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	2014	2013
Equity securities	$3,795	$3,340
U.S. bond market	2,033	2,453
Real estate securities	—	149
Subtotal	5,828	5,942
Level 2 significant other observable inputs
Money market fund	340	409
Total	$6,168	$6,351

At January 31, 2015, plan assets were held 62% in equity, 33% in debt and 5% 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 2014 resulted in $63 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, which is 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	2014		2013
Accumulated benefit obligations
Vested benefits	$7,626		$6,243
Accumulated benefits	$8,129		$6,827

Change in benefit obligation
Benefit obligation - beginning of year	$6,827		$7,240
Service cost	—		78
Interest cost	299		293
Actuarial (gain) loss	1,249		(539	)
Benefits paid	(246	)	(245	)
Benefit obligation - end of year	$8,129		$6,827

Change in plan assets
Fair value of plan assets - beginning of year	$6,351		$6,065
Actual gain on plan assets	63		531
Benefits paid	(246	)	(245	)
Fair value of plan assets - end of year	$6,168		$6,351

Unfunded status	$(1,961)		$(476)

Balance sheet classification
Current assets	$352		$335
Other assets	1,163		1,038
Other long-term liabilities	(3,476	)	(1,849	)
Net amount recognized	$(1,961)		$(476)

Amounts recognized in accumulated other comprehensive loss
Unrecognized actuarial loss	$3,124		$1,513
Net amount recognized	$3,124		$1,513



Weighted-average assumptions used to determine net cost and benefit obligations	2014		2013
End of year benefit obligation	3.35	%	4.50	%
Service cost discount rate *	4.50	%	4.50	%
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	2014		2013
Service cost		$—	$78
Interest cost	299		293
Expected return on plan assets	(494)		(483)
Amortization of prior service cost	—		21
Recognized actuarial loss	69		105
Curtailment cost	—		252
Net periodic benefit (income) cost	($126)		$266



Amounts recognized in other comprehensive income
Actuarial (loss) gain on obligation	($1,249)		$539
Actual (loss) gain on plan assets	(362	)	153
Reclassify prior service cost	—		21
Total in other comprehensive (loss) income	($1,611)		$713
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, 2016		$—
Expected employee contributions for the fiscal year ending January 31, 2016	—
Estimated future benefit payments reflecting expected future service for the fiscal year(s) ending January 31,:
2016	352
2017	349
2018	371
2019	368
2020	382
2021 - 2025	$1,837

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. Effective January 1, 2015, the employee match was increased to a maximum of 3.5% 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 $439 thousand and $430 thousand for the years ended January 31, 2015 and 2014, respectively.

Deferred compensation plan

The Company had a Supplemental Retirement and Deferred Compensation Plan ("Supplemental Plan"), pursuant to which key employees deferred compensation. Participants receive distributions from the plan at the later of age 65 or six months after separation from service. Life insurance contracts have been purchased which may be used to fund the Company's obligation under these agreements.



Deferred compensation liability	2014	2013
Current	$189	$189
Long-term	6,560	6,509
Total	$6,749	$6,698

Deferred compensation expense	$619	$519

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. The Company is obligated to deliver 9,991 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 #

2014

2013

Surcharge Imposed

Collective Bargaining Expiration Date

Pipe Fitters Retirement Fund, Local 597

626105084

001

Green

—

275

6/1/2014

Plumbers & Pipefitters Local 572 Pension Fund

626102837

001

Green

236

192

3/31/2016

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

Denmark

N/A

$296

$350

N/A