Attached files
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EX-32 - EXHIBIT 32 - PMFG, Inc. | c16838exv32.htm |
EX-10.1 - EXHIBIT 10.1 - PMFG, Inc. | c16838exv10w1.htm |
EX-31.2 - EXHIBIT 31.2 - PMFG, Inc. | c16838exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - PMFG, Inc. | c16838exv31w1.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 April 2, 2011
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)
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
(check one):
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 May 6, 2011, was
17,543,696.
TABLE OF CONTENTS
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39 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
2
Table of Contents
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 effects of natural disasters; and |
| loss of the services of any of our senior management or other key employees. |
3
Table of Contents
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. 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 forward-looking statements, except to the
extent required by law.
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)
April 2, | June 30, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 18,770 | $ | 24,271 | ||||
Restricted cash |
3,129 | 5,868 | ||||||
Accounts receivable, principally trade net of allowance for doubtful accounts of $852 and $886 at April 2, 2011
and June 30, 2010, respectively |
30,219 | 27,310 | ||||||
Inventories net |
6,147 | 7,220 | ||||||
Costs and earnings in excess of billings on uncompleted contracts |
12,914 | 13,560 | ||||||
Deferred income taxes |
2,066 | 2,066 | ||||||
Other current assets |
4,191 | 2,011 | ||||||
Total current assets |
77,436 | 82,306 | ||||||
Property, plant and equipment net |
9,150 | 7,506 | ||||||
Intangible assets net |
22,070 | 21,781 | ||||||
Goodwill |
29,702 | 29,702 | ||||||
Other assets |
992 | 1,786 | ||||||
Total assets |
$ | 139,350 | $ | 143,081 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 15,006 | $ | 10,180 | ||||
Current maturities of long-term debt |
1,950 | 4,000 | ||||||
Billings in excess of costs and earnings on uncompleted contracts |
4,921 | 5,424 | ||||||
Commissions payable |
1,987 | 1,932 | ||||||
Income taxes payable |
| 717 | ||||||
Accrued product warranties |
2,713 | 2,480 | ||||||
Customer deposits |
2,150 | 2,481 | ||||||
Accrued liabilities and other |
5,545 | 7,092 | ||||||
Total current liabilities |
34,272 | 34,306 | ||||||
Long-term debt |
10,621 | 16,221 | ||||||
Deferred income taxes |
8,603 | 8,548 | ||||||
Derivative liability |
534 | 25,916 | ||||||
Other non-current liabilities |
950 | 943 | ||||||
Commitments and contingencies |
||||||||
Preferred stock authorized, 5,000,000 shares of $0.01 par value;
issued and outstanding, 300 and 21,140 shares at
April 2, 2011 and June 30, 2010, respectively |
| | ||||||
Stockholders equity: |
||||||||
Common stock authorized, 50,000,000 shares of $0.01 par value;
issued and outstanding, 17,541,867 and 14,734,323 shares at
April 2, 2011 and June 30, 2010, respectively |
175 | 147 | ||||||
Additional paid-in capital |
48,010 | 27,240 | ||||||
Retained earnings |
36,145 | 31,142 | ||||||
Accumulated other comprehensive loss |
(1,324 | ) | (2,283 | ) | ||||
Total PMFG, Inc. stockholders equity |
83,006 | 56,246 | ||||||
Noncontrolling interest |
1,364 | 901 | ||||||
Total equity |
84,370 | 57,147 | ||||||
Total liabilities and equity |
$ | 139,350 | $ | 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 | Nine months ended | |||||||||||||||
April 2, | March 31, | April 2, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenue |
$ | 33,985 | $ | 32,221 | $ | 87,240 | $ | 88,081 | ||||||||
Cost of goods sold |
23,289 | 20,544 | 59,677 | 56,369 | ||||||||||||
Gross profit |
10,696 | 11,677 | 27,563 | 31,712 | ||||||||||||
Operating expenses |
||||||||||||||||
Sales and marketing |
3,396 | 2,684 | 8,918 | 8,261 | ||||||||||||
Engineering and project management |
2,316 | 1,897 | 6,158 | 5,525 | ||||||||||||
General and administrative |
4,154 | 3,556 | 11,950 | 11,235 | ||||||||||||
9,866 | 8,137 | 27,026 | 25,021 | |||||||||||||
Operating income |
830 | 3,540 | 537 | 6,691 | ||||||||||||
Other income (expense) |
||||||||||||||||
Interest income |
5 | 5 | 24 | 23 | ||||||||||||
Interest expense |
(406 | ) | (561 | ) | (1,916 | ) | (2,463 | ) | ||||||||
Loss on extinguishment of debt |
| | | (1,303 | ) | |||||||||||
Foreign exchange gain |
248 | 163 | 424 | 978 | ||||||||||||
Change in fair value of derivative liability |
4,549 | 3,623 | 6,419 | (4,689 | ) | |||||||||||
Other income (expense), net |
| 10 | | (231 | ) | |||||||||||
4,396 | 3,240 | 4,951 | (7,685 | ) | ||||||||||||
Earnings (loss) before income taxes |
5,226 | 6,780 | 5,488 | (994 | ) | |||||||||||
Income tax (expense) benefit |
(264 | ) | (1,044 | ) | 350 | (1,282 | ) | |||||||||
Net earnings (loss) |
$ | 4,962 | $ | 5,736 | $ | 5,838 | $ | (2,276 | ) | |||||||
Less net income (loss) attributable to noncontrolling interest |
$ | (13 | ) | $ | (18 | ) | $ | 119 | $ | (77 | ) | |||||
Net earnings (loss) attributable to PMFG, Inc. |
$ | 4,975 | $ | 5,754 | $ | 5,719 | $ | (2,199 | ) | |||||||
Dividends on preferred stock |
$ | (85 | ) | $ | (313 | ) | $ | (717 | ) | $ | (728 | ) | ||||
Earnings (loss) applicable to PMFG, Inc. common stockholders |
$ | 4,890 | $ | 5,441 | $ | 5,002 | $ | (2,927 | ) | |||||||
Basic earnings (loss) per common share |
$ | 0.28 | $ | 0.33 | $ | 0.29 | $ | (0.22 | ) | |||||||
Diluted earnings (loss) per share |
$ | 0.27 | $ | 0.32 | $ | 0.28 | $ | (0.22 | ) | |||||||
Weighted-average shares outstanding: |
||||||||||||||||
Basic |
16,977 | 13,703 | 15,591 | 13,377 | ||||||||||||
Effect of dilutive options and restricted stock |
554 | 462 | 542 | | ||||||||||||
Diluted |
17,531 | 14,165 | 16,133 | 13,377 | ||||||||||||
See accompanying notes to consolidated financial statements.
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Table of Contents
PMFG, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands, except share amounts)
Nine months ended | ||||||||
April 2, | March 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: |
||||||||
Net earnings (loss) |
$ | 5,838 | $ | (2,276 | ) | |||
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities: |
||||||||
Depreciation |
1,226 | 1,271 | ||||||
Amortization of deferred financing costs |
778 | 458 | ||||||
Amortization of other intangible assets |
811 | 777 | ||||||
Loss on extinguishment of debt |
| 1,303 | ||||||
Deferred income taxes |
55 | (1,134 | ) | |||||
Deferred rent expense |
7 | (232 | ) | |||||
Bad debt expense |
7 | 229 | ||||||
Provision for warranty expense |
1,080 | 1,251 | ||||||
Inventory valuation reserve |
43 | 512 | ||||||
Foreign exchange gain |
(424 | ) | (978 | ) | ||||
Change in fair value of derivative liability |
(6,419 | ) | 4,689 | |||||
Excess tax benefits from stock-based payment arrangements |
(321 | ) | (44 | ) | ||||
Stock-based compensation |
1,165 | 969 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(2,916 | ) | 3,581 | |||||
Inventories |
1,039 | 1,357 | ||||||
Costs and earnings in excess of billings on uncompleted contracts |
885 | 1,811 | ||||||
Other current assets |
(561 | ) | 900 | |||||
Other assets |
175 | (117 | ) | |||||
Accounts payable |
4,893 | (2,105 | ) | |||||
Billings in excess of costs and earnings on uncompleted contracts |
(503 | ) | (1,566 | ) | ||||
Commissions payable |
55 | (633 | ) | |||||
Income taxes payable |
(2,012 | ) | 803 | |||||
Product warranties |
(847 | ) | (209 | ) | ||||
Accrued liabilities and other |
(1,804 | ) | (4,810 | ) | ||||
Net cash provided by operating activities |
2,250 | 5,807 | ||||||
Cash flow from investing activities: |
||||||||
Decrease (increase) in restricted cash |
2,894 | (3,535 | ) | |||||
Purchases of property and equipment |
(2,811 | ) | (427 | ) | ||||
Acquisition of intangibles |
(1,100 | ) | (749 | ) | ||||
Proceeds from liquidation of equity method investment |
| 2,439 | ||||||
Net cash (used in) investing activities |
(1,017 | ) | (2,272 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
| 15,928 | ||||||
Net proceeds from issuance of preferred stock and warrants |
| 19,235 | ||||||
Payment of debt issuance costs |
(158 | ) | (552 | ) | ||||
Payment of long-term debt |
(7,650 | ) | (33,779 | ) | ||||
Equity contribution from noncontrolling interest |
344 | 920 | ||||||
Dividends paid on preferred stock |
(717 | ) | (728 | ) | ||||
Proceeds from exercise of stock options |
350 | | ||||||
Excess tax benefits from stock-based payment arrangements |
321 | | ||||||
Net cash (used in) provided by financing activities |
(7,510 | ) | 1,024 |
Consolidated Statements of Cash Flows continued on next page.
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PMFG, Inc. and Subsidiaries
Consolidated Statements of Cash Flows Continued
(In thousands, except share amounts)
Consolidated Statements of Cash Flows Continued
(In thousands, except share amounts)
Nine months ended | ||||||||
April 2, | March 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
776 | 764 | ||||||
Net (decrease) increase in cash and cash equivalents |
(5,501 | ) | 5,323 | |||||
Cash and cash equivalents at beginning of period |
24,271 | 17,738 | ||||||
Cash and cash equivalents at end of period |
$ | 18,770 | $ | 23,061 | ||||
Supplemental information on cash flow: |
||||||||
Income taxes paid |
$ | 1,300 | $ | 2,136 | ||||
Interest paid |
$ | 1,109 | $ | 1,259 |
During the nine months ended April 2, 2011, holders of Preferred Stock converted 20,840 shares
of Preferred Stock into 2,605,000 shares of the Companys common stock. This was a non cash
financing activity and as a result, the Company is no longer obligated to pay quarterly dividends
on the converted shares of Preferred Stock.
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 earnings |
5,719 | 5,719 | 119 | 5,838 | ||||||||||||||||||||||||||||
Foreign currency translation adjustment |
959 | 959 | 959 | |||||||||||||||||||||||||||||
Total comprehensive income |
6,678 | 119 | 6,797 | |||||||||||||||||||||||||||||
Stock grants |
101 | 1 | 1,164 | 1,165 | 1,165 | |||||||||||||||||||||||||||
Preferred stock conversion |
2,605 | 26 | 18,937 | 18,963 | 18,963 | |||||||||||||||||||||||||||
Stock options exercised |
102 | 1 | 349 | 350 | 350 | |||||||||||||||||||||||||||
Excess tax benefits from stock-based payment arrangements |
320 | 1 | 321 | 321 | ||||||||||||||||||||||||||||
Contributions from noncontrolling interest in subsidiary |
344 | 344 | ||||||||||||||||||||||||||||||
Preferred stock dividends |
(717 | ) | (717 | ) | (717 | ) | ||||||||||||||||||||||||||
Balance at April 2, 2011 |
17,542 | $ | 175 | $ | 48,010 | $ | 36,145 | $ | (1,324 | ) | $ | 83,006 | $ | 1,364 | $ | 84,370 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(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 April 2, 2011 and
for the three and nine months ended April 2, 2011 and March 31, 2010 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 June 30, 2010
consolidated financial statements are derived from the audited consolidated June 30, 2010 financial
statements included in the June 30, 2010 Form 10-K. 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 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 Statements 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 Statements of Cash Flows, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be cash equivalents.
The Company maintains cash balances in bank accounts that normally exceed Federal Deposit Insurance
Corporation insured limits. As of April 2, 2011, cash held in the United States exceeded federally
insured limits by $10,284. The Company has not experienced any losses related to this cash
concentration.
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Table of Contents
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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.
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 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 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, during the fourth quarter, 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
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Convertible Redeemable Preferred Stock
The Companys Certificate of Designations setting forth the terms of our Series A Convertible
Preferred Stock (Preferred Stock) includes redemption rights of the holders of Preferred Stock
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 and Comprehensive Income (Loss). 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). Because 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, accounts receivable, 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 carrying values of its
debt at April 2, 2011 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 revenue 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. Revenue
under the completed contract method are recognized upon shipment of the product.
Pre-contract, Start-up and Commissioning Costs
The Company does not consider the realization of any individual sales order as probable prior to
order acceptance. Therefore, pre-contract costs incurred prior to sales order acceptance are
included as a component of operating expenses when incurred. Some of the Companys contracts call
for the installation and placing in service of the product after it is distributed to the end user.
The costs associated with the start-up and commissioning of these
projects are estimated and recorded in cost of goods sold in the period in which the revenue is
recognized. Estimates are based on historical experience and expectation of future conditions.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Warranty Costs
The Company provides to its customers product warranties for specific products during a defined
period of time, generally less than 18 months after shipment of the product. Warranties cover the
failure of a product to perform after it has been placed in service. The Company reserves for
estimated future warranty costs in the period in which the revenue is recognized based on
historical experience, expectation of future conditions, and the extent of backup concurrent
supplier warranties in place. Warranty costs are included in the costs of goods sold.
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.
Earnings (losses) were allocated under the two class method as follows:
Three months ended | Nine months ended | |||||||||||||||
April 2, | March 31, | April 2, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Common Stock |
$ | 4,730 | $ | 4,562 | $ | 4,449 | $ | (2,199 | ) | |||||||
Preferred Stock |
245 | 1,192 | 1,270 | | ||||||||||||
Total |
$ | 4,975 | $ | 5,754 | $ | 5,719 | $ | (2,199 | ) | |||||||
Because holders of Preferred Stock do not participate in losses, 2,010,598 shares of common
stock equivalents were excluded from the calculation of basic and diluted earnings per share for
the nine months ended March 31, 2010. Diluted earnings per common share include the dilutive
effect of stock options and warrants granted using the treasury stock method. Options to acquire
94,718 shares of common stock and warrants to purchase 368,100 shares of common stock were omitted
from the calculation of dilutive securities for the nine months ended March 31, 2010 because they
were anti-dilutive.
Income Taxes
The Company is required to estimate income taxes in each jurisdiction in which it operates. This
process involves estimating actual current tax exposure together with assessing temporary
differences resulting from different treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities and are included in the Companys
consolidated balance sheets. Judgment is required in assessing the future tax consequences of
events that have been recognized in the Companys financial statements or tax returns. In the
event that actual results differ from these estimates, the Companys provision for income taxes
could be materially impacted. The Companys effective income tax rate varies primarily due to
changes in the fair value of the Derivative Liability, which are not taxable or deductible for
income tax purposes.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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 revenue and expenses during the reporting period. Because the use of estimates is
inherent in the financial reporting process, actual results could differ from those estimates.
2. INVENTORIES, NET
Principal components of inventories, net are as follows:
April 2, | June 30, | |||||||
2011 | 2010 | |||||||
Raw materials |
$ | 4,234 | $ | 4,443 | ||||
Work in progress |
2,356 | 3,164 | ||||||
Finished goods |
297 | 361 | ||||||
6,887 | 7,968 | |||||||
Reserve for obsolete and slow-moving inventory |
(740 | ) | (748 | ) | ||||
$ | 6,147 | $ | 7,220 | |||||
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The components of uncompleted contracts are as follows:
April 2, | June 30, | |||||||
2011 | 2010 | |||||||
Costs and earnings in excess of billings on
uncompleted contracts |
$ | 12,914 | $ | 13,560 | ||||
Billings in excess of costs and earnings on
uncompleted contracts |
(4,921 | ) | (5,424 | ) | ||||
$ | 7,993 | $ | 8,136 | |||||
The components of uncompleted contracts are reflected in the consolidated balance sheets as
follows:
April 2, | June 30, | |||||||
2011 | 2010 | |||||||
Costs incurred on uncompleted contracts and
estimated earnings |
$ | 55,004 | $ | 56,176 | ||||
Less billings to date |
(47,011 | ) | (48,040 | ) | ||||
$ | 7,993 | $ | 8,136 | |||||
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
4. GOODWILL AND OTHER INTANGIBLE ASSETS
All goodwill and other intangible assets are allocated to the Process Products segment and are
not deductible for income tax purposes.
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 April 2, 2011: |
||||||||||||||
Licensing agreements |
5 | $ | 3,299 | $ | (1,283 | ) | $ | 2,016 | ||||||
Customer
relationships |
13 | 6,890 | (2,056 | ) | 4,834 | |||||||||
Tradenames |
indefinite | 4,729 | | 4,729 | ||||||||||
Design guidelines |
indefinite | 10,491 | | 10,491 | ||||||||||
Total Value |
$ | 25,409 | $ | (3,339 | ) | $ | 22,070 | |||||||
Weighted-Average | ||||||||||||||
Estimated | Gross | |||||||||||||
Useful Life | Carrying | Accumulated | Net Book | |||||||||||
(Years) | Amount | Amortization | Value | |||||||||||
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 $811 and $777 was recorded to the Consolidated Statements of Operations for
the nine months ended April 2, 2011 and March 31, 2010, respectively. The Companys estimated
amortization for the remaining current and each of the next five fiscal years is as follows:
Estimated Amortization Expense
For the fiscal years ended
For the fiscal years ended
2011 (3 months) |
$ | 258 | ||
2012 |
1,005 | |||
2013 |
922 | |||
2014 |
555 | |||
2015 |
480 | |||
2016 |
405 |
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
5. ACCRUED PRODUCT WARRANTIES
Accrued product warranty activity is as follows:
Three months ended | Nine months ended | |||||||||||||||
April 2, | March 31, | April 2, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Balance at beginning of period |
$ | 2,361 | $ | 1,267 | $ | 2,480 | $ | 1,242 | ||||||||
Provision for warranty
expenses |
519 | 930 | 1,080 | 1,251 | ||||||||||||
Warranty charges |
(167 | ) | (400 | ) | (847 | ) | (696 | ) | ||||||||
Balance at end of period |
$ | 2,713 | $ | 1,797 | $ | 2,713 | $ | 1,797 | ||||||||
6. ACCRUED LIABILITIES AND OTHER
The components of accrued liabilities and other are as follows:
April 2, | June 30, | |||||||
2011 | 2010 | |||||||
Accrued start-up and commissioning expense |
$ | 1,405 | $ | 1,169 | ||||
Accrued compensation |
2,068 | 3,999 | ||||||
Accrued professional expenses |
1,959 | 1,679 | ||||||
Other |
113 | 245 | ||||||
$ | 5,545 | $ | 7,092 | |||||
7. DEBT
Outstanding long-term debt obligations are as follows:
April 2, | June 30, | |||||||
2011 | 2010 | |||||||
Term loan |
$ | 12,571 | $ | 20,221 | ||||
Total long-term debt |
12,571 | 20,221 | ||||||
Less current maturites |
(1,950 | ) | (4,000 | ) | ||||
Total long-term debt, net of current portion |
$ | 10,621 | $ | 16,221 | ||||
On May 6, 2011, the Company amended its Credit Agreement to modify the definition of
Consolidated Fixed Charges to exclude distributions paid to the holders of the Preferred Stock from
the definition and therefore from the consolidated fixed charge ratio. This amendment also waives
any noncompliance or default by the Company
with its current financial covenants, including its consolidated fixed charge coverage ratio and
its consolidated total leverage ratio during the quarter ended April 2, 2011.
On December 29, 2010, the Company entered into an amendment (the Fifth Amendment) to its Credit
Agreement. The Fifth Amendment refinances the Companys existing debt and extends the maturity
date of the revolving credit facility to April 30, 2012, and the senior term loan to January 1,
2016. The Fifth Amendment also enhances the Companys financial flexibility by relaxing the
Companys consolidated total leverage (CTL) and consolidated fixed charge coverage (FCC) ratio
covenants for the remaining terms of the senior term loan and revolving credit facility. As
amended, as of the last day of a fiscal quarter, the Companys CTL ratio may be no more than 3.25
to 1.00 for the quarter ended April 2, 2011, and 3.00 to 1.00 for the quarters ending July 2, 2011
and
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
7. DEBT CONTINUED
thereafter, and the Companys FCC ratio may be no less than 1.15 to 1.00 for the quarter ended
April 2, 2011 and 1.25 to 1.00 for quarters ending July 2, 2011 and thereafter. The Fifth Amendment
also redefined the Companys FCC to exclude certaincapital expenditures from consolidated fixed
charges. The Company must also maintain a minimum base adjusted net worth of not less than $65,000
plus 50% of consolidated net income for each fiscal quarter, commencing with the quarter ended on
April 2, 2011. In connection with the Amendment, the Company made an additional $5,000 principal
payment of the senior term loan in December 2010.
The Fifth Amendment excludes from consolidated net income any non-cash fair value adjustments
related to the Derivative Liability for purposes of determining the Companys excess cash flow each
fiscal year, and permits the Company to make intercompany loans and investments in its China
operations and facility, subject to certain limitations.
Interest rate margins on the senior term loan and revolving loans were revised effective as of
December 29, 2010 (depending on the type of borrowing and determined based upon the Companys CTL
ratio) as follows: (a) for base rate term loans, from a margin of between 275 and 400 basis points
to a margin of between 225 and 375 basis points; (b) for LIBOR rate term loans, from a margin of
between 375 and 500 basis points to a margin of between 325 and 475 basis points; (c) for base rate
revolving loans, from a margin of between 275 and 375 basis points to a margin of between 225 and
350 basis points; and (d) for LIBOR rate revolving loans, from a margin of between 350 and 475
basis points to a margin of between 300 and 450 basis points.
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 April 2, 2011 and 5.25% at June 30, 2010). The Credit
Agreement requires payments
on the senior term loan of equal quarterly principal installments of $650, to be paid on the first
day of each fiscal quarter, commencing on April 3, 2011, with the balance of the senior term loan
due at maturity.
At April 2, 2011, there was $6,695 borrowing availability after the borrowing base was adjusted for
$6,476 in outstanding letters of credit. At April 2, 2011 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. In addition to the CTL and FCC ratio covenants,
the Credit Agreement contains other covenants, including restrictions on additional debt,
dividends, capital expenditures, acquisitions and dispositions. As of April 2, 2011, the Company
was in compliance with all covenants in its Credit Agreement.
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, 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
April 2, 2011 the Interest Rate Cap Transaction has an estimated fair market value of $0.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
7. DEBT CONTINUED
The Companys U.K. subsidiary has a debenture agreement used to facilitate issuances of letters of
credit and bank guarantees of £6,000 ($9,669) at April 2, 2011 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 £1,800 ($2,901) at April 2,
2011 and £2,850 ($4,258) at June 30, 2010, which is recorded as restricted cash on the Consolidated
Balance Sheets. At April 2, 2011, there was £4,097 ($6,602) 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
April 2, 2011 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 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 April 2, 2011. At this
time, no lawsuit has been filed by the customer and the Company does not believe at this time that
it will have any additional losses or claims against the former Nitram stockholders that are in
excess of the amount already claimed or accrued.
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 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. As of the June
30, 2010 and April 2, 2011, the Company has recorded an accrual of $100 related to the insurance
deductible as a component of its warranty liability and reserved $487 against retention receivables
related to the MMPP jobs. At this time, the Company cannot estimate any potential finalrange of
loss resulting from this litigation as it is still in discovery. Management believes that MMPPs
claims are without merit and intends to vigorously defend this suit.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
8. COMMITMENTS AND CONTINGENCIES CONTINUED
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 April 2, 2011 and June 30, 2010, which have been
discounted using a rate of 3.25%. The Company believes that the cost of the monitoring will be
approximately $10 per year until complete. The Company may also incur additional costs in calendar
year 2011 related to the installation of four new test wells at the Vermont Street Plant and the
preparation of environmental reports, which the Company believes may cost approximately $90 in the
aggregate. The Company expects that the monitoring will continue for a period not to exceed five
years. The Company is seeking reimbursement for the full cost of the remediation and ongoing and
future monitoring activities under our purchase agreement with Nitrams former stockholders in the
amount of $655. 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 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 directly against the selling stockholders under the
terms of the Nitram acquisition agreement totaling approximately $9,500, related to the customer
warranty
dispute for the four Alco Products heat exchangers and other 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.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
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. There have been no adjustments to the Conversion Price, which
remains $8.00 per share. 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 $728 and $717 of cash dividends during the nine months ended March 31, 2010 and April 2, 2011,
respectively.
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.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
9. SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK AND WARRANTS CONTINUED
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.
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 became exercisable on March 4, 2010. 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.
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 April 2, 2011, the Company does not consider this liability to be probable
and has not recorded any amount on the Consolidated Balance Sheets.
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.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
9. SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK AND WARRANTS CONTINUED
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 Liability and
warrants |
$ | 19,235 | ||
Preferred Stock Conversions
During the nine months ended April 2, 2011, holders of Preferred Stock converted 20,840 shares of
Preferred Stock into 2,605,000 shares of the Companys common stock. 20,340 of the converted
Preferred Stock shares were converted during the three months ended April 2, 2011 into 2,542,500
shares of the Companys common stock.
See Note 12 for discussion of fair value measurements.
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 August 2008.
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 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.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
11. STOCK-BASED COMPENSATION
The following information represents the Companys grants of stock-based compensation to employees
and directors during the nine months ended April 2, 2011 and March 31, 2010:
Nine months ended | ||||||||||||||||
April 2, | March 31, | |||||||||||||||
2011 | 2010 | |||||||||||||||
Number of | Fair Value | Number of | Fair Value | |||||||||||||
Grant Type | Shares Granted | of Grant | Shares Granted | of Grant | ||||||||||||
Common stock |
36,000 | $ | 523 | 36,000 | $ | 315 | ||||||||||
Restricted stock |
64,887 | $ | 968 | 111,550 | $ | 1,038 |
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.
| 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. |
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
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 April 2, 2011, 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 and nine months ended April 2, 2011, a decrease in fair value of $4,549 and $6,419,
respectively, was recorded in Other income (expense) in the Consolidated Statements of Operations.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
Notes to Consolidated Financial Statements
April 2, 2011
(In thousands, except share and per share amounts)
12. FAIR VALUE MEASUREMENTS CONTINUED
Financial assets and liabilities measured at fair value on a recurring basis are summarized below
(in thousands):
Total | ||||||||||||||||
April 2, 2011 | Level 1 | Level 2 | Level 3 | |||||||||||||
Derivatives related
to conversion and
redemption rights |
$ | (534 | ) | $ | | $ | | $ | (534 | ) |
The following is a summary of changes to fair value measurements using Level 3 inputs (as
reclassified) during the nine months ended April 2, 2011:
Balance, June 30, 2010 |
$ | (25,916 | ) | |
Change in fair value of derivative liability |
6,419 | |||
Preferred stock conversion |
18,963 | |||
Balance, April 2, 2011 |
$ | (534 | ) | |
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 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 and nine months
ended April 2, 2011 and March 31, 2010 are presented below. The Company does not allocate Corporate
level general and administrative expenses, 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 | Nine months ended | |||||||||||||||
April 2, | March 31, | April 2, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
||||||||||||||||
Process Products |
$ | 23,524 | $ | 23,836 | $ | 64,882 | $ | 65,946 | ||||||||
Environmental |
10,461 | 8,385 | 22,358 | 22,135 | ||||||||||||
Consolidated |
$ | 33,985 | $ | 32,221 | $ | 87,240 | $ | 88,081 | ||||||||
Operating income |
||||||||||||||||
Process Products |
$ | 2,720 | $ | 4,391 | $ | 8,800 | $ | 12,028 | ||||||||
Environmental |
2,264 | 2,705 | 3,687 | 5,898 | ||||||||||||
Corporate level
expenses |
(4,154 | ) | (3,556 | ) | (11,950 | ) | (11,235 | ) | ||||||||
Consolidated |
$ | 830 | $ | 3,540 | $ | 537 | $ | 6,691 | ||||||||
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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(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. 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. This overview is followed by a discussion of our results of
operations for the three and nine months ended April 2, 2011 and March 31, 2010, including a
discussion of significant period-to-period variances. We also include information regarding our two
reportable segments: Process Products and Environmental Systems. We then discuss our financial
condition at April 2, 2011 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 revenue was from international sales. We expect our international sales to
continue to be an increasingly important part of our business.
Recent Developments
During the nine months ended April 2, 2011, the holders of 20,840 shares of Preferred Stock
elected to convert their Preferred Stock into 2,605,000 shares of the Companys common stock at the
initial conversion price of $.00 per share. Of those conversions, 20,340 shares of Preferred Stock
were converted into 2,542,500 shares of
common stock during the three months ended April 2, 2011. At April 2, 2011, 300 shares of
Preferred Stock remained issued and outstanding.
On April 20, 2011, we announced that Henry G. Schopfer resigned as the Chief Financial
Officer of the Company, effective April 22, 2011. We also announced the appointment of Ronald L.
McCrummen to the position of Vice President and Chief Financial Officer. Prior to joining the
Company, Mr. McCrummen served as the Senior Vice President and Chief Accounting Officer of Dean
Foods, Inc. from 2004 thru 2010 and was a partner with Ernst and Young, LLP from 1998 through 2004.
On May 6, 2011, we entered into an amendment of our Revolving Credit and Term Loan Agreement,
dated April 30, 2008, among Peerless Mfg. Co., PMC Acquisition, Inc., the Company, the other
borrowers party thereto, Comerica Bank and other lenders party thereto (the Credit Agreement).
The purpose of the amendment is to modify the definition of Consolidated Fixed Charges to exclude
distributions paid to the holders of the Companys Series A convertible Preferred Stock from the
definition and therefore from the consolidated fixed charge ratio.
On December 29, 2010, we entered into an amendment to our Credit Agreement. The amendment
refinances our existing debt and extends the maturity date of the revolving credit facility to
April 30, 2012 and the senior secured term loan to January 1, 2016.
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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
On July 12, 2010, we entered into the CEFCO Process Manufacturing License Agreement (the
License Agreement) with CEFCO Global Clean Energy, LLC, a Texas limited liability company
(CEFCO). Pursuant to the License Agreement and subject to the terms and conditions set forth
therein, we were granted exclusive manufacturing rights in the continental United States to
manufacture equipment and process units incorporating CEFCOs multi-stage apparatus used in the
selective capture and removal of purified carbon gas, including NOx, SOx, CO2 and Hg, and the
sequential capture and removal of mercury, metal, and particulate aerosols. The captured pollutants
may subsequently be converted into various high-grade end products through chemical conversion in a
recirculating and regenerating system and may then be commercially sold by an end-user or operator.
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.
Results of Operations
The following summarizes our consolidated statements of operations as a percentage of revenue:
Three months ended | Nine months ended | |||||||||||||||
April 2, | March 31, | April 2, | March 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of goods sold |
68.5 | 63.8 | 68.4 | 64.0 | ||||||||||||
Gross profit |
31.5 | 36.2 | 31.6 | 36.0 | ||||||||||||
Operating expenses |
29.0 | 25.3 | 31.0 | 28.4 | ||||||||||||
Operating income |
2.5 | 10.9 | 0.6 | 7.6 | ||||||||||||
Other income (expense) |
12.9 | 10.1 | 5.7 | (8.7 | ) | |||||||||||
Earnings (loss) before income taxes |
15.4 | 21.0 | 6.3 | (1.1 | ) | |||||||||||
Income tax expense |
(0.8 | ) | (3.2 | ) | 0.4 | (1.5 | ) | |||||||||
Net earnings (loss) |
14.6 | % | 17.8 | % | 6.7 | % | (2.6) | % | ||||||||
Less net (loss) earnings attributable to noncontrolling interest |
| (0.1 | ) | 0.1 | (0.1 | ) | ||||||||||
Net earnings (loss) attributable to PMFG, Inc. |
14.6 | 17.9 | 6.6 | (2.5 | ) | |||||||||||
Dividends on preferred stock |
(0.3 | ) | (1.0 | ) | (0.8 | ) | (0.8 | ) | ||||||||
Earnings (loss) applicable to PMFG, Inc. common stockholders |
14.3 | % | 16.9 | % | 5.8 | % | (3.3) | % | ||||||||
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, contract
related charges and warranty related costs.
Operating expenses include sales and marketing expenses, engineering and project management
expenses, and general and administrative expenses.
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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
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, 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, professional services, and other administrative fees.
Three Months Ended April 2, 2011 Compared to Three Months Ended March 31, 2010
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.
Results of Operations Consolidated
In fiscal 2010, we had significant warranty claims associated with two sales orders. Based on
our extensive historical performance, we believe these types of occurrences to be infrequent in
nature and have no expectation of a similar recurrence in future periods. Additionally, based on
improved information regarding claims history, we anticipate warranty provisions in fiscal 2011 to
be greater than those reported in fiscal 2008 or fiscal 2009, but do not expect them to be at the
same level as fiscal 2010. The expected reduction in warranty provision in fiscal 2011 is based on
the impact of the two orders, which we do not expect to repeat.
Revenue. We classify revenue as domestic or international based upon the origination of the
order. Revenue generated by orders originating from within the United States is classified as
domestic revenue.
Revenue generated by orders originating from a country other than the United States is classified
as international revenue. The following summarizes consolidated revenue:
Three months ended | ||||||||||||||||
April 2, | March 31, | |||||||||||||||
% of Total | % of Total | |||||||||||||||
2011 | Revenue | 2010 | Revenue | |||||||||||||
Domestic |
$ | 22,122 | 65.1 | % | $ | 21,108 | 65.5 | % | ||||||||
International |
11,863 | 34.9 | % | 11,113 | 34.5 | % | ||||||||||
Total |
$ | 33,985 | 100.0 | % | $ | 32,221 | 100.0 | % | ||||||||
Total revenue increased $1,764, or 5.5%, for the three months ended April 2, 2011
compared to the three months ended March 31, 2010 as domestic revenue increased $1,014, or 4.8%,
and international revenue increased $750, or 6.7%. The increase in domestic revenue was
attributable to completion of backlogged projects and the increase in international revenue 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.
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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
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 and commissioning costs. Shifts in the geographic composition of our sales also can have a
significant impact on our reported margins. The following summarizes revenue, cost of goods sold,
and gross profit:
Three months ended | ||||||||||||||||
April 2, | March 31, | |||||||||||||||
% of Total | % of Total | |||||||||||||||
2011 | Revenue | 2010 | Revenue | |||||||||||||
Revenue |
$ | 33,985 | 100.0 | % | $ | 32,221 | 100.0 | % | ||||||||
Cost of goods sold |
23,289 | 68.5 | % | 20,544 | 63.8 | % | ||||||||||
Gross profit |
$ | 10,696 | 31.5 | % | $ | 11,677 | 36.2 | % | ||||||||
For the three months ended April 2, 2011, our gross profit decreased $981, or 8.4%,
compared to the three months ended March 31, 2010. Our gross profit, as a percentage of revenue,
decreased to 31.5% for the three months ended April 2, 2011 compared to 36.2% for the three months
ended March 31, 2010. The decrease in gross profit as a percentage of revenue during the three
months ended April 2, 2011 primarily related to increased pricing pressure and changes in our
product mix.
Operating Expenses. The following summarizes operating expenses:
April 2, | March 31, | |||||||||||||||
% of Total | % of Total | |||||||||||||||
2011 | Revenue | 2010 | Revenue | |||||||||||||
Sales and marketing |
$ | 3,396 | 10.0 | % | $ | 2,684 | 8.3 | % | ||||||||
Engineering and project
management |
2,316 | 6.8 | % | 1,897 | 5.9 | % | ||||||||||
General and administrative |
4,154 | 12.2 | % | 3,556 | 11.1 | % | ||||||||||
Total |
$ | 9,866 | 29.0 | % | $ | 8,137 | 25.3 | % | ||||||||
Operating expenses increased $1,729 or 21.2% for the three months ended April 2, 2011
compared to the three months ended March 31, 2010. As a percentage of revenue, these expenses
increased to 29.0% during the three months ended April 2, 2011 from 25.3% during the three months
ended March 31, 2010. The increase in operating expenses primarily relates to higher commission
and selling related costs, higher professional fees, and higher product development costs, as well
as the impact of recognizing payroll expense in the current quarter that should have been
recognized in the quarter ended January 1, 2011. The timing of recognizing the payroll expense had
no impact on the operating expenses for the nine months ended April 2, 2011. Our sales and
marketing expenses increased $712 during the three months ended April 2, 2011 compared to the three
months ended March 31, 2010 primarily due to increased commission and other selling related
expenses associated with higher revenue in the current quarter. Our engineering and project
management expenses increased $419 for the three months ended April 2, 2011 compared to the three
months ended March 31, 2010 primarily due to an increase in employee wages and benefits. General
and administrative expenses increased $598 during the three months ended April 2, 2011 compared to
the three months ended March 31, 2010, primarily due to increased consulting from tax and
information technology advisors.
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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
Other Income and Expense. The following summarizes other income and expense:
Three months ended | ||||||||||||||||
April 2, | March 31, | |||||||||||||||
% of Total | % of Total | |||||||||||||||
2011 | Revenue | 2010 | Revenue | |||||||||||||
Interest income |
$ | 5 | | % | $ | 5 | | % | ||||||||
Interest expense |
(406 | ) | (1.2 | )% | (561 | ) | (1.7 | )% | ||||||||
Foreign exchange gain |
248 | 0.8 | % | 163 | 0.5 | % | ||||||||||
Gain on change in
fair value of
derivative liability |
4,549 | 13.4 | % | 3,623 | 11.2 | % | ||||||||||
Other expense, net |
| | % | 10 | 0.1 | % | ||||||||||
Total other income |
$ | 4,396 | 12.9 | % | $ | 3,240 | 10.1 | % | ||||||||
For the three months ended April 2, 2011, total other income (expense) items increased by
$1,156, compared to the three months ended March 31, 2010. The change was primarily due to a gain
on the Derivative
Liability of $4,549 this quarter compared to a gain on the liability of $3,623 for the three
months ended March 31, 2010.
Income Taxes. Our effective income tax rate was 5.1% and 15.4% for the three months ended
April 2, 2011 and March 31, 2010, respectively. Our effective income tax rate for the three months
ended April 2, 2011 and March 31, 2010, was impacted by $4,549 and $3,623 of gain, respectively,
recorded to reflect the change in fair value of our Derivative Liability, which is not a taxable
item for income tax purposes.
Net Earnings (Loss). Our net earnings were $4,962 during the three months ended April 2, 2011,
compared to net earnings of $5,736 during the three months ended March 31, 2010 which is a decrease
in earnings of $774. Basic and fully diluted earnings per share were $0.28 and $0.27 per share,
respectively, for the three months ended April 2, 2011, compared to basic and diluted earnings of
$0.33 and $0.32 per share, respectively, for the three months ended March 31, 2010. The decrease
in the current year earnings and per share earnings resulted primarily from the decrease in gross
profit as a percentage of revenue and the increase in operating expenses partially offset by the
decrease in the fair value of the Derivative Liability in the current period when compared to the
decrease in the fair value of the Derivative Liability for the three months ended March 31, 2010.
The decrease in earnings per share resulted from decreased earnings and the conversion of preferred
stock into 2,542,500 shares of common stock during the three months ended April 2, 2011.
Results of Operations Segments
We have two lines of business: Process Products and Environmental Systems. Revenue 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 69.2% and 74.0% of our revenue for the
three months ended April 2, 2011 and March 31, 2010, respectively.
29
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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
The following summarizes Process Products revenue and operating income:
Three months ended | ||||||||
April 2, | March 31, | |||||||
2011 | 2010 | |||||||
Revenue |
$ | 23,524 | $ | 23,836 | ||||
Operating income |
2,720 | 4,391 | ||||||
Operating income as % of revenue |
11.6 | % | 18.4 | % |
Process Products revenue decreased by $312, or 1.3%, during the three months ended April
2, 2011 compared to the three months ended March 31, 2010.
Process Products operating income for the three months ended April 2, 2011 decreased $1,671,
or 38.1%, compared to the three months ended March 31, 2010. As a percentage of Process Products
revenue, operating income was 11.6% and 18.4% for the three months ended April 2, 2011 and March
31, 2010, respectively. The decrease in operating income as a percentage of revenue is primarily
related to the external pricing pressures of the
global market, a shift in our product mix from premium separators to lower margin standard
models, and increased warranty costs.
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 30.8% and 26.0% of our revenue for the three months
ended April 2, 2011 and March 31, 2010, respectively.
The following summarizes Environmental Systems revenue and operating income:
Three months ended | ||||||||
April 2, | March 31, | |||||||
2011 | 2010 | |||||||
Revenue |
$ | 10,461 | $ | 8,385 | ||||
Operating income |
2,264 | 2,705 | ||||||
Operating income as % of revenue |
21.6 | % | 32.3 | % |
Revenue from Environmental Systems increased $2,076, or 24.8%, during the three months
ended April 2, 2011 compared to the three months ended March 31, 2010. The increase in the
Environmental Systems segment revenue for the three months ended April 2, 2011 is attributable to
completion of backlogged projects.
Environmental Systems operating income for the three months ended April 2, 2011 decreased
$441, or 16.3%, compared to the three months ended March 31, 2010. As a percentage of Environmental
Systems revenue, operating income decreased to 21.6% during the three months ended April 2, 2011
from 32.3% for the three months ended March 31, 2010. A more competitive pricing environment and a
change in geographic mix resulted in a decrease in operating income as a percentage of revenue for
the three months ended April 2, 2011 compared to the three months ended March 31, 2010.
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Table of Contents
PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
Corporate Level Expenses
Corporate level general and administrative expenses were $4,154 and $3,556 for the three
months ended April 2, 2011 and March 31, 2010, respectively. These expenses are excluded from our
segment operating results. See Operating Expenses above for additional discussion.
Nine Months Ended April 2, 2011 Compared to nine Months Ended March 31, 2010
Results of Operations Consolidated
In fiscal 2010, we had significant warranty claims associated with two sales orders. Based on
our extensive historical performance, we believe these types of occurrences to be infrequent in
nature and have no expectation of a similar recurrence in future periods. Additionally, based on
improved information regarding claims history, we anticipate warranty provisions in fiscal 2011 to
be greater than those reported in fiscal 2008 or fiscal 2009, but do not expect them to be at the
same level as fiscal 2010. The expected reduction in warranty provision in fiscal 2011 is based on
the impact of the two orders, which we do not expect repeat.
Revenue. The following table summarizes consolidated revenue:
Nine months ended | ||||||||||||||||
April 2, | March 31, | |||||||||||||||
% of Total | % of Total | |||||||||||||||
2011 | Revenue | 2010 | Revenue | |||||||||||||
Domestic |
$ | 55,133 | 63.2 | % | $ | 59,795 | 67.9 | % | ||||||||
International |
32,107 | 36.8 | % | 28,286 | 32.1 | % | ||||||||||
Total |
$ | 87,240 | 100.0 | % | $ | 88,081 | 100.0 | % | ||||||||
We classify revenue as domestic or international based upon the origination of the order.
Revenue generated by orders originating from within the United States is classified as domestic
revenue. Revenue generated by orders originating from a country other than the United States is
classified as international revenue.
For the nine months ended April 2, 2011, total revenue decreased $841, or 1.0%, compared to
the nine months ended March 31, 2010. Domestic revenue decreased $4,662, or 7.8%, in the nine
months ended April 2, 2011 when compared to the nine months ended March 31, 2010. International
revenue increased $3,821, or 13.5%, in the nine months ended April 2, 2011 when compared to the
nine months ended March 31, 2010. The decline in domestic revenue was offset by an increase in
international revenue. 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. The following table summarizes revenue, cost of goods sold, and gross profit:
Nine months ended | ||||||||||||||||
April 2, | March 31, | |||||||||||||||
% of Total | % of Total | |||||||||||||||
2011 | Revenue | 2010 | Revenue | |||||||||||||
Revenue |
$ | 87,240 | 100.0 | % | $ | 88,081 | 100.0 | % | ||||||||
Cost of goods sold |
59,677 | 68.4 | % | 56,369 | 64.0 | % | ||||||||||
Gross profit |
$ | 27,563 | 31.6 | % | $ | 31,712 | 36.0 | % | ||||||||
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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
For the nine months ended April 2, 2011, our gross profit decreased $4,149, or 13.1%,
compared to the nine months ended March 31, 2010. Our gross profit, as a percentage of revenue,
decreased to 31.6% during the nine months ended April 2, 2011 compared to 36.0% for the nine months
ended March 31, 2010. The decrease in gross profit as a percentage of revenue during the nine
months ended April 2, 2011 primarily related to changes in our product mix and increased pricing
pressure.
Operating Expenses. The following table summarizes operating expenses:
Nine months ended | ||||||||||||||||
April 2, | March 31, | |||||||||||||||
% of Total | % of Total | |||||||||||||||
2011 | Revenue | 2010 | Revenue | |||||||||||||
Sales and marketing |
$ | 8,918 | 10.2 | % | $ | 8,261 | 9.4 | % | ||||||||
Engineering and project
management |
6,158 | 7.1 | % | 5,525 | 6.3 | % | ||||||||||
General and administrative |
11,950 | 13.7 | % | 11,235 | 12.7 | % | ||||||||||
Total |
$ | 27,026 | 31.0 | % | $ | 25,021 | 28.4 | % | ||||||||
For the nine months ended April 2, 2011, our operating expenses increased by $2,005
compared to the nine months ended March 31, 2010. As a percentage of revenue, these expenses
increased to 31.0% in the nine months ended April 2, 2011 from 28.4% in the nine months ended March
31, 2010. Our sales and marketing expenses increased $657 in the nine months ended April 2, 2011
compared to the nine months ended March 31, 2010 primarily due to increased commissions and
employee related expenses. Our engineering and project management expense increased $633 in the
nine months ended April 2, 2011 compared to the nine months ended March 31, 2010 due to an increase
in employee wages and benefits and an increase in fees for professional engineering consultants.
Our general and administrative expenses increased $715 in the nine months ended April 2, 2011
compared to the nine months ended March 31, 2010 due to increased professional service fees to our
tax advisors and our information technology consultants.
Other Income and Expense. The following table summarizes other income and expenses:
Nine months ended | ||||||||||||||||
April 2, | March 31, | |||||||||||||||
% of Total | % of Total | |||||||||||||||
2011 | Revenue | 2010 | Revenue | |||||||||||||
Interest income |
$ | 24 | | % | $ | 23 | | % | ||||||||
Interest expense |
(1,916 | ) | (2.2) | % | (2,463 | ) | (2.8) | % | ||||||||
Loss on extinguishment of debt |
| | % | (1,303 | ) | (1.5) | % | |||||||||
Foreign exchange gain |
424 | 0.5 | % | 978 | 1.1 | % | ||||||||||
Gain (loss) on change in fair
value of derivative liability |
6,419 | 7.4 | % | (4,689 | ) | (5.3) | % | |||||||||
Other expense, net |
| | % | (231 | ) | (0.3) | % | |||||||||
Total other income (expense) |
$ | 4,951 | 5.7 | % | $ | (7,685 | ) | (8.7) | % | |||||||
For the nine months ended April 2, 2011, other income (expense) increased by $12,636,
from expense of $7,685 for the nine months ended March 31, 2010 to income of $4,951 in income for
the nine months ended April 2, 2011. The change in other income (expense) is primarily
attributable to the change in the fair value of our Derivative Liability associated with the
conversion and redemption features of our Preferred Stock and the write off of $1,303 of deferred
financing charges associated with the subordinated term debt that was extinguished in September
2009. The change also included a reduction of interest expense of $547 offset by a reduced gain
related to foreign currency transactions of $554 during the nine months ended April 2, 2011
compared to a gain on foreign currency transactions of $978 for the nine months ended March 31,
2010. The reduction in interest expense was
largely the result of extinguishing $20,000 of subordinated term debt in September 2009 and
the repayment of $7,650 of senior indebtedness during the nine months ended April 2, 2011. The
foreign exchange gain for the nine months ended March 31, 2010 includes $523 of accumulated foreign
currency translation adjustments that were recognized upon the liquidation of our joint venture in
Japan.
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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
Income Taxes. Our effective income tax rate was (6.4%) and (129.0%) for the nine months ended
April 2, 2011 and March 31, 2010, respectively. Our effective income tax rate for the nine months
ended April 2, 2011 and March 31, 2010, was impacted by $6,419 of gain and $4,689 of loss,
respectively, recorded to reflect the change in fair value of our Derivative Liability, which is
not a taxable item for income tax purposes.
Net Earnings. Our net earnings (loss) increased by $8,114 from a net loss of $2,276
in the nine months ended March 31, 2010, to net earnings of $5,838 in the nine months ended April
2, 2011. The primary reason for the increase in earnings was $6,419 of gain related to the change
in fair value of the derivative liability for the nine months ended April 2, 2011 and $4,689 of
expense related to the change in fair value of the derivative liability for the nine months ended
March 31, 2010.
Basic and diluted earnings per share increased to $0.29 and $0.28 per share, respectively, for
the nine months ended April 2, 2011, from a loss of ($0.22) per share for the nine months ended
March 31, 2010.
Results of Operations Segments
Process Products
Our Process Products segment represented 74.4% and 74.9% of our revenue for the nine months
ended April 2, 2011 and March 31, 2010, respectively.
The following table summarizes Process Products revenue and operating income:
Nine months ended | ||||||||
April 2, | March 31, | |||||||
2011 | 2010 | |||||||
Revenue |
$ | 64,882 | $ | 65,946 | ||||
Operating income |
8,800 | 12,028 | ||||||
Operating income as % of revenue |
13.6 | % | 18.2 | % |
Process Products revenue decreased by $1,064 or 1.6%, in the nine months ended April 2,
2011 when compared to the nine months ended March 31, 2010, remaining relatively consistent with
the comparable nine month period from a year ago.
Process Products operating income in the nine months ended April 2, 2011 decreased by $3,228
compared to the nine months ended March 31, 2010. As a percentage of Process Products revenue,
operating income was 13.6% in the nine months ended April 2, 2011 compared to 18.2% in the nine
months ended March 31, 2010. The decrease in operating income and operating income as a percentage
of sales is primarily related to external pricing pressures, a change in our product mix, and
warranty charges.
Environmental Systems
Our Environmental Systems segment represented 25.6% and 25.1% of our revenue for the nine
months ended April 2, 2011 and March 31, 2010, respectively.
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Table of Contents
PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
The following table summarizes Environmental Systems revenue and operating income:
Nine months ended | ||||||||
April 2, | March 31, | |||||||
2011 | 2010 | |||||||
Revenue |
$ | 22,358 | $ | 22,135 | ||||
Operating income |
3,687 | 5,898 | ||||||
Operating income as % of revenue |
16.5 | % | 26.6 | % |
Revenue from Environmental Systems increased $223, or 1.0% in the nine months ended April 2,
2011, when compared to the nine months ended March 31, 2010, remaining relatively consistent with
the comparable nine month period from a year ago.
Environmental Systems operating income in the nine months ended April 2, 2011 decreased $2,211
or 37.5% compared to the nine months ended March 31, 2010. The decrease was attributable to
increased external pricing pressures during the nine months ended April 2, 2011 combined with an
increase in contract-related charges and costs related to our agreement with CEFCO business and
product development.
Corporate Level Expenses
Corporate level expenses were $11,950 and $11,235 for the nine months ended April 2, 2011 and
March 31, 2010, respectively. Corporate level general and administrative expenses are excluded
from our segment operating results. See Operating Expenses above for additional discussion on
these expenses.
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 $93,000 at April 2, 2011, 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. Of our backlog at April 2, 2011, we estimate approximately 80% will be completed during
the next twelve months.
Financial Position
Assets. Total assets decreased by $3,731, or 2.6%, from $143,081 at June 30, 2010, to $139,350
at April 2, 2011. On April 2, 2011, we held cash and cash equivalents of $18,770, had working
capital of $43,164 and a current liquidity ratio of 2.3-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.
Liabilities and Equity. Total liabilities decreased by $30,954, or 36.0%, from $85,934 at June
30, 2010 to $54,980 at April 2, 2011. The decrease in our total liabilities is attributed to the
principal reduction of our senior term loan and the reduction of the Derivative Liability resulting
from the conversion of the Preferred Stock host instrument into common stock, offset by an increase
in our trade accounts payable.
The increase in our stockholders equity of $27,223, or 47.6%, from $57,147 at June 30, 2010
to $84,370 at April 2, 2011 is attributable to our net earnings for the nine months ended April 2,
2011, stock compensation awards, stock option activity, and the conversion of 20,840 shares of
preferred stock into 2,605,000 shares of common stock. Our ratio of debt (total
liabilities)-to-equity decreased from 1.5-to-1.0 at June 30, 2010 to 0.7-to-1.0 at April 2, 2011.
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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
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 April 2, 2011, the balance of these working capital accounts was $23,206
compared to $25,266 at June 30, 2010, reflecting a decrease of our investment in these working
capital items of $2,060.
Our cash and cash equivalents were $18,770 as of April 2, 2011 compared to $24,271 at June 30,
2010. During the nine months ended April 2, 2011, cash provided by operating activities was $2,250
compared to cash provided by operating activities of $5,807 for the nine months ended March 31,
2010. The decrease in cash provided by operating activities primarily related to changes in
accounts payable in the prior period and accounts receivable in the current period.
Cash used in investing activities was $1,017 for the nine months ended April 2, 2011, compared
to cash used in investing activities of $2,272 for the nine months ended March 31, 2010. Cash used
in investing activities during the nine months ended April 2, 2011 related primarily to purchases
of property and equipment and intangible assets. This was partially offset by a reduction of $2,894
in cash restricted to serve as collateral against open letters of credit. During the nine months
ended March 31, 2010, $2,439 of cash was provided by proceeds from the liquidation of our joint
venture in Japan offset by an increase of $3,535 in cash restricted to serve as collateral against
open letters of credit.
Cash used in financing activities during the nine months ended April 2, 2011 was $7,510,
compared to cash provided by financing activities of $1,024 during the nine months ended March 31,
2010. The cash used in financing activities for the nine months ended April 2, 2011 primarily
related to principal payments on the senior term loan and the payment of cash dividends to our
Preferred Stock holders. Cash provided by financing activities for the nine months ended March 31,
2010 primarily related to $15,928 and $19,235 of proceeds from our common stock and Preferred Stock
issuances, respectively, and equity contributions from our noncontrolling interest partner in our
joint venture in China of $920. These proceeds were offset by $20,000 of principal payments on the
subordinated term loan, $13,779 of principal payments on our senior term loan, and $728 of cash
dividends paid on our Preferred Stock.
As a result of the events described above, our cash and cash equivalents during the
nine months ended April 2, 2011 decreased by $5,501 compared to an increase of $5,323 during the
nine months ended March 31, 2010.
We believe we maintain adequate liquidity to support existing operations and planned growth
over the next 12 months.
35
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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(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 April 2, 2011, we had $12,571 of
outstanding borrowings under this Agreement. Currently we have an interest rate cap transaction
with a notional amount of $5,000, or 39.8% of our variable rate debt. This cap instrument complies
with our obligation under our Senior Secured Credit Agreement.
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, are 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 have historically had a material impact on our net income and the Derivative Liability
recorded on our Consolidated Balance Sheets.
During the nine months ended April 2, 2011, holders of our Preferred Stock converted 20,840
shares of Preferred Stock into 2,605,000 shares of the Companys common stock. As a result, future
changes in the fair value of the remaining portion of the embedded derivative are not expected to
have a material impact on our financial statements.
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 as defined above 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.
During the quarter ended April 2, 2011, 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.
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Table of Contents
PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
There have been no material changes in our legal proceedings since June 30, 2010, except as
described in our Quarterly Report on Form 10-Q for the period ended October 2, 2010. For
additional information regarding the Companys legal proceedings, see Item 3. Legal Proceedings of
Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 and Item 1. Legal
Proceeding of Part II of our Quarterly Report on Form 10-Q for the period ended October 2, 2010.
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.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the three months ended April 2, 2011, holders of Preferred Stock converted 20,340
shares of Preferred Stock into 2,542,500 shares of the Companys common stock.
During the nine months ended April 2, 2011, holders of Preferred Stock converted 20,840 shares
of Preferred Stock into 2,605,000 shares of the Companys common stock. The converted shares of
Preferred Stock had an original issue price of $1,000 per share and were converted at a conversion
price of $8.00 per share of Common Stock. The conversions were exempt from registration under
Section 3(a)(9) of the Securities Act of 1933. The Company did not receive any cash proceeds from
the conversions of the Preferred Stock.
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Table of Contents
PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(In thousands, except share and per share amounts)
Item 6. | Exhibits |
The following exhibits are filed as part of this report.
Exhibit | |||
No. | Exhibit | ||
10.1 | Revolving Credit and Term Agreement, dated April 30, 2008, between Peerless Mfg. Co., PMC
Acquisition, Inc., PMFG, Inc., Comerica Bank and other lenders a party thereto. |
||
10.2 | Fourth Amendment to Credit Agreement, dated December 29, 2010, between Peerless Mfg. Co.,
Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman Management, Inc., PMFG,
Inc., Comerica Bank and other lenders a party thereto (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K, filed on December 20, 2010). |
||
10.3 | Fifth Amendment to Credit Agreement, dated February 8, 2011, between Peerless Mfg. Co.,
Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman Management, Inc., PMFG,
Inc., Comerica Bank and other lenders a party thereto (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K, filed on February 8, 2011). |
||
10.4 | Sixth Amendment to Credit Agreement, dated May 6, 2011, between Peerless Mfg. Co., Nitram
Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman Management, Inc., PMFG, Inc.,
Comerica Bank and other lenders a party thereto (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K, filed on May 6, 2011). |
||
10.5 | Employment Agreement, dated April 25, 2011, between Peerless Mfg. Co. and Mr. Ronald L.
McCrummen
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K,
filed on April 25, 2011). |
||
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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PMFG, Inc. and Subsidiaries
April 2, 2011
(In thousands, except share and per share amounts)
April 2, 2011
(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: May 11, 2011
|
/s/ Peter J. Burlage
|
|||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Date: May 11, 2011
|
/s/ Ronald L. McCrummen
|
|||
Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
39