Note 9 - Retirement plans

Pension plan

The defined benefit plan that covered Winchester filtration hourly rated employees was frozen on June 30, 2013 per the third Amendment to the Plan dated May 15, 2013. Per the third amendment, the accrued benefit of each participant was frozen as of the freeze date and no further benefits shall accrue with respect to any service or hours of service after the freeze date. The benefits are based on fixed amounts multiplied by years of service of participants. The Company engages outside actuaries to calculate its obligations and costs. The funding policy is to contribute such amounts as are necessary to provide for benefits attributed to service to date. The amounts contributed to the plan are sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974.

Asset allocation

The plans hold no securities of MFRI, Inc. 100% of the assets are held for benefits under the plan. The fair value of the major categories of the pension plans' investments are presented below. The FASB has established a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 - Inputs that are both significant to the fair value measurement and unobservable.



Level 1 market value of plan assets	2013	2012
Equity securities	$3,340	$3,343
U.S. bond market	2,453	2,183
High-quality inflation-indexed bonds issued by the U.S. Treasury and government agencies as well as domestic corporations	0	279
Real estate securities	149	126
Subtotal	5,942	5,931
Level 2 significant other observable inputs
Money market fund	409	134
Total	$6,351	$6,065

At January 31, 2014, plan assets were held 50% in equity, 37% in debt, 2% in real estate securities and 11% in other. The investment policy is to invest all funds not needed to pay benefits and investment expenses for the year, with target asset allocations of 55% equities (with a range of 40% - 65%), 25% fixed income (with a range of 20% - 35%) and 20% Alternative Investments (with a range of 15% - 25%), diversified across a variety of sub-asset classes and investment styles, following a flexible asset allocation approach that will allow the plan to participate in market opportunities as they become available. The expected long-term rate of return on assets is based on historical long-term rates of equity and fixed income investments and the asset mix objective of the funds.

Investment market conditions in 2013 resulted in $531 thousand actual return on plan assets as presented below, which increased the fair value of plan assets at year end. The Company did not change its 8% expected return on plan assets used in determining cost and benefit obligations, the return that the Company has assumed during every profitable and unprofitable investment year since 1991. The plan's investments are intended to earn long-term returns to fund long-term obligations, and investment portfolios with asset allocations similar to those of the plan's investment policy have attained such returns over several decades. Future contributions that may be necessary to maintain funding requirements are not expected to materially affect the Company's liquidity.



Reconciliation of benefit obligations, plan assets and funded status of plan	2013		2012
Accumulated benefit obligations
Vested benefits	$6,243		$6,650
Accumulated benefits	$6,827		$7,240

Change in benefit obligation
Benefit obligation - beginning of year	$7,240		$7,186
Service cost	78		171
Interest cost	293		299
Actuarial (gain) loss	(539	)	(113	)
Benefits paid	(245	)	(303	)
Benefit obligation - end of year	$6,827		$7,240

Change in plan assets
Fair value of plan assets - beginning of year	$6,065		$5,502
Actual gain on plan assets	531		574
Company contributions	0		292
Benefits paid	(245	)	(303	)
Fair value of plan assets - end of year	$6,351		$6,065

Unfunded status	$(476)		$(1,175)

Balance sheet classification
Prepaid expenses and other current assets	$335		$328
Other assets	1,038		1,304
Other long-term liabilities	(1,849	)	(2,807	)
Net amount recognized	$(476)		$(1,175)

Amounts recognized in accumulated other comprehensive income
Unrecognized actuarial loss	$1,513		$2,206
Unamortized prior service cost	0		273
Net amount recognized	$1,513		$2,479



Weighted-average assumptions used to determine net cost and benefit obligations	2013		2012
End of year benefit obligation	4.50	%	4.00	%
Service cost discount rate *	4.50	%	4.25	%
Expected return on plan assets	8.00	%	8.00	%
Rate of compensation increase	N/A		N/A

*4.00% prior to the re-measurement on June 30, 2013 due to the plan freeze and 4.50% after the re-measurement.

The discount rate was based on a Citigroup pension discount curve of high quality fixed income investments with cash flows matching the plans' expected benefit payments. The Company determines the expected long-term rate of return on plan assets by performing a detailed analysis of historical and expected returns based on the strategic asset allocation approved by the Board of Directors and the underlying return fundamentals of each asset class. The Company's historical experience with the pension fund asset performance is also considered.



Components of net periodic benefit cost	2013	2012
Service cost	$78	$171
Interest cost	293	299
Expected return on plan assets	(483)	(444)
Amortization of prior service cost	21	50
Recognized actuarial loss	105	173
Curtailment cost	252	0
Net periodic benefit cost	$266	$249



Amounts recognized in other comprehensive income
Actuarial gain (loss) on obligation	$539	$113
Actual gain (loss) on plan assets	153	303
Reclassify prior service cost	21	50
Total in other comprehensive income (loss)	$713	$466
Other comprehensive income is also affected by the tax effect of the valuation allowance recorded on the domestic deferred tax assets.



Cash flows
Expected employer contributions for the fiscal year ending January 31, 2015		$0
Expected employee contributions for the fiscal year ending January 31, 2015		—
Estimated future benefit payments reflecting expected future service for the fiscal year(s) ending January 31,:
2015		335
2016		348
2017		345
2018		366
2019		364
2020 - 2024		$1,907

401(k) plan

The domestic employees of the Company participate in the MFRI, Inc. Employee Savings and Protection Plan, which is applicable to all employees except employees covered by collective bargaining agreement benefits. The plan allows employee pretax payroll contributions of up to 16% of total compensation. The Company matches 50% of each participant's contribution, up to a maximum of 3% of each participant's salary. For employees covered by the Winchester Bargaining Unit Savings Plan, the Company matches 15% of each participant's contribution, up to a maximum of 6% of each participant's salary.

Contributions to the 401(k) plan were $430 thousand and $560 thousand for the years ended January 31, 2014 and 2013, respectively.

Deferred compensation plan

The Company has a Supplemental Retirement and Deferred Compensation Plan ("Supplemental Plan"), pursuant to which key employees deferred compensation. Life insurance contracts have been purchased which may be used to fund the Company's obligation under these agreements. Participants receive distributions from the plan at the later of age 65 or six months after separation from service. Distributions can be lump sum or annual payments over a specified number of years based on elections made when the participant enters the plan.



Deferred compensation liability	2013	2012
Current	$189	$163
Long-term	6,509	5,670
Total	$6,698	$5,833

Deferred compensation expense	$519	$484

On April 10, 2014, the Company's Board of Directors terminated the Supplemental Plan and its Deferred Stock Purchase Plan, adopted on December 5, 2012 (collectively, the "Plans"), effective April 10, 2014 ("Termination Date"). No additional contributions will be made by the Company or participants under the Plans after the Termination Date. All funds and Company stock remaining in participant accounts will be distributed not later than 24 months after the Termination Date. As of the Termination Date, the Company was obligated to deliver 28,891 shares of Company common stock under the Deferred Stock Purchase Plan.

Multi-employer plans

The Company contributes to a multi-employer plan for certain collective bargaining U.S. employees and for foreign employees according to their countries requirements. The risks of participating in this multi-employer plan are different from a single employer plan in the following aspects:


•	Assets contributed to the multi-employer plans by one employer may be used to provide benefits to employees of other participating employers.


•	If a participating employer ceases contributing to the plan, the unfunded obligations of the plan may be inherited by the remaining participating employers.


•	If the Company chooses to stop participating in the multi-employer plan, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

The Company has assessed and determined that the multi-employer plans to which it contributes are not significant to the Company's consolidated financial statements. The Company does not expect to incur a withdrawal liability or expect to significantly increase its contribution over the remainder of the contract period. The Company made contributions to the bargaining unit supported multi-employer pension plans.

Funded Zone Status

FIP/RP Status Pending/Implemented

Contribution

Plan Name

EIN

Plan #

2013

2012

Surcharge Imposed

Collective Bargaining Expiration Date

Northern Illinois Pension Plan

362663798

001

Green

$—

6/1/2014

Pipe Fitters Retirement Fund, Local 597

626105084

001

Green

275

102

6/1/2014

Plumbers & Pipefitters Local 572 Pension Fund

626102837

001

Green

192

250

3/31/2016

Plans for which financial information is not publicly available outside MFRI's financial statements

Denmark

N/A

$350

$353

N/A