Attached files
file | filename |
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EX-32 - EXHIBIT 32 - PMFG, Inc. | c08004exv32.htm |
EX-31.2 - EXHIBIT 31.2 - PMFG, Inc. | c08004exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - PMFG, Inc. | c08004exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 2, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34156
PMFG, INC.
(Exact name of registrant as specified in its charter)
Delaware | 51-0661574 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
14651 North Dallas Parkway, Suite 500, Dallas, Texas 75254
(Address of principal executive offices)
(Address of principal executive offices)
(214) 357-6181
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of the registrants common stock outstanding on November 4, 2010, was
14,954,901.
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34 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
2
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FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other
than statements of historical fact contained in this Report are forward-looking statements. You
should not place undue reliance on these statements. These forward-looking statements include
statements that reflect the current views of our senior management with respect to our financial
performance and future events with respect to our business and our industry in general. Statements
that include the words expect, intend, plan, believe, project, forecast, estimate,
may, should, anticipate and similar statements of a future or forward-looking nature identify
forward-looking statements. Forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could cause our actual
results to differ materially from those indicated in these statements. We believe that these
factors include, but are not limited to, the following:
| adverse changes in the current global economic environment or in the markets in which we operate, including the power generation, natural gas infrastructure and petrochemical and processing industries; |
| the impact of the current global credit crisis, including the impact on the trading price of our common stock and our ability and our customers ability to access capital markets; |
| changes in the price, supply or demand for fuels such as natural gas, bio fuel, oil and coal; |
| changes in current environmental legislation; |
| compliance with United States and foreign laws and regulations applicable to our international operations, including export control and economic sanctions laws and regulations which are complex, change frequently and have tended to become more stringent over time; |
| changes in competition; |
| changes in demand for our products; |
| the effects of the United States involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts; |
| changes in our ability to conduct business outside the United States, including changes in foreign laws and regulations; |
| risks associated with our indebtedness; |
| risks associated with our product warranties; |
| the redemption and conversion features of our Series A Convertible Redeemable Preferred Stock (Preferred Stock) are classified as an embedded derivative and as such has resulted and will continue to result in volatility in our financial statements, including having a material negative impact on our net income and the derivative liability recorded, due to the fair value accounting requirement to mark-to-market the derivative liability each reporting period; |
| limitations on raising additional equity imposed by our Preferred Stock; |
| the effects of natural disasters; and |
| loss of the services of any of our senior management or other key employees. |
3
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The foregoing factors should not be construed as exhaustive and should be read together with
the other cautionary statements included in this and other reports we file with the Securities and
Exchange Commission (the SEC), including the information in Item 1A. Risk Factors of Part I to
our Annual Report on Form 10-K for the year ended June 30, 2010 and Part II of this Report. There
may be other factors that may cause our actual results to differ materially from the
forward-looking statements. If one or more events related to these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be incorrect, actual results may differ
materially from what we anticipate. We undertake no obligation to publicly update or revise any
forward-looking statement.
4
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PMFG, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
October 2, | June 30, | |||||||
2010 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 26,310 | $ | 24,271 | ||||
Restricted cash |
5,305 | 5,868 | ||||||
Accounts receivable, principally trade net of allowance for
doubtful accounts of $852 and $886 at October 2, 2010
and June 30, 2010 |
22,331 | 27,310 | ||||||
Inventories net |
7,127 | 7,220 | ||||||
Costs and earnings in excess of billings on uncompleted contracts |
13,849 | 13,560 | ||||||
Deferred income taxes |
2,066 | 2,066 | ||||||
Other current assets |
3,133 | 2,011 | ||||||
Total current assets |
80,121 | 82,306 | ||||||
Property, plant and equipment net |
7,928 | 7,506 | ||||||
Intangible assets net |
22,611 | 21,781 | ||||||
Goodwill |
29,702 | 29,702 | ||||||
Other assets |
1,076 | 1,786 | ||||||
Total assets |
$ | 141,438 | $ | 143,081 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 10,750 | $ | 10,180 | ||||
Current maturities of long-term debt |
4,000 | 4,000 | ||||||
Billings in excess of costs and earnings on uncompleted contracts |
5,579 | 5,424 | ||||||
Commissions payable |
1,900 | 1,932 | ||||||
Income taxes payable |
| 717 | ||||||
Accrued product warranties |
2,306 | 2,480 | ||||||
Customer deposits |
2,966 | 2,481 | ||||||
Accrued liabilities and other |
5,106 | 7,092 | ||||||
Total current liabilities |
32,607 | 34,306 | ||||||
Long-term debt |
15,221 | 16,221 | ||||||
Deferred income taxes |
8,579 | 8,548 | ||||||
Derivative liability |
31,350 | 25,916 | ||||||
Other non-current liabilities |
976 | 943 | ||||||
Commitments and contingencies |
||||||||
Preferred stock authorized, 5,000,000 shares of $0.01 par value;
issued and outstanding, 21,140 shares at
October 2, 2010 and June 30, 2010 |
| | ||||||
Stockholders equity: |
||||||||
Common stock authorized, 50,000,000 shares of $0.01 par value;
issued and outstanding, 14,893,929 and 14,734,323 shares at
October 2, 2010 and June 30, 2010, respectively |
149 | 147 | ||||||
Additional paid-in capital |
28,367 | 27,240 | ||||||
Retained earnings |
24,785 | 31,142 | ||||||
Accumulated other comprehensive loss |
(1,592 | ) | (2,283 | ) | ||||
Total PMFG, Inc. stockholders equity |
51,709 | 56,246 | ||||||
Noncontrolling interest |
996 | 901 | ||||||
Total equity |
52,705 | 57,147 | ||||||
Total liabilities and equity |
$ | 141,438 | $ | 143,081 | ||||
See accompanying notes to consolidated financial statements.
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PMFG, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Three months ended | Three months ended | |||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Revenue |
$ | 26,961 | $ | 31,331 | ||||
Cost of goods sold |
18,220 | 19,564 | ||||||
Gross profit |
8,741 | 11,767 | ||||||
Operating expenses |
||||||||
Sales and marketing |
2,736 | 3,010 | ||||||
Engineering and project management |
1,887 | 1,850 | ||||||
General and administrative |
4,162 | 3,944 | ||||||
8,785 | 8,804 | |||||||
Operating income (loss) |
(44 | ) | 2,963 | |||||
Other income (expense) |
||||||||
Interest income |
14 | 12 | ||||||
Interest expense |
(884 | ) | (1,211 | ) | ||||
Loss on extinguishment of debt |
| (1,303 | ) | |||||
Foreign exchange gain (loss) |
67 | 204 | ||||||
Change in fair value of derivative liability |
(5,434 | ) | (2,500 | ) | ||||
(6,237 | ) | (4,798 | ) | |||||
Loss before income taxes |
(6,281 | ) | (1,835 | ) | ||||
Income tax benefit (expense) |
318 | (256 | ) | |||||
Net loss |
$ | (5,963 | ) | $ | (2,091 | ) | ||
Less net loss (income) attributable to
noncontrolling interest |
$ | (75 | ) | $ | 50 | |||
Net loss attributable to PMFG |
$ | (6,038 | ) | $ | (2,041 | ) | ||
Dividends on preferred stock |
$ | (319 | ) | $ | (94 | ) | ||
Loss applicable to PMFG common stockholders |
$ | (6,357 | ) | $ | (2,135 | ) | ||
Basic and diluted loss per share |
$ | (0.43 | ) | $ | (0.16 | ) | ||
Weighted-average shares outstanding: |
||||||||
Basic shares outstanding |
14,844 | 13,202 | ||||||
Effect of dilutive options |
| | ||||||
Diluted shares outstanding |
14,844 | 13,202 | ||||||
See
accompanying notes to consolidated financial statements.
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PMFG, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Three months ended | Three months ended | |||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (5,963 | ) | $ | (2,091 | ) | ||
Adjustments to reconcile net loss to
net cash provided by operating activities: |
||||||||
Depreciation |
404 | 388 | ||||||
Amortization of deferred financing costs |
535 | 176 | ||||||
Amortization of other intangible assets |
270 | 247 | ||||||
Loss on extinguishment of debt |
| 1,303 | ||||||
Deferred income taxes |
31 | 2 | ||||||
Deferred rent expense |
33 | (19 | ) | |||||
Bad debt expense |
7 | | ||||||
Provision for warranty expense |
131 | 73 | ||||||
Inventory valuation reserve |
90 | 45 | ||||||
Foreign exchange gain |
(67 | ) | (204 | ) | ||||
Change in fair value of derivative liability |
5,434 | 2,500 | ||||||
Excess tax benefits from stock-based payment arrangements |
32 | | ||||||
Stock-based compensation |
1,129 | 550 | ||||||
Changes in operating assets and liabilities net of acquisitions: |
||||||||
Accounts receivable |
4,972 | 719 | ||||||
Inventories |
25 | (607 | ) | |||||
Costs and earnings in excess of billings on uncompleted contracts |
(287 | ) | 580 | |||||
Other current assets |
147 | 198 | ||||||
Other assets |
175 | (128 | ) | |||||
Accounts payable |
690 | 2,396 | ||||||
Billings in excess of costs and earnings on uncompleted contracts |
155 | (1,424 | ) | |||||
Commissions payable |
(32 | ) | (45 | ) | ||||
Income taxes payable |
(1,985 | ) | 36 | |||||
Product warranties |
(305 | ) | (31 | ) | ||||
Accrued liabilities and other |
(1,452 | ) | (378 | ) | ||||
Net cash provided by operating activities: |
4,169 | 4,286 | ||||||
Cash flow from investing activities: |
||||||||
Increase in restricted cash |
545 | | ||||||
Purchases of property and equipment |
(775 | ) | (10 | ) | ||||
Purchase of license agreement |
(1,100 | ) | | |||||
Net cash used in investing activities |
(1,330 | ) | (10 | ) | ||||
Cash flows from financing activities: |
||||||||
Net proceeds from issuance of preferred stock and warrants |
| 19,235 | ||||||
Payment of long-term debt |
(1,000 | ) | (21,000 | ) | ||||
Equity contribtuion from noncontrolling
interest |
20 | 505 | ||||||
Dividends paid on preferred stock |
(319 | ) | | |||||
Excess tax benefits from stock-based payment arrangements |
(32 | ) | | |||||
Net cash used in financing activities |
(1,331 | ) | (1,260 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
531 | 51 | ||||||
Net increase in cash and cash equivalents |
2,039 | 3,067 | ||||||
Cash and cash equivalents at beginning of period |
24,271 | 17,738 | ||||||
Cash and cash equivalents at end of period |
$ | 26,310 | $ | 20,805 | ||||
Supplemental information on cash flow: |
||||||||
Income taxes paid |
$ | 1,285 | $ | | ||||
Interest paid |
$ | 489 | $ | 1,210 |
See
accompanying notes to consolidated financial statements.
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PMFG, Inc. and Subsidiaries
Unaudited Consolidated Statement of Equity and Comprehensive Income (Loss)
(In thousands)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | Non | |||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Stockholders | Controlling | Total | ||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Equity | Interest | Equity | |||||||||||||||||||||||||
Balance at June 30, 2010 |
14,734 | $ | 147 | $ | 27,240 | $ | 31,142 | $ | (2,283 | ) | $ | 56,246 | $ | 901 | $ | 57,147 | ||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||||||
Net income (loss) |
(6,038 | ) | (6,038 | ) | 75 | (5,963 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustment |
691 | 691 | 691 | |||||||||||||||||||||||||||||
Total comprehensive loss |
(5,347 | ) | 75 | (5,272 | ) | |||||||||||||||||||||||||||
Restricted stock grants |
103 | 1 | 740 | 741 | 741 | |||||||||||||||||||||||||||
Stock options exercised |
57 | 1 | 419 | 420 | 420 | |||||||||||||||||||||||||||
Income tax benefit related to stock
options exercised |
(32 | ) | (32 | ) | (32 | ) | ||||||||||||||||||||||||||
Noncontrolling interest in subsidiary |
20 | 20 | ||||||||||||||||||||||||||||||
Preferred stock dividends |
(319 | ) | (319 | ) | (319 | ) | ||||||||||||||||||||||||||
Balance at October 2, 2010 |
14,894 | $ | 149 | $ | 28,367 | $ | 24,785 | $ | (1,592 | ) | $ | 51,709 | $ | 996 | $ | 52,705 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of PMFG, Inc. and subsidiaries have been
prepared in conformity with accounting principles generally accepted in the United States of
America (US GAAP) for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. References to Company, we, us and our refer to PMFG, Inc.
and its subsidiaries. The consolidated financial statements of the Company as of October 2, 2010
and for the three months ended October 2, 2010 and September 30, 2009 are unaudited and, in the
opinion of management, contain all adjustments necessary for the fair presentation of the financial
position and results of operations of the Company for the interim periods. The results of
operations for such interim periods are not necessarily indicative of results for a full year.
These consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Companys latest Annual Report on Form 10-K
for the fiscal year ended June 30, 2010.
Basis of Consolidation
The Company is the majority owner of Peerless Propulsys China Holdings LLC (Peerless Propulsys).
The Companys 60% equity investment in Peerless Propulsys entitles it to 80% of the earnings.
Peerless Propulsys is the sole owner of Peerless Manufacturing (Zhenjiang) Co. Ltd (PMZ). The
non-controlling interest of Peerless Propulsys is reported as a separate component on the
Consolidated Balance Sheets and Consolidated Statement of Operations. On July 15, 2010, the
Company formed a new wholly-owned subsidiary, Peerless Asia Pacific Pte. Ltd. (Peerless Asia
Pacific), which replaced the former Peerless Mfg. Co. regional sales office in Singapore. This
entity has been consolidated in the Companys financial statements. The Companys financial
statements for all periods presented are consolidated to include the accounts of all wholly-owned
and majority-owned subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Reporting Period
On July 1, 2010, the Board of Directors approved a resolution to change the Companys fiscal year,
which ended as of the last day of the month each June, to a new fiscal year, which will be
comprised of either 52 or 53 weeks, commencing within seven days of the month-end. Beginning in
fiscal 2011, the Companys fiscal year end will be the Saturday closest to June 30; therefore, the fiscal
year end date will vary slightly each year. In a 52 week fiscal year, each quarterly period will be
comprised of 13 weeks, consisting of two four week periods and one five week period. In a 53 week
fiscal year, three quarterly periods will be comprised of 13 weeks and one quarter will be
comprised of 14 weeks.
Cash and Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
The Companys accounts receivable are due from companies in various industries. Credit is extended
based on an evaluation of the customers financial condition. Generally, collateral is not required
except on credit extended to international customers. Accounts receivable are generally due within
30 days and are stated at amounts due from customers net of an allowance for doubtful accounts.
Accounts which are outstanding longer than contractual payment terms are considered past due. The
Company records an allowance on a specific basis by considering a number of factors, including the
length of time the accounts receivable are past due, the
Companys previous loss history, the customers current ability to pay its obligation to the Company and the condition of the industry
and the economy as a whole. The Company writes off accounts receivable when they become
uncollectible. Payments subsequently received on such receivables are credited back to bad debt
expense in the period the payment is received.
9
Table of Contents
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Inventories
The Company values its inventory using the lower of weighted average cost or market. The Company
regularly reviews the value of inventory on hand, using specific aging categories, and records a
provision for obsolete and slow-moving inventory based on historical usage and estimated future
usage. In assessing the ultimate realization of its inventory, the Company is required to make
judgments as to future demand requirements. As actual future demand or market conditions may vary
from those projected by the Company, adjustments to inventory valuations may be required.
Depreciable Assets
Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives, principally by the straight-line method,
as follows:
Buildings and improvements |
5 - 40 years | |||
Equipment |
3 - 10 years | |||
Furniture and fixtures |
3 - 15 years |
Routine maintenance costs are expensed as incurred. Major improvements that extend the
life, increase the capacity or improve the safety or the efficiency of property owned are
capitalized. Major improvements to leased buildings are capitalized as leasehold
improvements and amortized over the shorter of the estimated life or the lease term.
Long-Lived Assets
The Company reviews its long-lived assets for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable and exceeds its fair value. If
conditions indicate an asset might be impaired, the Company estimates the future cash flows
expected to result from the use of the asset and its eventual disposition. The impairment would be
measured by the amount by which the carrying value of the asset exceeds its fair value, typically
represented by the discounted cash flows associated with the asset.
Intangible Assets and Goodwill
The Company records the difference between the purchase price and the fair value of the net assets
acquired in a business combination as goodwill. Goodwill is not amortized; rather, it is measured
for impairment annually, or more frequently if conditions indicate an earlier review is necessary.
If the estimated fair value of goodwill is less than the carrying value, goodwill is impaired and
written down to its estimated fair value.
Intangible assets subject to amortization include customer backlog, licensing agreements and
customer relationships. These intangible assets are amortized over their useful lives based on a
pattern in which the economic benefit of the respective intangible asset is realized. Intangible
assets considered to have indefinite lives are trade names and design guidelines. The Company
evaluates the recoverability of intangible assets annually or whenever events or changes in
circumstances indicate that an intangible assets carrying value may not be recoverable.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Convertible Redeemable Preferred Stock
The Companys Series A convertible, redeemable preferred stock (Preferred Stock) host contract
contains redemption options which place redemption outside of the Companys control. The Preferred
Stock has been classified as temporary equity, outside of permanent stockholders equity, on the
Consolidated Balance Sheets and Consolidated Statement of Equity. The Company considers the
conversion rights and redemption options of the Preferred Stock to be an embedded derivative and,
as a result, the fair value of the embedded derivative is included as a derivative liability on the
Consolidated Balance Sheets (the Derivative Liability). Since the Derivative Liability had a fair
value in excess of the net proceeds received by the Company from the Preferred Stock transaction at
the date of issuance, no amounts have been assigned to the Preferred Stock in the allocation of
proceeds. Changes in fair value of the Derivative Liability are included in other income (expense)
in the Consolidated Statements of Operations and are not taxable or deductible for income tax
purposes.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, trade receivables, other current assets, accounts
payable and accrued expenses approximate fair value due to the short maturity of these instruments.
As the Companys debt bears interest at floating rates, the Company estimates that the carrying
values of its debt at October 2, 2010 and June 30, 2010 approximate fair value.
Revenue Recognition
The Company provides products under long-term, generally fixed-priced, contracts that may extend
over multiple financial periods. In connection with these contracts, the Company uses the
percentage-of-completion method of accounting for long-term contracts that contain enforceable
rights regarding services to be provided and received by the contracting parties, the consideration
to be exchanged, and the manner and terms of settlement, assuming reasonably dependable estimates
of revenues and expenses can be made. The percentage-of-completion method generally results in the
recognition of reasonably consistent profit margins over the life of a contract. Amounts recognized
in revenue are calculated using the percentage of construction cost completed, generally on a
cumulative cost to total cost basis. Cumulative revenue recognized may be less or greater than
cumulative costs and profits billed at any point during a contracts term. The resulting difference
is recognized as costs and earnings in excess of billings on uncompleted contracts or billings
in excess of costs and earnings on uncompleted contracts on the Consolidated Balance Sheets.
The completed contract method is applied to contracts that do not meet threshold requirements for
contract amounts or contract duration. Because of the short-term nature of these contracts, the
completed contract method accurately reflects the economic substance of these contracts. Revenues
under the completed contract method are recognized upon shipment of the product.
Earnings (Loss) Per Common Share
The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable
to common stockholders by the weighted average number of common shares outstanding. The Company has
determined that the Preferred Stock represents a participating security because holders of the
Preferred Stock have rights to participate in any dividends on an as-converted basis; therefore,
basic earnings per common share is calculated consistent with the provisions of Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC or the Codification)
Subtopic 260-45 Participating Securities and the Two Class Method.
11
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Because Preferred Stockholders do not participate in losses, 21,140 shares of preferred stock were
excluded from the calculation of basic and diluted earnings per share for the three months ended
October 2, 2010. Diluted earnings per common share include the dilutive effect of stock options
and warrants granted using the treasury stock method. Options to acquire 119,667 shares of common
stock and warrants to purchase 1,321,250 shares of common stock were omitted from the calculation
of dilutive securities for the three months ended October 2, 2010 because they were anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from those estimates.
2. INVENTORIES
Principal components of inventories are as follows:
October 2, | June 30, | |||||||
2010 | 2010 | |||||||
Raw materials |
$ | 4,096 | $ | 4,443 | ||||
Work in progress |
3,519 | 3,164 | ||||||
Finished goods |
323 | 361 | ||||||
7,938 | 7,968 | |||||||
Reserve for obsolete and slow-moving inventory |
(811 | ) | (748 | ) | ||||
$ | 7,127 | $ | 7,220 | |||||
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The components of uncompleted contracts are as follows:
October 2, | June 30, | |||||||
2010 | 2010 | |||||||
Costs incurred on uncompleted contracts and
estimated earnings |
$ | 55,528 | $ | 56,176 | ||||
Less billings to date |
(47,258 | ) | (48,040 | ) | ||||
$ | 8,270 | $ | 8,136 | |||||
The components of uncompleted contracts are reflected in the consolidated balance sheets as
follows:
October 2, | June 30, | |||||||
2010 | 2010 | |||||||
Costs and
earnings in excess of billings on uncompleted contracts |
$ | 13,849 | $ | 13,560 | ||||
Billings in
excess of costs and earnings on uncompleted contracts |
(5,579 | ) | (5,424 | ) | ||||
$ | 8,270 | $ | 8,136 | |||||
12
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and intangible assets are all allocated to the Process Products segment and are not
deductible for income tax purposes.
Intangible assets with indefinite lives consist primarily of design guidelines and tradenames. The
cost of intangible assets is based on fair values at the date of acquisition. The Company assesses
the recoverability of its definite-lived intangible assets primarily based on its current and
anticipated future undiscounted cash flows. Intangible asset additions during the quarter ended
October 2, 2010, consisted of $1,100 of licensing agreements acquired during the period.
The carrying amount and accumulated amortization of the Companys intangible assets at each balance
sheet date are as follows:
Weighted-Average | ||||||||||||||||
Estimated | Gross | |||||||||||||||
Useful Life | Carrying | Accumulated | Net Book | |||||||||||||
(Years) | Amount | Amortization | Value | |||||||||||||
As of October 2,
2010 |
||||||||||||||||
Licensing agreements |
5 | 3,299 | (1,063 | ) | 2,236 | |||||||||||
Customer
relationships |
13 | 6,890 | (1,735 | ) | 5,155 | |||||||||||
Tradenames |
indefinite | 4,729 | | 4,729 | ||||||||||||
Design guidelines |
indefinite | 10,491 | | 10,491 | ||||||||||||
Total Value |
$ | 25,409 | $ | (2,798 | ) | $ | 22,611 | |||||||||
As of June 30, 2010 |
||||||||||||||||
Licensing agreements |
5 | 2,199 | (953 | ) | 1,246 | |||||||||||
Customer
relationships |
14 | 6,890 | (1,575 | ) | 5,315 | |||||||||||
Tradenames |
indefinite | 4,729 | | 4,729 | ||||||||||||
Design guidelines |
indefinite | 10,491 | | 10,491 | ||||||||||||
Total Value |
$ | 24,309 | $ | (2,528 | ) | $ | 21,781 | |||||||||
Amortization expense of $270 and $247 were recorded to the Consolidated Statement of Operations for
the three months ended October 2, 2010 and September 30, 2009, respectively. The Companys
estimated amortization for the current and each of the next five fiscal years is as follows:
2011 |
$ | 1,069 | ||
2012 |
1,005 | |||
2013 |
922 | |||
2014 |
555 | |||
2015 |
480 | |||
2016 |
405 |
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
5. ACCRUED PRODUCT WARRANTIES
Accrued product warranty activity is as follows:
Three months ended | Three months ended | |||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
Balance at beginning of period |
$ | 2,480 | $ | 1,242 | ||||
Provision for warranty expenses |
131 | 73 | ||||||
Warranty charges |
(305 | ) | (31 | ) | ||||
Balance at end of period |
$ | 2,306 | $ | 1,284 | ||||
6. ACCRUED LIABILITIES AND OTHER
The components of accrued liabilities and other are as follows:
October 2, | June 30, | |||||||
2010 | 2010 | |||||||
Accrued start-up (commissioning) expense |
$ | 1,208 | $ | 1,169 | ||||
Accrued compensation |
2,029 | 3,999 | ||||||
Accrued professional expenses |
1,776 | 1,679 | ||||||
Other |
93 | 246 | ||||||
$ | 5,106 | $ | 7,093 | |||||
7. DEBT
Outstanding long-term debt obligations are as follows:
October 2, | June 30, | |||||||||||
Maturities | 2010 | 2010 | ||||||||||
Revolving credit facility |
2011 | $ | | $ | | |||||||
Term loan |
2013 | 19,221 | 20,221 | |||||||||
Total long-term debt |
19,221 | 20,221 | ||||||||||
Less current maturites |
(4,000 | ) | (4,000 | ) | ||||||||
Total long-term debt, net of current
portion |
$ | 15,221 | $ | 16,221 | ||||||||
14
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
7. DEBT CONTINUED
On September 4, 2009, the Company amended both its senior term loan and revolving credit facility
to permit the issuance of the Preferred Stock and the use of available cash to pre-pay the
subordinated secured term loan. The subordinated term loan was repaid in full using the proceeds
from the Preferred Stock issuance and available cash. Unamortized deferred financing costs of
$1,303 were recorded as a loss on extinguishment of debt on the Consolidated Statement of
Operations during the three months ended September 30, 2009.
The senior term loan matures on March 31, 2013. Interest on the senior term loan is payable
quarterly, calculated on either a base or LIBOR rate per annum, at the Companys option, (5.75% at
October 2, 2010 and 5.25% at June 30, 2010). Interest on the base rate option is calculated as the
greater of the administrative agents prime rate or the federal funds effective rate plus 100 basis
points plus a margin of between 275 and 400 basis points depending upon the Companys consolidated
total leverage ratio (CTL). Interest on the LIBOR rate option is calculated as the adjusted
LIBOR rate plus a margin of between 375 and 500 basis points depending upon the Companys CTL,
subject to a LIBOR floor of 1%. The senior secured credit agreement requires quarterly principal
payments on the senior term loan of $1,000 through and including April 1, 2011 and $1,500
thereafter through March 31, 2013, with the balance of the senior term loan due at maturity. The
senior secured credit agreement also requires additional principal payments of the senior term loan
based upon the Companys cash flow beginning with the 2009 fiscal year, the net proceeds of certain
asset sales and dispositions and the issuance by the Company of additional equity securities or
subordinated debt.
The revolving credit facility matures on April 30, 2011. As of October 2, 2010, interest under the
revolving credit facility is payable quarterly, calculated on either a base or LIBOR rate per
annum, at the Companys option. Interest on the base rate option for the revolving credit facility
is equal to the greater of the administrative agents prime rate or the federal funds effective
rate plus 100 basis points plus a margin of between 275 and 375 basis points depending upon the
Companys CTL. Interest on the LIBOR rate option is calculated as the adjusted LIBOR rate plus a
margin of between 375 and 475 basis points depending upon the Companys CTL, subject to a LIBOR
floor of 1%. Under the revolving credit facility, the Company has a maximum borrowing availability
equal to the lesser of (a) $20,000 or (b) 75% of eligible accounts receivable plus 45% of eligible
inventory (not to exceed 50% of the borrowing base). At October 2, 2010, there was $757 borrowing
availability after the borrowing base was adjusted for $9,726 in outstanding letters of credit. At
October 2, 2010 and June 30, 2010 there were no outstanding borrowings under the revolving credit
facility.
The senior term loan and any borrowings under the revolving credit facility are secured by a first
lien on substantially all assets of the Company and contain financial and other covenants,
including restrictions on additional debt, dividends, capital expenditures, acquisitions and
dispositions. They also contain covenants and events of default that, among other things, require
the Company to satisfy financial tests and maintain financial ratios. At October 2, 2010, required
financial ratios included a minimum fixed charge coverage ratio of 1.10 to 1.00, a maximum leverage
ratio of 3.50 to 1.00 and an adjusted minimum net worth requirement at all times not less than the
base adjusted net worth ($60,645 and $60,631 at October 2, 2010 and June 30, 2010, respectively).
Consolidated adjusted net worth is defined under the senior term loan agreement as total common
shareholders equity together with preferred stock which is classified as part of shareholders
equity. For purposes of calculating financial covenants, the Preferred Stock (and each aspect and
feature thereof) is deemed not to be debt or liabilities. As of October 2, 2010, the Company was in
compliance with all covenants in its senior secured credit agreement.
15
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
7. DEBT CONTINUED
The Company entered into a LIBOR interest rate cap transaction with respect to its senior term
loan, with a notional amount of $20,000 (the Interest Rate Cap Transaction). The Interest Rate
Cap Transaction became effective on August 15, 2008 and will terminate on April 2, 2012. Under the
terms of the Interest Rate Cap Transaction, the counterparty will pay to the Company, on the first
business day of each quarter, commencing on October 1, 2008, an amount equal to the greater of $0
and the product of (i) the outstanding notional amount of the Interest Rate Cap Transaction during
the prior quarter, (ii) the difference between the three month LIBOR rate at the beginning of the
prior quarter and 3.70% and (iii) the quotient of the number of days in the prior quarter over 360.
The notional amount of the Interest Rate Cap Transaction amortized $5,000 on October 1, 2010, 2009
and 2008 and will amortize $4,500 on October 3, 2011 and the remaining $500 upon termination on
April 2, 2012. As long as the counterparty makes the payments required under the Interest Rate Cap
Transaction, the Company will have a maximum annual LIBOR interest rate exposure equal to the sum
of 3.70% and a margin of 375 to 500 basis points, based on its CTL ratio, for the term of the
Interest Rate Cap Transaction. At October 2, 2010 the Interest Rate Cap Transaction has an
estimated fair market value of $0.
The Companys U.K. subsidiary has a debenture agreement used to facilitate issuances of letters of
credit and bank guarantees of £5,444 ($8,621) at October 2, 2010 and £4,700 ($7,083) at June 30,
2010. This facility was secured by substantially all of the assets of the Companys U.K. subsidiary
and by a cash deposit of £3,350 ($5,305) at October 2, 2010 and £2,850 ($4,258) at June 30, 2010,
which is recorded as restricted cash on the consolidated balance sheet. At October 2, 2010, there
was £4,310 ($6,825) outstanding under stand-by letters of credit and bank guarantees under this
debenture agreement. At June 30, 2010, there was £2,658 ($4,209) outstanding under stand-by
letters of credit and bank guarantees under this debenture agreement. There are no amounts
outstanding under the U.K. subsidiarys debenture agreement at October 2, 2010 or June 30, 2010.
8. COMMITMENTS AND CONTINGENCIES
Litigation
In June 2010, the Company received notice from a customer claiming approximately $9,100 in repair
costs associated with four heat exchangers sold by Alco Products, a division of Nitram, in 2006
prior to the Companys acquisition of Nitram. The customer requested reimbursement for the repair
costs pursuant to Alco Products warranty obligations under the terms and conditions of the
purchase order. The Company is in the process of assessing the validity of the claim and has
notified the Nitram insurance carrier and the selling stockholders of Nitram of this claim. The
Company believes if any valid claim exists, the Company is entitled to be indemnified by the Nitram
selling stockholders pursuant to the terms of the Nitram acquisition agreement for any amounts that
are paid by the Company in connection with such claim. At this time, the Company cannot estimate
any potential range of loss that may result from this asserted claim as the claim is in its early
stages and the Company is still investigating the merits of the claim and the facts and
circumstances surrounding the claim. No amount has been accrued in the financial statements for
this claim as of October 2, 2010. At this time, no lawsuit has been filed by the customer.
On June 19, 2007, Martin-Manatee Power Partners, LLC (MMPP) filed a complaint against the Company
in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida. In the
complaint, MMPP asserted claims for breach of contract and express warranty, breach of implied
warranty and indemnification against the Company. MMPPs claims arise out of an incident in
September 2005 when an electric fuel gas start-up heater, which was a component of a fuel gas
heater skid supplied by the Company to MMPP, allegedly ruptured, resulting in a fire. In the
complaint, MMPP did not make a specific demand for damages.
16
Table of Contents
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
8. COMMITMENTS AND CONTINGENCIES CONTINUED
The Companys insurance carriers have agreed to defend the claims asserted by MMPP, pursuant to
reservation of rights letters issued on September 5, 2007 and have retained counsel to defend the
Company. The Companys motion to dismiss the complaint for improper venue was granted on
December 11, 2007. On February 20, 2008, MMPP filed a new action in the District Court of Johnson
County, Kansas, the venue referenced in the purchase order pursuant to which the skid was purchased
by MMPP from the Company. In this complaint, MMPP asserted the same claims as described above. MMPP
has made a demand for damages in the amount of $2,500, which it claims represents its net costs
incurred related to this incident. The Company is currently appealing a ruling by the District
Court, which dismissed a third party defendant, Controls International, Inc., the manufacturer of a
valve used on the skid. The Company filed its appeal on July 24, 2009. On June 18, 2010, the Kansas
Court of Appeals affirmed the decision of the District Court, granting the motion for dismissal of
Controls International, Inc. The Company filed a motion for rehearing with the Kansas Court of
Appeals and filed a petition for review with the Kansas Supreme Court on July 2, 2010, requesting
the reconsideration and reversal of the Kansas Court of Appeals decision to dismiss Controls
International, Inc. The Kansas Court of Appeals denied the motion for rehearing. The Company has
recorded an accrual of $100 related to the insurance deductible as a component of its warranty
liability and has also reserved $487 against retention receivables related to the MMPP jobs. At
this time, the Company cannot estimate any potential final range of loss resulting from this
litigation as it is still in discovery. At this time, management believes that MMPPs claims are
without merit and intends to vigorously defend this suit.
In April 2008, Burgess-Manning, Inc., a subsidiary of Nitram, made a voluntary disclosure to the
Office of Foreign Assets Control (OFAC) regarding sales of industrial separators to Iran. The
Company cannot predict the response of OFAC, the outcome of any related proceeding or the
likelihood that future proceedings will be instituted against the Company. In the event that there
is an adverse ruling in any proceeding, the Company may be required to pay fines and penalties.
In connection with the Companys acquisition of Nitram and the related financing transactions,
environmental site assessments were performed on both its existing manufacturing properties and
Nitrams properties in Cisco, Texas and Wichita Falls, Texas. These assessments involved visual
inspection, testing of soil and groundwater, interviews with site personnel and a review of
publicly available records. The results of these assessments indicated soil and groundwater
contamination at the Vermont Street plant in Wichita Falls and groundwater concerns at the
Jacksboro Highway plant in Wichita Falls and the Cisco plants. Additional sampling and evaluation
of the groundwater concerns at Jacksboro Highway and Cisco plants indicated levels of impact did
not exceed applicable regulatory standards and that further investigation and remediation was not
required. Soil remediation at the Vermont Street Plant in Wichita Falls was completed in July 2009
and the Company will continue to monitor groundwater at and near the site for an additional five
years. The total costs accrued are $175 at October 2, 2010 and June 30, 2010, which have been
discounted using a rate of 3.25%. The Company is seeking reimbursement for the cost of the
remediation under our purchase agreement with Nitrams former stockholders. Funds have been
deposited into an escrow account that may be used to reimburse these costs.
Under the contract for the Nitram acquisition, the Company has certain rights to indemnification
against the selling stockholders for claims relating to breach of representation and certain other
claims, including litigation costs and damages. The Nitram selling stockholders previously placed
$10,920 of the purchase price in escrow to reimburse the Company for breach of representation and
certain other claims. The escrow amount, less any claim amounts made by the Company or amounts paid
to third parties as agreed upon by the Company and sellers, was released to the seller in five
installments on each of October 8, 2008, January 30, 2009, April 30, 2009, July 30, 2009 and
October 30, 2009. Certain claims made by the Company against the escrow are subject to a deductible
equal to one percent of the purchase price paid by the Company for the Nitram acquisition. Prior
to the final escrow
17
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
8. COMMITMENTS AND CONTINGENCIES CONTINUED
payment
release on October 30, 2009, the Company had filed claims with the sellers relating to
environmental matters and indemnification for breach of representations and warranties of the
Nitram purchase agreement, totaling approximately $1,998 against the escrow, and a total of $1,388 was withheld from the escrow
releases, which represents the Companys claims, less the one percent deductible, estimated at
$610. Following the final escrow release in October 2009, the Company has made additional claims against the selling stockholders
under the terms of the Nitram acquisition agreement totaling approximately $9,500, related to a
customer warranty dispute and environmental matters. The sellers have objected to the claims made
by the Company and the parties are currently in the process of negotiating the various claims.
From time to time the Company is involved in various litigation matters arising in the ordinary
course of its business. The Company accrues for its litigation contingencies when losses are both
probable and reasonably estimable.
9. SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK AND WARRANTS
On September 4, 2009, the Company issued and sold 21,140 shares of Preferred Stock, par value $0.01
per share, and attached warrants to certain accredited investors (each a Purchaser and
collectively, the Purchasers) for an aggregate purchase price of $21,140 (the Offering). The
Company and each Purchaser entered into a securities purchase agreement (the Purchase Agreement)
in connection with the Offering. The Offering was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended (the Securities Act). The Company used the $19,235 net
proceeds received from the Offering and available cash to repay all of the Companys outstanding
indebtedness under its subordinated term loan.
Preferred Stock
The terms, rights, obligations and preferences of the Preferred Stock are set forth in the
Certificate of Designations of the Preferred Stock (the Certificate of Designations) filed with
the Secretary of State of the State of Delaware on September 4, 2009.
The Preferred Stock is immediately convertible, at the option of the holder, into shares of common
stock at an initial conversion price of $8.00 per share, subject to certain anti-dilution
adjustments (the Conversion Price). The Conversion Price will be adjusted for stock splits,
dividends and the like and in the event the Company issues and sells its equity securities at a
price below the Conversion Price. In addition, in some circumstances, the holders of Preferred
Stock will be entitled to participate in an offering by the Company of its equity securities or
securities convertible into or exchangeable for its equity securities, subject to certain
exceptions including any public offering of its common stock.
Holders of the Preferred Stock are entitled to quarterly dividends at an annual rate of 6.0%. In
the event the Company fails to fulfill its obligations under the Preferred Stock, the dividend rate
will increase to an annual rate of 8.0%. All dividends will be cumulative and compound quarterly
and may be paid, at the option of the Company, in cash or common stock, or a combination of the
two. If the Company elects to issue shares of common stock as dividend payments, the value per
share will be equal to 85% of the volume weighted average price per share (VWAP) of the common
stock for the fifteen days preceding, but not including, the date of such payments. The Company
paid $319 of cash dividends during the quarter ended October 2, 2010.
18
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
9. SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK AND WARRANTS CONTINUED
At any time after five years from the date of issuance, the Preferred Stock is redeemable, in whole
or in part, at the option of the holders or the Company. The purchase price per share for
redemptions will be equal to the original price per share of the Preferred Stock, plus any
accumulated and unpaid dividends. Redemption payments may be made, at the option of the Company, in
cash or common stock, or a combination of the two. The Company does not consider exercise of the
redemption option probable and, therefore, no accretion is recorded to account for redemption. If
the Company elects to make redemption payments in common stock, the value per share will be equal
to 85% of the VWAP of the common stock for the fifteen trading days preceding, but not including,
the redemption date.
Beginning on September 4, 2011, the Company may require the conversion of any and all outstanding
shares of Preferred Stock, provided that the VWAP of the common stock exceeds 200% of the
Conversion Price for twenty of the immediately preceding thirty consecutive trading days.
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the
holders of Preferred Stock are entitled to a liquidation preference (the Liquidation Preference)
equal to:
| the greater of: |
| the price per share the holder paid for the Preferred Stock; or |
| the amount the holder would have received upon a liquidation, if the holder had converted their shares immediately prior thereto; |
| plus any accumulated and unpaid dividends. |
A change in control of the Company will be deemed to be a liquidation and will entitle the holders
of Preferred Stock to receive the Liquidation Preference. In the event of certain change in control
transactions, the Liquidation Preference will be payable, at the option of the Company, in cash or
in common stock, or a combination of the two.
If the Company elects to pay in common stock, the value per share will be equal to 85% of the VWAP
of the common stock for the fifteen trading days preceding, but not including, the date of
liquidation.
The NASDAQ Marketplace rules limit the number of shares of common stock that may be issued in a
private placement at a discount to the then current market price without obtaining stockholder
approval. As a result, the aggregate number of shares of common stock that could have been issued
upon the conversion or redemption of the Preferred Stock or payment of the dividends or
Liquidation Preference would have been limited to 19.99% of the outstanding shares of common stock
(the Issuance Limitation), unless stockholder approval was obtained. The Company agreed to seek
stockholder approval of this matter and to increase the number of authorized shares of common stock
by 25 million shares. At the annual meeting of the Company, held on November 19, 2009, the
Companys stockholders approved, by the required votes needed, a proposal to permit the issuance of
common stock in excess of the Issuance Limitation and to increase the number of authorized shares
of common stock by 25 million shares.
Warrants
The Warrants entitle the holders to purchase 50% of the number of shares of common stock that may
be obtained upon conversion of the Preferred Stock, or 1,321,250 shares. The Warrants have a
five-year term and will become exercisable nine months after their issuance. The exercise price is
equal to the closing bid price of the common stock on September 3, 2009, or $10.56, and is not
subject to anti-dilution protection, except in the case of stock splits and dividends.
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Table of Contents
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
9. SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK AND WARRANTS CONTINUED
Other Obligations
As required by the Purchase Agreement, the Company filed a registration statement following the closing of the offering to register the shares of common stock issuable upon conversion of the Preferred Stock and exercise of the Warrants. The registration statement was declared effective on November 25, 2009. In certain circumstances, should the registration cease to become effective, the Company would be liable for damages equal to 1% per month of the aggregate purchase price paid by the Purchasers. At June 30, 2010, the Company does not consider this liability to be probable and has not recorded any amount on the Consolidated Balance Sheets.
As required by the Purchase Agreement, the Company filed a registration statement following the closing of the offering to register the shares of common stock issuable upon conversion of the Preferred Stock and exercise of the Warrants. The registration statement was declared effective on November 25, 2009. In certain circumstances, should the registration cease to become effective, the Company would be liable for damages equal to 1% per month of the aggregate purchase price paid by the Purchasers. At June 30, 2010, the Company does not consider this liability to be probable and has not recorded any amount on the Consolidated Balance Sheets.
So long as at least $5,000 of the Preferred Stock remains outstanding, the Purchasers are entitled
to participate in an offering by the Company of its equity securities or securities convertible
into or exchangeable for its equity securities, subject to certain exceptions, including any public
offering of common stock. The Purchase Agreement contains customary representations, warranties and
covenants by the parties. In addition, each Purchaser made representations and other agreements
with the Company regarding the Purchasers beneficial ownership and group status under Rule 13(d)
of the Securities Exchange Act of 1934, as amended, as a result of the Offering.
Initial Accounting
Under the initial accounting, the Company separated the Preferred Stock instrument into component
parts of the Preferred Stock host contract, the Warrants and the Derivative Liability which
reflected the redemption and conversion rights of the Purchasers and the Company. The Company
estimated the fair value of each component as of the date of issuance and allocated net proceeds
initially to the fair value of the Derivative Liability, with any remaining net proceeds allocated
to the Warrants, as paid-in-capital, and to Preferred Stock, as temporary equity.
At September 4, 2009, the fair value of the Derivative Liability exceeded the net proceeds received
by the Company from the Preferred Stock issuance. Therefore, the Derivative Liability was recorded
at the amount of the net proceeds, and no value was assigned to the Preferred Stock host contract
or the Warrants. The following is a summary of the proceeds from the issuance of the Preferred
Stock and the initial accounting of the issuance:
Cash proceeds from preferred stock issuance |
$ | 21,140 | ||
Transaction costs |
(1,905 | ) | ||
Net proceeds from preferred stock issuance |
$ | 19,235 | ||
Fair value of derivative liability |
$ | 19,235 | ||
Preferred Stock/temporary equity (relative fair value) |
| |||
Warrant/Equity (relative fair value) |
| |||
Net fair value of preferred stock, derivative and warrants |
$ | 19,235 | ||
See note 12 for discussion of subsequent fair value adjustments.
20
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
10. STOCKHOLDER RIGHTS PLAN
On August 15, 2008, the Company adopted a new stockholder rights plan. The new rights plan replaced
a previous rights plan, which was adopted in May 2007 and terminated in connection with the holding
company reorganization.
Stockholders of record at the close of business on August 15, 2008 received a dividend distribution
of one right for each share of common stock outstanding on that date. The rights generally will
become exercisable and allow the holder to acquire the Companys common stock at a discounted price
if a person or group (other than certain
institutional investors specified in the rights plan) acquires beneficial ownership of 20% or more
of the Companys outstanding common stock. Rights held by those that exceed the 20% threshold will
be void.
The rights plan also includes an exchange option. In general, after the rights become exercisable,
the Board of Directors may, at its discretion, effect an exchange of part or all of the rights
(other than rights that have become
void) for shares of the Companys common stock. Under this option, the Company would issue one
share of common stock for each right, subject to adjustment in certain circumstances.
The Board of Directors may, at its discretion, redeem all outstanding rights for $0.001 per right
at any time prior to the time the rights become exercisable. The rights will expire on August 15,
2018, unless earlier redeemed, exchanged or amended by the Board of Directors.
11. STOCK-BASED COMPENSATION
The following information represents the Companys grants of stock-based compensation to employees
and directors during the three months ended October 2, 2010 and September 30, 2009:
Three months ended | ||||||||||||||||
October 2, | September 30, | |||||||||||||||
2010 | 2009 | |||||||||||||||
Number of | Fair Value | Number of | Fair Value | |||||||||||||
Grant Type | Shares Granted | of Grant | Shares Granted | of Grant | ||||||||||||
Stock |
36,000 | $ | 523 | 36,000 | $ | 315 | ||||||||||
Restricted stock |
67,800 | $ | 1,006 | 99,881 | $ | 873 |
The Company recognizes compensation expense for restricted stock awards over the four-year vesting
period based on the fair value of the awards on the grant date, net of forfeitures. The fair value
of stock and restricted stock awards is based on the fair market value of the Companys stock on
the date of grant.
12. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value maximize the use of observable inputs and minimize the use of
unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs,
of which the first two are considered observable and the last unobservable.
21
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
12. FAIR VALUE MEASUREMENTS CONTINUED
| Level 1 Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
| Level 2 Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments. |
| Level 3 Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entitys own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. |
As discussed above, the Company considers the conversion rights and redemption options of the
Preferred Stock to be embedded derivatives, and, as a result, the fair value of the Derivative
Liability is reported on the Consolidated Balance Sheets. The Company values the Derivative
Liability using a Monte Carlo simulation which contains significant unobservable, or Level 3,
inputs. The use of valuation techniques requires the Company to make various key assumptions for
inputs into the model, including assumptions about the expected behavior of the Preferred Stock
holders and expected future volatility of the price of the Companys common stock. At certain
extreme common stock price points within the Monte Carlo simulation, the Company assumes holders of
Preferred Stock will convert their shares of Preferred Stock into shares of the Companys common
stock. In estimating the fair value at October 2, 2010, the Company estimated future volatility by
calculating a blended volatility rate which considered the historic volatility of the Companys
stock and the historic volatility of the stock of a selected peer group over a five year period.
For the three months ended October 2, 2010, an increase in fair value of $5,434 was recorded in
Other income (expense) in the Consolidated Statements of Operations.
The Company values its Interest Rate Cap using a Modified Black-Scholes valuation methodology and
market data derived from published market data sources. For the three months ended October 2,
2010, a decrease in fair value of $1 was recorded as a component of interest expense in the
Consolidated Statement of Operations.
Financial assets and liabilities measured at fair value on a recurring basis are summarized below
(in thousands):
October 2, | ||||||||||||||||
2010 | Level 1 | Level 2 | Level 3 | |||||||||||||
Derivatives related
to conversion and redemption rights
|
$ | (31,350 | ) | $ | | $ | | $ | (31,350 | ) | ||||||
Interest Rate Cap |
$ | | $ | | $ | | $ | |
The following is a summary of changes to fair value measurements using Level 3 inputs (as
reclassified) during the three months ended October 2, 2010:
Balance, June 30, 2010 |
$ | (25,916 | ) | |
Change in fair value of derivative liability |
(5,434 | ) | ||
Balance, October 2, 2010 |
$ | (31,350 | ) | |
22
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
October 2, 2010
(In thousands, except share and per share amounts)
13. SEGMENT INFORMATION
The Company has two reportable segments: Process Products and Environmental Systems. The Process
Products segment produces various types of separators and filters used for removing liquids and
solids from gases and air. The segment also includes industrial silencing equipment to control
noise pollution on a wide range of industrial processes and heat transfer equipment to conserve
energy in many industrial processes and in petrochemical processing. The main product of the
Environmental Systems segment is its Selective Catalytic Reduction Systems,
referred to as SCR systems. These environmental control systems are used for air pollution
abatement and converting nitrogen oxide (NOx) emissions into nitrogen and water, and reducing air
pollution from exhaust gases caused by burning hydrocarbon fuels such as coal, bio-fuels, natural
gas and oil. Along with the SCR Systems, this segment also offers systems to reduce other
pollutants such as carbon monoxide (CO) and particulate matter. The Company combines these systems
with other components, such as instruments, controls and related valves and piping to offer its
customers a totally integrated system.
Segment profit and loss is based on revenue less direct expenses of the segment before allocation
of general, administrative, research and development costs. All inter-company transfers between
segments have been eliminated. The Company allocates all costs associated with the manufacture,
sale and design of its products to the appropriate segment. Segment information and reconciliation
to operating profit for the three months ended October 2, 2010 are presented below. The Company
does not allocate general and administrative expenses (reconciling items), assets, expenditures
for assets or depreciation expense on a segment basis for internal management reporting, and
therefore this information is not presented.
Three months ended | ||||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
Revenues |
||||||||
Process Products |
$ | 22,099 | $ | 22,701 | ||||
Environmental |
4,862 | 8,630 | ||||||
Consolidated |
$ | 26,961 | $ | 31,331 | ||||
Operating income
|
||||||||
Process Products |
$ | 3,174 | $ | 4,592 | ||||
Environmental |
944 | 2,315 | ||||||
Reconciling items |
(4,162 | ) | (3,944 | ) | ||||
Consolidated |
$ | (44 | ) | $ | 2,963 | |||
23
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PMFG, Inc. and Subsidiaries
October 2, 2010
(In thousands, except share and per share amounts)
October 2, 2010
(In thousands, except share and per share amounts)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our results of operations and financial condition should be read
together with our consolidated financial statements and the notes thereto included in Item 1 of
this Report. This discussion includes forward-looking statements that are subject to risks,
uncertainties and other factors described in this and other reports we file with the Securities and
Exchange Commission (the SEC), including the information in Item 1A. Risk Factors of Part I to
our Annual Report for the year ended June 30, 2010 and Part II of this report. These factors could
cause our actual results for future periods to differ materially from those experienced in, or
implied by, these forward-looking statements.
We begin this discussion with an overview of our Company to give you an understanding of our
business and the markets we serve. The overview also includes a summary of the issuance of our
Preferred Stock and Warrants and a brief summary of recent developments regarding our acquisition
of Nitram. This overview is followed by a discussion of our results of operations for the three
months ended October 2, 2010 and September 30, 2009, including a discussion of significant
period-to-period variances. We also include information regarding our two reportable business
segments: Process Products and Environmental Systems. We then discuss our financial condition at
October 2, 2010 with a comparison to June 30, 2010. This discussion includes information regarding
our liquidity and capital resources, including cash flows from operating, investing and financing
activities.
Overview
We are a leading provider of custom-engineered systems and products designed to help ensure
that the delivery of energy is safe, efficient and clean. We primarily serve the markets for power
generation, natural gas infrastructure, refining and petrochemical processing. We offer a broad
range of separation and filtration products, selective catalytic reduction, turbine emission
exhaust and silencing systems, and other complementary products including specialty heat
exchangers, pulsation dampeners and silencers. Our primary customers include equipment
manufacturers, engineering contractors and operators of power plants.
Our products and systems are marketed worldwide. In each of the last three fiscal years,
approximately 35% of our revenues have been generated from outside the United States. We expect our
international sales to continue to be an increasingly important part of our business.
Recent Developments
On July 15, 2010, we formed a new wholly-owned subsidiary, Peerless Asia Pacific Pte. Ltd.
(Peerless Asia Pacific), which replaced the former Peerless Mfg. Co. regional sales office in
Singapore. The coordination of Peerless Asia Pacific with Peerless Manufacturing (Zhenjiang) Co.
Ltd (PMZ), our majority-owned business venture in China, will provide a stronger foundation to
execute projects throughout the Asia Pacific region.
Critical Accounting Policies
See the Companys critical accounting policies as described in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations, in Part II of our Annual
Report on Form 10-K for the year ended June 30, 2010. Since the date of that report, there have
been no material changes to our critical accounting policies.
24
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PMFG, Inc. and Subsidiaries
October 2, 2010
(In thousands, except share and per share amounts)
October 2, 2010
(In thousands, except share and per share amounts)
Results of Operations
The following summarizes our consolidated statements of operations as a percentage of
revenues:
Three months ended | ||||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
Net revenues |
100.0 | % | 100.0 | % | ||||
Cost of goods sold |
67.6 | 62.4 | ||||||
Gross profit |
32.4 | 37.6 | ||||||
Operating expenses |
32.6 | 28.1 | ||||||
Operating income |
(0.2 | ) | 9.5 | |||||
Other income (expense) |
(23.1 | ) | (15.3 | ) | ||||
Earnings before income taxes |
(23.3 | ) | (5.8 | ) | ||||
Income tax expense |
1.2 | (0.8 | ) | |||||
Net earnings (loss) |
(22.1 | )% | (6.6 | )% | ||||
Less net earning (loss) attributable to noncontrolling interest |
0.3 | (0.1 | ) | |||||
Net earnings (loss) attributable to PMFG, Inc. |
(22.4 | ) | (6.5 | ) | ||||
Dividends on preferred stock |
(1.2 | ) | (0.3 | ) | ||||
Earnings (loss) applicable to PMFG, Inc. common stockholders |
(23.6 | )% | (6.8 | )% | ||||
Cost of goods sold includes manufacturing and distribution costs for products sold. The
manufacturing and distribution costs include material, direct and indirect labor, manufacturing
overhead, sub-contract work, inbound and outbound freight, purchasing, receiving, inspection,
warehousing, internal transfer costs, and other costs of our manufacturing and distribution
processes. Cost of goods sold also includes the costs of commissioning the equipment and warranty
related costs.
Operating expenses include sales and marketing expenses, engineering and project management
expenses, and general and administrative expenses.
Sales and marketing expenses include payroll, employee benefits, stock-based compensation and
other employee-related costs associated with sales and marketing personnel. Sales and marketing
expenses also include travel and entertainment, advertising, promotions, trade shows, seminars and
other programs, and sales commissions paid to independent sales representatives.
Engineering and project management expenses include payroll, employee benefits, stock-based
compensation and other employee-related costs associated with engineering, project management and
field service personnel. Additionally, engineering and project management expenses include the cost
of sub-contracted engineering services.
General and administrative costs include payroll, employee benefits, stock-based compensation
and other employee-related costs associated with executive management, finance, accounting, human
resources, information systems, and other administrative employees. General and administrative
costs also include facility costs, insurance, audit fees, legal fees, reporting expense,
professional services, and other administrative fees.
Three Months Ended October 2, 2010 Compared to Three Months Ended September 30, 2009
On July 1, 2010, the Board of Directors approved a resolution to change our fiscal year, which
ended as of the last day of the month each June, to a new fiscal year, which will be comprised of
either 52 or 53 weeks, commencing within seven days of the month-end. Beginning in fiscal 2011,
our fiscal year end will be the Saturday closest to June 30; therefore, the fiscal year end date
will vary slightly each year. In a 52 week fiscal year, each of our quarterly periods will be
comprised of 13 weeks. In a 53 week fiscal year, three of our quarterly periods will be comprised
of 13 weeks and one quarter will be comprised of 14 weeks. We believe this change in fiscal year
will reduce financial variability by making the quarterly periods more consistent in length.
25
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PMFG, Inc. and Subsidiaries
October 2, 2010
(In thousands, except share and per share amounts)
October 2, 2010
(In thousands, except share and per share amounts)
Results of Operations Consolidated
Revenues. We classify revenues as domestic or international based upon the origination of the
order. Revenues generated by orders originating from within the United States are classified as
domestic revenues.
Revenues generated by orders originating from a country other than the United States are classified
as international revenues. The following summarizes consolidated revenues:
Three months ended | ||||||||||||||||
October 2, | September 30, | |||||||||||||||
2010 | % of Total | 2009 | % of Total | |||||||||||||
Domestic |
$ | 16,490 | 61.2 | % | $ | 21,577 | 68.9 | % | ||||||||
International |
10,471 | 38.8 | % | 9,754 | 31.1 | % | ||||||||||
Total |
$ | 26,961 | 100.0 | % | $ | 31,331 | 100.0 | % | ||||||||
Total revenues decreased $4,370, or 13.9%, for the three months ended October 2, 2010 compared
to the three months ended September 30, 2009 as domestic revenues decreased $5,087, or 23.6%, and
international revenues increased $717, or 7.4%. The decrease in the domestic revenues can be
attributed to a decrease in domestic power consumption which has impeded the progress of new
projects which would require several of our product lines, particularly our environmental products.
The overall decline in revenues was partially offset by an increase in international revenues.
This increase was the result of a combination of growth in the Asian and South American markets and
our strategic decision to increase our focus in the international markets.
Gross Profit. Our gross profit during any particular period may be impacted by several
factors, primarily sales volume, shifts in our product mix, material cost changes, and warranty and
start-up (commissioning) costs. Shifts in the geographic composition of our sales can also have a
significant impact on our reported margins. The following summarizes revenues, cost of goods sold,
and gross profit:
Three months ended | ||||||||||||||||
October 2, | September 30, | |||||||||||||||
2010 | % of Total | 2009 | % of Total | |||||||||||||
Revenues |
$ | 26,961 | 100.0 | % | $ | 31,331 | 100.0 | % | ||||||||
Cost of goods sold |
18,220 | 67.6 | % | 19,564 | 62.4 | % | ||||||||||
Gross profit |
$ | 8,741 | 32.4 | % | $ | 11,767 | 37.6 | % | ||||||||
For the three months ended October 2, 2010, our gross profit decreased $3,026, or 25.7%,
compared to the three months ended September 30, 2009. Our gross profit, as a percentage of
revenues, decreased to 32.4% for the three months ended October 2, 2010 compared to 37.6% for the
same period a year ago. The decrease in gross profit as a percentage of revenues during the three
months ended October 2, 2010 primarily related to changes in our product mix and increased pricing
pressure in the current quarter.
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PMFG, Inc. and Subsidiaries
October 2, 2010
(In thousands, except share and per share amounts)
October 2, 2010
(In thousands, except share and per share amounts)
Operating Expenses. The following summarizes operating expenses:
Three months ended | ||||||||||||||||
October 2, | September 30, | |||||||||||||||
2010 | % of Total | 2009 | % of Total | |||||||||||||
Sales and marketing |
$ | 2,736 | 10.1 | % | $ | 3,010 | 9.6 | % | ||||||||
Engineering and project
management |
1,887 | 7.0 | % | 1,850 | 5.9 | % | ||||||||||
General and administrative |
4,162 | 15.5 | % | 3,944 | 12.6 | % | ||||||||||
Total |
$ | 8,785 | 32.6 | % | $ | 8,804 | 28.1 | % | ||||||||
Operating expenses decreased $19 or 0.2% for the three months ended October 2, 2010 compared
to the same period a year ago. As a percentage of revenues, these expenses increased to 32.6%
during the three months ended October 2, 2010 from 28.1% during the three months ended September
30, 2009 due to a decrease in revenues during the current period. Our sales and marketing expenses
decreased $274 during the three months ended October 2, 2010 compared to the same period in the
previous year primarily due to reduced commissions and other selling related expenses associated
with lower revenues in the current quarter. Our engineering and project management expenses
increased $37 for the three months ended October 2, 2010 compared to the three months ended
September 30, 2009. General and administrative expenses increased $218 during the three months
ended October 2, 2010 compared to the same period a year ago partially due to an increase in
software amortization expense of $95.
Other Income and Expense. The following summarizes other income and expense:
Three months ended | ||||||||||||||||
October 2, | September 30, | |||||||||||||||
% of | % of | |||||||||||||||
2010 | Revenues | 2009 | Revenues | |||||||||||||
Interest income |
$ | 14 | 0.1 | % | $ | 12 | | % | ||||||||
Interest expense |
(884 | ) | (3.3 | )% | (1,211 | ) | (3.9 | )% | ||||||||
Loss on extinguishment of debt |
| | % | (1,303 | ) | | % | |||||||||
Foreign exchange gain (loss) |
67 | 0.2 | % | 204 | 0.7 | % | ||||||||||
Change in fair value of
derivative liability |
(5,434 | ) | (20.2 | )% | (2,500 | ) | (8.0 | )% | ||||||||
Total other income (expense) |
$ | (6,237 | ) | (23.1 | )% | $ | (4,798 | ) | (15.3 | )% | ||||||
For the three months ended October 2, 2010, total other income (expense) items increased by
$1,439, compared to the three months ended September 30, 2009. The change was primarily due to an
adjustment in the fair value of our Derivative Liability of $5,434 this quarter compared to $2,500
for the three months ended September 30, 2009. This increase in other expense was partially offset
by a reduction of $327 in our interest expense compared to the same period a year ago and the write
off of $1,303 in debt issuance costs associated with the extinguishment of subordinated term debt
in September 2009 that was not replicated this quarter.
Income Taxes. Our effective income tax rate was 5.1% and (14.0%) for the three months ended
October 2, 2010 and September 30, 2009, respectively. Our effective rate for the three months
ended October 2, 2010 and September 30, 2009 was impacted by a non-taxable benefit to adjust our
Derivative Liability in the amounts of $5,434 and $2,500, respectively.
27
Table of Contents
PMFG, Inc. and Subsidiaries
October 2, 2010
(In thousands, except share and per share amounts)
October 2, 2010
(In thousands, except share and per share amounts)
Net Earnings (Loss). Our net loss increased by $3,872 to $5,963 during the three months ended
October 2, 2010, from a net loss of $2,091 during the same period in the previous year. Basic and
fully diluted loss per share was $0.43 per share for the three months ended October 2, 2010,
compared to basic and diluted loss of $0.16 per share for the three months ended September 30,
2009. The increase in the current year loss and per share loss resulted primarily from the
increase in the fair value adjustment of the Derivative Liability and reduced revenues in the
current period compared to the three months ended September 30, 2009.
Results of Operations Segments
We have two lines of business: Process Products and Environmental Systems. Revenues and
operating income in this section are presented on a basis consistent with accounting principles
generally accepted in the United States of America (US GAAP). Certain corporate level expenses
have been excluded from our segment operating results and are analyzed separately.
Process Products
The Process Products segment produces specialized systems and products that remove
contaminants from gases and liquids, improving efficiency, reducing maintenance and extending the
life of energy infrastructure. Process Products represented 82.0% and 73.0% of our revenues for the
three months ended October 2, 2010 and September 30, 2009, respectively.
The following summarizes Process Products revenues and operating income:
Three months ended | ||||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
Revenues |
$ | 22,099 | $ | 22,701 | ||||
Operating income |
$ | 3,174 | $ | 4,592 | ||||
Operating income as % of revenues |
14.4 | % | 20.2 | % |
Process Products revenues decreased by $602, or 2.7%, during the three months ended October 2,
2010 compared to the three months ended September 30, 2009.
Process Products operating income for the three months ended October 2, 2010 decreased $1,418,
or 30.9%, compared to the same period a year ago. As a percentage of Process Products revenues,
operating income was 14.4% and 20.2% for the three months ended October 2, 2010 and September 30,
2009, respectively. The decrease in operating income as a percentage of revenues during the three
months ended October 2, 2010 is primarily related to external pricing pressures and a change in our
product mix.
Environmental Systems
The primary product of our Environmental Systems business is selective catalytic reduction
systems, which we refer to as SCR systems. SCR systems are integrated systems, with instruments,
controls and related valves and piping. Our SCR systems convert nitrogen oxide, or NOx, into
nitrogen and water, reducing air pollution and helping our customers comply with environmental
regulations. Environmental Systems represented 18.0% and 27.0% of our revenues for the three months
ended October 2, 2010 and September 30, 2009, respectively.
28
Table of Contents
PMFG, Inc. and Subsidiaries
October 2, 2010
(In thousands, except share and per share amounts)
October 2, 2010
(In thousands, except share and per share amounts)
The following summarizes Environmental Systems revenues and operating income:
Three months ended | ||||||||
October 2, | September 30, | |||||||
2010 | 2009 | |||||||
Revenues |
$ | 4,862 | $ | 8,630 | ||||
Operating income |
$ | 944 | $ | 2,315 | ||||
Operating income as % of revenues |
19.4 | % | 26.8 | % |
Revenues from Environmental Systems decreased $3,768, or 43.7%, during the three months ended
October 2, 2010 compared to the same period in the previous year. The decrease in the Environmental
Systems segment revenue for the three months ended October 2, 2010, is attributable to decreased
demand driven by a reduction in domestic power consumption.
Environmental Systems operating income for the three months ended October 2, 2010 decreased
$1,371, or 59.2%, compared to the three months ended September 30, 2009. As a percentage of
Environmental Systems revenues, operating income decreased to 19.4% during the three months ended
October 2, 2010 from 26.8% for the same period in the prior year. The decrease in operating income
as a percentage of revenues is due to a more competitive pricing environment. Additionally, lower
revenues in the current quarter and the inelastic nature of some of the segments operating costs,
resulted in a decrease in operating income as a percentage of revenues for the three months ended
October 2, 2010 compared to the same period in the prior year.
Corporate Level Expenses
Corporate level general and administrative expenses were $4,162 and $3,944 for the three
months ended October 2, 2010 and September 30, 2009, respectively. These expenses are excluded from
our segment operating results. See Operating Expenses above for additional discussion.
Contingencies
From time to time we are involved in various litigation matters arising in the
ordinary course of our business. We do not believe the disposition of any current matter will have
a material adverse effect on our consolidated financial position or results of operations. See
Note 8 of the consolidated financial statements.
Backlog
Our backlog of uncompleted orders was approximately $90,000 at October 2, 2010, compared to
$96,000 at June 30, 2010. Backlog has been calculated under our customary practice of including
incomplete orders for products that are deliverable in future periods but that could be changed or
cancelled.
Financial Position
Assets. Total assets decreased by $1,643, or 1.1%, from $143,081 at June 30, 2010, to $141,438
at October 2, 2010. On October 2, 2010, we held cash and cash equivalents of $26,310, had working
capital of $47,514 and a current liquidity ratio of 2.5-to-1.0. This compares with cash and cash
equivalents of $24,271, working capital of $48,000, and a current liquidity ratio of 2.4-to-1.0 at
June 30, 2010.
29
Table of Contents
PMFG, Inc. and Subsidiaries
October 2, 2010
(In thousands, except share and per share amounts)
October 2, 2010
(In thousands, except share and per share amounts)
Liabilities and Equity. Total liabilities increased by $2,799, or 3.3%, from $85,934 at June
30, 2010 to $88,733 at October 2, 2010. The increase in our total liabilities is attributed to the
fair value adjustment of the Derivative Liability and an increase in our trade accounts payable.
This increase was offset by the payment of employee bonuses in the three months ended October 2,
2010 that were accrued at June 30, 2010, and principal reduction of our senior term loan.
The decrease in our stockholders equity of $4,442, or 7.8%, from $57,147 at June 30, 2010 to
$52,705 at October 2, 2010 is primarily attributable to our net loss for the three months ended
October 2, 2010. Our ratio of debt (total liabilities)-to-equity increased from 1.5-to-1.0 at June
30, 2010 to 1.7-to-1.0 at October 2, 2010.
Liquidity and Capital Resources
Because we are engaged in the business of manufacturing systems, our progress billing
practices are event-oriented rather than date-oriented and vary from contract to contract.
Generally, a contract will either allow for amounts to be billed upon shipment or on a progress
basis based on the attainment of certain milestones. We typically bill our customers upon the
occurrence of project milestones. Billings to customers affect the balance of billings in excess of
costs and earnings on uncompleted contracts or the balance of costs and earnings in excess of
billings on uncompleted contracts, as well as the balance of accounts receivable. Consequently, we
focus on the net amount of these accounts, along with accounts payable, to determine our management
of working capital. At October 2, 2010, the balance of these working capital accounts was $19,851
compared to $25,266 at June 30, 2010, reflecting a decrease of our investment in these working
capital items of $5,415.
Our cash and cash equivalents were $26,310 as of October 2, 2010 compared to $24,271 at June
30, 2010. During the three months ended October 2, 2010, cash provided by operating activities was
$4,169 compared to cash provided by operating activities of $4,286 for the three months ended
September 30, 2009. Cash provided by operating activities primarily related to changes in accounts
receivable in the current period and accounts payable in the prior year.
Cash used in investing activities was $1,330 for the three months ended October 2, 2010,
compared to $10 for the three months ended September 30, 2009. Cash used in investing activities
during the three months ended October 2, 2010 related primarily to purchases of property and
equipment and intangible assets. This was partially offset by a reduction in cash restricted to
serve as collateral against open letters of credit of $545.
Cash used in financing activities during the three months ended October 2, 2010 was $1,331
compared to cash used in financing activities of $1,260 during the same period in the previous
year. The cash used in financing activities for the three months ended October 2, 2010 primarily
related to principal payment on the senior term loan and the payment of cash dividends to our
Preferred Stock holders.
As a result of the events described above, our cash and cash equivalents during the three
months ended October 2, 2010 increased by $2,039 compared to an increase of $3,067 during the three
months ended September 30, 2009.
We believe we maintain adequate liquidity to support existing operations and planned growth
over the next 12 months.
30
Table of Contents
PMFG, Inc. and Subsidiaries
October 2, 2010
(In thousands, except share and per share amounts)
October 2, 2010
(In thousands, except share and per share amounts)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposures are in the areas of interest rate risk and foreign currency
exchange rate risk.
Interest Rate Risk
We are subject to interest rate risk on outstanding borrowings under our Senior Secured Credit
Agreement, which bears interest at a variable rate. At October 2, 2010, we had $19,221 of
outstanding borrowings under this Agreement. Currently we have an interest rate cap transaction
with a notional amount of $10,000, or 52% of our variable rate debt. This cap instrument complies
with our obligation under our Senior Secured Credit Agreement.
Foreign Currency Risk
Our exposure to currency exchange rate fluctuations has been, and is expected to continue to
be, modest as foreign contracts payable in currencies other than United States dollars are
performed principally in the local currency and therefore provide a natural hedge against
currency fluctuations. The impact of currency exchange rate movements on inter-company
transactions has historically been immaterial. We did not have any currency derivatives
outstanding as of, or during the three months ended October 2, 2010.
Derivative Liability Risk
We have not entered into financial instruments for speculative or trading purposes. However,
the conversion rights and redemption options of our Preferred Stock are classified as an embedded
derivative, and as a result, marked to market to reflect fair value of the embedded derivative at
each reporting period. The fair value of the embedded derivative is influenced by a variety of
factors, including the actual and anticipated behavior of the holders of the preferred stock, the
expected volatility of our common stock price and our common stock price as of the fair value
measurement date. Some of these factors are outside of our control. As a result, changes in these
factors may have a material impact on our net income and the derivative liability recorded on our
Consolidated Balance Sheets. Consequently, our financial statements may vary periodically based on
factors other than the Companys revenues and expenses. Changes in the estimated fair value of the
embedded derivative do not have an impact on our cash flows.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information related to the Company (including its consolidated subsidiaries) that is required to be
disclosed in the reports it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms.
The Companys management has evaluated, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, the effectiveness of these disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the SEC under the Securities
Exchange Act of 1934) as of the end of the period covered by this Report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures were effective in ensuring that all information required to be
disclosed in this Report has been recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms. Additionally, based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of the period
covered by this Report, the Companys disclosure controls and procedures were effective in ensuring
that all material information required to be filed in this Report has been accumulated and
communicated to the Companys management, including its principal executive and principal financial
officers, in a timely fashion to allow decisions regarding required disclosures.
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October 2, 2010
(In thousands, except share and per share amounts)
Due to the inherent limitations of control systems, not all misstatements may be detected.
These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of a simple error or mistake. Additionally, controls could be
circumvented by the individual acts of some persons or by collusion of two or more people. The
Companys controls and procedures can only provide reasonable, not absolute, assurance that the
above objectives have been met.
During the three months ended October 2, 2010, there have been no changes in the Companys
internal control over financial reporting, or in other factors, that have materially affected or
are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 19, 2007, Martin-Manatee Power Partners, LLC (MMPP) filed a complaint against the
Company in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida.
In the complaint, MMPP asserted claims for breach of contract and express warranty, breach of
implied warranty and indemnification against the Company. MMPPs claims arise out of an incident
in September 2005 when an electric fuel gas start-up heater, which was a component of a fuel gas
heater skid supplied by the Company to MMPP, allegedly ruptured resulting in a fire. In the
complaint, MMPP did not make a specific demand for damages.
The Companys insurance carriers have agreed to defend the claims asserted by MMPP, pursuant
to reservation of rights letters issued on September 5, 2007 and have retained counsel to defend
the Company. The Companys motion to dismiss the complaint for improper venue was granted on
December 11, 2007. On February 20, 2008, MMPP filed a new action in the District Court of Johnson
County, Kansas, the venue referenced in the purchase order pursuant to which the skid was purchased
by MMPP from the Company. In this complaint, MMPP asserted the same claims as described above.
MMPP has made a demand for damages in the amount of $2,500, which it claims represents its net
costs incurred related to this incident. The Company appealed the ruling by the District Court,
which dismissed third party defendant, Controls International, Inc., the manufacturer of a valve
used on the skid. The Company filed its appeal on July 24, 2009. On June 18, 2010, the Kansas
Court of Appeals affirmed the decision of the District Court, granting the motion for dismissal of
Controls International, Inc. The Company filed a motion for rehearing with the Kansas Court of
Appeals and filed a petition for review with the Kansas Supreme Court on July 2, 2010, requesting
the reconsideration and reversal of the Kansas Court of appeals decision to dismiss Controls
International, Inc. The Kansas Court of Appeals denied the motion for rehearing. At October 2,
2010, we have accrued $100 for the applicable insurance deductible relating to this claim. However,
at this time the Company cannot estimate any potential final range of loss resulting from this
litigation, as it is still in discovery. At this time, we believe MMPPs claims are without merit
and we intend to vigorously defend this suit.
We are also involved, from time to time, in various litigation, claims and proceedings arising
in the normal course of business that are not expected to have any material effect on the financial
condition of the Company.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Item 1A of
Part I of our Annual Report on 10-K for the year ended June 30, 2010.
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(In thousands, except share and per share amounts)
October 2, 2010
(In thousands, except share and per share amounts)
Item 6. Exhibits
The following exhibits are filed as part of this report.
Exhibit | ||||
Number | Exhibit | |||
31.1 | Rule 13a
14(a)/15d 14(a) Certification of Chief Executive Officer. |
|||
31.2 | Rule 13a
14(a)/15d 14(a) Certification of Chief Financial Officer. |
|||
32 | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. |
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October 2, 2010
(In thousands, except share and per share amounts)
October 2, 2010
(In thousands, except share and per share amounts)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
PMFG, INC. | ||||
Date: November 9, 2010
|
/s/ Peter J. Burlage
|
|||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Date: November 9, 2010
|
/s/ Henry G. Schopfer, III
|
|||
Henry G. Schopfer, III | ||||
Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
34