10-Q 1 mpr10q2ndq.htm SECOND QUARTER 10Q Second Quarter 10Q
 
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 quarter ended: July 31, 2006
 
or

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-07763

MET-PRO CORPORATION
(Exact name of registrant as specified in its charter)

Pennsylvania
  
23-1683282
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
     
160 Cassell Road, P.O. Box 144
    
Harleysville, Pennsylvania
  
19438
(Address of principal executive offices)
  
(Zip Code)

Registrant’s telephone number, including area code: (215) 723-6751




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 [   ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer [   ] Accelerated filer [ X ] Non-accelerated filer [   ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ] No [ X ]

As of July 31, 2006 the Registrant had 11,204,577 Common Shares, par value of $.10 per share, issued and outstanding.




MET-PRO CORPORATION


 



1
MET-PRO CORPORATION
 

(unaudited)

PART I - FINANCIAL INFORMATION
        
         
Item 1. Financial Statements
        
         
 
    July 31,
  
January 31,
  
ASSETS
    2006
  
2006      
 
Current assets
        
      Cash and cash equivalents
$20,019,306
  
$17,683,305
 
      Accounts receivable, net of allowance for doubtful
        
         accounts of approximately $167,000 and
        
         $247,000, respectively
16,496,106
  
17,909,727
 
      Inventories
17,926,444
  
16,438,481
  
      Prepaid expenses, deposits and other current assets
1,146,452
  
1,381,900
  
      Deferred income taxes
620,164
  
591,534
  
                Total current assets
56,208,472
  
54,004,947
  
         
Property, plant and equipment, net
16,491,707
  
13,838,221
 
Costs in excess of net assets of businesses acquired, net
20,798,913
  
20,798,913
  
Other assets
1,009,959
  
1,020,844
  
                 Total assets
$94,509,051
  
$89,662,925
 
         
LIABILITIES AND SHAREHOLDERS' EQUITY
        
Current liabilities
        
      Current portion of long-term debt
$1,944,293
  
$1,689,413
 
      Accounts payable
5,967,264
  
5,900,281
 
      Accrued salaries, wages and expenses
6,934,733
  
7,150,142
 
      Dividend payable
700,286
  
699,819
  
      Customers' advances
1,170,482
  
1,703,092
  
                Total current liabilities
16,717,058
  
17,142,747
  
         
Long-term debt
5,825,255
  
2,723,586
 
Other non-current liabilities
44,310
  
43,211
 
Deferred income taxes
2,257,636
  
2,215,143
  
                Total liabilities
24,844,259
  
22,124,687
 
         
Shareholders' equity
        
      Common shares, $.10 par value; 18,000,000 shares
        
         authorized, 12,846,608 shares issued,
       
         of which 1,642,031 and 1,649,498 shares were reacquired
       
         and held in treasury at the respective dates
1,284,661
  
1,284,661
 
      Additional paid-in capital
7,730,370
  
7,564,180
 
      Retained earnings
72,261,277
  
70,645,717
  
      Accumulated other comprehensive loss
(29,659
)
(321,821
)
      Treasury shares, at cost
(11,581,857
)
(11,634,499
)
                Total shareholders' equity
69,664,792
  
67,538,238
  
                Total liabilities and shareholders' equity
$94,509,051
  
$89,662,925
 
See accompanying notes to consolidated financial statements.
      
2
MET-PRO CORPORATION

 (unaudited)

 
Six Months Ended
July 31,
Three Months Ended
July 31,
 
2006       
 
2005      
 
2006       
 
2005      
 
Net sales
$43,557,923
  
$40,574,132
  
$23,778,882
  
$22,646,520
  
Cost of goods sold
30,968,074
  
27,557,134
 
17,044,392
  
15,583,797
  
Gross profit
12,589,849
  
13,016,998
 
6,734,490
  
7,062,723
  
 
                
Operating expenses
                
   Selling
3,972,366
 
3,927,401
  
2,076,187
  
1,973,138
  
   General and administrative
4,551,520
  
4,351,964
 
2,188,597
  
2,258,506
  
 
8,523,886
  
8,279,365
 
4,264,784
  
4,231,644
  
Income from operations
4,065,963
  
4,737,633
 
2,469,706
  
2,831,079
  
                 
Interest expense
(147,314
)
(135,914
)
(87,509
)
(69,862
)
Other income, net
516,840
  
285,993
  
277,632
  
159,004
  
Income before taxes
4,435,489
  
4,887,712
  
2,659,829
  
2,920,221
  
                 
Provision for taxes
1,419,356
  
1,612,945
  
851,144
  
963,672
  
Net income
$3,016,133
  
$3,274,767
  
$1,808,685
  
$1,956,549
 
                 
Earnings per share, basic (1)
$.27
  
$.29
  
$.16
  
$.18
  
                 
Earnings per share, diluted (2)
$.27
 
$.29
  
$.16
 
$.17
  
                 
Cash dividend per share - declared (3)
$.1250
 
$.1162
  
$.0625
 
$.0581
  
                 
Cash dividend per share - paid (3)
$.1250
 
$.1162
  
$.0625
 
$.0581
  

 
(1)
Basic earnings per share are based upon the weighted average number of shares outstanding of 11,202,088 and 11,180,204 for the six-month periods ended July 31, 2006 and 2005, respectively, and 11,201,507 and 11,179,138 for the three-month periods ended July 31, 2006 and 2005, respectively.
     
  (2)
Diluted earnings per share are based upon the weighted average number of shares outstanding of 11,379,867 and 11,307,786 for the six-month periods ended July 31, 2006 and 2005, respectively, and 11,383,659 and 11,302,289 for the three-month periods ended July 31, 2006 and 2005, respectively.  
     
 
(3)
The Board of Directors declared quarterly dividends of $.0625 per share payable on March 9, 2006, June 7, 2006, and September 6, 2006 to shareholders of record as of February 24, 2006, May 26, 2006, and August 24, 2006, respectively. Quarterly dividends of $.0581 per share were paid on March 8, 2005, June 8, 2005, and September 8, 2005 to shareholders of record as of February 25, 2005, May 27, 2005, and August 28, 2005, respectively.
     
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 

3
MET-PRO CORPORATION
 

(unaudited)
 
 
 
            
       
Accumulated
      
   
Additional
  
Other
      
 
Common
Paid-in
Retained
Comprehensive
Treasury
    
 
Shares
Capital
Earnings
Income/(Loss)
Shares
Total
 
Balances, January 31, 2006
$1,284,661
$7,564,180
  
$70,645,717
  
($321,821
)
($11,634,499
)
$67,538,238
  
                       
Comprehensive income:
                      
    Net income
-
-
  
3,016,133
  
-
  
-
      
    Cumulative translation adjustment
-
-
  
-
  
201,298
  
-
      
    Interest rate swap,
                      
        net of tax of $43,599
-
-
  
-
  
90,864
  
-
      
            Total comprehensive income
                  
3,308,295
  
                       
Dividends paid, $.0625 per share
-
-
  
(700,287
)
-
  
-
  
(700,287
)
Dividends declared, $.0625 per
                     
        share
-
-
  
(700,286
)
-
  
-
  
(700,286
)
Stock-based compensation
-
163,601
  
-
  
-
  
-
  
163,601
  
Stock option transactions
-
2,589
  
-
  
-
  
52,642
  
55,231
  
Balances, July 31, 2006
$1,284,661
$7,730,370
  
$72,261,277
  
($29,659
)
($11,581,857
)
$69,664,792
  
     
 
        
               
       
Accumulated
      
   
Additional
  
Other
      
 
Common
Paid-in
Retained
Comprehensive
Treasury
    
 
Shares
Capital
Earnings
Income/(Loss)
Shares
Total
  
Balances, January 31, 2005
$963,496
$7,930,646
  
$66,032,446
  
$100,635
  
($11,862,032
)
$63,165,191
  
 
 
                    
Comprehensive income:
                      
    Net income
-
-
  
3,274,767
  
-
  
-
     
    Cumulative translation adjustment
-
-
  
-
  
(282,343
)
-
     
    Interest rate swap,
                      
        net of tax of ($26,746)
-
-
  
-
  
50,090
 
-
      
            Total comprehensive income
                  
3,042,514
  
                       
Dividends paid, $.0581 per share
-
-
  
(650,258
)
-
  
-
  
(650,258
)
Dividends declared, $.0581 per
                      
        share
-
-
  
(650,115
)
-
  
-
 
(650,115
)
Stock option transactions
-
(8,043
)
-
  
-
  
192,189
  
184,146
  
Balances, July 31, 2005
$963,496
$7,922,603
  
$68,006,840
  
($131,618
)
($11,669,843
)
$65,091,478
  
See accompanying notes to consolidated financial statements.
        

 
 
 
 
 
 
 
4
MET-PRO CORPORATION
 

(unaudited)
       
     
Six Months Ended
     
July 31,
     
2006      
 
2005
  

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Cash flows from operating activities
            
   Net income
    
$3,016,133
  
$3,274,767
  
   Adjustments to reconcile net income to net            
          cash provided by operating activities:
            
      Depreciation and amortization
   
768,427
  
742,600
 
      Deferred income taxes
    
(1,106
)
(1,177
)
      (Gain) loss on sale of property and equipment, net
    
(11,589
)
8,591
  
      Stock-based compensation
    
163,601
  
-
  
      Allowance for doubtful accounts
   
(79,629
)
55,466
  
      (Increase) decrease in operating assets:
            
          Accounts receivable
   
1,607,822
  
(2,305,022
)
          Inventories
    
(1,405,805
)
(2,530,526
)
          Prepaid expenses, deposits and other current assets
   
247,600
  
303,086
  
          Other assets
    
(4,644
)
(17,394
)
      Increase (decrease) in operating liabilities:
            
          Accounts payable and accrued expenses
   
(276,556
)
1,267,070
  
          Customers’ advances
    
(532,636
)
(329,212
)
          Other non-current liabilities
    
1,098
  
1,098
  
        Net cash provided by operating activities
    
3,492,716
  
469,347
  
             
Cash flows from investing activities
            
   Proceeds from sale of property and equipment
    
12,810
  
30,907
  
   Acquisitions of property and equipment
    
(3,275,209
)
(488,380
)
        Net cash (used in) investing activities
    
(3,262,399
)
(457,473
)
             
Cash flows from financing activities
            
   Proceeds from new borrowings
    
4,140,315
  
-
  
   Reduction of debt
    
(713,113
)
(1,200,910
)
   Exercise of stock options
    
55,232
  
184,146
  
   Payment of dividends
    
(1,400,107
)
(1,298,639
)
        Net cash provided by (used in) financing activities
    
2,082,327
  
(2,315,403
)
Effect of exchange rate changes on cash
    
23,357
  
(22,212
)
             
Net increase (decrease) in cash and cash equivalents
    
2,336,001
  
(2,325,741
)
             
Cash and cash equivalents at February 1
    
17,683,305
  
20,889,476
  
Cash and cash equivalents at July 31
    
$20,019,306
  
$18,563,735
  
See accompanying notes to consolidated financial statements.
        

 

 
5
MET-PRO CORPORATION
 


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Pronouncements: In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, "Inventory Costs". The new Statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing", to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current period charges and requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. This Statement is effective for fiscal years beginning after June 15, 2005. SFAS No. 151 has not had a material impact on our financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. This Statement replaces SFAS No. 123 and supersedes Accounting Principles Board Opinion (“APB”) No. 25. SFAS No. 123(R) requires the fair value of all stock option awards issued to employees to be recorded as an expense over the related vesting period. The Statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. Prior to the adoption of SFAS No. 123(R) on February 1, 2006, the Company, as permitted by SFAS No. 123, provided pro forma disclosure of its compensation costs associated with the fair value of stock options that had been granted, and accordingly, no compensation costs were recognized in its consolidated financial statements. The Company adopted SFAS No. 123(R) using the modified prospective method, and accordingly, the financial statement amounts for the prior periods presented in this Quarterly Report on Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation. During the six-month period ended July 31, 2006, the adoption of SFAS No. 123(R) lowered net income by $111,249 and increased general and administrative expense by $163,601. The after-tax impact of adopting SFAS No. 123(R) is expected to approximate $223,000 during the fiscal year ending January 31, 2007. The adoption of this standard had no material impact on the Company's overall financial position and no impact on cash flow. See Note 4 for further information and the required disclosures under SFAS No. 123(R).

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets,” which addresses the measurement of exchanges of non-monetary assets. SFAS No. 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets, which was previously provided by APB No. 29, “Accounting for Non-monetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. SFAS No. 153 has not had a material impact on our financial condition or results of operations.

In March 2005, the FASB issued Interpretation FIN No. 47, “Accounting for Conditional Asset Retirement Obligations”. FIN No. 47 requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. The Interpretation also clarifies that the term Conditional Asset Retirement Obligation refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 was effective for the Company with its fiscal year ended January 31, 2006. FIN No. 47 has not had a material impact on our financial condition or results of operations.
 
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which replaces APB No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 changes the requirements for accounting and reporting a change in accounting principle, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance it does not include specific transition provisions. Specifically, SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine the period specific effects or the cumulative effect of the change. When it is impracticable to determine the effects of the change, the new accounting principle must be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and a corresponding adjustment must be made to the opening balance of retained earnings for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of the change, the
6
MET-PRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
new principle must be applied as if it were adopted prospectively from the earliest date practicable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 does not change the transition provisions of any existing pronouncements. SFAS No. 154 has not had a material impact on our financial condition or results of operations.

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of SFAS No. 109”, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 is effective and will be adopted by the Company on February 1, 2007. FIN No. 48 is not expected to have a material impact on our financial condition or results of operations.

Reclassifications: Effective February 1, 2006, Sethco Division was transferred from the product recovery/pollution control equipment segment to the fluid handling equipment segment. This transfer was occasioned by management’s determination that Sethco’s product line has become more consistent with the fluid handling equipment segment, as well as by the consolidation of Sethco and Fybroc Divisions’ management and financial reporting systems in connection with Sethco’s relocation to a facility it now shares with Fybroc. The business segment information for the six-month and three-month periods ended July 31, 2005, and the period ended January 31, 2006 have been restated to reflect this change.
 
This reclassification has been made to the notes of the consolidated financial statements (see Note 11 - Business Segment Data) for the six-month and three-month periods ended July 31, 2005 and the period ended January 31, 2006 to conform with the presentation of the financial statements for the six-month and three-month periods ended July 31, 2006. Such reclassifications did not have any impact on the consolidated statements of operations for the six-month and three-month periods ended July 31, 2006 and 2005, shareholders’ equity and cash flows for the six-month periods ended July 31, 2006 and 2005, and consolidated balance sheet as of July 31, 2006 and January 31, 2006.

Stock Split: On October 10, 2005, the Company’s Board of Directors declared a four-for-three stock split, effective in the form of a stock distribution, payable on November 15, 2005 to shareholders of record on November 1, 2005. The Company retained the current par value of $.10 per share for all common shares. All references in the financial statements and notes to the number of shares outstanding, per share amounts, and stock option data of the Company’s common shares have been restated to reflect the effect of the stock split for all periods presented.

Shareholders’ equity reflects the stock split by reclassifying from “Additional paid-in capital” to “Common shares” an amount equal to the par value of the additional shares arising from the split.


NOTE 2 - PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the accounts of Met-Pro Corporation (“Met-Pro” or the “Company”) and its wholly-owned subsidiaries, Mefiag B.V., Flex-Kleen Canada Inc., Strobic Air Corporation, MPC Inc., Pristine Water Solutions Inc., Mefiag (Guangzhou) Filter Systems Ltd. and Met-Pro (Hong Kong) Limited Company. Significant intercompany accounts and transactions have been eliminated.


NOTE 3 - BASIS OF PRESENTATION
 
In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the financial position of the Company as of July 31, 2006 and the results of operations for the six-month and three-month periods ended July 31, 2006 and 2005, and changes in shareholders’ equity and cash flows for the six-month periods then ended. The results of operations for the six-month and three-month periods ended July 31, 2006 and 2005 are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended January 31, 2006.

7
MET-PRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - STOCK-BASED COMPENSATION

Stock Options: Effective February 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based Payment," which revised SFAS No. 123, "Accounting for Stock-Based Compensation," and superseded APB No. 25, "Accounting for Stock Issued to Employees". Prior to February 1, 2006, the Company accounted for stock-based compensation under the provisions of APB No. 25 and related interpretations. Accordingly, no compensation expense related to granting of stock options had been recognized in the financial statements prior to adoption of SFAS No. 123(R) for stock options that were granted, as the grant price equaled the market price on the date of grant.
 
The Company has adopted SFAS No. 123(R) using the modified prospective method, and accordingly the financial statement amounts for the prior periods presented in this Quarterly Report on Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation. Under this transition method, compensation cost recognized in the six-month and three-month periods ended July 31, 2006 includes compensation cost for all share-based payments granted prior to, but not vested as of February 1, 2006 and shared-based payments granted after February 1, 2006.

For the six-month and three-month periods ended July 31, 2006, the impact of the adoption of SFAS No. 123(R) as compared to if the Company had continued to account for share-based compensation under APB Opinion No. 25 is as follows: an increase in general and administrative expense by $163,601 and $81,801, respectively; a reduction in net income by $111,249 and $55,625, respectively; and had a de minimis effect on basic and diluted earnings per share. SFAS No. 123(R) requires the Company to estimate forfeitures in calculating the compensation expense instead of recognizing these forfeitures and the resulting reduction in compensation expense as they occur. As of February 1, 2006, the cumulative after-tax effect of this change in accounting for forfeitures reduced stock-based compensation by $8,670. The estimate of forfeitures will be adjusted over the vesting period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. The adoption of this standard had no impact on net cash flows and results in the reclassification on the consolidated cash flow statement of related tax benefits from cash flows from operating activities to cash flows from financing activities to the extent these tax benefits exceeded the associated compensation cost recognized in the income statement.
 
At this time, the Company’s practice is to grant options with one-third exercisable as of the date of grant and the remaining two-thirds vesting over a two year period; provided, however, in the event of a “change of control”, any unvested portion of the option shall become immediately exercisable. The Company’s present practice is that the duration of options is for up to ten years from the date of grant, subject to earlier termination under various conditions. The fair value of each option is amortized into compensation expense on a straight-line basis over their respective vesting period, net of estimated forfeitures. The fair value of options was estimated at the grant date using the Black-Scholes option valuation model. The per share weighted-average fair value at the date of grant for stock options granted during the fiscal year ended January 31, 2006 was $2.76 per option. For the six months ended July 31, 2006, there have been no additional stock options granted. The application of this valuation model relies on the following assumptions that are judgmental and sensitive in the determination of the compensation expense:


 
Six Months Ended
July 31,
 
2006
  
2005
 
      
Expected term (years)
5.0
  
5.0
Risk-free interest rate
3.63% - 4.58%
  
3.11% - 4.58%
Expected volatility
30% - 32%
  
30% - 32%
Dividend yield
2.26% - 3.39%
  
2.26% - 3.73%

Historical information was the principal basis for the selection of the expected term and dividend yield. The expected volatility is based on a weighted-average combination of historical and implied volatilities over a time period that approximates the expected term of the option. The risk-free interest rate was selected based upon the U.S. Treasury Bill rates in effect at the time of grant for the expected term of the option.
 
8
MET-PRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
The following table summarizes stock option transactions for the six-month period ended July 31, 2006:

 
 
 Shares
Weighted   
 Average   
Exercise Price
  Weighted 
     Average  
  Remaining
    Life (years)
Aggregate   
Intrinsic Value
Options:
        
 
Outstanding at February 1, 2006
810,742
$9.8071
7.68
  
 
Granted
-
-
    
 
Forfeited
-
-
  
 
 
Expired
-
-
    
 
Exercised
7,467
7.3969
    
 
Outstanding at July 31, 2006
803,275
$9.8295
7.44
$2,466,456
           
 
Exercisable at July 31, 2006
630,155
$9.4137
7.44
$2,196,909

The aggregate intrinsic value of options exercised during the six-month periods ended July 31, 2006 and 2005 was $43,332 and $89,966, respectively. The intrinsic value of stock options is the amount by which the market price of the stock on a given date, such as at the end of the period or on the day of exercise, exceeded the market price of stock on the date of grant.

The following table summarizes information about the options outstanding and options exercisable as of July 31, 2006:

 
 
Options Outstanding
  
Options Exercisable
   
 Shares
Weighted Average Remaining
Life (years)
     Weighted Average
       Exercise Price
  
Shares
         Weighted Average
          Exercise Price
Range of prices:
              
$5.48 - 5.99
 
32,980
3.46
$5.5533
  
32,980
$5.5533
$6.00 - 6.99
  
64,716
4.64
6.8063
  
64,716
6.8063
$7.00 - 8.99
 
210,565
5.73
7.3735
  
210,565
7.3735
$9.00 - 11.99
 
169,340
8.69
9.8813
  
112,892
9.8813
$12.00 - 12.99
 
325,674
8.69
12.4242
  
209,002
12.6331
   
803,275
7.44
$9.8295
  
630,155
$9.4137

 
As of July 31, 2006, there was $456,982 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. The cost is expected to be recognized over a weighted-average period of 1.8 years.
 
 
 
 
 
 
 
 
 
 
 

9
MET-PRO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following table provides the pro forma net income and earnings per share for the six-month and three-month periods ended July 31, 2005 as if compensation cost for stock-based employee compensation was determined as of the grant date under the fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148.

   
Six Months Ended
July 31, 2005
  
Three Months Ended July 31, 2005
  
 
Net income, as reported
 
$3,274,767
  
 
$1,956,549
  
Add:
Stock-based employee compensation expense
included in reported net income, net of tax
 
-
  
 
-
  
Less:
Pro forma expense related to stock options granted,
net of tax effects
 
(83,380
 
)
 
(41,690
)
Pro forma
$3,191,387
  
$1,914,859
  
Earnings per share, basic:
        
 
As reported
$.29
  
$.18
  
 
Pro forma
.29
  
.17
  
Earnings per share, diluted:
        
 
As reported
$.29
  
$.17
  
 
Pro forma
.28
  
.17
  

For the purposes of this pro forma disclosure, the fair value of the options at the date of grant was estimated using the Black-Scholes option-pricing model.


NOTE 5 - INVENTORIES

Inventories consisted of the following:

 
    July 31,
   2006
  
January 31,
 2006
Raw materials
$10,569,704
  
$9,116,168
Work in progress
3,959,818
  
2,334,589
Finished goods
3,396,922
  
4,987,724
 
$17,926,444
  
$16,438,481


NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION

Net cash flows from operating activities reflect cash payments for interest and income taxes as follows:
 
 
Six Months Ended
July 31,
 
       2006
  
   2005
Cash paid during the period for:
      
   Interest
$155,138
 
$152,245
   Income taxes
1,964,283
 
1,062,858
 
 
 
 

10
MET-PRO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 NOTE 7 - DEBT

Short-term debt:

The Company and its subsidiaries have domestic and foreign unsecured lines of credit totaling $5,000,000 which can be used for working capital. As of July 31, 2006, the Company’s Mefiag B.V. subsidiary borrowed $383,220 (300,000 Euro) from its available line of credit.

Long-term debt:

Long-term debt consisted of the following:

 
July 31,
  
January 31,
 
2006
  
2006      
Note payable, bank, payable in
      
     quarterly installments of $300,000,
      
     plus interest at a rate of 75 basis points
      
     over the ninety day LIBOR rate
      
     (effective interest rate of 5.90% at
      
     July 31, 2006), maturing October, 2008.
$3,000,000
  
$3,600,000
       
Note payable, bank, payable in
     
     quarterly installments of $31,935
      
     (25,000 Euro), plus interest at a
      
     fixed rate of 3.82%, maturing
          
     January, 2016.
1,052,572
 
379,387
       
Line of credit, $383,220 (300,000 Euro),
      
     payable upon demand, plus
     
     interest at a rate of 70 basis points
      
     over the thirty day EURIBOR rate
      
     (effective interest rate of 3.71% at
      
     July 31, 2006).
383,220
  
364,559
       
Bond payable, bank, payable in
      
     quarterly installments of $58,333,
      
     plus interest at a rate of 16 basis points
      
     below the ninety day LIBOR rate
      
     (effective interest rate of 4.99% at
      
     July 31, 2006), maturing April, 2021.
3,449,166
  
50,000
       
 
7,884,958
  
4,393,946
Less current portion
1,944,293
  
1,689,413
 
5,940,665
  
2,704,533
Fair market value of interest rate
      
     swap liability
(115,410
)
19,053
Long-term portion
$5,825,255
  
$2,723,586
 
The note payables and bond payable are subject to certain covenants, including maintenance of prescribed amounts of leverage and fixed charge coverage ratios.
 
11
MET-PRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company has two separate interest rate swap agreements to hedge against the potential impact on earnings from increases in market interest rates. Effective October 29, 1998, the Company entered into a ten-year interest rate swap agreement for a notional amount equal to the balance on the note payable maturing October 2008. The Company swapped the ninety day LIBOR for a fixed rate of 5.23%. As a result, the effective fixed interest rate is 5.98%. Effective April 3, 2006, the Company entered into a fifteen-year interest rate swap agreement for a notional amount equal to the balance on the bond payable maturing April 2021. The Company swapped the ninety day LIBOR for a fixed rate of 4.87%. As a result, the effective fixed interest rate is 4.71%. These interest rate swap agreements are accounted for as fair value hedges that qualify for treatment under the short-cut method of measuring effectiveness in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS 138, “Accounting for Certain Derivative Instruments and Hedging Activities - an Amendment to FASB Statement No. 133”. There was no hedge ineffectiveness as of July 31, 2006. The fair value of the interest rate swap agreements resulted in an increase in equity of $78,479 (net of tax) for the six-months ended July 31, 2006 and a decrease in equity of $12,385 (net of tax) for the fiscal year ended January 31, 2006. These results are recorded in the accumulated other comprehensive loss section of shareholders’ equity.
 
Maturities of long-term debt are as follows:
 
Year Ending
    
January 31,
    
2007
$1,944,293
 
2008
1,561,072
  
2009
1,561,072
  
2010
361,072
  
2011
361,072
  
Thereafter
2,096,377
  
 
$7,884,958
  
 

NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive income/(loss) consisted of the following:

 
July 31,
  
January 31,
  
 
2006   
 
2006   
 
Interest rate swap, net of tax
$78,479
  
($12,385
)
Cumulative translation of adjustment
601,729
  
400,431
  
Minimum pension liability adjustment, net of tax
(709,867
)
(709,867
)
 
($29,659
)
($321,821
)


NOTE 9 - OTHER INCOME, NET

Other income, net was comprised of the following:
 
 
        Six Months Ended July 31,
 
Three Months Ended July 31,
 
2006   
 
2005   
 
2006   
 
2005   
Gain/(loss) on sale of property and equipment
$11,589
  
($8,591
)
$7,179
  
$3,607
Other, primarily interest income
505,251
  
294,584
  
270,453
  
 155,397
 
$516,840
  
$285,993
  
$277,632
 
$159,004

 
12
MET-PRO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 - EMPLOYEE BENEFIT PLANS

Pension Plans: The Company has several defined benefit pension plans covering eligible employees in the United States. The net periodic benefit cost is based on estimated values provided by independent actuaries. The following table provides the components of net periodic benefit costs:


 
 
 Pension Benefits
  
 
    Six Months Ended
  
     Three Months Ended   
 
 
July 31,
  
  July 31,
  
 
      2006
  
      2005
  
     2006
  
       2005
  
Service cost
$354,124
 
$310,032
  
$177,062
  
$155,016
  
Interest cost
535,814
  
514,992
  
267,907
  
257,496
  
Expected return on plan assets
(584,930
)
(513,800
)
(292,465
)
(256,900
)
Amortization of transition asset
(8,058
)
(5,258
)
(4,029
)
(2,629
)
Amortization of prior service cost
49,406
  
50,592
  
24,703
  
25,296
  
Recognized net actuarial loss
51,678
  
13,818
  
25,839
  
6,909
  
Net periodic benefit cost
$398,034
  
$370,376
  
$199,017
  
$185,188
  



The Company contributed $82,374 to the pension plans during the six-month period ended July 31, 2006 and expects an additional minimum contribution of $49,739 during the six-month period ending January 31, 2007.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

13
MET-PRO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - BUSINESS SEGMENT DATA

The Company’s operations are conducted in two business segments: the manufacture and sale of product recovery/pollution control equipment, and the manufacture and sale of fluid handling equipment.

Effective February 1, 2006, Sethco Division was transferred from the product recovery/pollution control equipment segment to the fluid handling equipment segment. This transfer was occasioned by management’s determination that Sethco’s product line has become more consistent with the fluid handling equipment segment, as well as by the consolidation of Sethco and Fybroc Divisions’ management and financial reporting systems in connection with Sethco’s relocation to a facility it now shares with Fybroc. The business segment information below for the six-month and three-month periods ended July 31, 2005, and the period ended January 31, 2006 have been restated to reflect this change.

No significant intercompany revenue is realized by either business segment. Interest income and expense are not included in the measure of segment profit reviewed by management. Income taxes are also not included in the measure of segment operating profit reviewed by management.

Financial information by business segment is shown below:


 
   Six Months Ended July 31,
Three Months Ended July 31,
 
2006      
 
2005       
 
2006       
 
2005      
Net sales
              
     Product recovery/pollution control equipment
$25,004,126
  
$21,976,446
  
$14,344,461
  
$13,151,912
     Fluid handling equipment
18,553,797
  
18,597,686
  
9,434,421
 
9,494,608
 
$43,557,923
  
$40,574,132
  
$23,778,882
  
$22,646,520
               
Income from operations
              
     Product recovery/pollution control equipment
$1,666,913
  
$1,858,726
  
$944,816
  
$1,136,398
     Fluid handling equipment
2,399,050
  
2,878,907
  
1,524,890
  
1,694,681
 
$4,065,963
  
$4,737,633
  
$2,469,706
 
$2,831,079



 
July 31,    
 
January 31,
 
2006       
 
2006       
Identifiable assets
      
     Product recovery/pollution control equipment
$39,480,632
  
$40,526,378
     Fluid handling equipment
33,003,946
  
28,308,734
 
72,484,578
  
68,835,112
     Corporate
22,024,473
  
20,827,813
 
$94,509,051
  
$89,662,925


NOTE 12 - ACCOUNTANTS’ 10-Q REVIEW

Margolis & Company P.C., the Company’s independent registered public accountants, has performed a limited review of the financial information included herein. Their report on such review accompanies this filing.
 
 
14
MET-PRO CORPORATION
 

 
To the Board of Directors
Met-Pro Corporation
Harleysville, Pennsylvania

We have reviewed the accompanying consolidated balance sheet of Met-Pro Corporation and its wholly-owned subsidiaries as of July 31 2006, and the related consolidated statements of operations for the six-month and three-month periods ended July 31, 2006 and 2005 and shareholders’ equity and cash flows for the six-month period ended July 31, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements in order for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Met-Pro Corporation and its wholly-owned subsidiaries as of January 31, 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 24, 2006, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 31, 2006 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.




/s/ Margolis & Company P.C.
Certified Public Accountants




Bala Cynwyd, Pennsylvania
August 18, 2006
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
15
MET-PRO CORPORATION
 
 


Results of Operations:

The following table sets forth, for the six-month and three-month periods indicated, certain financial information derived from the Company’s consolidated statement of operations expressed as a percentage of net sales.

   
               Six Months Ended
  
Three Months Ended    
 
   
                July 31,
  
July 31,               
 
   
2006
  
2005
  
2006
  
2005
  
Net Sales
 
100.0
%
100.0
% 
100.0
 %
100.0
%
Cost of goods sold
  
71.1
%
67.9
%
71.7
 %
68.8
%
Gross profit
  
28.9
%
32.1
% 
28.3
 %
31.2
%
         
 
      
 
Selling expenses
  
9.1
% 
9.7
% 
8.7
 %
8.7
%
General and administrative expenses
  
10.5
% 
10.7
% 
9.2
 %
10.0
%
Income from operations
  
9.3
% 
11.7
% 
10.4
 %
12.5
%
         
 
        
Interest expense
  
(.3
%)
(.3
%)
(.4
%)
(.3
%)
Other income, net
  
1.2
% 
.7
% 
1.2
 %
.7
%
Income before taxes
  
10.2
% 
12.1
% 
11.2
 %
12.9
%
         
 
        
Provision for taxes
  
3.3
% 
4.0
% 
3.6
 %
4.3
%
Net income
  
6.9
% 
8.1
% 
7.6
 %
8.6
%


Six Months Ended July 31, 2006 vs Six Months Ended July 31, 2005

Net sales for the six-month period ended July 31, 2006 were $43,557,923 compared with $40,574,132 for the six-month period ended July 31, 2005, an increase of $2,983,791 or 7.4%. Sales in the Product Recovery/Pollution Control Equipment segment were $25,004,126 or 13.8% higher than the six-month period ended July 31, 2005. The increase in the Product Recovery/Pollution Control Equipment segment was due primarily to increased demand for our fume and odor control equipment. Sales in the Fluid Handling Equipment segment were $18,553,797, or slightly lower, compared with $18,597,686 for the six-month period ended July 31, 2005.

The dollar amount of the Company’s backlog of orders totaled $23,996,831 and $16,044,603 as of July 31, 2006 and 2005, respectively. The Company expects that substantially all of the backlog that existed as of July 31, 2006 will be shipped during the current fiscal year.
 
Net income for the six-month period ended July 31, 2006 was $3,016,133 compared with $3,274,767 for the six-month period ended July 31, 2005, a decrease of $258,634 or 7.9%. Net income was impacted by (i) product mix and high material costs in both operating segments, (ii) a loss on one large Product Recovery/Pollution Control Equipment segment project which reduced our net income by approximately $264,000, (iii) non-recurring and non-capitalized expenses incurred in the first quarter resulting from the relocation of the Company’s Sethco and Mefiag Divisions and the expansion of the Company’s Netherlands and Telford, Pennsylvania facilities, which reduced net income in the Fluid Handling Equipment segment by approximately $243,000, and (iv) a non-cash charge for stock options which reduced net income by approximately $111,000.

The gross margin for the six-month period ended July 31, 2006 was 28.9% versus 32.1% for the same period in the prior year. This decrease in gross margin was due to (i) product mix and higher material costs in the both operating segments and (ii) a loss on one large Product Recovery/Pollution Control Equipment segment project previously mentioned, which on its own reduced the gross margin from 29.8% to 28.9% for the six-month period. Procedures have been implemented to avoid profit erosion on larger projects. To offset the higher material costs, the Company has taken certain measures including selected price increases and improved purchasing practices. The relocation of the Company’s Sethco and Mefiag Divisions and the expansion
 
16
MET-PRO CORPORATION
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations continued…
 

of the Company’s Netherlands and Telford, Pennsylvania facilities are complete and are expected to result in improved operational results. These several initiatives are expected to relieve pressures on the Company’s gross margins in the third and fourth quarters of this year.

Selling expense increased $44,965 during the six-month period ended July 31, 2006 compared with the same period last year. Selling expense as a percentage of net sales was 9.1% for the six-month period ended July 31, 2006 compared with 9.7% for the same period last year.

General and administrative expense was $4,551,520 for the six-month period ended July 31, 2006 compared with $4,351,964 for the same period last year, an increase of $199,556. This increase is principally related to non-recurring and non-capitalized expenses resulting from the relocation of our Company’s Sethco and Mefiag Divisions and the expansion of the Company's Netherlands and Telford, Pennsylvania facilities which occurred during the fiscal quarter ended April 30, 2006, combined with the impact of expensing stock options. General and administrative expense as a percentage of net sales was 10.5% for the six-month period ended July 31, 2006, compared with 10.7% for the same period last year.

Interest expense was $147,314 for the six-month period ended July 31, 2006, compared with $135,914 for the same period in the prior year, an increase of $11,400. This increase was due principally to an increase of long-term debt related to plant expansions.

Other income, net, was $516,840 for the six-month period ended July 31, 2006 compared with $285,993 for the same period in the prior year. This change is related to higher interest income earned on cash on hand.

The effective tax rates for the six-month periods ended July 31, 2006 and 2005 were 32% and 33%, respectively.

Three Months Ended July 31, 2006 vs Three Months Ended July 31, 2005

Net sales for the three-month period ended July 31, 2006 were $23,778,882 compared with $22,646,520 for the three month-period ended July 31, 2005, an increase of $1,132,362 or 5.0%. Sales in the Product Recovery/Pollution Control Equipment segment were $14,344,461 or 9.1% higher than the three-month period ended July 31, 2005. The increase in the Product Recovery/Pollution Control Equipment segment was due primarily to increased demand for our particulate collection as well as our fume and odor control equipment. Sales in the Fluid Handling Equipment segment were $9,434,421, or slightly lower, compared with the three-month period ended July 31, 2005.

Net income for the three-month period ended July 31, 2006 was $1,808,685 compared with $1,956,549 for the three-month period ended July 31, 2005, a decrease of $147,864 or 7.6%. Net income was impacted by (i) product mix and higher material costs in both operating segments, (ii) a loss on one large Product Recovery/Pollution Control Equipment project which reduced our net income by approximately $264,000, and (iii) a non-cash charge for stock options which reduced net income by approximately $56,000.

The gross margin for the three-month period ended July 31, 2006 was 28.3% compared with 31.2% for the same period in the prior year. This decrease in gross margin was due to (i) product mix and higher material costs in both operating segments and (ii) a loss on one large Product Recovery/Pollution Control project previously mentioned, which on its own reduced the gross margin from 30.0% to 28.3% for the three-month period.

Selling expenses increased $103,049 during the three-month period ended July 31, 2006 compared with the same period last year. As a percentage of net sales, selling expenses were 8.7% for the three-month period ended July 31, 2006 and 2005.

General and administrative expense was $2,188,597 for the three-month period ended July 31, 2006 compared with $2,258,506 for the three-month period ended July 31, 2005, a decrease of $69,909. This decrease is principally related to the decrease in an accrual for the management incentive program, a lower reserve for bad debts and a lower personnel acquisition expense, offset by the expensing of stock options. General and administrative expense as a percentage of net sales was 9.2% for the six-month period ended July 31, 2006, compared with 10.0% of net sales for the same period last year.
 
17
MET-PRO CORPORATION
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations continued…
 

Interest expense was $87,509 for the three-month period ended July 31, 2006 compared with $69,862 for the same period in the prior year, an increase of $17,647. This increase was due principally to an increase of long-term debt related to plant expansions.

Other income, net, was $277,632 for the three-month period ended July 31, 2006 compared with $159,004 for the same period in the prior year. This change is related to higher interest income earned on cash on hand.

The effective tax rates for the three-month periods ended July 31, 2006 and 2005 were 32% and 33%, respectively.

Liquidity:

The Company’s cash and cash equivalents were $20,019,306 on July 31, 2006 compared with $17,683,305 on January 31, 2006, an increase of $2,336,001. This increase is the net result of the positive cash flows provided by operating activities of $3,492,716 and the proceeds from new borrowings (as discussed in the Capital Resources and Requirements section below) amounting to $4,140,315, offset by payment of the quarterly cash dividends amounting to $1,400,107, payments on long term debt totaling $713,113 and investment in property and equipment amounting to $3,275,209. The Company’s cash flows from operating activities are influenced, in part, by the timing of shipments and negotiated standard payment terms, including retention associated with major projects, as well as, other factors including changes in inventories and accounts receivable.

Accounts receivable (net) amounted to $16,496,106 on July 31, 2006 compared with $17,909,727 on January 31, 2006, which represents a decrease of $1,413,621. In addition to changes in sales volume, the timing and size of shipments and retainage on contracts, especially in the Product Recovery/Pollution Control Equipment segment, will, among other factors, influence accounts receivable balances at any point in time.

Inventories were $17,926,444 on July 31, 2006 compared with $16,438,481 on January 31, 2006, an increase of $1,487,963. This increase is primarily due to inventory purchased in the six-month period ended July 31, 2006 for projects which are expected to ship in the third and fourth quarters of this fiscal year. Inventory balances fluctuate depending on market demand and on the timing and size of shipments, especially when major systems and contracts are involved.

Current liabilities amounted to $16,717,058 on July 31, 2006, compared with $17,142,747 on January 31, 2006, a decrease of $425,689. A decrease in customer advances and accrued salaries, wages and expenses, offset partially by an increase in the current portion of long-term debt, accounted for this decrease.

The Company has consistently maintained a high current ratio and it and its subsidiaries maintain domestic and foreign lines of credit totaling $5.0 million, which are available for working capital purposes. As of July 31, 2006, the Company’s Mefiag B.V. subsidiary had borrowed $383,220 (300,000 EURO) on a low interest foreign line of credit to partially finance an expansion and renovation of its facility located in The Netherlands. Cash flows, in general, have exceeded the current needs of the Company. The Company presently foresees no change in this situation in the immediate future. As of July 31, 2006 and January 31, 2006, working capital was $39,491,414 and $36,862,200, respectively, and the current ratio was 3.4 and 3.2, respectively.

Capital Resources and Requirements:

Cash flows provided by operating activities during the six-month period ended July 31, 2006 amounted to $3,492,716 compared with $469,347 in the six-month period ended July 31, 2005. This increase in cash flows from operating activities was due principally to the decrease in accounts receivable and the reduction in the increase of inventory, offset by decreases in accrued expenses and customer advances.

Cash flows used in investing activities during the six-month period ended July 31, 2006 amounted to $3,262,399 compared with $457,473 for the six-month period ended July 31, 2005, an increase of $2,804,926. The increase in investing activities is partially due to capital expenses incurred in connection with the expansion of the Company’s Telford, Pennsylvania facility, as to which the Company incurred costs of $1,661,272 for the six-month period ended July 31, 2006. This expansion was required to accommodate the relocation of the Sethco Division from Hauppauge, New York to the Telford, Pennsylvania facility. In addition, the increase in investing activities was due to an expansion and renovation of our Mefiag B.V. facility in the Netherlands, in which the Company has incurred costs of $751,765 for the six-month period ended July 31, 2006. This
18
MET-PRO CORPORATION
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations continued…
 
 
expansion is required to maintain the projected growth of Mefiag B.V. The balance of the increase is due to the Company’s capital expenditures in the two operating segments and in its corporate headquarters.

During the second quarter, the Company listed for sale, its 30,000 square foot building located on four acres in Hauppauge, Long Island, New York, previously occupied by our Sethco Division at an asking price of $4,950,000. The book value of the land and building amounted to $742,583 as of July 31, 2006 and is included in the property, plant and equipment, net, section of the consolidated balance sheet.

Consistent with past practices, the Company intends to continue to invest in new product development programs and to make capital expenditures to support the ongoing operations during the coming year. The Company expects to finance all routine capital expenditure requirements through cash flows generated from operations.

Financing activities during the six-month period ended July 31, 2006 provided $2,082,327 of available resources compared with $2,315,403 utilized during the six-month period ended July 31, 2005. The 2006 activity is the result of the proceeds from new borrowings of $4,140,315, offset by the reduction of debt of $713,113 and payment of dividends amounting to $1,400,107. During the six-month period ended July 31, 2006, the Company borrowed $3,450,000 in an industrial revenue bond financing, totaling $3,500,000 for a term of fifteen years, at a fixed interest rate swap of 4.71% in order to finance the expansion of the Telford, Pennsylvania facility. In addition, during the six-month period ended July 31, 2006, the Company’s Mefiag B.V. subsidiary borrowed $690,315 (561,795 Euro) from a bank for a term of ten years, at a fixed interest rate of 3.82% for the expansion of its facility in the The Netherlands.

The Board of Directors declared quarterly dividends of $.0625 payable on March 9, 2006, June 7, 2006, and September 6, 2006, to shareholders of record as of February 24, 2006, May 26, 2006, and August 24, 2006, respectively.

Critical Accounting Policies and Estimates:

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

The Company’s recognizes revenues from product sales or services provided when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured. The Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 104.

Property, plant and equipment, intangible and certain other long-lived assets are depreciated and amortized over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, which supersedes Accounting Principles Board (“APB”) No. 17, “Intangible Assets”, effective February 1, 2002, the Company’s unamortized goodwill balance is not being amortized over its estimated useful life; rather, it is being assessed at least annually for impairment.

The determination of our obligation and expense for pension benefits is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. These assumptions include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation. In accordance with generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore generally affect our recognized expense and recorded obligation in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension obligations and our future expense.
19
MET-PRO CORPORATION
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations continued…


Cautionary Statement Concerning Forward-Looking Statements:

Our prospects are subject to certain uncertainties and risk. This Quarterly Report on Form 10-Q also contains certain forward-looking statements within the meaning of the Federal securities laws. These forward-looking statements may be identified by words describing our belief or expectation, such as where we say that we “believe”, “expect” or “anticipate”, or where we characterize something in a manner in which there is an express or implicit reference to the future, such as “non-recurring” or “unusual,” or where we express that our view is based upon the “current status” of a given matter, or upon facts as we know them as of the date of the statement. The content and/or context of other statements that we make may indicate that the statement is “forward-looking”. We claim the “safe harbor” provided by The Private Securities Reform Act of 1995 for all forward-looking statements.

Results may differ materially from our current results and actual results could differ materially from those suggested in the forward-looking statements as a result of certain risk factors, including but not limited to those set forth below, other one time events, other important factors disclosed previously and from time to time in Met-Pro’s other filings with the Securities and Exchange Commission.

The following important factors, along with those discussed elsewhere in this Quarterly Report on Form 10-Q, could affect our future financial condition and results of operations, and could cause our future financial condition and results of operations to differ materially from those expressed in our SEC filings and in our forward-looking statements:

·  
the write-down of costs in excess of net assets of businesses acquired (goodwill), as a result of the determination that the acquired business is impaired. Our Flex-Kleen Division, which initially performed well after being acquired by Met-Pro, thereafter had several years of declining performance which we attributed primarily to a general weakness in its served markets, followed by improved performance in the fiscal years ended January 31, 2006 and 2005. During the fiscal year ended January 31, 2006, we performed an impairment analysis of the $11.1 million of goodwill that the Company carries for Flex-Kleen and concluded that no impairment had occurred. Flex-Kleen’s performance needs to continue to improve in order for us not to be required to write-off some or all of its goodwill;
·  
materially adverse changes in economic conditions in the markets served by us or in significant customers of ours;
·  
material changes in available technology;
·  
adverse developments in the asbestos cases that have been filed against the Company, including without limitation the exhaustion of insurance coverage, the imposition of punitive damages or other adverse developments in the availability of insurance coverage;
·  
changes in accounting rules promulgated by regulatory agencies, including the SEC, which could result in an impact on earnings;
·  
the cost of compliance with Sarbanes-Oxley and other applicable legal and listing requirements, and the unanticipated possibility that Met-Pro may not meet these requirements;
·  
unexpected results in our product development activities;
·  
loss of key customers;
·  
changes in product mix and the cost of materials, with effect on margins;
·  
changes in our existing management;
·  
exchange rate fluctuations;
·  
changes in federal laws, state laws and regulations;
·  
lower than anticipated return on investments in the Company’s defined benefit plans, which could affect the amount of the Company’s pension liabilities;
·  
the assertion of litigation claims that the Company’s products, including products produced by companies acquired by the Company, infringe third party patents or have caused injury, loss or damage;
·  
the effect of acquisitions and other strategic ventures;
·  
failure to properly quote and/or execute customer orders, including misspecifications, design, engineering or production errors;
·  
the cancellation or delay of purchase orders or shipments;
·  
losses related to international sales; and/or
·  
failure in execution of acquisition strategy.
 
20
MET-PRO CORPORATION
 

We have no disclosure to make with respect to this Item.



(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, are designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that no change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Item 1. Legal Proceedings

Certain of the statements made in this Item 1 (and elsewhere in this Report) are “forward-looking” statements which are subject to the considerations set forth in “Cautionary Statement Regarding Forward-Looking Statements” located in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Report, and we refer you to these considerations.

Beginning in 2002, the Company and/or one of its divisions began to be named as one of many defendants in asbestos-related lawsuits filed predominantly in Mississippi on a mass basis by large numbers of plaintiffs against a large number of industrial companies including in particular those in the pump and fluid handling industries. More recently, the Company and/or this division have been named as one of many pump and fluid handling defendants in asbestos-related lawsuits filed in New York and Maryland by individual plaintiffs, sometimes husband and wife. To a lesser extent, the Company and/or this division have also been named together with many other pump and fluid handling defendants in these type of cases in other states as well. The complaints filed against the Company and/or this division have been vague, general and speculative, alleging that the Company, and/or the division, along with the numerous other defendants, sold unidentified asbestos-containing products and engaged in other related actions which caused injuries and loss to the plaintiffs. The Company believes that it and/or the division have meritorious defenses to the cases which have been filed and that none of its and/or the division’s products were a cause of any injury or loss to any of the plaintiffs. The Company’s insurers have hired attorneys who together with the Company are vigorously defending these cases. The Company and/or the division have been dismissed from or settled a number of these cases. Most of these cases have not advanced beyond the early stages of discovery, although several cases in different jurisdictions are on schedules leading to trial. The Company presently believes that these proceedings will not have a material adverse impact upon the Company’s results of operations, liquidity or financial condition.

The Company is also party to a small number of other legal proceedings arising out of the ordinary course of business or other proceedings that the Company does not presently believe will have a material adverse impact upon the Company’s results of operations, liquidity or financial condition.

21
MET-PRO CORPORATION
 
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2006 as filed with the Securities and Exchange Commission on April 13, 2006, which could materially affect our business, financial condition, financial results or future performance. Additionally, we refer you to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement Concerning Forward-Looking Statements” of this report which we incorporate herein by reference.


 
(a) During the second quarter ended July 31, 2006, we did not sell any of our equity securities that were not registered under the Securities Act of 1933.
   
(b)  Not applicable
   
(c) The following table summarizes Met-Pro’s purchases of its Common Shares for the quarter ended July 31, 2006:
 
Issuer Purchases of
Equity Securities
Period
  
Total
Number of
Shares
Purchased
  
Average
Price Paid
Per Share
  
Total
Number of
Shares
Purchased
As Part of
Publicly
Announced
Plans or
Programs
  
Maximum
Number of
Shares
That May
Yet be
Purchased
Under the
Plan or
Programs
 
 
 
 
 
 
 
 
 
(1)
                   
May 1-31, 2006
  
0
  
$ -
  
0
  
270,918
  
June 1-30, 2006
  
0
  
-
 
0
  
270,918
  
July 1-31, 2006
  
0
  
-
  
0
  
270,918
  
Total
  
0
 
$ -
  
0
  
270,918
  
 
(1)
On December 15, 2000, our Board of Directors authorized a Common Share repurchase program that was publicly announced on December 19, 2000, for up to 533,333 (adjusted for stock split) shares. The program has no fixed expiration date.



None






 

22
MET-PRO CORPORATION
 
 
An Annual Meeting of the Company’s shareholders was held on June 7, 2006. At that meeting, two proposals were submitted to a vote of the Company’s shareholders. Proposal 1 was a proposal to elect three Directors (with George H. Glatfelter, II, Alan Lawley, Ph.D., and Gary J. Morgan being the nominees) to serve until the 2009 Annual Meeting of Shareholders. Proposal 2 was to ratify the election of Margollis & Company P.C. as independent registered public accountants for the Company’s fiscal year ending January 31, 2007.

At the close of business on the record date for the meeting (which was April 13, 2006), there were 11,204,577 Common Shares outstanding and entitled to be voted at the meeting. Holders of 10,404,010 Common Shares (representing a like number of votes) were present at the meeting, either in person or by proxy.

The following table sets forth the results of the voting on each of the proposals:

 
     
           Number of Votes
Proposals
    
For       
Against
Abstain/
Broker
Non Vote
Proposal 1 -
Election of Directors
  
 
 
 
  George H. Glatfelter, II   10,121,409 282,601 -
  Alan Lawley, Ph.D.   9,900,065 503,945 -
  Gary J. Morgan  
9,849,124
554,886
 -
Proposal 2 -
Selection of Margolis & Company P.C. as Independent Registered Public Accountants
  
9,907,335
471,242
25,433

Consequently, both proposals were adopted by the shareholders.       



None


 
 
* Filed herewith.

23
MET-PRO CORPORATION
 
 


 
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.




 
Met-Pro Corporation
  (Registrant)
   
   
   
   
September 8, 2006 /s/ Raymond J. De Hont
  Raymond J. De Hont
  Chairman, President and Chief Executive
  Officer
   
   
   
September 8, 2006 /s/ Gary J. Morgan
  Gary J. Morgan
  Senior Vice President of Finance,
  Secretary and Treasurer, Chief
  Financial Officer, Chief Accounting
  Officer and Director









 






 


 





24