10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended October 31, 2012

Commission File No. 0-18370

MFRI, Inc.

(Exact name of registrant as specified in its charter)

Delaware	36-3922969
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7720 N. Lehigh Avenue, Niles, Illinois	60714
(Address of principal executive offices)	(Zip Code)

(847) 966-1000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

On December 4, 2012, there were 6,923,996 shares of the registrant's common stock outstanding.

MFRI, Inc.

FORM 10-Q

For the fiscal quarter ended October 31, 2012

TABLE OF CONTENTS

Item		Page
Part I	Financial Information
1.	Financial Statements
	Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2012 and 2011	1
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended October 31, 2012 and 2011	2
	Consolidated Balance Sheets as of October 31, 2012 and January 31, 2012	3
	Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2012 and 2011	4
	Notes to Consolidated Financial Statements	5
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
4.	Controls and Procedures	14
Part II	Other Information
6.	Exhibits	15
Signatures		16

PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements

MFRI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share information)

	Three Months Ended October 31,				Nine Months Ended October 31,
	2012		2011		2012			2011
Net sales		$58,325		$71,330		$163,314			$188,721
Cost of sales	46,879		58,898		132,834			157,263
Gross profit	11,446		12,432		30,480			31,458
Operating expenses
General and administrative expenses	6,925		6,457		20,886			19,464
Selling expenses	3,840		3,743		11,303			11,318
Total operating expenses	10,765		10,200		32,189			30,782
Income (loss) from operations	681		2,232		(1,709		)	676
Income from joint venture	531		683		354			584
Interest expense, net	594		395		1,385			1,014
Income (loss) before income taxes	618		2,520		(2,740		)	246
Income tax expense	163		1,834		218			2,889
Net income (loss)		$455		$686		($2,958	)		($2,643	)
Weighted average number of common shares outstanding
Basic and diluted	6,924		6,881		6,921			6,866
Earnings (loss) per share
Basic and diluted		$0.07		$0.10		($0.43	)		($0.38	)

See accompanying notes to consolidated financial statements.

1

MFRI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In thousands)

	Three Months Ended October 31,					Nine Months Ended October 31,
	2012		2011			2012			2011
Net income (loss)		$455		$686			($2,958	)		($2,643	)
Other comprehensive income (loss)
Currency translation adjustments	328		(741		)	(505		)	(260		)
Interest rate swap, net of tax	33		5			15			122
Other comprehensive income (loss)	361		(736		)	(490		)	(138		)
Comprehensive income (loss)		$816		($50	)		($3,448	)		($2,781	)

See accompanying notes to consolidated financial statements.

2

MFRI, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands except per share data)	October 31, 2012			January 31, 2012
ASSETS	Unaudited
Current assets
Cash and cash equivalents		$5,591			$4,209
Restricted cash	1,498			1,854
Trade accounts receivable, less allowance for doubtful accounts of $363 at October 31, 2012 and $235 at January 31, 2012	34,351			28,109
Inventories, net	38,753			40,204
Prepaid expenses and other current assets	4,196			3,973
Deferred tax assets - current	2,271			1,946
Costs and estimated earnings in excess of billings on uncompleted contracts	1,828			2,375
Income tax receivable	120			—
Total current assets	88,608			82,670
Property, plant and equipment, net of accumulated depreciation	48,544			47,842
Other assets
Deferred tax assets - long-term	10,250			10,967
Note receivable from joint venture	5,187			4,195
Investment in joint venture	4,990			4,636
Cash surrender value of deferred compensation plan	2,903			2,782
Other assets	2,384			3,860
Patents, net of accumulated amortization	361			331
Total other assets	26,075			26,771
Total assets		$163,227			$157,283
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable		$18,605			$20,020
Accrued compensation and payroll taxes	4,663			4,571
Commissions and management incentives payable	4,016			4,722
Current maturities of long-term debt	7,956			2,736
Customers' deposits	4,297			2,432
Billings in excess of costs and estimated earnings on uncompleted contracts	1,200			1,978
Other accrued liabilities	2,926			2,610
Income taxes payable	—			417
Total current liabilities	43,663			39,486
Long-term liabilities
Long-term debt, less current maturities	39,487			34,682
Deferred compensation liabilities	5,506			5,686
Other long-term liabilities	5,249			5,074
Total long-term liabilities	50,242			45,442
Stockholders' equity
Common stock, $.01 par value, authorized 50,000 shares; 6,924 issued and outstanding at October 31, 2012 and 6,913 issued and outstanding at January 31, 2012	69			69
Additional paid-in capital	50,243			49,828
Retained earnings	20,080			23,038
Accumulated other comprehensive loss	(1,070		)	(580		)
Total stockholders' equity	69,322			72,355
Total liabilities and stockholders' equity		$163,227			$157,283

See accompanying notes to consolidated financial statements.

3

MFRI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended October 31,
(In thousands)	2012			2011
Operating activities
Net loss		($2,958	)		($2,643	)
Adjustments to reconcile net loss to net cash flows used in operating activities
Depreciation and amortization	4,373			4,290
Deferred tax expense	353			2,148
Stock-based compensation expense	366			470
Income from joint venture	(354		)	(584		)
Cash surrender value of deferred compensation plan	(121		)	133
Loss on disposals of fixed assets	57			118
Changes in operating assets and liabilities
Accounts receivable, net	(6,383		)	(8,874		)
Inventories	1,302			(3,543		)
Costs and estimated earnings in excess of billings on uncompleted contracts	(231		)	54
Accounts payable	(522		)	2,936
Accrued compensation and payroll taxes	(592		)	(1,109		)
Customers' deposits	1,870			(510		)
Income taxes receivable and payable	(539		)	(327		)
Prepaid expenses and other current assets	64			228
Other assets and liabilities	1,693			(2,025		)
Net cash used in operating activities	(1,622		)	(9,238		)
Investing activities
Additions to property, plant and equipment	(5,316		)	(7,228		)
Loan to joint venture	(989		)	—
Proceeds from sales of property and equipment	94			16
Net cash used in investing activities	(6,211		)	(7,212		)
Financing activities
Borrowings	157,554			152,608
Repayment of debt	(147,112		)	(146,463		)
Decrease in drafts payable	(789		)	(694		)
Payments on capitalized lease obligations	(432		)	(243		)
Stock options exercised	35			164
Tax benefit of stock options exercised	15			64
Net cash provided by financing activities	9,271			5,436
Effect of exchange rate changes on cash and cash equivalents	(56		)	(38		)
Net increase (decrease) in cash and cash equivalents	1,382			(11,052		)
Cash and cash equivalents - beginning of period	4,209			16,718
Cash and cash equivalents - end of period		$5,591			$5,666
Supplemental cash flow information
Interest paid		$1,718			$1,172
Income taxes paid	133			430

See accompanying notes to consolidated financial statements.

4

MFRI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

OCTOBER 31, 2012

(Tabular amounts presented in thousands, except per share amounts)

1. Basis of presentation. The interim consolidated financial statements of MFRI, Inc. and subsidiaries (the "Company") are unaudited, but include all adjustments, which the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2012 is derived from the audited consolidated balance sheet as of that date. The results of operations for any interim period are not necessarily indicative of future or annual results. Interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K/A. The Company's fiscal year ends on January 31. Years and balances described as 2012 and 2011 are for the nine months ended October 31,2012 and 2011, respectively.

2. Business segment reporting. The Company has three reportable segments. Piping systems engineers, designs, manufactures and sells specialty piping and leak detection and location systems. Filtration products manufactures and sells a wide variety of filter elements for air filtration and particulate collection. Industrial process cooling engineers, designs, manufactures and sells chillers, cooling towers, plant circulating systems and accessories for industrial process applications. Included in corporate and other activity is a subsidiary which engages in the installation of heating, ventilation and air conditioning systems ("HVAC"), but which is not sufficiently large to constitute a reportable segment.

	Three Months Ended October 31,						Nine Months Ended October 31,
	2012			2011			2012			2011
Net sales
Piping Systems		$26,498			$35,371			$69,147			$80,737
Filtration Products	20,738			24,000			62,990			74,122
Industrial Process Cooling	9,199			8,948			27,225			24,334
Corporate and Other	1,890			3,011			3,952			9,528
Total		$58,325			$71,330			$163,314			$188,721
Gross profit
Piping Systems		$6,060			$6,222			$14,327			$13,666
Filtration Products	2,616			3,409			8,280			10,258
Industrial Process Cooling	2,617			2,486			7,586			6,657
Corporate and Other	153			315			287			877
Total		$11,446			$12,432			$30,480			$31,458
Income (loss) from operations
Piping Systems		$2,585			$3,026			$4,183			$3,730
Filtration Products	(410		)	315			(506		)	1,341
Industrial Process Cooling	526			517			1,403			1,014
Corporate and Other	(2,020		)	(1,626		)	(6,789		)	(5,409		)
Total		$681			$2,232			($1,709	)		$676
Income (loss) before income taxes
Piping Systems		$3,116			$3,709			$4,537			$4,314
Filtration Products	(410		)	315			(506		)	1,341
Industrial Process Cooling	526			517			1,403			1,014
Corporate and Other	(2,614		)	(2,021		)	(8,174		)	(6,423		)
Total		$618			$2,520			($2,740	)		$246

5

3. Income taxes. Each quarter, the Company estimates the annual effective income tax rate ("ETR") for the full year and applies that rate to the income (loss) before income taxes in determining its provision for income taxes for the interim periods. The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Income earned in the United Arab Emirates ("U.A.E.") is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.

The Company's consolidated ETR was (8)% and 1,174% for the nine months ended October 31,2012 and 2011, respectively. The October 31, 2012 computation of the ETR was affected primarily by the change in the mix of the projected tax-free earnings in the U.A.E. versus total projected earnings. In May 2012, the Company was granted an extension of time to file a tax election from the IRS Commissioner, which allowed the Company to file amended income tax returns to carry back approximately $3.3 million of net operating losses ("NOL"). As a result of the increase in NOL utilization, approximately $0.7 million of research and development tax credits, which the Company established a liability for unrecognized tax benefits, were released back to the Company for future use. Accordingly, the Company recorded an increase to the liability for unrecognized tax benefits of $220 thousand discretely during the second quarter. The 2011 computation of the projected annual tax rate had been significantly impacted by the loss in the U.A.E. for which no tax benefit was provided. In July 2011, the Company recorded a one-time $1.8 million tax expense associated with the $3.1 million repatriation of foreign earnings. These foreign earnings were previously considered to be indefinitely reinvested outside the U.S. The Company does not believe that it will be necessary to repatriate cash held outside of the U.S.

The Company periodically reviews the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates and may make further adjustments based on management's outlook for continued profits in each jurisdiction.

The Company files income tax returns in U.S. federal and state jurisdictions. As of October 31, 2012, open tax years in federal and some state jurisdictions date back to January 31, 2009. In addition, federal and state tax years January 31, 2002 through January 31, 2008 are subject to adjustment on audit, up to the amount of research tax credit generated in those years. As of October 31, 2012, the Company had NOL carryforwards of $7.8 million expiring in various years beginning in January 31, 2030. Additionally, the Company files income tax returns in Denmark, India and Saudi Arabia. As of October 31, 2012, open tax years in foreign jurisdictions vary from three to seven years from the date of filing the income tax returns.

4. Pension plan. The Winchester filtration hourly rated employees are covered by a defined benefit plan. The major categories of the pension plan's investments remained the same.

Level 1 market value of plan assets	October 31, 2012		January 31, 2012
Equity securities		$3,175		$3,018
U.S. bond market	2,141		1,968
High-quality inflation-indexed bonds issued by the U.S. Treasury and government agencies as well as domestic corporations	281		268
Real estate	118		110
Subtotal	5,715		5,364
Level 2 significant other observable inputs
Money market fund	252		138
Total		$5,967		$5,502

6

	Three Months Ended October 31,						Nine Months Ended October 31,
Components of net periodic benefit costs	2012			2011			2012			2011
Service cost		$43			$31			$128			$94
Interest cost	75			79			224			235
Expected return on plan assets	(111		)	(101		)	(333		)	(304		)
Amortization of prior service cost	12			31			37			95
Recognized actuarial loss	43			16			130			47
Net periodic benefit costs		$62			$56			$186			$167

For the nine months ended October 31,2012, contributions of $292 thousand were made.

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

	Three Months Ended October 31,		Nine Months Ended October 31,
	2012	2011	2012	2011
Stock-based compensation expense	$106	$173	$366	$470

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

	Nine Months Ended October 31,
Fair value assumptions	2012	2011
Expected volatility	58.12% - 66.82%	51.72% - 66.82%
Risk free interest rate	.74% - 2.82%	1.54% - 5.13%
Dividend yield	none	none
Expected life	4.9 - 5.7 years	4.9 - 5.7 years

Option activity	Options	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding on February 1, 2012	843		$11.48	6.9		$430
Granted	158	6.88
Exercised	(11)	3.11			46
Expired or forfeited	(33)	10.47
Outstanding end of period	957	10.85		6.8	34
Exercisable end of period	580		$13.39	5.5		$34
Weighted-average fair value of options granted 2012			$6.88

7

Unvested option activity	Unvested Options Outstanding	Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding on February 1, 2012	373		$7.84		$212
Granted	158	6.88
Vested	(144)
Expired or forfeited	(10)	7.07
Outstanding end of period	377		$6.96		$—

As of October 31, 2012, there was $1 million of total unrecognized compensation expense related to unvested stock options. The expense is expected to be recognized over a period of 2.7 years.

6. Earnings per share.

	Three Months Ended October 31,		Nine Months Ended October 31,
	2012	2011	2012	2011
Basic weighted average number of common shares outstanding	6,924	6,881	6,921	6,866
Dilutive effect of stock options	—	—	—	—
Weighted average number of common shares outstanding assuming full dilution	6,924	6,881	6,921	6,866
Stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares	785	311	494	311
Stock options with an exercise price below the average market price	172	547	463	547

7. Other assets. The $1.5 million decrease in other assets related to deposits applied to the purchase of fixed assets by the new facility in Saudi Arabia.

	October 31, 2012		January 31, 2012
Other assets		$2,384		$3,860

8. Interest expense, net.

	Three Months Ended October 31,						Nine Months Ended October 31,
	2012			2011			2012			2011
Interest expense		$673			$584			$1,757			$1,655
Interest income	(79		)	(189		)	(372		)	(641		)
Interest expense, net		$594			$395			$1,385			$1,014

9. Debt. On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan Agreement"). Under the terms of the Loan Agreement as amended, which matures on November 30, 2013, the Company can borrow up to $38 million, subject to borrowing base and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, investments, do not permit payment of dividends and require attainment of levels of profitability and cash flows. At October 31, 2012, the Company was in compliance with all covenants under the Loan Agreement. Interest rates are based on options selected by the Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At October 31, 2012, the prime rate was 3.25% and the margins added to the prime rate and the LIBOR rate, which are determined each quarter

8

based on the applicable financial statement ratio, were 0.50 and 2.75 percentage points, respectively. Monthly interest payments were made during the nine months ended October 31,2012 and 2011. As of October 31, 2012, the Company had borrowed $17.8 million and had $8.7 million available to it under the revolving line of credit. In addition, $0.3 million of availability was used under the Loan Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. The Loan Agreement provides that all domestic receipts are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At October 31, 2012, the amount of such restricted cash was $0.9 million. Cash required for operations is provided by draw downs on the line of credit.

On April 10, 2012, the Company obtained a loan from a U.A.E. bank to purchase equipment and office furniture for a building for the piping system's facility in Saudi Arabia, in the amount of 22.2 million Dirhams, approximately $5.9 million U.S. dollars at the exchange rate prevailing on the transaction date. The loan bears interest at 5.5% with monthly payments of $97 thousand for both principal and interest and matures April 2017.

On June 19, 2012, Perma-Pipe, Inc. borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at 4.5% with monthly payments of $13 thousand for both principal and interest and matures July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate provided the applicable interest rate shall not adjust more than 2% per annum, and shall be subject to ceiling of 18% and a floor of 4.5%.

10. Fair value of financial instruments. At October 31, 2012, interest rate swap agreements were in effect with a notional value of $9 million that matures November 30, 2013 and a value of $1.3 million that matures December 2021 . The swap agreements, which reduce the exposure to market risks from changing interest rates, exchanges the variable rate to fixed interest rate payments of 2.23% plus LIBOR margin and 2.47%, respectively. The exchange-traded swaps are valued on a recurring basis using quoted market prices and were classified within Level 2 of the fair value hierarchy because the exchange is not deemed to be an active market. The derivative mark to market of $275 thousand was classified as a long-term liability on the balance sheet.

11. Recent accounting pronouncements. The Company evaluated recent accounting pronouncements and do not expect them to have a material impact on the consolidated financial statements.

Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")

The statements contained under the caption MD&A and other information contained elsewhere in this quarterly report, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely" and "probable" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including but not limited to those under the heading Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K/A.

RESULTS OF OPERATIONS

Consolidated MFRI, Inc.

MFRI, Inc. ("MFRI", the "Company" or the "Registrant") is engaged in the manufacture and sale of products in three reportable segments: piping systems, filtration products and industrial process cooling. The Company website is www.mfri.com.

9

In the latest recession, the economy experienced a severe and prolonged downturn which adversely impacted all of the Company's businesses, directly or indirectly. Although improvement is expected, the timing of economic recovery in the markets we serve remains uncertain. Because economic and market conditions vary within the Company's segments, the Company's future performance by segment will vary. Should current economic conditions continue, or a further downturn occur in one or more of our significant markets, the Company could experience a period of declining net sales, which could adversely impact the Company's results of operations.

This discussion should be read in conjunction with the consolidated financial statements, including the notes thereto, contained elsewhere in this report. An overview of the segment results is provided in "Notes to Consolidated Financial Statements, Note 2 Business segment reporting" contained in Item 1 of this report.

Three months endedOctober 31, 2012 ("current quarter") vs. Three months endedOctober 31, 2011 ("prior-year quarter")

Net sales decreased18% to $58 million in the current quarter from $71 million in the prior-year quarter. Piping systems sales decreased$8.9 million in the quarter driven by a decline in U.S. sales partially offset by an increase in sales in the Middle East. Filtration products decreased by $3.3 million due primarily to reduced demand for fabric filters.

Gross profit was $11.4 million in the current quarter down from $12.4 million in the prior-year quarter mainly due to the sales decrease in filtration products. Even with 18% less sales than the prior year quarter, gross margin increased2percentage points from 17.4% to 19.6%. Higher volume for both piping systems delivered by the U.A.E. facility and industrial process cooling led to the increased margin result. In response to lower demand for fabric filters and domestic piping systems, staff was reduced to match market needs. In addition, the filtration group has replaced some key management, increased marketing activities to drive sales growth and is actively sourcing lower cost but high quality materials to improve margins.

Operating expenses increased6% to $10.8 million in the current quarter from $10.2 million in the prior-year quarter. This increase was due to start-up costs of $209 thousand for the Saudi Arabia facility, $170 thousand higher non-cash deferred compensation expense, $97 thousand for audit, tax consulting and other professional service expenses and one-time domestic severance payments partially offset by a reduction in stock-based compensation expense.

Third quarter produced net income of $0.5 million compared to net income of $0.7 million in the comparable prior-year's quarter.

Nine months endedOctober 31, 2012 (“YTD”) vs. Nine months endedOctober 31, 2011(“prior-year YTD”)

YTD net sales of $163.3 milliondecreased13.5% from $188.7 million in the prior-year YTD. Piping systems sales decreased$11.6 million driven by a decline in U.S. sales in the second and third quarters partially offset by an increase in sales in the Middle East. Reduced market demand for fabric filters led to a decreased$11.1 million in filtration products. Corporate and other decreased by $5.6 million partly due to customer decisions to extend project completion dates. Industrial process cooling sales increased$2.9 million as order intake continued to improve.

Despite the decrease in sales, gross margin improved by 2percentage points to 19% of net sales YTD from 17% of net sales in the prior-year YTD. Gross profit increased significantly in piping systems due to higher volume delivered by the U.A.E. facility and strong sales in industrial process cooling while filtration products gross profit decreased due to lower demand.

General and administrative expenses increased 7% to $20.9 million YTD from $19.5 million in the prior-year YTD. The increase was due to start-up costs of $0.8 million for the Saudi Arabia facility, $0.6 million for audit, tax

10

consulting and other professional service expenses, higher non-cash deferred compensation expense partially offset by a reduction in stock-based compensation expense.

In July 2011, the Company recorded $1.8 million in tax expense associated with the $3.1 million repatriation of foreign earnings. These foreign earnings were previously considered to be indefinitely reinvested outside the United States. The repatriation was a one-time nonrecurring event. This tax expense included a payment of $0.5 million to the foreign tax authority and an accrual of $1.3 million U.S. tax on foreign source income. No cash was paid for this tax in the U.S. since the Company has a net operating loss carryforward.

Net loss was $3 million in 2012 compared to a net loss of $2.6 million in the comparable prior-year's period.

Piping Systems

Current quarter vs. prior-year quarter

The manufacturing facility in Dammam, Saudi Arabia opened in April 2012. Expenses aggregating $1.8 million for the third quarter relating to this start-up facility were recorded to cost of goods sold, general and administrative and selling expenses.

Net sales decreased 25% to $26.5 million in the current quarter from $35.4 million in the prior-year quarter, attributed to a decrease in sales of domestic district heating and cooling products ("DHC") and the prior-year quarter included large domestic oil and gas projects. In 2011, the oil and gas projects were underway for all of the third quarter whereas in 2012, they began later in the third quarter. Sales increased in the U.A.E.

Gross margin increased to 23% of net sales in the current quarter from 18% of net sales in the prior-year quarter. Gross profit increased due to higher volume produced at the U.A.E. facility.

Operating expenses increased by $0.3 million in the current quarter, which included one-time domestic severance payments and start-up costs for the Saudi Arabia facility.

YTD vs. prior-year YTD

YTD net sales of $69 million declined 14% from $80.7 million in the prior-year YTD attributed to a decrease in sales of DHC and the prior year included a difference in timing of large domestic oil and gas projects. In 2011, the oil and gas projects were underway for all of the third quarter whereas in 2012, they began later in the third quarter.

Gross margin rose to 21% of net sales YTD from 17% of net sales in the prior year. Gross profit increased due to higher volume produced at the U.A.E. facility. Additionally, in the first quarter, domestic DHC had increased sales and improved margins due to product mix.

General and administrative expenses increased to $7.3 million or 11% of net sales YTD from $6.8 million or 8% of net sales for the prior-year YTD, which is related to operational start-up costs for the Saudi Arabia facility.

Selling expenses decreased to $2.8 million or 4% of net sales YTD from $3.1 million or 4% of net sales for the prior-year YTD. This decrease was due to decreased commission expense due to lower sales.

Filtration Products

Current quarter vs. prior-year quarter

Net sales decreased14% to $20.7 million from $24 million in the prior-year quarter. Sales declines were the result of lower market demand across most filtration products. Gross profit decreased24% to $2.6 million from $3.4 million due to lower sales volume and extremely competitive market conditions. In response to lower demand for fabric filters, the Company has reduced staff to better match market needs. In addition, management has increased

11

marketing activities and taken other actions to drive sales growth and improve margins. Operating expenses remained level during the period.

YTD vs. prior-year YTD

YTD net sales decreased15% to $63 million from $74 million in the prior-year period. Sales declines were the result of lower market demand across most filtration products. YTD gross profit decreased20% to $8 million from $10 million in the prior-year period due to lower sales volume and gross margin decreased from 14% to 13%. Operating expenses remained level during the period.

Industrial Process Cooling

Current quarter vs. prior-year quarter

Net sales increased3% to $9.2 million in the current quarter from $8.9 million in the prior-year quarter due to improving business conditions in the North American plastic and industrial market sectors. Gross margin increased to 28.4% from 27.8%. Operating expenses increased slightly in the current quarter.

YTD vs. prior-year YTD

YTD net sales of $27.2 millionincreased12% from $24.3 million in the prior-year six months due to improving business conditions in the North American plastic and industrial market sectors. Gross margin increased to 27.9% from 27.4%.

General and administrative expenses increased YTD to $2.9 million from $2.6 million in the prior-year period. The change in spending was a result of additional staffing, professional costs and increased management incentive compensation expense related to improved performance partially offset by lower legal costs. General and administrative expense as a percentage of net sales was level. YTD selling expenses increased to $3.3 million from $3.0 million in the prior-year period driven by additional sales that led to higher commission expense, increased staffing after the 2011 first quarter and additional advertising expenses.

Corporate and Other

Current quarter vs. prior-year quarter

Net sales of $1.9 million in the current quarter decreased from $3 million in the prior-year quarter. Sales volume is lower than the same quarter last year.

Corporate expenses include interest expense and general and administrative expenses that are not allocated to the segments. General and administrative expenses increased to $2.2 million or 4% of consolidated net sales in the current quarter from $1.9 million or 3% of consolidated net sales in the prior-year quarter. This increase was due to $170 thousand higher deferred compensation expense, $97 thousand for audit, tax consulting and other professional service expenses partially offset by a reduction in stock-based compensation expense.

Net interest expense increased to $594 thousand in the current quarter from $395 thousand in the prior-year quarter, due to less interest income earned overseas by piping systems as this cash was primarily deployed for the Saudi Arabia facility .

YTD vs. prior-year YTD

YTD net sales of $4 milliondecreased from $9.5 million in the prior-year YTD partly due to customer decisions to extend project completion dates.

General and administrative expenses increased to $7.1 million or 4% of consolidated net sales YTD from $6.3 million or 3% of consolidated net sales in the prior-year YTD. This increase was due to $0.6 million for audit, tax

12

consulting and other professional service expenses, $149 thousand higher deferred compensation expense partially offset by a reduction in stock-based compensation expense.

YTD net interest expense increased to $1.4 million from $1 million in the prior-year YTD primarily due to less interest income earned overseas by piping systems as this cash was primarily deployed for the Saudi Arabia facility

INCOME TAXES

The Company's consolidated ETR was (8)% for the nine months ended October 31,2012, which was affected primarily by the change in the mix of the projected tax-free earnings in the U.A.E. versus total projected earnings and losses. For additional information, see "Notes to Consolidated Financial Statements, Note 3 Income taxes".

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents as of October 31, 2012 were $5.6 million compared to $4.2 million at January 31, 2012. Cash and cash equivalents were primarily held at the foreign subsidiaries. The Company's working capital was $45 million at October 31, 2012 compared to $43 million at January 31, 2012. Net cash used in operating activities during the first nine months of 2012 was $1.6 million compared to $9.2 million during the first nine months of 2011. The Company does not believe that it will be necessary to repatriate cash held outside of the U.S.

Net cash used in investing activities for the nine months ended October 31, 2012 included $5.3 million for capital expenditures, primarily for machinery and equipment in piping systems of which $2.2 million was related to the new plant in Saudi Arabia. In February 2012, the Company loaned $1 million to its Canadian joint venture to be used mainly for capital expenditures.

Debt totaled $47.4 million at October 31, 2012, a net increase of $10 million compared to the beginning of the current fiscal year. For additional information, see "Notes to Consolidated Financial Statements, Note 9 Debt". Net cash provided by financing activities was $9.3 million.

On July 11, 2002, the Company entered into the Loan Agreement. Under the terms of the Loan Agreement as amended, which matures on November 30, 2013, the Company can borrow up to $38 million, subject to borrowing base and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, investments, do not permit payment of dividends and require attainment of levels of profitability and cash flows. At October 31, 2012, the Company was in compliance with all covenants under the Loan Agreement. Interest rates are based on options selected by the Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At October 31, 2012, the prime rate was 3.25% and the margins added to the prime rate and the LIBOR rate, which are determined each quarter based on the applicable financial statement ratio, were 0.50 and 2.75 percentage points, respectively. Monthly interest payments were made during the Nine months endedOctober 31, 2012 and 2011. As of October 31, 2012, the Company had borrowed $17.8 million and had $8.7 million available to it under the revolving line of credit. In addition, $0.3 million of availability was used under the Loan Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. The Loan Agreement provides that all domestic receipts are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At October 31, 2012, the amount of such restricted cash was $0.9 million. Cash required for operations is provided by draw downs on the line of credit.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended January 31, 2012 contained on Form 10-K/A. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the

13

Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments and different amounts could be reported using different assumptions and estimates.

Item 4.Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of October 31, 2012. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of October 31, 2012 to ensure that information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and is accumulated and communicated to the issuer's management, including the principal executive and financial officers, to allow timely decisions regarding required disclosure.

Changes in Internal Controls: There was a material weakness in internal control described in Item 9A of the Company's January 31, 2012 10-K/A filed on May 9, 2012. The Company's processes, procedures and controls related to the preparation, review and filing of its Annual Report on Form 10-K ("10-K") were not deemed effective at January 31, 2012 to ensure that its Independent Registered Public Accounting Firm ("Auditors") had completed its audit work and signed its Report and Consent prior to filing the 10-K. This material weakness did not result in any material adjustments to the Registrant's financial statements, notes thereto, or other disclosures in the 10-K.

In addition, the Company's processes, procedures and controls related to the preparation, review and filing of its Quarterly Report on Form 10-Q ("10-Q") were not effective at July 31, 2012 to ensure that contracts and significant adjustments outside the normal course of business had been properly approved, reviewed and reported in the Consolidated Interim Financial Statements. These material weaknesses did not result in a material adjustment to the Registrant's financial statements, notes thereto, or other disclosures in the 10-Q.

Other than the material weaknesses noted above, there has been no change in internal control over financial reporting during the quarter ended October 31, 2012 that has materially affected or is reasonably likely to materially affect, internal control over financial reporting except as discussed below.

Remediation Plan for the Material Weaknesses in Internal Controls over Financial Reporting:The Company increased senior management's direction and review of filings to ensure compliance with the Company's internal controls. Beginning with the filing of the Annual Report on Form 10-K/A filed on May 9, 2012, the Company adopted a procedure that requires the Auditors signed Report and Consent, or such other report that is required for filing any report with the SEC to be in hand prior to such filing.

Upon discovering the material weaknesses related to contracts and significant adjustments outside the normal course of business being properly adhered to, the Company immediately took steps to implement formal operating policies regarding approval, communication and reporting of contracts and significant adjustments outside the normal course of business, and controls to ensure that such policies have been followed.

We believe the actions described above and resulting improvements in controls will strengthen the Company's processes, procedures and controls related to the preparation, review and filing of such reports, and will address the related material weaknesses that were identified as of January 31, 2012 and July 31, 2012.

14

PART II - OTHER INFORMATION

Item 6. Exhibits

10 (k)	Project Work Agreement
31	Rule 13a - 14(a)/15d - 14(a) Certifications (1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Section 1350 Certifications (Chief Executive Officer and Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
101.INS	XBRL Instance
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Labels
101.PRE	XBRL Taxonomy Extension Presentation

15

SIGNATURES

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

MFRI, INC.

Date:	December 7, 2012	/s/ David Unger
		David Unger
		Chairman of the Board of Directors and
		Chief Executive Officer
		(Principal Executive Officer)
Date:	December 7, 2012	/s/ Gerald O'Connor
		Gerald O'Connor
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

16

EX-10

EXHIBIT 10 (k)

Gerald P. O'Connor

1300 East Gartner Road

Naperville, IL 60540

Project Work Agreement

October 9, 2012

Mr. Brad Mautner

President

MFRI Inc.

7720 N. Lehigh Avenue

Niles, IL 60714

Dear Mr. Mautner:

1, Gerald O'Connor, ("me", "I" or "my") am pleased that MFRI Inc. (the "Company," "you" or "your") has selected me to perform certain consulting services on behalf of the Company (the "Services"). This letter along with the terms and conditions attached as Exhibit A (collectively, the "Agreement") confirms our mutual understanding of the terms and conditions upon which the Services will be provided.

As previously discussed, I will assist the company by serving as Interim Chief Financial Officer and Interim Chief Accounting Officer of the Company, effective October 12, 2012.

Any additional Services requested by you from time to time are subject to our mutual consent. You acknowledge that my success in performing the Services depends on the participation, cooperation, and support of your management. I understand Bradley Mautner, President of the Company, has been designated as the officer of the Company overseeing the Services. Yon acknowledge that the Services are limited to those which the Company has determined will meet its objectives. Throughout the course of providing the Services, I will meet with Mr. Bradley Mautner and members of the Board of Directors of the Company to discuss the findings and recommendations resulting from the Services.

The Services will be performed solely by me. I will provide the Services to you beginning on or about October 9, 2012, until terminated in accordance with Exhibit A.

In consideration for the Services provided, you will pay me a daily fee equal to $1,600, prorated downwards if less than a minimum of eight hours Services are provided for any day. In addition, you will reimburse me directly for all MFRI- approved travel and out-of-pocket expenses incurred in performing the Services. Fees incurred in each two week period will be billed the following week with 10 days payment terms.

I appreciate the opportunity to serve you and believe this Agreement accurately reflects our mutual understanding of the terms upon which the Services will be provided. I would be pleased to discuss this Agreement with you at your convenience. If the foregoing is in accordance with your understanding, please sign a copy of this Agreement and return it to my attention.

Sincerely,                Accepted and agreed:

/s/ Gerald P. O'Connor            Signed: Brad Mautner            Date:10/9/2012

Gerald P. O'Connor            Mr Brad Mautner, President MFRI, Inc.

Gerald P. O'Connor

1300 East Gartner Road

Naperville, IL 60540

Exhibit A

Terms and Conditions

1. Relationship of the Parties. The parties agree that Gerald P. O'Connor will be serving the Company as an independent contractor for all purposes and not as an employee, agent, or partner of or joint ventures with the Company. I will have control over the order and sequence of the Services and the specific hours worked and will not be subject to Company withholding of income or employment taxes. I will not serve as an employee or director of the Company. In addition to my co-signing federal and state securities filings and representation letters as Chief Financial Officer and Chief Accounting Officer, I will have all of the duties and responsibilities of the principal financial officer and principal accounting officer of a company with a class of securities registered under the Securities Exchange Act of 1934, as amended. I will not have the authority to sign any other documents except as principal financial officer and principal accounting officer on behalf of the Company, including, without limitation, checks and other means of payment or tax filings any other title that suggests I am an employee, manager, officer, or director of the Company, nor will the Company represent or require me to represent to any third party that I am anything other than the Interim Chief Financial Officer and Interim Chief Accounting Officer of the Company. As an officer of the Company I will be covered by the Company's director and officer liability insurance and enter into the standard indemnity agreement generally entered into between the Company and its Officers.

2. Payment Terms. Payments should be made within [see earlier comment] days of receipt of invoice by check payable to me. Any amounts not paid when due may be subject to a periodic service charge equal to the lesser of 1.5% per month and the maximum amount allowed under applicable law, until such amounts are paid in full, including assessed service charges. In lieu of terminating this Agreement, I may suspend the provision of Services if amounts owed are not paid in accordance with the terms of this Agreement.

3. Effective Date and Termination.

a. This Agreement will be effective as of the earlier of (i) the date I begIn providing Services to the Company, and (ii) the date of the last signature to this Agreement as indicated on the signature page.

b. After the expiration of any minimum term, if any, either party may terminate this Agreement by providing the other party a minimum of 30 days' advance written notice and such termination will be effective as of the date specified in such notice, provided that such date is no earlier than 30 days after the date of delivery of the notice. I will continue to provide, and the Company will continue to pay for, the Services until the termination effective date.

c. I may terminate this Agreement immediately upon written notice to the Company if: (i) the Company is engaged in or asks me to engage in or ignore any illegal or unethical activity; (ii) I become disabled; or (iii) the Company fails to pay any amounts due to me when due.

d. In the event that a party commits a breach of this Agreement, other than for the reasons described in the above Section, and fails to cure the same within 20 days following delivery by the non-breaching party of written notice specifying the nature of the breach, the non-breaching party may terminate this Agreement effective upon written notice of such termination.

e. The expiration or termination of this Agreement will not destroy or diminish the binding force and effect of any of the provisions of this Agreement that expressly, or by reasonable implication, come into or continue in effect on or after such expiration or termination, including, without limitation, provisions relating to payment of fees and expenses, governing law, arbitration, and limitation of liability.

4. Warranties and Disclaimers.

EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, IT IS UNDERSTOOD THAT I DO NOT HAVE A CONTRACTUAL OBLIGATION TO THE COMPANY OTHER THAN TO PROVIDE THE SERVICES USING COMMERCIALLY REASONABLY EFFORTS IN ACCORDANCE WITH INDUSTRY STANDARDS. I WILL NOT BE RESPONSIBLE FOR ANY ACTION TAKEN BY THE COMPANY IN FOLLOWING OR DECLINING TO FOLLOW ANY OF MY ADVICE OR RECOMMENDATIONS. I DISCLAIM ALL OTHER WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY. WITHOUT LIMITING THE FOREGOING, I MAKE NO

REPRESENTATION OR WARRANTY AS TO THE ACCURACY OR RELIABILITY OF REPORTS, PROJECTIONS, CERTIFICATIONS, OPINIONS, REPRESENTATIONS, OR ANY OTHER INFORMATION PREPARED OR MADE BY ME (COLLECTIVELY, THE "INFORMATION") EVEN IF DERIVED FROM OTHERS' INTELLECTUAL CAPITAL, AND I WILL NOT BE LIABLE FOR ANY CLAIMS OF RELIANCE ON THE INFORMATION OR THAT THE INFORMATION DOES NOT COMPLY WITH FEDERAL, STATE OR LOCAL LAWS OR REGULATIONS. THE SERVICES ARE FOR THE SOLE BENEFIT OF THE COMPANY AND NOT ANY UNNAMED THIRD PARTIES.

5. Limitation of Liability. EXCEPT IN THE CASE OF FRAUD, MY LIABILITY IN ANY

AND ALL CATEGORIES AND FOR ANY AND ALL CAUSES ARISING OUT OF THIS AGREEMENT, WHETHER BASED IN CONTRACT, TORT, NEGLIGENCE OR STRICT LIABILITY WILL, IN THE AGGREGATE, NOT EXCEED THE ACTUAL FEES PAID BY THE COMPANY TO ME OVER THE PREVIOUS TWO MONTHS' OF THE AGREEMENT. IN NO EVENT WILL I BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, PUNITIVE, INDIRECT OR SPECIAL DAMAGES, INCLUDING, WITHOUT LIMITATION, ANY INTERRUPTION OR LOSS OF BUSINESS, PROFIT OR GOODWILL. AS A CONDITION FOR RECOVERY OF ANY LIABILITY, THE COMPANY MUST ASSERT ANY CLAIM AGAINST ME WITHIN THREE MONTHS AFTER DISCOVERY OR 60 DAYS AFTER THE TERMINATION OR EXPIRATION OF THIS AGREEMENT, WHICHEVER IS EARLIER.

6. Governing Law, Arbitration, and Witness Fees.

a. This Agreement will be governed by and construed in accordance with the laws of the State of Illinois, without regard to conflicts of law's provisions.

b. If the parties are unable to resolve any dispute arising out of or in connection with this Agreement, the parties agree and stipulate that any such disputes will be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The arbitration will be conducted in the Chicago, Illinois office of the AAA by a single arbitrator selected by the parties according to the rules of the AAA, and the decision of the arbitrator will be final and binding on both parties. In the event that the parties fail to agree on the selection of the arbitrator within 30 days after either party's request for arbitration under this Section, the arbitrator will be chosen by the AAA. The arbitrator may in his or her discretion order documentary discovery but will not allow depositions without a showing of compelling need. The arbitrator will render his or her decision within 90 days after the call for arbitration. Judgment on the award of the arbitrator may be entered in and enforced by any court of competent jurisdiction. The arbitrator will have no authority to award damages in excess or in contravention of this Agreement and may not amend or disregard any provision of this Agreement, including this Section. Notwithstanding the foregoing, either party may seek appropriate injunctive relief from any court of competent jurisdiction, and I may pursue payment of any unpaid amounts due under this Agreement through any court of competent jurisdiction.

c. In the event I am requested or authorized by the Company or am required by government regulation, subpoena, or other legal process to produce documents or appear as witness in connection with any action, suit or other proceeding initiated by a third party against the Company or by the Company against a third party, the Company will, so long as I am not a party to the proceeding in which the information is sought, reimburse me for my reasonable time (based on customary rates) and expenses, as well as the reasonable fees and expenses of my counsel incurred in responding to such requests. This provision is in addition to and not in lieu of any indemnification obligations the Company may have under this Agreement.

7. Miscellaneous.

a. This Agreement constitutes the entire agreement between the paI1ies with regard to the subject matter hereof and supersedes any and all agreements, whether oral or written, between the parties with respect to its subject matter. No amendment or modification to this Agreement will be valid unless in writing and signed by both parties.

b. If any portion of this Agreement is found to be invalid or unenforceable, such provision will be deemed severable from the remainder of this Agreement and will not cause the invalidity or unenforceability of the remainder of this Agreement, except to the extent that the severed provision deprives either party of a substantial portion of its bargain.

c. Neither party will be deemed to have waived any rights or remedies accruing under this Agreement unless such waiver is in writing and signed by the party electing to waive the right or remedy. The waiver by any paI1y of a breach or violation of any provision of this Agreement will not operate or be construed as a waiver of any subsequent breach of such provision or any other provision of this Agreement.

d. Neither pal1y will be liable for any delay or failure to perform under this Agreement (other than with respect to payment obligations) to the extent such delay or failure is a result of an act of God, war, earthquake, civil disobedience, court order, labor dispute, or other cause beyond such party's reasonable control.

e. The Company may not assign its rights or obligations under this Agreement without the express written consent of me. Nothing in this Agreement will confer any rights upon any person or entity other than the paJ1ies hereto and their respective successors and permitted assign.

f. In any action for enforcing collection of any monies due under this Agreement all costs and expenses (including, without limitation, reasonable attorneys' fees, court costs and arbitration fees) incurred by the prevailing party will be paid by the other party.

EX-31.1

Exhibit 31.1

I, David Unger, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MFRI, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with the respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 7, 2012

/s/ David Unger

David Unger

Director, Chairman of the Board of Directors and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

I, Gerald O'Connor, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MFRI, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with the respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 7, 2012

/s/ Gerald O'Connor

Gerald O'Connor

Chief Financial Officer

(Principal Financial and Accounting Officer)

EX-32

Exhibit 32

Certification of Principal Executive Officers

Pursuant to 18 U.S.C. 1350

(Section 906 of the Sarbanes-Oxley Act of 2002)

The undersigned in their capacities as Chief Executive Officer and Chief Financial Officer of MFRI, Inc. (the “Registrant’), certify that, to the best of their knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended October 31, 2012 of the Registrant, (the “Report”):

(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ David Unger

David Unger

Director, Chairman of the Board of Directors

and Chief Executive Officer

(Principal Executive Officer)

December 7, 2012

/s/ Gerald O'Connor

Gerald O'Connor

Chief Financial Officer

(Principal Financial and Accounting Officer)

December 7, 2012

A signed original of     this written statement required by Section 906 has been provided by MFRI, Inc. and will be retained by MFRI, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Interest expense, net (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2012	Oct. 31, 2011
Interest expense, net [Abstract]
Interest expense	$ 673	$ 584	$ 1,757	$ 1,655
Interest income	(79)	(189)	(372)	(641)
Interest expense, net	$ 594	$ 395	$ 1,385	$ 1,014

XML

R&D Credit (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jul. 31, 2012
Income taxes R&D Credit [Abstract]
Unrecognized Tax Benefits, Increases Resulting from Current Period Tax Positions	$ 220

XML

Fair value of financial instruments (Details) (USD $)	19 Months Ended	116 Months Ended
	Nov. 30, 2013	Dec. 31, 2021	Oct. 31, 2012 Rate
Fair value of financial instruments [Line Items]
Notional value			$ 9,000,000
Derivative, Maturity Date		Dec. 31, 2021
Notional value second swap			1,300,000
Maturity date	Nov. 30, 2013
Fixed interest rate			2.23%
second swap fixed interest rate			2.47%
Derivative mark to market long-term liability			$ 275,000

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Income taxes

9 Months Ended

Oct. 31, 2012

Income taxes [Abstract]

Income taxes [Text Block]

3. Income taxes. Each quarter, the Company estimates the annual effective income tax rate ("ETR") for the full year and applies that rate to the income (loss) before income taxes in determining its provision for income taxes for the interim periods. The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Income earned in the United Arab Emirates ("U.A.E.") is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.

The Company's consolidated ETR was (8)% and 1,174% for the nine months ended October 31,2012 and 2011, respectively. The October 31, 2012 computation of the ETR was affected primarily by the change in the mix of the projected tax-free earnings in the U.A.E. versus total projected earnings. In May 2012, the Company was granted an extension of time to file a tax election from the IRS Commissioner, which allowed the Company to file amended income tax returns to carry back approximately $3.3 million of net operating losses ("NOL"). As a result of the increase in NOL utilization, approximately $0.7 million of research and development tax credits, which the Company established a liability for unrecognized tax benefits, were released back to the Company for future use. Accordingly, the Company recorded an increase to the liability for unrecognized tax benefits of $220 thousand discretely during the second quarter. The 2011 computation of the projected annual tax rate had been significantly impacted by the loss in the U.A.E. for which no tax benefit was provided. In July 2011, the Company recorded a one-time $1.8 million tax expense associated with the $3.1 million repatriation of foreign earnings. These foreign earnings were previously considered to be indefinitely reinvested outside the U.S. The Company does not believe that it will be necessary to repatriate cash held outside of the U.S.

The Company periodically reviews the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates and may make further adjustments based on management's outlook for continued profits in each jurisdiction.

The Company files income tax returns in U.S. federal and state jurisdictions. As of October 31, 2012, open tax years in federal and some state jurisdictions date back to January 31, 2009. In addition, federal and state tax years January 31, 2002 through January 31, 2008 are subject to adjustment on audit, up to the amount of research tax credit generated in those years. As of October 31, 2012, the Company had NOL carryforwards of $7.8 million expiring in various years beginning in January 31, 2030. Additionally, the Company files income tax returns in Denmark, India and Saudi Arabia. As of October 31, 2012, open tax years in foreign jurisdictions vary from three to seven years from the date of filing the income tax returns.

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Stock-based compensation Fair value assumptions (Details)	9 Months Ended
	Oct. 31, 2012	Oct. 31, 2011
Minimum [Member]
Fair value assumptions [Line Items]
Expected volatility	58.12%	51.72%
Risk free interest rate	0.74%	1.54%
Dividend yield	0.00%	0.00%
Expected life	4 years 10 months 24 days	4 years 10 months 24 days
Maximum [Member]
Fair value assumptions [Line Items]
Expected volatility	66.82%	66.82%
Risk free interest rate	2.82%	5.13%
Dividend yield	0.00%	0.00%
Expected life	5 years 8 months 12 days	5 years 8 months 12 days

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Stock-based compensation Stock-based compensation expense (Details) (USD $)	3 Months Ended		9 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2012	Oct. 31, 2011
Stock-based compensation expense [Abstract]
Stock-based compensation expense	$ 106,000	$ 173,000	$ 366,000	$ 470,000
unrecognized compensation expense related to unvested stock options	$ 1,000,000		$ 1,000,000
expense is expected to be recognized over a period			2 years 7 months 30 days

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Stock-based compensation (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	9 Months Ended	12 Months Ended
	Oct. 31, 2012	Jan. 31, 2012
unvested option [Member]
Option activity [Line Items]
Outstanding on February 1, 2012	377	373
Weighted Average Exercise Price Per Share	$ 6.96	$ 7.84
Options Outstanding Aggregate Intrinsic Value	$ 0	$ 212
Granted	158
Granted Weighted Average Exercise Price Per Share	$ 6.88
Vested options in the period	(144)
Expired or forfeited	(10)
Expired or Forfeited Weighted Average Exercise Price Per Share	$ 7.07
Stock Option [Member]
Option activity [Line Items]
Outstanding on February 1, 2012		843
Weighted Average Exercise Price Per Share		$ 11.48
Weighted Average Remaining Contractual Term		6 years 10 months 24 days
Options Outstanding Aggregate Intrinsic Value	34	430
Granted	158
Exercised	(11)
Exercised Weighted Average Exercise Price Per Share	$ 3.11
Exercised Aggregate Intrinsic Value	46
Expired or forfeited	(33)
Expired or Forfeited Weighted Average Exercise Price Per Share	$ 10.47
Outstanding end of period	957
Outstanding Weighted Average Exercise Price Per Share	$ 10.85
Outstanding Weighted Average Remaining Contractual Term	6 years 9 months 24 days
Exercisable end of period	580
Exercisable Weighted Average Remaining Contractual Term	5 years 5 months 24 days
Exercisable Weighted Average Exercise Price Per Share	$ 13.39
Exercisable Aggregate Intrinsic Value	$ 34
Weighted-average fair value of options granted 2012	$ 6.88

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Earnings per share (Details) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2012	Oct. 31, 2011
Earnings Per Share [Abstract]
Basic weighted average number of common shares outstanding	6,924	6,881	6,921	6,866
Dilutive effect	0	0	0	0
Weighted average number of common shares outstanding assuming full dilution	6,924	6,881	6,921	6,866
Stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares	785	311	494	311
Stock options with an exercise price below the average market price	172	547	463	547

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Business segment reporting

9 Months Ended

Oct. 31, 2012

Segment reporting [Line Items]

Segment Reporting Disclosure [Text Block]

Business segment reporting. The Company has three reportable segments. Piping systems engineers, designs, manufactures and sells specialty piping and leak detection and location systems. Filtration products manufactures and sells a wide variety of filter elements for air filtration and particulate collection. Industrial process cooling engineers, designs, manufactures and sells chillers, cooling towers, plant circulating systems and accessories for industrial process applications. Included in corporate and other activity is a subsidiary which engages in the installation of heating, ventilation and air conditioning systems ("HVAC"), but which is not sufficiently large to constitute a reportable segment.

	Three Months Ended October 31,						Nine Months Ended October 31,
	2012			2011			2012			2011
Net sales
Piping Systems		$26,498			$35,371			$69,147			$80,737
Filtration Products	20,738			24,000			62,990			74,122
Industrial Process Cooling	9,199			8,948			27,225			24,334
Corporate and Other	1,890			3,011			3,952			9,528
Total		$58,325			$71,330			$163,314			$188,721
Gross profit
Piping Systems		$6,060			$6,222			$14,327			$13,666
Filtration Products	2,616			3,409			8,280			10,258
Industrial Process Cooling	2,617			2,486			7,586			6,657
Corporate and Other	153			315			287			877
Total		$11,446			$12,432			$30,480			$31,458
Income (loss) from operations
Piping Systems		$2,585			$3,026			$4,183			$3,730
Filtration Products	(410		)	315			(506		)	1,341
Industrial Process Cooling	526			517			1,403			1,014
Corporate and Other	(2,020		)	(1,626		)	(6,789		)	(5,409		)
Total		$681			$2,232			($1,709	)		$676
Income (loss) before income taxes
Piping Systems		$3,116			$3,709			$4,537			$4,314
Filtration Products	(410		)	315			(506		)	1,341
Industrial Process Cooling	526			517			1,403			1,014
Corporate and Other	(2,614		)	(2,021		)	(8,174		)	(6,423		)
Total		$618			$2,520			($2,740	)		$246

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Other assets (Details) (USD $)	9 Months Ended
	Oct. 31, 2012	Jan. 31, 2012
Other Assets [Abstract]
decrease in other assets	$ 1,500,000
Other assets	$ 2,384,000	$ 3,860,000

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CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2012	Oct. 31, 2011
Statements of Operations [Abstract]
Net sales	$ 58,325	$ 71,330	$ 163,314	$ 188,721
Cost of sales	46,879	58,898	132,834	157,263
Gross profit	11,446	12,432	30,480	31,458
Operating expenses
General and administrative expenses	6,925	6,457	20,886	19,464
Selling expenses	3,840	3,743	11,303	11,318
Total operating expenses	10,765	10,200	32,189	30,782
Income (loss) from operations	681	2,232	(1,709)	676
Income from joint venture	531	683	354	584
Interest expense, net	594	395	1,385	1,014
Income (loss) before income taxes	618	2,520	(2,740)	246
Income tax expense	163	1,834	218	2,889
Net income (loss)	$ 455	$ 686	$ (2,958)	$ (2,643)
Weighted average number of common shares outstanding
Basic and diluted	6,924	6,881	6,921	6,866
Earnings (loss) per share
Basic and diluted	$ 0.07	$ 0.10	$ (0.43)	$ (0.38)

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Oct. 31, 2012	Oct. 31, 2011
Operating activities
Net loss	$ (2,958)	$ (2,643)
Adjustments to reconcile net loss to net cash flows used in operating activities
Depreciation and amortization	4,373	4,290
Deferred tax expense	353	2,148
Stock-based compensation expense	366	470
Income from joint venture	(354)	(584)
Cash surrender value of deferred compensation plan	(121)	133
Loss on disposal of fixed assets	57	118
Changes in operating assets and liabilities
Accounts receivable, net	(6,383)	(8,874)
Inventories	1,302	(3,543)
Costs and estimated earnings in excess of billings on uncompleted contracts	(231)	54
Accounts payable	(522)	2,936
Accrued compensation and payroll taxes	(592)	(1,109)
Customers' deposits	1,870	(510)
Income taxes receivable and payable	(539)	(327)
Prepaid expenses and other current assets	64	228
Other assets and liabilities	1,693	(2,025)
Net cash used in operating activities	(1,622)	(9,238)
Investing activities
Additions to property, plant and equipment	(5,316)	(7,228)
Loan to joint venture	(989)	0
Proceeds from sales of property and equipment	94	16
Net cash used in investing activities	(6,211)	(7,212)
Financing activities
Borrowings	157,554	152,608
Repayment of debt	(147,112)	(146,463)
Decrease in drafts payable	(789)	(694)
Payments on capitalized lease obligations	(432)	(243)
Stock options exercised	35	164
Tax benefit of stock options exercised	15	64
Net cash provided by financing activities	9,271	5,436
Effect of exchange rate changes on cash and cash equivalents	(56)	(38)
Net increase (decrease) in cash and cash equivalents	1,382	(11,052)
Cash and cash equivalents - beginning of period	4,209	16,718
Cash and cash equivalents - end of period	5,591	5,666
Supplemental cash flow information
Interest paid	1,718	1,172
Income taxes paid	$ 133	$ 430

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Debt Saudi term loan (Details) (Saudi term loan [Member], USD $)	3 Months Ended	9 Months Ended
	Oct. 31, 2012	Oct. 31, 2012
Saudi term loan [Member]
Debt Instrument [Line Items]
Debt Instrument, Issuance Date		Apr. 10, 2012
Saudi term loan, Currency	22.2 million Dirhams
Saudi term loan, amount	$ 5,900,000	$ 5,900,000
Debt Instrument, Interest Rate at Period End	5.50%	5.50%
Periodic payment	$ 97,000
Saudi loan maturity date	Apr. 01, 2017	Apr. 01, 2017

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Other assets (Table) (USD $)
In Millions, unless otherwise specified

9 Months Ended

Oct. 31, 2012

Other Assets [Abstract]

decrease in other assets

$ 1.5

Other assets in thousands [Table Text Block]

	October 31, 2012		January 31, 2012
Other assets		$2,384		$3,860

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Debt Mortgage TN (Details) (Secured Debt [Member], USD $)	3 Months Ended	9 Months Ended
	Oct. 31, 2012	Oct. 31, 2012
Secured Debt [Member]
Mortgage Loans on Real Estate [Line Items]
Mortgage TN, issuance date		Jun. 19, 2012
Mortgage Loans on Real Estate, Face Amount of Mortgages	$ 1,800,000	$ 1,800,000
Mortgage TN, interest rate at period end	4.50%	4.50%
Periodic payment		$ 13,000
Mortgage TN, maturity date	Jul. 01, 2027
Mortgage TN, interest rate changes		Jun. 19, 2022
Mortgage TN, basis spread on variable rate	2.00%	2.00%
Mortgage TN, maximum interest rate	18.00%
Mortgage TN, minimum interest rate	4.50%

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Business segment reporting (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2012 Segments	Oct. 31, 2011
Segment reporting
Number of reportable segments			3
Net sales	$ 58,325	$ 71,330	$ 163,314	$ 188,721
Gross profit	11,446	12,432	30,480	31,458
Income (loss) from operations	681	2,232	(1,709)	676
Income (loss) before income taxes	618	2,520	(2,740)	246
Piping Systems [Member]
Segment reporting
Net sales	26,498	35,371	69,147	80,737
Gross profit	6,060	6,222	14,327	13,666
Income (loss) from operations	2,585	3,026	4,183	3,730
Income (loss) before income taxes	3,116	3,709	4,537	4,314
Filtration Products [Member]
Segment reporting
Net sales	20,738	24,000	62,990	74,122
Gross profit	2,616	3,409	8,280	10,258
Income (loss) from operations	(410)	315	(506)	1,341
Income (loss) before income taxes	(410)	315	(506)	1,341
Industrial Process Cooling [Member]
Segment reporting
Net sales	9,199	8,948	27,225	24,334
Gross profit	2,617	2,486	7,586	6,657
Income (loss) from operations	526	517	1,403	1,014
Income (loss) before income taxes	526	517	1,403	1,014
Corporate and Other [Member]
Segment reporting
Net sales	1,890	3,011	3,952	9,528
Gross profit	153	315	287	877
Income (loss) from operations	(2,020)	(1,626)	(6,789)	(5,409)
Income (loss) before income taxes	$ (2,614)	$ (2,021)	$ (8,174)	$ (6,423)

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Basis of presentation

9 Months Ended

Oct. 31, 2012

Basis of presentation [Abstract]

Basis of presentation [Text Block]

Basis of presentation. The interim consolidated financial statements of MFRI, Inc. and subsidiaries (the "Company") are unaudited, but include all adjustments, which the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2012 is derived from the audited consolidated balance sheet as of that date. The results of operations for any interim period are not necessarily indicative of future or annual results. Interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K/A. The Company's fiscal year ends on January 31. Years and balances described as 2012 and 2011 are for the nine months ended October 31,2012 and 2011, respectively.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Oct. 31, 2012	Oct. 31, 2011	Oct. 31, 2012	Oct. 31, 2011
Net income (loss)	$ 455	$ 686	$ (2,958)	$ (2,643)
Other comprehensive income (loss)
Currency translation adjustments	328	(741)	(505)	(260)
Interest rate swap, net of tax	33	5	15	122
Other comprehensive income (loss)	361	(736)	(490)	(138)
Comprehensive income (loss)	$ 816	$ (50)	$ (3,448)	$ (2,781)

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Recent accounting pronouncements

9 Months Ended

Oct. 31, 2012

Recent accounting pronouncements [Abstract]

Recent accounting pronouncements [Text Block]

Recent accounting pronouncements. The Company evaluated recent accounting pronouncements and do not expect them to have a material impact on the consolidated financial statements.

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Entity information Document (USD $)	9 Months Ended
	Oct. 31, 2012	Dec. 04, 2012	Jul. 31, 2011
Document Information
Entity Registrant Name	MFRI INC.
Entity Central Index Key	0000914122
Current Fiscal Year End Date	--01-31
Entity Filer Category	Smaller Reporting Company
Document Type	10-Q
Document Period End Date	Oct. 31, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Amendment Flag	false
Entity Common Stock, Shares Outstanding		6,923,996
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Public Float			$ 53,878,437

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(Tables)

9 Months Ended

Oct. 31, 2012

Business segment reporting [Abstract]

Business segment reporting [Table Text Block]

	Three Months Ended October 31,						Nine Months Ended October 31,
	2012			2011			2012			2011
Net sales
Piping Systems		$26,498			$35,371			$69,147			$80,737
Filtration Products	20,738			24,000			62,990			74,122
Industrial Process Cooling	9,199			8,948			27,225			24,334
Corporate and Other	1,890			3,011			3,952			9,528
Total		$58,325			$71,330			$163,314			$188,721
Gross profit
Piping Systems		$6,060			$6,222			$14,327			$13,666
Filtration Products	2,616			3,409			8,280			10,258
Industrial Process Cooling	2,617			2,486			7,586			6,657
Corporate and Other	153			315			287			877
Total		$11,446			$12,432			$30,480			$31,458
Income (loss) from operations
Piping Systems		$2,585			$3,026			$4,183			$3,730
Filtration Products	(410		)	315			(506		)	1,341
Industrial Process Cooling	526			517			1,403			1,014
Corporate and Other	(2,020		)	(1,626		)	(6,789		)	(5,409		)
Total		$681			$2,232			($1,709	)		$676
Income (loss) before income taxes
Piping Systems		$3,116			$3,709			$4,537			$4,314
Filtration Products	(410		)	315			(506		)	1,341
Industrial Process Cooling	526			517			1,403			1,014
Corporate and Other	(2,614		)	(2,021		)	(8,174		)	(6,423		)
Total		$618			$2,520			($2,740	)		$246

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CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $) In Thousands, unless otherwise specified	Oct. 31, 2012	Jan. 31, 2012
Current assets
Cash and cash equivalents	$ 5,591	$ 4,209
Restricted cash	1,498	1,854
Trade accounts receivable, less allowance for doubtful accounts of $363 at October 31, 2012 and $235 at January 31, 2012	34,351	28,109
Inventories, net	38,753	40,204
Prepaid expenses and other current assets	4,196	3,973
Deferred tax assets - current	2,271	1,946
Costs and estimated earnings in excess of billings on uncompleted contracts	1,828	2,375
Income tax receivable	120	0
Total current assets	88,608	82,670
Property, plant and equipment, net of accumulated depreciation	48,544	47,842
Other assets
Deferred tax assets - long-term	10,250	10,967
Note receivable from joint venture	5,187	4,195
Investment in joint venture	4,990	4,636
Cash surrender value of deferred compensation plan	2,903	2,782
Other assets	2,384	3,860
Patents, net of accumulated amortization	361	331
Total other assets	26,075	26,771
Total assets	163,227	157,283
Current liabilities
Trade accounts payable	18,605	20,020
Accrued compensation and payroll taxes	4,663	4,571
Commissions and management incentives payable	4,016	4,722
Current maturities of long-term debt	7,956	2,736
Customers' deposits	4,297	2,432
Billings in excess of costs and estimated earnings on uncompleted contracts	1,200	1,978
Other accrued liabilities	2,926	2,610
Income taxes payable	0	417
Total current liabilities	43,663	39,486
Long-term liabilities
Long-term debt, less current maturities	39,487	34,682
Deferred compensation liabilities	5,506	5,686
Other long-term liabilities	5,249	5,074
Total long-term liabilities	50,242	45,442
Stockholders' equity
Common stock, $.01 par value, authorized 50,000 shares; 6,924 issued and outstanding at October 31, 2012 and 6,913 issued and outstanding at January 31, 2012	69	69
Additional paid-in capital	50,243	49,828
Retained earnings	20,080	23,038
Accumulated other comprehensive loss	(1,070)	(580)
Total stockholders' equity	69,322	72,355
Total liabilities and stockholders' equity	$ 163,227	$ 157,283

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Earnings per share

9 Months Ended

Oct. 31, 2012

Earnings Per Share [Abstract]

Earnings per share [Text Block]

Earnings per share.

	Three Months Ended October 31,		Nine Months Ended October 31,
	2012	2011	2012	2011
Basic weighted average number of common shares outstanding	6,924	6,881	6,921	6,866
Dilutive effect of stock options	—	—	—	—
Weighted average number of common shares outstanding assuming full dilution	6,924	6,881	6,921	6,866
Stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares	785	311	494	311
Stock options with an exercise price below the average market price	172	547	463	547

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Stock-based compensation

9 Months Ended

Oct. 31, 2012

Stock-based compensation [Abstract]

Stock-based compensation [Text Block]

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

	Three Months Ended October 31,		Nine Months Ended October 31,
	2012	2011	2012	2011
Stock-based compensation expense	$106	$173	$366	$470

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

	Nine Months Ended October 31,
Fair value assumptions	2012	2011
Expected volatility	58.12% - 66.82%	51.72% - 66.82%
Risk free interest rate	.74% - 2.82%	1.54% - 5.13%
Dividend yield	none	none
Expected life	4.9 - 5.7 years	4.9 - 5.7 years

Option activity	Options	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding on February 1, 2012	843		$11.48	6.9		$430
Granted	158	6.88
Exercised	(11)	3.11			46
Expired or forfeited	(33)	10.47
Outstanding end of period	957	10.85		6.8	34
Exercisable end of period	580		$13.39	5.5		$34
Weighted-average fair value of options granted 2012			$6.88

Unvested option activity	Unvested Options Outstanding	Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding on February 1, 2012	373		$7.84		$212
Granted	158	6.88
Vested	(144)
Expired or forfeited	(10)	7.07
Outstanding end of period	377		$6.96		$—

As of October 31, 2012, there was $1 million of total unrecognized compensation expense related to unvested stock options. The expense is expected to be recognized over a period of 2.7 years.

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Interest expense, net (Tables)

9 Months Ended

Oct. 31, 2012

Interest expense, net [Abstract]

Interest income and interest expense [Table Text Block]

	Three Months Ended October 31,						Nine Months Ended October 31,
	2012			2011			2012			2011
Interest expense		$673			$584			$1,757			$1,655
Interest income	(79		)	(189		)	(372		)	(641		)
Interest expense, net		$594			$395			$1,385			$1,014

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Pension plan (Tables)

9 Months Ended

Oct. 31, 2012

Pension plan [Abstract]

Market value of plan assets [Table Text Block]

Level 1 market value of plan assets	October 31, 2012		January 31, 2012
Equity securities		$3,175		$3,018
U.S. bond market	2,141		1,968
High-quality inflation-indexed bonds issued by the U.S. Treasury and government agencies as well as domestic corporations	281		268
Real estate	118		110
Subtotal	5,715		5,364
Level 2 significant other observable inputs
Money market fund	252		138
Total		$5,967		$5,502

Components of net periodic benefit costs[Table Text Block]

	Three Months Ended October 31,						Nine Months Ended October 31,
Components of net periodic benefit costs	2012			2011			2012			2011
Service cost		$43			$31			$128			$94
Interest cost	75			79			224			235
Expected return on plan assets	(111		)	(101		)	(333		)	(304		)
Amortization of prior service cost	12			31			37			95
Recognized actuarial loss	43			16			130			47
Net periodic benefit costs		$62			$56			$186			$167

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Debt

9 Months Ended

Oct. 31, 2012

Debt [Abstract]

Debt Disclosure [Text Block]

Debt. On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan Agreement"). Under the terms of the Loan Agreement as amended, which matures on November 30, 2013, the Company can borrow up to $38 million, subject to borrowing base and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, investments, do not permit payment of dividends and require attainment of levels of profitability and cash flows. At October 31, 2012, the Company was in compliance with all covenants under the Loan Agreement. Interest rates are based on options selected by the Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At October 31, 2012, the prime rate was 3.25% and the margins added to the prime rate and the LIBOR rate, which are determined each quarter based on the applicable financial statement ratio, were 0.50 and 2.75 percentage points, respectively. Monthly interest payments were made during the nine months ended October 31,2012 and 2011. As of October 31, 2012, the Company had borrowed $17.8 million and had $8.7 million available to it under the revolving line of credit. In addition, $0.3 million of availability was used under the Loan Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. The Loan Agreement provides that all domestic receipts are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At October 31, 2012, the amount of such restricted cash was $0.9 million. Cash required for operations is provided by draw downs on the line of credit.

On April 10, 2012, the Company obtained a loan from a U.A.E. bank to purchase equipment and office furniture for a building for the piping system's facility in Saudi Arabia, in the amount of 22.2 million Dirhams, approximately $5.9 million U.S. dollars at the exchange rate prevailing on the transaction date. The loan bears interest at 5.5% with monthly payments of $97 thousand for both principal and interest and matures April 2017.

On June 19, 2012, Perma-Pipe, Inc. borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at 4.5% with monthly payments of $13 thousand for both principal and interest and matures July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate provided the applicable interest rate shall not adjust more than 2% per annum, and shall be subject to ceiling of 18% and a floor of 4.5%.

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Other assets

9 Months Ended

Oct. 31, 2012

Other Assets [Abstract]

Other assets [Text Block]

Other assets. The $1.5 million decrease in other assets related to deposits applied to the purchase of fixed assets by the new facility in Saudi Arabia.

	October 31, 2012		January 31, 2012
Other assets		$2,384		$3,860

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Interest expense, net

9 Months Ended

Oct. 31, 2012

Interest expense, net [Abstract]

Interest Income and Interest Expense Disclosure [Text Block]

Interest expense, net.

	Three Months Ended October 31,						Nine Months Ended October 31,
	2012			2011			2012			2011
Interest expense		$673			$584			$1,757			$1,655
Interest income	(79		)	(189		)	(372		)	(641		)
Interest expense, net		$594			$395			$1,385			$1,014

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Fair value of financial instruments

9 Months Ended

Oct. 31, 2012

Fair value of financial instruments

Fair Value Disclosures [Text Block]

Fair value of financial instruments. At October 31, 2012, interest rate swap agreements were in effect with a notional value of $9 million that matures November 30, 2013 and a value of $1.3 million that matures December 2021 . The swap agreements, which reduce the exposure to market risks from changing interest rates, exchanges the variable rate to fixed interest rate payments of 2.23% plus LIBOR margin and 2.47%, respectively. The exchange-traded swaps are valued on a recurring basis using quoted market prices and were classified within Level 2 of the fair value hierarchy because the exchange is not deemed to be an active market. The derivative mark to market of $275 thousand was classified as a long-term liability on the balance sheet.

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Debt (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended	19 Months Ended
	Oct. 31, 2012	Nov. 30, 2013
Line of Credit Facility [Line Items]
Maturity date		Nov. 30, 2013
Line of Credit Facility, Maximum Borrowing Capacity	$ 38
Line of Credit Facility, Dividend Restrictions	do not permit payment of dividends
Document Period End Date	Oct. 31, 2012
Line of Credit Facility, Covenant Compliance	in compliance with all covenants under the Loan Agreement
Line of Credit Facility, Interest Rate Description	(a) a margin in effect plus a prime rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period.
Line of Credit Facility, Interest Rate at Period End	3.25%
Line of Credit Facility, Amount Outstanding	17.8
Line of Credit Facility, Remaining Borrowing Capacity	8.7
Letters of Credit Outstanding, Amount	0.3
Restricted Cash and Cash Equivalents, Current	$ 0.9
Line of Credit Prime Rate [Member]
Line of Credit Facility [Line Items]
Margin added to rate	0.50%
Line of Credit Libor Rate [Member]
Line of Credit Facility [Line Items]
Margin added to rate	2.75%

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Earnings per share (Tables)

9 Months Ended

Oct. 31, 2012

Earnings Per Share [Abstract]

Earnings per share [Table Text Block]

	Three Months Ended October 31,		Nine Months Ended October 31,
	2012	2011	2012	2011
Basic weighted average number of common shares outstanding	6,924	6,881	6,921	6,866
Dilutive effect of stock options	—	—	—	—
Weighted average number of common shares outstanding assuming full dilution	6,924	6,881	6,921	6,866
Stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares	785	311	494	311
Stock options with an exercise price below the average market price	172	547	463	547

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Income taxes Income taxes (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Jul. 31, 2012	Jul. 31, 2011	Oct. 31, 2012 Rate	Oct. 31, 2011 Rate
Income tax [Abstract]
effective income tax rate			(8.00%)	1174.40%
Net operating loss carried back	$ 3.3
Deferred tax assets credit carryforward-RD	0.7
tax expense associated with the repatriation of foreign earnings		1.8
repatriation of foreign earnings		3.1
Operating loss carryforwards	$ 7.8

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Balance Sheet parenthetical (Parentheticals) (USD $) In Thousands, except Per Share data, unless otherwise specified	Oct. 31, 2012	Jan. 31, 2012
Allowance for Doubtful Accounts Receivable, Current	$ 363	$ 235
Common Stock, Par or Stated Value Per Share	$ 0.01	$ 0.01
Common Stock, Shares Authorized	50,000	50,000
Common Stock, Shares, Issued	6,924	6,913
Common Stock, Shares, Outstanding	6,924	6,913

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Pension plan

9 Months Ended

Oct. 31, 2012

Pension plan [Abstract]

Pension plan [Text Block]

Pension plan. The Winchester filtration hourly rated employees are covered by a defined benefit plan. The major categories of the pension plan's investments remained the same.

Level 1 market value of plan assets	October 31, 2012		January 31, 2012
Equity securities		$3,175		$3,018
U.S. bond market	2,141		1,968
High-quality inflation-indexed bonds issued by the U.S. Treasury and government agencies as well as domestic corporations	281		268
Real estate	118		110
Subtotal	5,715		5,364
Level 2 significant other observable inputs
Money market fund	252		138
Total		$5,967		$5,502

	Three Months Ended October 31,						Nine Months Ended October 31,
Components of net periodic benefit costs	2012			2011			2012			2011
Service cost		$43			$31			$128			$94
Interest cost	75			79			224			235
Expected return on plan assets	(111		)	(101		)	(333		)	(304		)
Amortization of prior service cost	12			31			37			95
Recognized actuarial loss	43			16			130			47
Net periodic benefit costs		$62			$56			$186			$167

For the nine months ended October 31,2012, contributions of $292 thousand were made.

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Pension plan (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended												3 Months Ended		9 Months Ended
	Oct. 31, 2012	Jan. 31, 2012	Oct. 31, 2012 Equity Securities [Member]	Jan. 31, 2012 Equity Securities [Member]	Oct. 31, 2012 Bonds [Member]	Jan. 31, 2012 Bonds [Member]	Oct. 31, 2012 US Treasury and Government [Member]	Jan. 31, 2012 US Treasury and Government [Member]	Oct. 31, 2012 Real Estate Funds [Member]	Jan. 31, 2012 Real Estate Funds [Member]	Oct. 31, 2012 Money Market Funds [Member]	Jan. 31, 2012 Money Market Funds [Member]	Oct. 31, 2012 Other Postretirement Benefit Plans, Defined Benefit [Member]	Oct. 31, 2011 Other Postretirement Benefit Plans, Defined Benefit [Member]	Oct. 31, 2012 Other Postretirement Benefit Plans, Defined Benefit [Member]	Oct. 31, 2011 Other Postretirement Benefit Plans, Defined Benefit [Member]
Pension plan [Line Items]
Service cost													$ 43	$ 31	$ 128	$ 94
Interest cost													75	79	224	235
Expected return on plan assets													(111)	(101)	(333)	(304)
Amortization of prior service cost													12	31	37	95
Recognized actuarial loss													43	16	130	47
Net periodic benefit costs													62	56	186	167
Equity securities			3,175	3,018
Available-for-sale Securities, Fair Value Disclosure	5,715	5,364			2,141	1,968	281	268
Real Estate									118	110
Money market Fund											252	138
Defined Benefit Plan, Fair Value of Plan Assets	5,967	5,502
Pension Contributions	$ 292

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Stock-based compensation (Tables)

9 Months Ended

Oct. 31, 2012

Stock-based compensation [Abstract]

Stock-based compensation expense [Table Text Block]

	Three Months Ended October 31,		Nine Months Ended October 31,
	2012	2011	2012	2011
Stock-based compensation expense	$106	$173	$366	$470

Fair value assumptions [Table Text Block]

	Nine Months Ended October 31,
Fair value assumptions	2012	2011
Expected volatility	58.12% - 66.82%	51.72% - 66.82%
Risk free interest rate	.74% - 2.82%	1.54% - 5.13%
Dividend yield	none	none
Expected life	4.9 - 5.7 years	4.9 - 5.7 years

Option activity [Table Text Block]

Option activity	Options	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding on February 1, 2012	843		$11.48	6.9		$430
Granted	158	6.88
Exercised	(11)	3.11			46
Expired or forfeited	(33)	10.47
Outstanding end of period	957	10.85		6.8	34
Exercisable end of period	580		$13.39	5.5		$34
Weighted-average fair value of options granted 2012			$6.88

Nonvested option activity [Table Text Block]

Unvested option activity	Unvested Options Outstanding	Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding on February 1, 2012	373		$7.84		$212
Granted	158	6.88
Vested	(144)
Expired or forfeited	(10)	7.07
Outstanding end of period	377		$6.96		$—