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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 29, 2014
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 þ 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 þ 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 | þ | |||
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 þ
The number of shares of the registrant’s common stock outstanding on May 1, 2014, was 21,094,530.
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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 identify and execute on growth and market opportunities, including through acquisitions and strategic partnerships; |
• | 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 29, 2013 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.
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PMFG, Inc. and Subsidiaries
(In thousands, except share and per share amounts)
March 29, 2014 | June 29, 2013 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 42,573 | $ | 53,020 | ||||
Restricted cash | 4,919 | 5,029 | ||||||
Accounts receivable - trade, net of allowance for doubtful accounts of $310 at March 29, 2014 and $300 at June 29, 2013 | 29,473 | 22,509 | ||||||
Inventories, net | 10,994 | 6,488 | ||||||
Costs and earnings in excess of billings on uncompleted contracts | 19,119 | 16,544 | ||||||
Income taxes receivable | 1,450 | 1,152 | ||||||
Deferred income taxes | 304 | 304 | ||||||
Other current assets | 4,949 | 3,427 | ||||||
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Total current assets | 113,781 | 108,473 | ||||||
Property, plant and equipment, net | 31,348 | 24,031 | ||||||
Intangible assets, net | 18,444 | 16,180 | ||||||
Goodwill | 35,919 | 30,429 | ||||||
Other assets | 838 | 998 | ||||||
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Total assets | $ | 200,330 | $ | 180,111 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 21,736 | $ | 14,899 | ||||
Current maturities of long-term debt | 2,210 | — | ||||||
Billings in excess of costs and earnings on uncompleted contracts | 12,019 | 6,277 | ||||||
Commissions payable | 1,575 | 1,763 | ||||||
Income taxes payable | 1,089 | 339 | ||||||
Accrued product warranties | 2,462 | 2,241 | ||||||
Customer deposits | 2,946 | 2,566 | ||||||
Accrued liabilities and other | 7,957 | 5,386 | ||||||
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Total current liabilities | 51,994 | 33,471 | ||||||
Long-term debt | 15,160 | 8,719 | ||||||
Deferred income taxes | 4,136 | 4,135 | ||||||
Other long-term liabilities | 1,835 | 1,900 | ||||||
Commitments and contingencies | ||||||||
Preferred stock – authorized, 5,000,000 shares of $0.01 par value; no shares outstanding at March 29, 2014 or June 29, 2013 | — | — | ||||||
Stockholders’ equity: | ||||||||
Common stock – authorized, 50,000,000 shares of $0.01 par value; issued and outstanding, 21,094,530 and 20,966,426 shares at March 29, 2014 and June 29, 2013, respectively | 211 | 210 | ||||||
Additional paid-in capital | 97,388 | 96,634 | ||||||
Accumulated other comprehensive loss | (761 | ) | (2,004 | ) | ||||
Retained earnings | 24,738 | 33,114 | ||||||
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Total PMFG, Inc. stockholders’ equity | 121,576 | 127,954 | ||||||
Noncontrolling interest | 5,629 | 3,932 | ||||||
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Total equity | 127,205 | 131,886 | ||||||
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Total liabilities and equity | $ | 200,330 | $ | 180,111 | ||||
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See accompanying notes to consolidated financial statements.
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PMFG, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Three months ended | Nine months ended | |||||||||||||||
March 29, | March 30, | March 29, | March 30, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenue | $ | 32,273 | $ | 34,970 | $ | 90,958 | $ | 99,399 | ||||||||
Cost of goods sold | 24,231 | 24,223 | 65,080 | 65,731 | ||||||||||||
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Gross profit | 8,042 | 10,747 | 25,878 | 33,668 | ||||||||||||
Operating expenses: | ||||||||||||||||
Sales and marketing | 3,489 | 3,278 | 10,127 | 10,282 | ||||||||||||
Engineering and project management | 2,726 | 2,335 | 7,624 | 7,036 | ||||||||||||
General and administrative | 5,444 | 4,112 | 14,979 | 14,008 | ||||||||||||
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11,659 | 9,725 | 32,730 | 31,326 | |||||||||||||
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Operating income (loss) | (3,617 | ) | 1,022 | (6,852 | ) | 2,342 | ||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 31 | 12 | 63 | 29 | ||||||||||||
Interest expense | (436 | ) | (148 | ) | (1,142 | ) | (463 | ) | ||||||||
Loss on extinguishment of debt | — | — | — | (291 | ) | |||||||||||
Foreign exchange gain (loss) | (194 | ) | (32 | ) | (666 | ) | 3 | |||||||||
Other income (loss) | 13 | (1 | ) | 84 | 33 | |||||||||||
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(586 | ) | (169 | ) | (1,661 | ) | (689 | ) | |||||||||
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Income (loss) before income taxes | (4,203 | ) | 853 | (8,513 | ) | 1,653 | ||||||||||
Income tax expense (benefit) | 439 | (156 | ) | 254 | (367 | ) | ||||||||||
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Net income (loss) | $ | (3,764 | ) | $ | 697 | $ | (8,259 | ) | $ | 1,286 | ||||||
Net income attributable to noncontrolling interest | 17 | 152 | 117 | 584 | ||||||||||||
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Net income (loss) attributable to PMFG, Inc. | $ | (3,781 | ) | $ | 545 | $ | (8,376 | ) | $ | 702 | ||||||
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Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 21,097 | 20,920 | 21,092 | 20,919 | ||||||||||||
Diluted | 21,097 | 20,936 | 21,092 | 20,935 | ||||||||||||
Basic income (loss) per common share | $ | (0.18 | ) | $ | 0.03 | $ | (0.40 | ) | $ | 0.03 | ||||||
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Diluted income (loss) per common share | $ | (0.18 | ) | $ | 0.03 | $ | (0.40 | ) | $ | 0.03 | ||||||
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See accompanying notes to consolidated financial statements.
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PMFG, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Three months ended | Nine months ended | |||||||||||||||
March 29, | March 30, | March 29, | March 30, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Net income (loss) | $ | (3,764 | ) | $ | 697 | $ | (8,259 | ) | $ | 1,286 | ||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustment | (99 | ) | (749 | ) | 1,216 | (97 | ) | |||||||||
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Other comprehensive income (loss) | (99 | ) | (749 | ) | 1,216 | (97 | ) | |||||||||
Comprehensive income (loss) | (3,863 | ) | (52 | ) | (7,043 | ) | 1,189 | |||||||||
Net income attributable to noncontrolling interest | 17 | 152 | 117 | 584 | ||||||||||||
Other comprehensive loss: | ||||||||||||||||
Foreign currency translation adjustment | (67 | ) | (2 | ) | (27 | ) | — | |||||||||
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Comprehensive income (loss) attributable to noncontrolling interest | (50 | ) | 150 | 90 | 584 | |||||||||||
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Comprehensive income (loss) attributable to PMFG, Inc. | $ | (3,813 | ) | $ | (202 | ) | $ | (7,133 | ) | $ | 605 | |||||
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See accompanying notes to consolidated financial statements
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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 29, 2013 | 20,966 | $ | 210 | $ | 96,634 | $ | 33,114 | $ | (2,004 | ) | $ | 127,954 | $ | 3,932 | $ | 131,886 | ||||||||||||||||
Net loss | — | — | — | (8,376 | ) | — | (8,376 | ) | 117 | (8,259 | ) | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 1,243 | 1,243 | (27 | ) | 1,216 | |||||||||||||||||||||||
Stock grants, net of forfeitures | 128 | 1 | 754 | — | — | 755 | — | 755 | ||||||||||||||||||||||||
Equity contribution from noncontrolling interest in subsidiary | — | — | — | — | — | — | 1,607 | 1,607 | ||||||||||||||||||||||||
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Balance at March 29, 2014 | 21,094 | $ | 211 | $ | 97,388 | $ | 24,738 | $ | (761 | ) | $ | 121,576 | $ | 5,629 | $ | 127,205 | ||||||||||||||||
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See accompanying notes to consolidated financial statements
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Consolidated Statements of Cash Flows
(In thousands)
Nine months ended | ||||||||
March 29, | March 30, | |||||||
2014 | 2013 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (8,259 | ) | $ | 1,286 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of business acquisition: | ||||||||
Depreciation and amortization | 1,851 | 1,926 | ||||||
Amortization of deferred finance charges | 184 | 132 | ||||||
Stock-based compensation | 755 | 460 | ||||||
Bad debt expense | 64 | 1,008 | ||||||
Inventory valuation reserve | (65 | ) | 19 | |||||
Provision for warranty expense | 726 | 1,666 | ||||||
Loss on extinguishment of debt | — | 291 | ||||||
Gain on disposal of property | (325 | ) | (74 | ) | ||||
Foreign currency exchange gain (loss) | 666 | (3 | ) | |||||
Change in fair value of interest rate swap | 99 | — | ||||||
Changes in operating assets and liabilities, net of business acquisition: | ||||||||
Accounts receivable | (5,024 | ) | 9,894 | |||||
Inventories | (4,353 | ) | (693 | ) | ||||
Costs and earnings in excess of billings on uncompleted contracts | (2,193 | ) | (3,243 | ) | ||||
Other current assets | (1,617 | ) | (44 | ) | ||||
Accounts payable | 6,438 | 459 | ||||||
Billings in excess of costs and earnings on uncompleted contracts | 4,958 | (2,330 | ) | |||||
Commissions payable | (188 | ) | 341 | |||||
Income taxes | 452 | 1,775 | ||||||
Product warranties | (705 | ) | (1,466 | ) | ||||
Accrued liabilities and other | 1,012 | (1,644 | ) | |||||
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Net cash provided by (used in) operating activities: | (5,524 | ) | 9,760 | |||||
Cash flows from investing activities: | ||||||||
Increase in restricted cash | (6 | ) | (422 | ) | ||||
Purchases of property and equipment | (9,172 | ) | (9,912 | ) | ||||
Net proceeds from sale of property | 521 | 135 | ||||||
Business acquisition, net of cash received | (8,891 | ) | (1,363 | ) | ||||
Payments of deferred consideration | (37 | ) | — | |||||
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Net cash used in investing activities | (17,585 | ) | (11,562 | ) | ||||
Cash flows from financing activities: | ||||||||
Payment of long-term debt | (533 | ) | — | |||||
Payment of debt issuance costs | — | (963 | ) | |||||
Proceeds from short-term debt | 1,634 | — | ||||||
Proceeds from long-term debt | 9,311 | 5,129 | ||||||
Equity contribution from noncontrolling interest | 1,607 | 2,000 | ||||||
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Net cash provided by financing activities | 12,019 | 6,166 |
Consolidated Statements of Cash Flows continued on next page
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PMFG, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Continued
(In thousands)
Nine months ended | ||||||||
March 29, | March 30, | |||||||
2014 | 2013 | |||||||
(unaudited) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | 643 | 85 | ||||||
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Net (decrease) increase in cash and cash equivalents | (10,447 | ) | 4,449 | |||||
Cash and cash equivalents at beginning of period | 53,020 | 52,286 | ||||||
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Cash and cash equivalents at end of period | $ | 42,573 | $ | 56,735 | ||||
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Supplemental information on cash flow: | ||||||||
Income tax refunds received | $ | 399 | $ | 2,475 | ||||
Interest paid | $ | 908 | $ | 442 |
See accompanying notes to consolidated financial statements
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
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 29, 2014 and for the three and nine months ended March 29, 2014 and March 30, 2013 are unaudited and, in the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations of the Company for the interim periods have been included and are of a normal recurring nature. 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 29, 2013.
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 2014” and “fiscal 2013” refer to fiscal years ended June 28, 2014 and June 29, 2013, respectively. The third quarters of fiscal 2014 and fiscal 2013 ended on March 29, 2014 and March 30, 2013, 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 of Peerless Propulsys. 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
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash balances, including restricted cash, held within and outside the United States are as follows (in thousands):
March 29, 2014 | ||||
Domestic | $ | 23,090 | ||
International | 24,402 | |||
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$ | 47,492 | |||
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The Company maintains cash balances in bank accounts that normally exceed Federal Deposit Insurance Corporation insured limits. As of March 29, 2014, cash held in banks in the United States exceeded federally insured limits by $21.2 million. The Company has not experienced any losses related to this cash concentration.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Company had restricted cash balances of $4.9 million and $5.0 million as of March 29, 2014 and June 29, 2013, respectively. Foreign restricted cash balances were $4.9 million and $4.7 million as of March 29, 2014 and June 29, 2013, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the ordinary 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.
The Company records an allowance for doubtful accounts based on a specific identification, taking into consideration 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 29, | March 30, | |||||||
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Balance at beginning of period | $ | 300 | $ | 650 | ||||
Bad debt expense | 64 | 1,008 | ||||||
Acquired - CCA | 26 | — | ||||||
Accounts written off | (80 | ) | (1,358 | ) | ||||
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Balance at end of period | $ | 310 | $ | 300 | ||||
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Inventories
The Company values its inventories using the lower of weighted average cost or market. The Company regularly reviews the value of inventories on hand, using specific aging categories, and records a provision for obsolete and slow-moving inventory based on historical 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 |
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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.
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 (i.e., cumulative cost incurred to date in comparison to the estimated total cost at completion). 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. Changes in estimated total costs are reflected in the computation of percentage-of-completion when such changes are identified and can be reasonably estimated. Change orders affecting the contract amount are considered only after receipt of a legally binding agreement. Incremental costs related to change orders are included in the estimate of total costs upon the earlier of receipt of the change order or the Company’s committed purchase obligation. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Many of our customer contracts define events of default related to product performance and/or timing of delivery, as well as remedies for such events of default. Anticipated events of default and estimated remedies, such as those provided under liquidated damages clauses, are accounted for as reductions in revenue in the period in which the potential default is first identified and the damages can be reasonably estimated. Historically, the impact of liquidated damages has not been material to the Company’s consolidated financial position, results of operations, or cash flows. Anticipated losses on percentage-of-completion 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.
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 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 concurrent supplier warranties in place. Warranty costs are included in “cost of goods sold” in the Consolidated Statements of Operations.
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.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
For the nine months ended March 29, 2014, income tax expense was 3.0% of the loss before income taxes. The rate varies from the statutory rate because of the blend of taxable income in some state and foreign taxing jurisdictions and permanent differences and taxable losses in the United States for which no tax benefit has been recognized. At March 29, 2014, the Company had $5.1 million of operating loss carry forwards primarily in the United States available for carryover to future periods, subject to certain limitations and expiring beginning in fiscal 2032. A valuation allowance of $1.3 million has been established to reduce the computed benefits to the estimated future realization of the tax related benefit.
Earnings (Loss) Per Common Share
The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable to PMFG, Inc. stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share include the dilutive effect of stock options, restricted stock units and warrants granted using the treasury stock method. For the three and nine months ended March 29, 2014, 72,339 restricted stock units with performance and service based restrictions were omitted from the calculation of dilutive securities because they were anti-dilutive. Options to acquire 37,200 shares of common stock were omitted from the calculation of dilutive securities for the three and nine months ended March 29, 2014 because they were anti-dilutive. Warrants to acquire 839,063 shares of common stock were omitted from the calculation of dilutive securities for the three and nine months ended March 29, 2014 and the three and nine months ended March 30, 2013 because they were anti-dilutive. The warrants entitle the holders to purchase common stock for $10.56 per share, through a cashless exercise. The warrants expire on September 4, 2014.
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.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
2. ACQUISITIONS
On March 28, 2014, the Company acquired substantially all of the assets of Combustion Components Associates, Inc. (“CCA”), a leading provider of in-furnace and post-combustion control technologies. CCA technology is used to improve efficiency and reduce emissions at utility power plants, pulp and paper mills, chemical plants, oil refineries and other industrial facilities. The purchase price was approximately $8.9 million in cash plus performance-based contingent payments. Additional cash consideration will be paid if the Company recognizes revenue from certain customer projects specified in the purchase agreement. The contingent payment is 5% of the aggregate revenue recognized by the Company in connection with the specified projects. The preliminary allocation of consideration paid for the acquisition includes $0.6 million of contingent liabilities reported in current liabilities.
The Company funded the purchase of CCA with cash on hand. The assets acquired and liabilities assumed, including a preliminary allocation of purchase price, have been included in the Consolidated Balance Sheet as of March 29, 2014. The financial results of the acquisition will be included in the Environmental Systems segment in future periods.
The following table summarizes the consideration paid for the CCA acquisition and presents the preliminary allocation of these amounts to the net tangible and identifiable intangible assets based on their estimated fair values as of the respective acquisition dates. This allocation requires the significant use of estimates and is based on the information that was available to management at the time these condensed consolidated financial statements were prepared.
Current assets | $ | 2,444 | ||
Property, plant and equipment | 325 | |||
Identifiable intangible assets | 2,760 | |||
Goodwill | 5,490 | |||
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Total assets acquired | $ | 11,019 | ||
Current liabilities | $ | (2,128 | ) | |
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Net assets acquired | $ | 8,891 | ||
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The Company determined the purchase price allocation for the acquisition based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed. The fair value of the assets acquired and liabilities assumed in the acquisition remain subject to adjustment.
Acquired intangible assets of $2.8 million consisted of customer projects currently in backlog, customer relationships, and trade names and design guidelines. The amortization period for these intangible assets ranges from 6 months to 10 years. As the acquisition was completed on March 28, 2014, no amortization expense related to these intangible assets was recognized during the three months ended March 29, 2014.
The acquisition of CCA extends the Company’s ability to deliver a broader portfolio of combustion and air pollution products and services to commercial, industrial and utility power-generation customers both domestically and internationally. The goodwill associated with the acquisition will be deductible for tax purposes.
The following unaudited pro forma information has been provided for illustrative purposes only and is not necessarily indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor are they necessarily indicative of future results.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
2. ACQUISITIONS - CONTINUED
Three months ended | Nine months ended | |||||||||||||||
March 29, 2014 | March 30, 2013 | March 29, 2014 | March 30, 2013 | |||||||||||||
Revenue | $ | 34,973 | $ | 38,270 | $ | 100,557 | $ | 108,099 | ||||||||
Net income (loss) | (2,968 | ) | 789 | (7,162 | ) | 1,588 | ||||||||||
Net income (loss) attributable to PMFG, Inc | (2,985 | ) | 637 | (7,279 | ) | 1,004 | ||||||||||
Basic earnings per common share | $ | (0.14 | ) | $ | 0.03 | $ | (0.35 | ) | $ | 0.05 | ||||||
Diluted earnings per common share | $ | (0.14 | ) | $ | 0.03 | $ | (0.35 | ) | $ | 0.05 |
The pro forma combined results for the three and nine months ended March 29, 2014 and March 30, 2013 have been prepared by adjusting the Company’s historical results to include the acquisition as if it occurred on July 1, 2012. These pro forma combined historical results were then adjusted for an increase in amortization expense due to the incremental intangible assets recorded related to the acquisition. The pro forma results of operations also include adjustments to reflect the impact of $0.7 million of acquisition related costs as of July 1, 2012. The pro forma results do not include any adjustments to eliminate the impact of cost savings or other synergies that may result from the acquisition. As noted above, the pro forma results of operations do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future.
The Company recognized approximately $576,000 of acquisition-related costs that were expensed during the three months ended March 29, 2014. These acquisition costs are included in general and administrative expenses in the condensed Consolidated Statements of Operations for the three months ended March 29, 2014.
3. INVENTORIES
Principal components of inventories are as follows (in thousands):
March 29, | June 29, | |||||||
2014 | 2013 | |||||||
Raw materials | $ | 6,676 | 3,729 | |||||
Work in progress | 4,009 | 2,516 | ||||||
Finished goods | 406 | 493 | ||||||
Acquired - CCA | 88 | — | ||||||
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11,179 | 6,738 | |||||||
Reserve for obsolete and slow-moving inventory | (185 | ) | (250 | ) | ||||
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$ | 10,994 | $ | 6,488 | |||||
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The components of uncompleted contracts are as follows (in thousands):
March 29, | June 29, | |||||||
2014 | 2013 | |||||||
Costs incurred on uncompleted contracts and estimated earnings | $ | 100,599 | $ | 70,389 | ||||
Less billings to date | (93,499 | ) | (60,122 | ) | ||||
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$ | 7,100 | $ | 10,267 | |||||
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The components of uncompleted contracts are reflected in the Consolidated Balance Sheets as follows (in thousands):
March 29, | June 29, | |||||||
2014 | 2013 | |||||||
Costs and earnings in excess of billings on uncompleted contracts | $ | 19,119 | $ | 16,544 | ||||
Billings in excess of costs and earnings on uncompleted contracts | (12,019 | ) | (6,277 | ) | ||||
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$ | 7,100 | $ | 10,267 | |||||
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5. GOODWILL AND OTHER INTANGIBLE ASSETS
The reporting units used in assessing goodwill are the same as the Company’s reportable segments, Process Products and Environmental Systems. The goodwill acquired with the purchase of CCA is allocated and assessed at the Environmental Systems segment, and the remaining goodwill is assessed at the Process Products segment.
Goodwill
The following table shows the activity and balances related to goodwill from June 30, 2013 through March 29, 2014 (in thousands):
Balance as of June 29, 2013 | $ | 30,429 | ||
Goodwill acquired: | ||||
Preliminary allocation of purchase price related to CCA | 5,490 | |||
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Balance as of March 29, 2014 | $ | 35,919 | ||
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Acquisition-Related Intangibles
Acquisition-related intangible assets are as follows (in thousands):
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
5. GOODWILL AND OTHER INTANGIBLE ASSETS - CONTINUED
Weighted Average Estimated Useful Life (Years) | Gross Value March 29, 2014 | Accumulated Amortization | Net Book Value March 29, 2014 | Gross Value June 29, 2013 | Accumulated Amortization | Net Book Value June 29, 2013 | ||||||||||||||||||||
Design guidelines | Indefinite | $ | 8,290 | $ | — | $ | 8,290 | $ | 6,940 | $ | — | $ | 6,940 | |||||||||||||
Customer relationships | 8 | 8,840 | (3,925 | ) | $ | 4,915 | 7,940 | (3,429 | ) | 4,511 | ||||||||||||||||
Trade names | Indefinite | 5,179 | — | $ | 5,179 | 4,729 | — | 4,729 | ||||||||||||||||||
Backlog | 0.5 | 60 | — | $ | 60 | — | — | — | ||||||||||||||||||
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$ | 22,369 | $ | (3,925 | ) | $ | 18,444 | $ | 19,609 | $ | (3,429 | ) | $ | 16,180 | |||||||||||||
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Amortization expense on finite-lived intangible assets was $0.2 million and $0.3 million for the three months ended March 29, 2014 and March 30, 2013, respectively. Amortization expense on finite-lived intangible assets for the nine months ended March 29, 2014 and March 30, 2013 was $0.5 million and $0.8 million, respectively. Estimated aggregate finite-lived intangible asset amortization expense for the next five years is as follows (in thousands):
Fiscal Year | ||||
2014 | $ | 713 | ||
2015 | 705 | |||
2016 | 600 | |||
2017 | 599 | |||
2018 | 594 |
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. In determining whether the events or changes in circumstances in the third quarter of the fiscal year provided an indication that certain long-lived assets may not be recoverable and therefore warrant the acceleration of the annual evaluation to be completed in the fourth quarter of the fiscal year, the Company took into consideration both short- and long-term indicators. Such consideration included the year-to-date trend in customer bookings, relative quote activity, short- and long-term industry and market segment indicators and longer-term financial forecasts in addition to the consideration of the year to date operating losses against year to date. Management concluded that acceleration of the impairment evaluation was not required and will be completed in the fourth quarter.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
6. ACCRUED PRODUCT WARRANTIES
Accrued product warranty activity is as follows (in thousands):
Nine months ended | ||||||||
March 29, | March 30, | |||||||
2014 | 2013 | |||||||
Balance at beginning of period | $ | 2,241 | $ | 2,615 | ||||
Provision for warranty expenses | 726 | 1,666 | ||||||
Acquired - CCA | 200 | — | ||||||
Warranty charges | (705 | ) | (1,466 | ) | ||||
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Balance at end of period | $ | 2,462 | $ | 2,815 | ||||
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7. ACCRUED LIABILITIES AND OTHER
The components of accrued liabilities and other are as follows (in thousands):
March 29, | June 29, | |||||||
2014 | 2013 | |||||||
Accrued start-up and commissioning expense | $ | 230 | $ | 230 | ||||
Accrued compensation | 2,574 | 2,393 | ||||||
Accrued professional expenses | 3,144 | 1,819 | ||||||
Subsidiary short-term debt | 1,610 | — | ||||||
Other | 399 | 944 | ||||||
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$ | 7,957 | $ | 5,386 | |||||
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In July 2013, the Company obtained short-term financing from Bank of China Limited. The financing provides for borrowings up to ¥10 million ($1.6 million) at an interest rate of 6.6%. Interest is payable quarterly. All amounts outstanding are due July 2014 and are expected to be repaid with cash on hand.
8. DEBT
Outstanding long-term debt obligations are as follows (in thousands):
March 29, | June 29, | |||||||||||
Maturities | 2014 | 2013 | ||||||||||
Term loan A | 2019 | $ | 981 | $ | 604 | |||||||
Term loan B | 2022 | 9,466 | 8,115 | |||||||||
Subsidiary loan | 2017 | 6,923 | — | |||||||||
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Total long-term debt | 17,370 | 8,719 | ||||||||||
Less current maturites | (2,210 | ) | — | |||||||||
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Total long-term debt, net of current portion |
| $ | 15,160 | $ | 8,719 | |||||||
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
8. DEBT - CONTINUED
In September 2012, the Company entered into a 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 used for the purchase of equipment for a manufacturing facility in Denton, Texas (“Term Loan A”) and term loan commitments of $10.0 million used to fund the construction of the 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 29, 2014, there were no outstanding borrowings and approximately $6.4 million of outstanding letters of credit under the Credit Agreement.
Beginning June 30, 2014, the Company is required to make quarterly principal payments on the term loans. 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 29, 2014, 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, as defined in the Credit Agreement, 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 12 month basis.
Under the Credit Agreement, as amended, capital expenditures are limited to (a) those made in connection with the new manufacturing facility in Denton, Texas; (b) those made in connection with the new manufacturing facility in China, not to exceed $12.5 million; and (c) $3.0 million of other capital expenditures in any fiscal year plus any amounts below $3.0 million of expenditures from the immediately preceding fiscal year. The Credit Agreement also contains other covenants, including restrictions on additional debt, dividends, capital expenditures, acquisitions and dispositions.
At March 29, 2014, the Company was not in compliance with the minimum DSC covenant in the Credit Agreement primarily as a result of the operating loss reported in the nine-month period ended March 29, 2014. Subsequent to March 29, 2014, the Company obtained an amendment to the Credit Agreement that brought the Company into compliance as of March 29, 2014. Pursuant to the amendment, if the DSC is less than 1.50 to 1.00 as of the end of any fiscal quarter, the Company must deposit and maintain cash in a blocked collateral account (to which only the administrative agent under the Credit Agreement has access) in an aggregate amount equal to the greater of (a) $10.0 million or (b) the sum of (i) the aggregate principal amount of all revolving credit and swing line loans outstanding under the Credit Agreement, plus (ii) 100% of the undrawn face amount of all performance-related letters of credit outstanding under the Credit Agreement, plus (iii) 30% (subject to upward adjustment) of the undrawn face amount of all warranty-related letters of credit outstanding under the Credit Agreement, plus (iv) $3.0 million, less (v) all term loan principal payments made on or after March 29, 2014. The Company may withdraw the cash in the collateral account when it achieves a DSC of at least 1.50 to 1.00 as of the end of a subsequent fiscal quarter, so long as no default or borrowing base deficiency then exists.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
8. DEBT - CONTINUED
In July 2013, the Company’s subsidiary in China entered into a loan agreement with Bank of China Limited. The loan agreement provides for a loan commitment of ¥45.0 million ($7.2 million) to fund the construction of a manufacturing facility in Zhenjiang, China. The loan is guaranteed by PCMC’s property, plant and equipment.The loan matures on September 30, 2018. At March 29, 2014, there was an outstanding borrowing of ¥43.0 million ($6.9 million). Beginning June 20, 2014, the Company is required to make semi-annual principal payments on the loan which will be paid using cash on hand in China. Interest rates use floating rates as established by The People’s Bank of China. The rate at March 29, 2014 was 7.2%. The loan agreement also contains covenants, including restrictions on additional debt, dividends, acquisitions and dispositions. At March 29, 2014, the Company’s subsidiary was in compliance with all of its debt covenants. The Company’s subsidiary in China had bank guarantees of $0.8 million and $0.6 million at March 29, 2014 and June 29, 2013, respectively, secured by $0.8 million and $0.6 million of restricted cash balances.
The Company’s U.K. subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of £6.0 million ($10.0 million) at March 29, 2014 and £6.0 million ($9.1 million) at June 29, 2013. This facility was secured by substantially all of the assets of the Company’s U.K. subsidiary, a protective letter of credit issued by the Company to HSBC Bank and a cash deposit of £1.8 million ($3.0 million) at March 29, 2014 and £2.1 million ($3.2 million) at June 29, 2013, which is recorded as restricted cash on the Consolidated Balance Sheets. At March 29, 2014, there was £4.7 million ($7.8 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. At June 29, 2013, there was £4.4 million ($6.8 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 ($6.6 million) at March 29, 2014 and €4.8 million ($6.2 million) at June 29, 2013. 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 ($1.1 million) at March 29, 2014 and €0.7 million ($0.9 million) at June 29, 2013, which is recorded as restricted cash on the Consolidated Balance Sheets. At March 29, 2014, there was €3.2 million ($4.4 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. At June 29, 2013, there was €2.7 million ($3.5 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.
The Company’s subsidiary in Singapore had bank guarantees of $0.7 million and $0.6 million at March 29, 2014 and June 29, 2013, respectively. These guarantees are secured with a protective letter of credit issued by the Company to Citibank.
9. COMMITMENTS AND CONTINGENCIES
Litigation
Under the contract for the Nitram acquisition, the Company has certain rights to indemnification from the selling stockholders for claims relating to breach of representations and certain other claims, including litigation costs and damages. Prior to the final escrow payment in October 2009, the Company made claims relating to environmental matters and indemnification for breach of representations and warranties in the Nitram purchase agreement, totaling approximately $2.0 million. Of this amount, $1.4 million was not released from escrow. This amount represents the Company’s claims, less the deductible of $0.6 million. The sellers have objected to the claims made by the Company and the parties are currently negotiating the 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.
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
9. COMMITMENTS AND CONTINGENCIES - CONTINUED
From time to time the Company is involved in various litigation matters arising in the ordinary course of its business. The Company accrues for its litigation contingencies when losses are both probable and reasonably estimable.
10. 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 29, 2014 and March 30, 2013 (in thousands, except share amounts):
Nine months ended | ||||||||||||||||
March 29, | March 30, | |||||||||||||||
2014 | 2013 | |||||||||||||||
Grant Type | Number of Shares Granted | Fair Value of Grant | Number of Shares Granted | Fair Value of Grant | ||||||||||||
Stock to directors | 40,430 | $ | 300 | 36,000 | $ | 291 | ||||||||||
Restricted stock awards | 101,410 | 752 | 110,377 | 894 | ||||||||||||
Restricted stock units | 77,460 | 575 | — | — |
The stock granted to the members of the Board of Directors vested upon grant, therefore the fair value amount was recognized as expense at the time of grant. The compensation expense for the restricted stock awards granted to officers and other employees in fiscal year 2014 is recognized over a three-year vesting period whereas the awards granted to such persons in fiscal year 2013 are recognized over a four-year vesting period. The compensation expense is based on the fair value of the awards on the grant date, net of forfeitures.
In July 2013, the Company also awarded restricted stock units (“RSUs”), which are subject to both service and performance conditions, to some of the officers of the Company. The fair value of the RSUs is based on the probability of the performance condition being achieved on the date of grant. The actual number of shares that are eligible to vest is determined based on the Company’s performance during the performance period, which is a year from the date of grant, against established metrics and could range from 0% to 200% of the number of units originally granted. The RSUs that are issuable based on the one year performance period cliff vest on the third anniversary of the grant date subject to the continued employment of the grantee. The Company recognizes compensation expense for the RSUs based upon management’s determination of the potential likelihood of achievement of the performance conditions at each reporting date in fiscal 2014, net of estimated forfeitures.
The Company recognized $0.8 million and $0.5 million of stock-based compensation expense in the nine months ended March 29, 2014 and March 30, 2013, respectively. For the three months ended March 29, 2014 and March 30, 2013, the Company recognized $0.2 million and $0.1 million, respectively, of stock-based compensation expense.
11. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Derivative Financial Instruments
The Company has entered into interest rate swap agreements that effectively convert the interest rates on the long-term debt issued under the Senior Credit facility from floating to fixed rates. The following table summarizes the interest rate agreements in effect as of March 29, 2014 (in thousands):
Fixed Interest Rate | Expiration Date | Notional Amounts | ||||||
1.95% | September 30, 2022 | $ | 9,000 | |||||
1.50% | September 30, 2019 | 1,000 |
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
11. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS - CONTINUED
The swap agreements are recorded as an asset or liability in the Consolidated Balance Sheets at fair value, with the change in fair value recorded as interest expense within the Consolidated Statements of Operations.
The Company is exposed to market risk under these arrangements due to the possibility of interest rates on the term loans under the Credit Agreement declining below the rates in the interest rate swap agreements. Credit risk under these arrangements is believed to be remote as the counterparty to the interest rate swap agreements is a major financial institution. However, if the counterparty becomes unable to fulfill its obligations to the Company, the financial benefits of the arrangements may not be realized.
The derivatives recorded at fair value in the Company’s Consolidated Balance Sheets were (in thousands):
Derivative Assets | Derivative Liabilities | |||||||||||||||
March 29, | June 29, | March 30, | June 29, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Interest rate swap contracts | $ | 61 | $ | 160 | $ | — | $ | — |
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
• | Level 1 — Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
• | Level 2 — Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments. |
• | Level 3 — Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. |
A summary of derivative assets and liabilities measured at fair value on a recurring basis is as follows (in thousands):
Fair Value as of March 29, 2014 | Level 1 | Level 2 | Level 3 | |||||||||||||
Asset - Interest rate swap contracts | $ | 61 | $ | — | $ | 61 | $ | — |
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PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Unaudited
March 29, 2014
11. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS - CONTINUED
The fair value of the interest rate swaps is determined based on the notional amounts of the swaps and the forward LIBOR curve relative to the fixed interest rates under the swap agreements. The Company classifies these instruments in Level 2 because quoted market prices can be corroborated utilizing observable benchmark market rates at commonly quoted intervals, observable current and forward commodity market prices on active exchanges, and observable market transactions of spot currency rates and forward currency prices.
12. SEGMENT INFORMATION
The Company has two reportable segments: Process Products and Environmental Systems. The Process Products segment produces various types of separation and filtration equipment 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 Environmental Systems segment designs, engineers and installs highly efficient systems for combustion modification, fuel conversions and post-combustion nitrogen oxide (NOx) control for both new and existing sources. These environmental control systems are used for air pollution abatement and converting burners to accommodate alternative sources of fuel. System applications include Selective Catalytic Reduction (“SCR”) systems and Selective Non-Catalytic Reduction (“SNCR”) systems. The financial results of the CCA acquisition will be included in the Environmental Systems segment in future periods (see Note 2).
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 expenses. The Company does not allocate general and administrative expenses, assets, or expenditures 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 29, 2014 and March 30, 2013 are presented below (in thousands).
Three months ended | Nine months ended | |||||||||||||||
March 29, | March 30, | March 29, | March 30, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenue: | ||||||||||||||||
Process Products | $ | 24,170 | $ | 27,397 | $ | 72,937 | $ | 84,592 | ||||||||
Environmental Systems | 8,103 | 7,573 | 18,021 | 14,807 | ||||||||||||
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$ | 32,273 | $ | 34,970 | $ | 90,958 | $ | 99,399 | |||||||||
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Operating income (loss): | ||||||||||||||||
Process Products | $ | 24 | $ | 3,593 | $ | 4,063 | $ | 13,679 | ||||||||
Environmental Systems | 1,803 | 1,541 | 4,064 | 2,671 | ||||||||||||
Corporate and other unallocated expenses | (5,444 | ) | (4,112 | ) | (14,979 | ) | (14,008 | ) | ||||||||
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$ | (3,617 | ) | $ | 1,022 | $ | (6,852 | ) | $ | 2,342 | |||||||
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PMFG, Inc. and Subsidiaries
March 29, 2014
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 our 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 29, 2013. 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. With the recent acquisition of substantially all of the assets of Combustion Components Associates, Inc. (“CCA”), the Company expanded the markets it serves to include industrial and utility industries. We offer a broad range of separation and filtration products, Selective Catalytic Reduction (“SCR”) systems, Selective Non-Catalytic Reduction (“SNCR”) systems, low emissions burner and related combustion systems and other complementary products including heat transfer equipment, pulsation dampeners and silencers. Our primary customers include original equipment manufacturers, engineering contractors, commercial and industrial companies and operators of power facilities.
Our products and systems are marketed worldwide. The percentage of revenue generated from outside the United States was approximately 42% in the nine months ended March 29, 2014 compared to 49% in the nine months ended March 30, 2013. The decline in revenue generated outside the United States from 2013 to 2014 is attributed to decreased demand from certain markets including Canada, Latin America and the Middle East, as well as from increased demand for the Company’s environmental system applications, which are primarily deployed in the United States. As a result of the global demand for our products and our increased sales resources outside of the United States, we expect our international revenue will continue to be a significant percentage of our consolidated revenue in the future. International markets, and in particular emerging markets such as Latin America, India, Northern Africa and China, will be subject to significant variations in demand from period to period.
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 revenue also can have a significant impact on our reported margins.
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PMFG, Inc. and Subsidiaries
March 29, 2014
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 Environmental Systems segment designs, engineers and installs highly efficient systems for combustion modification, fuel conversions and post-combustion nitrogen oxide (NOx) control for both new and existing sources. These environmental control systems are used for air pollution abatement and converting burners to accommodate alternative sources of fuel. System applications include combustion systems, SCR systems and SNCR systems.
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-licensing 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-licensing 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 Environmental and Combustion 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 March 28, 2014, the Company completed the acquisition of substantially all of the assets of CCA. CCA is a leading provider of in-furnace and post-combustion control technologies. CCA technology is used to improve efficiency and reduce emissions at utility power plants, pulp and paper mills, chemical plants, oil refineries and other industrial facilities. The purchase price was $8.9 million in cash plus contingent performance-based payments. Additional cash consideration will be paid if the Company recognizes revenue from certain customer projects specified in the purchase agreement. The contingent payment is 5% of the aggregate recognized revenue by the Company in connection with the specified projects. The additional cash consideration, if any, is not expected revenue to be material to the Company’s financial position, results of operations or cash flows. The financial results of the CCA acquisition will be included in the Environmental Systems segment in future periods.
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PMFG, Inc. and Subsidiaries
March 29, 2014
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,” and Note A to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” in Part II of our Annual Report on Form 10-K for the year ended June 29, 2013. Since the date of that report, there have been no material changes to our critical accounting policies.
Results of Operations
The following summarizes our Consolidated Statements of Operations as a percentage of revenue:
Three months ended | Nine months ended | |||||||||||||||
March 29, | March 30, | March 29, | March 30, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of goods sold | 75.1 | 69.3 | 71.5 | 66.1 | ||||||||||||
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Gross profit | 24.9 | 30.7 | 28.5 | 33.9 | ||||||||||||
Operating expenses | 36.1 | 27.8 | 36.0 | 31.5 | ||||||||||||
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Operating income (loss) | (11.2 | ) | 2.9 | (7.5 | ) | 2.4 | ||||||||||
Other expense, net | (1.8 | ) | (0.5 | ) | (1.8 | ) | (0.7 | ) | ||||||||
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Income (loss) before income taxes | (13.0 | ) | 2.4 | (9.3 | ) | 1.7 | ||||||||||
Income tax benefit (expense) | 1.4 | (0.4 | ) | 0.3 | (0.4 | ) | ||||||||||
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Net income (loss) | (11.6 | )% | 2.0 | % | (9.1 | )% | 1.3 | % | ||||||||
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Net income attributable to noncontrolling interest | 0.1 | 0.4 | 0.1 | 0.6 | ||||||||||||
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Net income (loss) attributable to PMFG, Inc. | (11.7 | )% | 1.6 | % | (9.2 | )% | 0.7 | % | ||||||||
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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. |
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PMFG, Inc. and Subsidiaries
March 29, 2014
Quarter Ended March 29, 2014 Compared to Quarter Ended March 30, 2013
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 37% and 40% of consolidated revenue in the quarters ended March 29, 2014 and March 30, 2013, respectively. The decline in total and relative revenue generated outside the United States from 2013 to 2014 is attributed to decreased demand from certain markets including Canada, Latin America and the Middle East, as well as from increased demand for the Company’s environmental system applications, which are primarily deployed in the United States. The decline in the noted markets is believed by management to be cyclical rather than a long-term shift in market demand.
The following summarizes consolidated revenue (in thousands):
Three months ended | ||||||||||||||||
March 29, 2014 | % of Total Revenue | March 30, 2013 | % of Total Revenue | |||||||||||||
Domestic | $ | 20,381 | 63.2 | % | $ | 20,849 | 59.6 | % | ||||||||
International | 11,892 | 36.8 | % | 14,121 | 40.4 | % | ||||||||||
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Total | $ | 32,273 | 100.0 | % | $ | 34,970 | 100.0 | % | ||||||||
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Total revenue decreased $2.7 million, or 7.7%, to $32.3 million in the third quarter of fiscal 2014 compared to the same period in fiscal 2013, as higher revenue from our Environmental Systems segment partially offset lower revenue from our Process Products segment. Additional detail on the year over year change by product category is as follows (in thousands):
Proces products systems | ||||
Separation and filtration equipment | $ | (2,101 | ) | |
Silencer and heat transfer equipment | (1,126 | ) | ||
Environmental systems | 530 | |||
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$ | (2,697 | ) | ||
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The Company’s environmental systems are primarily marketed in the United States, where pending changes in air pollution regulations and increased demand for natural gas power generation is driving demand for our products. As the acquisition of CCA was completed on March 28, 2014, it did not contribute to the increased revenue in our Environmental Systems segment in the periods presented.
The lower revenue from our Process Products segment resulted from lower demand for our silencer and heat transfer equipment, reduced demand for separation and filtration equipment in certain markets and to a lesser extent delays in the design and fabrication process in the China market. The lower demand for silencer and heat transfer equipment is attributed to a highly competitive market environment and a lack of sufficient differentiation with regard to technical capabilities, cost or delivery time. The lower revenue from separation and filtration equipment primarily resulted from lower relative revenue from the Middle East and China. In the Middle East, the Company is overlapping a significant contract which was largely completed in the prior year. In China, the Company has experienced lower bookings and revenue flow-through attributed to the transition of governmental leadership and restriction on liquidity requirements of many of our customers.
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PMFG, Inc. and Subsidiaries
March 29, 2014
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 29, 2014 | % of Total Revenue | March 30, 2013 | % of Total Revenue | |||||||||||||
Revenue | $ | 32,273 | 100.0 | % | $ | 34,970 | 100.0 | % | ||||||||
Cost of goods sold | 24,231 | 75.1 | % | 24,223 | 69.3 | % | ||||||||||
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Gross profit | $ | 8,042 | 24.9 | % | $ | 10,747 | 30.7 | % | ||||||||
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Gross profit in the third quarter of fiscal 2014 decreased $2.7 million, or 25.2%, compared to the same period in fiscal 2013. The decrease in gross profit resulted from lower revenue, cost overruns on specific projects, and inefficiencies in the start-up of our new manufacturing facilities in Denton, Texas and Zhenjiang, China, partially offset by a change in estimated future warranty obligations. These factors are summarized as follows (in thousands):
Decline in revenue | $ | (699 | ) | |
Change in estimated future warranty obligations | 770 | |||
Cost overruns on projects completed or in process | (1,730 | ) | ||
Underabsorption of facility costs | (981 | ) | ||
Other | (65 | ) | ||
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Decrease in gross profit | $ | (2,705 | ) | |
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The Company offers a broad range of products that have a wide range of anticipated profit margin due in part to technological or material complexity, scope of product, extent of service to be performed and competitive nature of a particular product or project. As a result, the product, customer and geographical mix from period to period will result in changes in the profit dollars and as a percentage of revenue.
The Company completed construction and began operation of two manufacturing facilities in the second half of calendar 2013. The Company is continuing to experience cost overruns and inefficiencies in the plant operations resulting from training and utilization of new personnel and processes, increased supervisory and quality assurance personnel responsive to current and anticipated future projects, and higher depreciation and occupancy costs. As these facilities mature and additional work is moved through the facilities, these cost overruns and inefficiencies are expected to decline.
Operating Expenses. The following summarizes operating expenses (in thousands):
Three months ended | ||||||||||||||||
March 29, 2014 | % of Total Revenue | March 30, 2013 | % of Total Revenue | |||||||||||||
Sales and marketing | $ | 3,489 | 10.8 | % | $ | 3,278 | 9.4 | % | ||||||||
Engineering and project management | 2,726 | 8.4 | % | 2,335 | 6.7 | % | ||||||||||
General and administrative | 5,444 | 16.9 | % | 4,112 | 11.8 | % | ||||||||||
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Total | $ | 11,659 | 36.1 | % | $ | 9,725 | 27.9 | % | ||||||||
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PMFG, Inc. and Subsidiaries
March 29, 2014
Operating expenses increased $1.9 million, or 19.9%, for the third quarter of fiscal 2014 compared to the same period in fiscal 2013. The increase in operating expenses resulted from increase in personnel and occupancy costs in our Europe, Middle East and Africa (“EMEA”) region largely associated with the sales, engineering, and project management office opened in Dubai in the spring of 2013, increased personnel costs in the Americas region in support of our nuclear power generation product line and commitments under a joint development agreement entered into with a major OEM customer in the nuclear power generation industry, costs associated with the integration of a consistent enterprise resource planning (“ERP”) software product across our European locations and costs associated with the acquisition of CCA. The Company was notified in April 2014 of the OEM’s intent to defer further investment under the joint development agreement as a result of an anticipated delay in the identified market opportunity. The change in operating expenses in the third quarter of fiscal 2014 compared to the same period in fiscal 2013 is summarized as follows (in thousands):
Incremental personnel and occupancy costs related to Dubai office | $ | 584 | ||
Incremental personnel costs in support of nuclear product line and joint development agreement | 307 | |||
Implementation of ERP system in European locations | 152 | |||
Due diligence and transaction advisor fees related to the CCA acquisition | 576 | |||
Other | 315 | |||
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$ | 1,934 | |||
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Other Income and Expense. The following summarizes other income and expense (in thousands):
Three months ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Interest income | $ | 31 | $ | 12 | ||||
Interest expense | (436 | ) | (148 | ) | ||||
Foreign exchange gain (loss) | (194 | ) | (32 | ) | ||||
Other income (expense), net | 13 | (1 | ) | |||||
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Total other income (expense) | $ | (586 | ) | $ | (169 | ) | ||
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Income Taxes. Our effective income tax rates were 10.4% and 18.3% for the quarters ended March 29, 2014 and March 30, 2013, respectively. The lower tax rate for the quarter ended March 29, 2014 is the result of a mix profits and losses in different taxing jurisdictions.
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 75% and 78% of our consolidated revenue in the quarters ended March 29, 2014 and March 30, 2013, respectively.
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PMFG, Inc. and Subsidiaries
March 29, 2014
The following summarizes the Process Products segment revenue, gross profit and operating income for the three month periods ended March 29, 2014 and March 30, 2013 (in thousands):
Three months ended | ||||||||
March 29, | March 30, | |||||||
2014 | 2013 | |||||||
Revenue | $ | 24,170 | $ | 27,397 | ||||
Gross profit | 5,304 | 8,418 | ||||||
Operating income | 24 | 3,593 | ||||||
Operating income as % of revenue | 0.1 | % | 13.1 | % |
Process Products revenue decreased $3.2 million, or 11.8%, to $24.2 million in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. The lower revenue from our Process Products segment resulted from lower demand for our silencer and heat transfer equipment, overlap of significant contract which was largely completed in the prior year and to a lesser extent delays in the design and fabrication process in the China market. The lower demand for silencer and heat transfer equipment is attributed to a highly competitive market environment and a lack of sufficient differentiation with regard to technical capabilities, cost or delivery time. The lower revenue from separation and filtration equipment primarily resulted from lower relative revenue from the Middle East and China. In the Middle East, the Company is overlapping a significant contract which was largely completed in the prior year. In China, the Company has experienced lower bookings and revenue flow-through attributed to the transition of governmental leadership and restriction on liquidity requirements of many of our customers. The decline in Process Products revenue was partially offset by an increase of $2.1 million in revenue from separation equipment utilized in nuclear power generation facilities.
Additional detail on the year-over-year change by product category is as follows (in thousands):
Separation and filtration equipment | $ | (2,101 | ) | |
Silencer and heat transfer equipment | (1,126 | ) | ||
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$ | (3,227 | ) | ||
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Process Products gross profit for the third quarter of fiscal 2014 decreased $3.1 million, or 37.0%, compared to the third quarter of fiscal 2013. The decrease in gross profit resulted from lower revenue, cost overruns on specific projects and inefficiencies in the start-up of our new manufacturing facilities in Denton, Texas and Zhenjiang, China, partially offset by a change in estimated future warranty obligations quantified as follows (in thousands):
Decline in revenue | $ | (991 | ) | |
Change in estimated future warranty obligations | 442 | |||
Cost overruns on projects completed or in process | (1,597 | ) | ||
Underabsorption of facility costs | (904 | ) | ||
Other | (64 | ) | ||
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$ | (3,114 | ) | ||
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Process Products operating income for the third quarter of fiscal 2014 decreased $3.6 million, or 99.3%, driven by the $3.1 million reduction in gross profit and $0.5 million increase in operating costs. The increase in operating expenses resulted from increase in personnel and occupancy costs in our EMEA region largely associated with the sales, engineering and project management office that opened in Dubai in the spring of 2013, increased personnel costs in the Americas region in support of our nuclear power generation product line and commitments under a joint development agreement entered into with a major OEM customer in the nuclear power generation industry.
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PMFG, Inc. and Subsidiaries
March 29, 2014
Environmental Systems
The Environmental Systems segment designs, engineers and installs highly efficient systems for combustion modification, fuel conversions and post-combustion NOx control for both new and existing sources. These environmental control systems are used for air pollution abatement and converting burners to accommodate alternative sources of fuel. System applications include SCR systems, combustion systems and SNCR systems. The Environmental Systems segment represented 25% and 22% of our consolidated revenue in the quarters ended March 29, 2014 and March 30, 2013, respectively.
The following summarizes the Environmental Systems segment revenue, gross profit and operating income for the three month periods ended March 29, 2014 and March 30, 2013 (in thousands):
Three months ended | ||||||||
March 29, | March 30, | |||||||
2014 | 2013 | |||||||
Revenue | $ | 8,103 | $ | 7,573 | ||||
Gross profit | 2,738 | 2,329 | ||||||
Operating income | 1,803 | 1,541 | ||||||
Operating income as % of revenue | 22.3 | % | 20.3 | % |
Environmental Systems revenue increased $0.5 million, or 7.0%, to $8.1 million in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. The Company’s environmental systems are primarily marketed in the United States, where stringent air pollution regulations, pending changes in regulation and increased demand for natural gas power generation is driving demand for our products. As the acquisition of CCA was completed on March 28, 2014, it did not contribute to the increased revenue in our Environmental Systems segment. Management anticipates that increased regulation of air pollution combined with the expansion of products and services acquired in the CCA transaction, will increase the revenue generated domestically and internationally in future periods.
Gross profit in the Environmental Systems increased $0.4 million or 17.6% to $2.7 million in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. The increase in gross profit resulted from higher revenue, lower estimated future warranty obligations, and higher relative profit on projects completed or in process (in thousands):
Increase in revenue | $ | 163 | ||
Change in estimated future warranty obligations | 328 | |||
Other | (82 | ) | ||
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$ | 409 | |||
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Environmental Systems operating income for the third quarter of fiscal 2014 increased $0.3 million compared to the third quarter of fiscal 2013. The increase in operating income is attributable to higher gross profit partially offset by increased personnel costs in support of current and planned growth within this product line.
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PMFG, Inc. and Subsidiaries
March 29, 2014
Nine Months Ended March 29, 2014 Compared to Nine Months Ended March 30, 2013
Results of Operations – Consolidated
Revenue.The following table summarizes consolidated revenue (in thousands):
Nine months ended | ||||||||||||||||
March 29, 2014 | % of Total Revenue | March 30, 2013 | % of Total Revenue | |||||||||||||
Domestic | $ | 52,399 | 57.6 | % | $ | 50,993 | 51.3 | % | ||||||||
International | 38,559 | 42.4 | % | 48,406 | 48.7 | % | ||||||||||
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Total | $ | 90,958 | 100.0 | % | $ | 99,399 | 100.0 | % | ||||||||
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For the nine months ended March 29, 2014, total revenue decreased $8.4 million, or 8.5%, as higher revenue from our Environmental Systems segment partially offset lower revenue from our Process Products segment. Additional detail on the year-over-year change by product category is as follows (in thousands):
Process products systems | ||||
Separation and filtration equipment | $ | (6,746 | ) | |
Silencer and heat transfer equipment | (4,909 | ) | ||
Environmental systems | 3,214 | |||
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$ | (8,441 | ) | ||
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The Company’s environmental systems are primarily marketed in the United States, where stringent air pollution regulations, pending changes in regulation and increased demand for natural gas power generation is driving demand for our products. As the acquisition of CCA was completed on March 28, 2014, it did not contribute to the increased revenue in our Environmental Systems segment.
The lower revenue from our Process Products segment resulted from lower demand for our silencer and heat transfer equipment, overlap of significant contract which was largely completed in the prior year, and to a lesser extent delays in the design and fabrication process in the China market. The lower demand for silencer and heat transfer equipment is attributed to a highly competitive market environment and a lack of sufficient differentiation with regard to technical capabilities, cost or delivery time. The lower revenue from separation and filtration equipment primarily resulted from lower relative revenue from the Middle East and China. In the Middle East, the Company is overlapping a significant contract which was largely completed in the prior year. In China, the Company has experienced lower bookings and revenue flow-through attributed to the transition of governmental leadership and restriction on liquidity requirements of many of our customers. Domestic revenue increased $1.4 million, or 2.8%, in the nine months ended March 29, 2014 when compared to the same period last year on stronger Environmental System revenue. The increase in domestic revenue was offset by a decrease in international revenue of $9.8 million, or 20.3%.
Gross Profit.The following table summarizes revenue, cost of goods sold, and gross profit (in thousands):
Nine months ended | ||||||||||||||||
March 29, 2014 | % of Total Revenue | March 30, 2014 | % of Total Revenue | |||||||||||||
Revenue | $ | 90,958 | 100.0 | % | $ | 99,399 | 100.0 | % | ||||||||
Cost of goods sold | 65,080 | 71.5 | % | 65,731 | 66.1 | % | ||||||||||
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Gross profit | $ | 25,878 | 28.5 | % | $ | 33,668 | 33.9 | % | ||||||||
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PMFG, Inc. and Subsidiaries
March 29, 2014
Gross profit decreased $7.8 million on lower revenue and lower relative gross profit in the nine months ended March 29, 2014 compared to the nine months ended March 30, 2013. Gross profit, as a percentage of revenue, decreased to 28.5% for the nine months ended March 29, 2014 compared to 33.9% for the nine months ended March 30, 2013. That margin deterioration was most notable in the second and third quarters. The decrease in gross profit resulted from lower revenue, cost overruns on specific projects, exit costs related to the closure of two manufacturing facilities in the United States and one in China, inefficiencies in the start-up of our new manufacturing facilities in Denton, Texas and Zhenjiang, China, partially offset by a change in estimated future warranty obligations. These factors are summarized as follows (in thousands):
Decline in revenue | $ | (2,610 | ) | |
Change in estimated future warranty obligations | 940 | |||
Cost overruns on projects completed or in process | (3,208 | ) | ||
Underabsorption of facility costs | (2,426 | ) | ||
Exit costs related to facility closures | (486 | ) | ||
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$ | (7,790 | ) | ||
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Operating Expenses.The following table summarizes operating expenses (in thousands):
Nine months ended | ||||||||||||||||
March 29, 2014 | % of Total Revenue | March 30, 2013 | % of Total Revenue | |||||||||||||
Sales and marketing | $ | 10,127 | 11.1 | % | $ | 10,282 | 10.3 | % | ||||||||
Engineering and project management | 7,624 | 8.4 | % | 7,036 | 7.1 | % | ||||||||||
General and administrative | 14,979 | 16.5 | % | 14,008 | 14.1 | % | ||||||||||
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Total | $ | 32,730 | 36.0 | % | $ | 31,326 | 31.5 | % | ||||||||
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Operating expenses increased $1.4 million, or 4.5%, in the nine months ended March 29, 2014 compared to the nine months ended March 30, 2013. As a percentage of revenue, operating expenses increased on lower revenue to 36.0% for the nine months ended March 29, 2014 from 31.5% in the same period in fiscal 2013. The increase in operating expenses resulted from increased personnel and occupancy costs in our EMEA region largely associated with the sales, engineering and project management office that opened in Dubai in the spring of 2013, increased personnel costs in the Americas region in support of our nuclear power generation product line and commitments under a joint development agreement entered into with a major OEM customer in the nuclear power generation industry, costs associated with the integration of a consistent enterprise resource planning (“ERP”) software product across our European locations, and costs associated with the acquisition of CCA quantified, partially offset by lower bad debt expense. These factors are summarized as follows (in thousands):
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PMFG, Inc. and Subsidiaries
March 29, 2014
Incremental personnel and occupancy costs related to Dubai office | $ | 842 | ||
Incremental personnel costs in support of nuclear product line and joint development agreement | 372 | |||
Implementation of ERP system in European locations | 180 | |||
Due diligence and transaction advisor fees related to the CCA acquisition | 576 | |||
Lower bad debt expense | (944 | ) | ||
Other | 378 | |||
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$ | 1,404 | |||
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Other Income and Expense. The following table summarizes other income and expenses (in thousands):
Nine months ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Interest income | $ | 63 | $ | 29 | ||||
Interest expense | (1,142 | ) | (463 | ) | ||||
Loss on extinguishment of debt | — | (291 | ) | |||||
Foreign exchange gain (loss) | (666 | ) | 3 | |||||
Other income (expense), net | 84 | 33 | ||||||
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Total other income (expense) | $ | (1,661 | ) | $ | (689 | ) | ||
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For the nine months ended March 29, 2014, other expense was $1.7 million, an increase of $1.0 million from $0.7 million for the nine months ended March 30, 2013. In the first quarter of fiscal 2013, we recorded a loss on the extinguishment of debt associated with paying in full our existing term loan. There was no similar activity in fiscal 2014. The higher level of interest expense reflects borrowings related to the Company’s two new manufacturing facilities. The nine months ended March 29, 2014 reported a loss on foreign currency translation of $0.7 million, driven largely by movements in the euro and U.S. dollar relative to the British pound, compared to a gain of $3,000 for the nine months ended March 30, 2013.
Income Taxes:Our effective income tax rates were 3.0% and 22.2% for the nine months ended March 29, 2014 and March 30, 2013, respectively. For the nine months ended March 29, 2014, our effective tax rate was impacted by the blend of taxable income in some state and foreign taxing jurisdictions and permanent differences and taxable losses in the United States which recognized no tax benefit. 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, as well as positive adjustments to the previously filed tax returns.
Net Earnings (loss).For the nine months ended March 29, 2014, we had a net loss of $8.3 million, a decrease of $9.6 million compared to net earnings of $1.3 million in the nine months ended March 30, 2013. The net loss was the result of lower revenue and margin flowing through to the net loss.
Basic and diluted earnings (loss) per share attributable to our common stockholders was a loss of $0.40 per share for the nine months ended March 29, 2014 compared to earnings of $0.03 per share for the nine months ended March 30, 2013.
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PMFG, Inc. and Subsidiaries
March 29, 2014
Results of Operations – Segments
Process Products
Our Process Products segment represented 80% and 85% of our revenue for the nine months ended March 29, 2014 and March 30, 2013, respectively. The following table summarizes Process Products revenue, gross profit and operating income for the nine month periods ended March 29, 2014 and March 30, 2013 (in thousands):
Nine months ended | ||||||||
March 29, | March 30, | |||||||
2014 | 2013 | |||||||
Revenue | $ | 72,937 | $ | 84,592 | ||||
Gross profit | 19,440 | 28,649 | ||||||
Operating income | 4,063 | 13,679 | ||||||
Operating income as % of revenue | 5.6 | % | 16.2 | % |
Process Products revenue decreased by $11.7 million, or 13.8%, in the nine months ended March 29, 2014 when compared to the nine months ended March 30, 2013. The lower revenue from our Process Products segment resulted from lower demand for our silencer and heat transfer equipment, overlap of a significant contract which was largely completed in the prior year, and to a lesser extent delays in the design and fabrication process in the China market. It is further noted that the increase in revenue generated in the United States from separation equipment utilized in the nuclear power generation industry was almost entirely offset by a decline of similar products in China. We continue to expect demand for nuclear power generation equipment in China, but current delays on timing of projects will have significant impact on revenue.
Additional detail on the year over year change by product category is as follows (in thousands):
Separation and filtration equipment | $ | (6,746 | ) | |
Silencer and heat transfer equipment | (4,909 | ) | ||
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$ | (11,655 | ) | ||
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Process Products gross profit for the nine month period ended March 29, 2014 decreased $9.2 million, or 32.1%, compared to the prior year. The decrease in gross profit resulted from lower revenue, change in geographical mix of products, cost overruns on specific projects, inefficiencies in the start-up of our new manufacturing facilities in Denton, Texas and Zhenjiang, China, exit costs related to the closure of two manufacturing facilities in the United States and one in China, partially offset by a change in estimated future warranty obligations. These factors are summarized as follows (in thousands):
Decline in revenue | $ | (3,700 | ) | |
Impact of product and geographical mix | (350 | ) | ||
Change in estimated future warranty obligations | 679 | |||
Cost overruns on project completed and in process | (3,192 | ) | ||
Underabsorption of facility costs | (2,160 | ) | ||
Exit costs related to facility closures | (486 | ) | ||
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$ | (9,209 | ) | ||
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Process Products operating income for the nine month period ended March 29, 2014 decreased $9.6 million driven by the $9.2 million reduction in gross profit and $0.4 million increase in operating costs. The increase in operating expenses resulted from increased personnel and occupancy costs in our EMEA region largely associated with the sales, engineering and project management office opened in Dubai in the spring of 2013, increased personnel costs in the Americas region in support of our nuclear power generation product line and commitments under a joint development agreement entered into with a major OEM customer in the nuclear power generation industry.
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PMFG, Inc. and Subsidiaries
March 29, 2014
Environmental Systems
Our Environmental Systems segment represented 20% and 15% of our revenue for the nine months ended March 29, 2014 and March 30, 2013, respectively. The following table summarizes Environmental Systems revenue, gross profit and operating income (in thousands):
Nine months ended | ||||||||
March 29, | March 30, | |||||||
2014 | 2013 | |||||||
Revenue | $ | 18,021 | $ | 14,807 | ||||
Gross profit | 6,438 | 5,019 | ||||||
Operating income | 4,064 | 2,671 | ||||||
Operating income as % of revenue | 22.6 | % | 18.0 | % |
Revenue from Environmental Systems increased $3.2 million, or 21.7%, in the nine months ended March 29, 2014 compared to the prior year. Operating income increased $1.4 million, or 52.2%, in the nine months ended March 29, 2014, when compared to the prior year. As a percentage of revenue, operating income increased to 22.6% in 2014 compared to 18.0% in the prior year. The increase in operating income resulted from higher revenue, lower estimated future warranty obligations, higher relative profit on projects completed or in process, partially offset by higher sales and marketing related costs, quantified as follows (in thousands):
Increase in revenue | $ | 1,089 | ||
Change in estimated future warranty obligations | 261 | |||
Other | 43 | |||
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$ | 1,393 | |||
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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, cash flows or results of operations.
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PMFG, Inc. and Subsidiaries
March 29, 2014
Net Bookings and Backlog
The following table shows the activity and balances related to our backlog for the nine months ended March 29, 2014 and March 30, 2013 (in millions):
Nine months ended | ||||||||
March 29, 2014 | March 30, 2013 | |||||||
Backlog at beginning of period | $ | 84.2 | $ | 99.9 | ||||
Net bookings | 111.0 | 87.2 | ||||||
Acquired backlog | 3.0 | — | ||||||
Removed from backlog | — | (12.5 | ) | |||||
Revenue recognized | (91.0 | ) | (99.4 | ) | ||||
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Backlog at end of period | $ | 107.2 | $ | 75.2 | ||||
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Backlog includes contractual purchase orders for products that are deliverable in future periods less revenue recognized on such orders to date. Approximately 30% of the consolidated backlog at March 29, 2014 relates to Environmental Systems projects compared to 15% at March 30, 2013. Year to date net bookings has increased $23.8 million or nearly 30% providing an indication of the improving demand for the Company’s products both domestically and internationally. The increase in net bookings by product category is as follows (in millions):
Separation and filtration equipment | $ | 12.7 | ||
Silencer and heat transfer equipment | — | |||
Environmental systems | 11.1 | |||
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$ | 23.8 | |||
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The increase in bookings for separation and filtration equipment is being driven by the growth in separation equipment to be utilized in nuclear power generation facilities, separation and filtration equipment utilized in both natural gas infrastructure and oil/petrochemical producing and refining, as well as oily water separation equipment. The EMEA region, which has shown lower demand over recent periods, is contributing approximately 42% of the year-over-year growth in net bookings. Included in the backlog as of March 30, 2013 was approximately $12.5 million related to two customer contracts which were cancelled in the fourth quarter of fiscal 2013. They are shown above as removed to improve the comparability of the data. The Company anticipates approximately 90% of the backlog as of March 29, 2014 will be recognized as revenue over the next 12 months.
Financial Position
Assets. Total assets increased by $20.2 million, or 11.2%, from $180.1 million at June 29, 2013 to $200.3 million at March 29, 2014. On March 29, 2014, we held cash, including restricted cash, and cash equivalents of $47.5 million, had working capital of $61.8 million and a current liquidity ratio of 2.2-to-1.0. This compares with cash, including restricted cash, and cash equivalents of $58.0 million, working capital of $75.0 million, and a current liquidity ratio of 3.2-to-1.0 at June 29, 2013.
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PMFG, Inc. and Subsidiaries
March 29, 2014
Liabilities and Equity. Total liabilities increased by $24.9 million, or 51.6%, from $48.2 million at June 29, 2013 to $73.1 million at March 29, 2014. The increase in our total liabilities is attributed to an increase in long-term debt associated with the construction of manufacturing facilities in Denton, Texas and Zhenjiang, China, in addition to an increase in accounts payable, billings in excess of costs and earnings on uncompleted contracts and other accrued liabilities.
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 29, 2014, the balance of these working capital accounts was $14.8 million compared to $17.9 million at June 29, 2013, reflecting a decrease of our investment in these working capital items of $3.0 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 29, 2014 and June 29, 2013, we had outstanding letters of credit and bank guarantees of $14.6 million and $18.1 million, respectively.
Our cash and cash equivalents were $47.5 million as of March 29, 2014, compared to $58.0 million at June 29, 2013, of which $4.9 million and $5.0 million were restricted as collateral for stand-by letters of credit and bank guarantees at March 29, 2014, and June 29, 2013, respectively. Cash and cash equivalents held in financial institutions outside the United States totaled $24.4 million and $19.6 million at March 29, 2014 and June 29, 2013, respectively, to support the existing operations and planned growth of our operating locations outside the United States. The Company has elected to treat foreign earnings as permanently reinvested outside the U.S. and has not recognized the U.S. tax expense, if any, on those earnings. During the nine months ended March 29, 2014, cash used in operating activities was $5.5 million compared to cash provided by operating activities of $9.8 million for the nine months ended March 30, 2013.
Cash used in investing activities was $17.6 million for the nine months ended March 29, 2014, compared to cash used in investing activities of $11.6 million for the nine months ended March 30, 2013. Cash used in investing activities during the nine months ended March 29, 2014 included cash consideration paid for the acquisition of substantially all of the assets of CCA on March 28, 2014 and construction costs incurred to date on our new manufacturing facilities in Denton, Texas and Zhenjiang, China. The construction of both facilities has been completed, with only minor remaining capital expenditures expected in future periods for land improvements and finish work related the adjoining office complex in Zhenjiang.
Cash provided by financing activities during the nine months ended March 29, 2014 was $12.0 million compared to cash provided by financing activities of $6.2 million during the nine months ended March 30, 2013. The cash provided by financing activities for the nine months ended March 29, 2014 primarily consisted of proceeds from long-term debt as we drew on our construction term loan and the equity contribution from the non-controlling interest in our China subsidiary, offset by a payment of our long term debt. The cash provided by financing activities for the nine months ended March 30, 2013 primarily consisted of proceeds from short-term debt.
As a result of the events described above, our cash and cash equivalents during the nine months ended March 29, 2014 decreased by $10.4 million compared to an increase of $4.4 million during the nine months ended March 30, 2013.
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PMFG, Inc. and Subsidiaries
March 29, 2014
At March 29, 2014, the Company was not in compliance with the minimum DSC covenant in the Credit Agreement as described in Note 8 to the consolidated financial statements included in this Report. Subsequent to March 29, 2014, the Company obtained an amendment to the Credit Agreement that brought the Company into compliance as of March 29, 2014. Pursuant to the amendment, if the DSC is less than 1.50 to 1.00 as of the end of any fiscal quarter, the Company must deposit and maintain cash in a blocked collateral account (to which only the administrative agent under the Credit Agreement has access) in an aggregate amount equal to the greater of (a) $10.0 million or (b) the sum of (i) the aggregate principal amount of all revolving credit and swing line loans outstanding under the Credit Agreement, plus (ii) 100% of the undrawn face amount of all performance-related letters of credit outstanding under the Credit Agreement, plus (iii) 30% (subject to upward adjustment) of the undrawn face amount of all warranty-related letters of credit outstanding under the Credit Agreement, plus (iv) $3.0 million, less (v) all term loan principal payments made on or after March 29, 2014. The Company may withdraw the cash in the collateral account when it achieves a DSC of at least 1.50 to 1.00 as of the end of a subsequent fiscal quarter, so long as no default or borrowing base deficiency then exists.
The Company believes its unrestricted cash and cash equivalents together with expected cash flow from operations will be sufficient to meet the liquidity and capital requirements of the Company for the next 12 months including our ability to meet all customer and supplier commitments, as well as meet all repayment obligations under financing agreements.
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 29, 2013.
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.
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PMFG, Inc. and Subsidiaries
March 29, 2014
During the nine months ended March 29, 2014, 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.
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.
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 29, 2013
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The following exhibits are filed as part of this report.
Exhibit No. | Exhibit Description | |
10.1* | Amended and Restated Employment Agreement, dated February 7, 2014, between PMFG, Inc., Peerless Mfg. Co. and Peter J. Burlage (filed as Exhibit 10.1 to the Current Report on Form 8-K Filed by PMFG, Inc. on February 7, 2014 and incorporated herein by reference). | |
10.2† | Asset Purchase Agreement, dated March 18, 2014, by and among Combustion Components Associates, Inc., R. Gifford Broderick and Peerless Mfg. Co. | |
10.3† | Second Amendment to Credit Agreement, dated May 7, 2014, among PMFG, Inc., the lenders party thereto and Citibank, N.A. as administrative agent for the lenders. | |
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 |
*Management contract, compensatory plan or arrangement.
† Indicates furnished herewith.
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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 8, 2014 | /s/ Peter J. Burlage | |
| ||
Peter J. Burlage | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: May 8, 2014 | /s/ Ronald L McCrummen | |
| ||
Ronald L. McCrummen Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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