
12.1%
 
12.4%
 
General and administrative expenses
 
16.4%
 
13.1%
 
Income from operations
 
7.0%
 
8.9%
 
           
Interest expense
 
(0.2%
)
(0.2%
)
Other income, net
 
0.2%
 
0.4%
 
Income before taxes
 
7.0%
 
9.1%
 
           
Provision for taxes
 
2.0%
 
3.1%
 
Net income
 
5.0%
 
6.0%
 

 
 
 
 
 

 

 
17

MET-PRO CORPORATION AND SUBSIDIARIES
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:

Three Months Ended April 30, 2012 vs. Three Months Ended April 30, 2011:

Net sales for the three-month period ended April 30, 2012 were $25,207,061 compared with $23,429,903 for the three-month period ended April 30, 2011, an increase of $1,777,158 or 7.6%.

Sales in the Product Recovery/Pollution Control Technologies reporting segment were $10,500,840, or $2,168,868 higher than the $8,331,972 of sales for the three-month period ended April 30, 2011, an increase of 26.0%.  The sales increase in the Product Recovery/Pollution Control Technologies reporting segment was due to higher sales in our Met-Pro Environmental Air Solutions and Strobic Air business units, with the Met-Pro Environmental Air Solutions business unit contributing a higher percentage of the overall increase in sales of the reporting segment.

Sales in the Fluid Handling Technologies reporting segment totaled $9,400,199, or $152,905 lower than the $9,553,104 of sales for the three-month period ended April 30, 2011, a decrease of 1.6%.  Sales in the Fluid Handling Technologies reporting segment were slightly lower as compared with the same period last year due to slightly lower sales in our Global Pump Solutions business unit.  Based upon the current level of business activity,  the Company believes that the decrease sales in Global Pump Solutions business unit will recover.

Sales in the Mefiag Filtration Technologies reporting segment were $2,852,166, or $287,751 lower than the $3,139,917 of sales for the three-month period ended April 30, 2011, a decrease of 9.2%.  Sales in the Mefiag Filtration Technologies reporting segment were lower as compared with the same period last year due to decreased sales for our horizontal disc filter systems.  Based upon the current level of business activity, the Company believes that the decrease in sales for our horizontal disc filter systems will recover.

Sales in the Filtration/Purification Technologies segment were $2,453,856, or $48,946 higher than the $2,404,910 of sales for the three-month period ended April 30, 2011, an increase of 2.0%.  This increase was due primarily to increased sales for our Pristine Water Solutions products, partially offset by a decrease in sales of our Keystone Filter products.

The Company’s backlog of orders was $30,455,950 and $20,066,943 as of April 30, 2012 and 2011, 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.  The Company has also observed a trend over the last several years wherein larger projects are more frequently booked and shipped in the same quarter in which the customer’s purchase order was received, 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 that substantially all of the backlog that existed as of April 30, 2012 will be shipped during the current fiscal year.

The gross profit margin for the three-month period ended April 30, 2012 was 35.5% compared with 34.4% for the three-month period ended April 30, 2011.  The gross profit margin in our Product Recovery/Pollution Control Technologies and Fluid Handling Technologies reporting segments were higher as compared with the same period last year, partially offset by lower gross profit margins in our Mefiag Filtration Technologies reporting segment and Filtration/Purification Technologies segment as compared with the same period last year.

Income from operations for the three-month period ended April 30, 2012 was $1,746,856 compared with $2,082,976 for the three-month period ended April 30, 2011, a decrease of $336,120, or 16.1%.  The decrease in income from operations was primarily the result of one-time costs totaling approximately $695,000 in connection with the Company’s transition to a new Chief Financial Officer.
 
The loss from operations in the Product Recovery/Pollution Control Technologies reporting segment totaled $443,062, or $37,223 less than the loss of $480,285 for the three-month period ended April 30, 2011.  The decrease in the loss from operations in the Product Recovery/Pollution Control Technologies reporting segment was primarily related to the increase in sales of the business units within this reporting segment, partially offset by an increase in operating expenses.
 
 
 
18

MET-PRO CORPORATION AND SUBSIDIARIES
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
 
Income from operations in the Fluid Handling Technologies reporting segment totaled $2,384,370, or $143,674 higher than the $2,240,696 for the three-month period ended April 30, 2011, an increase of 6.4%.  The increase in income from operations was due to higher gross profit margins in our Global Pump Solutions business unit, partially offset by a small decrease in sales.

Loss from operations in the Mefiag Filtration Technologies reporting segment totaled $72,088 compared with income from operations of $221,472 for the three-month period ended April 30, 2011, a decrease of $293,560.  The loss from operations in the Mefiag Filtration Technologies reporting segment resulted primarily from lower gross profit margins as well as a decrease in sales.

Loss from operations in the Filtration/Purification Technologies segment was $122,364 compared with income from operations of $101,093 for the three-month period ended April 30, 2011, a decrease of $223,457.  The loss from operations was related primarily to lower gross profit margins in our Pristine Water Solutions business unit that were due primarily to increases in material costs and competitive pricing pressures.

Net income for the three-month period ended April 30, 2012 was $1,258,698 compared with $1,412,507 for the three-month period ended April 30, 2011, a decrease of $153,809, or 10.9%.

Selling expense was $3,059,581 for the three-month period ended April 30, 2012, an increase of $143,455 compared with selling expense of $2,916,126 for last year’s first quarter.  The increase in selling expense was primarily due to increased advertising activities.  Selling expense as a percentage of net sales was 12.1% for the three-month period ended April 30, 2012, compared with 12.4% for the same period last year.
 
General and administrative expense was $4,144,089 for the three-month period ended April 30, 2012 compared with $3,059,103 for the same period last year, an increase of $1,084,986.  The increase in general and administrative expense was due primarily to: (i) costs of approximately $695,000 related to separation expenses, which included salary continuation, stock option modification and transition expenses, associated with the Company’s change in its Chief Financial Officer, as well as (ii) increased healthcare and pension expenses.  General and administrative expense as a percentage of net sales was 16.4% for the three-month period ended April 30, 2012, compared with 13.1% for the same period last year.

Interest expense was $42,535 for the three-month period ended April 30, 2012, compared with $48,801 for the same period in the prior year, a decrease of $6,266.  This decrease was due to the reduction of debt.

Other income was $45,925 for the three-month period ended April 30, 2012 compared with $105,986 for the same period in the prior year, a decrease of $60,061.  The decrease in other income related to lower gains on currency exchange as well as lower interest income earned on our cash balance.

The effective tax rates for the three-month periods ended April 30, 2012 and 2011 were 28.1% and 34.0%, respectively.  The effective tax rate of 28.1% for the three-month period ended April 30, 2012 was a result of a 35.0% tax rate, 1.0% higher compared with the same period last year due to the expiration of government sponsored tax credits, primarily the research and development tax credit.  This was off-set by a one-time benefit of 6.9% attributable to deductible stock compensation expense resulting from a change in the status of outstanding stock options.  The Company will continue to analyze its tax position in future periods, and could increase or decrease the effective tax rate.


Liquidity and Capital Resources:

The Company’s principal sources of liquidity are cash flows from operations, borrowings under existing lines of credit and access to credit markets.  The Company’s principal uses of cash are operating expenses, capital expenditures, working capital requirements, dividends and debt service.  Management expects that the Company’s current cash and cash equivalent balances, cash generated from operations and unused borrowing capacity will be sufficient to support the Company’s planned operating and capital requirements for the foreseeable future and at least the next twelve months.
 
 

 
 
19

MET-PRO CORPORATION AND SUBSIDIARIES
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
 
The Company’s cash and cash equivalents were $33,718,966 on April 30, 2012 compared with $34,581,394 on January 31, 2012, a decrease of $862,428.  The decrease in the Company’s cash and cash equivalents is primarily the net result of quarterly cash dividend payments amounting to $1,042,183, investment in property and equipment of $474,884 and payments on debt totaling $387,451, offset by cash provided by operating activities amounting to $1,037,786.  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.

Cash flows provided by operating activities during the three-month period ended April 30, 2012 amounted to $1,037,786 compared with cash used in operating activities of $2,111,821 in the three-month period ended April 30, 2011, an increase of $3,149,607.  The increase in cash flows from operating activities, as compared with the same period last year, was due principally to the following: (i) a positive change in accounts receivable of $2,171,197 compared with a negative change in accounts receivable of $1,636,920 for the same period last year, or a period-to-period cash inflow of $3,808,117, (ii) an increase in accrued pension retirement benefits of $62,569 compared with a decrease in accrued pension retirement benefits of $2,776,476 for the same period last year, or a period-to-period cash inflow of $2,839,045 and (iii) a positive change in prepaid expenses, deposits and other assets of $123,755 compared with a negative change in prepaid expenses, deposits and other assets of $38,705 for the same period last year, or a period-to-period cash inflow of $162,460.  The previously listed cash inflows were partially offset by (i) a decrease in accounts payable and accrued expenses of $862,836 compared with an increase in accounts payable and accrued expenses of $687,771 for the same period last year, or a period-to-period cash outflow of $1,550,607, (ii) a decrease in customers’ advances of $1,036,453 compared with a decrease in customers’ advances of $52,906 for the same period last year, or a period-to-period cash outflow of $983,547 and (iii) an increase in inventory of $1,361,633 compared with an increase in inventory of $388,008 for the same period last year, or a period-to-period cash outflow of $973,625.

Cash flows used in investing activities during the three-month period ended April 30, 2012 amounted to $482,075 compared with cash flows used in investing activities of $235,679 for the three-month period ended April 30, 2011, an increase of $246,396.  The increase in cash outflow from investing activities was due primarily to the acquisition of equipment to be used in normal operations.

Financing activities during the three-month period ended April 30, 2012 utilized $1,429,634 of available resources, compared with $682,737 utilized during the three-month period ended April 30, 2011, an increase of $746,897.  The increase in cash used in financing activities is due primarily to the payment by our Mefiag B.V. subsidiary of amounts advanced under its line of credit, as well as from the increase by the Company in its dividend payment.

The Company and its subsidiaries also have access to $4,397,170 of uncommitted, unsecured domestic and foreign lines of credit, subject to terms thereof, of which $1,250,115 has been committed for standby letters of credit.  The existing domestic credit agreements include two financial covenants: a liability/tangible net worth ratio and a fixed charge coverage ratio. At April 30, 2012, we were in compliance with both financial covenants.

The Board of Directors declared quarterly dividends of $0.071 per share payable on March 16, 2012 and June 15, 2012 to shareholders of record at the close of business on March 2, 2012 and June 1, 2012, respectively.
 
 
 
 
 
 
 
 
 
 
 

 

 
 
20

MET-PRO CORPORATION AND SUBSIDIARIES
 
 
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 Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP.  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 a majority of its 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.  Revenue from contracts related to the Company’s subsidiary Bio-Reaction Industries Inc., representing the minority of revenues, are recognized on the percentage of completion method, measured by the percentage of contract costs incurred to date, compared with the estimated total contract costs for each contract.  This method is used because management considers contract costs to be the best available measure of progress on these contracts related to Bio-Reaction Industries Inc.

Depreciation and Amortization:

Property, plant and equipment, finite lived intangible assets and certain other long-lived assets are depreciated or amortized over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue.  Property, plant and equipment, as well as 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:
 
The Company assesses the qualitative and quantitative factors which could affect the fair value of goodwill carried in its reporting units on an annual basis or more frequently when an indicator of impairment exists.  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.   

During the fiscal year ended January 31, 2012, we performed a quantitative impairment analysis 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 and Pristine Water Solutions which represents 69.6% of the total Company-wide goodwill.  

For Flex-Kleen, the carrying value as of January 31, 2012 and 2011 amounted to $9.3 million and $9.1 million, respectively.  The fair value of Flex-Kleen as of January 31, 2012 and 2011 totaled $13.2 million and $12.3 million, respectively.   As a result, the fair value exceeded the carrying amount, including goodwill, by $3.9 million and $3.2 million at January 31, 2012 and 2011, respectively.  Therefore, as of January 31, 2012, Flex-Kleen’s goodwill was not impaired.

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
 
 
 
21

MET-PRO CORPORATION AND SUBSIDIARIES
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations continued:
 
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.  In the fiscal year ended January 31, 2012, Flex-Kleen’s net sales and operating profit exceeded 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 $0.9 million, respectively.  Additionally, the Company cannot predict the occurrence of unknown events that might adversely affect the reportable value of Flex-Kleen’s goodwill.

For Pristine Water Solutions, the carrying value as of January 31, 2012 and 2011 amounted to $4.6 million at both dates.  The fair value of Pristine Water Solutions as of January 31, 2012 and 2011 totaled $5.9 million and $9.8 million, respectively.   As a result, the fair value exceeded the carrying amount, including goodwill, by $1.3 million and $5.2 million at January 31, 2012 and 2011, respectively.  Therefore, as of January 31, 2012, Pristine Water Solutions’ goodwill was not impaired.

During the fiscal year 2012, there was a decline in net sales and operating profit of our Pristine Water Solutions business unit that we attribute to a number of factors including raw material price increases, increased price competition, product mix, continued weaknesses in Pristine Water Solutions’ principal market, the municipal market, and inclement weather in certain geographic areas which affected product demand.  Our impairment model requires that Pristine Water Solutions’ 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 Pristine Water Solutions by $0.7 million, $0.5 million, and $0.4 million, respectively.  Additionally, the Company cannot predict the occurrence of unknown events that might adversely affect the reportable value of goodwill related to Pristine Water Solutions.
 
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, 2012 consolidated financial statements included in Form 10-K/A 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.
 

 
 
 
 
 
 
 
 
 
 
 

 
22

 
We are exposed to certain market risks, primarily changes in interest rates.  There have been no significant changes in our exposure to market risks since January 31, 2012.  Refer to “Item 7A. Quantitative and Qualitative Disclosure About Market Risks” of the Company’s Annual Report on Form 10-K/A for the fiscal year ended January 31, 2012 for additional information.


 
(a) Evaluation of Disclosure Controls and Procedures
 
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, under the supervision of the Company’s Disclosure Committee, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were effective as of April 30, 2012.
 
(b) Changes in Internal Control Over Financial Reporting
 
During the three months ended April 30, 2012, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
(c) Limitations on the Effectiveness of Controls
 
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
23

MET-PRO CORPORATION AND SUBSIDIARIES
 
 
 
Item 1.   Legal Proceedings

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 “Forward-Looking Statements; Factors That May Affect Future Results” 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 April 30, 2012 to settle cases involving asbestos-related claims was $675,000, all of which has 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 $25,000.
 
Based upon the most recent information available to the Company regarding such claims, there were a total of 134 cases pending against the Company as of April 30, 2012 (with Connecticut, New York, Pennsylvania and West Virginia having the largest number of cases), as compared with approximately 130 cases that were pending as of March 22, 2012.  Subsequent to January 31, 2012, twelve new cases were filed against the Company, and the Company was dismissed from thirteen cases and settled zero 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. 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.





 


 
 
 
 
 
 
 

 
 
 

 
 
24

MET-PRO CORPORATION AND SUBSIDIARIES
 
 
 
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/A for the year ended January 31, 2012 as filed with the Securities and Exchange Commission which could materially affect our business, financial condition, financial results or future performance.  
 

 
(a)  
During the three months ended April 30, 2012, 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 three months ended April 30, 2012:
 
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)
                   
February 1-29, 2012
 
-
 
$           -
 
-
 
170,496
 
March 1-31, 2012
 
-
 
-
 
-
 
170,496
 
April 1-30, 2012
 
-
 
-
 
-
 
170,496
 
Total
 
-
 
$           -
 
-
 
170,496
 


(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.
 
 
 
 
 
 

 
25

MET-PRO CORPORATION AND SUBSIDIARIES
 
 
 
(a)  
Exhibits Required by Item 601 of Regulation S-K
     
   
Exhibit No.
 
Description
         
   
(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.
   
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
26

MET-PRO CORPORATION AND SUBSIDIARIES
 
 
 
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)
     
     
June 8, 2012
 
/s/ Raymond J. De Hont
   
Raymond J. De Hont
   
Chairman, Chief Executive Officer
   
and President
   
(Duly Authorized Officer and Principal Executive Officer)
 
     
June 8, 2012
 
/s/ Neal E. Murphy
   
Neal E. Murphy
   
Vice President-Finance,
   
Chief Financial Officer, Secretary and Treasurer
   
(Duly Authorized Officer and Principal Financial Officer)
     
     








 
 

 

















 

 
27