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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 30, 2013

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  x    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 3, 2013, was 20,920,255.

 

 

 


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 30, 2013 (unaudited) and June 30, 2012

     4   

Unaudited Consolidated Statements of Operations for the three and nine months ended March  30, 2013 and March 31, 2012

     5   

Unaudited Consolidated Statements of Comprehensive Income for the nine months ended March  30, 2013 and March 31, 2012

     6   

Unaudited Consolidated Statement of Equity for the nine months ended March 30, 2013

     7   

Unaudited Consolidated Statements of Cash Flows for the nine months ended March  30, 2013 and March 31, 2012

     8   

Notes to Consolidated Financial Statements (unaudited)

     10   

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

     22   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     33   

Item 4. Controls and Procedures

     33   

PART II: OTHER INFORMATION

  

Item 1. Legal Proceedings

     33   

Item 1A. Risk Factors

     33   

Item 6. Exhibits

     34   

SIGNATURES

     35   

 

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 credit agreements and our ability to raise additional capital;

 

   

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 June 30, 2012 and Part II of this Report. There may be other factors that may cause our actual results to differ materially from the forward-looking statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. We undertake no obligation to publicly update or revise 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 30,     June 30,  
     2013     2012  
     (unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 56,735      $ 52,286   

Restricted cash

     8,170        7,927   

Accounts receivable—trade, net of allowance for doubtful accounts of $300 and $650 at March 30, 2013 and June 30, 2012, respectively

     21,556        32,428   

Inventories, net

     7,155        6,478   

Costs and earnings in excess of billings on uncompleted contracts

     17,902        14,635   

Income taxes receivable

     2,217        4,101   

Deferred income taxes

     1,191        1,191   

Other current assets

     3,329        3,240   
  

 

 

   

 

 

 

Total current assets

     118,255        122,286   

Property, plant and equipment, net

     18,141        9,522   

Intangible assets, net

     19,906        20,731   

Goodwill

     30,429        30,429   

Other assets

     852        311   
  

 

 

   

 

 

 

Total assets

   $ 187,583      $ 183,279   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 18,980      $ 18,539   

Billings in excess of costs and earnings on uncompleted contracts

     9,430        11,797   

Commissions payable

     1,778        1,437   

Income taxes payable

     485        595   

Accrued product warranties

     2,815        2,615   

Customer deposits

     2,640        3,241   

Accrued liabilities and other

     4,677        6,795   
  

 

 

   

 

 

 

Total current liabilities

     40,805        45,019   

Long-term debt

     5,129        —     

Deferred income taxes

     6,180        6,180   

Other long-term liabilities

     936        1,194   

Commitments and contingencies

    

Preferred stock – authorized, 5,000,000 shares of $0.01 par value; no shares outstanding at March 30, 2013 or June 30, 2012

     —          —     

Stockholders’ equity:

    

Common stock – authorized, 50,000,000 shares of $0.01 par value; issued and outstanding, 20,920,255 and 20,773,878 shares at March 30, 2013 and June 30, 2012, respectively

     209        208   

Additional paid-in capital

     96,529        96,072   

Accumulated other comprehensive loss

     (2,031     (1,913

Retained earnings

     35,896        35,194   
  

 

 

   

 

 

 

Total PMFG, Inc.’s stockholders’ equity

     130,603        129,561   

Noncontrolling interest

     3,930        1,325   
  

 

 

   

 

 

 

Total equity

     134,533        130,886   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 187,583      $ 183,279   
  

 

 

   

 

 

 

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 30,     March 31,     March 30,     March 31,  
     2013     2012     2013     2012  
     (unaudited)     (unaudited)  

Revenue

   $ 34,970      $ 35,498      $ 99,399      $ 102,307   

Cost of goods sold

     24,223        25,352        65,731        70,977   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     10,747        10,146        33,668        31,330   

Operating expenses:

        

Sales and marketing

     3,278        2,481        10,282        8,958   

Engineering and project management

     2,335        2,342        7,036        6,798   

General and administrative

     4,112        4,111        14,008        14,531   
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,725        8,934        31,326        30,287   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,022        1,212        2,342        1,043   

Other income (expense):

        

Interest income

     12        6        29        22   

Interest expense

     (148     (142     (463     (1,012

Loss on extinguishment of debt

     —          (347     (291     (347

Foreign exchange gain (loss)

     (32     16        3        (652

Other income (loss)

     (1     (17     33        7   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (169     (484     (689     (1,982
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     853        728        1,653        (939

Income tax benefit (expense)

     (156     285        (367     824   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     697        1,013        1,286        (115
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to noncontrolling interest

     152        (15     584        (64
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to PMFG, Inc.

   $ 545      $ 1,028      $ 702      $ (51
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     20,920        19,137        20,919        18,162   

Diluted

     20,936        19,739        20,935        18,162   

Basic earnings per common share

   $ 0.03      $ 0.05      $ 0.03      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.03      $ 0.05      $ 0.03      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

PMFG, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

     Three months ended     Nine months ended  
     March 30,     March 31,     March 30,     March 31,  
     2013     2012     2013     2012  
     (unaudited)     (unaudited)  

Net income (loss)

   $ 697      $ 1,013      $ 1,286      $ (115

Other comprehensive income (loss):

        

Foreign currency translation adjustment

     (749     527        (97     (89
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (749     527        (97     (89

Comprehensive income (loss)

     (52     1,540        1,189        (204

Comprehensive income (loss) attributable to noncontrolling interests

     150        (3     605        (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to PMFG, Inc.

   $ (202   $ 1,543      $ 584      $ (164
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Consolidated Statement of Equity

(In thousands)

(unaudited)

 

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

Balance at June 30, 2012

     20,774       $ 208       $ 96,072       $ 35,194       $ (1,913   $ 129,561      $ 1,325       $ 130,886   

Comprehensive income:

                     

Net income

              702           702        584         1,286   

Foreign currency translation adjustment

                 (118     (118     21         (97
                

 

 

   

 

 

    

 

 

 

Total comprehensive income

                   584        605         1,189   

Stock grants, net of forfeitures

     146         1         457              458           458   

Equity contribution from noncontrolling interest in subsidiary

                     2,000         2,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at March 30, 2013

     20,920       $ 209       $ 96,529       $ 35,896       $ (2,031   $ 130,603      $ 3,930       $ 134,533   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements

 

7


Table of Contents

PMFG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

     Nine months ended  
     March 30,     March 31,  
     2013     2012  
     (unaudited)  

Cash flows from operating activities:

    

Net income (loss)

   $ 1,286      $ (115

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     1,926        2,108   

Amortization of deferred finance charges

     132        245   

Stock-based compensation

     460        3,072   

Excess tax benefits of stock-based compensation

     —          (37

Bad debt expense

     1,008        (59

Inventory valuation reserve

     19        28   

Provision for warranty expense

     1,666        1,300   

Loss on extinguishment of debt

     291        347   

(Gain) loss on disposal of property

     (74     17   

Foreign exchange (gain) loss

     (3     652   

Deferred tax expense

     —          3   

Changes in operating assets and liabilities:

    

Accounts receivable

     9,894        3,600   

Inventories

     (693     (526

Costs and earnings in excess of billings on uncompleted contracts

     (3,243     (2,969

Other current assets

     (44     (474

Other assets

     —          (10

Accounts payable

     459        2,349   

Billings in excess of costs and earnings on uncompleted contracts

     (2,330     3,180   

Commissions payable

     341        (718

Income taxes

     1,775        (949

Product warranties

     (1,466     (964

Accrued liabilities and other

     (1,644     (611
  

 

 

   

 

 

 

Net cash provided by operating activities:

     9,760        9,469   

Cash flows from investing activities:

    

Increase in restricted cash

     (422     (1,728

Purchases of property and equipment

     (9,912     (2,769

Net proceeds from sale of property

     135        —     

Advance payment of license agreement

     —          (555

Business acquistion, net of cash received

     (1,363     (2,351
  

 

 

   

 

 

 

Net cash used in investing activities

     (11,562     (7,403

 

Consolidated Statements of Cash Flows continued on next page

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows – Continued

(In thousands)

 

     Nine months ended  
     March 30,     March 31,  
     2013     2012  
     (unaudited)  

Cash flows from financing activities:

    

Net proceeds from issuance of common stock

     —          44,411   

Payment of debt

     —          (12,571

Payment of debt issuance costs

     (963     (94

Payment of deferred consideration costs

     —          (37

Proceeds from long-term debt

     5,129        —     

Equity contribution from noncontrolling interest

     2,000        —     

Proceeds from exercise of stock options

     —          27   

Excess tax benefits from stock-based payment arrangements

     —          37   
  

 

 

   

 

 

 

Net cash provided by financing activities

     6,166        31,773   

Effect of exchange rate changes on cash and cash equivalents

     85        (649
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     4,449        33,190   

Cash and cash equivalents at beginning of period

     52,286        12,905   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 56,735      $ 46,095   
  

 

 

   

 

 

 

Supplemental information on cash flow:

    

Income taxes received

   $ 2,475      $ —     

Interest paid

     442        810   

See accompanying notes to consolidated financial statements

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of PMFG, Inc. and subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America (“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 30, 2013 and for the three and nine months ended March 30, 2013 and March 31, 2012 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 June 30, 2012.

Each of the Company’s interim reporting periods ends on the Saturday closest to the last day of the corresponding quarterly calendar period. References to “fiscal 2013” and “fiscal 2012” refer to fiscal years ended June 29, 2013 and June 30, 2012, respectively. The third quarter of fiscal 2013 and fiscal 2012 ended on March 30, 2013, and March 31, 2012, 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 China Manufacturing Co. Ltd. (“PCMC”), formerly known as Peerless Manufacturing (Zhenjiang) Co. Ltd. The non-controlling interest of Peerless Propulsys is reported as a separate component on the Consolidated Balance Sheets and Consolidated Statements of Operations.

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 30, 2013, cash held in the United States exceeded federally insured limits by $42.3 million. The Company has not experienced any losses related to this cash concentration.

The Company had restricted cash balances of $8.2 million and $7.9 million as of March 30, 2013 and June 30, 2012, respectively. Foreign restricted cash balances were $7.7 million and $7.8 million as of March 30, 2013 and June 30, 2012, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the normal course of business.

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. 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.

 

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PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

1. SIGNIFICANT ACCOUNTING POLICIES—CONTINUED

 

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 are deemed to be uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts in the period the payment is received.

Changes in the Company’s allowance for doubtful accounts are as follows (in thousands):

 

     Nine months ended  
     March 30,     March 31,  
     2013     2012  

Balance at beginning of period

   $ 650      $ 600   

Bad debt expense

     1,008        (59

Accounts written off

     (1,358     (94
  

 

 

   

 

 

 

Balance at end of period

   $ 300      $ 447   
  

 

 

   

 

 

 

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.

Property, Plant and Equipment

Depreciation of property, plant and equipment is calculated using the straight-line method over a period considered adequate to depreciate the total cost over the useful lives of the assets, 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 remaining 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 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.

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

1. SIGNIFICANT ACCOUNTING POLICIES—CONTINUED

 

Goodwill and Other Intangible Assets

Goodwill represents the difference between the purchase price and the fair value of the net assets acquired upon acquisition. Goodwill is not amortized, however, it is measured at the reporting unit level to test for impairment annually, in the fourth quarter, or more frequently if conditions indicate an earlier review is necessary. A discounted future cash flow analysis is primarily used to determine whether impairment exists. If the fair value of a reporting unit is less than the carrying amount, then the Company writes down goodwill to its estimated fair value.

Intangible assets subject to amortization include licensing agreements, customer relationships and acquired sales order backlog. 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, in the fourth quarter, or whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. The Company uses the market and income approach methods to determine whether impairment exists.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, trade receivables, other current assets, accounts payable and accrued expenses approximate fair value due to the short maturity of these instruments. The carrying amount of the Company’s debt approximates fair value as the debt bears interest at floating market rates.

Revenue Recognition

The Company recognizes revenue, net of sales taxes, from product sales or services provided when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.

The Company provides certain products under long-term, generally fixed-priced, contracts that may extend over multiple financial periods, where revenue and cost of sales are recognized in accordance with accounting rules relating to construction-type and production-type contracts. Amounts recognized in revenue are calculated using the percentage of cost completed, generally on a cumulative cost to estimated total cost basis. This method requires the Company to make estimates regarding the total costs of the project at completion, which impacts the amount of gross margin the Company recognizes in each reporting period. The Company routinely reviews its estimates relating to estimated total costs at completion and recognizes changes in those estimates as they are determined. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract. Anticipated losses on these contracts are recorded in full in the period in which they become evident. 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 and require less product customization are accounted for under the completed contract method. Revenue under the completed contract method is recognized upon shipment of the product.

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

1. SIGNIFICANT ACCOUNTING POLICIES—CONTINUED

 

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 require the installation and placing in service of the product after it is distributed to the end user. The costs of start-up and commissioning and the related revenue associated with the relevant percentage of completion of these projects are recognized in the period incurred.

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 cost 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 basis 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. 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.

The Company had unrecognized tax benefits of $1.0 million and $0.7 million at March 30, 2013 and June 30, 2012, respectively. During the nine months ended March 30, 2013, unrecognized tax benefits increased by $0.6 million relating to current and prior year tax positions and decreased by $0.3 million due to settlement with taxing authorities.

Earnings (Loss) Per Common Share

The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share include the dilutive effect of stock options and warrants granted using the treasury stock method. Warrants to

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

1. SIGNIFICANT ACCOUNTING POLICIES—CONTINUED

 

acquire 839,063 shares of common stock were omitted from the calculation of dilutive securities for the nine months ended March 30, 2013, because they were anti-dilutive. Options to acquire 43,200 shares of common stock and warrants to acquire 1,290,000 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.

The warrants entitle the holders to purchase 50% of the number of shares of common stock that may be obtained upon conversion of the Preferred Stock, or 1,321,250 shares. The warrants have a five-year term and became exercisable on March 4, 2010. The exercise price is equal to the closing bid price of the common stock on September 3, 2009, or $10.56, and is not subject to anti-dilution protection, except in the case of stock splits and dividends.

Use of Estimates

The preparation of financial statements in conformity with 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.

2. INVENTORIES

Principal components of inventories are as follows (in thousands):

 

     March 30,     June,  
     2013     2012  

Raw materials

   $ 4,278      $ 2,991   

Work in progress

     2,668        3,330   

Finished goods

     422        341   
  

 

 

   

 

 

 
     7,368        6,662   

Reserve for obsolete and slow-moving inventory

     (213     (184
  

 

 

   

 

 

 
   $ 7,155      $ 6,478   
  

 

 

   

 

 

 

3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

The components of uncompleted contracts are as follows (in thousands):

 

     March 30,     June 30,  
     2013     2012  

Costs incurred on uncompleted contracts and estimated earnings

   $ 69,058      $ 64,503   

Less billings to date

     (60,586     (61,665
  

 

 

   

 

 

 
   $ 8,472      $ 2,838   
  

 

 

   

 

 

 

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS—CONTINUED

 

The components of uncompleted contracts are reflected in the Consolidated Balance Sheets as follows (in thousands):

 

     March 30,     June 30,  
     2013     2012  

Costs and earnings in excess of billings on uncompleted contracts

   $ 17,902      $ 14,635   

Billings in excess of costs and earnings on uncompleted contracts

     (9,430     (11,797
  

 

 

   

 

 

 
   $ 8,472      $ 2,838   
  

 

 

   

 

 

 

4. 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

There were no changes in the carrying amount of goodwill for the nine months ended March 30, 2013.

Acquisition-Related Intangibles

Acquisition-related intangible assets are as follows (in thousands):

 

     Weighted
Average
Estimated
Useful Life
(Years)
   Gross Value
March 30, 2013
     Accumulated
Amortization
    Net Book
Value
March 30, 2013
     Gross Value
June 30, 2012
     Accumulated
Amortization
    Net Book
Value
June 30, 2012
 

Design guidelines

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

Customer relationships

   13      7,940         (3,265     4,675         7,940         (2,769     5,171   

Trade names

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

Licensing agreements

   5      2,199         (2,162     37         2,199         (1,833     366   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
      $ 21,808       $ (5,427   $ 16,381       $ 21,808       $ (4,602   $ 17,206   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense on finite-lived intangible assets was $0.3 million for each of the three months ended March 30, 2013 and March 31, 2012. Amortization expense on finite-lived intangible assets was $0.8 million for the nine months ended March 30, 2013 and March 31, 2012. Estimated aggregate finite-lived intangible asset amortization expense for the next five years is as follows (in thousands):

 

2013

   $ 558   

2014

     660   

2015

     510   

2016

     510   

2017

     506   

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

4. GOODWILL AND OTHER INTANGIBLE ASSETS—CONTINUED

 

CEFCO Licensing Agreement

In July 2010, the Company entered into the CEFCO Process Manufacturing License Agreement (the “License Agreement”) with CEFCO Global Clean Energy, LLC, a Texas limited liability company (“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 to complete additional testing of the CEFCO technology. The Company paid $1.1 million 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 30, 2013 and June 30, 2012, $3.5 million was included in Intangibles, net. 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.

5. ACCRUED PRODUCT WARRANTIES

Accrued product warranty activity is as follows (in thousands):

 

     Nine months ended  
     March 30,     March 31,  
     2013     2012  

Balance at beginning of period

   $ 2,615      $ 2,575   

Provision for warranty expenses

     1,666        1,300   

Warranty charges

     (1,466     (881
  

 

 

   

 

 

 

Balance at end of period

   $ 2,815      $ 2,994   
  

 

 

   

 

 

 

6. ACCRUED LIABILITIES AND OTHER

The components of accrued liabilities and other are as follows (in thousands):

 

     March 30,      June 30,  
     2013      2012  

Accrued start-up and commissioning expense

   $ 230       $ 363   

Accrued compensation

     2,168         2,562   

Accrued professional expenses

     1,705         1,871   

Deferred consideration related to

     

Burgess Manning GmbH acquisition

     56         1,375   

Other

     518         624   
  

 

 

    

 

 

 
   $ 4,677       $ 6,795   
  

 

 

    

 

 

 

In November 2011, the Company completed the acquisition of all of the outstanding shares of Burgess-Manning GmbH. Included in the purchase was deferred consideration of €1.1 million ($1.5 million). As of March 30, 2013, the Company paid all deferred consideration except €37,000 ($56,000).

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

 

7. DEBT

Outstanding long-term debt obligations are as follows (in thousands):

 

            March 30,      June 30,  
     Maturities      2013      2012  

Term loan B

     2022         5,129         —     
     

 

 

    

 

 

 

Total long-term debt

        5,129         —     

Less current maturites

        —           —     
     

 

 

    

 

 

 

Total long-term debt, net of current portion

      $ 5,129       $  —     
     

 

 

    

 

 

 

In September 2012, the Company entered into a new Credit Agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent and other financial institutions party thereto. The Credit Agreement provides for, among other things, revolving credit commitments of $30.0 million to be used for working capital and general corporate purposes, term loan commitments of $2.0 million to be used for the purchase of equipment for a new manufacturing facility in Denton, Texas (“Term Loan A”) and term loan commitments of $10.0 million to fund the construction of the new Denton facility (“Term Loan B”). All borrowings and other obligations of the Company are guaranteed by substantially all of its domestic subsidiaries and are secured by substantially all of the assets of the Company.

The revolving credit facility under the Credit Agreement will terminate on September 30, 2015, and all revolving credit loans mature on that date. Under the revolving credit facility, the Company has a maximum borrowing availability equal to the lesser of (a) $30.0 million or (b) the sum of 80% of eligible accounts receivable plus 50% of eligible inventory plus 100% of the cash amount held in a special collateral account less a foreign currency letter of credit reserve. At March 30, 2013, there were no outstanding borrowings and approximately $6.9 million of outstanding letters of credit under the Credit Agreement, leaving the Company with approximately $4.7 million of available capacity for additional borrowings and letters of credit under the Credit Agreement.

The term loan commitments expire 18 months after the date of the Credit Agreement. Beginning June 30, 2014, the Company is required to make quarterly principal payments on the term loans that were incurred during that 18-month period. Term Loan A matures in 2019 and Term Loan B matures in 2022. The Credit Agreement also requires the Company to maintain an interest rate protection agreement with respect to at least 50% of the aggregate outstanding principal amount of the term loans.

Interest on all loans must generally be paid quarterly. Interest rates on term loans use floating rates plus  1/2 of 1% up to 2%, plus a margin of between 0 to 75 basis points based upon the Company’s consolidated funded debt to consolidated EBITDA for the trailing four consecutive fiscal quarters.

At March 30, 2013, the Company was required to maintain a Consolidated Total Leverage Ratio (“CTL”) not to exceed 1.75 to 1.00 and a Debt Service Coverage Ratio (“DSC”) of not less than 1.50 to 1.00. The CTL ratio is calculated as the ratio of the Company’s aggregate total liabilities to the sum of the excess of the Company’s total assets over its total liabilities as each is determined on a consolidated basis in accordance with generally accepted accounting principles. The DSC ratio is calculated as the ratio of the Company’s consolidated EBITDA less certain restricted cash payments, capitalized expenditures and taxes to the Company’s consolidated fixed charges, which is 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 Credit Agreement also contains other covenants, including restrictions on additional debt, dividends, capital expenditures, acquisitions and dispositions. At March 30, 2013, the Company was in compliance with all of its debt covenants.

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

7. DEBT – CONTINUED

 

The Company’s U.K. subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of £6 million ($9.1 million) at March 30, 2013 and £6.0 million ($9.4 million) at June 30, 2012. This facility was secured by substantially all of the assets of the Company’s U.K. subsidiary and by a cash deposit of £4.2 million ($6.4 million) at March 30, 2013 and £4.1 million ($6.4 million) at June 30, 2012, which is recorded as restricted cash on the Consolidated Balance Sheets. At March 30, 2013, there was £4.8 million ($7.3 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. At June 30, 2012, there was £5.9 million ($9.3 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.

The Company’s German subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of €4.8 million ($6.2 million) at March 30, 2013 and €4.8 million ($6.0 million) at June 30, 2012. This facility is secured by substantially all of the assets of the Company’s German subsidiary and by a cash deposit of €0.8 million ($1.0 million) at March 30, 2013 and €1.1 million ($1.4 million) at June 30, 2012, which is recorded as restricted cash on the Consolidated Balance Sheets. At March 30, 2013, there was €2.1 million ($2.7 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. At June 30, 2012, there was €3.5 million ($4.4 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.

8. COMMITMENTS AND CONTINGENCIES

Litigation

In June 2010, the Company received notice from a customer claiming approximately $9.1 million 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 “Alco Claim”). 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 Alco Claim and has notified the Nitram insurance carrier and the selling stockholders of Nitram. 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 the Alco Claim as the Company has not received sufficient information to assess its validity. No amount has been accrued in the financial statements for the Alco Claim as of March 30, 2013 or June 30, 2012. At this time, the Company has not been notified that any lawsuit has been filed by the customer.

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 facility. 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. In October 2012, the Company sold the Vermont Street facility but retained the monitoring obligations and remediation costs, if any. The total costs accrued are $0.2 million at March 30, 2013 and June 30, 2012, and are related to the costs of monitoring and the preparation of environmental reports. The Company is seeking reimbursement for the full cost of the remediation and ongoing and future monitoring activities under the indemnification provisions of the purchase agreement with Nitram’s selling stockholders in the amount of $0.6 million. Funds were deposited into an escrow account that may be used to reimburse these costs.

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

8. COMMITMENTS AND CONTINGENCIES – CONTINUED

 

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 $10.9 million 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. 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 in October 2009, the Company had made claims relating to environmental matters and indemnification for breach of representations and warranties of the Nitram purchase agreement, totaling approximately $2.0 million against the escrow, and a total of $1.4 million was withheld from the release of the escrow amount, which represents the Company’s claims, less the one percent deductible, estimated at $0.6 million. 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 $9.5 million, related to the Alco Claim and the 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.

Other Matters

The Company has entered into certain non-cancelable agreements to construct manufacturing facilities in Denton, Texas and Zhenjiang, China. The estimated remaining cost to be incurred under such contracts is $8.2 million as of March 30, 2013.

During the nine months ended March 30, 2013, the Company entered into an agreement related to a customer warranty claim. The agreement provided for the payment of cash by the Company, replacement of product within an established time frame, as needed, and a discount on future purchase orders received from the customer. The discount on future purchase orders, if any, will be recognized in future periods.

9. 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.

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

9. STOCKHOLDER RIGHTS PLAN—CONTINUED

 

On April 1, 2013, the Board of Directors amended the rights plan. The amendment provides that the rights issued pursuant to the rights agreement will expire on June 29, 2013 unless exchanged or redeemed prior to that date.

10. 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 30, 2013 and March 31, 2012 (in thousands, except share amounts):

 

     Nine months ended  
     March 30,      March 31,  
     2013      2012  

Grant Type

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

Stock to directors

     36,000       $  291         36,000       $  765   

Restricted stock

     110,377         894         38,438         816   

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. The Company recognized $0.5 million and $3.1 million of stock-based compensation expense in the nine months ended March 30, 2013 and March 31, 2012, respectively.

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 $2.1 million during the nine months ended March 31, 2012, which was recorded consistent with employees’ compensation expense.

11. 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.

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 general and administrative costs. The Company does not allocate general and administrative expenses, assets, or expenditures

 

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Table of Contents

PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

11. SEGMENT INFORMATION—CONTINUED

 

for assets on a segment basis for internal management reporting, therefore, this information is not presented. Segment information and reconciliation to operating income (loss) for the three and nine months ended March 30, 2013 and March 31, 2012 are presented below (in thousands).

 

     Three months ended     Nine months ended  
     March 30,     March 31,     March 30,     March 31,  
     2013     2012     2013     2012  

Revenue:

        

Process Products

   $ 27,397      $ 32,367      $ 84,592      $ 89,267   

Environmental Systems

     7,573        3,131        14,807        13,040   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 34,970      $ 35,498      $ 99,399      $ 102,307   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

        

Process Products

   $ 3,593      $ 4,972      $ 13,679      $ 13,851   

Environmental Systems

     1,541        351        2,671        1,723   

Corporate and other unallocated expenses

     (4,112     (4,111     (14,008     (14,531
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,022      $ 1,212      $ 2,342      $ 1,043   
  

 

 

   

 

 

   

 

 

   

 

 

 

12. SUBSEQUENT EVENT

In April, 2013, the Company entered into an agreement to sell the existing manufacturing facility in Denton, Texas for $610,000. The transaction is expected to close in June 2013. The net proceeds of the sale will be used to repay a portion of the outstanding long-term debt. The Company will exit the facility upon completion of the new Denton facility.

 

 

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PMFG, Inc. and Subsidiaries

March 30, 2013

 

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 for the year ended June 30, 2012. These factors could cause our actual results for future periods to differ materially from those experienced in, or implied by, these forward-looking statements.

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 Systems (“SCR Systems”), and other complementary products including 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. Revenue generated from outside the United States was approximately 49% in the nine months ended March 30, 2013 compared to 47% in the nine months ended March 31, 2012. 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 be a significant percentage of our consolidated revenue in the future.

We believe 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 into nitrogen and water, reducing air pollution and helping our customers comply with environmental regulations.

 

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March 30, 2013

 

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 is expected to lead the global expansion of nuclear power generation growth. Re-commissioning of existing nuclear facilities in the United States and Europe also will contribute to product demand.

We believe 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

On April 1, 2013, the Board of Directors amended the Rights Agreement, dated as of August 15, 2008 (the “Rights Agreement”), by and between PMFG, Inc. and Computershare Shareowner Services, LLC, (formerly known as Mellon Investor Services LLC), as Rights Agent. The Amendment provides that the rights issued pursuant to the Rights Agreement will expire on June 29, 2013 unless exchanged or redeemed prior to that date.

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 June 30, 2012. Since the date of that report, there have been no material changes to our critical accounting policies.

 

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Results of Operations

The following summarizes our Consolidated Statements of Operations as a percentage of revenue:

 

     Three months ended     Nine months ended  
     March 30,     March 31,     March 30,     March 31,  
     2013     2012     2013     2012  

Net revenue

     100.0     100.0     100.0     100.0

Cost of goods sold

     69.3        71.4        66.1        69.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     30.7        28.6        33.9        30.6   

Operating expenses

     27.8        25.2        31.5        29.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2.9        3.4        2.4        1.0   

Other expense, net

     (0.5     (1.4     (0.7     (1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     2.4        2.0        1.7        (0.9

Income tax benefit (expense)

     (0.4     0.9        (0.4     0.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     2.0     2.9     1.3     (0.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to noncontrolling interest

     0.4        —          0.6        (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to PMFG, Inc.

     1.6     2.9     0.7     (0.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

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, professional services and other administrative fees.

Quarter Ended March 30, 2013 Compared to Quarter Ended March 31, 2012

Results of Operations – Consolidated

Revenue. We classify revenue as domestic or international based upon the origination of the order. Revenue generated by orders originating from within the United States is classified as domestic revenue, 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. International revenue was approximately 40% and 50% of consolidated revenue in the quarters ended March 30, 2013 and March 31, 2012, respectively.

 

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March 30, 2013

 

The following summarizes consolidated revenue (in thousands):

 

     Three months ended  
     March 30,
2013
     % of Total
Revenue
    March 31,
2012
     % of Total
Revenue
 

Domestic

   $ 20,849         59.6   $ 17,592         49.6

International

     14,121         40.4     17,906         50.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 34,970         100.0   $ 35,498         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue decreased $0.5 million, or 1.5%, to $35.0 million in the third quarter of fiscal 2013 compared to the same period in fiscal 2012. Reduced revenue in our Process Products segment was partially offset by growth in the Environmental Systems segment resulting in consolidated revenue remaining relatively flat for the quarter.

Gross Profit. Our gross profit during any particular period may be impacted by several factors, primarily revenue volume, shifts in our product mix, material cost changes, warranty, start-up and commissioning 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 (in thousands):

 

     Three months ended  
     March 30,
2013
     % of Total
Revenue
    March 31,
2012
     % of Total
Revenue
 

Revenue

   $ 34,970         100.0   $ 35,498         100.0

Cost of goods sold

     24,223         69.3     25,352         71.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 10,747         30.7   $ 10,146         28.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit in the third quarter of fiscal 2013 increased $0.6 million compared to the same period in fiscal 2012. The increase in gross profit, as a percentage of revenue, during the third quarter of fiscal 2013 compared to the same period last year was due to a change in product mix and a one-time acceleration of an anticipated loss on a specific project in the comparable quarter in the prior year. During the third quarter of fiscal 2013 we amended our policy applicable to U.S.-based employees related to the accumulation of paid time off. The impact of the change was a one-time benefit to costs of goods sold of $0.2 million. The improvement in gross margin as a percentage of revenue was dampened by the provision for estimated warranty costs, which increased $0.4 million over the prior year.

Operating Expenses. The following summarizes operating expenses (in thousands):

 

     Three months ended  
     March 30,
2013
     % of Total
Revenue
    March 31,
2012
     % of Total
Revenue
 

Sales and marketing

   $ 3,278         9.4   $ 2,481         7.0

Engineering and project management

     2,335         6.7     2,342         6.6

General and administrative

     4,112         11.8     4,111         11.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 9,725         27.9   $ 8,934         25.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating expenses increased $0.8 million, or 8.9%, for the third quarter of fiscal 2013 compared to the same period in fiscal 2012. As a percentage of revenue, these expenses increased to 27.9% during the third quarter of fiscal 2013, from 25.2% during the same period last year. The increase in operating expense was partially offset by a one-time benefit of $0.3 million related to the policy change note above.

Our sales and marketing expenses increased $0.8 million in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012, primarily due to higher commissions’ expense and increased costs associated with additional sales resources located in China. Our engineering and project management and our general and administrative expenses essentially stayed constant in the third quarter of fiscal 2013 compared to the same period in fiscal 2012.

 

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Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

 

Other Income and Expense. The following summarizes other income and expense (in thousands):

 

     Three months ended  
     March 30,
2013
    March 31,
2012
 

Interest income

   $ 12      $ 6   

Interest expense

     (148     (142

Loss on extinguishment of debt

     —          (347

Foreign exchange gain (loss)

     (32     16   

Other income (expense), net

     (1     (17
  

 

 

   

 

 

 

Total other income (expense)

   $ (169   $ (484
  

 

 

   

 

 

 

For the third quarter of fiscal 2013, total other income and expense was a net expense of $0.2 million compared to $0.5 million in the third quarter of fiscal 2012. In the third quarter of fiscal 2012, we recorded a loss on the extinguishment of debt associated with paying off our outstanding term loan. There was no similar activity in the third quarter of fiscal 2013.

Income Taxes. Our effective income tax rates were 18.3% and (39.1%) for the quarters ended March 30, 2013 and March 31, 2012, respectively. For the third quarter of fiscal 2013, the effective tax rate was impacted by increased profits of our foreign subsidiaries that have a lower relative effective tax rate. For the third quarter of fiscal 2012, the effective tax rate was impacted by permanent differences for research and development credits that were enacted into United States law during the quarter.

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, 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. Process Products represented 78% and 91% of our revenue in the quarters ended March 30, 2013 and March 31, 2012, respectively.

The following summarizes Process Products revenue and operating income (in thousands):

 

     Three months ended  
     March 30,     March 31,  
     2013     2012  

Revenue

   $ 27,397      $ 32,367   

Operating income

     3,593        4,972   

Operating income as % of revenue

     13.1     15.4

Process Products revenue decreased $5.0 million, or 15.4%, to $27.4 million in the third quarter of fiscal 2013, compared to the third quarter of fiscal 2012. The decrease in the current quarter resulted from lower demand in the United States in early fiscal 2013 for separation and filtration equipment partially offset by increased demand in Asia. Revenue was further impacted by customer-driven delays on certain projects in backlog.

 

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March 30, 2013

 

Process Products operating income for the third quarter of fiscal 2013 decreased $1.4 million, or 27.7%, compared to the third quarter of fiscal 2012. The decrease in operating income in the third quarter of fiscal 2013 was primarily a result of decreased revenue and higher warranty expense in the current period. As a percentage of revenue, operating income decreased to 13.1% from 15.4% for the quarters ended March 30, 2013 and March 31, 2012, respectively.

Environmental Systems

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. Environmental Systems represented 22% and 9% of our revenue in the quarters ended March 30, 2013 and March 31, 2012, respectively.

The following summarizes Environmental Systems revenue and operating income (in thousands):

 

     Three months ended  
     March 30,     March 31,  
     2013     2012  

Revenue

   $  7,573      $  3,131   

Operating income

     1,541        351   

Operating income as % of revenue

     20.3     11.2

Environmental Systems revenue increased $4.4 million, or 141.9%, to $7.6 million in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012. The higher revenue resulted from SCR System orders booked in early fiscal 2013 that have accelerated delivery time tables.

Environmental Systems operating income for the third quarter of fiscal 2013 increased $1.2 million compared to the third quarter of fiscal 2012. As a percentage of revenue, operating income increased to 20.3% in the third quarter of fiscal 2013 compared to 11.2%, in the third quarter of fiscal 2012. The increase in operating income as a percentage of revenue is primarily attributable to lower relative selling and engineering expenses at higher levels of revenue.

 

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March 30, 2013

 

Nine Months Ended March 30, 2013 Compared to Nine Months Ended March 31, 2012

Results of Operations – Consolidated

Revenue. The following table summarizes consolidated revenue (in thousands):

 

     Nine months ended  
     March 30,
2013
     % of Total
Revenue
    March 31,
2012
     % of Total
Revenue
 

Domestic

   $ 50,993         51.3   $ 54,631         53.4

International

     48,406         48.7     47,676         46.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 99,399         100.0   $ 102,307         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

For the nine months ended March 30, 2013, total revenue decreased $2.9 million, or 2.8%, compared to the nine months ended March 31, 2012. Domestic revenue decreased $3.6 million, or 6.7%, in the nine months ended March 30, 2013 when compared to the same period last year. Growth in the Asia-Pacific region fueled by China’s investment in natural gas infrastructure and the overlap impact of the acquisition of Burgess-Manning GmbH in the second quarter of fiscal 2012 were offset by decreased domestic revenue in our Process Products segment.

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

 

     Nine months ended  
     March 30,
2013
     % of Total
Revenue
    March 31,
2012
     % of Total
Revenue
 

Revenue

   $ 99,399         100.0   $ 102,307         100.0

Cost of goods sold

     65,731         66.1     70,977         69.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 33,668         33.9   $ 31,330         30.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit increased $2.3 million in the nine months ended March 30, 2013, or 7.5%, compared to the nine months ended March 31, 2012. Gross profit, as a percentage of revenue, increased to 33.9% for the nine months ended March 30, 2013 compared to 30.6% for the nine months ended March 31, 2012. The increase in gross profit as a percentage of revenue during the nine months ended March 30, 2013 compared to the nine months ended March 31, 2012 related to changes in product and geographical mix, as well as improved manufacturing efficiencies. Gross profit percentage in the nine months ended March 31, 2012 was further dampened by cost overruns on certain projects which were not present in the current period.

Operating Expenses. The following table summarizes operating expenses (in thousands):

 

     Nine months ended  
     March 30,
2013
     % of Total
Revenue
    March 31,
2012
     % of Total
Revenue
 

Sales and marketing

   $ 10,282         10.3   $ 8,958         8.8

Engineering and project management

     7,036         7.1     6,798         6.6

General and administrative

     14,008         14.1     14,531         14.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 31,326         31.5   $ 30,287         29.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating expenses increased by $1.0 million in the nine months ended March 30, 2013 compared to the nine months ended March 31, 2012. As a percentage of revenue, operating expenses increased to 31.5% for the nine months ended March 30, 2013, from 29.6% in the same period in fiscal 2012.

Our sales and marketing expenses increased $1.3 million in the nine months ended March 30, 2013 compared to the same period last year, primarily due to higher commissions paid to independent sales representatives and the overlap of incremental sales resources added in Asia during fiscal 2012. Our engineering and project management expense increased $0.2 million in the nine months ended March 30, 2013 compared to the

 

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March 30, 2013

 

same period last year due largely to the addition of international engineering and project management resources. Our general and administrative expenses decreased $0.5 million in the nine months ended March 30, 2013 compared to the same period last year. The decrease in general and administrative expense during the current nine month period was primarily due to the expense of $2.1 million for accelerated vesting of restricted stock in the same period last year that was not replicated in the current nine month period in fiscal 2013, partially offset by increased costs of maintaining foreign offices, and a write off of a customer receivable that was identified as uncollectible in the first quarter of fiscal 2013.

Other Income and Expense. The following table summarizes other income and expenses (in thousands):

 

     Nine months ended  
     March 30,
2013
    March 31,
2012
 

Interest income

   $ 29      $ 22   

Interest expense

     (463     (1,012

Loss on extinguishment of debt

     (291     (347

Foreign exchange gain (loss)

     3        (652

Other income (expense), net

     33        7   
  

 

 

   

 

 

 

Total other income (expense)

   $ (689   $ (1,982
  

 

 

   

 

 

 

For the nine months ended March 30, 2013, other expense decreased by $1.3 million. Interest expense during the nine months ended March 30, 2013 decreased by $0.5 million compared to the same period last year on lower average debt balances outstanding. In the nine months ended March 30, 2013 we recorded a gain on foreign currency translation of $3,000 compared to a loss of $0.7 million for the nine months ended March 31, 2012, which was, primarily the result of changes in the exchange rates of the Canadian dollar and the euro relative to the U.S. dollar.

Income Taxes. Our effective income tax rates were 22.2% and 87.8% for the nine months ended March 30, 2013 and March 31, 2012, respectively. For the nine months ended March 30, 2013 the effective tax rate was impacted by increased profits of our foreign subsidiaries which have a lower relative effective tax rate. For the nine months ended March 31, 2012, the effective tax rate varied from statutory rates because of deductions for our research and development expenditures.

Net Earnings (loss). Our net earnings increased by $1.4 million from a net loss of ($0.1) million in the nine months ended March 31, 2012, to net earnings of $1.3 million in the nine months ended March 30, 2013.

Basic and diluted earnings (loss) per share attributable to our common stockholders increased to earnings of $0.03 per share for the nine months ended March 30, 2013, from $0.00 per share for the nine months ended March 31, 2012.

Results of Operations – Segments

Process Products

Our Process Products segment represented 85% and 87% of our revenue for the nine months ended March 30, 2013 and March 31, 2012, respectively.

 

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The following table summarizes Process Products revenue and operating income (in thousands):

 

     Nine months ended  
     March 30,     March 31,  
     2013     2012  

Revenue

   $  84,592      $  89,267   

Operating income

     13,679        13,851   

Operating income as % of revenue

     16.2     15.5

Process Products revenue decreased by $4.7 million or 5.2%, in the nine months ended March 30, 2013 when compared to the nine months ended March 31, 2012. The acquisition of Burgess Manning GmbH in the second quarter of fiscal 2012 contributed approximately $1.2 million more revenue in the nine months ended March 30, 2013 compared to the comparable nine months ended March 31, 2012 because of the additional three months of contribution. The decrease in the current quarter resulted from lower demand in the United States in early fiscal 2013 for separation and filtration equipment partially offset by increased demand in Asia. Revenue was further impacted by customer-driven delays on certain projects in backlog.

Process Products operating income in the nine months ended March 30, 2013 decreased by $0.2 million compared to the nine months ended March 31, 2012. As a percentage of Process Products revenue, operating income was 16.2% in the nine months ended March 30, 2013 compared to 15.5% in the same period last year.

Environmental Systems

Our Environmental Systems segment represented 15% and 13% of our revenue for the nine months ended March 30, 2013 and March 31, 2012, respectively.

The following table summarizes Environmental Systems revenue and operating income (in thousands):

 

     Nine months ended  
     March 30,     March 31,  
     2013     2012  

Revenue

   $  14,807      $  13,040   

Operating income

     2,671        1,723   

Operating income as % of revenue

     18.0     13.2

Revenue from Environmental Systems increased $1.8 million, or 13.6% in the nine months ended March 30, 2013, when compared to the nine months ended March 31, 2012.

Environmental Systems operating income in the nine months ended March 30, 2013 was $2.7 million, an increase of 55.0% compared to the nine months ended, March 31, 2012. As a percentage of revenue, operating income increased to 18.0% during the nine months ended March 30, 2013 from 13.2% for the same period last year primarily as a result of lower selling and engineering costs relative to revenue.

General and Administrative Expenses

General and administrative expenses include those related to the corporate office, as well as general and administrative costs of international locations. General and administrative expenses decreased $0.5 million or 3.6% in the nine months ended March 30, 2013 compared to the nine months ended March 31, 2012. The decrease was primarily due to lower stock-based compensation expense partially offset by increased costs of maintaining foreign offices and higher bad debt expense in the current year.

 

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Contingencies

From time to time we are involved in various litigation matters arising in the ordinary course of our business. We do not believe the disposition of any current matter will have a material adverse effect on our consolidated financial position or results of operations. See Note 8 in the Notes to 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 30, 2013 and March 31, 2012 (in millions):

 

     Nine Months Ended  
     March 30,
2013
    March 31,
2012
 

Backlog at beginning of period

   $ 99.9      $ 89.0   

Net bookings

     87.2        114.2   

Acquired backlog

     —          5.0   

Removed from backlog

     (12.5     —     

Revenue recognized

     (99.4     (102.3
  

 

 

   

 

 

 

Backlog at end of period

   $ 75.2      $ 105.9   
  

 

 

   

 

 

 

Backlog includes contractual purchase orders for products that are deliverable in future periods less revenue recognized on such orders to date. At March 30, 2013, approximately 85% of our backlog related to Process Products sales orders with the balance pertaining to Environmental Systems sales orders. Orders in backlog are subject to change, delays or cancellation by our customers.

In the third quarter of fiscal 2013, we removed $12.5 million from backlog relating to a customer purchase order received in fiscal 2012. The customer notified us in May 2013 that the purchase order will be cancelled. In the fourth quarter of fiscal 2012, we removed a customer purchase order in the amount of $11.4 million from our backlog. Cancelation of the purchase orders will result in cancellation penalties. The removal of two orders from backlog and lower net bookings resulted in a decrease of backlog of $30.7 million to $75.2 million at March 30, 2013, compared to $105.9 million at March 31, 2012.

Financial Position

Assets. Total assets increased by $4.3 million, or 2.3%, from $183.3 million at June 30, 2012, to $187.6 million at March 30, 2013. On March 30, 2013, we held cash, including restricted cash, and cash equivalents of $64.9 million, had working capital of $77.5 million and a current liquidity ratio of 2.9-to-1.0. This compares with cash, including restricted cash, and cash equivalents of $60.2 million, working capital of $77.3 million, and a current liquidity ratio of 2.7-to-1.0 at June 30, 2012.

Liabilities and Equity. Total liabilities increased by $0.7 million, or 1.3%, from $52.4 million at June 30, 2012 to $53.1 million at March 30, 2013. The increase in our total liabilities is attributed to an increase in long-term debt associated with the construction of a manufacturing facility in Denton, Texas, offset in part by a decrease in billings in excess of costs and earnings on uncompleted contracts.

 

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March 30, 2013

 

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 invoice 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 30, 2013, the balance of these working capital accounts was $11.0 million compared to $16.7 million at June 30, 2012, reflecting a decrease of our investment in these working capital items of $5.7 million.

Many of our customers require bank letters of credit or other forms of financial guarantees to secure progress payments and performance. Such letters of credit and guarantees are issued under various bank and financial institution arrangements (see Note 7 of Item 1 in the Notes to the Consolidated Financial Statements). As of March 30, 2013 and June 30, 2012, we had outstanding letters of credit and bank guarantees of $20.6 million and $22.1 million, respectively.

Our cash and cash equivalents were $64.9 million as of March 30, 2013, compared to $60.2 million at June 30, 2012, of which $8.2 million and $7.9 million were restricted as collateral for stand-by letters of credit and bank guarantees at March 30, 2013, and June 30, 2012, respectively. During the nine months ended March 30, 2013, cash provided by operating activities was $9.8 million compared to cash provided by operating activities of $9.5 million for the nine months ended March 31, 2012.

Cash used in investing activities was $11.6 million for the nine months ended March 30, 2013, compared to cash used in investing activities of $7.4 million for the nine months ended March 31, 2012. Cash used in investing activities during the nine months ended March 30, 2013, primarily related to construction costs incurred to date on our new manufacturing facilities in Denton, Texas and Zhenjiang, China, and payment of deferred consideration for the acquisition of Burgess Manning GmbH. Cash used in investing activities during the nine months ended March 31, 2012 primarily related to the acquisition of Burgess Manning GmbH and purchases of property and equipment.

Cash provided by financing activities during the nine months ended March 30, 2013, was $6.2 million compared to cash provided by financing activities of $31.8 million during the nine months ended March 31, 2012. The cash provided by financing activities for the nine months ended March 30, 2013, primarily consisted of proceeds from long-term debt as we drew on our construction term loan and the equity contribution from a non-controlling interest in our China subsidiary, offset by payment of debt issuance costs for our new credit facility. 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.

As a result of the events described above, our cash and cash equivalents during the nine months ended March 30, 2013, increased by $4.4 million compared to an increase of $33.2 million during the nine months ended March 31, 2012.

We are constructing new manufacturing facilities in both the United States and China. These facilities are intended to support anticipated future growth in product demand both domestically and internationally. We believe the China manufacturing facility will be primarily focused on projects within China. We intend to fund the construction of the facilities and acquisition of related equipment using both cash on hand and additional debt.

We believe we maintain adequate liquidity and the capacity to enter into letters of credit and guarantees to support existing operations and planned growth over the next 12 months.

 

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March 30, 2013

 

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 on Form 10-K for the year ended June 30, 2012.

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.

During the nine months ended March 30, 2013, 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. See Note 8 of Item 1 in the Notes to the Consolidated Financial Statements.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Item 1A of Part I of our Annual Report on 10-K for the year ended June 30, 2012.

 

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March 30, 2013

 

Item 6. Exhibits

The following exhibits are filed as part of this report.

 

Exhibit
No.

  

Exhibit Description

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 Certifications of Chief Executive Officer and Chief Financial Officer.
101.INS    XBRL Report Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Calculation Linkbase Document
101.LAB    XBRL Taxonomy Label Linkbase Document
101.PRE    XBRL Taxonomy Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

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March 30, 2013

 

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, 2013    /s/Peter J. Burlage
  

 

   Peter J. Burlage
   President and Chief Executive Officer
   (Principal Executive Officer)
Date: May 9, 2013    /s/Ronald L McCrummen
  

 

  

Ronald L. McCrummen

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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