Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
For the Quarterly Period Ended March 31, 2005
OR
oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from to
Commission File Number 0-5214
PEERLESS MFG. CO.
Texas | 75-0724417 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
2819 Walnut Hill Lane, Dallas, Texas | 75229 | |
(Address of Principal Executive Offices) | (Zip code) |
(214) 357-6181
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. Yesþ Noo
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of May 12, 2005, there were 3,036,434 shares of the Registrant’s common stock outstanding.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
TABLE OF CONTENTS
3 | ||||||||
4 | ||||||||
5 | ||||||||
Notes to the Condensed Consolidated Financial Statements | 6 | |||||||
16 | ||||||||
36 | ||||||||
36 | ||||||||
38 | ||||||||
38 | ||||||||
Item 3. Defaults Upon Senior Securities | 38 | |||||||
38 | ||||||||
Item 5. Other Information | 38 | |||||||
38 | ||||||||
41 | ||||||||
Description of Compensation Payable to Non-Employee Directors | ||||||||
Employment Agreement | ||||||||
Rule 13a-14(a)/15d-14(a) Certification of CEO | ||||||||
Rule 13a-14(a)/15d-14(a) Certification of CFO | ||||||||
Section 1350 Certification of CEO | ||||||||
Section 1350 Certification of CFO |
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Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2005 | June 30, 2004 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 9,458 | $ | 4,119 | ||||
Accounts receivable — principally trade — net of allowance of uncollectible accounts of $478 at March 31, 2005 and $431 at June 30, 2004 | 9,370 | 13,604 | ||||||
Inventories | 4,080 | 3,106 | ||||||
Costs and earnings in excess of billings on uncompleted contracts | 10,395 | 12,448 | ||||||
Deferred income taxes | 1,165 | 1,165 | ||||||
Other — net | 1,304 | 816 | ||||||
Assets of discontinued operations | 216 | 225 | ||||||
Total current assets | 35,988 | 35,483 | ||||||
Property, plant and equipment — net | 2,913 | 3,053 | ||||||
Other assets | 868 | 930 | ||||||
Other assets of discontinued operations | 9 | 9 | ||||||
$ | 39,778 | $ | 39,475 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Account payable — trade | 8,946 | 9,791 | ||||||
Billings in excess of costs and earnings on uncompleted contracts | 2,523 | 399 | ||||||
Commissions payable | 737 | 844 | ||||||
Income taxes payable | — | 557 | ||||||
Product warranties | 1,042 | 982 | ||||||
Accrued liabilities and other | 1,734 | 1,923 | ||||||
Liabilities of discontinued operations | 224 | 306 | ||||||
Total current liabilities | 15,206 | 14,802 | ||||||
Shareholders’ equity | ||||||||
Common stock | 3,036 | 3,014 | ||||||
Additional paid-in capital | 2,104 | 1,884 | ||||||
Other | 292 | 214 | ||||||
Retained earnings | 19,140 | 19,561 | ||||||
Total shareholders’ equity | 24,572 | 24,673 | ||||||
Total liabilities and shareholders’ equity | $ | 39,778 | $ | 39,475 | ||||
See accompanying notes to the condensed consolidated financial statements.
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PEERLESS MFG. CO. AND SUBSIDIARIES
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Revenues | $ | 12,999 | $ | 13,491 | $ | 35,061 | $ | 46,727 | ||||||||
Cost of goods sold | 9,155 | 8,679 | 25,063 | 32,564 | ||||||||||||
Gross profit | 3,844 | 4,812 | 9,998 | 14,163 | ||||||||||||
Operating expenses | ||||||||||||||||
Sales and marketing | 1,558 | 1,648 | 4,440 | 4,660 | ||||||||||||
Engineering and project management | 892 | 1,041 | 2,724 | 3,172 | ||||||||||||
General and administrative | 1,200 | 1,227 | 3,612 | 3,463 | ||||||||||||
3,650 | 3,916 | 10,776 | 11,295 | |||||||||||||
Operating income (loss) | 194 | 896 | (778 | ) | 2,868 | |||||||||||
Other income (expense) | ||||||||||||||||
Foreign exchange gain (loss) | 3 | (68 | ) | 68 | (20 | ) | ||||||||||
Other income — net | 53 | 14 | 92 | 45 | ||||||||||||
56 | (54 | ) | 160 | 25 | ||||||||||||
Earnings (loss) from continuing operations before income taxes | 250 | 842 | (618 | ) | 2,893 | |||||||||||
Income tax expense (benefit) | 45 | 287 | (250 | ) | 989 | |||||||||||
Net earnings (loss) from continuing operations | 205 | 555 | (368 | ) | 1,904 | |||||||||||
Discontinued operations (Note 7) | ||||||||||||||||
Loss from discontinued operations (including gain on disposal of $0 and $140 in nine months ended 2005 and 2004, respectively) | — | (179 | ) | (80 | ) | (297 | ) | |||||||||
Income tax benefit | — | (62 | ) | (27 | ) | (103 | ) | |||||||||
Net loss from discontinued operations | — | (117 | ) | (53 | ) | (194 | ) | |||||||||
Net earnings (loss) | $ | 205 | $ | 438 | $ | (421 | ) | $ | 1,710 | |||||||
BASIC EARNINGS (LOSS) PER SHARE | ||||||||||||||||
Earnings (loss) from continuing operations | $ | 0.07 | $ | 0.18 | $ | (0.12 | ) | $ | 0.63 | |||||||
Loss from discontinued operations | 0.00 | (0.04 | ) | (0.02 | ) | (0.06 | ) | |||||||||
Basic earnings (loss) per share | $ | 0.07 | $ | 0.15 | $ | (0.14 | ) | $ | 0.57 | |||||||
DILUTED EARNINGS (LOSS) PER SHARE | ||||||||||||||||
Earnings (loss) from continuing operations | $ | 0.07 | $ | 0.18 | $ | (0.12 | ) | $ | 0.63 | |||||||
Loss from discontinued operations | 0.00 | (0.04 | ) | (0.02 | ) | (0.06 | ) | |||||||||
Diluted earnings (loss) per share | $ | 0.07 | $ | 0.14 | $ | (0.14 | ) | $ | 0.56 | |||||||
See accompanying notes to the condensed consolidated financial statements.
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PEERLESS MFG. CO. AND SUBSIDIARIES
Nine months ended | ||||||||
March 31, | ||||||||
2005 | 2004 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings (loss) | $ | (421 | ) | $ | 1,710 | |||
Net loss from discontinued operations | (53 | ) | (194 | ) | ||||
Net earnings (loss) from continuing operations | (368 | ) | 1,904 | |||||
Adjustments to reconcile net earnings (loss) from continuing operations to net cash provided by operating activities of continuing operations: | ||||||||
Depreciation and amortization | 487 | 583 | ||||||
Bad debt expense | 268 | (11 | ) | |||||
Foreign exchange (gain) loss | (68 | ) | 20 | |||||
Other | 70 | — | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | 4,003 | 1,533 | ||||||
Inventories | (973 | ) | (383 | ) | ||||
Costs and earnings in excess of billings on uncompleted contracts | 2,094 | (3,768 | ) | |||||
Other current assets | (488 | ) | 450 | |||||
Other assets | 62 | (72 | ) | |||||
Accounts payable | (795 | ) | (3 | ) | ||||
Billings in excess of costs and earnings on uncompleted contracts | 2,124 | (1,372 | ) | |||||
Commissions payable | (107 | ) | (154 | ) | ||||
Product warranties | 60 | (26 | ) | |||||
Income taxes payable | (557 | ) | 674 | |||||
Accrued liabilities and other | (178 | ) | (748 | ) | ||||
6,002 | (3,277 | ) | ||||||
Net cash provided by (used in) operating activities | 5,634 | (1,373 | ) | |||||
Cash flow from investing activities: | ||||||||
Net proceeds from short-term investments | — | 248 | ||||||
Net purchases of property and equipment | (347 | ) | (301 | ) | ||||
Net cash used in investing activities | (347 | ) | (53 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from sale of common stock | 173 | 51 | ||||||
Net cash provided by financing activities | 173 | 51 | ||||||
Net cash provided by (used in) discontinued operations | (126 | ) | 1,664 | |||||
Effect of exchange rate changes on cash and cash equivalents | 5 | (9 | ) | |||||
Net increase in cash and cash equivalents | 5,339 | 280 | ||||||
Cash and cash equivalents at beginning of period | 4,119 | 6,680 | ||||||
Cash and cash equivalents at end of period | $ | 9,458 | $ | 6,960 | ||||
See accompanying notes to condensed consolidated financial statements.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Peerless Mfg. Co. and Subsidiaries (hereafter referred to as the “Company”, “we”, “us”, “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The condensed consolidated financial statements of the Company as of March 31, 2005, and for the three and nine months ended March 31, 2005 and March 31, 2004 are unaudited and, in the opinion of management, contain all adjustments necessary for the fair presentation of the financial position and results of operations of the Company for the interim periods. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004. The results of operations for the three and nine months ended March 31, 2005 are not necessarily indicative of the results to be expected for the entire year (see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Our Operating Results and Other Risk Factors”). The Company’s fiscal year ends on June 30. References herein to fiscal 2004 and fiscal 2005 refer to our fiscal years ended June 30, 2004 and 2005, respectively.
In connection with the discontinuation of our Boiler operations (see Note 7 – “Discontinued Operations” in our Notes to Consolidated Financial Statements), the financial information has been presented to report the discontinued operations in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Certain fiscal 2004 items have been reclassified to conform to the fiscal 2005 presentation.Unless otherwise noted, all dollar and share amounts in the tables are in thousands, except per share amounts.
2. New Accounting Standards
In November 2004, the FASB issued SFAS No. 151,Inventory Costs(SFAS 151). SFAS 151 requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as current-period charges. Further, SFAS 151 requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. SFAS 151 is effective for inventory costs incurred beginning in the first quarter of fiscal 2006. The Company is currently evaluating the effect of SFAS 151 on its financial statements and related disclosures.
In December 2004, the Financial Accounting Standards Board (FASB) issued the revised SFAS No. 123R,Share-Based Payment(SFAS 123R). SFAS 123R requires compensation costs related to share-based payment transactions to be recognized in the financial statements. Generally, compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the requisite service period, generally, as the award vests. The Company will be required to adopt SFAS 123R in the first quarter of fiscal 2006. SFAS 123R applies to all awards granted after June 30, 2005 and to previously granted awards unvested as of the adoption date. The Company is currently evaluating the impact that the adoption of SFAS 123R will have on its financial statements and related disclosures.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
3. Accounts Receivable
The Company’s accounts receivable are due from companies in various industries. Credit is extended based on evaluation of a customer’s financial condition and, generally collateral is not required except on credit extension to international customers. Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for uncollectible accounts. Accounts outstanding longer than contractual payment terms are considered past due. The Company records an allowance on a specific basis by considering a number of factors, including the length of time the trade 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 general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited back to bad debt expense in the period the payment is received.
Changes in the Company’s allowance for uncollectible accounts are as follows:
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Balance at beginning of period | $ | 427 | $ | 383 | $ | 431 | $ | 402 | ||||||||
Bad debt expense | 51 | — | 268 | (11 | ) | |||||||||||
Accounts written off, net | — | — | (221 | ) | (8 | ) | ||||||||||
Balance at end of period | $ | 478 | $ | 383 | $ | 478 | $ | 383 | ||||||||
4. Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead. The Company regularly reviews inventory values on hand, using specific aging categories, and records a provision for excess and potentially obsolete inventories based on historical usage and estimated future usage. In assessing the ultimate realization of its inventory, the Company is required to make judgments as to future demand requirements. As actual future demand or market conditions may vary from those projected by the Company, adjustments to inventory valuations may be required.
Principal components of inventories are as follows :
March 31, | June 30, | |||||||
2005 | 2004 | |||||||
Raw materials | $ | 3,447 | $ | 2,630 | ||||
Work in progress | 567 | 427 | ||||||
Finished goods | 299 | 245 | ||||||
4,313 | 3,302 | |||||||
Reserve for excess and potentially obsolete inventory | (233 | ) | (196 | ) | ||||
$ | 4,080 | $ | 3,106 | |||||
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
4. Inventories - Continued
Changes in the Company’s reserve for obsolete and slow-moving inventory are as follows:
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Balance at beginning of period | $ | 218 | $ | 184 | $ | 196 | $ | 122 | ||||||||
Additions/adjustments | 15 | (81 | ) | 37 | (19 | ) | ||||||||||
Amounts written off | — | — | — | — | ||||||||||||
Balance at end of period | $ | 233 | $ | 103 | $ | 233 | $ | 103 | ||||||||
5. Product Warranties
The Company warrants that its products will be free from defects in materials and workmanship and will conform to agreed upon specifications at the time of delivery and typically for a period of 12 to 18 months from the date of customer acceptance, depending upon the specific product and terms of the customer agreement. Typical warranties require the Company to repair or replace defective products during the warranty period at no cost to the customer. The Company attempts to obtain back-up concurrent warranties for major component parts from its suppliers. The Company provides for the estimated cost of product warranties, based on historical experience by product type, expectation of future conditions and the extent of back-up concurrent supplier warranties in place, at the time the product revenue is recognized. Revision to the estimated product warranties is made when necessary, based on changes in these factors.
Changes in the Company’s product warranty reserve are as follows:
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Balance at beginning of period | $ | 984 | $ | 771 | $ | 982 | $ | 846 | ||||||||
Provision for warranty expenses | 213 | 144 | 419 | 499 | ||||||||||||
Warranty charges | (155 | ) | (95 | ) | (359 | ) | (525 | ) | ||||||||
Balance at end of period | $ | 1,042 | $ | 820 | $ | 1,042 | $ | 820 | ||||||||
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
6. Revenue Recognition and Cost and Earnings on Uncompleted Contracts
The Company provides products under long-term, generally fixed-priced, contracts that may extend up to 18 months, or longer, in duration. In connection with these contracts, the Company follows the guidance contained in AICPA Statement of Position 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts(“SOP 81.1”). SOP81-1 requires the use of percentage-of-completion accounting for long-term contracts that contain enforceable rights regarding services to be provided and received by the contracting parties, consideration to be exchanged, and the manner and terms of settlement, assuming reasonably dependable estimates of revenues and expenses can be made. The percentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract. If it is determined that a loss will result from the performance of a contract, the entire amount of the loss is charged against income when it is determined. Amounts recognized in revenue are calculated using the percentage of construction cost completed, generally on a cumulative cost to total cost basis. Cumulative revenues recognized may be less or greater than cumulative costs and profits billed at any point in time 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.”
The completed contract method is applied to relatively short-term contracts where the financial statement presentation does not vary materially from the presentation under the percentage-of-completion method. Revenues under the completed contract method are recognized upon shipment of the product.
The components of uncompleted contracts are as follows:
March 31, | June 30, | |||||||
2005 | 2004 | |||||||
Costs incurred on uncompleted contracts and estimated earnings | $ | 51,189 | $ | 44,348 | ||||
Less billings to date | (43,317 | ) | (32,299 | ) | ||||
$ | 7,872 | $ | 12,049 | |||||
The components of uncompleted contracts are reflected in the balance sheets as follows:
March 31, | June 30, | |||||||
2005 | 2004 | |||||||
Costs and earnings in excess of billings on uncompleted contracts | $ | 10,395 | $ | 12,448 | ||||
Billings in excess of costs and earnings on uncompleted contracts | (2,523 | ) | (399 | ) | ||||
$ | 7,872 | $ | 12,049 | |||||
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
7. Discontinued Operations
During the first quarter of fiscal 2004, the Board of Directors authorized the divestiture, and the Company sold for $250,000 certain assets, of its Boiler business segment with a net book value of approximately $110,000, resulting in a gain on disposal of $140,000.
The following represents a summary of operating results and the gain on disposition of the boiler segment presented as discontinued operations:
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Revenues | $ | — | $ | — | $ | — | $ | 360 | ||||||||
Cost of goods sold | — | 136 | 75 | 514 | ||||||||||||
Gross profit (loss) | — | (136 | ) | (75 | ) | (154 | ) | |||||||||
Operating expenses | — | 43 | 5 | 283 | ||||||||||||
Operating loss | — | (179 | ) | (80 | ) | (437 | ) | |||||||||
Income tax benefit | — | (62 | ) | (27 | ) | (151 | ) | |||||||||
Net loss from operations | — | (117 | ) | (53 | ) | (286 | ) | |||||||||
Gain on disposal, net of taxes | — | — | — | 92 | ||||||||||||
Net loss from operations | $ | — | $ | (117 | ) | $ | (53 | ) | $ | (194 | ) | |||||
Diluted loss per share | ||||||||||||||||
Net loss from operations | $ | — | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.09 | ) | |||||
Net gain on disposal | $ | — | $ | — | $ | — | $ | 0.03 | ||||||||
Net loss | $ | — | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.06 | ) | |||||
The current and non-current assets and liabilities of the discontinued boiler segment are as follows:
March 31, | June 30, | |||||||
2005 | 2004 | |||||||
Assets | ||||||||
Accounts receivable, principally trade — net of allowance for uncollectible accounts of $10 at March 31, 2005 and June 30, 2004. | $ | 216 | $ | 225 | ||||
Current assets of discontinued operations | 216 | 225 | ||||||
Equipment — net of accumulated depreciation of $11 at March 31, 2005 and June 30, 2004. | 9 | 9 | ||||||
Total assets of discontinued operations | $ | 225 | $ | 234 | ||||
Liabilities | ||||||||
Commissions payable | — | 6 | ||||||
Product warranties and start-up reserves | 224 | 300 | ||||||
Total current liabilities of discontinued operations | $ | 224 | $ | 306 | ||||
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
8. Income Taxes
On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act creates a temporary incentive for U.S. corporations to repatriate foreign subsidiary earnings by providing an elective 85% dividends received deduction for certain dividends from controlled foreign corporations. In December 2004, the FASB issued FSP 109-2,Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.FSP 109-2 provides companies with additional time beyond the financial reporting period of enactment to evaluate the effects of the Act on their plans for repatriation of foreign earnings for purposes of applying SFAS 109,Accounting for Income Taxes. On January 13, 2005 the U.S. Treasury published Notice 2005-10 providing guidance on the implementation of the repatriation deduction. The Company is currently evaluating the repatriation provisions of the Act, which if implemented by the Company would affect the Company’s tax provision and deferred tax assets and liabilities. However, given the preliminary stage of the Company’s evaluation, it is not possible at this time to determine the amount that may be repatriated or the related potential income tax effects of such repatriation.
9. Contingencies
On March 19, 2004, the Company received notice that an adversary proceeding was initiated by Enron Corp. and National Energy Production Corporation in the United States Bankruptcy Court for the Southern District of New York against PMC Acquisition, Inc., a subsidiary that operated the discontinued Boiler business under the name ABCO Industries, alleging that certain accounts receivable payments paid to ABCO were avoidable transfers under the Bankruptcy Code. The plaintiffs are seeking to recover approximately $1.0 million from ABCO. The Company believes that all or a majority of the payments fail to meet the applicable standards for avoidance under the Bankruptcy Code and other applicable law, and that a number of defenses can be asserted that will negate any recovery by the plaintiffs. The Company intends to vigorously defend against the lawsuit and management believes the likelihood of loss is not probable.
On April 25, 2005, the Company received notice that the Company may have received preferential transfers amounting to approximately $900,000 in connection with the Chapter 11 filing by Erie Power Technologies, Inc. Based on its preliminary investigation, the Company believes that all of the payments received fail to meet the applicable standards for avoidance under the Bankruptcy Code and other applicable law, and that a number of defenses can be asserted that will negate any recovery by the plaintiffs. The Company intends to vigorously defend against the lawsuit and management believes the likelihood of loss is not probable.
From time to time the Company is involved in various litigation matters arising in the ordinary course of its business. The Company does not believe the disposition of any current matter will have a material adverse effect on its consolidated financial position or its results of operations.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
10. Comprehensive Income (Loss)
Comprehensive income (loss) is defined as all changes in equity during a period, except those resulting from investments by owners and distributions to owners. The components of comprehensive income (loss) were as follows:
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net earnings (loss) from continuing operations | $ | 205 | $ | 555 | $ | (368 | ) | $ | 1,904 | |||||||
Net loss from discontinued operations | — | (117 | ) | (53 | ) | (194 | ) | |||||||||
Foreign currency translation adjustment | (42 | ) | 60 | 78 | 222 | |||||||||||
Comprehensive income (loss) | $ | 163 | $ | 498 | $ | (343 | ) | $ | 1,932 | |||||||
11. Earnings (Loss) Per Share
Basic earnings (loss) per share have been computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the applicable period. Diluted earnings (loss) per share reflect the potential dilution that could occur if options or other contracts to issue common shares were exercised or converted into common stock. The following table sets forth the computation for basic and diluted earnings (loss) per share for the periods indicated.Certain earnings (loss) per share amounts may not total due to rounding.
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net earnings (loss) from continuing operations | $ | 205 | $ | 555 | $ | (368 | ) | $ | 1,904 | |||||||
Loss from discontinued operations | — | (117 | ) | (53 | ) | (194 | ) | |||||||||
Net earnings (loss) | $ | 205 | $ | 438 | $ | (421 | ) | $ | 1,710 | |||||||
Basic weighted average common shares outstanding | 3,032 | 3,004 | 3,026 | 3,001 | ||||||||||||
Effect of dilutive options | 43 | 44 | — | 43 | ||||||||||||
Diluted weighted average common shares outstanding | 3,075 | 3,048 | 3,026 | 3,044 | ||||||||||||
BASIC EARNINGS (LOSS) PER SHARE | ||||||||||||||||
Earnings (loss) from continuing operations | $ | 0.07 | $ | 0.18 | $ | (0.12 | ) | $ | 0.63 | |||||||
Loss from discontinued operations | 0.00 | (0.04 | ) | (0.02 | ) | (0.06 | ) | |||||||||
Net earnings (loss) per share | $ | 0.07 | $ | 0.15 | $ | (0.14 | ) | $ | 0.57 | |||||||
DILUTED EARNINGS (LOSS) PER SHARE | ||||||||||||||||
Earnings (loss) from continuing operations | $ | 0.07 | $ | 0.18 | $ | (0.12 | ) | $ | 0.63 | |||||||
Loss from discontinued operations | 0.00 | (0.04 | ) | (0.02 | ) | (0.06 | ) | |||||||||
Net earnings (loss) per share | $ | 0.07 | $ | 0.14 | $ | (0.14 | ) | $ | 0.56 | |||||||
Diluted weighted average common shares outstanding excluded 80,800 and 166,967 outstanding stock options for the three and nine months ended March 31, 2005 because their impact would be anti-dilutive. Likewise, diluted weighted average common shares outstanding excluded 96,700 and 87,467 outstanding stock options for the three and nine months ended March 31, 2004, respectively, because their impact would be anti-dilutive.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
12. Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS 148) which amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires disclosures in annual and interim financial statements of the effects of stock-based compensation as reflected below.
The Company continues to account for its stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation expense related to the Company’s stock options is reflected in the net earnings (loss), as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation.
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net earnings (loss), as reported | $ | 205 | $ | 438 | $ | (421 | ) | $ | 1,710 | |||||||
Deduct: Total stock-based employee compensation expense determined using the fair value based method for all awards, net of tax | (48 | ) | (23 | ) | (118 | ) | (146 | ) | ||||||||
Pro forma net earnings (loss) | $ | 157 | $ | 415 | $ | (539 | ) | $ | 1,564 | |||||||
Earnings (loss) per share: | ||||||||||||||||
Basic — as reported | $ | 0.07 | $ | 0.15 | $ | (0.14 | ) | $ | 0.57 | |||||||
Basic — pro forma | $ | 0.05 | $ | 0.14 | $ | (0.18 | ) | $ | 0.52 | |||||||
Diluted — as reported | $ | 0.07 | $ | 0.14 | $ | (0.14 | ) | $ | 0.56 | |||||||
Diluted — pro forma | $ | 0.05 | $ | 0.14 | $ | (0.18 | ) | $ | 0.51 | |||||||
13. Segment Information
The Company identifies reportable segments based on management responsibility within the corporate structure. The Company has two reportable industry segments: Environmental Systems and Separation Filtration Systems. The main product of its Environmental Systems segment is its Selective Catalytic Reduction Systems, referred to as “SCR Systems”. These environmental control systems are used for air pollution abatement and convert nitrogen oxide (NOx) emissions from exhaust gases caused by burning hydrocarbon fuels such as coal, gasoline, natural gas and oil, into harmless nitrogen and water vapor. Along with the SCR Systems, this segment also offers systems to reduce other pollutants such as carbon monoxide (CO) and particulate matter. The Company combines these systems with other components, such as instruments, controls and related valves and piping to offer customers a totally integrated system. The Separation Filtration
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FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
13. Segment Information - Continued
Systems segment produces various types of separators and filters used for removing liquids and solids from air and other gases. This segment also provides engineering design and services, pulsation dampeners, natural gas odorizers, quick-opening closures and parts for its products.
Segment profit and loss is based on revenue less direct expenses of the segment before allocation of general, administrative, research and development costs. All inter-company transfers between segments have been eliminated. The Company allocates all costs associated with the design, manufacture, and sale of its products to the appropriate segment. Segment information and reconciliation to operating profit for the three and nine months ended March 31, 2005 and March 31, 2004 are presented below. The Company does not allocate general and administrative expenses (“unallocated overhead”), assets, expenditures for assets or depreciation expense on a segment basis for internal management reporting, and therefore such information is not presented.
Separation | ||||||||||||||||
Environmental | Filtration | Unallocated | ||||||||||||||
Systems | Systems | Overhead | Consolidated | |||||||||||||
Three months ended March 31, 2005 | ||||||||||||||||
Net sales from customers | $ | 6,549 | $ | 6,450 | $ | — | $ | 12,999 | ||||||||
Segment profit (loss) | 645 | 749 | (1,200 | ) | 194 | |||||||||||
Three months ended March 31, 2004 | ||||||||||||||||
Net sales from customers | $ | 4,937 | $ | 8,554 | $ | — | $ | 13,491 | ||||||||
Segment profit | 694 | 1,429 | (1,227 | ) | 896 | |||||||||||
Nine months ended March 31, 2005 | ||||||||||||||||
Net sales from customers | $ | 15,526 | $ | 19,535 | $ | — | $ | 35,061 | ||||||||
Segment profit (loss) | 1,919 | 915 | (3,612 | ) | (778 | ) | ||||||||||
Nine months ended March 31, 2004 | ||||||||||||||||
Net sales from customers | $ | 23,946 | $ | 22,781 | $ | — | $ | 46,727 | ||||||||
Segment profit | 3,923 | 2,408 | (3,463 | ) | 2,868 |
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
14. Industry Segment and Geographic Information
The Company attributes revenues from external customers to individual geographic areas based on the country where the sale originated. Information about the Company’s operations in different geographic areas as of and for the three and nine months ended March 31, 2005 and March 31, 2004 is as follows:
United | ||||||||||||||||
States | Europe | Eliminations | Consolidated | |||||||||||||
Three months ended March 31, 2005 | ||||||||||||||||
Net sales to unaffiliated customers | $ | 10,242 | $ | 2,757 | $ | — | $ | 12,999 | ||||||||
Transfers between geographic areas | 1,128 | — | (1,128 | ) | — | |||||||||||
Total | $ | 11,370 | $ | 2,757 | $ | (1,128 | ) | $ | 12,999 | |||||||
Identifiable long-lived assets | $ | 2,829 | $ | 84 | $ | — | $ | 2,913 | ||||||||
Three months ended March 31, 2004 | ||||||||||||||||
Net sales to unaffiliated customers | $ | 10,788 | $ | 2,703 | $ | — | $ | 13,491 | ||||||||
Transfers between geographic areas | 1,191 | — | (1,191 | ) | — | |||||||||||
Total | $ | 11,979 | $ | 2,703 | $ | (1,191 | ) | $ | 13,491 | |||||||
Identifiable long-lived assets | $ | 3,017 | $ | 101 | $ | — | $ | 3,118 | ||||||||
Nine months ended March 31, 2005 | ||||||||||||||||
Net sales to unaffiliated customers | $ | 28,842 | $ | 6,219 | $ | — | $ | 35,061 | ||||||||
Transfers between geographic areas | 1,809 | — | (1,809 | ) | — | |||||||||||
Total | $ | 30,651 | $ | 6,219 | $ | (1,809 | ) | $ | 35,061 | |||||||
Identifiable long-lived assets | $ | 2,829 | $ | 84 | $ | — | $ | 2,913 | ||||||||
Nine months ended March 31, 2004 | ||||||||||||||||
Net sales to unaffiliated customers | $ | 38,163 | $ | 8,564 | $ | 46,727 | ||||||||||
Transfers between geographic areas | 1,431 | — | (1,431 | ) | — | |||||||||||
Total | $ | 39,594 | $ | 8,564 | $ | (1,431 | ) | $ | 46,727 | |||||||
Identifiable long-lived assets | $ | 3,017 | $ | 101 | $ | — | $ | 3,118 | ||||||||
Transfers between the geographic areas primarily represent inter-company export sales and are accounted for based on established sales prices between the related companies.
Identifiable long-lived assets of geographic areas are those assets related to the Company’s operations in each area.
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FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
15. Lines of Credit
The Company maintains a $12.5 million revolving line of credit facility for working capital requirements that expires on October 31, 2006. The credit line carries a floating interest rate based on the prime or Euro rate plus or minus an applicable margin (Euro plus 1.75% at March 31, 2005), and is secured by substantially all of the Company’s assets. As of March 31, 2005, the Company had no outstanding balances under the credit line, and $3.2 million outstanding under stand-by letters of credit, leaving $9.3 million of availability under the facility. The facility contains financial covenants, restrictions on capital expenditures, acquisitions, asset dispositions, and additional debt, as well as other customary covenants. As of March 31, 2005, the Company was in compliance with all financial and other covenants of the loan agreement.
In addition, our subsidiary located in the United Kingdom (our “UK subsidiary”) has a £2.4 million (approximately $4.5 million) debenture agreement used to facilitate the issuances of bank guarantees. This facility is secured by substantially all of the UK subsidiary’s assets, and is backed by a Peerless stand-by letter of credit of £1.0 million (approximately $1.9 million, which is included in the $3.2 million outstanding under stand-by letters of credit as described above) and expires on October 31, 2005. At March 31, 2005, there was approximately £2.2 million outstanding under this facility, leaving availability of approximately £200,000 (approximately $375,000).
16. Supplemental Cash Flow Information
Net cash flows from operating activities reflects cash payments for income taxes as follows:
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Income taxes paid | $ | — | $ | — | $ | 660 | $ | 251 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
From time to time, we make oral and written statements that may constitute “forward-looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1996 or by the Securities and Exchange Commission in its rules, regulations and releases, including statements regarding our expectations, hopes, beliefs, intentions, projections or strategies regarding the future. We desire to avail ourselves of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1996 for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements made in this Report, as well as those made in our other filings with the SEC. Forward-looking statements contained in this Report are based on management’s current plans and expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In the preparation of this Report, where such
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FOR THE PERIOD ENDED MARCH 31, 2005
forward-looking statements appear, we have sought to accompany such statements with meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those described in the forward-looking statements. Such factors include, but are not limited to, the “Factors That May Affect Our Operating Results and Other Risk Factors,” as set forth starting on page 31 of this Report.
All forward-looking statements included in this Report are based on information available to us on the date hereof, and we expressly disclaim any obligation to release publicly any updates or changes in the forward-looking statements, whether as a result of changes in events, conditions, or circumstances on which any forward-looking statement is based.
Overview
We are a global company providing environmental and separation filtration products for the abatement of air pollution and the removal of contaminants from gases and liquids through our two principal business segments – Environmental Systems and Separation Filtration Systems. During fiscal year 2004, we discontinued the operations of our Boiler business. See Note 7 – “Discontinued Operations” in our Notes to Condensed Consolidated Financial Statements of this Report for additional discussion on the discontinuance of this business unit.
Environmental Systems.This business segment represented approximately 44% and 51% of our revenues for the nine months ended March 31, 2005 and 2004, respectively. The main product of the Environmental Systems segment is Selective Catalytic Reduction Systems, referred to as “SCR Systems”. These environmental control systems are used for air pollution abatement and convert NOx emissions from exhaust gases caused by burning hydrocarbon fuels such as coal, gasoline, natural gas and oil, into harmless nitrogen and water vapor. Along with the SCR Systems, this segment also offers systems to reduce other pollutants such as CO and particulate matter. These systems are totally integrated, complete with instruments, controls and related valves and piping.
Separation Filtration Systems.This business segment represented approximately 56% and 49% of our revenues for the nine months ended March 31, 2005 and 2004, respectively. The Separation Filtration Systems segment produces specialized products known as “separators” or “filters” which are used for a variety of purposes in cleaning gases and liquids as they move through piping systems. These products are used primarily to remove solid and liquid contaminants from natural gas as well as saltwater aerosols from combustion intake air of shipboard gas turbine and diesel engines. In addition, separators are also used in nuclear power plants to remove water from saturated steam.
Boilers.In this discontinued business segment, we designed, engineered, manufactured and sold packaged boilers and other steam generating equipment. This equipment is used to produce steam, which is used for heating, drying, driving steam engines and a variety of other applications. See also Note 7 – “Discontinued Operations” in the Notes to the Consolidated Financial Statements of this Report for additional information regarding the Boiler segment.
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FOR THE PERIOD ENDED MARCH 31, 2005
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.
Certain of our accounting policies require a higher degree of judgment than others in their application. These include revenue recognition on long-term contracts, accrual for estimated warranty costs, allowance for doubtful accounts, and reserve for obsolete and slow moving inventory. Our policies and related procedures for these items are summarized below.
Revenue Recognition. We provide products under long-term, generally fixed-priced, contracts that may extend up to 18 months, or longer, in duration. In connection with these contracts, we follow the guidance contained in AICPA Statement of Position (“SOP”) 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” SOP 81-1 requires the use of percentage-of-completion accounting for long-term contracts that contain enforceable rights regarding services to be provided and received by the contracting parties, consideration to be exchanged, and the manner and terms of settlement, assuming reasonably dependable estimates of revenues and expenses can be made. The percentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract. Amounts recognized in revenue are calculated using the percentage of construction cost completed, generally on a cumulative cost to total cost basis. Cumulative revenues recognized may be less or greater than cumulative costs and profits billed at any point in time 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.”
When using the percentage-of-completion method, we must be able to accurately estimate the total costs we expect to incur on a project in order to record the proper amount of revenues for that period. We continually update our estimates of costs and status of each project with our subcontractors and our manufacturing plants. If it is determined that a loss will result from the performance of a contract, the entire amount of the loss is charged against income when it is determined. The impact of revisions in contract estimates are recognized on a cumulative basis in the period in which the revisions are made. In addition, significant portions of our costs are subcontracted under fixed-priced arrangements, thereby reducing the risk of significant cost overruns on any given project. However, a number of internal and external factors, including labor rates, plant utilization factors, future material prices, changes in customer specifications, and other factors can affect our cost estimates. While we attempt to reduce the risk relating to revenue and cost estimates in percentage-of-completion models through corporate policy and approval and monitoring processes, any estimation process, including that used in preparing contract accounting models, involves inherent risk.
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Product Warranties. We offer warranty periods of various lengths to our customers depending upon the specific product and terms of the customer agreement. We typically negotiate varying terms regarding warranty coverage and length of warranty depending upon the product involved and customary practices. In general, our warranties require us to repair or replace defective products during the warranty period at no cost to the customer. We attempt to obtain back-up concurrent warranties for major component parts from our suppliers. As of each balance sheet date, we record an estimate for warranty related costs for products sold based on historical experience, expectation of future conditions and the extent of back-up concurrent supplier warranties in place. While we believe that our estimated warranty reserve is adequate and the judgment applied is appropriate, due to a number of factors our estimated liability for product warranties could differ from actual warranty costs incurred in the future.
Allowance for Doubtful Accounts.We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. On an on-going basis, we evaluate the collectability of accounts receivable based upon historical collection trends, current economic factors, and the assessment of the collectability of specific accounts. We evaluate the collectability of specific accounts using a combination of factors, including the age of the outstanding balances, evaluation of customers’ current and past financial condition and credit scores, recent payment history, current economic environment, discussions with our project managers, and discussions with the customers directly.
Reserve for Obsolete and Slow-Moving Inventory.Inventories are valued at the lower of cost or market and are reduced by a reserve for excess and potentially obsolete inventories. The Company regularly reviews inventory values on hand, using specific aging categories, and records a provision for obsolete and slow-moving inventory based on historical usage and estimated future usage. As actual future demand or market conditions may vary from those projected by management, adjustments to inventory valuations may be required.
Results of Operations
The following table displays our statements of operations as a percentage of net revenues:
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of goods sold | 70.4 | 64.4 | 71.5 | 69.7 | ||||||||||||
Gross profit | 29.6 | 35.6 | 28.5 | 30.3 | ||||||||||||
Operating expenses | 28.1 | 29.0 | 30.7 | 24.2 | ||||||||||||
Operating income (loss) | 1.5 | 6.6 | (2.2 | ) | 6.1 | |||||||||||
Other income (expense) | 0.4 | (0.4 | ) | 0.5 | 0.1 | |||||||||||
Net earnings (loss) from continuing operations before income taxes | 1.9 | 6.2 | (1.7 | ) | 6.2 | |||||||||||
Income tax expense (benefit) | 0.3 | 2.1 | (0.7 | ) | 2.1 | |||||||||||
Net earnings (loss) from continuing operations | 1.6 | 4.1 | (1.0 | ) | 4.1 | |||||||||||
Loss from discontinued operations, net of tax | — | (0.9 | ) | (0.2 | ) | (0.4 | ) | |||||||||
Net earnings (loss) | 1.6 | % | 3.2 | % | (1.2 | )% | 3.7 | % | ||||||||
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FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Results of Operations – Consolidated
Revenues.For the three months ended March 31, 2005, revenues decreased approximately $500,000, or 3.7%, to $13.0 million from $13.5 million for the three months ended March 31, 2004. Revenues originated by our domestic operations decreased by approximately $600,000, or 5.6%, from $10.8 million for the three months ended March 31, 2004 to $10.2 million for the three months ended March 31, 2005. Revenues originated by our international operations increased by approximately $100,000, or 3.7%, from $2.7 million for the three months ended March 31, 2004 to $2.8 million for the three months ended March 31, 2005. The decrease in our domestically originated revenues was mainly attributable to the decrease in our Separation Filtration System sales, which decreased by approximately $2.2 million, or 36.9%. This was partially offset by an increase in our Environmental Systems sales, which increased by approximately $1.6 million, or 32.7%. The increase in our international originated revenues related primarily to an increase in our pressure vessel sales originated by our United Kingdom operations, which increased by approximately $100,000, or 3.7%. See Item 2 – “Results of Operations – Segments” of this Report for further discussion on revenues.
Gross Profit Margin.Our margins, during a particular period, may be impacted by the following factors: (1) sales volume, (2) shifts in our product mix, (3) unanticipated increase in our component costs, and (4) start-up and warranty costs. Shifts in our product mix can impact our margin performance two ways: (1) certain of our products have higher margins than others; and as a result, shifts in the composition of our sales from quarter to quarter can have a significant impact on our reported margins, and (2) certain of our products have a higher internal manufacturing cost component associated with them, thus changes in our sales mix from quarter to quarter can have a significant impact on the utilization of our manufacturing facilities, and thus impact our reported margin through our absorption factors.
For the three months ended March 31, 2005, our gross profit margin decreased by approximately $1.0 million, or 20.8%, from $4.8 million for the three months ended March 31, 2004 to $3.8 million for the three months ended March 31, 2005. Gross profit margin, as a percentage of sales, decreased from 35.6% for the three months ended March 31, 2004 to 29.6% for the three months ended March 31, 2005. Our margins during the quarter were impacted by all of the factors noted above. Our sales volume was down for the quarter and our domestic Separation Filtration System sales, which tend to have a much higher internal manufacturing cost component associated with them, decreased as a percentage of our sales during the quarter from 43.3% to 28.4% for the three months ended March 31, 2004 and 2005, respectively. The result was that our plant utilization factors decreased during the quarter and as such, our unabsorbed manufacturing costs increased from approximately $500,000, or 3.6% of sales for the three months ended March 31, 2004 to approximately $600,000, or 4.8% of sales for the three months ended March 31, 2005. In addition, our warranty and start-up costs increased as a percentage of sales from 0.8% for the third quarter of fiscal 2004 to 4.3% for the third quarter of fiscal year 2005. The increase in our warranty and start-up costs related primarily to one Environmental System project, for which the Company has provided a specific reserve of approximately $450,000 ($250,000 during the current period) to cover certain contractually imposed process related issues and a potential liquidated damages claim. The Company feels it potentially has mitigating factors with respect to the liquidated damages claim and intends to assert such factors
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FOR THE PERIOD ENDED MARCH 31, 2005
against such claim if made. With respect to the process issues, while the equipment meets operating permit standards, it is not meeting all contractually obligated process requirements. As such, the Company has agreed with the owner, at the Company’s expense, to install additional catalyst to comply with all contractually obligated process requirements.
Operating Expenses.For the three months ended March 31, 2005, operating expenses from continuing operations decreased by approximately $200,000, or 5.1%, from approximately $3.9 million for the three months ended March 31, 2004 to approximately $3.7 million for the three months ended March 31, 2005. As a percentage of sales, our operating expenses decreased from 29.0% for the three months ended March 31, 2004 to 28.1% for the three months ended March 31, 2005. On a comparative basis, our sales and marketing expenses decreased approximately $100,000 and our engineering and project management expenses decreased approximately $100,000. Our general and administrative expenses remained relatively constant during both periods, as any cost control benefits achieved during the current quarter were offset by the increased costs of compliance with corporate governance mandates enacted by the SEC and the Nasdaq Stock Market, which are expenses that are expected to continue.
Other Income and Expense.For the three months ended March 31, 2005, other income and expense items changed by approximately $110,000 from expense of approximately $54,000 for the three months ended March 31, 2004 to income of approximately $56,000 for the three months ended March 31, 2005. This change related primarily to the impact associated with our foreign currency exchange. During the three months ended March 31, 2004, we realized foreign currency exchange losses of approximately $68,000 compared to foreign currency exchange gains of approximately $3,000 for the three months ended March 31, 2005. In addition to the foreign currency impact during the current period, we recognized net rental income of approximately $33,000 associated with the lease of a portion of our Dallas, Texas warehouse space.
Income Taxes.The Company’s provision for incomes taxes is based upon the estimated effective tax rates in the tax jurisdictions in which the Company operates and includes federal, state and foreign taxes. The effective tax rate for the three months ended March 31, 2005 and 2004 was approximately 18% and 34%, respectively. During the current period, our effective tax rate was impacted by a change in our estimated effective annual tax rate from 34% to 40%. This adjustment resulted in a reduction of our current period tax expense of approximately $40,000. The increase in our effective tax rate is due primarily to a shift in the composition of our foreign and domestic pre-tax earnings (loss).
Net Earnings (Loss) from Continuing Operations.As a result of the above factors, our net earnings from continuing operations decreased by approximately $350,000, from earnings of approximately $555,000 or 4.1% of sales for the three months ended March 31, 2004, to earnings of approximately $205,000, or 1.6% of sales for the three months ended March 31, 2005. Basic earnings per share decreased from earnings of $0.18 per share for the three months ended March 31, 2004, to earnings per share of $0.07 per share for the three months ended March 31, 2005. Diluted earnings per share decreased from earnings of $0.18 per share for the three months ended March 31, 2004, to earnings of $0.07 per share for the three months ended March 31, 2005.
Discontinued Operations. For the three months ended March 31, 2005, there were no charges or income recognized from discontinued operations compared to a net loss of approximately $117,000 for the three months ended March 31, 2004. The Company has a reserve of approximately $224,000 at March 31, 2005, based on its estimate of potential start-up and warranty costs associated with certain non-commissioned boiler projects. The Company has
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established this reserve based on the most current information available and historical experience, and while the Company believes the reserve to be adequate and the judgment applied appropriate, due to a number of factors, our estimated liability could differ from our actual cost incurred (see “Critical Accounting Policies – Product Warranties” of this Report). Basic and diluted loss per share from discontinued operations was $0.00 per share for the three months ended March 31, 2005, compared to a loss of ($0.04) per share for the three months ended March 31, 2004.
Net Earnings.As a result of the above factors, our earnings for the three months ended March 31, 2005 decreased approximately $233,000 from net earnings of $438,000, or 3.2% of sales for the three months ended March 31, 2004, to net earnings of approximately $205,000, or 1.6% of sales for the three months ended March 31, 2005. Basic earnings per share decreased from earnings of $0.15 per share for the three months ended March 31, 2004, to earnings per share of $0.07 for the three months ended March 31, 2005. Diluted earnings per share decreased from earnings of $0.14 per share for the three months ended March 31, 2004, to earnings per share of $0.07 for the three months ended March 31, 2005.
Nine months ended March 31, 2005 Compared to Nine months ended March 31, 2004
Results of Operations – Consolidated
Revenues.For the nine months ended March 31, 2005, revenues decreased approximately $11.6 million, or 24.8% from $46.7 million for the nine months ended March 31, 2004 to $35.1 million for the nine months ended March 31, 2005. Revenues originated by our domestic operations decreased by approximately $9.3 million, or 24.3%, from $38.2 million for the nine months ended March 31, 2004 to $28.9 million for the nine months ended March 31, 2005. Revenues originated by our international operations decreased by approximately $2.3 million, or 27.1% from $8.5 million for the nine months ended March 31, 2004 to $6.2 million for the nine months ended March 31, 2005. The decline in our domestically originated revenues was mainly attributable to the decline in our Environmental Systems sales, which has been impacted by the slow pace of new power plant construction and regulatory uncertainties. The decrease in our internationally originated revenues related primarily to the decrease in our Separation Filtration System sales through our United Kingdom operations. See Item 2 – “Results of Operations – Segments” of this Report for further discussion on revenues.
Gross Profit Margin.For the nine months ended March 31, 2005, our gross profit margin decreased by approximately $4.2 million, or 29.6% from $14.2 million for the nine months ended March 31, 2004 to $10.0 million for the nine months ended March 31, 2005. Our gross profit margin, as a percentage of sales, decreased from 30.3% for the nine months ended March 31, 2004 to 28.5% for the nine months ended March 31, 2005. As noted previously, our margins during any particular period may be impacted by any of, or combination of, the following factors: (1) sales volume, (2) shifts in our product mix, (3) unanticipated increase in our component costs, and (4) start-up and warranty costs. During the current period our margins were negatively impacted by unanticipated increases in our material costs. Due to worldwide demand, the cost associated with steel, and particularly stainless steel, increased dramatically over the last 18 months. As most of our contracts are long-term fixed-priced contracts, unanticipated changes in our material costs can have a significant impact on our reported margins (see also Item 2 – “Results of Operations - Segment Profit - Separation Filtration Systems” for further discussion on the impact of material cost increases). Additionally, during the period our margins were marginally impacted by: 1) our warranty and start-up costs, which increased as a percentage of
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FOR THE PERIOD ENDED MARCH 31, 2005
sales from 1.8% for the nine months ended March 31, 2004 to 2.1% for the nine months ended March 31, 2005, and 2) our unabsorbed manufacturing costs, which increased as a percentage of sales from 3.7% for the nine months ended March 31, 2004 to 4.1% for the nine months ended March 31, 2005. While these costs increased as a percentage of sales, they actually decreased on a dollar basis. Our actual warranty and start-up costs decreased from approximately $900,000 for the nine months ended March 31, 2004 to $800,000 for the nine months ended March 31, 2005, and our actual unabsorbed manufacturing costs decreased from $1.7 million for the nine months ended March 31, 2004 to $1.4 million for the nine months ended March 31, 2005.
Operating Expenses.For the nine months ended March 31, 2005, operating expenses from continuing operations decreased by approximately $500,000, or 4.6% from approximately $11.3 million for the nine months ended March 31, 2004 to approximately $10.8 million for the nine months ended March 31, 2005. As a percentage of sales, our operating expenses increased from 24.2% for the nine months ended March 31, 2004 to 30.7% for the nine months ended March 31, 2005. The increase in operating expenses, as a percentage of sales, is directly related to the reduction in our sales during the period. On a comparative basis, our sales and marketing expenses decreased from approximately $4.6 million to approximately $4.4 million, our engineering and project management expenses decreased from approximately $3.2 million to approximately $2.7 million and our general and administrative expenses increased from approximately $3.5 million to approximately $3.6 million. The decrease in our sales and marketing expenses related primarily to a decrease in our commission expense during the nine months ended March 31, 2005, which is directly related to the decrease in our revenues. The decrease in engineering and project management expenses can be attributed to our continued emphasis on cost controls and improved project execution. The increase in our general and administrative expenses is attributed to the increased expense of compliance with corporate governance mandates enacted by the SEC and the Nasdaq Stock Market, which are expenses that are expected to continue.
Other Income and Expense.For the nine months ended March 31, 2005, other income and expense items changed by approximately $135,000, from income of approximately $25,000 for the nine months ended March 31, 2004 to income of approximately $160,000 for the nine months ended March 31, 2005. This change related primarily to the impact associated with our foreign currency exchange. During the nine months ended March 31, 2004, we realized foreign currency exchange losses of approximately $20,000, compared to foreign currency exchange gains of approximately $68,000 for the nine months ended March 31, 2005. Additionally, we recognized net rental income of approximately $55,000 associated with the lease of some of our warehouse space.
Income Taxes.The Company’s effective tax rate for continuing operations was approximately 40% for the nine months ended March 31, 2005 and 34% for the nine months ended March 31, 2004. The increase in our effective tax rate for the current period is due primarily to a shift in the composition of our foreign and domestic pre-tax earnings (loss).
Net Earnings (Loss) from Continuing Operations.As a result of the above factors, our net earnings (loss) from continuing operations decreased by approximately $2.3 million from earnings of approximately $1.9 million, or 4.1% of sales for the nine months ended March 31, 2004, to a loss of approximately $368,000, or 1.0% of sales for the nine months ended March 31, 2005. Basic earnings (loss) per share decreased from earnings of $0.63 per share for the nine months ended March 31, 2004, to a loss of ($0.12) per share for the nine months ended March 31,
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2005. Diluted earnings per share decreased from earnings of $0.63 per share for the nine months ended March 31, 2004, to a loss of ($0.12) per share for the nine months ended March 31, 2005.
Discontinued Operations. For the nine months ended March 31, 2005, we recognized a net loss from discontinued operations of approximately $53,000 compared to a net loss of approximately $194,000 for the nine months ended March 31, 2004. The Company has a reserve of approximately $224,000 at March 31, 2005, based on its estimate of potential start-up and warranty costs associated with certain non-commissioned boiler projects. The Company has established this reserve based on the most current information available and historical experience, and while the Company believes the reserve to be adequate and the judgment applied appropriate, due to a number of factors, our estimated liability could differ from our actual cost incurred (see “Critical Accounting Policies – Product Warranties” of this Report). Included in our net loss for the nine months ended March 31, 2004 was a net gain related to the disposal of our Boiler operation of approximately $92,000 ($140,000 gain less taxes of $48,000). Basic and diluted loss per share from discontinued operations was ($0.02) per share for the nine months ended March 31, 2005, compared to a loss of ($0.06) per share for the nine months ended March 31, 2004.
Net Earnings (Loss).As a result of the above factors, our earnings for the nine months ended March 31, 2005 decreased approximately $2.1 million, from net earnings of approximately $1.7 million, or 3.7% of sales, to a net loss of approximately $421,000, or 1.2% of sales for the nine months ended March 31, 2005. Basic earnings (loss) per share decreased from earnings of $0.57 per share for the nine months ended March 31, 2004, to a loss of ($0.14) per share for the nine months ended March 31, 2005. Diluted earnings (loss) per share decreased from earnings of $0.56 per share for the nine months ended March 31, 2004, to a loss of ($0.14) per share for the nine months ended March 31, 2005.
Results of Operations – Segments
We are organized along two lines of business: Environmental Systems, and Separation Filtration Systems. The Company’s Boiler segment was discontinued and its assets sold during the first quarter of fiscal 2004. See Note 7 – “Discontinued Operations” in the Notes to our Consolidated Financial Statements for further discussion on the Boiler segment.
Revenues.The following table displays revenues by reportable segment (dollars in thousands).
Three months ended | Nine months ended | |||||||||||||||||||||||||||||||
March 31, | March 31, | |||||||||||||||||||||||||||||||
2005 | % | 2004 | % | 2005 | % | 2004 | % | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Environmental Systems | $ | 6,549 | 50.4 | % | $ | 4,937 | 36.6 | % | $ | 15,526 | 44.3 | % | $ | 23,946 | 51.2 | % | ||||||||||||||||
Separation Filtration Systems | 6,450 | 49.6 | % | 8,554 | 63.4 | % | 19,535 | 55.7 | % | 22,781 | 48.8 | % | ||||||||||||||||||||
Total | $ | 12,999 | 100.0 | % | $ | 13,491 | 100.0 | % | $ | 35,061 | 100.0 | % | $ | 46,727 | 100.0 | % | ||||||||||||||||
Environmental Systems.Revenues from our Environmental Systems for the three months ended March 31, 2005, when compared to the same period last year, increased by approximately $1.6 million, or 32.7%. For the nine months ended March 31, 2005, revenues from Environmental Systems, when compared to the same period last year, decreased by approximately $8.4 million, or 35.2%. The increase in the revenues for the three months ended
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March 31, 2005 is due to the completion of two projects, and specifically one short cycle project for which revenue was recognized predominately during this period. The reduction in revenues during the nine month period ended March 31, 2005 is due primarily to the completion of a $15 million, NOx compliance project during the first half of fiscal 2004, which impact has not been replicated this fiscal year. We are currently beginning to see compliance projects in regions of the United States that previously have not had requirements for NOx control equipment. We also expect that spending for NOx reduction systems will increase in future periods as users execute their compliance plan to meet State Implementation Plans (SIP). In addition, while the construction of new power plants has experienced a significant decline compared to previous years, we believe this portion of the Environmental Systems business will begin to improve beginning in 2006 – 2007. On March 10, 2005, the United States Environmental Protection Agency (“EPA”) announced the most comprehensive air quality regulations for power plants since the Clean Air Acts Acid Rain Program, which began in 1995. Among other provisions, the regulations require power plants in 28 eastern states and the District of Columbia to reduce NOx emissions by 53% of 2003 levels by 2009. We expect this mandate to positively impact our future Environmental Systems business.
Separation Filtration Systems.When compared to the same periods last fiscal year, our Separation Filtration Systems revenues decreased approximately $2.1 million, or 24.6% and $3.2 million, or 14.2% for the three and nine months ended March 31, 2005, respectively. Revenues originated by our domestic operations, when compared to the same periods last year, decreased approximately $2.2 million, or 36.9%, and approximately $900,000, or 6.3%, for the three and nine months ended March 31, 2005, respectively. Revenues originated by our international operations, when compared to the same periods last year, increased by approximately $100,000, or 3.7% for the three months ended March 31, 2005 and decreased by approximately $2.3 million, or 27.4% for the nine months ended March 31, 2005. The decrease in revenue through our domestic operations can be attributed primarily to a decrease in our domestic pressure product sales, which decreased by approximately $2.2 million, or 51.7% for the three months ended March 31, 2005 and $3.8 million, or 35.0 % for the nine months ended March 31, 2005 and related principally to a decrease in domestic pipeline projects. The decrease in our pressure product sales has been partially offset by an increase in our nuclear marine product sales, which for the nine months ended March 31, 2005 has increased by approximately $3.0 million, or 90.2% and related principally to life extension projects at several nuclear power plants. The decrease in revenues originated through our international operations relates to the completion by our United Kingdom subsidiary of two major projects during the first part of fiscal 2004, which impact has not been replicated during the current year.
Segment Profit.The following table displays segment profit by reportable segment (dollars in thousands):
Three months ended | Nine months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Segment profit | ||||||||||||||||
Environmental Systems | $ | 645 | $ | 694 | $ | 1,919 | $ | 3,923 | ||||||||
Separation Filtration Systems | 749 | 1,429 | 915 | 2,408 | ||||||||||||
Total | 1,394 | 2,123 | 2,834 | 6,331 | ||||||||||||
Unallocated general and administrative expenses | (1,200 | ) | (1,227 | ) | (3,612 | ) | (3,463 | ) | ||||||||
Operating income (loss) | $ | 194 | $ | 896 | $ | (778 | ) | $ | 2,868 | |||||||
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Segment profit and loss is based on revenue less direct expenses of the segment before allocation of general, administrative, research and development costs. All inter-company transfers between segments have been eliminated. The Company allocates all costs associated with the design, manufacture, and sale of its products to each segment. The Company does not allocate general and administrative expenses (“unallocated overhead”), assets, expenditures for assets or depreciation expense on a segment basis for internal management reporting, and therefore such information is not presented.
Environmental Systems.Environmental Systems profits for the three months ended March 31, 2005 decreased by approximately $49,000, or 7.1% compared to the same period of fiscal 2004. As a percentage of Environmental Systems revenue, profit in Environmental Systems was 9.8% and 14.1% for the three months ended March 31, 2005 and 2004, respectively. The decrease in profit, as a percentage of sales, during the three months ended March 31, 2005 is primarily related to an increase in start-up and warranty costs during the current period when compared to the prior year. During the current period, our start-up and warranty costs were $542,000, or 8.3% of revenues, compared to $103,000, or 2.1% of revenues for the three months ended March 31, 2004. The increase in start-up and warranty costs during the current period related primarily to one project. For further discussion please refer to Item 2 – “Results of Operations – Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 – Gross Profit Margin” section of this Report. For the nine months ended March 31, 2005, our Environmental Systems profits decreased by approximately $2.0 million, or 51.1% over the same period last year. As a percentage of Environmental Systems revenue, our operational performance decreased from a segment profit of 16.4% for the nine months ended March 31, 2004 to segment profit of 12.4% for the same period this year. The decrease in our Environmental Systems profit during the nine months ended March 31, 2005, relates primarily to the following:
1. | Increase in operational expenses, as a percentage of sales. While our actual operational expenses were down from approximately $3.4 million to $2.8 million for the nine months ended March 31, 2004 and 2005, respectively, as a percentage of sales, these expenses increased from 14.1% of sales for the nine months ended March 31, 2004 to 18.3% of sales for the three months ended March 31, 2005. | |||
2. | Increase in start-up and warranty expenses, as a percentage of sales. Although our actual start-up and warranty expenses have declined on a dollar-basis, from approximately $816,000 for the nine months ended March 31, 2004 to $688,000 for the nine months ended March 31, 2005, as a percentage of sales, these expenses increased from 3.4% for the nine months ended March 31, 2004 to 4.4% for the nine months ended March 31, 2005. | |||
3. | Corrections associated with control deficiencies. As discussed under Part I – Item 4 “Controls and Procedures” of this Report and as more fully described under that same section in our Quarterly Report on Form 10-Q filed with the commission on February 14, 2005, the Company’s management discovered certain control deficiencies during the second quarter of fiscal 2005. In connection therewith, certain correcting adjustments were recorded in the second quarter to the Company’s previously reported financial results. These adjustments, while immaterial in aggregate to both the Company’s previously reported financial results and to the quarter, did have a significant impact on the Company’s reported segment profit for the period. |
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Specifically, this correction increased the Company’s Environmental Systems reported segment profits for the nine months ended March 31, 2005 by approximately $348,000, or 2.2%. |
Separation Filtration Systems. Separation Filtration Systems profits decreased in the three months ended March 31, 2005 by approximately $700,000, from a profit of approximately $1.4 million for the three months ended March 31, 2004, to $700,000 for the three months ended March 31, 2005. As a percentage of Separation Filtration Systems revenue, our operational performance decreased from a segment profit of 16.7% for the three months ended March 31, 2004 to 11.6% for the three months ended March 31, 2005. The decrease in our Separation Filtration Systems profit during the current quarter was primarily volume related, as our operational expenses as a percentage of sales increased from 18.0% for the three months ended March 31, 2004 to 21.9% for the three months ended March 31, 2005.
Our Separation Filtration Systems profits decreased for the nine months ended March 31, 2005 by approximately $1.5 million, from a profit of approximately $2.4 million for nine months ended March 31, 2004, to a profit of $900,000 for the same period this fiscal year. As a percentage of Separation Filtration Systems revenue, our operational performance decreased from a segment profit of 10.6%, to a segment profit of 4.7%, for the nine months ended March 31, 2004 and 2005, respectively. The decrease in our Separation Filtration Systems operational performance during the nine months ended March 31, 2005 can be attributed to the following items:
1. | Increase in operational expenses, as a percentage of sales. While our actual operational expenses were down from approximately $4.5 million to $4.3 million for the nine months ended March 31, 2004 and 2005, respectively, as a percentage of sales, these expenses increased from 19.6% for the nine months ended March 31, 2004 to 22.1% for the nine months ended March 31, 2005. | |||
2. | Significant material price increases. Due to worldwide consumption, steel prices, most notably stainless steel prices, have increased considerably over the past year (over 55% in the past 18 months). Stainless steel is a very significant material cost to the production of our nuclear steam dryer products and our marine separation products. Most of the contracts governing the sale of these products are long-term, fixed-priced contracts, which in a volatile environment, increases the Company’s risks to margin deterioration. The Company attempts to stabilize its costs by ordering materials at the time an order is received. However, on long-term deliverable contracts (i.e., over 3 years), this may not always be possible. To mitigate its risk under these contracts the Company attempts to negotiate escalation provisions. SeeFactors That May Affect Our Operating Results and Other Risk Factors – “We enter into fixed-priced contracts. If our actual costs exceed our original estimates, our profits will be reduced”– page 32 of this Report. | |||
3. | Corrections associated with control deficiencies. As noted underEnvironmental Systems, during the three months ended December 31, 2004, correcting adjustments were made to the Company’s financial statements as the result of certain management identified control deficiencies. These adjustments, while immaterial in aggregate to both the Company’s previously reported financial results and to the quarter, did have a significant impact on the Company’s reported segment profit for the period. Specifically, this correction decreased the Company’s Separation |
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Filtration Systems reported segment profits for the nine months ended March 31, 2005 by approximately $452,000, or 2.3%. |
Market Outlook
Environmental Systems.We expect that the spending for NOx reduction systems will increase in late 2005 through 2009 as users implement their compliance plans to adhere to regulatory compliance deadlines that come into effect over the next 3 to 5 years. In addition, while the construction of new power plants has significantly declined over the last several years, we expect this market to improve beginning in 2006 or 2007.
Separation Filtration Systems.The market for nuclear/marine products remains strong, and is expected to continue at such levels for at least the next 5 years, as nuclear power plants continue to invest in life extension projects. The Nuclear Regulatory Commission estimates that by 2010, nearly 80% of nuclear power plants in the United States will be in the license renewal process. In addition, the increased demand for natural gas, both domestically and internationally, should also create new opportunities for our separation and filtration products. One such opportunity is Liquified Natural Gas (LNG) and its associated gas processing facilities, which are currently being proposed in a number of areas to facilitate the transportation of LNG to the United States and other markets.
Contingencies
On March 19, 2004, the Company received notice that an adversary proceeding was initiated by Enron Corp. and National Energy Production Corporation in the United States Bankruptcy Court for the Southern District of New York against PMC Acquisition, Inc., a subsidiary that operated the discontinued Boiler business of the Company under the name ABCO Industries. The plaintiffs allege that certain accounts receivable payments paid to ABCO were avoidable transfers under the Bankruptcy Code and are seeking to recover approximately $1 million from ABCO. The Company has engaged outside counsel and believes that all, or a majority of the payments, fail to meet the applicable standards for avoidance under the Bankruptcy Code and other applicable law, and that a number of defenses can be asserted that will negate any recovery by the plaintiffs. The Company intends to vigorously defend against the lawsuit and management believes the likelihood of loss is not probable.
On April 25, 2005, the Company received notice that the Company may have received preferential transfers amounting to approximately $900,000 in connection with the Chapter 11 filing by Erie Power Technologies, Inc. Based on its preliminary investigation, the Company believes that all of the payments received fail to meet the applicable standards for avoidance under the Bankruptcy Code and other applicable law, and that a number of defenses can be asserted that may negate any recovery by the plaintiffs. The Company intends to vigorously defend against the lawsuit and management believes the likelihood of loss is not probable.
From time to time the Company is involved in various litigation matters arising in the ordinary course of its business. The Company does not believe the disposition of any current matter will have a material adverse effect on its consolidated financial position or its results of operations.
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Backlog
The Company’s backlog of unfilled orders was approximately $36.0 million at March 31, 2005, compared to $34.0 million at June 30, 2004 and $34.0 million at March 31, 2004. Our Environmental Systems segment continues to be impacted by the effects of the slow down in new power plant construction. We expect that spending for NOx reduction systems will increase in 2005 – 2009 as users implement their compliance plans and as regulatory deadlines approach, and we continue to see an increase in requests for proposals relating to such initiatives. In addition, while the construction of new power plants has seen a decline over the past several years, we believe this portion of the Environmental Systems business will improve in 2006 – 2007. The market for Peerless nuclear and marine products remains strong as nuclear power plants continue to invest in life extension projects. The shortage of natural gas supplies is creating new opportunities for Peerless separators and filters, such as the production of LNG and the associated gas processing facilities.
Financial Position
Assets.Total assets increased by approximately $300,000, or 0.8% from approximately $39.5 million at June 30, 2004 to approximately $39.8 million at March 31, 2005. The increase in our assets during the fiscal year resulted primarily from an increase in our cash and cash equivalents balances of approximately $5.4 million and an increase in our inventories of approximately $1.0 million, which was offset by a decrease in costs and earnings in excess of billings on uncompleted contracts of approximately $2.0 million and a decrease in our accounts receivable of approximately $4.2 million. See Item 2 – “Liquidity and Capital Resources” of this Report for further discussion. At March 31, 2005, we held cash and cash equivalents of $9.5 million, had working capital of approximately $20.8 million, and a current ratio of 2.4 to 1.0. This compares with cash and cash equivalents of $4.1 million, approximately $20.7 million in working capital, and a current ratio of 2.4 to 1.0 at June 30, 2004.
Liabilities and Shareholders EquityTotal liabilities increased by approximately $400,000 or 2.7%, from approximately $14.8 million at June 30, 2004 to approximately $15.2 million at March 31, 2005. The increase in liabilities related primarily to an increase in our billings in excess of costs and earnings on uncompleted contracts, offset by a decrease in our trade payables and other accrued liabilities. Our debt (total liabilities) to equity ratio increased slightly to .62-to-1.0 at March 31, 2005, compared to .60-to-1.0 at June 30, 2004. See Item 2 – “Liquidity and Capital Resources” of this Report for further discussion.
Liquidity and Capital Resources
Our cash and cash equivalents were $9.5 million as of March 31, 2005, compared to $4.1 million at June 30, 2004. Cash provided by operating activities during the nine months ended March 31, 2005 was approximately $5.6 million compared to cash of approximately $1.4 million used by our operating activities during the nine months ended March 31, 2004.
Because we are engaged in the business of manufacturing custom systems, our progress billing practices are event-oriented rather than date-oriented, and vary from contract to contract. We customarily bill our customers after the occurrence of project milestones. Billings to customers affect the balance of billings in excess of costs and earnings or the balance of cost and
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earnings in excess of billings, 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 June 30, 2004, the balance of these working capital accounts was $15.9 million, compared to $8.3 million at March 31, 2005, reflecting a decrease of our investment in these working capital items of $7.6 million. 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. Therefore, changes in the composition of contract mix, from quarter-to-quarter, can tend to either increase or decrease our net investment in these accounts during any given quarter or period. In addition, during the nine months ended March 31, 2005, funds were used by our operating loss and used to reduce our accrued expenses and pay our prior year tax liability.
Cash used in investing activities was approximately $347,000 for the nine months ended March 31, 2005, compared to cash used in investing activities of approximately $53,000 for the same period in fiscal 2004. The use of cash during the nine months ended March 31, 2005 and 2004 related primarily to capital expenditures during the periods. Fiscal year 2004 capital expenditures were offset by proceeds of approximately $248,000 relating to the sale of certain short-term investments.
Cash provided by financing activities was approximately $173,000 and $51,000 for the nine months ended March 31, 2005 and 2004, respectively, and related to the proceeds from the issuance of common stock, pursuant to employee stock options.
Cash used in our discontinued operations was $126,000 during the nine months ended March 31, 2005, compared to $1.7 million provided by our discontinued operations during the same period in fiscal 2004.
As a result of the above factors, during the first nine months of fiscal year 2005, our cash and cash equivalents increased by approximately $5.3 million, compared to an increase of approximately $280,000 during the same period of fiscal 2004.
On October 31, 2003, we entered into a $12.5 million revolving credit facility for working capital requirements that expires on October 31, 2006. The facility carries a floating interest rate based on the prime or Euro rate plus or minus an applicable margin (Euro plus 1.75% at March 31, 2005), and is secured by substantially all our domestic assets. At March 31, 2005, we had $3.2 million outstanding under stand-by letters of credit and no loans outstanding, leaving us availability under our credit facility of $9.3 million. The facility contains financial covenants, certain restrictions on capital expenditures, acquisitions, asset dispositions, dividends and additional debt, as well as other customary covenants. As of March 31, 2005, the Company was in compliance with all financial and other covenants under the credit facility.
In addition, our UK subsidiary has a £2.4 million (approximately $4.5 million) debenture agreement used to facilitate the issuances of bank guarantees. This facility is secured by substantially all of the UK subsidiary assets, and is backed by a Peerless stand-by letter of credit of £1.0 million (approximately $1.9 million, which is included in the $3.2 million outstanding above) and expires on October 31, 2005. At March 31, 2005, there was approximately £2.2 million outstanding under this facility, leaving availability of approximately £200,000 (approximately $375,000).
We believe we maintain adequate liquidity to support existing operations and planned growth, as well as to continue operations during reasonable periods of unanticipated adversity.
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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The Company has no off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
New Accounting Standards
In November 2004, the FASB issued SFAS No. 151,Inventory Costs(SFAS 151). SFAS 151 requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as current-period charges. Further, SFAS 151 requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. SFAS 151 is effective for inventory costs incurred beginning in the first quarter of fiscal 2006. We are is currently evaluating the effect of SFAS 151 on our financial statements and related disclosures.
In December 2004, the Financial Accounting Standards Board (FASB) issued the revised SFAS No. 123R,Share-Based Payment(SFAS 123R). SFAS 123R requires compensation costs related to share-based payment transactions to be recognized in the financial statements. Generally, compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the requisite service period, generally, as the award vests. We will be required to adopt SFAS 123R in the first quarter of fiscal 2006. SFAS 123R applies to all awards granted after June 30, 2005 and to previously granted awards unvested as of the adoption date. We are currently evaluating the impact that the adoption of SFAS 123R will have on our financial statements and our related disclosures.
Factors That May Affect Our Operating Results and Other Risk Factors
Investing in our common stock involves a high degree of risk. Any of the following risks could have a material adverse effect on our financial condition, liquidity, and results of operations or prospects, financial or otherwise. Reference to these factors in the context of a forward-looking statement or statements will be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements. See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” of this Report.
Changes in the power generation industry and/or the economy could have an adverse impact on sales of our Environmental Systems and our operating results.
The demand for our Environmental Systems depends to an extent on the continued construction of power generation plants and the upgrade of existing power plants. In the first nine months of fiscal 2005, approximately 44% of our consolidated revenues were derived from sales of Environmental Systems for new and refurbished power plants compared to approximately 51 % for the same period in fiscal 2004. The power generation industry has experienced cyclical periods of slow growth or decline. Any change in the power plant industry that results in a decline in the construction of new power plants or a decline in the refurbishing of existing power
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plants could have a materially adverse impact on our Environmental Systems revenues and our results of operations. See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.
Changes in the price, supply or demand for natural gas could have an adverse impact on our sales of Separation Systems and our operating results.
A large portion of our separation filtration business is driven by the construction of natural gas production and transportation infrastructure. Increasing demand for natural gas may result in the construction of natural gas production facilities and facilities to transport the gas to its end destination (i.e., pipelines and LNG processing plants). Increasing prices of natural gas, while beneficial to exploration activities and the financing of new projects, can adversely impact demand. Excessive supply could also negatively impact the price of natural gas, which could discourage spending on new projects.
Changes in current environmental legislation could have an adverse impact on the sale of our Environmental Systems and on our operating results.
Our Environmental Systems business is primarily regulatory driven. Laws and regulations governing the discharge of pollutants into the environment or otherwise relating to the protection of the environment or human health have played a significant part in the increased use of Environmental Systems in the United States. These laws include U.S. federal statutes such as the Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), the Clean Water Act and the Clean Air Act, and the regulations implementing them, as well as similar laws and regulations at state and local levels and in other countries. These laws and regulations may change or other jurisdictions may not adopt similar laws and regulations. This business segment will be adversely impacted to the extent that current regulations requiring the reduction of NOx emissions are repealed, amended or implementation dates delayed or to the extent that regulatory authorities minimize enforcement. See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.
Competition could result in lower sales and decreased margins.
We operate in highly competitive markets worldwide. Competition could result in not only a reduction in our sales, but also a reduction in the prices we charge for our products. To remain competitive we must be able to not only anticipate or respond quickly to our customers’ needs and enhance and upgrade our existing products and services to meet those needs, but also continue to price our products competitively. Our competitors may develop cheaper, more efficient products or may be willing to charge lower prices for strategic marketing or to increase market share. Some of our competitors have more capital and resources than we do and may be better able to take advantage of acquisition opportunities or adapt more quickly to changes in customer requirements. See Item 2 - - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.
We enter into fixed-priced contracts. If our actual costs exceed our original estimates, our profits will be reduced.
The majority of our contracts are on a fixed-priced basis. Although we benefit from cost savings, we have limited ability to recover cost overruns. Because of the large scale and long duration of our contracts, unanticipated cost increases may occur as a result of several factors, including, but not limited to, (1) increases in the cost, or shortages of components, materials or
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FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
labor; (2) unanticipated technical problems; (3) required project modifications not initiated by the customer; and (4) suppliers’ or subcontractors’ failure to perform. These factors could delay delivery of our products and our contracts often provide for liquidated damages for late delivery. Unanticipated costs that we cannot pass on to our customers, for example, the volatile nature of steel prices, or the payment of liquidated damages under fixed contracts would negatively impact our profits. See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.
Our backlog may not be indicative of our future revenue.
Customers may cancel or delay projects for reasons beyond our control. Our orders normally contain cancellation provisions, which permit us to recover only our costs and a portion of our anticipated profit in the event a customer cancels an order. If a customer elects to cancel, we may not realize the full amount of revenues included in our backlog. If projects are delayed, the timing of our revenues could be affected and projects may remain in our backlog for extended periods of time. Revenue recognition occurs over long periods of time and is subject to unanticipated delays. If we receive relatively large orders in any given quarter, fluctuations in the levels of our quarterly backlog can result because the backlog in that quarter may reach levels that may not be sustained in subsequent quarters. Our backlog may not be indicative of our future revenues. See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.
Our ability to conduct business outside the United States may be adversely affected by factors outside of our control and our revenues and profits from international sales could be adversely impacted.
For the first nine months of fiscal 2005 and fiscal 2004, revenue outside the United States represented approximately 18% of our consolidated revenues. Our operations and earnings throughout the world have been, and may in the future be, affected from time to time in varying degrees by war, political developments and foreign laws and regulations, such as regional economic uncertainty, political instability, restrictions, customs and tariffs, changing regulatory environments, fluctuations in foreign currency exchange rates and adverse tax consequences. The likelihood of such occurrences and their overall effect upon us vary greatly from country to country and are not predictable. These factors may result in a decline in revenues or profitability and could adversely affect our ability to expand our business outside of the United States.
Our financial performance may vary significantly from period to period, making it difficult to estimate future revenue.
Our annual revenues and earnings have varied in the past and are likely to vary in the future. Our Environmental Systems contracts generally stipulate customer specific delivery terms and may have contract cycles of a year or more, which subjects them to many factors beyond our control. In addition, these contracts are significantly larger in size than our typical Separation Filtration Systems contracts, which tend to intensify their impact on our annual operating results. Furthermore, as a significant portion of our operating costs are fixed, an unanticipated decrease in our revenues, a delay or cancellation of orders in backlog, or a decrease in the demand for our products, may have a significant impact on our annual operating results. Therefore, our annual operating results may be subject to significant variations and our operating performance in one period may not be indicative of our future performance. See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
Our margins are affected by shifts in our product mix.
Certain of our products have higher margins than others. Consequently, changes in the composition of our sales between products from quarter-to-quarter or from period-to-period can have a significant impact on our reported margins. Certain of our products also have a much higher internally manufactured cost component; and therefore, changes from quarter-to-quarter or from period-to-period can have a significant impact on our reported margins through a negative or positive impact on our manufacturing absorption. See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.
Our products are covered by warranties. Unanticipated warranty costs for defective products could adversely affect our financial condition and results of operations and reputation.
We provide warranties on our products generally for terms of three years or less. These warranties require us to repair or replace faulty products and meet certain performance standards, among other customary warranty provisions. While we continually monitor our warranty claims and provide a reserve for estimated warranty issues on an on-going basis, an unanticipated claim could have a material adverse impact on our operations. In some cases, we may be able to subrogate a claim back to a subcontractor, if the subcontractor supplied the defective product or performed the service, but this may not always be possible. The need to repair or replace products with design or manufacturing defects could temporarily delay the sale of new products, reduce our profits and could adversely affect our reputation. See Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this Report.
Product liability claims not covered by insurance could adversely affect our financial condition and results of operations.
We may be subject to product liability claims involving claims of personal injury or property damage. While we maintain product liability insurance coverage to protect us in the event of such a claim, our coverage may not be adequate to cover the cost of defense and the potential award in the event of a claim. Also, a well-publicized actual or perceived problem could adversely affect our reputation and reduce the demand for our products.
Large contracts represent a significant portion of our accounts receivable, which increases our exposure to credit risk.
We closely monitor the credit worthiness of our customers. Significant portions of our sales are to customers who place large orders for custom products and whose activities are related to the power and oil/gas industries. As such, our exposure to credit risk is affected to some degree by conditions within these industries and governmental and/or political conditions. We mitigate our exposure to credit risk, to some extent, by requiring progress payments and letters of credit. However, as some of our exposure is outside of our control, unanticipated events could have a materially adverse impact on our operating results. See Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources” of this Report.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
Changes in billing terms can increase our exposure to working capital and credit risk.
Our products are generally sold under contracts that allow us to either bill upon the completion of certain agreed upon milestones, or upon the actual shipment of the product. The Company attempts to negotiate progress-billing milestones on all large contracts to help the Company manage the working capital and credit risk associated with these large contracts. Consequently, shifts in the billing terms of the contracts in the Company’s backlog from period to period can increase the Company’s requirement for working capital and can increase the Company’s exposure to credit risk. See Item 2 – “Management’s Discussion and Analysis and Results of Operations – Liquidity and Capital Resources” of this Report.
The terms and conditions of our credit facility impose restrictions on our operations. We may not be able to raise additional capital, if needed.
The terms and conditions of our current $12.5 million revolving credit facility impose restrictions that affect, among other things, our ability to incur debt, make capital expenditures, merge, sell assets, make distributions, or create or incur liens. The availability of our credit facility is also subject to certain financial covenants, including a prohibition against consecutive quarterly losses. Our ability to comply with the covenants may be affected by events beyond our control and we cannot assure that we will achieve operating results meeting the requirements of the credit agreement. A breach of any of these covenants could result in a default under our credit facility. In the event of a default, the bank could elect to declare the outstanding principal amount of our credit facility, all interest thereon, and all other amounts payable under our credit facility to be immediately due and payable. As of March 31, 2005 we were in compliance with all financial and other covenants of our credit facility.
Our ability to satisfy any debt obligations will depend upon our future operating performance, which will be affected by prevailing economic, financial and business conditions and other factors, some of which are beyond our control. We anticipate that borrowings from our existing revolving credit facility, or the refinancing of our revolving credit facility, and cash provided by operating activities, should provide sufficient funds to finance capital expenditures, working capital and otherwise meet our operating expenses and service our debt requirements as they become due. However, in the event that we require additional capital, there can be no assurance that we will be able to raise such capital when needed or on satisfactory terms, if at all.
Our business is subject to risks of terrorist acts and acts of war.
Terrorist acts and acts of war may disrupt our operations, as well as our customers’ operations. Such acts have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Any future terrorist activities, and any continued military or security operations could further weaken the global economy and create additional uncertainties forcing our customers to further reduce their capital spending, or cancel or delay already planned construction projects, which could have a material adverse impact on our business, operating results and financial condition.
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FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
Our common stock is thinly traded, which may result in low liquidity.
The daily trading volume of our common stock is relatively low and therefore the liquidity and appreciation in our stock may not meet our shareholders’ expectations. The market price of our common stock could be adversely impacted as a result of sales by our existing shareholders of a large number of shares of our common stock in the market, or the perception that such sales could occur.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. We feel our risk to interest rate fluctuations is nominal, as our investments are short-term in nature and we are currently not borrowing under our bank credit facility. Our exposure to currency exchange rate fluctuations has been, and is expected to continue to be, modest as foreign contracts payable in currencies other than United States dollars are performed, for the most part, in the local currency and therefore provide a “natural hedge” against currency fluctuations. On occasion, we will purchase derivative transactions with respect to foreign contracts that do not contain a “natural hedge,” but the impact of any fluctuation in the exchange rates in these hedged currencies, would be expected to have an immaterial impact on our financial operations. The impact of currency exchange rate movements on inter-company transactions has been, and is expected to continue to be, immaterial. As of March 31, 2005, we did not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features. We have no affiliation with partnerships, trusts or other entities (sometimes referred to a special-purpose or variable-interest entities) whose purpose is to facilitate off-balance-sheet financial transactions or similar arrangements.
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 Securities and Exchange Commission’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 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, as of March 31, 2005, the Company’s disclosure controls and procedures were effective in ensuring that all material information required to be filed in this Report has been made known to them in a timely fashion. 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 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 Registrant’s controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
During the quarter ended March 31, 2005, there have been no changes in the Company’s internal control over financial reporting, or in other factors, except as noted below, that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
During the previous quarter, the Company’s principal executive officer and principal financial officer identified certain deficiencies in the Company’s internal controls over financial reporting as they relate to the Company’s administration of contracts. For further discussion on the control deficiencies noted, reference is made to our Quarterly Report on Form 10-Q for the period ended December 31, 2004, filed with the Commission on March 14, 2005. Management concluded, after a thorough review, that while a material weakness, as defined by the Public Company Accounting Oversight Board (“PCAOB”), existed with respect to its administration of contracts, such weakness did not result in a material misstatement of the Company’s previously reported financial results, nor is it expected to have a material impact on the Company’s projected results for fiscal year 2005. The correction of the control deficiencies did however have a significant impact on the reported segment results (but not the Company’s consolidated results) for the quarter ended December 31, 2004 and the nine months ended March 31, 2005. Management presented the Audit Committee with a plan of remediation to correct the control issues noted. In connection therewith, the following steps have been taken:
1. | We have developed and implemented new written sales order entry procedures designed to ensure that the essential elements of all contracts are in place prior to entering sales orders into the Company’s Enterprise Resource Planning System (“ERP”). | |||
2. | We have developed and implemented written contract filing and maintenance procedures designed to ensure that all contracts meet Company, customer and 3rd party requirements. | |||
3. | We have developed and implemented new written change order procedures designed to ensure: a) proper management approval prior to implementation, b) timely entry of contract changes, and c) the Company’s ERP system reflects the most current contract sales order value and data. | |||
4. | We have improved the status review process for on-going projects to assure that potential project cost overruns are timely identified and the Company’s ERP system is timely updated. | |||
5. | We have realigned the departments and reporting responsibilities associated with the Contracts Administration and Project Management departments. |
Our management and Audit Committee is dedicating significant resources to assessing the issues underlying the weakness identified with the Company’s administration of contracts and to ensuring that proper steps have been and are being taken to improve our control environment. We have prioritized the correction of these deficiencies and have taken and will continue to take action to correct them. Management is committed to instilling strong control policies and procedures and will ensure that the ‘tone at the top’ is committed to accuracy and completeness in all financial reporting.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires the Company to include a report regarding the effectiveness of its internal control over financial reporting, beginning with its Annual Report on Form 10-K for the year ending June 30, 2007. That report is to include an assessment by the Company’s management of the effectiveness of its internal control over financial reporting as of the end of the fiscal year along with an attestation report from the Company’s independent auditors regarding that assessment. Accordingly, the Company will undertake a comprehensive effort to assess its system of internal controls over financial reporting. Using internal resources and external consulting assistance, the Company will review its internal controls over financial reporting to assess their adequacy and, as necessary, to address identified issues or inadequacies.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in various litigation matters arising in the ordinary course of our business. We do not believe the disposition of any current matter will have a material adverse effect on our consolidated financial position or results of operations (see Note 9 – “Contingencies” in our Notes to the Condensed Consolidated Financial Statements of this Report).
Items 2, 3, and 5 are not applicable and have been omitted
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to security holders for a vote during this quarter.
Item 6. Exhibits and Reports on Form 8-K
(a) | Exhibits |
The following exhibits are filed as part of this report.
Exhibit | ||
Number | Exhibit | |
3(a) | Articles of Incorporation, as amended to date (filed as Exhibit 3(a) to our Quarterly Report on Form 10-Q (file No. 0-5214) for the fiscal quarter ended December 31, 1997, and incorporated herein by reference). | |
3(b) | Bylaws, as amended to date (filed as Exhibit 3(b) to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004, and incorporated herein by reference). | |
4(a) | Rights Agreement dated May 22, 1997 between Peerless Mfg. Co. and Mellon Investor Services, LLC (formerly ChaseMellon Shareholder Services, L.L.C.), as Rights Agent (filed as Exhibit 1 to our Registration Statement on Form 8-A (file No. 0-5214), dated May 22, 1997, and incorporated herein by reference). |
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FOR THE PERIOD ENDED MARCH 31, 2005
Exhibit | ||||
Number | Exhibit | |||
4 | (b) | Amendment to Rights Agreement dated August 23, 2001, between Peerless Mfg. Co. and Mellon Investor Services, LLC, as Rights Agent (filed as Exhibit 2 to our Registration Statement on Form 8-A dated August 30, 2001, and incorporated herein by reference). | ||
10 | (a) | Key Employee Bonus Plan effective as of January 4, 2005 (filed as Exhibit 10.4 to our Current Report on Form 8-K dated February 9, 2005, and incorporated herein by reference). | ||
10 | (b) | Description of Compensation Payable to Non-Employee Directors. * | ||
10 | (c) | Form of Non-Employee Director Stock Option Agreement (filed as Exhibit 10.1 to our Current Report of Form 8-K on February 9, 2005, and incorporated herein by reference). | ||
10 | (d) | Form of Chief Executive Officer Stock Option Agreement (filed as Exhibit 10.2 to our Current Report of Form 8-K on February 9, 2005, and incorporated herein by reference). | ||
10 | (e) | Form of Executive Stock Option Agreement (filed as Exhibit 10.3 to our Current Report of Form 8-K on February 9, 2005, and incorporated herein by reference). | ||
10 | (f) | Employment Agreement dated February 11, 2005, by and between Peerless Mfg. Co. and Richard L. Travis, Jr. * | ||
31 | (a) | Rule 13a – 14(a)/15d – 14(a) Certification of Chief Executive Officer. * | ||
31 | (b) | Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer. * | ||
32 | (a) | Section 1350 Certification of Chief Executive Officer. ** | ||
32 | (b) | Section 1350 Certification of Chief Financial Officer. ** |
* | Filed herewith | |
** | Furnished herewith |
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FOR THE PERIOD ENDED MARCH 31, 2005
Item 6. Exhibits and Reports on Form 8-K - continued
(b) | Reports on Form 8-K. |
On February 9, 2005, the Company filed a Report on Form 8-K describing Non-Employee Director Compensation, announcing the grant of stock options to employees, and describing the Company’s Key Employee Bonus Plan.
On February 11, 2005, the Company filed a Report on Form 8-K to file a press release announcing its financial results for the second quarter of the fiscal year ending June 30, 2005, which information was “furnished” and not “filed” with the Commission.
On February 16, 2005, the Company filed a Report on Form 8-K describing an employment agreement with its existing Chief Financial Officer and Vice President of Administration, Mr. Richard L. Travis, Jr.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PEERLESS MFG. CO. | ||||
Date: May 16, 2005 | /s/ Sherrill Stone | |||
Sherrill Stone | ||||
Chairman and Chief Executive Officer | ||||
Date: May 16, 2005 | /s/ Richard L. Travis, Jr. | |||
Richard L. Travis, Jr., Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
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