MFRI (MFRI) Reports Third Quarter Sales Up 11.9% and Net Income Up Sharply From Corresponding Period Last Year

NILES, IL — (Marketwire) — 12/10/10 — MFRI, Inc. (NASDAQ: MFRI) announced today sales and earnings for the quarter and nine months ended October 31, 2010. Third quarter net sales increased 11.9% to $58.8 million, from $52.6 million in the corresponding quarter of the prior year; net income was $3.6 million or $0.52 per diluted share, compared to net income of $0.7 million or $0.10 per diluted share, in the prior-year’s quarter.

THIRD QUARTER:

SALES — Sales increased 11.9% to $58.8 million, from $52.6 million for the prior-year’s quarter. Sales increased in all reportable segments.

GROSS PROFIT — Gross profit for the quarter increased to $13.6 million or 23.0% of sales from $12.5 million or 23.8% of sales in the corresponding prior year’s quarter. Gross profit increased in all reportable segments.

EXPENSES — Operating expenses decreased to $10.5 million or 17.9% of sales from $10.7 million or 20.3% of sales in the prior year’s period. The decrease in expenses was primarily due to staffing reductions and expense control measures.

NET INCOME — Net income rose to $3.6 million or $0.52 per diluted share, compared to net income of $0.7 million or $0.10 per diluted share in the prior-year’s quarter, primarily due to the increase in sales and income from the joint venture. The annual effective income tax rate was less than the statutory U. S. federal income tax rate mainly due to the impact of income tax free earnings in the United Arab Emirates (“U.A.E.”).

YEAR-TO-DATE (NINE MONTHS):

SALES — Sales for the nine months ended October 31, 2010 were $170.6 million, 5.9% less than the $181.3 million for the prior-year’s first nine months. Year-to-date sales increased in the industrial process cooling and filtration products businesses while slightly decreasing (1.6%), in the piping systems business. The prior year’s period for the piping systems business included higher sales related to the India pipeline project, completed in the fall of 2009, and a stronger Dubai market. The heating, ventilating and air conditioning (“HVAC”) business, included in Corporate and Other, decreased in the current year, primarily because new construction activity was adversely affected by the soft economy.

GROSS PROFIT — Year-to-date gross profit decreased to $38.1 million or 22.3% of sales from $45.8 million or 25.3% in the prior year. Gross profit decline occurred in the piping systems business, due primarily to reduced volume in the U.A.E. and the completion of the large project in India, and in the HVAC business, due to the slowdown in local construction activity. The filtration products and industrial process cooling businesses each experienced an increase in their gross profit for the period. This increase in gross profit was primarily due to increased volume and margin and contributed towards reversing the operating losses of recent years for the continuing activities.

EXPENSES — Year-to-date operating expenses decreased to $32.4 million, or 19.0% of sales, in 2010 from $34.4 million, also 19.0% of sales, in the corresponding period in 2009, primarily due to lower profit-based management incentives, lower legal expenses, reduced costs in connection with staff reductions and an absence of foreign exchange losses, partially offset by an increase in deferred compensation expense and South African closing costs.

NET INCOME — Net income was $6.0 million or $0.87 diluted earnings per share, compared to $10.5 million or $1.53 diluted earnings per share in the prior-year period. This decrease was primarily due to the lower volume of the piping systems business related to reduced economic activity in the U.A.E., the completion of the India pipeline project in 2009, and sharply reduced profits from the HVAC activities because of the decline in construction activity in the Chicago area. The annual effective income tax rate was less than the statutory U. S. federal income tax rate mainly due to the impact of income tax free earnings in the U.A.E.

CURRENT STATUS:

BACKLOG — The Company’s backlog on October 31, 2010 was $75.1 million, an increase of 2.4% from January 31, 2010, principally the result of increased activity in the U.S. Much of this backlog is not expected to result in sales until the second or third quarter next year, postponing any profit realization on those contracts until after the first quarter of 2011.

PIPING SYSTEMS — In the fall of 2009, the Company completed its work insulating a 600 kilometer (370 mile) hot oil pipeline project in India. The Company received an additional order in January 2010, to insulate and jacket approximately 150 kilometers (93 miles) of additional pipe for the same project. Production of this material began in the second quarter of 2010 and was substantially completed by the end of the third quarter 2010. A poor economic climate, particularly in Dubai, has been a major cause of our decreased business activity in the Gulf Cooperation Council countries (“GCC”). Piping systems’ domestic sales and earnings are seasonal, typically higher during the second and third quarters due to favorable weather for construction over much of North America, and are correspondingly lower during the first and fourth quarters.

FILTRATION PRODUCTS — Industrial markets show some improvement, which was indicated by a 21.0% increase in net sales and a 35.6% increase in gross profit from the prior-year’s third quarter. The third quarter resulted in operating income of $120,000 compared to an operating loss of $889,000 in last year’s third quarter. Year-to-date sales rose 3.5%, and the operating loss was reduced by 69.4%. Excluding the South African operating losses and closing costs, the filtration products business year-to-date operating loss would have had a small operating profit. The Company intends to continue to invest in new product development and geographic expansion to improve its competitive position in this very challenging climate.

INDUSTRIAL PROCESS COOLING — Market conditions for industrial process cooling also show some signs of improvement. Net sales grew 1.5% for the quarter and 12.0% year-to-date versus last year. Gross profit grew 15.6% and the gross margin percentage improved 3.1 percentage points from last year’s third quarter. This improvement, coupled with expense control, resulted in a modest profit for the nine months. Quoting activity and recent orders show increased strength over the past several quarters, both domestically and internationally, but market conditions remain uncertain.

David Unger, CEO, commented, “Maintaining our diversified product mix and geographic view has helped mitigate some of the effects of a difficult economic climate. We believe market conditions will remain challenging for some time. We plan to continue to make strategic investments to facilitate growth for the long term. One example is our recently announced initiative to establish a pipe insulation facility in Saudi Arabia, to capture a greater share of the growing market in that country and nearby GCC.”

Brad Mautner, President and COO, said, “We are happy to report that the third quarter continued to deliver year-over-year operating profit improvement in both the industrial process cooling and filtration segments. The piping systems segment also showed modest operating profit growth even though margins were lower than the prior year’s quarter due to pricing pressures in the U.A.E., U.S. and ongoing development expenses for expansion into Saudi Arabia. The expected timing for work in the backlog coupled with the usual winter slow period for piping systems is anticipated to produce another difficult fourth quarter, but we expect results better than last year. Given a slowly improving U.S. business climate and a backlog with some large projects due for execution next year, 2011 shows promise for improvement compared to 2010.”

MFRI, Inc. is a multi-line company engaged in the following businesses: pre-insulated specialty piping systems for oil and gas gathering, district heating and cooling and other applications; custom-designed industrial filtration products to remove particulates from dry gas streams; industrial process cooling equipment to remove heat from molding, printing and other industrial processes; and installation of heating, ventilation and air conditioning for large buildings.

Form 10-Q for the period ended October 31, 2010 will be accessible at http://www.sec.gov/. For more information visit the Company’s website www.mfri.com or contact the Company directly.

Statements and other information contained in this announcement which can be identified by the use of forward-looking terminology such as “anticipate,” “may,” “will,” “expect,” “continue,” “remain,” “intend,” “aim,” “should,” “prospects,” “could,”” position,” “future,” “potential,” “believes,” “plans,” “likely,” ” seems,” “promise,” and “probable,” or the negative thereof or other variations thereon or comparable terminology, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 as amended and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company’s operations and business environment. Such risks and uncertainties include, but are not limited to, economic conditions, market demand and pricing, competitive and cost factors, raw material availability and prices, global interest rates, currency exchange rates, labor relations and other risk factors.

MFRI, INC. AND SUBSIDIARIES
Condensed Statements of Operations and Related Data (Unaudited)

                                    Three Months Ended   Nine Months Ended
(In 000's except per share data)        October 31,         October 31,
Operating Statement Information       2010      2009      2010      2009
                                    --------  --------  --------  --------
Net sales
  Piping Systems                    $ 31,073  $ 25,704  $ 89,449  $ 90,887
  Filtration Products                 21,159    17,481    61,318    59,221
  Industrial Process Cooling           6,022     5,934    18,529    16,550
  Corporate and Other                    583     3,467     1,278    14,613
                                    --------  --------  --------  --------
    Total                             58,837    52,586   170,574   181,271
                                    --------  --------  --------  --------
Gross profit
  Piping Systems                       9,181     8,506    25,451    33,963
  Filtration Products                  2,912     2,147     7,990     6,007
  Industrial Process Cooling           1,498     1,296     4,899     3,799
  Corporate and Other                    (36)      541      (290)    2,077
                                    --------  --------  --------  --------
    Total                             13,555    12,490    38,050    45,846
                                    --------  --------  --------  --------
Income (loss) from operations
  Piping Systems                       5,601     5,398    14,524    22,214
  Filtration Products                    120      (889)     (913)   (2,984)
  Industrial Process Cooling             (53)     (471)      128    (1,254)
  Corporate and Other                 (2,650)   (2,227)   (8,058)   (6,511)
                                    --------  --------  --------  --------
    Total                              3,018     1,811     5,681    11,465

Income (loss) from joint venture         695        40       574       (66)

Interest expense, net                    371       371     1,060     1,589

                                    --------  --------  --------  --------
Income before income taxes             3,342     1,480     5,195     9,810

Income tax benefit                      (223)      785      (768)     (642)

                                    --------  --------  --------  --------
Net income                          $  3,565  $    695  $  5,963  $ 10,452
                                    ========  ========  ========  ========

Weighted average common shares
 outstanding
Basic                                  6,842     6,826     6,839     6,820
Diluted                                6,842     6,856     6,865     6,852

Earnings per share:
Basic                               $   0.52  $   0.10  $   0.87  $   1.53
Diluted                                 0.52      0.10      0.87      1.53

                                                    October 31, January 31,
Backlog:                                               2010        2010
                                                    ----------- -----------
Piping Systems                                      $    39,678 $    48,770
Filtration Products                                      20,027      21,397
Industrial Process Cooling                                4,306       2,377
Corporate and Other                                      11,089         788
                                                    ----------- -----------
    Total                                           $    75,100 $    73,332
                                                    =========== ===========

See the Company’s Form 10-Q for the period for notes to financial statements.