Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - PMFG, Inc.Financial_Report.xls
EX-32 - EX-32 - PMFG, Inc.d343535dex32.htm
EX-31.1 - EX-31.1 - PMFG, Inc.d343535dex311.htm
EX-31.2 - EX-31.2 - PMFG, Inc.d343535dex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ 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)

(214) 357-6181

(Registrant’s 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  x    No  ¨

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  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  ¨  No  x

The number of shares of the registrant’s common stock outstanding on May 4, 2012, was 20,773,878.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

    

Page

Number

 

Forward-Looking Statements

     3   

PART I: FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Consolidated Balance Sheets at March 31, 2012 (unaudited) and July 2, 2011

     4   

Unaudited Consolidated Statements of Operations for the three and nine months ended March  31, 2012 and April 2, 2011

     5   

Unaudited Consolidated Statements of Cash Flows for the nine months ended March  31, 2012 and
April 2, 2011

     6   

Unaudited Consolidated Statements of Equity and Comprehensive Income (Loss) for the nine months ended March 31, 2012

     8   

Unaudited Notes to the Consolidated Financial Statements

     9   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     35   

Item 4. Controls and Procedures

     35   

PART II: OTHER INFORMATION

  

Item 1. Legal Proceedings

     36   

Item 1A. Risk Factors

     36   

Item 6. Exhibits

     36   

SIGNATURES

     37   

 

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 or political environment or in the markets in which we operate, including the natural gas infrastructure, power generation, and petrochemical and processing industries;

 

   

compliance with United States and foreign laws and regulations, 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 current environmental legislation or regulations;

 

   

risks associated with our indebtedness, the terms of our Senior Secured Credit Agreement and our ability to raise additional capital;

 

   

risks associated with the concentration of ownership of our stock;

 

   

changes in competition;

 

   

changes in demand for our products;

 

   

our ability to realize the full value of our backlog and the timing of our receipt of revenue under contracts included in backlog;

 

   

risks associated with our product warranties; and

 

   

changes in the price, supply or demand for natural gas, bio fuel, oil or coal.

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 July 2, 2011. 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.

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PMFG, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

     March 31,
2012
    July 2,
2011
 
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 46,095      $ 12,905   

Restricted cash

     8,341        6,633   

Accounts receivable – trade, net of allowance for doubtful accounts of $447 and $600 at March 31, 2012 and July 2, 2011, respectively

     29,011        30,567   

Inventories, net

     7,291        6,556   

Costs and earnings in excess of billings on uncompleted contracts

     22,389        16,991   

Income taxes receivable

     4,547        3,061   

Deferred income taxes

     1,952        1,952   

Other current assets

     3,058        2,474   
  

 

 

   

 

 

 

Total current assets

     122,684        81,139   

Property, plant and equipment, net

     10,451        8,854   

Intangible assets, net

     20,763        20,108   

Goodwill

     30,690        29,702   

Other assets

     419        906   
  

 

 

   

 

 

 

Total assets

   $ 185,007      $ 140,709   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 21,577      $ 17,308   

Current maturities of long-term debt

     —          2,600   

Billings in excess of costs and earnings on uncompleted contracts

     8,046        4,866   

Accrued product warranties

     2,994        2,575   

Customer deposits

     2,326        1,938   

Accrued liabilities and other

     8,972        7,944   
  

 

 

   

 

 

 

Total current liabilities

     43,915        37,231   

Long-term debt, net of current portion

     —          9,971   

Deferred income taxes

     7,418        7,135   

Other non-current liabilities

     1,290        1,331   

Commitments and contingencies

    

Preferred stock – authorized, 5,000,000 shares of $0.01 par value; no shares outstanding at March 31, 2012 or July 2, 2011

     —          —     

Stockholders’ equity:

    

Common stock – authorized, 50,000,000 shares of $0.01 par value; issued and outstanding, 20,686,002 and 17,597,186 shares at March 31, 2012 and July 2, 2011, respectively

     207        176   

Additional paid-in capital

     96,172        48,657   

Accumulated other comprehensive loss

     (1,444     (1,331

Retained earnings

     36,120        36,170   
  

 

 

   

 

 

 

Total PMFG, Inc.’s stockholders’ equity

     131,055        83,672   

Noncontrolling interest

     1,329        1,369   
  

 

 

   

 

 

 

Total equity

     132,384        85,041   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 185,007      $ 140,709   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

PMFG, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

 

     Three months ended     Nine months ended  
     March 31,
2012
    April 2,
2011
    March 31,
2012
    April 2,
2011
 
     (unaudited)     (unaudited)  

Revenue

   $ 35,498      $ 33,985      $ 102,307      $ 87,240   

Cost of goods sold

     25,352        23,289        70,977        59,677   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     10,146        10,696        31,330        27,563   

Operating expenses:

        

Sales and marketing

     2,481        3,396        8,958        8,918   

Engineering and project management

     2,342        2,316        6,798        6,158   

General and administrative

     4,111        4,154        14,531        11,950   
  

 

 

   

 

 

   

 

 

   

 

 

 
     8,934        9,866        30,287        27,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,212        830        1,043        537   

Other income (expense):

        

Interest income

     6        5        22        24   

Interest expense

     (142     (406     (1,012     (1,916

Loss on extinguishment of debt

     (347     —          (347     —     

Foreign exchange gain (loss)

     16        248        (652     424   

Change in fair value of derivative liability

     —          4,549        —          6,419   

Other expense, net

     (17     —          7        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     (484     4,396        (1,982     4,951   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     728        5,226        (939     5,488   

Income tax benefit (expense)

     285        (264     824        350   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ 1,013      $ 4,962      $ (115   $ 5,838   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less net (loss) earnings attributable to noncontrolling interest

   $ (15   $ (13   $ (64   $ 119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to PMFG, Inc.

   $ 1,028      $ 4,975      $ (51   $ 5,719   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred stock

   $ —        $ (85   $ —        $ (717
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to PMFG, Inc. common stockholders

   $ 1,028      $ 4,890      $ (51   $ 5,002   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.05      $ 0.28      $ 0.00      $ 0.29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.05      $ 0.27      $ 0.00      $ 0.28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding:

        

Basic

     19,137        16,977        18,162        15,591   

Effect of dilutive warrants and options

     602        554        —          542   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted shares outstanding

     19,739        17,531        18,162        16,133   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

PMFG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands, except share amounts)

 

     Nine months ended  
     March 31,
2012
    April 2,
2011
 
     (unaudited)  

Cash flows from operating activities:

    

Net (loss) earnings

   $ (115   $ 5,838   

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities, net of business acquisition:

    

Depreciation and amortization

     2,353        2,822   

Loss on extinguishment of debt

     347        —     

Stock-based compensation

     3,072        1,165   

Excess tax benefits of stock-based compensation

     (37     (321

Bad debt expense

     (59     7   

Inventory valuation reserve

     28        43   

Provision for warranty expense

     1,300        1,080   

Loss on sale of property

     17        —     

Change in fair value of derivative liability

     —          (6,419

Foreign exchange loss (gain)

     652        (424

Deferred tax expense

     3        55   

Changes in operating assets and liabilities, net of business acquisition:

    

Accounts receivable

     3,600        (1,371

Inventories

     (526     1,039   

Costs and earnings in excess of billings on uncompleted contracts

     (2,969     885   

Other current assets

     (474     (561

Other assets

     (10     175   

Accounts payable

     2,349        4,893   

Billings in excess of costs and earnings on uncompleted contracts

     3,180        (503

Commissions payable

     (718     55   

Income taxes

     (949     (2,012

Product warranties

     (964     (847

Accrued liabilities and other

     (611     (1,804
  

 

 

   

 

 

 

Net cash provided by operating activities:

     9,469        3,795   

Cash flows from investing activities:

    

Increase (decrease) in restricted cash

     (1,728     2,894   

Purchases of property and equipment

     (2,769     (2,811

Advance payment of license agreement

     (555     (2,645

Business acquistion, net of cash received

     (2,351     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,403     (2,562

 

Consolidated Statements of Cash Flows continued on next page

 

6


Table of Contents

PMFG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands, except share amounts)

 

     Nine months ended  
     March 31,
2012
    April 2,
2011
 
     (unaudited)  

Cash flows from financing activities:

    

Net proceeds from issuance of common stock

     44,411        —     

Payment of debt issuance costs

     (94     (158

Payment of debt

     (12,571     (7,650

Payment of deferred consideration costs

     (37     —     

Equity contribution from noncontrolling interest

     —          344   

Payment of dividends on preferred stock

     —          (717

Proceeds from exercise of stock options

     27        350   

Excess tax benefits from stock-based payment arrangements

     37        321   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     31,773        (7,510

Effect of exchange rate changes on cash and cash equivalents

     (649     776   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     33,190        (5,501

Cash and cash equivalents at beginning of period

     12,905        24,271   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 46,095      $ 18,770   
  

 

 

   

 

 

 

Supplemental information on cash flow:

    

Income taxes paid

   $ —        $ 1,300   

Interest paid

   $ 810      $ 1,109   

See accompanying notes to consolidated financial statements

During the nine months ended March 31, 2012, holders of warrants exchanged 31,250 warrant shares for 17,528 shares of the Company’s common stock in cashless exercises.

In November 2011, $1,516 was recorded as deferred consideration as part of the Burgess Manning GmbH acquisition that is due to the seller within 12 months from the date of acquisition. This is a non-cash financing activity. The $2,351, presented as an investing activity from the business acquisition, represents the preliminary purchase consideration for Burgess Manning GmbH of $5,719, less deferred consideration, net of $1,852 of cash acquired.

 

7


Table of Contents

PMFG, Inc. and Subsidiaries

Consolidated Statement of Equity and Comprehensive Income (Loss)

(In thousands)

(unaudited)

 

            Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity
    Non
Controlling
Interest
    Total
Equity
 
                
   Common Stock                
   Shares      Amount                

Balance at July 2, 2011

     17,597       $ 176       $ 48,657       $ 36,170      $ (1,331   $ 83,672      $ 1,369      $ 85,041   

Comprehensive income (loss):

                   

Net loss

              (51       (51     (64     (115

Foreign currency translation adjustment

                (113     (113     24        (89
               

 

 

   

 

 

   

 

 

 

Total comprehensive loss

                  (164     (40     (204

Stock grants, net of forfeitures

     73         1         3,070         1          3,072          3,072   

Stock options exercised

     8         —           27             27          27   

Warrants exercised

     18         —           —               —            —     

Issuance of common stock

     2,990         30         44,381             44,411          44,411   

Income tax benefit related to stock options exercised

           37             37          37   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     20,686       $ 207       $ 96,172       $ 36,120      $ (1,444   $ 131,055      $ 1,329      $ 132,384   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

8


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(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 March 31, 2012 and for the three and nine months ended March 31, 2012 and April 2, 2011 are unaudited and, in the opinion of management, contain all adjustments necessary for the fair presentation of the financial position and results of operations of the Company for the interim periods. The results of operations for such interim periods are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended July 2, 2011.

Each of the Company’s interim reporting periods ends on the Saturday closest to the last day of the corresponding quarterly calendar period. The third quarter of fiscal 2012 and 2011 ended on March 31, 2012, and April 2, 2011, respectively. References to “fiscal 2012” and “fiscal 2011” refer to the fiscal years ending June 30, 2012 and July 2, 2011, respectively.

Basis of Consolidation

The Company’s 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. The Company is the majority owner of Peerless Propulsys China Holdings LLC (“Peerless Propulsys”). The Company’s 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 noncontrolling interest of Peerless Propulsys is reported as a separate component on the Consolidated Balance Sheets and Consolidated Statements of Operations.

Acquisition of Burgess Manning GmbH

On November 4, 2011, the Company acquired all of the outstanding shares of Burgess Manning GmbH, a limited liability company organized under the laws of Germany. The aggregate purchase price, excluding transaction costs which were expensed as incurred, totaled 4.3 million euros ($5,719), including $187 of post-closing adjustments. Three million euros ($4,016) was paid in cash at closing from cash on hand. The remaining balance is due within the next year. Burgess Manning GmbH’s results of operations have been included in the Company’s consolidated financial statements from the date of acquisition.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

The Company maintains cash balances in bank accounts that normally exceed Federal Deposit Insurance Corporation insured limits. As of March 31, 2012, cash held in the United States exceeded federally insured limits by $39,803. The Company has not experienced any losses related to this cash concentration.

The Company had restricted cash balances of $8,341 and $6,633 as of March 31, 2012 and July 2, 2011, respectively. Foreign restricted cash balances were $8,257 and $5,306 as of March 31, 2012 and July 2, 2011, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the normal course of business.

 

9


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

1. SIGNIFICANT ACCOUNTING POLICIES – CON\TINUED

 

Accounts Receivable

The Company’s accounts receivable are due from companies in various industries. Credit is extended based on an evaluation of the customer’s 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 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 Company’s previous loss history, the customer’s 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 to the allowance for doubtful accounts 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 for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally by the straight-line method, as follows:

 

Buildings and improvements

     5 - 40 years   

Equipment

     3 - 10 years   

Furniture and fixtures

     3 - 15 years   

Routine maintenance costs are expensed as incurred. Major improvements that extend the life, increase the capacity or improve the safety or the efficiency of property owned are capitalized. Major improvements to leased buildings are capitalized as leasehold improvements and amortized over the shorter of the estimated life or the lease term.

Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount 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 undiscounted 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 asset exceeds its fair value, typically represented by the discounted cash flows associated with the asset.

 

10


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

1. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Goodwill and Other Intangible Assets

Goodwill is measured at the reporting unit level for impairment annually, or more frequently if conditions indicate an earlier review is necessary. The Company performs its annual impairment test of goodwill during the fourth quarter. The Company conducted its most recent assessment for impairment as of March 31, 2011. The fair value of goodwill is determined based on discounted cash flow projections. If the estimated fair value of goodwill is less than the carrying value, goodwill is impaired and is 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 estimated 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 include trade names and design guidelines. The Company evaluates the recoverability of indefinite lived intangible assets annually or whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, trade receivables, other current assets, accounts payable, accrued expenses, and long-term debt approximate fair value due to the short maturity or variable rates associated with these instruments.

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 contract’s 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.

Contracts that are considered short-term in nature are accounted for under the completed contract method. 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 is 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 Company’s 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.

 

11


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(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.

Income Taxes

The Company utilizes the asset and liability approach in its reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income tax related interest and penalties are included in income tax expense. The Company recognizes in its financial statements the impact of a tax position taken or expected to be taken in a tax return, if that position is “more likely than not” of being sustained upon examination by the relevant taxing authority, based on the technical merits of the position.

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 Company’s consolidated balance sheets. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In the event that actual results differ from these estimates, the Company’s provision for income taxes could be materially impacted.

Earnings (Loss) Per Common Share

The Company calculates basic earnings (loss) per common share by dividing the net earnings (loss) attributable to PMFG, Inc. common stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share include the dilutive effect of warrants and stock options granted using the treasury stock method. Warrants to acquire 1,290,000 shares of common stock and options to acquire 43,200 shares of common stock were omitted from the calculation of dilutive securities for the nine months ended March 31, 2012, because they were anti-dilutive. No shares were anti-dilutive for the nine months ended April 2, 2011.

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 of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

 

12


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

1. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Conforming Changes for Current Year Presentation

The presentation of the Consolidated Statements of Cash Flows for the nine months ended April 2, 2011 was changed to include a reclassification of $1,545 related to intangibles associated with the Company’s license agreement with CEFCO Global Clean Energy, LLC, a Texas limited liability company (“CEFCO”), from changes in accounts receivable to advance payment of license agreement.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to present the components of other comprehensive income (“OCI”) as part of the consolidated statement of equity and provides two alternatives for presenting the components of net income and OCI, either: (i) in a single continuous statement of comprehensive income or (ii) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of comprehensive income. ASU 2011-05 requires retrospective application, and is effective for the Company as of the beginning of fiscal year 2013. The application of ASU 2011-05 is not expected to have a financial impact on the Company’s consolidated financial statements, but will result in a change in the presentation of the Company’s consolidated statements of operations and equity.

2. BUSINESS ACQUISITION

During the quarter ended December 31, 2011, the Company completed the acquisition of all of the outstanding shares of Burgess Manning GmbH and included it in the Company’s Process Products segment. The acquisition is to expand the Company’s ability to service customers in Germany and surrounding countries. Acquisition costs, for the nine months ended March 31, 2012, were $223 and were expensed when incurred to general and administrative expenses. At the acquisition date, the preliminary purchase price was allocated to assets acquired, including identifiable intangibles and liabilities assumed based on their estimated fair values. Acquired intangible assets of $900 were initially assigned to customer relationships, including acquired backlog, and are to be amortized over a ten-year period from the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired represents goodwill of $988. We have not completed the final fair value assignments and continue to analyze certain assets acquired and liabilities assumed. The preliminary allocation of the purchase price to the fair value of the Burgess Manning GmbH assets acquired and liabilities assumed is presented as follows:

 

Cash

   $ 1,852   

Other tangible assets

     4,851   

Intangible assets

     900   

Goodwill

     988   

Liabilities assumed

     (2,592

Net deferred tax liability on fair value adjustment of intangible assets

     (280
  

 

 

 

Total estimated preliminary purchase price

   $ 5,719   
  

 

 

 

 

13


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

2. BUSINESS ACQUISITION – CONTINUED

 

The following unaudited pro forma condensed combined consolidated financial information shows the results of our operations for the nine months ended March 31, 2012, and the year ended July 2, 2011, and gives effect to the acquisition as if it had occurred at July 1, 2010. Results of operations for Burgess Manning GmbH for the nine months ended April 2, 2011 are not available, and as such, the comparative pro forma financial information for the nine months ended April 2, 2011 is not presented. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the Company’s actual results of operations had the Burgess Manning GmbH acquisition occurred at the beginning of the periods presented, or of the Company’s results of future operations.

 

     Nine months
ended March 31,
2012
    Year ended July 2,
2011
 

Revenue

   $ 106,503      $ 137,870   

Operating income (loss)

   $ 1,136      $ (335

Net (loss) earnings

   $ (63   $ 7,161   

Net earnings attributable to PMFG, Inc.

   $ 1      $ 7,049   

Net earnings per share:

    

Basic

   $ 0.00      $ 0.37   

Diluted

   $ 0.00      $ 0.35   

3. INVENTORIES

Principal components of inventories are as follows:

 

     March 31,
2012
    July 2,
2011
 

Raw materials

   $ 3,566      $ 3,261   

Work in progress

     3,790        3,382   

Finished goods

     420        389   
  

 

 

   

 

 

 
     7,776        7,032   

Reserve for obsolete and slow-moving inventory

     (485     (476
  

 

 

   

 

 

 
   $ 7,291      $ 6,556   
  

 

 

   

 

 

 

4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

The components of uncompleted contracts are as follows:

 

     March 31,
2012
    July 2,
2011
 

Costs incurred on uncompleted contracts and estimated earnings

   $ 69,668      $ 64,457   

Less billings to date

     (55,325     (52,332
  

 

 

   

 

 

 
   $ 14,343      $ 12,125   
  

 

 

   

 

 

 

 

14


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS – CONTINUED

 

The components of uncompleted contracts are reflected in the consolidated balance sheets as follows:

 

     March 31,
2012
    July 2,
2011
 

Costs and earnings in excess of billings on uncompleted contracts

   $ 22,389      $ 16,991   

Billings in excess of costs and earnings on uncompleted contracts

     (8,046     (4,866
  

 

 

   

 

 

 
   $ 14,343      $ 12,125   
  

 

 

   

 

 

 

5. GOODWILL AND OTHER INTANGIBLE ASSETS

All goodwill and other intangible assets are allocated to the Process Products segment. Goodwill is not deductible for income tax purposes.

Goodwill

The following table shows the activity and balances related to goodwill from July 2, 2011 through March 31, 2012:

 

Balance as of July 2, 2011

   $ 29,702   

Goodwill acquired:

  

Acquisition of Burgess Manning GmbH

     988   
  

 

 

 

Balance as of March 31, 2012

   $ 30,690   
  

 

 

 

Acquisition-Related Intangibles

Acquisition-related intangible assets are as follows:

 

     Weighted
Average
Estimated
Useful Life
(Years)
   Gross Value
March 31, 2012
     Accumulated
Amortization
    Net Book
Value
March 31, 2012
     Gross
Value
July 2, 2011
     Accumulated
Amortization
    Net Book
Value
July 2, 2011
 

Design guidelines

   Indefinite    $ 6,940       $ —        $ 6,940       $ 6,940       $ —        $ 6,940   

Customer relationships

   11      7,790         (2,674     5,116         6,890         (2,204     4,686   

Trade names

   Indefinite      4,729         —          4,729         4,729         —          4,729   

Licensing agreements

   5      2,199         (1,723     476         2,199         (1,393     806   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
      $ 21,658       $ (4,397   $ 17,261       $ 20,758       $ (3,597   $ 17,161   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

15


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

5. GOODWILL AND OTHER INTANGIBLE ASSETS – CONTINUED

 

Amortization expense of $800 and $811 was recorded in the Consolidated Statements of Operations for the nine months ended March 31, 2012 and April 2, 2011, respectively. The Company’s estimated amortization for the remainder of the current fiscal year and for each of the next five fiscal years is as follows:

 

Estimated Amortization Expense For the fiscal years ended

 

June 30, 2012

   $ 273   

June 29, 2013

     1,012   

June 28, 2014

     645   

June 27, 2015

     570   

July 02, 2016

     495   

July 01, 2017

     494   

CEFCO Licensing Agreement

In July 2010, the Company entered into the CEFCO Process Manufacturing License Agreement (the “License Agreement”) with CEFCO. In November 2011, the Company announced the successful completion of large scale prototype tests associated with the first two pollution control modules of the CEFCO processing equipment. The Company and CEFCO are seeking a sponsor to conduct a pilot program at a potential customer facility. The Company advanced $1,100 to CEFCO at the inception of the License Agreement. The Company has recorded certain additional costs incurred related to the construction and testing of a scaled version of the technology as advances on future payments due under the License Agreement. As of March 31, 2012 and July 2, 2011, $3,502 and $2,947 were included in intangibles, net, respectively. Amortization of the License Agreement will be recognized over the life of the License Agreement (10 years) commencing after the initial sale, construction and commissioning of a full scale version of the CEFCO processing equipment.

6. ACCRUED PRODUCT WARRANTIES

Accrued product warranty activity is as follows:

 

     Three months ended     Nine months ended  
     March 31,
2012
    April 2,
2011
    March 31,
2012
    April 2,
2011
 

Balance at beginning of period

   $ 2,659      $ 2,361      $ 2,575      $ 2,480   

Provision for warranty expenses

     565        519        1,300        1,080   

Warranty charges

     (230     (167     (881     (847
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 2,994      $ 2,713      $ 2,994      $ 2,713   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

7. ACCRUED LIABILITIES AND OTHER

The components of accrued liabilities and other are as follows:

 

     March 31,
2012
     July 2,
2011
 

Accrued start-up and commissioning expense

   $ 363       $ 794   

Accrued compensation

     3,376         1,733   

Commissions payable

     1,468         2,186   

Income taxes payable

     750         281   

Accrued professional expenses

     1,240         2,510   

Deferred consideration related to

     

Burgess Manning GmbH acquisition

     1,484         —     

Other

     291         440   
  

 

 

    

 

 

 
   $ 8,972       $ 7,944   
  

 

 

    

 

 

 

8. DEBT

Outstanding long-term debt obligations are as follows:

 

     Maturities      March 31,
2012
     July 2,
2011
 

Term loan

     2016       $ —         $ 12,571   

Less current maturites

        —           (2,600
     

 

 

    

 

 

 

Total long-term debt, net of current portion

      $ —         $ 9,971   
     

 

 

    

 

 

 

In connection with the sale of 2,990,000 shares of common stock in the Company’s registered public offering, which closed on February 22, 2012, the Company received $44,411 of net proceeds after deducting $3,429 of underwriter fees, commissions, and legal and accounting fees. In accordance with the terms of the Company’s senior term loan, the Company used $10,600 of the net proceeds to repay all amounts outstanding under the senior term loan. The senior term loan was under the Company’s Senior Secured Credit Agreement, dated April 30, 2008 (“Senior Secured Credit Agreement”). Unamortized deferred financing costs of $347 were recorded as a loss on extinguishment of debt on the Consolidated Statement of Operations for the quarter ended March 31, 2012.

The Company terminated its LIBOR interest rate cap transaction with respect to its senior term loan on February 22, 2012.

The revolving credit facility is also under the Company’s Senior Secured Credit Agreement. Under the revolving credit facility, the Company has a maximum borrowing capacity based on eligible accounts receivable and inventory, not to exceed $20,000. Any borrowings under the revolving credit facility are secured by a first lien on substantially all assets of the Company. At March 31, 2012, there was borrowing availability of $1,070 after the borrowing base was adjusted for $8,211 of outstanding letters of credit. At March 31, 2012 and July 2, 2011 there were no outstanding borrowings under the revolving credit facility. The Company currently pays an annual fee on this revolving credit facility of $50.

 

17


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

8. DEBT – CONTINUED

 

The revolving credit facility, as amended, matures on April 30, 2013. Interest under the revolving credit facility, as amended, is payable quarterly at a floating rate per annum equal to either (a) for prime rate loans, a margin of between 225 and 375 basis points based on our Consolidated Total Leverage (“CTL”) ratio plus the higher of (1) the administrative agent’s prime rate, or (2) the federal funds effective rate (as determined in accordance with the Senior Secured Credit Agreement) plus a margin of 100 basis points, or (b) for LIBOR rate loans, the adjusted LIBOR rate (as determined in accordance with the Senior Secured Credit Agreement) plus a margin of between 300 and 475 basis points based on our CTL ratio.

At March 31, 2012, the Company was required to maintain a CTL ratio not to exceed 3.0 to 1.0 and a Consolidated Fixed Charge Coverage (“FCC”) ratio of not less than 1.1 to 1.0. The CTL ratio is calculated as the ratio of the Company’s outstanding debt and letters of credit to the Company’s trailing 12 months earnings before interest, income taxes, depreciation, amortization, and other non-cash expenses (“EBITDA”). The FCC ratio is calculated as the ratio of the Company’s EBITDA less certain capitalized expenditures to the sum of the Company’s current maturities of long-term debt and the amount of cash paid for interest on a trailing twelve month basis. The Senior Secured Credit Agreement also contains other covenants, including restrictions on additional debt, dividends, capital expenditures, acquisitions and dispositions. At March 31, 2012, the Company was in compliance with its debt covenant requirements.

The Company’s U.K. subsidiary had debenture agreements used to facilitate issuances of letters of credit and bank guarantees of £6,000 ($9,607) at March 31, 2012 and £6,000 ($9,645) at July 2, 2011. This facility was secured by substantially all of the assets of the Company’s U.K. subsidiary and by a cash deposit of £4,071 ($6,519) at March 31, 2012 and £3,301 ($5,306) at July 2, 2011, which is recorded as restricted cash on the consolidated balance sheets. At March 31, 2012, there was £4,857 ($7,776) of outstanding stand-by letters of credit and bank guarantees under the debenture agreements. At July 2, 2011, there was £3,222 ($5,180) of outstanding stand-by letters of credit and bank guarantees under the debenture agreements. There were no borrowings outstanding under the U.K. subsidiary’s debenture agreements at March 31, 2012 or July 2, 2011.

The Company’s German subsidiary had debenture agreements used to facilitate issuances of letters of credit and bank guarantees of €4,750 ($6,338) at March 31, 2012. This facility is secured by all of the trade receivables of Burgess Manning GmbH and by a cash deposit of €1,303 ($1,738) at March 31, 2012, which is recorded as restricted cash on the consolidated balance sheets. At March 31, 2012, there was €3,987 ($5,319) of outstanding stand-by letters of credit and bank guarantees under the debenture agreements. There were no borrowings outstanding under Burgess Manning GmbH’s debenture agreements at March 31, 2012.

9. 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 Company’s 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 has not received sufficient information to assess 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 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 has not received sufficient information to assess the validity of the claim. No amount has been accrued in the financial statements for this claim as of March 31, 2012. At this time, the Company has not been notified that any lawsuit has been filed by the customer.

 

18


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

9. COMMITMENTS AND CONTINGENCIES – CONTINUED

 

In connection with the Company’s acquisition of Nitram and the related financing transactions, environmental site assessments were performed on both its existing manufacturing properties and Nitram’s 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 facility in Wichita Falls and groundwater concerns at the Jacksboro Highway facility in Wichita Falls and the Cisco facilities. Additional sampling and evaluation of the groundwater concerns at Jacksboro Highway and Cisco facilities 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 facility in Wichita Falls was completed in July 2009 and the Company will continue to monitor groundwater at and near the site. The total costs accrued are $120 at March 31, 2012 and July 2, 2011, which have been discounted using a rate of 3.25%. The Company may incur additional one-time costs related to the installation of four new test wells and the preparation of environmental reports, which the Company estimates will be $100. The Company believes that the cost of the monitoring is approximately $20 per year until complete. The Company is seeking reimbursement for the full cost of the remediation and ongoing and future monitoring activities under the indemnification provisions of our purchase agreement with Nitram’s selling stockholders in the amount of $633. 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 indemnification 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 sellers 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 made claims to the sellers relating to environmental matters and indemnification for breach of representations and warranties of the Nitram purchase agreement, totaling approximately $1,976 against the escrow, and a total of $1,388 was withheld from the payment of the escrow amount, which represents the Company’s 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. The Company does not currently believe it will have additional losses or claims against the former Nitram stockholders that are in excess of the amounts already claimed or accrued.

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.

10. 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 Company’s outstanding indebtedness under its subordinated term loan.

 

19


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

10. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND WARRANTS – CONTINUED

 

Preferred Stock

The terms, rights, obligations and preferences of the Preferred Stock were 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.

During fiscal year 2011, holders of Preferred Stock converted all of the outstanding shares of Preferred Stock into 2,642,500 shares of the Company’s common stock. Prior to conversion, holders of Preferred Stock were entitled to quarterly dividends at an annual rate of 6.0%. All dividends were cumulative, compounded quarterly and paid in cash. The Company paid $75 and $717 of cash dividends during the three and nine months ended April 2, 2011. The Company considered 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 was measured using a Monte Carlo simulation model and valuation techniques that required 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 Company’s common stock. 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.

Warrants

The warrants entitle the holders to purchase 50% of the initial number of shares of common stock obtainable 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. During the nine months ended March 31, 2012, holders of warrants, in cashless exercises, exchanged 31,250 warrant shares for 17,528 shares of the Company’s common stock.

11. STOCKHOLDER RIGHTS PLAN

On August 15, 2008, the Company adopted a stockholder rights plan. 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 Company’s common stock at a discounted price if a person or group (other than certain institutional investors specified in the rights plan, such as Schedule 13G filers) acquires beneficial ownership of 20% or more of the Company’s outstanding common stock. Rights held by those that exceed the 20% threshold will be void.

The rights plan also includes an exchange option. In general, after the rights become exercisable, the Board of Directors may, at its discretion, effect an exchange of part or all of the rights (other than rights that have become void) for shares of the Company’s 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.

 

20


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

12. STOCK-BASED COMPENSATION

The following information represents the Company’s grants of stock-based compensation to employees and directors during the nine months ended March 31, 2012 and April 2, 2011:

 

     Nine months ended  
     March 31, 2012      April 2, 2011  

Grant Type

   Number of
Shares
Granted
     Fair
Value of
Grant
     Number of
Shares
Granted
     Fair
Value of
Grant
 

Stock

     36,000       $ 765         36,000       $ 523   

Restricted stock

     38,438         816         64,887         968   

The fair value of the stock granted to the Board of Directors is recognized immediately. 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 Company’s stock on the date of grant.

In October 2011, a stockholder reported an increase in its beneficial ownership to approximately 69% of our common stock in a filing with the SEC. This change in beneficial ownership constituted a change in control as defined in the Company’s 2007 Incentive Stock Plan, resulting in the acceleration of vesting of approximately 146,000 unvested restricted stock awards. The acceleration of vesting resulted in a charge of $2,098 during the quarter ended December 31, 2011, which was recorded consistent with employees’ compensation expense. There are no unvested stock options or restricted stock awards outstanding as of March 31, 2012.

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 from exhaust gases caused by burning hydrocarbon fuels such as coal, gasoline, 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 information and reconciliation to operating profit for the three and nine months ended March 31, 2012 and April 2, 2011 are presented below. The Company allocates all costs associated with the manufacture, sale and design of its products to the appropriate segment. Segment profit and loss is based on revenue less direct expenses of the segment before allocation of general and administrative costs. The Company does not allocate general and administrative expenses (“reconciling items”), assets, or expenditures for assets on a segment basis for internal management reporting; therefore this information is not presented.

 

21


Table of Contents

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2012

(In thousands, except share and per share amounts)

 

13. SEGMENT INFORMATION – CONTINUED

 

     Three months ended     Nine months ended  
     March 31,
2012
    April 2,
2011
    March 31,
2012
    April 2,
2011
 

Revenue

        

Process Products

   $ 32,367      $ 23,524      $ 89,267      $ 64,882   

Environmental Systems

     3,131        10,461        13,040        22,358   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 35,498      $ 33,985      $ 102,307      $ 87,240   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

        

Process Products

   $ 4,972      $ 2,720      $ 13,851      $ 8,800   

Environmental Systems

     351        2,264        1,723        3,687   

Corporate and other general and administrative expenses

     (4,111     (4,154     (14,531     (11,950
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 1,212      $ 830      $ 1,043      $ 537   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand PMFG, Inc., our operations, and our present business environment. MD&A is provided to supplement – and should be read in conjunction with – our unaudited consolidated financial statements and the accompanying notes thereto contained in “Item 1. Financial Statements” of this report. This overview summarizes the MD&A, which includes the following sections:

 

   

Our Business – a general description of our business and the key drivers of product demand.

 

   

Results of Operations – an analysis of our Company’s consolidated and reporting segment results of operations for the three and nine month periods presented in our consolidated unaudited financial statements.

 

   

Liquidity, Capital Resources and Financial Position – an analysis of cash flows; aggregate contractual obligations; foreign currency exposure; and an overview of financial position.

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 on Form 10-K for the year ended July 2, 2011. These factors could cause our actual results for future periods to differ materially from those experienced in, or implied by, these forward-looking statements.

All currency amounts included in this Form 10-Q are expressed in thousands, except per share amounts.

Our Business

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 natural gas infrastructure, power generation and refining and petrochemical processing. We offer a broad range of separation and filtration products, selective catalytic reduction, or SCR 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 facilities.

Our products and systems are marketed worldwide. 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, regardless of where the product is shipped or where it will eventually be installed. Revenue generated by orders originating from a country other than the United States is classified as international revenue. Revenue generated from outside the United States was approximately 47% for the nine months ended March 31, 2012 compared to 37% for the nine months ended April 2, 2011. As a result of global demand for our products and our increased sales resources outside of the United States, we expect our international sales will continue to increase as a percentage of our consolidated revenue in the future.

We believe that our success depends on our ability to understand the complex operational demands of our customers and deliver systems and products that meet or exceed the indicated design specifications. Our success further depends on our ability to provide such products in a cost-effective manner and within the time frames established with our customers. Our gross profit during any particular period may be impacted by several factors, primarily shifts in our product mix, material cost changes, and warranty costs. Shifts in the geographic composition of our sales also can have a significant impact on our reported margins.

We have two reporting segments: Process Products and Environmental Systems. 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. 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 primary product of our Environmental Systems business is 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.

 

23


Table of Contents

Key Drivers of Product Demand

We believe demand for our products is driven by the increasing demand for energy in both developed and emerging markets, coupled with the global trend towards increasingly restrictive environmental regulations. These trends should stimulate investment in new power generation facilities and related infrastructure, and in upgrading existing facilities.

With a shift to cleaner, more environmentally responsible power generation, power providers and industrial power consumers are building new facilities that use cleaner fuels, such as natural gas, nuclear technology, and renewable resources. In developed markets, natural gas is increasingly becoming one of the energy sources of choice. We supply product offerings throughout the entire natural gas infrastructure value chain and believe the expansion of natural gas infrastructure will drive growth of our process products and the global market for our SCR systems for natural-gas-fired power plants.

Despite existing concerns over safety and government regulations related to the construction of new nuclear power facilities and the re-commissioning of existing facilities, we believe rising nuclear capacity utilization rates and concerns about energy security and emissions will drive the increase for nuclear power generation, both domestically and internationally. China and India are expected to lead the global expansion of nuclear power generation growth. Recommissioning of existing nuclear facilities in France also will contribute to growth in product demand.

These market trends will drive the demand for both our separation/filtration products and our SCR systems, creating significant opportunities for us. We face strong competition from numerous other providers of custom-engineered systems and products. We, along with other companies that provide alternative products and solutions, are affected by a number of factors, including, but not limited to, global economic conditions, level of capital spending by companies engaged in energy production, processing, transportation, storage and distribution, as well as current and anticipated environmental regulations.

Recent Developments

Public Offering of Common Stock

On February 22, 2012, we completed a public offering of 2,990,000 shares of our common stock, par value $0.01 per share, at a price of $16.00 per share. We received net proceeds of $44,411 from the public offering after deducting underwriting discounts, commissions, and offering expenses. In accordance with the terms of our Senior Secured Credit Agreement, we used $10,600 of these net proceeds to repay our entire outstanding senior term loan. The balance of the net proceeds is available for working capital and other general corporate purposes.

Acquisition of Burgess Manning GmbH

On November 4, 2011, the Company acquired all of the outstanding shares of Burgess Manning GmbH. Prior to the acquisition, Burgess Manning GmbH held an exclusive license in Germany and surrounding countries to design, manufacture, and market custom engineered systems and products under the Burgess Manning trademark, which we own. Burgess Manning GmbH’s results of operations have been included in our consolidated financial statements from the date of acquisition. We believe the acquisition will increase our ability to serve companies located within Germany and surrounding countries.

 

24


Table of Contents

Acceleration of Unvested Restricted Stock Grants

On October 11, 2011, a stockholder reported an increase in its beneficial ownership to approximately 69% of our common stock in a filing with the SEC. This change in beneficial ownership constituted a change in control as defined in our 2007 Incentive Stock Plan, resulting in the acceleration of vesting of approximately 146,000 unvested restricted stock awards. This acceleration of vesting resulted in a charge of approximately $2,098 in the quarter ended December 31, 2011.

Acquisition of Real Estate

On September 14, 2011, the Company entered into a contract to purchase 33 acres in the City of Denton, Denton County, Texas for $1,800. On December 22, 2011, we completed the land purchase. We also entered into a contract with Schwob Building Company, Ltd. on March 12, 2012 for the construction of a new 87,500 square foot manufacturing facility on the site. We intend to begin building a new manufacturing facility and administration offices on the property during calendar year 2012.

Critical Accounting Policies

See the Company’s critical accounting policies as described in “Item 7. Management’s 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 July 2, 2011. 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  
     March 31,
2012
    April 2,
2011
    March 31,
2012
    April 2,
2011
 

Net revenue

     100.0     100.0     100.0     100.0

Cost of goods sold

     71.4        68.5        69.4        68.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     28.6        31.5        30.6        31.6   

Operating expenses

     25.2        29.0        29.6        31.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     3.4        2.5        1.0        0.6   

Other income (expense), net

     (1.4     12.9        (1.9     5.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     2.0        15.4        (0.9     6.3   

Income tax (expense) benefit

     0.9        (0.8     0.8        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     2.9     14.6     (0.1 )%      6.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Less net earnings (loss) attributable to noncontrolling interest

     —          —          (0.1     0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to PMFG, Inc.

     2.9        14.6        (0.0     6.6   

Dividends on preferred stock

     —          (0.3     —          (0.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to PMFG, Inc. common stockholders

     2.9     14.3     (0.0 )%      5.8
  

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

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, depreciation, sub-contract work, inbound and outbound freight, purchasing, receiving, inspection, warehousing, internal transfer costs and other costs of our manufacturing and distribution processes. Cost of goods sold also includes the costs of commissioning the equipment and warranty related costs. Operating expenses include sales and marketing expenses, engineering and project management expenses and general and administrative expenses which are further described below.

 

   

Sales and marketing expenses - include payroll, employee benefits, stock-based compensation and other employee-related costs associated with sales and marketing personnel. Sales and marketing expenses also include travel and entertainment, advertising, promotions, trade shows, seminars and other programs and sales commissions paid to independent sales representatives.

 

   

Engineering and project management expenses - include payroll, employee benefits, stock-based compensation and other employee-related costs associated with engineering, project management and field service personnel. Additionally, engineering and project management expenses include the cost of sub-contracted engineering services.

 

   

General and administrative expenses - include payroll, employee benefits, stock-based compensation and other employee-related costs and costs associated with executive management, finance, human resources, information systems and other administrative employees. General and administrative costs also include board of director compensation and expenses, facility costs, insurance, audit fees, legal fees, reporting expense, professional services and other administrative fees.

Three Months Ended March 31, 2012 Compared to Three Months Ended April 2, 2011

Revenue. We classify revenue as domestic or international based upon the origination of the order. International revenue was approximately 50% and 35% of consolidated revenue in the three-month periods ended March 31, 2012 and April 2, 2011, respectively. We believe the increase in our international sales relative to the Company as a whole reflects our strategic acquisitions, our international focused sales efforts, and the changing economic environment in which we operate. The following summarizes consolidated revenue:

 

     Three months ended  
     March 31,     April 2,  
     2012      % of Total     2011      % of Total  

Domestic

   $ 17,592         49.6   $ 22,122         65.1

International

     17,906         50.4     11,863         34.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 35,498         100.0   $ 33,985         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue increased $1,513 or 4.5% to $35,498 in the three months ended March 31, 2012, compared to prior year as increased revenue of Process Products were substantially offset by decreased revenue from Environmental Systems. Domestic revenue decreased $4,530, or 20.5%, in the three months ended March 31, 2012 when compared to the prior year. International revenue increased $6,043, or 50.9%, in the three months ended March 31, 2012 when compared to the prior year. Domestically, a $3,784 revenue decrease occurred within the Environmental segment. The acquisition of Burgess Manning GmbH contributed $3,827 of revenue in the three months ended March 31, 2012. Additional increases this quarter in international revenue resulted from growth in Asia.

 

26


Table of Contents

Gross Profit. Our gross profit during any particular period may be impacted by several factors, primarily level of revenue, shifts in our product mix, material and labor cost changes, and warranty costs. Shifts in the geographic composition of our revenue also can have a significant impact on our reported margins. The following summarizes revenue, cost of goods sold, and gross profit:

 

     Three months ended  
     March 31     April 2,  
     2012      % of Total     2011      % of Total  

Revenue

   $ 35,498         100.0   $ 33,985         100.0

Cost of goods sold

     25,352         71.4     23,289         68.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 10,146         28.6   $ 10,696         31.5
  

 

 

    

 

 

   

 

 

    

 

 

 

For the three months ended March 31, 2012 gross profit decreased $550 or 5.1% from the comparable three months in the prior year. As a percentage of revenue, gross profit decreased from 31.5% in the prior year period to 28.6% for the three months ended March 31, 2012. The decrease in gross profit as a percentage of revenue was due to acceleration of an anticipated loss related to a specific pressure products contract and a reduction in higher margin Environmental sales as a component of the overall product mix when compared to the same quarter in fiscal 2011.

Operating Expenses. The following summarizes operating expenses:

 

     Three months ended  
     March 31,     April 2,  
     2012      % of Total     2011      % of Total  

Sales and marketing

   $ 2,481         7.0   $ 3,396         10.0

Engineering and project management

     2,342         6.6     2,316         6.8

General and administrative

     4,111         11.6     4,154         12.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 8,934         25.2   $ 9,866         29.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating expenses decreased $932 or 9.4% for the three months ended March 31, 2012 in comparison to the prior year. As a percentage of revenue, these expenses decreased to 25.2% during the three months ended March 31, 2012 from 29.0% during the three months ended April 2, 2011.

Our sales and marketing expenses decreased $915 due to reduced expenses related to commissions and temporary reductions in our personnel costs. Our engineering and project management expenses remained relatively flat for the three months ended March 31, 2012 compared to the three months ended April 2, 2011. General and administrative expenses decreased $43 during the three months ended March 31, 2012 compared to the same period in the prior year. The decrease was primarily the result of reduced professional consulting fees offset by an increase in general and administrative expenses related to our international operations.

 

27


Table of Contents

Other Income and Expense. The following summarizes other income and expense:

 

     Three months ended  
     March 31,
2012
    % of Revenues     April 2,
2011
    % of Revenues  

Interest income

   $ 6        —     $ 5        —  

Interest expense

     (142     (0.4 )%      (406     (1.2 )% 

Loss on extinguishment of debt

     (347     (1.0 )%      —          —  

Foreign exchange gain (loss)

     16        —       248        0.7 

Change in fair value of derivative liability

     —          —       4,549        13.4 

Other income, net

     (17     —       —          —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (484     (1.4 )%    $ 4,396        12.9 
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended March 31, 2012, total other income (expense) was a net expense of $484 compared to net income of $4,396 in the prior year. Interest expense decreased $264 from the prior year on lower average outstanding debt balances. A $347 write off of deferred financing charges, associated with the senior term loan that was extinguished during the quarter, was recognized in the quarter ended March 31, 2012. A gain on foreign exchange was recognized in the quarter ended March 31, 2012 primarily as a result of changes in exchange rates for the Canadian Dollar and euro relative to the U.S. Dollar. The change in the fair value of derivative liability recognized in the prior year relates to the preferred stock issued by the Company in September 2009. All of the preferred stock was converted into shares of our common stock prior to July 2, 2011.

Income Taxes. Our effective income tax rate was (39.1%) and 5.1% for the three months ended March 31, 2012 and April 2, 2011, respectively. For the quarter ended March 31, 2012, the effective tax rate varied from statutory rates because of deductions for our research and development expenditures. For the quarter ended April 2, 2011, the effective tax rate varied from statutory rates because of the change in fair value of derivative liability, which is not taxable for income tax purposes.

Results of Operations – Segments

We have two reporting segments: Process Products and Environmental Systems.

Process Products

The Process Products segment produces specialized systems and products that remove contaminants from gases and liquids, resulting in improved efficiency, reduced maintenance and extended life of energy infrastructure. 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. Process Products represented 91% and 69% of our revenue in the three months ended March 31, 2012 and April 2, 2011, respectively.

 

28


Table of Contents

The following summarizes Process Products revenue and operating income:

 

     Three months ended  
     March 31,
2012
    April 2,
2011
 

Revenue

   $ 32,367      $ 23,524   

Operating income

   $ 4,972      $ 2,720   

Operating income as % of revenue

     15.4     11.6

The Process Products segment revenue increased $8,843 or 37.6% to $32,367 in the quarter ended March 31, 2012, compared to prior year period. The acquisition of Burgess Manning GmbH contributed $3,827 of revenue in this quarter. Additional revenue growth this quarter resulted from increased pressure product sales in Asia and the Middle East driven by our continued focused sales efforts in those regions.

Process Products operating income for the three months ended March 31, 2012 increased $2,252, or 82.8%, compared to the same period a year ago. As a percentage of revenue, operating income was 15.4% and 11.6% for the three months ended March 31, 2012 and April 2, 2011, respectively. The increase of operating income as a percentage of revenue resulted from reduced selling and engineering costs as a percentage of increased revenue.

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 power and industrial customers comply with environmental regulations. Environmental Systems represented 9% and 31% of our revenue in the three months ended March 31, 2012 and April 2, 2011, respectively.

The following summarizes Environmental Systems revenue and operating income:

 

     Three months ended  
     March 31,
2012
    April 2,
2011
 

Revenue

   $ 3,131      $ 10,461   

Operating income

   $ 351      $ 2,264   

Operating income as % of revenue

     11.2     21.6

Revenue from Environmental Systems decreased $7,330 or 70% in the quarter ended March 31, 2012 in comparison to the prior year. The decrease in Environmental Systems revenue reflects the lower level of new environmental projects awarded in the latter part of fiscal 2011 and early part of fiscal 2012. Revenue from recent environmental project bookings will be more weighted to fiscal 2013 given the length of the projects and the estimated delivery schedules.

Environmental Systems operating income for the three months ended March 31, 2012 decreased $1,913, or 84.5%, in comparison to the prior year. As a percentage of revenue, operating income decreased to 11.2% during the three months ended March 31, 2012 from 21.6% for the same period in the prior year. The decrease in Environmental Systems operating income, as a percentage of revenue, is the result of lower margins and an increase in the relative level of selling and engineering costs on lower gross revenue.

 

29


Table of Contents

Nine Months Ended March 31, 2012 Compared to Nine Months Ended April 2, 2011

Results of Operations – Consolidated

Revenue. The following table summarizes consolidated revenue:

 

     Nine months ended  
     March 31,     April 2,  
     2012      % of Total     2011      % of Total  

Domestic

   $ 54,631         53.4   $ 55,133         63.2

International

     47,676         46.6     32,107         36.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 102,307         100.0   $ 87,240         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

For the nine months ended March 31, 2012, total revenue increased $15,067, or 17.3%, compared to the prior year. Domestic revenue decreased $502, or 0.9%, in the nine months ended March 31, 2012 when compared to the prior year. International revenue increased $15,569, or 48.5%, in the nine months ended March 31, 2012 when compared to the prior year. Domestically, revenue growth was noted in multiple product lines within the Process Products segment offset by reduced revenue in the Environmental segment. The acquisition of Burgess Manning GmbH contributed $6,728 of revenue in the nine months ended March 31, 2012. Additional increases in international revenue were a combination of growth in Europe, the Middle East and Asia.

Gross Profit. The following table summarizes revenue, cost of goods sold, and gross profit:

 

     Nine months ended  
     March 31     April 2,  
     2012      % of Total     2011      % of Total  

Revenue

   $ 102,307         100.0   $ 87,240         100.0

Cost of goods sold

     70,977         69.4     59,677         68.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 31,330         30.6   $ 27,563         31.6
  

 

 

    

 

 

   

 

 

    

 

 

 

For the nine months ended March 31, 2012, our gross profit increased $3,767, or 13.7%, compared to the comparable period from the prior year, on higher revenue. Our gross profit, as a percentage of revenue, decreased to 30.6% for the nine months ended March 31, 2012 from 31.6% in the comparable period from the prior year.

 

30


Table of Contents

Operating Expenses. The following table summarizes operating expenses:

 

     Nine months ended  
     March 31,     April 2,  
     2012      % of Total     2011      % of Total  

Sales and marketing

   $ 8,958         8.8   $ 8,918         10.2

Engineering and project management

     6,798         6.6     6,158         7.1

General and administrative

     14,531         14.2     11,950         13.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 30,287         29.6   $ 27,026         31.0
  

 

 

    

 

 

   

 

 

    

 

 

 

For the nine months ended March 31, 2012, our operating expenses increased by $3,261 compared to the comparable prior year period and included an expense of $2,098 related to the accelerated vesting of approximately 146,000 shares of previously unvested restricted stock awards. As a percentage of revenue, these expenses decreased to 29.6% for the nine months ended March 31, 2012 from 31.0% in the nine months ended April 2, 2011.

Our sales and marketing expenses remained flat in the nine months ended March 31, 2012 compared to the prior year. Our engineering and project management expense increased $640 in the nine months ended March 31, 2012 compared to the comparable prior year period due largely to the addition of international engineering and project management resources. Our general and administrative expenses increased $2,581 in the nine months ended March 31, 2012 compared to the comparable prior year period. The increase in general and administrative expense during the current nine month period was the result of the accelerated vesting of previously unvested restricted stock awards, increased costs of maintaining foreign offices, and additional costs associated with the acquisition of Burgess Manning GmbH.

Other Income and Expense. The following table summarizes other income and expenses:

 

     Nine months ended  
     March 31,
2012
    % of
Revenues
    April 2,
2011
    % of
Revenues
 

Interest income

   $ 22        —     $ 24        —  

Interest expense

     (1,012     (1.0 )%      (1,916     (2.2 )% 

Loss on extinguishment of debt

     (347     (0.3 )%      —          —  

Foreign exchange gain (loss)

     (652     (0.6 )%      424        0.5 

Change in fair value of derivative liability

     —          —       6,419        7.4 

Other income, net

     7        —       —          —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (1,982     (1.9 )%    $ 4,951        5.7 
  

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended March 31, 2012, other expense increased by $6,933 from income of $4,951 for the nine months ended April 2, 2011 to expense of $1,982 for the nine months ended March 31, 2012. The increase in other expense is primarily attributable to $6,419 change in the fair value of our derivative liability associated with the conversion and redemption features of our preferred stock during the nine months ended April 2, 2011. Interest expense during the nine months ended March 31, 2012 decreased by $904 compared to the comparable nine months in the prior year on lower average debt balances outstanding. A $347 write off of deferred financing charges associated with the extinguished senior term loan was recognized in the quarter ended March 31, 2012. The nine months ended March 31, 2012, reported a loss on foreign currency translation of $652 compared to a gain of $424 for the nine months ended April 2, 2011, both of which were driven largely by changes in the exchange rates of the Canadian Dollar and the euro relative to the U.S. Dollar.

 

31


Table of Contents

Income Taxes. Our effective income tax rate was 87.8% for the nine months ended March 31, 2012. For the quarter ended March 31, 2012, the effective tax rate varied from statutory rates because of deductions for our research and development expenditures. Our effective income tax rate for the nine months ended April 2, 2011 was significantly lower than the statutory rates as the $6,419 gain recorded to reflect the change in fair value of our derivative liability is not taxable for income tax purposes.

Net Earnings (loss). Our net earnings decreased by $5,953 from $5,838 in the nine months ended April 2, 2011, to a net loss of ($115) in the nine months ended March 31, 2012. The primary reason for the decrease in net earnings was $2,098 of stock based compensation that was recorded in October 2011 upon the accelerated vesting of all the previously unvested stock awards granted under our 2007 Stock Incentive Plan. Additionally, the nine-month period ended April 2, 2011 contained $6,419 of gain related to the change in fair value of the derivative liability.

Basic and diluted loss per share attributable to our common stockholders decreased to $0.00 per share for the nine months ended March 31, 2012, from basic and diluted earnings per share of $0.29 and $0.28 per share, respectively, for the nine months ended April 2, 2011.

Results of Operations – Segments

Process Products

Our Process Products segment represented 87% and 74% of our revenue for the nine months ended March 31, 2012 and April 2, 2011, respectively.

The following table summarizes Process Products revenue and operating income:

 

     Nine months ended  
     March 31,
2012
    April 2,
2011
 

Revenue

   $ 89,267      $ 64,882   

Operating income

   $ 13,851      $ 8,800   

Operating income as % of revenue

     15.5     13.6

Process Products revenue increased by $24,385 or 37.6%, in the nine months ended March 31, 2012 when compared to the nine months ended April 2, 2011. The acquisition of Burgess Manning GmbH contributed $6,728 of revenue in the nine months ended March 31, 2012. Additional revenue growth for the nine months ended March 31, 2012 resulted from increased pressure product sales in Asia and the Middle East driven by our continued focused sales efforts in those regions.

Process Products operating income in the nine months ended March 31, 2012 increased by $5,051 compared to the nine months ended April 2, 2011. As a percentage of Process Products revenue, operating income was 15.5% in the nine months ended March 31, 2012 compared to 13.6% in the nine months ended April 2, 2011. The increase in operating income as a percentage of sales is due to lower selling and engineering costs as a percentage of revenue.

Environmental Systems

Our Environmental Systems segment represented 13% and 26% of our revenue for the nine months ended March 31, 2012 and April 2, 2011, respectively.

 

32


Table of Contents

The following table summarizes Environmental Systems revenue and operating income:

 

     Nine months ended  
     March 31,
2012
    April 2,
2011
 

Revenue

   $ 13,040      $ 22,358   

Operating income

   $ 1,723      $ 3,687   

Operating income as % of revenue

     13.2     16.5

Revenue from Environmental Systems decreased $9,318, or 41.7% in the nine months ended March 31, 2012, when compared to the nine months ended April 2, 2011. The decrease in Environmental Systems revenue for the nine months ended March 31, 2012 reflects the lower level of new environmental projects awarded in late fiscal 2011 and early fiscal 2012. Revenue from recent environmental project bookings will be more weighted to fiscal 2013 given the length of the projects and the estimated delivery schedules.

Environmental Systems operating income in the nine months ended March 31, 2012 decreased $1,964 compared to the nine months ended April 2, 2011. As a percentage of revenue, operating income decreased to 13.2% during the nine months ended March 31, 2012 from 16.5% for the same period in the prior year, primarily as a result of increased selling and engineering costs as a percentage of the reduced amount of revenue.

General and Administrative Expenses

General and administrative expenses include those related to the corporate office, as well as those of international subsidiaries. General and administrative expenses increased $2,581 or 21.6% in the nine months ended March 31, 2012 in comparison to the prior year as a result of the accelerated vesting of restricted stock awards and the increased cost of maintaining foreign offices, higher employee-related costs and higher professional fees.

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 9 of the consolidated financial statements.

Net Bookings and Backlog

The following table shows the activity and balances related to our backlog for the nine months ended and as of March 31, 2012 and April 2, 2011:

 

     Nine months ended  
     March 31,
2012
    April 2, 2011  

Backlog at beginning of period

   $ 89,000      $ 96,000   

Net Bookings

     114,200        85,000   

Acquired backlog

     5,000        —     

Revenue recognized

     (102,300     (87,200
  

 

 

   

 

 

 

Backlog at end of period

   $ 105,900      $ 93,800   
  

 

 

   

 

 

 

 

33


Table of Contents

Our backlog was approximately $106,000 at March 31, 2012, compared to $89,000 at July 2, 2011. At both March 31, 2012 and July 2, 2011, approximately 75% of our backlog related to Process Products sales orders with the balance pertaining to Environmental Systems sales orders. Backlog includes contractual purchase orders for products that are deliverable in future periods less revenue recognized on such orders to date. Of our backlog at March 31, 2012, we estimate approximately 85% of the revenue related to our existing backlog will be recognized in the next 12 months. Orders in backlog are subject to change, delays or cancellation by our customers. At March 31, 2012, certain contracts within the backlog have been placed on indefinite hold by the customer. We believe these contracts will result in executed projects in future periods. Cancelled orders are subject to cancellation fees.

Financial Position

Assets. Total assets increased by $44,298, or 31.5%, from $140,709 at July 2, 2011, to $185,007 at March 31, 2012. On March 31, 2012, we held cash, including restricted cash, and cash equivalents of $54,436. We had working capital of $78,769 and a current liquidity ratio of 2.8-to-1.0. This compares with cash, including restricted cash, and cash equivalents of $19,538, working capital, excluding the current portion of long-term debt, of $46,508, and a current liquidity ratio of 2.2-to-1.0 at July 2, 2011.

Liabilities and Equity. Total liabilities decreased by $3,045, or 5.5%, from $55,668 at July 2, 2011 to $52,623 at March 31, 2012. The decrease in our total liabilities is primarily attributed to the extinguishment of our senior term loan partially offset by an increase in our trade payables, billings in excess of costs and earning on uncompleted contracts and accrued liabilities.

The increase in our stockholder’s equity of $47,343, or 55.7%, from $85,041 at July 2, 2011 to $132,384 at March 31, 2012 is primarily attributable to our public offering of 2,990,000 shares of common stock in February 2012 and the accelerated vesting of all previously unvested restricted stock awards. Our ratio of debt (total liabilities)-to-equity was 0.4-to-1.0 at March 31, 2012 compared to 0.7-to-1.0 at July 2, 2011.

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 March 31, 2012, the balance of these working capital accounts was $21,777 compared to $25,384 at July 2, 2011, reflecting a decrease of our investment in these working capital items of $3,607.

Many of our customers require bank letters of credit or other forms of financial guarantees to secure progress payments and performance. These letters of credit and guarantees are issued under various bank and financial institution arrangements (see Note 8 of Item 1 in the Notes to the Consolidated Financial Statements). As of March 31, 2012 and July 2, 2011, we had outstanding letters of credit and bank guarantees of $21,306 and $9,999, respectively. The increase is primarily attributed to the increase in international projects.

Our cash and cash equivalents were $54,436 as of March 31, 2012 compared to $19,538 at July 2, 2011, of which $8,341 was restricted as collateral for stand-by letters of credit and bank guarantees as of March 31, 2012, compared to $6,633 at July 2, 2011. During the nine months ended March 31, 2012, cash provided by operating activities was $9,469 compared to cash provided by operating activities of $3,795 for the nine months ended April 2, 2011. Cash provided by operating activities primarily related to a decrease in accounts receivable partially offset by increases in accounts payable, cost and earnings in excess of billings and billings in excess of cost and earnings.

 

34


Table of Contents

Cash used in investing activities was $7,403 for the nine months ended March 31, 2012, compared to $2,562 for the nine months ended April 2, 2011. Cash used in investing activities during the nine months ended March 31, 2012 primarily related to the acquisition of Burgess Manning GmbH, purchases of property and equipment and an increase in restricted cash. Cash used in investing activities during the nine months ended April 2, 2011, primarily related to purchases of property and equipment and the investment in the CEFCO manufacturing license agreement, offset by a decrease in restricted cash.

Cash provided by financing activities during the nine months ended March 31, 2012 was $31,773 compared to cash used in financing activities of $7,510 during the nine months ended April 2, 2011. The cash provided by financing activities for the nine months ended March 31, 2012 related to the proceeds from the our public offering of 2,990,000 shares of common stock in February 2012, partially offset by the principal payment of extinguishment of long-term debt. The cash used in financing activities for the nine months ended April 2, 2011 consisted primarily of payment of long-term debt and dividends on preferred stock, partially offset by the proceeds from the sale of common stock and excess tax benefits from stock options exercised.

As a result of the events described above, our cash and cash equivalents during the nine months ended March 31, 2012 increased by $33,190 compared to a decrease of $5,501 during the nine months ended April 2, 2011.

We anticipate that our cash and cash equivalents on hand, our borrowing availability under our current revolving credit facility and debenture agreement, our short-term investments, if any, and our future cash flow from operations will provide sufficient cash to enable us to meet our future operating needs, debt service requirements and capital expenditures for the foreseeable future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risk exposures from those disclosed in Item 7A of part II of our Annual Report of Form 10-K for the year ended July 2, 2011.

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 SEC’s rules and forms.

The Company’s management has evaluated, with the participation of the Company’s 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 Company’s 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 Company’s disclosure controls and procedures were effective in ensuring that all material information required to be filed in this Report has been accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, in a timely fashion to allow decisions regarding required disclosures.

Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. The Company’s controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. Notwithstanding the foregoing, the Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

 

35


Table of Contents

During the three months ended March 31, 2012, there have been no changes in the Company’s internal control over financial reporting, or in other factors, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved, from time to time, in various litigation, claims and proceedings arising in the normal course of business that are not expected to have any material effect on the financial condition of the Company.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Item 1A of Part I of our Annual Report on 10-K for the year ended July 2, 2011.

Item 6. Exhibits

The following exhibits are filed as part of this report.

 

Exhibit
Number

  

Exhibit

10.1    AIA Document A101-2007 Standard Contract for Construction, dated March 12, 2012, between Peerless Mfg. Co. and Schwob Building Company, Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on March 14, 2012).
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.

 

36


Table of Contents

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 9, 2012  

/s/ Peter J. Burlage

  Peter J. Burlage
  President and Chief Executive Officer
  (Principal Executive Officer)
Date: May 9, 2012  

/s/ Ronald L. McCrummen

  Ronald L. McCrummen
  Vice President and Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

37