NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recent
Accounting Pronouncements
:
In
May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error
Corrections”, which replaces Accounting Principles Board (“APB”) No. 20,
“Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim
Financial Statements”. SFAS No. 154 changes the requirements for
accounting and reporting a change in accounting principle, and applies to all
voluntary changes in accounting principles, as well as changes required by
an
accounting pronouncement in the unusual instance it does not include specific
transition provisions. Specifically, SFAS No. 154 requires
retrospective application to prior periods’ financial statements, unless it is
impracticable to determine the period specific effects or the cumulative effect
of the change. When it is impracticable to determine the effects of
the change, the new accounting principle must be applied to the balances of
assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and a corresponding adjustment must
be
made to the opening balance of retained earnings for that period rather than
being reported in the statement of operations. When it is
impracticable to determine the cumulative effect of the change, the new
principle must be applied as if it were adopted prospectively from the earliest
date practicable. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. SFAS No. 154 does not change the transition provisions of any
existing pronouncements. SFAS No. 154 has not had a material impact
on our financial position, results of operations or cash flows.
In
October 2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes - An Interpretation of SFAS No. 109”. FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes”. FIN No. 48 also prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. In addition, FIN No. 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The provisions of FIN No. 48 are to be
applied to all tax positions upon initial adoption of this
standard. Only tax positions that meet the more-likely-than-not
recognition threshold at the effective date may be recognized or continue to
be
recognized as an adjustment to the opening balance of retained earnings (or
other appropriate components of equity) for that fiscal year. The
provisions of FIN No. 48 are effective for fiscal years beginning after December
15, 2006. The Company adopted FIN 48 effective February 1,
2007. See Note 8 on page 10 for further information.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) 108, to address diversity in practice in quantifying
financial statement misstatements. SAB 108 requires that the Company
quantify misstatements based on their impact on each of our financial statements
and related disclosures. SAB 108 is effective for fiscal years ending
after November 15, 2006. The Company has adopted SAB 108 effective as
of January 31, 2007. The adoption of this bulletin did not have a
material impact on our financial position, results of operations or cash
flows.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. SFAS No. 157 provides guidance for using fair value to
measure assets and liabilities. It also responds to investors’
requests for expanded information about the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of the fair value measurements on
earnings. SFAS No. 157 applies whenever other standards require (or
permit) assets or liabilities to be measured at fair value, and does not expand
the use of fair value in any new circumstances. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and is required to be adopted by the Company in the first
quarter of fiscal year 2009. The Company is currently evaluating the
effect that the adoption of SFAS No. 157 will have on our financial position,
results of operations and cash flows.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
September 2006, the FASB issued SFAS No. 158,
“
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,
an
amendment of FASB Statements No. 87, 88, 106 and 132(R)”
.
SFAS No.
158 requires that we recognize the over-funded or under-funded status of our
pension plans (the Plans) as an asset or liability in the fiscal year ended
January 31, 2007 consolidated balance sheet, with changes in the funded status
recognized through other comprehensive income in the year in which they
occur. SFAS No. 158 also requires us to measure the funded status of
the Plans as of the year end consolidated balance sheet date not later than
December 31, 2008. The impact of adopting SFAS No. 158 resulted in an
increase in the pension liabilities and an increase in accumulated other
comprehensive loss of approximately $0.3 million, prior to any deferred tax
adjustment, in the fiscal year ended January 31, 2007.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of SFAS
No.
115”. SFAS No. 159 permits an entity to measure certain financial
assets and financial liabilities at fair value that are not currently required
to be measured at fair value. Entities that elect the fair value
option will report unrealized gains and losses in earnings at each subsequent
reporting date. The fair value option may be elected on an
instrument-by-instrument basis, with few exceptions. SFAS No. 159
amends previous guidance to extend the use of the fair value option to
available-for-sale and held-to-maturity securities. The statement
also established presentation and disclosure requirements to help financial
statement users understand the effect of the election. SFAS No. 159
is effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the potential
impact of SFAS No. 159 on our financial position, results of operations and
cash
flows.
Treasury
Share Retirement:
On
October 17, 2007, the Company’s Board of Directors approved the retirement of
900,000 treasury shares (pre-split shares) and returned them to the authorized
and unissued status. The transaction reduced Common Shares,
Additional Paid-in-Capital and Treasury Shares in the amounts of $90,000,
$6,462,000 and $6,552,000, respectively.
Stock
Splits
:
On
October 17, 2007, the Company’s Board of Directors declared a four-for-three
stock split effected in the form of a stock distribution, paid on November
14,
2007 to shareholders of record on November 1, 2007. The Company
retained the current par value of $0.10 per share for all Common
Shares. All references in the financial statements to the number of
shares outstanding, per share amounts, and stock option data of the Company’s
Common Shares have been restated to reflect the effect of the stock split for
all periods presented, except for the shares outstanding and shares held in
treasury as of January 31, 2007 in the Shareholders’ Equity section of the
Consolidated Balance Sheet.
NOTE
2 – PRINCIPLES OF CONSOLIDATION
|
|
The
consolidated financial statements include the accounts of Met-Pro Corporation
(“Met-Pro” or the “Company”) and its wholly-owned subsidiaries, Mefiag B.V.,
Flex-Kleen Canada Inc., Strobic Air Corporation, MPC Inc., Pristine Water
Solutions Inc., Mefiag (Guangzhou) Filter Systems Ltd. and Met-Pro (Hong Kong)
Limited Company. Significant intercompany accounts and transactions have been
eliminated.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
3 - BASIS OF PRESENTATION
|
|
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, 2007 and the results of operations for the
nine-month and three-month periods ended October 31, 2007 and 2006, 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, 2007 and 2006 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, 2007.
NOTE
4 –
STOCK-BASED
COMPENSATION
Stock
Options:
On
December 15, 2006, the Company granted 238,666 stock options to employees and
directors, with one-third exercisable one year from the grant date and the
remaining two-thirds vesting two and three years from the grant date,
respectively. Previous options granted by the Company became exercisable with
one-third exercisable as of the date of grant and the remaining two-thirds
vesting over a two year period. In the event of a “change of
control”, any unvested portion of the option shall become immediately
exercisable. The Company’s present practice is that 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 each option is amortized into compensation
expense on a straight-line basis over its respective vesting period, net of
estimated forfeitures. The fair value of options was estimated at the grant
date
using the Black-Scholes option valuation model. The per share weighted-average
fair value at the date of grant for stock options granted during the fiscal
year
ended January 31, 2007 was $3.02 per option. 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,
|
|
|
2007
|
|
2006
|
|
Expected
term (years)
|
5.0
|
|
5.0
|
|
Risk-free
interest rate
|
4.50%
- 4.58%
|
|
3.63%
- 4.58%
|
|
Expected
volatility
|
29%
- 30%
|
|
30%
- 32%
|
|
Dividend
yield
|
1.86%
- 3.39%
|
|
2.26%
- 3.39%
|
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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes stock option transactions for the nine-month period
ended October 31, 2007:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
Average
|
|
|
|
|
|
Average
|
Remaining
|
Aggregate
|
|
|
|
Shares
|
Exercise
Price
|
Life
(years)
|
Intrinsic
Value
|
|
Options:
|
|
|
|
|
|
|
Outstanding
at February 1, 2007
|
1,275,921
|
$8.0169
|
7.49
|
|
|
|
Granted
|
-
|
-
|
|
|
|
|
Forfeited
|
16,890
|
-
|
|
|
|
|
Expired
|
-
|
-
|
|
|
|
|
Exercised
|
136,578
|
7.9211
|
|
|
|
|
Outstanding
at October 31, 2007
|
1,122,453
|
$7.9911
|
6.73
|
$5,568,938
|
|
|
|
|
|
|
|
|
|
Exercisable
at October 31, 2007
|
830,003
|
$7.1175
|
6.73
|
$4,843,067
|
The
aggregate intrinsic value of options exercised during the nine-month periods
ended October 31, 2007 and 2006 was $553,004 and $92,085,
respectively. 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 the stock on
the
date of grant.
The
following table summarizes information about the options outstanding and options
exercisable as of October 31, 2007:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
Remaining
|
Weighted
Average
|
|
|
Weighted
Average
|
|
|
|
Shares
|
Life
(years)
|
Exercise
Price
|
|
Shares
|
Exercise
Price
|
|
Range
of prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4.11
– 4.49
|
|
43,973
|
|
2.20
|
|
$4.1650
|
|
|
43.973
|
|
$4.165
|
|
|
$4.50
– 5.24
|
|
79,176
|
|
3.37
|
|
5.1048
|
|
|
79,176
|
|
5.1048
|
|
|
$5.25
– 6.74
|
|
245,510
|
|
4.99
|
|
5.5307
|
|
|
245,510
|
|
5.5307
|
|
|
$6.75
– 8.99
|
|
184,008
|
|
7.42
|
|
7.4110
|
|
|
184,008
|
|
7.4110
|
|
|
$9.00
– 9.74
|
|
344,453
|
|
7.51
|
|
9.3052
|
|
|
277,336
|
|
9.37
|
|
|
$9.75
– 11.24
|
|
225,333
|
|
9.26
|
|
10.8975
|
|
|
-
|
|
-
|
|
|
|
|
1,122,453
|
|
6.73
|
|
$7.9911
|
|
|
830,003
|
|
$7.1175
|
|
As
of October 31, 2007, there was $568,454 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
2.5 years.
NOTE
5 – MARKETABLE SECURITIES
At
October 31, 2007 the Company's marketable securities had a fair market value
of
$22,761, which includes an unrealized gain of $941. The marketable
securities are composed of 555 shares of Armstrong World Industries, Inc.
(“AWI”) distributed to Met-Pro as part of a Chapter 11 reorganization settlement
in October of 2006.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 – INVENTORIES
Inventories
consisted of the following:
|
|
October
31,
|
|
J
anuary
31,
|
|
|
2007
|
|
2007
|
|
Raw
materials
|
$15,129,197
|
|
$13,596,396
|
|
Work
in progress
|
3,002,458
|
|
2,365,479
|
|
Finished
goods
|
2,665,850
|
|
3,334,404
|
|
|
$20,797,505
|
|
$19,296,279
|
NOTE
7 – 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,
|
|
|
2007
|
|
2006
|
|
Cash
paid during the period for:
|
|
|
|
|
Interest
|
$255,828
|
|
$247,049
|
|
Income
taxes
|
3,592,573
|
|
2,834,775
|
NOTE
8 – INCOME TAXES
The
Company adopted the provisions of FIN No. 48 on February 1, 2007.
Previously, the Company accounted for tax contingencies in accordance with
SFAS
No. 5, “Accounting for Contingencies”. As required by FIN No. 48, which
clarifies SFAS No. 109, “Accounting for Income Taxes”, 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. At the adoption date,
the Company applied FIN No. 48 to all tax positions for which the statute of
limitations remained open. As a result of the implementation of FIN No. 48,
the
Company recognized an increase of $125,000 in the liability for
unrecognized tax benefits, which was accounted for as a reduction to the
February 1, 2007 balance of retained earnings.
The
amount of unrecognized tax benefits as of February 1, 2007, prior to the
FIN No. 48 adjustment, amounted to $38,000. The total unrecognized tax benefit
amounted to $163,000 which, if ultimately realized, will reduce the Company’s
annual effective tax rate. The Company recognizes interest and
penalties related to unrecognized tax benefits in income tax expense for all
periods presented. The Company had accrued approximately $65,000 for
the payment of interest and penalties through February 1, 2007, which is
included in the $163,000 unrecognized tax benefit amount.
The
Company plans to enter into Voluntary Disclosure programs in several taxing
jurisdictions. The Company anticipates that the resolution of these unrecognized
tax benefits will occur within the next twelve months.
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, state and local, or non-U.S. income tax examinations by tax authorities
for the years before 2004.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company and its subsidiaries have domestic and foreign unsecured lines of credit
totaling $5,000,000 which can be used for working capital. As of
October 31, 2007, the Company’s Mefiag B.V. subsidiary had borrowed $434,580
(300,000 Euro) from its available line of credit, which is included in the
table
below.
Short-term
and long-term debt consisted of the following:
|
|
October
31,
|
|
January 31,
|
|
|
2007
|
|
2007
|
|
|
|
|
|
|
Bond
payable, bank, payable in quarterly installments of
|
|
|
|
|
$58,460,
plus interest at a rate of 16 basis points below
|
|
|
|
|
the
ninety day LIBOR rate (effective interest rate of 5.19%
|
|
|
|
|
at
October 31, 2007), maturing April, 2021, collateralized
|
|
|
|
|
by
the Telford, PA building
|
$3,156,864
|
|
$3,332,246
|
|
|
|
|
|
|
Note
payable, bank, payable in quarterly installments of
|
|
|
|
|
$300,000,
plus interest at a rate of 75 basis points over
|
|
|
|
|
the
ninety day LIBOR rate (effective interest rate of 6.10%
|
|
|
|
|
at
October 31, 2007), maturing October, 2008
|
1,500,000
|
|
2,400,000
|
|
|
|
|
|
|
Note
payable, bank, payable in quarterly installments of
|
|
|
|
|
$36,215
(25,000 Euro), plus interest at a fixed rate of 3.82%,
|
|
|
|
|
maturing
January, 2016
|
1,195,096
|
|
1,173,061
|
|
|
|
|
|
|
Line
of credit, $434,580 (300,000 Euro), payable upon demand,
|
|
|
|
|
plus
interest at a rate of 70 basis points over the thirty day
|
|
|
|
|
EURIBOR
rate (effective interest rate of 5.30% at
|
|
|
|
|
October
31, 2007)
|
434,580
|
|
391,020
|
|
|
6,286,540
|
|
7,296,327
|
|
Less
current portion
|
2,013,282
|
|
1,955,202
|
|
|
4,273,258
|
|
5,341,125
|
|
Fair
market value of interest rate swap liability
|
549
|
|
76,865
|
|
Long-term
portion
|
$4,273,807
|
|
$5,417,990
|
The
notes payable and bond payable are subject to certain covenants, including
maintenance of prescribed amounts of leverage and fixed charge coverage
ratios.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company has two separate interest rate swap agreements to hedge against the
potential impact on earnings from increases in market interest
rates. Effective October 29, 1998, the Company entered into a
ten-year interest rate swap agreement for a notional amount equal to the balance
on the note payable maturing October 2008. The Company swapped the
ninety day LIBOR for a fixed rate of 5.23%. As a result, the
effective fixed interest rate is 5.98%. 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 a result, the effective fixed interest rate is 4.71%. These
interest rate swap agreements are accounted for as fair value hedges that
qualify for treatment under the short-cut method of measuring effectiveness
in
accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” as amended by SFAS 138, “Accounting for Certain Derivative
Instruments and Hedging Activities – an Amendment to FASB Statement No.
133”. There was no hedge ineffectiveness as of October 31,
2007. The fair value of the interest rate swap agreements resulted in
a decrease in equity of $346 (net of tax) for the nine-months ended October
31,
2007 and a decrease in equity of $48,425 (net of tax) for the fiscal year ended
January 31, 2007. These results are recorded in the accumulated other
comprehensive loss section of shareholders’ equity.
Maturities
of short-term and long-term debt are as follows:
|
Year
Ending
|
|
|
January
31,
|
|
|
2008
|
$2,013,282
|
|
2009
|
1,578,700
|
|
2010
|
378,700
|
|
2011
|
378,700
|
|
2012
|
378,700
|
|
Thereafter
|
1,558,458
|
|
|
$6,286,540
|
NOTE
10 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated
other comprehensive income (loss) consisted of the following:
|
|
October
31,
|
|
January
31,
|
|
|
|
2007
|
|
2007
|
|
|
Interest
rate swap, net of tax
|
($346
|
)
|
($48,425
|
)
|
|
Unrealized
gain on securities available-for sale, net of tax
|
593
|
|
1,430
|
|
|
Foreign
currency translation adjustment
|
1,305,695
|
|
691,730
|
|
|
Minimum
pension liability adjustment, net of tax
|
(678,206
|
)
|
(678,206
|
)
|
|
|
$627,736
|
|
($33,471
|
)
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – OTHER INCOME, NET
Other
income, net was comprised of the following:
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
October
31,
|
|
October
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Interest
income
|
$745,161
|
|
$736,050
|
|
$216,133
|
|
$242,066
|
|
|
Other
miscellaneous income (loss)
|
(30
|
)
|
23,662
|
|
12,605
|
|
12,395
|
|
|
|
$745,131
|
|
$759,712
|
|
$228,738
|
|
$254,461
|
|
NOTE
12 – 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. The net periodic
pension
cost is based on estimated values provided by independent actuaries.
The
following table provides the components of net periodic pension
costs:
|
|
|
Pension
Benefits
|
|
|
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
|
October
31,
|
|
October
31,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
Service
cost
|
$111,192
|
|
$523,584
|
|
$37,064
|
|
$169,460
|
|
|
|
Interest
cost
|
780,123
|
|
764,040
|
|
260,041
|
|
228,226
|
|
|
|
Expected
return on plan assets
|
(944,625
|
)
|
(877,394
|
)
|
(314,875
|
)
|
(292,464
|
)
|
|
|
Amortization
of transition asset
|
(1,113
|
)
|
(24,986
|
)
|
(371
|
)
|
(16,928
|
)
|
|
|
Amortization
of prior service cost
|
26,085
|
|
62,416
|
|
8,695
|
|
13,010
|
|
|
|
Recognized
net actuarial loss
|
30,552
|
|
63,726
|
|
10,184
|
|
12,048
|
|
|
|
Curtailment
loss
|
-
|
|
234,180
|
|
-
|
|
234,180
|
|
|
|
Net
periodic benefit cost
|
$2,214
|
|
$745,566
|
|
$738
|
|
$347,532
|
|
|
|
The
Company contributed $77,011 to the pension plans during the nine-month
period ended October 31, 2007 and expects an additional contribution
of
$26,311 during the three-month period ended January 31,
2008.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13 – BUSINESS SEGMENT DATA
During
the fiscal quarter ended October 31, 2006, management reviewed operating segment
aggregation in accordance with SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” and based upon changes beginning in
February 2006 in the manner in which management manages the Company, as well
as
the current economic characteristics of its operating segments, management
determined that a revision of the aggregation of operating segments was
appropriate. Therefore, the segment discussion outlined below
represents the adjusted segment structure as determined by management in
accordance with SFAS No. 131. All prior year amounts related to these
reporting segments have been restated to conform to the new reporting segment
structure.
The
Company has identified nine operating segments and has aggregated those segments
into two reportable segments, Product Recovery/Pollution Control Technologies
and Fluid Handling Technologies and one other segment, Filtration/Purification
Technologies. The Filtration/Purification Technologies segment is comprised
of
four operating segments that do not presently meet the criteria for aggregation
outlined in SFAS No. 131. However, the Company’s analysis is that SFAS No. 131
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 percent or more of combined revenue of all reported operating
segments, (ii) the absolute amount of reported profit or loss is 10 percent
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 percent or more of the combined assets of all operating
segments. Since none of the operating segments included in the
Filtration/Purification Technologies segment meet these criteria, and at least
75 percent of total consolidated revenue is included in the Product
Recovery/Pollution Control Technologies and Fluid Handling Technologies
reporting segments, the Company has determined the aggregation of these
operating segments into this other segment is appropriate under SFAS No.
131.
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 pollution control or product recovery
issues. The products are sold worldwide through Company sales
personnel and a network of manufacturer’s representatives. This
reporting segment is comprised of the Duall, Systems, Flex-Kleen and Strobic
Air
business units.
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 Dean Pump, Fybroc and Sethco business
units.
Filtration/Purification
Technologies
: This other segment consists of four operating segments that
produce the following products: proprietary chemicals for the treatment of
municipal drinking water systems and boiler and cooling tower systems;
cartridges and filter housings; filtration products for difficult industrial
air
and liquid applications; and filter systems using horizontal disc
technology. This other segment is comprised of the Keystone Filter,
Pristine Water Solutions, Mefiag and Mefiag B.V. 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 inter-company 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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Financial
information for the two reporting segments and one other segment is shown
below:
|
|
Nine
Months Ended
|
Three
Months Ended
|
|
|
October
31,
|
October
31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
sales
|
|
|
|
|
|
|
|
|
Product
recovery/pollution control technologies
|
$40,596,227
|
|
$35,083,198
|
|
$15,496,497
|
|
$12,991,946
|
|
Fluid
handling technologies
|
20,616,228
|
|
19,440,477
|
|
7,204,658
|
|
7,416,844
|
|
Filtration/purification
technologies
|
16,359,759
|
|
14,358,175
|
|
5,358,361
|
|
4,915,137
|
|
|
$77,572,214
|
|
$68,881,850
|
|
$28,059,516
|
|
$25,323,927
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
|
|
|
|
|
|
Product
recovery/pollution control technologies
|
$4,606,921
|
|
$3,140,233
|
|
$2,012,537
|
|
$1,734,161
|
|
Fluid
handling technologies
|
4,325,164
|
|
3,054,544
|
|
1,592,550
|
|
1,320,796
|
|
Filtration/purification
technologies
|
1,056,861
|
|
1,046,732
|
|
425,549
|
|
109,000
|
|
|
9,988,946
|
|
7,241,509
|
|
4,030,636
|
|
3,163,957
|
|
Gain
on sale of building
|
3,513,940
|
|
-
|
|
-
|
|
-
|
|
|
$13,502,886
|
|
$7,241,509
|
|
$4,030,636
|
|
$3,163,957
|
|
|
October
31,
|
|
January
31,
|
|
|
2007
|
|
2007
|
|
Identifiable
assets
|
|
|
|
|
Product
recovery/pollution control technologies
|
$37,407,259
|
|
$35,332,252
|
|
Fluid
handling technologies
|
22,206,857
|
|
21,667,719
|
|
Filtration/purification
technologies
|
20,806,083
|
|
20,514,339
|
|
|
80,420,199
|
|
77,514,310
|
|
Corporate
|
25,769,606
|
|
19,652,276
|
|
|
$106,189,805
|
|
$97,166,586
|
NOTE
14 – ACCOUNTANTS’ 10-Q REVIEW
Margolis
& Company P.C., the Company’s independent registered public accountants, has
performed a limited review of the financial information included herein. Their
report on such review accompanies this filing.
Item
2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
following discussion should be read in conjunction with, and is qualified in
its
entirety by, the Unaudited Consolidated Financial Statements and Notes thereto
included elsewhere in this Quarterly Report on Form 10-Q. This item contains
forward-looking statements that involve risks and uncertainties. Actual results
may differ materially from those indicated in such forward-looking statements.
Factors that may cause such a difference include, but are not limited to, those
discussed in “Item 1A: Risk Factors” of our Annual Report on Form 10-K for
the year ended January 31, 2007.
Results
of Operations:
The
following table sets forth, for the nine-month and three-month periods
indicated, certain financial information derived from the Company’s consolidated
statement of operations expressed as a percentage of net sales.
|
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
|
October
31,
|
|
October
31,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Net
sales
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
|
Cost
of goods sold
|
|
67.7%
|
|
69.6%
|
|
67.5%
|
|
67.2%
|
|
|
Gross
profit
|
|
32.3%
|
|
30.4%
|
|
32.5%
|
|
32.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
8.6%
|
|
9.1%
|
|
7.5%
|
|
9.1%
|
|
|
General
and administrative expenses
|
|
10.8%
|
|
10.7%
|
|
10.6%
|
|
11.3%
|
|
|
Gain
on sale of building
|
|
(4.5%
|
)
|
-
|
|
-
|
|
-
|
|
|
Income
from operations
|
|
17.4%
|
|
10.6%
|
|
14.4%
|
|
12.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(.3%
|
)
|
(.4%
|
)
|
(.3%
|
)
|
(.4%
|
)
|
|
Other
income, net
|
|
1.0%
|
|
1.1%
|
|
.8%
|
|
1.0%
|
|
|
Income
before taxes
|
|
18.1%
|
|
11.3%
|
|
14.9%
|
|
13.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for taxes
|
|
6.2%
|
|
3.7%
|
|
5.0%
|
|
4.5%
|
|
|
Net
income
|
|
11.9%
|
|
7.6%
|
|
9.9%
|
|
8.5%
|
|
Nine
Months Ended October 31, 2007 vs. Nine Months Ended October 31,
2006
Net
sales for the nine-month period ended October 31, 2007 were $77,572,214 compared
with $68,881,850 for the nine-month period ended October 31, 2006, an increase
of $8,690,364 or 12.6%. Sales in the Product Recovery/Pollution
Control Technologies reporting segment were $40,596,227, or $5,513,029 higher
than the $35,083,198 of sales for the nine-month period ended October 31, 2006,
an increase of 15.7%. The sales increase in the Product
Recovery/Pollution Control Technologies reporting segment was due primarily
to
increased demand for our air pollution control systems for the removal of
volatile organic compounds and other atmospheric pollutants, laboratory fume
hood exhaust systems, particulate collection equipment, as well as our odor
control equipment. Sales in the Fluid Handling Technologies reporting
segment totaled $20,616,228, or $1,175,751 higher than the $19,440,477 of sales
for the nine-month period ended October 31, 2006, an increase of
6.0%. The sales increase in the Fluid Handling Technologies reporting
segment was due primarily to increased demand for our centrifugal pumps that
handle a broad range of industrial applications. Sales in the
Filtration/Purification Technologies segment were $16,359,759, or $2,001,584
higher than the $14,358,175 of sales for the nine-month period ended October
31,
2006, an increase of 13.9%. This increase was due primarily to
increased demand for our horizontal disc filter systems which are utilized
in
the metal finishing and plating industry.
The
Company’s backlog of orders totaled $20,563,041 and $24,683,895 as of October
31, 2007 and 2006, respectively. Backlog for the Product
Recovery/Pollution Control Technologies reporting segment was $14,640,912 or
18.4% lower than the $17,934,844 backlog for the nine-month period ended October
31, 2006. The decrease in backlog in the Product Recovery/Pollution
Control Technologies reporting segment was primarily due to the timing of new
orders for larger odor
Item
2.
Management’s Discussion and
Analysis
of Financial Condition and Results of Operations
continued…
control
and particulate collection equipment projects. Backlog for the Fluid
Handling Technologies reporting segment was $3,935,673 or 22.8% lower than
the
$5,095,316 backlog for the nine-month period ended October 31,
2006. The decrease in backlog in the Fluid Handling Technologies
reporting segment was due primarily to the lack of any large orders equivalent
to the $1,700,000 order received during the second quarter of last fiscal year
for our fiberglass reinforced plastic centrifugal pumps. Backlog for
the Filtration/Purification Technologies segment was $1,986,456 or 20.1% higher
than the $1,653,735 backlog for the nine-month period ended October 31,
2006. The increase in backlog in the Filtration/Purification
Technologies segment was due primarily to increased demand for filter, cartridge
and filter housing products, as well as our horizontal disc filter
systems. The Company expects that substantially all of the backlog
existing as of October 31, 2007 will be shipped during the current fiscal
year.
Income
from operations for the nine-month period ended October 31, 2007 was $13,502,886
compared with $7,241,509 for the nine-month period ended October 31, 2006,
an
increase of $6,261,377, of which $3,513,940 was due to the sale during the
first
quarter ended April 30, 2007 of the Company’s property in Hauppauge, Long
Island, New York, consisting of a 30,000 square foot building situated on 4
acres. Excluding the gain on the sale of this New York property,
income from operations for the nine-month period ended October 31, 2007 was
$9,988,946, or 37.9% higher than the $7,241,509 for the nine-month period ended
October 31, 2006. For comparative purposes, the following income from
operations analysis by segment does not include the gain on the sale of the
New
York property.
Income
from operations in the Product Recovery/Pollution Control Technologies reporting
segment was $4,606,921, or $1,466,688 higher than the $3,140,233 for the
nine-month period ended October 31, 2006, an increase of 46.7%. The
increase in income from operations in the Product Recovery/Pollution Control
Technologies reporting segment was primarily related to increased net sales
and
higher gross margins for our laboratory fume hood exhaust systems, particulate
collection equipment and odor control equipment, as well as from higher sales
for our air pollution control systems for the removal of volatile organic
compounds and other atmospheric pollutants.
Income
from operations in the Fluid Handling Technologies reporting segment totaled
$4,325,164, or $1,270,620 higher than the $3,054,544 for the nine-month period
ended October 31, 2006, an increase of 41.6%. The increase in income
from operations in the Fluid Handling Technologies reporting segment was
principally related to increased net sales and higher gross margins for our
centrifugal pumps that handle a broad range of industrial
applications.
Income
from operations in the Filtration/Purification Technologies segment was
$1,056,861 or $10,129 higher than the $1,046,732 for the nine-month period
ended
October 31, 2006, an increase of 1.0%. Operating margins in this
other segment were adversely affected by lower gross margins for our horizontal
disc filter systems, offset by higher sales for our horizontal disc filter
systems and higher gross margins for our water treatment compounds.
Net
income for the nine-month period ended October 31, 2007 was $9,192,083 compared
with $5,188,951 for the nine-month period ended October 31, 2006, an increase
of
$4,003,132. This increase in net income was related to (i) a gain
during the first quarter ended April 30, 2007 on the sale of the New York
property, which increased net income by $2,213,782, (ii) higher sales volume
in
the two reporting segments and the one other segment and (iii) higher gross
margins in the Product Recovery/Pollution Control and Fluid Handling
Technologies reporting segments, which was offset by (iv) an increase in
selling, general and administrative expenses in the two reporting segments
and
the other segment amounting to $1,422,709.
The
gross margin for the nine-month period ended October 31, 2007 was 32.3% versus
30.4% for the same period in the prior year. This increase in gross
margin was due to higher gross margins in the Product Recovery/Pollution Control
Technologies and Fluid Handling Technologies reporting segments as a result
of
the implementation of certain strategic measures, including among other
measures, selected sales price increases and improved purchasing practices,
offset by a slight decrease in gross margins in the Filtration/Purification
Technologies segment.
Selling
expense increased $445,488 during the nine-month period ended October 31, 2007
compared with the same period last year. This increase was primarily
due to higher payroll and fringes relating to the expansion of the sales
organization for the Filtration/Purification Technologies
segment. Selling expense as a percentage of net sales was 8.6% for
the nine-month period ended October 31, 2007 compared with 9.1% for the same
period last year.
Item
2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations continued…
General
and administrative expense was $8,373,726 for the nine-month period ended
October 31, 2007 compared with $7,396,505 for the same period last year, an
increase of $977,221. This increase was primarily related to higher
executive and office payroll, healthcare expenses, management incentive
accruals, stock option expenses, legal expenses and personnel acquisition
expenses. General and administrative expense as a percentage of net
sales was 10.8% for the nine-month period ended October 31, 2007, compared
with
10.7% for the same period last year.
Interest
expense was $240,394 for the nine-month period ended October 31, 2007, compared
with $256,519 for the same period in the prior year, a decrease of
$16,125. This decrease was due principally to a reduction in
long-term debt.
Other
income, net, was $745,131 for the nine-month period ended October 31, 2007
compared with $759,712 for the same period in the prior year, a decrease of
$14,581. This decrease in other income, net, consisted primarily of
interest income, which was affected by fluctuations in the amount of cash on
hand during the nine-month period ended October 31, 2007.
The
effective tax rates for the nine-month periods ended October 31, 2007 and 2006
were 34.4% and 33.0%, respectively. The increase in the effective tax
rate to 34.4% was due to the additional tax expense related to the gain on
the
sale of the New York property, which increased the effective tax rate by 0.9%,
combined with the reduction in the tax benefit provided by the Extraterritorial
Income Exclusion (“EIE”).
On
August 2, 2007, the Company expended $3,157,113 to purchase a 45,000 sq. ft.
facility in suburban Chicago, Illinois to consolidate the operations of its
Flex-Kleen business unit, which currently leases office space in the Chicago
area and warehouse facilities in North Carolina. The purchase was
structured as part of an IRS Section 1031 tax-free exchange, in connection
with
the sale of the New York property. As a result, the Company recorded
a deferred income tax liability in the first quarter ended April 30, 2007,
to
record the income tax on the gain related to $3,157,113 of the $4,326,696 net
sales price of the New York property. The income tax on the
$1,169,583 balance of the gain is reflected in the current liability section
of
the consolidated balance sheet.
Three
Months Ended October 31, 2007 vs. Three Months Ended October 31,
2006
Net
sales for the three-month period ended October 31, 2007 were $28,059,516
compared with $25,323,927 for the three month-period ended October 31, 2006,
an
increase of $2,735,589 or 10.8%. Sales in the Product
Recovery/Pollution Control Technologies reporting segment were $15,496,497
compared with $12,991,946 for the three-month period ended October 31, 2006,
an
increase of $2,504,551 or 19.3%. The sales increase in the
Product Recovery/Pollution Control Technologies reporting segment was due
primarily to increased demand for our air pollution control systems for the
removal of volatile organic compounds and other atmospheric pollutants, as
well
as for our laboratory fume hood exhaust systems and odor control
equipment. Sales in the Fluid Handling Technologies reporting segment
were $7,204,658, compared with $7,416,844 for the three-month period ended
October 31, 2006, a decrease of $212,186 or 2.9%. The sales decrease
in the Fluid Handling Technologies reporting segment was due primarily to the
timing of shipments for our centrifugal pumps that handle a broad range of
applications. Sales in the Filtration/Purification Technologies
segment were $5,358,361 compared with $4,915,137 for the three-month period
ended October 31, 2006, an increase of $443,224 or 9.0%. The sales
increase in the Filtration/Purification Technologies segment was due primarily
to increased demand for our horizontal disc filter systems which are utilized
in
the metal finishing and plating industry.
Income
from operations for the three-month period ended October 31, 2007 was $4,030,636
compared with $3,163,957 for the three-month period ended October 31, 2006,
an
increase of $866,679 or 27.4%.
Income
from operations in the Product Recovery/Pollution Control Technologies reporting
segment was $2,012,537, or $278,376 higher than the $1,734,161 for the
three-month period ended October 31, 2006, an increase of 16.1% . The
increase in income from operations in the Product Recovery/Pollution Control
Technologies reporting segment was primarily related to increased sales and
higher gross margins for our laboratory fume hood exhaust systems and odor
control equipment.
Income
from operations in the Fluid Handling Technologies reporting segment totaled
$1,592,550, or $271,754 higher than the $1,320,796 for the three-month period
ended October 31, 2006, an increase of 20.6%. The increase in income
from operations in the Fluid Handling Technologies reporting segment was
principally related to higher gross margins for our centrifugal pumps that
handle a broad range of industrial applications.
Item
2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations continued…
Income
from operations in the Filtration/Purification Technologies segment was $425,549
or $316,549 higher than the $109,000 for the three-month period ended October
31, 2006. This increase was principally related to increased sales
and higher gross margins for our horizontal disc filter systems.
Net
income for the three-month period ended October 31, 2007 was $2,786,139 compared
with $2,172,818 for the three-month period ended October 31, 2006, an increase
of $613,321 or 28.2%. The increase in net income was related to (i)
higher sales volume in the Product Recovery/Pollution Control Technologies
reporting segment and the Filtration/Purification Technologies segment, and
(ii)
higher gross margins in the Fluid Handling Technologies reporting
segment.
The
gross margin for the three-month period ended October 31, 2007 was 32.5%
compared with 32.8% for the same period in the prior year. The slight
decrease in gross margin was due primarily to product mix within the Product
Recovery/Pollution Control Technologies reporting segment, specifically relating
to our air pollution control systems for the removal of volatile organic
compounds and other atmospheric pollutants, offset by higher gross margins
in
the Fluid Handling Technologies reporting segment.
Selling
expenses decreased $171,924 during the three-month period ended October 31,
2007
compared with the same period last year. As a percentage of net
sales, selling expenses were 7.5% for the three-month period ended October
31,
2007 compared to 9.1% for the three-month period ended October 31,
2006.
General
and administrative expense was $2,966,465 for the three-month period ended
October 31, 2007 compared with $2,856,574 for the three-month period ended
October 31, 2006, an increase of $109,891. This increase was
primarily related to higher executive and office payroll, management incentive
accruals, and stock option expenses. General and administrative
expense as a percentage of net sales was 10.6% for the nine-month period ended
October 31, 2007, compared with 11.3% of net sales for the same period last
year.
Interest
expense was $69,696 for the three-month period ended October 31, 2007 compared
with $109,205 for the same period in the prior year, a decrease of
$39,509. This decrease was due principally to a reduction in
long-term debt.
Other
income, net, was $228,738 for the three-month period ended October 31, 2007
compared with $254,461 for the same period in the prior year. This
change is related to lower interest income earned on cash on hand.
The
effective tax rates for the three-month periods ended October 31, 2007 and
2006
were 33.5% and 34.3%, respectively.
Liquidity:
The
Company’s cash and cash equivalents were $20,770,697 on October 31, 2007
compared with $17,322,194 on January 31, 2007, an increase of
$3,448,503. This increase is the net result of the positive cash
flows provided by operating activities of $6,290,077, the proceeds from the
sale
of property and equipment, principally the sale of the New York property,
amounting to $4,377,115 and the exercise of stock options amounting to
$1,081,835, offset by payment of the quarterly cash dividends amounting to
$2,274,699, payments on long-term debt totaling $1,119,526, the investment
in
property and equipment amounting to $4,200,072 (principally the purchase of
the
property in suburban Chicago, Illinois), and the purchase of treasury shares
totaling $630,516. The Company’s cash flows from operating activities
are 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 $22,639,155 on October 31, 2007 compared with
$20,837,589 on January 31, 2007, which represents an increase of
$1,801,566. 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.
Inventories
were $20,797,505 on October 31, 2007 compared with $19,296,279 on January 31,
2007, an increase of $1,501,226. This increase is primarily
attributable to inventory purchased during the nine-month period ended October
31, 2007 for projects which are expected to ship in the next six-month
period. Inventory balances fluctuate depending on market demand and
the timing and size of shipments, especially when major systems and contracts
are involved.
Item
2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
continued…
Current
liabilities amounted to $15,526,550 on October 31, 2007, compared with
$14,525,297 on January 31, 2007, an increase of $1,001,253. This
increase is due to an increase in accrued salaries, wages and expenses offset
by
a decrease in accounts payable and customers’ advance payments.
The
Company has consistently maintained a high current ratio and it and its
subsidiaries maintain domestic and foreign lines of credit totaling $5,000,000,
all of which are available for working capital purposes, except for $434,580
outstanding as of October 31, 2007 borrowed by the Company’s Mefiag B.V.
subsidiary to partially finance an expansion and renovation of its facility
located in The Netherlands. Cash flows, in general, have exceeded the
current needs of the Company. The Company presently foresees no
change in this situation in the immediate future. As of October 31,
2007 and January 31, 2007, working capital was $50,253,397 and $44,702,985,
respectively, and the current ratio was 4.2 and 4.1, respectively.
Capital
Resources and Requirements:
Cash
flows provided by operating activities during the nine-month period ended
October 31, 2007 amounted to $6,290,077 compared with $3,775,000 in the
nine-month period ended October 31, 2006, an increase of
$2,515,077. This increase in cash flows from operating activities was
due principally to increases in net income and deferred taxes, decreases in
accounts receivable, inventories and customers’ advances, offset by decreases in
accounts payable and accrued expenses.
Cash
flows provided by investing activities during the nine-month period ended
October 31, 2007 amounted to $177,043 compared with cash flows used in investing
activities of $4,200,159 for the nine-month period ended October 31, 2006,
an
increase of $4,377,202. The increase in cash from investing
activities is principally due to the sale of the New York property amounting
to
$4,326,696. On August 2, 2007, the Company expended $3,157,113 of
cash to purchase a property in suburban Chicago, Illinois to be occupied by
its
Flex-Kleen business unit, as part of a Section 1031 tax free exchange in
connection with the sale of the New York property.
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, 2007 utilized
$2,942,906 of available resources, compared with $1,249,806 provided during
the
nine-months ended October 31, 2006. The 2007 activity is the result
of the payments of the quarterly cash dividends amounting to $2,274,699, the
reduction of long-term debt totaling $1,119,526 and the purchase of treasury
shares amounting to $630,516, offset by the exercise of stock options amounting
to $1,081,835.
The
Board of Directors declared quarterly dividends of $.0506 payable on March
14,
2007, June 12, 2007 and September 10, 2007 to shareholders of record as of
February 28, 2007, May 29, 2007 and August 27, 2007, respectively, and a
quarterly dividend of $.0550 per share payable on December 10, 2007 to
shareholders of record as of November 26, 2007.
On
October 17, 2007, the Company’s Board of Directors approved the retirement of
900,000 treasury shares (pre-split shares) and returned them to the authorized
and unissued status. The transaction reduced Common Shares,
Additional Paid-in-Capital and Treasury Shares in the amounts of $90,000,
$6,462,000 and $6,552,000, respectively.
On
October 17, 2007, the Board of Directors declared a four-for-three stock split
which was paid on November 14, 2007 to shareholders of record on November 1,
2007.
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
of America. 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:
Item
2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
continued…
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 collectibility is reasonably
assured. The Securities and Exchange Commission’s Staff Accounting
Bulletin (“SAB”) No. 104, “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 generally accepted
accounting principles and SAB No. 104.
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.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets”, which supersedes Accounting Principles
Board (“APB”) Opinion No. 17, “Intangible Assets”, effective February 1, 2002,
the Company’s unamortized goodwill balance is being assessed, at least annually,
for impairment. The Company performs its annual impairment test for each
reporting unit using a fair value approach. The test for goodwill impairment
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 were based upon
market and industries outlooks, 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 applicable to the Company.
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. These assumptions include, among others, the discount rate
and 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:
Item
2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
continued…
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the
write-down of costs in excess of net assets of businesses acquired
(goodwill), as a result of the determination that the acquired business
is
impaired. Our Flex-Kleen business unit, 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, 2006 and 2005. During the
fiscal year ended January 31, 2007, 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. For the nine-month
period ended October 31, 2007, the annualized projection for net
sales and
operating profit for our Flex-Kleen business unit currently exceeds
the
projections used in our annual impairment model for the fiscal year
ended
January 31, 2008;
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materially
adverse changes in economic conditions in the markets served by us
or 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 insolvency of our insurance carriers, the imposition
of
punitive damages or other adverse developments in the availability
of
insurance 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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unexpected
results in our product development
activities;
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changes
in product mix and the cost of materials, with 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 litigation 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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failure
to properly quote and/or execute customer orders, including
misspecifications, design, engineering or production
errors;
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the
cancellation or delay of purchase orders or
shipments;
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losses
related to international sales;
and/or
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failure
in execution of acquisition
strategy.
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