UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended July 2, 2011
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No. 001-34156
PMFG, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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51-0661574 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. employer identification no.) |
14651 North Dallas Parkway, Suite 500, Dallas, Texas 75254
(Address of principal executive offices)
Registrants telephone number, including area code: (214) 357-6181
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock, $0.01 par value per share
Common Share Purchase Right
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The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate value of the voting stock held by non-affiliates of the registrant as of December 31,
2010 was approximately $288.6 million.
The number of shares outstanding of the registrants common stock, $0.01 par value, as of September
9, 2011 was 17,676,624.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the Registrants
definitive Proxy Statement for its 2011 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the Form 10-K) contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. All statements other than statements of historical fact contained in this Form 10-K
are forward-looking statements. You should not place undue reliance on these statements. These
forward-looking statements include statements that reflect the current views of our senior
management with respect to our financial performance and future events with respect to our business
and our industry in general. Statements that include the words expect, intend, plan,
believe, project, forecast, estimate, may, should, anticipate and similar statements
of a future or forward-looking nature identify forward-looking statements. Forward-looking
statements address matters that involve risks and uncertainties. Accordingly, there are or will be
important factors that could cause our actual results to differ materially from those indicated in
these statements. We believe that these factors include, but are not limited to, the following:
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adverse changes in the current global economic or political environment or in the markets
in which we operate, including the power generation, natural gas infrastructure and
petrochemical and processing industries; |
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compliance with United States and foreign laws and regulations, including export control
and economic sanctions laws and regulations which are complex, change frequently and have
tended to become more stringent over time; |
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changes in current environmental legislation; |
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changes in competition; |
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changes in demand for our products; |
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risks associated with our product warranties; |
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changes in the price, supply or demand for natural gas, bio fuel and oil and coal; and |
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risks associated with our indebtedness, the terms of our credit facility and our ability to
raise additional capital. |
The foregoing factors should not be construed as exhaustive and should be read together with
the other cautionary statements included in this and other reports we file with the Securities and
Exchange Commission (the SEC), including the information in Part I Item 1A Risk Factors of
this Form 10-K, and elsewhere in this Form 10-K. There may be other factors that may cause our
actual results to differ materially from the forward-looking statements. If one or more events
related to these or other risks or uncertainties materialize, or if our underlying assumptions
prove to be incorrect, actual results may differ materially from what we anticipate. We undertake
no obligation to publicly update or revise forward-looking statements, except to the extent
required by law.
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INTRODUCTORY NOTE
On August 15, 2008, we completed a holding company reorganization. In the reorganization,
Peerless Mfg. Co. (Peerless), a Texas corporation, became a wholly owned subsidiary of PMFG, Inc.
(PMFG), a newly formed Delaware corporation. Shareholders of Peerless received two shares of
common stock of PMFG for each outstanding share of common stock of Peerless held prior to the
reorganization. Under SEC rules, PMFG, Inc. is a successor registrant to Peerless Mfg. Co.
As used in this Form 10-K, references to Company, we, us and our refer to (a) PMFG,
Inc. and its subsidiaries after the holding company reorganization and (b) Peerless Mfg. Co. and
its subsidiaries prior to the holding company reorganization, in each case unless the context
requires otherwise. Additionally, references to PMFG refer to PMFG, Inc. and references to
Peerless refer to Peerless Mfg. Co., in each case unless the context requires otherwise.
In July 2010, we changed our fiscal year, which previously ended as of the last day of the
month each June to a new fiscal year, which is comprised of either 52 or 53 weeks, commencing
within seven days of the month-end. Beginning in fiscal 2011, our fiscal year end will be the
Saturday closest to June 30; therefore, the fiscal year end date will vary slightly each year. In a
52 week fiscal year, each of our quarterly periods will be comprised of 13 weeks, consisting of two
four week periods and one five week period. In a 53 week fiscal year, three of our quarterly
periods will be comprised of 13 weeks and one quarter will be comprised of 14 weeks. We believe
that this change in fiscal year will reduce financial variability by making the quarterly periods
more consistent in length.
References in this Form 10-K to fiscal 2011, fiscal 2010 and fiscal 2009 refer to our fiscal
years ended July 2, 2011, June 30, 2010 and June 30, 2009, respectively. All currency amounts
included in this Form 10-K are expressed in thousands, except per share amounts.
PART I
Overview
We are a leading provider of custom-engineered systems and products designed to help ensure
that the delivery of energy is safe, efficient and clean. We primarily serve the markets for power
generation, natural gas infrastructure, refining and petrochemical processing. We offer a broad
range of separation and filtration products, selective catalytic reduction, turbine emission
exhaust and silencing systems and other complementary products including specialty heat exchangers,
pulsation dampeners and silencers. Our primary customers include equipment manufacturers,
engineering contractors and owner operators.
A demand for energy in both developed and emerging countries, coupled with the global trend
toward stricter environmental regulations, drives demand for our systems and products. These
trends stimulate investment, both in new power generation facilities, refineries and related
infrastructure and in upgrading older facilities to extend their useful lives. Further, in
response to demand for cleaner, more environmentally responsible power generation, power providers
and industrial power consumers are building new facilities that use cleaner eco-fuels, such as
natural gas and bio fuels. Power providers in international and domestic markets also are
upgrading existing facilities and building new facilities that use nuclear power generation
technology. We believe we are positioned to benefit from the increased use of both natural gas and
nuclear technology.
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Our products and systems are marketed worldwide. Revenue generated from outside the United
States was approximately 38% in fiscal 2011, compared to 35% and 34% in fiscal 2010 and 2009,
respectively. We expect our international sales to continue to be an increasingly important part
of our business.
We have been in business for over 75 years and believe we succeed in winning customer orders
because of the relationships we have developed over our years of service; the long history of
performance and reliability of our systems and products; and our advanced technical engineering
capabilities on complex projects. We work closely with our customers to design and custom-engineer
our systems and products to meet their specific needs. Our customers include some of the largest
natural gas producers, transmission and distribution companies, refiners, power generators, boiler
manufacturers, compressor manufacturers and engineering and construction companies around the
world. Reliable product performance, timely delivery and customer satisfaction are critical in
maintaining our competitive position.
Our business strategy is to continue to pursue opportunities in high-growth international
markets, capitalize on opportunities to deliver complete systems, use our technological
capabilities to address a broader range of pollutants, further expand our technical expertise by
investing in engineering talent and improve our manufacturing processes. In addition to our
organic strategies, we will maintain an outward view of the industry and pursue strategic
acquisitions. We believe these efforts will improve our financial performance and better position
our company to compete globally.
Recent Developments
During the year ended July 2, 2011, the holders of our Series A convertible redeemable
preferred stock (Preferred Stock) elected to convert their Preferred Stock into 2,642,500 shares
of the Companys common stock at the initial conversion price of $8.00 per share. See Note M to
our consolidated financial statements included in Item 8 of this Form 10-K.
On September 12, 2011, we entered into an amendment to our Credit Agreement (the Seventh
Amendment) to extend the maturity date of the revolving credit facility to April 30, 2013, to
waive any noncompliance or default by the Company with its current financial covenants and to
reduce the Consolidated Fixed Charge Coverage (FCC) ratio covenants.
On May 6, 2011, we entered into an amendment of our Revolving Credit and Term Loan Agreement,
dated April 30, 2008, among Peerless Mfg. Co., PMC Acquisition, Inc., the Company, the other
borrowers party thereto, Comerica Bank and other lenders party thereto (the Credit Agreement).
The purpose of the amendment was to modify the definition of Consolidated Fixed Charges to exclude
distributions paid to the holders of the Companys Series A convertible Preferred Stock from the
definition and therefore from the consolidated fixed charge ratio. On December 29, 2010, we
entered into an amendment to our Credit Agreement. The amendment refinanced our existing debt and
extended the maturity date of the revolving credit facility to April 30, 2012 and the senior
secured term loan to January 1, 2016.
On April 20, 2011, we announced that Henry G. Schopfer resigned as the Chief Financial Officer
of the Company, effective April 22, 2011. We also announced the appointment of Ronald L. McCrummen
to the position of Vice President and Chief Financial Officer. Prior to joining the Company, Mr.
McCrummen served as the Senior Vice President and Chief Accounting Officer of Dean Foods, Inc. from
2004 thru 2010 and was a partner with Ernst and Young, LLP from 1998 through 2004.
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On July 15, 2010, we formed a new wholly-owned subsidiary, Peerless Asia Pacific Pte. Ltd.
(Peerless Asia Pacific), which replaced the former Peerless Mfg. Co. regional sales office in
Singapore. The coordination of Peerless Asia Pacific with Peerless Manufacturing (Zhenjiang) Co.
Ltd (PMZ), our majority-owned business venture in China, will provide a stronger foundation to
execute projects throughout the Asia Pacific region.
On July 12, 2010, we entered into the CEFCO Process Manufacturing License Agreement (the
License Agreement) with CEFCO Global Clean Energy, LLC, a Texas limited liability company
(CEFCO). Pursuant to the License Agreement and subject to the terms and conditions set forth
therein, we were granted exclusive manufacturing rights in the continental United States to
manufacture equipment and process units incorporating CEFCOs multi-stage apparatus used in the
selective capture and removal of purified carbon gas, including NOx, SOx, CO2 and Hg, and the
sequential capture and removal of mercury, metal, and particulate aerosols. The captured pollutants
may subsequently be converted into various high-grade end products through chemical conversion in a
recirculating and regenerating system and may then be commercially sold by an end-user or operator.
Our Industry
We primarily serve the power generation, natural gas infrastructure and refining and
petrochemical processing markets. According to the Energy Information Administration, (EIA)
worldwide marketed energy consumption is expected to increase nearly 50% from 2009 to 2035, with
the most rapid growth expected in emerging economies outside the Organization for Economic
Cooperation and Development (OCED), led by China and India. In the United States, per capita
energy from 2013 to 2035 is expected to decline approximately 0.3% per year. Over the long term,
increases in worldwide energy consumption drive demand for infrastructure in our target markets.
In the short term, a variety of factors affect demand for energy infrastructure, including general
economic conditions, current and anticipated environmental regulations and the level of capital
spending by companies engaged in energy production, processing, transportation, storage and
distribution.
Power generation
Power generation encompasses a broad range of activities related to the production of
electricity. The primary types of fuel used to generate electricity are coal, natural gas, hydro
and nuclear. In 2010, coal accounted for 45% of United States power generation, followed by
natural gas (24%), nuclear (20%) and other forms (11%). Coal plants generally have higher emission
rates than natural gas-powered plants. In the United States, concerns about potential
environmental regulations have impeded the construction of many proposed coal-fired plants. In
contrast, more natural gas-fired plants are or will be built in the United States and natural gas
has become the fastest growing fuel in the United States and Western Europe for electrical power
generation. Natural gas-fired power plants are considered cleaner than coal and they are more
flexible in terms of start-up times. Additionally, many countries are relicensing existing nuclear
facilities and building additional nuclear facilities.
Natural gas infrastructure
The natural gas industry consists of the production, processing, transportation, storage and
distribution of natural gas. Natural gas is primarily used for electricity generation, residential
and commercial heating and industrial applications. The EIA estimates that worldwide natural gas
consumption will increase 44% between 2007 and 2035, with consumption in non-OCED countries growing
approximately three times as fast as consumption in OCED countries. Natural gas delivery is a
complex process that refines raw natural gas for industrial, commercial or residential uses.
Initially, raw natural gas is extracted from the earth and cleansed of contaminants such as dirt
and water at the well site. The natural gas is then transported to a gathering or processing facility, where it is
processed to meet quality standards set by pipeline and distribution companies, such as specified
levels of solids, liquids and other gases. After processing, the natural gas is transmitted for
storage or through an extensive network of pipelines to end users.
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The natural gas pipeline network in the United States can transport to nearly any location in
the contiguous 48 states. This network, which consists of more than 300,000 miles of interstate
and intrastate pipelines and over 1,400 compressor stations, continually undergoes maintenance and
expansion upgrades to meet demand.
Refining and petrochemical processing
Refining and petrochemical processing involves the refining and processing of fuels and
chemicals for use in a variety of applications, such as gasoline, fertilizers and plastics. In
response to increasing international demand for petrochemicals and refined products, companies are
constructing new refineries and petrochemical processing facilities as well as expanding existing
facilities, creating opportunities for all Peerless products. In many cases, these new and
expanded facilities must comply with stricter environmental regulations, which influence both
choice of fuel and demand for systems to control exhaust emissions.
Market Opportunity
We believe that a number of trends in the markets in which we operate create significant
opportunities for us including:
Increasing worldwide energy demand placing a strain on existing power generation capacity
Rapid industrialization in countries such as China and India is increasing worldwide energy
consumption. Consequently, the global demand for energy is placing a strain on existing power
generation capacity. This demand for energy is driving the construction of new power generation
and related facilities and the upgrade of existing facilities, many of which are near the end of
their useful lives. In 2000, there were over 2,775 power plants operating in the United States,
with coal-fired plants providing the most electrical power. Generally, coal-fired power plants are
designed with an expected useful life of 25 to 40 years. The average age of coal-fired plants in
the United States is approximately 35 years. As these plants age, they must be refurbished or
replaced to maintain power generation capacity. Additionally, according to the World Nuclear
Association, there are currently 440 commercial nuclear power reactors operating worldwide,
providing 377 GWe of power (approximately 14% of the worlds electricity), with 62
reactors under construction, 154 reactors planned/on order and 342 more proposed.
Growth of energy infrastructure
As energy demand increases, the need for energy infrastructure is expected to rise. The
Pipeline and Gas Technology construction report estimates that operators are building, planning and
studying the feasibility of approximately 60,000 additional miles of natural gas pipeline
throughout the world. According to the Interstate Natural Gas Association of America (INGAA)
Foundation, Inc. and ICF International, industry groups that sponsors research regarding natural
gas use and pipeline construction and operation, approximately $133 billion to $210 billion of new
investment in infrastructure will be required to satisfy energy demand over the next 20 years in
the United States and Canada to build an estimated 29,000 to 62,000 miles of additional natural gas
pipeline. Internationally, the EIA estimates that approximately 78% of the worlds natural gas
reserves are located in the Middle East, Eurasia, Central America and South America, where pipeline
systems are generally less developed than the
systems in North America. Consequently, new pipeline systems in these regions will need to be
constructed to transport natural gas. Additionally, as known reserves of natural gas are depleted,
development of other resources, such as deep offshore reserves, will increase, which will require
more complex infrastructure.
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Increased environmental awareness spurring regulations
Governmental agencies, consumers and others concerned with the environment continue to drive
the adoption of stricter environmental regulations. In the United States, as well as a number of
other countries, legislative and regulatory programs have targeted NOx emissions, which are a
byproduct of burning hydrocarbon fuels in power generation facilities. These emissions gather at
low atmospheric levels causing ground level ozone or the dark haze commonly referred to as smog.
NOx is the third most prevalent greenhouse gas behind CO2 and methane. NOx emissions
have the potential to cause serious respiratory conditions, threaten vegetation and contribute to
global warming. State and federal programs in the United States require the reduction of NOx
emissions and in many cases have caused existing power plants to upgrade their emission control
equipment to reduce NOx emissions. Internationally, governmental agencies are enacting new laws to
reduce emissions from power generation facilities. For example, Saudi Arabia has issued
regulations to reduce NOx emissions and most economically developed nations (such as those that are
members of the Organization for Economic Cooperation and Development) have adopted regulations to
reduce or control NOx emissions. The increased regulations require new facilities to incorporate
improved NOx emission control capabilities into their designs and some existing facilities to be
retrofitted to comply with these regulations.
Shift to cleaner energy sources
In response to demand for cleaner, more environmentally responsible power generation, power
providers are building new facilities that use cleaner fuels, such as natural gas and nuclear
technology. In the United States, concerns about potential environmental regulations have slowed
the construction of proposed coal-fired plants. However, more natural gas-fired plants are being
built in the United States. In addition, emerging countries are increasing their power generation
capacity, including the construction of additional nuclear facilities, to meet their growing power
demands. For example, the EIA estimates that the global nuclear generation capacity will increase
74% between 2007 and 2035 with the highest increases expected to occur in Asian countries.
Increased concerns about the environment, government tax incentives and government sponsored
programs have also stimulated growth in power generation using alternative fuels.
Alternative approaches to electric power generation and transmission
Environmental, economic, safety, logistical and efficiency concerns are affecting traditional
approaches for energy delivery. For example, base load power plants, which are large-scale,
capital-intensive facilities that operate continuously and are the foundation of a regions power
generation network, are typically built away from heavily populated areas to reduce concerns
regarding pollution and safety. Recently, electric utilities have increased their focus on
distributed power generation. Distributed power generation provides power from smaller capacity
facilities that are located closer to the final destination of use. Because these facilities are
located closer to where the power is needed, they are generally cleaner, lower-emission facilities,
often using natural gas. This proximity lowers the cost of bringing power to commercial,
industrial and residential end-users and reduces the amount of power lost in transmission. In
addition, power generation companies are increasingly relying on peaker plants, which typically
operate only in periods of high demand. Most peaker plants use natural gas.
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Our Competitive Strengths
We believe there is a significant opportunity for companies serving the energy infrastructure
market to differentiate themselves by delivering proven solutions to customers in a timely manner.
We believe our competitive strengths position us well to capitalize on global energy trends.
Strong, competitive position in our markets
We believe we have established a strong, competitive position in our markets by consistently
and reliably providing custom-engineered, quality systems and products to our customers. We
consider many of our systems and products to be innovative and technologically advanced and we
continually seek to improve our existing systems and products and develop new systems and products.
We believe that our long history of performance has allowed us to gain substantial market share.
For example, we have provided more than 800 Selective Catalytic Reduction (SCR) systems for
various industry clients that include emissions reductions of facilities that generate more than
100,000 megawatts of electric power capability. We believe we have provided more SCR systems than
any other supplier of these systems.
Longstanding customer relationships
We have developed strong customer relationships by using our technical sales, engineering and
manufacturing resources to deliver quality systems and products and by providing a high level of
customer service. We focus our efforts on consistently and reliably meeting our customers needs
with respect to system and product performance and timely delivery. We believe that we have
established long-term preferred supplier relationships with many of our customers.
Substantial engineering and technical expertise
We believe that we compete most effectively in providing solutions that require a high level
of complex design and engineering expertise. We currently employ over 70 degreed engineers with
backgrounds in chemical, mechanical, industrial, structural, process and civil engineering. We
believe that our customers depend on our engineering and technical expertise and experience in
designing complex systems to meet their individual needs. We regularly employ sophisticated
computer and physical modeling programs, including advanced computational fluid dynamic modeling,
to verify the performance criteria of designs prior to manufacturing our systems and products. We
continue to invest in research and development to further broaden our capabilities. We also
believe that our patented processes and proprietary know-how developed over years of industry
experience provides us with a competitive advantage.
Ability to broaden the applications of our technology
We offer our customers an extensive line of systems and products. We believe we can advance
our proprietary technologies to further broaden our portfolio of systems and products and expand
our market potential. For example, we have utilized the experience and expertise gained from our
SCR systems to broaden the application of our environmental control technology to address renewable
and alternative fuels such as bio fuels. We are also applying our separation technologies to a
wider range of fluids such as molten sulfur, silicon wafer production and petroleum products. By
broadening our line of high quality systems and products, we believe we are better able to meet our
customers needs, enter new markets and add new customers.
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Established network of subcontractors
We employ subcontractors at various locations around the world to meet our customers needs in
a timely manner, meet local content requirements and reduce costs. Subcontractors generally
perform the majority of our manufacturing for international customers. We also utilize
subcontractors in North America, primarily to add additional non-proprietary manufacturing
capacity. We believe that our network of subcontractors compounds the benefit of our in house
engineering resources while improving the timeliness of our delivery and achieving more competitive
pricing, which improves our market position
Our Business Strategy
Our objective is to enhance our position as a leading global provider of custom-engineered
systems and products designed to help ensure that the delivery of energy is safe, efficient and
clean. The key elements of our strategy to achieve this goal are:
Enhance our pursuit of high-growth international markets
We believe we have established a strong international presence, with international sales
representing approximately 38% of our total revenue in fiscal year 2011. We estimate that
international markets for our systems and products are substantial and are growing more rapidly
than our North American markets due to the significant growth in the use of natural gas and the
demand for additional power generation in China, the Middle East and Europe, as well as oil
recovery and processing in Western Canada. We believe that we are well-positioned to capitalize on
this growth. To exploit these opportunities, we are dedicating additional sales and marketing
resources to our international operations. Additionally, through our majority-owned joint venture,
Peerless Propulsys China Holdings LLC, we have established manufacturing operations in China and
continue to develop our established network of subcontractors to grow our international market
share and increase profitability.
Offer complete systems to our customers
We believe we have a considerable opportunity to utilize our engineering know-how to offer our
customers complete systems and subsystems, as well as individual products that our customers use as
components in other systems. Complete systems generally have higher profit margins and should
allow us to develop longer-term, preferred supplier relationships with customers. For example, we
are marketing fuel gas conditioning systems for the power industry, which combine a series of
components, instruments and controls and are custom-engineered to the customers specifications.
We believe these systems highlight our engineering expertise.
Expand technology and product offerings to better meet our customers needs
We believe we have opportunities to further expand our technology and product offerings in
related markets both through internal technology development and strategic acquisitions. For
example, we have taken the expertise gained from our SCR systems and have applied it to systems for
alternative fuel sources such as bio fuels. We believe we can employ our technology to reduce
emissions in addition to NOx, such as mercury, sulfur dioxide and greenhouse gases. We have also
expanded the applications of our separation and filtration technology to liquids such as molten
sulfur and petroleum products. By expanding our product and technology offerings, we believe that
we can broaden our customer base and capture additional market share.
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Invest in engineering talent and technical expertise
We believe our success depends on our ability to attract, retain and develop engineering
talent and technical expertise, including skilled labor. As a result, we have actively taken steps
to recruit additional engineers and technical workers, including certified welders. For example,
we collaborate with local universities on research and development projects, offer engineering
scholarships and recruit directly from these universities. We also foster relationships with
technical schools to gain exposure to technical talent and opportunities to recruit skilled
workers. We believe that these investments will allow us to maintain and expand our engineering
expertise, improve our manufacturing capabilities and capacity and pursue additional business
opportunities.
Improve our manufacturing and global supply chain capabilities
Our customers generally select to purchase our products because of our reputation, functional
capability, quality, timely delivery, and price. With the increase in global customers, changes in
regulations, and uncertain economic environment, it is critical that we continue to identify
opportunities to improve our manufacturing and global supply chain capabilities. Initiatives will
include improving the efficiency of our manufacturing operations, as well as ensuring that we have
developed high quality, responsive and efficient relationships with our vendors and subcontractors
within and around the countries that we operate. We believe these supply chain initiatives will
help ensure that we continue to deliver high quality products within the timeframe established by
our customers, while maintaining competitive pricing.
Pursue selective acquisitions
We believe that strategic acquisitions will help us to broaden our product offerings, expand
our markets, advance our research and development capabilities, further our strategy of providing
more systems to our customers and provide opportunities to lower raw material costs and leverage
the cost of our corporate overhead. We continually review potential acquisitions and believe we
have established a diligent process for identifying complementary acquisition opportunities.
Our Systems and Products
We classify our systems and products into two broad groups consistent with our reportable
segments: Process Products and Environmental Systems. Below is a brief description of our primary
offerings for each of our segments.
Process Products
Our Process Products segment accounted for 73.0% of total revenue in fiscal 2011, compared to
77.1% of total revenue in fiscal 2010 and 78.0% of total revenue in fiscal 2009. Our separation
and filtration systems and products improve efficiency, reduce maintenance and extend the life of
energy infrastructure by removing liquid contaminants from gases, removing solid contaminants from
gases or liquids and separating different liquids. Our separation and filtration systems and
products are applied in the power generation, natural gas infrastructure, refining and
petrochemical processing and other specialized industries. In addition, products in our Process
Products segment include pulsation dampeners and heat exchangers. The segment also includes
industrial silencing equipment to control noise pollution on a wide range of industrial processes
and heat transfer equipment to conserve energy in many industrial processes and in petrochemical
processing. Our process products systems and products include:
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Vane Separators. Also known as mist extractors, these devices remove liquids from
vapor or gas streams and can be used within vertical or horizontal pressure vessels,
directly within ductwork systems or mounted to bulkheads. |
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Centrifugal Separators. We offer two types of centrifugal separators: swirl tubes,
which operate in both horizontal and vertical pressure vessels and cyclones, which
operate in vertical pressure vessels. These devices remove both solid particles and
liquid droplets from vapor or gas streams. |
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Filter Separators. Our filter separators are typically used in natural gas
pipelines to remove solid and liquid particles from gas streams. This product combines
our separation and filtration technologies into one product. |
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Three-Phase Separators. We offer a horizontal gas scrubber, which is a device that
separates large liquid volumes from gas and is typically used for well head test
separators. We can design the scrubber for three phase applications oil, water and
gas. |
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Absolute Separators. Our absolute separator is designed for maximum separation
efficiency of submicron liquid droplets and aerosols. Our customers use absolute
separators in ammonia, urea and other chemical plants to protect critical process
equipment. |
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Fuel Gas Conditioning Systems. Our fuel gas conditioning systems remove particulate
matter, hydrocarbon and water droplets from fuel gas, which contaminants can disrupt
the gas systems of combustion turbine engines. Our fuel gas conditioning systems may
also include bulk liquid removal, pressure regulation and temperature control. These
systems are usually applied in electric power generating plants and gas compression
systems. |
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Gas Filters. Our gas filters remove solid particles, such as dust, dirt, scale and
rust, from a flowing pressurized gas stream. |
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Nuclear Plant Steam Separators. Nuclear power generators use our separators, also
known as steam dryers, as the final stage of water separation within a reactor vessel
or steam generator vessel. These devices remove water droplets from the process steam
to maximize thermal efficiency in the steam turbine and minimize erosion and corrosion
of steam loop piping. Our customers also use similar separators between the high
pressure and low pressure turbines to increase thermal efficiency. |
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Inlet Air Treatment Systems. Military ships and commercial maritime vessels use our
vane separators, along with coalescer panels and filters, to protect gas turbines and
air intake ducts by separating sea spray, salts and other solid particles. |
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Pulsation Dampeners. Gas compressors produce pulsations in the attached piping
system, which can reduce compressor efficiency, cause severe damage to compressor
cylinders and cause cracking in pipes and vessels. Our customers apply our pulsation
dampeners to the suction and discharge of each compressor cylinder to reduce pulsation
levels to acceptable limits. |
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Heat Exchangers. We offer heat transfer equipment, which are devices that transfer
heat from one gas to another or to the environment. Our products include double-pipe
and multi-tube hairpin exchangers and shell and tube exchangers. |
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Industrial Silencers. Our customers use our industrial silencing equipment to
control the noise pollution associated with a wide range of industrial processes. Our
silencing products include vent and blowdown silencers, blower silencers, engine
silencers, gas turbine silencers, compressor silencers and vacuum pump silencers. |
9
Environmental Systems
Our Environmental Systems segment accounted for 27.0% of total revenue in fiscal 2011,
compared to 22.9% of total revenue in fiscal 2010 and 22.0% of total revenue in fiscal 2009. We
design, engineer, fabricate and sell environmental control systems and products for air and noise
pollution abatement. Our environmental control systems and products are applied in the power
generation, natural gas infrastructure, refining and petrochemical processing and other specialized
industries. Examples of these systems and products include:
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Selective Catalytic Reduction (SCR) Systems. Our SCR systems are our primary
pollution control product. These systems convert NOx emissions produced by burning
hydrocarbon and organic fuels such as coal, gasoline, natural gas, wood, grass and
grain, into nitrogen and water vapor. Our system operates by injecting an ammonia
reagent into the exhaust gas and mixing the reagent with the exhaust gas prior to
passing it through a catalyst. We supply SCR systems for a variety of applications,
including both simple cycle and combined cycle gas power plants, package boilers,
process heaters, internal combustion engines and other combustion sources. |
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Oxidation Systems. Our oxidation systems oxidize carbon monoxide and a variety of
volatile organic compounds into carbon dioxide and water without the use of any
additional chemical reagent. The catalyst is the only component used to accelerate the
oxidation reaction. The oxidation system is separate from the SCR system and is
typically located upstream of the SCR system. |
Customers
Our customers are geographically diversified and our systems and products are not dependent
upon any single customer or group of customers. The loss of any single customer or group of
customers would not have a material adverse effect on our business as a whole. However, the
custom-designed and project-specific nature of our business can cause significant variances in
sales to specific customers from year to year. No single customer accounted for more than 10% of
the Companys consolidated revenue in fiscal 2011, 2010 or 2009.
We sell the majority of our separation and filtration systems and products, including gas
separators, filters and conditioning systems, to gas producers, gas gathering, transmission and
distribution companies, chemical manufacturers and refiners, either directly or through contractors
engaged to build plants and pipelines. We also sell these products to manufacturers of
compressors, turbines and nuclear and conventional steam generating equipment. We sell our marine
separation and filtration systems primarily to shipbuilders. We also sell our heat exchangers and
pulsation dampeners to power generation owners and operators, refiners, petrochemical processors
and specialty industrial users.
We sell our environmental control systems and products to power generators, engineering and
construction companies, heat recovery steam generator manufacturers, boiler manufacturers,
refiners, petrochemical plants and others who desire or may be required by environmental
regulations to reduce NOx emissions and ground level ozone, of which NOx is a precursor.
10
Sales and Marketing
We believe our sales and marketing efforts have helped establish our reputation for providing
innovative engineering solutions and meeting our customers needs in a timely, cost-efficient
manner. The sales and marketing of our systems and products largely depends upon the type of
offering, type of market and extent of engineering involvement in the sales cycle.
We market our products worldwide through independent sales representatives who sell on a
commission basis. These independent representatives, substantially all of whom have technical
backgrounds, work in conjunction with our application engineers. We also sell our products
directly to customers through our internal sales force. Additionally, we have license agreements
with third parties outside the U.S. to use our trade name and design guidelines. Our promotional
and marketing activities include direct sales contacts, participation in trade shows, an internet
website, advertising in trade magazines and distribution of product brochures.
Competition
The markets we serve are highly competitive and fragmented. We believe no single company
competes with us across the full range of our systems and products. Competition in the markets we
serve is based on a number of considerations, including price, timeliness of delivery, technology,
applications experience, know-how, reputation, product warranties and service. We believe our
reputation, service and technical engineering capabilities differentiate us from many of our
competitors, including those competitors who often offer products at a lower price.
We believe our primary competitors for our separation and filtration systems and products
include Anderson Separators Company, King Tool Company, NATCO Group (Cameron), PECO-Facet, a
subsidiary of CLARCOR, Inc., Donaldson and Koch Industries. We believe our primary competitors for
our environmental control systems and products include Envirokinetics, Hitachi Zosen Corporation,
Applied Utility Systems (Johnson Matthey), Global Power Equipment Group, Inc. and Universal
Silencer.
Backlog
Our backlog of uncompleted orders was approximately $89,000 at July 2, 2011, compared to
$96,000 at June 30, 2010. Backlog has been calculated under our customary practice of including
incomplete orders for products that are deliverable in future periods but that could be changed or
cancelled. Of our backlog at July 2, 2011, we estimate approximately 80% will be completed during
fiscal 2012. But by nature, unforeseen events could affect our backlog and we may not realize the
full amount of revenue included in our backlog.
Raw Materials
We purchase raw materials and component parts essential to our business from a number of
reliable suppliers. From time to time, we are exposed to rapid increases in raw material costs and
temporary disruptions in supply, including steel and other component parts that we purchase. We
believe that raw materials and component parts will be available in sufficient quantities to meet
our anticipated demand for at least the next 12 months.
11
Environmental Regulations
Our operations are subject to a number of federal, state and local laws and regulations
relating to the protection of the environment. In connection with our acquisition of Nitram and
the related financing transactions, environmental site assessments were performed on both our
existing manufacturing properties and Nitrams properties in Cisco, Texas and Wichita Falls, Texas.
These assessments involved visual inspection, testing of soil and groundwater, interviews with
site personnel and a review of publicly available records. The results of these assessments
indicated soil and groundwater contamination at the dormant Vermont Street facility in Wichita
Falls and groundwater concerns at the Jacksboro Highway facility in Wichita Falls and the Cisco
facilities. Additional sampling and evaluation of the groundwater concerns at the Jacksboro
Highway and Cisco facilities indicated levels of impact did not exceed applicable regulatory
standards and that further investigation and remediation was not required. Soil remediation at the
Vermont Street facility in Wichita Falls was completed in July 2009 and we will continue to monitor
groundwater at the sites for an additional four years. We have an accrued liability of $175 at
July 2, 2011, for the estimated costs relating to these environmental matters. We believe that the
cost of the monitoring will be approximately $10 per year until complete. We expect that the
monitoring will continue for a period not to exceed five years. We are seeking reimbursement for
the full cost of the remediation and ongoing and future monitoring activities under our purchase
agreement with Nitrams former stockholders in the amount of $655. Funds have been deposited into
an escrow account that may be used to reimburse these costs.
Employees
As of July 2, 2011, we employed approximately 400 full-time employees. None of our employees
are represented by a labor union or are subject to a collective bargaining agreement. We did not
experience any material labor difficulties during fiscal 2011. We believe our employee relations
are good.
Intellectual Property
We rely on a combination of patent, trademark, copyright and trade secret laws, employee and
third-party nondisclosure/confidentiality agreements and license agreements to protect our
intellectual property. We sell most of our products under a number of registered trade names, brand
names and registered trademarks, which we believe are widely recognized in the industry. All of
the Companys filed and issued United States patents have a duration of 20 years from the issuance
date and the expiration dates of these patents range from 2014 through 2025. The Company does not
consider any particular patent or intellectual property to be critical to the Companys long-term
performance.
We anticipate we may apply for additional patents in the future as we develop new products and
processes. Any issued patents that cover our proprietary technology may not provide us with
substantial protection or be commercially beneficial to us. The issuance of a patent is not
conclusive as to its validity or its enforceability. If we are unable to protect our technologies
or confidential information, our competitors could commercialize our technologies. Competitors may
also be able to design around our patents. In addition, we may face claims that our products,
services, or operations infringe patents or misappropriate other intellectual property rights of
others.
With respect to proprietary know-how, we rely on trade secret protection and confidentiality
agreements. Monitoring the unauthorized use of our proprietary technology is difficult and the
steps we have taken may not prevent unauthorized use of such technology. The disclosure or
misappropriation of our trade secrets and other proprietary information could harm our ability to
protect our rights and our competitive position.
12
Research and Development
Our research and development expenses were $467, $509 and $449 for the fiscal years 2011, 2010
and 2009, respectively. We believe current expenditures are adequate to sustain ongoing research
and development activities. We believe we have additional opportunities for growth by developing
new technologies and products that offer our clients greater performance. We also continue to
support research and development to improve existing products and manufacturing methods.
Website Information
Our corporate website is located at www.peerlessmfg.com. We make our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(Exchange Act) available free of charge through our website as soon as reasonably practicable
after we electronically file the reports with, or furnish them to, the SEC. Our website provides
access to reports filed by our directors, executive officers and certain significant stockholders
pursuant to Section 16 of the Exchange Act. In addition, our corporate governance policies,
corporate code of conduct and charters for the standing committees of our board of directors are
available on our website. The information on our website is not incorporated by reference into
this Form 10-K. In addition, the SEC maintains a website, www.sec.gov, which contains reports,
proxy and information statements and other information that we file electronically with the SEC.
Executive Officers of the Registrant
Our executive officers are as follows:
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Name |
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Age |
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Position with the Company |
Melissa G. Beare
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36 |
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Vice President, General Counsel and Secretary |
Peter J. Burlage
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47 |
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President and Chief Executive Officer |
John H. Conroy
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46 |
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Vice President, Engineering and Product Development |
Warren R. Hayslip
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57 |
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Vice President and Chief Operating Officer |
Ronald L McCrummen
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47 |
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Vice President and Chief Financial Officer |
Sean P. McMenamin
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46 |
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Vice President, Operations Control |
Jon P. Segelhorst
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41 |
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Vice President, Sales and Market Business Units |
David Taylor
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46 |
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Vice President, Business Development and Asia
Pacific Operations |
Melissa G. Beare joined the Company in December 2008 as Vice President and General Counsel.
Prior to joining the Company, Ms. Beare served as the Assistant General Counsel of Advanced
Neuromodulation Systems, Inc., a subsidiary of St. Jude Medical, Inc., from 2004 through 2008.
Prior to that, she was an attorney at Jones Day and at Hughes and Luce, LLP in Dallas, Texas,
working in their respective corporate practices. Ms. Beare earned her B.A. from the University of
Texas at Austin and holds a J.D. from the University of Texas at Austin School of Law. Ms. Beare
is licensed to practice law in the State of Texas.
Peter J. Burlage joined the Company in 1992. Mr. Burlage has served as our President and
Chief Executive Officer and a member of our Board of Directors since June 2006. He served as
Executive Vice President and Chief Operating Officer from October 2005 to June 2006 and Vice
President, Environmental Systems from January 2001 to October 2005. Mr. Burlage also served as
Vice President of Engineering from 2000 to 2001 and SCR Division Manager from 1997 to 2000. Mr.
Burlage earned his B.S. in Mechanical Engineering from the University of Texas, Arlington and
M.B.A. from Baylor University.
13
John H. Conroy joined the Company in July 2010. Mr. Conroy has served as our Vice President
of Engineering and Product Development since December 2010. He served as our Director of Business &
Product Development for the CEFCO project from July 2010 to December 2010. Prior to joining the
Company, Mr. Conroy served as the General Manager of Red Hawk Texas from 2008 to 2010, a $200
million operating division of United Technologies (UTC). Prior to his tenure at Red Hawk, Mr.
Conroy served as President from 2004 to 2008 and VP-Engineering from 2002 to 2004 of Forney
Corporation, a $50 million subsidiary of UTC. Mr. Conroy earned his B.S. in Chemical Engineering
from the University of California, Berkeley and M.B.A. from Southern Methodist University.
Warren R. Hayslip joined the Company in November 2009 as Vice President and Chief Operating
Officer. Prior to joining the Company, Mr. Hayslip was the General Manager of Donaldson Membranes,
a division of Donaldson Company, Inc. from February 2003 to October 2009. He also served as the
Vice President of Sales & Marketing for Bob Barker Company from 2000 to 2002. Mr. Hayslip earned
his B.A. from Wofford College and M.B.A. from Owen Graduate School of Management, Vanderbilt
University.
Ronald L. McCrummen joined the Company in April 2011 as our Vice President and Chief Financial
Officer. Prior to joining Peerless, Mr. McCrummen was the Senior Vice President and Chief
Accounting Officer of Dean Foods, Inc. from 2004 until November 2010. Prior to his tenure at Dean
Foods he served as a partner of Ernst & Young, LLP from 1998 until 2004. Mr. McCrummen is a
certified public accountant and holds a B.S. in Business Administration and Accounting from St.
Louis University.
Sean P. McMenamin joined the Company in 2001. Mr. McMenamin became our Vice President of
Operations Control in April 2010. Prior to that time, Mr. McMenamin served as our Vice President,
Environmental Systems since January 2006. He served as product manager for refinery and retrofit
applications in our environmental systems business from 2001 to January 2006. Prior to joining the
Company, Mr. McMenamin was a project manager for Telcordia Technologies from 1999 to 2001, and
served in various positions in the environmental and power business at Foster Wheeler from 1994 to
1999. Mr. McMenamin also served in the U.S. Navy as a nuclear trained submariner. Mr. McMenamin
earned his B.S. in Mechanical Engineering from the New Jersey Institute of Technology and M.B.A. in
Finance from Lehigh University.
Jon P. Segelhorst joined the Company in August 2006. Mr. Segelhorst became our Vice President,
Sales and Market Business Units in April 2010. Prior to that time, he served as our Vice
President, Pressure Products since January 2007. He served as General Manager of our Pressure
Products business from August 2006 to January 2007. Prior to joining the Company, Mr. Segelhorst
managed surge protection and DSL product lines for Corning Cable Systems, a telecommunications
equipment company, from 1996 to 2007. Mr. Segelhorst holds several U.S. patents related to fiber
optic hardware. Mr. Segelhorst earned his B.S. in Mechanical Engineering from the University of
Texas at Austin and M.B.A. from Baylor University.
David Taylor joined the Company in 1988. Mr. Taylor was named our Vice President of Business
Development in 2010. Prior to that time, Mr. Taylor served as our Vice President, Separation
Systems since 2000. He has served in a variety of engineering, sales and management positions since
joining the Company. From 1997 through 1999, Mr. Taylor served as Director of Sales and Engineering
in our Singapore office in support of our Asia Pacific operations and resumed responsibility for
our Asia Pacific operations in July 2004. Mr. Taylor earned his B.S. in Mechanical Engineering from
Southern Methodist University.
14
In evaluating the Company, the factors described below should be considered carefully. The
occurrence of one or more of these events could significantly and adversely affect our business,
prospects, financial condition, results of operations and cash flows.
Industry
The current economic uncertainty in domestic and global markets and the volatility of the credit
markets may continue to negatively impact us.
The domestic and international economies experienced a significant recession in 2009 and 2010,
which included an increase in credit restrictions in the global financial markets. Market
conditions in fiscal 2010 and 2011 have shown some limited improvement, but it is not clear that
domestic and international economies will show significant improvements in the remainder of 2011
and into 2012. Management is uncertain as to the depth or length of time that the global recession
and global credit restrictions will have an effect on the markets that we serve and the ability of
financial institutions to provide credit. Our customers are dependent on the financial
institutions to provide liquidity for capital programs and operating capital. We expect our
revenue, earnings and liquidity to be impacted to the extent that global credit restrictions impact
the markets we serve.
Changes in the price, supply or demand for natural gas could have an adverse impact on sales of our
separation and filtration systems and products and our operating results.
A large portion of our Process Product business is driven by the construction of natural gas
infrastructure. Increased demand for natural gas may result in the construction of additional
infrastructure. Higher prices of natural gas, while beneficial to exploration activities and the
financing of new projects, can adversely impact the demand for natural gas. Excess supply could
negatively impact the price of natural gas, which could discourage spending on related capital
projects.
Changes in the power generation industry could have an adverse impact on sales of our environmental
control systems and products and our operating results.
The demand for our environmental control systems and products depends in part on the continued
construction of new power generation and related facilities and the retrofitting of existing
facilities. The power generation industry is cyclical and has experienced periods of slow or no
growth in the past. Any change in the power generation industry that results in a decrease in new
construction or refurbishing of power plants, in particular natural gas facilities, could have a
material adverse impact on our environmental systems segments revenue and our results of
operations.
Changes in current environmental legislation could have an adverse impact on the sale of our
environmental control systems and products and on our operating results.
Our environmental systems business is primarily driven by capital spending by our customers to
comply with laws and regulations governing the discharge of pollutants into the environment or
otherwise relating to the protection of the environment or human health. 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, the
Clean Air Act, the Clean Air Interstate Rule (CAIR) and the regulations implementing these
statutes, as well as similar laws and regulations at state and local levels and in other countries.
These U.S. laws and
regulations may change and other countries may not adopt similar laws and regulations. The
interplay between the judicial system and the EPA instills uncertainty and our business may be
adversely impacted by this court ruling and may be adversely impacted to the extent that other
regulations requiring the reduction of NOx emissions are repealed, amended, implementation dates
delayed, or to the extent that regulatory authorities reduce enforcement.
15
We are subject to United States and foreign laws and regulations including export control and
economic sanctions laws and regulations. These regulations are complex, change frequently and have
tended to become more stringent over time. Implementing compliance with the requirements of any
new or amended U.S. or foreign laws and regulations as well as failure to comply with any laws and
regulations could adversely affect our results of operations, financial condition and our strategic
objectives.
As a result of our global operations, we face a variety of special U.S. and international
legal and compliance risks, in addition to the risks of our domestic business. These federal,
state and local laws, regulations and policies are complex, change frequently, have tended to
become more stringent over time and increase our cost of doing business. These laws and
regulations include environmental, health and safety regulations, data privacy requirements,
international labor laws, anti-corruption and bribery laws such as the U.S. Foreign Corrupt
Practices Act and U.K. Bribery Act, and trade sanctions laws and regulations. In the event new
laws and regulations are enacted or existing laws are amended, implementing compliance with such
new or amended laws may result in a loss of revenue, increased costs of doing business and a change
to our strategic objectives, all of which could adversely affect our results of operations. In
addition, we are subject to the risk that we, our affiliated entities or their respective officers,
directors, employees and agents may take action determined to be in violation of any of these laws.
An actual or alleged violation could result in substantial fines, sanctions, civil or criminal
penalties, debarment from government contracts, curtailment of operations in certain jurisdictions,
competitive or reputational harm, litigation or regulatory action and other consequences that might
adversely affect our results of operations, financial condition or strategic objectives.
In April 2008, Burgess-Manning, Inc., a subsidiary of Nitram, made a voluntary disclosure to
OFAC regarding sales of industrial separators to Iran. In connection with the Nitram acquisition,
we are entitled to reimbursement from the Nitram selling stockholders for potential costs, fines or
penalties related to the OFAC voluntary disclosure. As of September 9, 2011, we have not received
any response from OFAC. We cannot predict the nature and timing of the response of OFAC, the
outcome of any related proceeding, the likelihood that future proceedings will be instituted
against us. In the event that there is an adverse ruling in any proceeding, we may be required to
pay fines and penalties that could harm our business and financial results.
Litigation against us could be costly and time consuming to defend.
We are from time to time subject to legal proceedings and claims that arise in the ordinary
course of business, such as claims brought by our customers in connection with commercial disputes
and employment claims made by our current or former employees. Litigation may result in
substantial costs and may divert managements attention and resources, which may seriously harm our
business, financial condition and results of operations. In addition, legal claims that have not
yet been asserted against us may be asserted in the future.
16
Products and Customers
Competition could result in lower revenue, decreased margins and loss of market share.
We operate in highly competitive markets worldwide and contracts for our systems and products
are generally awarded on a competitive basis. We face competition from potential new competitors
that in some cases face low barriers to entry, specialized competitors that focus on competing with
only one of our systems or products and low cost competitors that are able to produce similar
systems and products for less. Competition could result in not only a reduction in our revenue,
but also may lower the prices we can charge for our systems and products and reduce our market
share. To remain competitive we must be able to anticipate and respond quickly to our customers
needs and enhance and upgrade our existing systems and products to meet those needs. We also must
be able to price our systems and products competitively and make timely delivery of our systems and
products. Our competitors may develop less expensive or more efficient systems and products, may
be willing to charge lower prices in order to increase market share and may be better equipped to
make deliveries to customers on a more timely basis. Some of our competitors have more capital and
resources than we do and may be better able to take advantage of market opportunities or adapt more
quickly to changes in customer requirements. In addition, despite increased market demand, we may
not be able to realize higher prices for our systems and products because we have competitors that
use cost-plus pricing and do not set prices in accordance with market demand.
Customers may cancel or delay projects. Our backlog may not be indicative of our future revenue.
Customers may cancel or delay projects for reasons beyond our control. Our orders generally
contain cancellation provisions which permit us to recover our costs in the event a customer
cancels an order. If a customer cancels an order, we may not realize the full amount of revenue
included in our backlog. If projects are delayed, the timing of our revenue 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. As a
result, our backlog may not be indicative of our future revenue.
Changes in our product mix can have a significant impact on our profit margins.
Some of our products have higher profit margins than others. Consequently, changes in the
product mix of our sales from quarter-to-quarter or from year-to-year can have a significant impact
on our reported profit margins. Some of our products also have a much higher internally
manufactured cost component. Therefore, changes from quarter-to-quarter or from year-to-year can
have a significant impact on our reported margins through a change in our manufacturing costs and
specifically in our manufacturing costs as a percentage of revenue.
A significant portion of our accounts receivable are related to large contracts from customers in
the same markets, which increases our exposure to credit risk.
We monitor the credit worthiness of our customers. Significant portions of our sales are to
customers who place large orders for custom systems and products and whose activities are related
to the power generation, natural gas infrastructure and refining and petrochemical processing
markets. As a result, our exposure to credit risk is affected to some degree by conditions within
these markets and governmental and political conditions. We attempt to reduce our exposure to
credit risk by requiring progress payments and letters of credit. However, unanticipated events
that affect our customers could have a materially adverse impact on our operating results.
17
Our systems and products could be subject to product liability claims and litigation, which could
adversely affect our financial condition and results of operations and harm our business
reputation.
We manufacture systems and products that create exposure to product liability claims, breach
of contract claims, and litigation. If our systems and products are not properly manufactured or
designed, personal injuries or property damage could result, which could subject us to claims for
damages. The costs associated with defending product liability claims and payment of damages could
be substantial. Our reputation could also be adversely affected by such claims, whether or not
successful, and such claims could lead to decreased demand for our systems and products.
Our insurance policies may not cover all claims against us or may be insufficient to cover such
claims.
We may be subject to breach of contract claims or product liability claims for personal injury
and property damage. We maintain insurance coverage against these and other risks associated with
our business. However, this insurance may not protect us against liability from some kinds of
events, including events involving losses resulting from business interruption. We cannot assure
that our insurance will be adequate in risk coverage or policy limits to cover all losses or
liabilities that we may incur. Moreover, we cannot assure that we will be able in the future to
maintain insurance at levels of risk coverage or policy limits that we deem adequate. Any future
damages caused by our systems and products that are not covered by insurance or are in excess of
policy limits could have a material adverse effect on our financial condition and results of
operations.
Currency fluctuations may reduce profits on our foreign sales or increase our costs, either of
which could adversely affect our financial results.
A significant portion of our consolidated revenue is generated outside the United States.
Consequently, we are subject to fluctuations in foreign currency exchange rates. Translation
losses resulting from currency fluctuations may adversely affect the profits from our operations
and have a negative impact on our financial results. Foreign currency fluctuations also may make
our systems and products more expensive for our customers, which could have a negative impact on
our revenue. In addition, we purchase some foreign-made products directly and through our
subcontractors. Due to the multiple currencies involved in our business, foreign currency
positions partially offset and are netted against one another to reduce exposure. We cannot assure
that fluctuations in foreign currency exchange rates will not make these products more expensive to
purchase. Increases in our direct or indirect costs of purchasing these products could negatively
impact our financial results if we are not able to pass those increased costs on to our customers.
Our business is subject to risks of terrorist acts, acts of war, political unrest, public health
concerns, labor disputes and natural disasters.
Terrorist acts, acts of war, political unrest, public health concerns, labor disputes or
national disasters may disrupt our operations, as well as those of our customers. These types of
acts have created, and continue to create, economic and political uncertainties and have
contributed to global economic instability. Future terrorist activities, military or security
operations, or natural disasters could weaken the domestic and global economies and create
additional uncertainties, thus forcing our customers to 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, including loss of sales or customers.
18
The CEFCO manufacturing license agreement and the testing and development of the CEFCO Process may
not be successful and in such event, we would incur the loss of the initial payment and testing
costs with no return.
As of July 2, 2011, we have invested $2,947 under the CEFCO manufacturing license agreement
and are obligated to pay installment and royalty payments if certain conditions are met. We are
conducting testing of the CEFCO technology and are funding the costs and expense for such testing.
There can be no assurances as to the successful testing of the CEFCO technology, our ability to
develop a commercially viable product, or our ability to receive manufacturing orders under the
CEFCO license agreement. Our investment may not result in future revenue.
Manufacturing and Procurement
Our industry has experienced shortages in the availability of skilled workers. Any difficulty we
experience replacing or adding qualified personnel could adversely affect our business.
Our operations require the services of employees having technical training and related
experience, including certified welders. As a result, our operations depend on the continuing
availability of qualified employees. Our industry has experienced shortages of workers with the
necessary skills. If we should suffer any material loss of these employees to competitors, or be
unable to employ additional or replacement personnel with the requisite level of training and
experience, our operations could be adversely affected. A significant increase in the wages paid
to these workers by other employers could result in a reduction in our workforce, increases in wage
rates, or both.
Our customers may require us to perform portions of our projects in their local countries.
Some foreign countries have regulations requiring, and some customers in foreign countries
prefer, a certain degree of local content be included in projects destined for installation in
their country. These requirements and preferences may require us to outsource significant
functions to manufacturers in foreign countries or otherwise to establish manufacturing
capabilities in foreign countries. These requirements may negatively impact our profit margins and
present project management issues.
Our ability to conduct business outside the United States may be adversely affected by factors
outside of our control and our revenue and profits from international sales could be adversely
impacted.
Because we manufacture and sell our products and services worldwide, our business is subject
to risks associated with doing business internationally. Revenue generated outside the United
States represented 38%, 35% and 34% of our consolidated revenue during fiscal 2011, 2010 and 2009,
respectively. Our operations and earnings throughout the world have been, and may in the future
be, affected from time to time in varying degrees by a number of factors, including changes in
foreign laws and regulations, regional economic uncertainty, political instability, customs and
tariffs, government sanctions, inability to obtain export licenses unexpected changes in regulatory
requirements, difficulty in collecting international accounts receivable, difficulty in enforcement
of contractual obligations governed by non-U.S. law, fluctuations in foreign currency exchange
rates and tax rates. The likelihood of the occurrence and the overall effect on our business vary
from country to country and are not predictable. These factors may result in a decline in revenue
or profitability or could adversely affect our ability to expand our business outside of the United
States and may impact our ability to deliver our products and collect our receivables.
19
Our systems and products are covered by warranties. Unanticipated warranty costs for defective
systems and products could adversely affect our financial condition and results of operations and
reputation. In addition, an increase in the number of systems we sell, compared to individual
products that our customers use as components in other systems, may increase our warranty costs.
We offer warranty periods of various lengths to our customers depending upon the specific
system or product and terms of the customer agreement. Among other things, warranties require us
to repair or replace faulty systems or products. 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 results of operations. In some cases, we may be able
to recover a portion of our warranty cost from a subcontractor if the subcontractor supplied the
defective product or performed the service. However, this recovery may not always be possible.
The need to repair or replace systems and products with design or manufacturing defects could
temporarily delay the sale of new systems and products, reduce our profits, cause us to suffer a
loss and could adversely affect our reputation. Furthermore, average warranty costs for complete
systems are higher than warranty costs for individual products that our customers use as components
in other systems due to complete systems being more complex. As a result, our transition to
offering more complete systems may increase our warranty costs.
If actual costs for our projects with fixed-price contracts exceed our original estimates, or if we
are required to pay liquidated damages due to late delivery, our profits will be reduced or we may
suffer losses.
The majority of our contracts are fixed-price contracts from which we have limited ability to
recover cost overruns. Because of the large scale and long-term nature of our contracts,
unanticipated cost increases may occur as a result of several factors, including:
|
|
|
increases in cost or shortages of components, materials or labor; |
|
|
|
errors in estimates or bidding; |
|
|
|
unanticipated technical problems; |
|
|
|
variations in productivity; |
|
|
|
required project modifications not initiated by the customer; and |
|
|
|
suppliers or subcontractors failure to perform. |
In addition to increasing costs, these factors could lead to hold backs by our customers
impacting our cash flow negatively and also could delay delivery of our products. Our contracts
often provide for liquidated damages in the case of late delivery. Unanticipated costs, such as
liquidated damages that we are required to pay in the case of late delivery, could negatively
impact our profits.
Increasing costs for manufactured components and raw materials, such as steel, may adversely affect
our profitability.
We use a broad range of manufactured components and raw materials in our products, primarily
raw steel and steel-related components. Rapid increases in the costs for these components and
materials or temporary disruptions in supply could increase our operating costs and adversely
affect our profit margins.
Our use of subcontractors may reduce our ability to deliver products within the committed delivery
timetables and within the design requirements.
Our global customer base and product demand requires that we utilize a global network of
subcontractors. While we believe our established network provides the Company a competitive
advantage, it exposes the Company to manufacturing delays, cost overruns, and quality aspects
which are in large part outside of the Companys direct control. We have developed processes to
select, communicate, and monitor the work flow, costs, and product quality of our subcontractors,
however we could be adversely affected by project delays, cost overruns, and substandard products
developed by our subcontractors.
20
Capital and Liquidity
Our financing agreements may be insufficient to meet the operational and strategic needs of the
Company; Further, an inability to achieve financial covenants in such financial agreements could
negatively impact our liquidity and cost of such financing agreements.
As of July 2, 2011, we had $12,571 of outstanding indebtedness under our senior secured term
loan. In addition, we have revolving credit and debenture agreements in place that support
short-term working capital needs, as well as provide letters of credit and bank guarantees to be
issued to customers, suppliers, and subcontractors. As of July 2, 2011 there were no outstanding
balances under the revolving credit and debenture agreements; however the letters of credit and
bank guarantees aggregated to approximately $10,000. The revolving credit and debenture agreements
include both financial and non-financial covenants that may limit our ability to purchase capital
equipment, pay dividends, enter into strategic transactions, or enter into certain agreements. The
revolving credit agreement requires that the eligible collateral, primarily accounts receivable and
inventory, exceed the balances outstanding, as well as the unexpired letters of credit and bank
guarantees. Further, the revolving credit and debenture agreements require that we restrict a
portion of our cash balances in relationship to the unexpired letters of credit and bank
guarantees.
Failure to comply with any of the debt covenants or lack of sufficient collateral could reduce
or eliminate our ability to borrow money or obtain letters of credit and bank guarantees under the
revolving credit and debenture agreements. Further, a default would permit the lenders to
accelerate repayment of the term loan. Under these circumstances, we may not have sufficient
working capital, access to capital markets, or other resources to satisfy our debt and other
obligations.
Our financial performance may vary significantly from period to period, making it difficult to
estimate future revenue.
Our revenue and earnings have varied in the past and are likely to vary in the future. Our
contracts generally stipulate customer-specific delivery terms and may have contract cycles of a
year or more, which subjects these contracts to many factors beyond our control. In addition,
contracts that are significantly larger in size than our typical contracts tend to have a greater
impact on our operating results. Furthermore, as a significant portion of our operating costs are
fixed, an unanticipated decrease in our revenue, a delay or cancellation of orders in backlog, or a
decrease in the demand for our products, may have a significant impact on our operating results.
Therefore, our operating results may be subject to significant variations and our operating
performance in any period may not be indicative of our future performance.
Changes in billing terms can increase our exposure to working capital and credit risk.
We sell our systems and products under contracts that allow us to either bill upon the
completion of certain agreed upon milestones, or upon actual shipment of the system or product. We
attempt to negotiate progress-billing milestones on large contracts to help us manage working
capital and to reduce the credit risk associated with these large contracts. Consequently, shifts
in the billing terms of the
contracts in our backlog from period to period can increase our requirement for working
capital and can increase our exposure to credit risk.
21
We intend to continue to pursue acquisition opportunities, which may subject us to considerable
business and financial risk.
We evaluate potential acquisitions on an ongoing basis. We may not be successful in
identifying acquisition opportunities, assessing the value, strengths and weaknesses of these
opportunities and consummating acquisitions on acceptable terms. Furthermore, suitable acquisition
opportunities may not be made available or known to us. In addition, we may compete for
acquisition targets with companies having greater financial resources than we do. Borrowings
necessary to finance acquisitions may not be available on terms acceptable to us, or at all.
Future acquisitions also may result in potentially dilutive issuances of equity securities.
If we are unable to successfully implement our acquisition strategy or address the risks
associated with acquisitions, or if we encounter unforeseen expenses, difficulties, complications
or delays frequently encountered in connection with the integration of acquired entities and the
expansion of operations, our growth and ability to compete may be impaired, we may fail to achieve
acquisition synergies and we may be required to focus resources on integration of operations rather
than on our primary business.
There is a concentration of ownership in our stockholders.
NSB Advisors, LLC (NSB) has reported that it beneficially owns more than 50% of our stock.
While NSB has disclaimed any voting powers over the stock it holds, it does hold dispositive
powers. If NSB sells substantial amounts of our common stock, the market price of our common stock
could decrease. In addition, this concentration in ownership could have an adverse effect on the
liquidity of our common stock. This ownership position may make it more difficult for us to sell
equity and equity-related securities in the future.
Provisions of our charter documents, Delaware law and our stockholder rights plan could discourage
a takeover that individual stockholders may consider favorable or the removal of our current
directors and management.
Some provisions of our amended and restated certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that individual stockholders may consider
favorable or the removal of our current management.
Delaware law may discourage, delay or prevent someone from acquiring or merging with us. In
addition, purchase rights distributed under our stockholder rights plan will cause substantial
dilution to any person or group attempting to acquire us without conditioning the offer on our
redemption of the rights. As a result, our stock price may decrease and stockholders might not
receive a change of control premium over the then-current market price of the common stock.
The Companys amended and restated certificate of incorporation contains a blank check
preferred stock provision. Blank check preferred stock enables the Companys board of directors,
without stockholder approval, to designate and issue additional series and classes of preferred
stock with such dividend rights, liquidation preferences, conversion rights, terms of redemption,
voting or other rights, including the right to issue convertible securities with no limitation on
conversion, as the Companys board of directors may determine, including rights to dividends and
proceeds in a liquidation that are senior to the common stock. These provisions may have the
effect of making it more difficult or
expensive for a third party to acquire or merge with us which could adversely affect the
market price of the common stock and the voting and other rights of the holders of common stock.
22
We may not be able to successfully enforce our rights to indemnification against Nitrams selling
stockholders for claims relating to breach of representation and certain other claims, including
litigation costs and damages.
We have outstanding claims against the selling stockholders under the terms of the Nitram
acquisition agreement relating to a customer warranty dispute and environmental matters. The
sellers have not agreed to pay for the claims and we are currently in the process of discussing the
various claims with the sellers, which could have the effect of delaying or ultimately preventing
all or a portion of, our reimbursement for such claims and damages. Our ability to collect any
portion of these outstanding claims is not assured. If we are unable to collect reimbursement for
those claims, we may be responsible for unforeseen additional costs and expenses.
The limited liquidity for our common stock could affect your ability to sell your shares at a
satisfactory price.
Our common stock is relatively illiquid. As of September 9, 2011, we had 17,676,624 shares of
common stock outstanding. The average daily trading volume in our common stock, as reported by the
NASDAQ Stock Market, for the 3 months ended September 9, 2011 was less than 45,000 shares. A more
active public market for our common stock may not develop, which could adversely affect the trading
price and liquidity of our common stock. Moreover, a thin trading market for our stock could cause
the market price for our common stock to fluctuate significantly more than the stock market as a
whole. Without a larger float, our common stock is less liquid than the stock of companies with
broader public ownership and, as a result, the trading prices of our common stock may be more
volatile. In addition, in the absence of an active public trading market, stockholders may be
unable to liquidate their shares of our common stock at a satisfactory price.
The market price of our common stock may be volatile or may decline regardless of our operating
performance.
The market price of our common stock has experienced, and may continue to experience,
substantial volatility. During the period beginning July 1, 2009 through July 2, 2011, the sale
prices of our common stock on the NASDAQ Stock Market have ranged from a low of $8.26 to a high of
$23.61 per share. We expect our common stock to continue to be subject to fluctuations. Broad
market and industry factors may adversely affect the market price of our common stock, regardless
of our actual operating performance.
|
|
|
ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS. |
None.
23
We own and lease office, manufacturing and warehousing facilities in various locations. Our
principal facilities are described in the following table. All facilities are currently, for the
most part, fully utilized.
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
Location |
|
Sq. Footage |
|
|
General Use |
Owned: |
|
|
|
|
|
|
Abilene, Texas |
|
|
78,000 |
|
|
Manufacturing |
Cisco, Texas |
|
|
67,000 |
|
|
Manufacturing |
Denton, Texas |
|
|
22,000 |
|
|
Manufacturing |
Wichita Falls, Texas* |
|
|
119,000 |
|
|
Manufacturing |
|
|
|
|
|
|
|
Leased: |
|
|
|
|
|
|
Dallas, Texas |
|
|
30,000 |
|
|
Corporate office |
Dallas, Texas |
|
|
8,000 |
|
|
Research and development |
Houston, Texas |
|
|
3,000 |
|
|
Sales |
Orchard Park, New York |
|
|
18,000 |
|
|
Sales, engineering and administration |
Calgary, Alberta, Canada |
|
|
1,000 |
|
|
Sales |
Doha, Qatar |
|
|
500 |
|
|
Sales |
Essex, United Kingdom |
|
|
6,000 |
|
|
Sales, engineering and administration |
Singapore |
|
|
3,000 |
|
|
Sales, engineering and administration |
Zhenjiang, China |
|
|
28,000 |
|
|
Manufacturing and administration |
|
|
|
* |
|
We have two manufacturing facilities located in Wichita Falls, Texas |
|
|
|
ITEM 3. |
|
LEGAL PROCEEDINGS. |
On June 19, 2007, Martin-Manatee Power Partners, LLC (MMPP) filed a complaint
against the Company in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach
County, Florida. In the complaint, MMPP asserted claims for breach of contract and express
warranty, breach of implied warranty and indemnification against the Company. MMPPs
claims arise out of an incident in September 2005 when an electric fuel gas start-up
heater, which was a component of a fuel gas heater skid supplied by the Company to MMPP,
allegedly ruptured resulting in a fire. In the complaint, MMPP did not make a specific
demand for damages.
24
The Companys insurance carriers have agreed to defend the claims asserted by MMPP,
pursuant to reservation of rights letters issued on September 5, 2007 and have retained
counsel to defend the Company. MMPP made a demand for damages in the amount of $2,500,
which it claimed represented its net costs incurred related to this incident. At June 30,
2010, we had accrued $100 for the applicable insurance deductible relating to this claim.
The Company and its insurers have reached an agreement in principle with MMPP to settle
this matter and are in the process of finalizing the settlement agreement. The parties
expect to file a request for voluntary dismissal with the District Court before the end of
the first quarter of fiscal year 2012. The
settlement amount will be paid by the Companys insurers, less the cost of the $100
deductible, which will be paid by the Company.
We also are involved, from time to time, in various litigation, claims and proceedings
arising in the normal course of business that are not expected to have any material effect
on the financial condition of the Company.
ITEM 4. REMOVED AND RESERVED
25
PART II
|
|
|
ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES. |
Market Information
Our common stock is traded on the NASDAQ Stock Market under the symbol PMFG. The table
below sets forth the reported high and low sales prices for our common stock, as reported on the
NASDAQ Stock Market for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
High |
|
|
Low |
|
2010 |
|
|
First Quarter |
|
$ |
12.95 |
|
|
$ |
8.26 |
|
|
|
|
|
Second Quarter |
|
|
17.79 |
|
|
|
12.27 |
|
|
|
|
|
Third Quarter |
|
|
17.72 |
|
|
|
12.78 |
|
|
|
|
|
Fourth Quarter |
|
|
16.99 |
|
|
|
12.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
First Quarter |
|
$ |
18.51 |
|
|
$ |
13.83 |
|
|
|
|
|
Second Quarter |
|
|
17.45 |
|
|
|
14.16 |
|
|
|
|
|
Third Quarter |
|
|
21.77 |
|
|
|
15.91 |
|
|
|
|
|
Fourth Quarter |
|
|
23.61 |
|
|
|
16.69 |
|
Number of Holders
As of September 9, 2011, there were approximately 74 holders of record of our common stock.
Dividends
We did not pay cash dividends on our common stock in fiscal 2011, 2010 or 2009. We paid $722
and $1,044 in cash dividends on our preferred stock in fiscal 2011 and 2010, respectively. We had
no preferred stock issued or outstanding during fiscal 2009. Cash dividends may be paid on our
common stock, from time to time, as our Board of Directors deems appropriate after consideration of
our continued growth rate, operating results, financial condition, cash requirements and other
related factors. Additionally, our debt agreement contains restrictions on our ability to pay
dividends based on satisfaction of certain performance measures and compliance with other
conditions. Our ability to comply with these performance measures and conditions may be affected
by events beyond our control. A breach of any of the covenants (including financial covenant
ratios) contained in our debt agreement could result in a default under the debt agreement. Any
defaults under our debt agreement could prohibit us from paying any dividends.
Stock Repurchase
We did not repurchase any of our common stock in fiscal 2011 or 2010. Additionally, we do not
have a stock repurchase program.
26
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA. |
The following table summarizes certain selected financial data that should be read in
conjunction with Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations and the consolidated financial statements and notes thereto included in Item 8.
Financial Statements and Supplementary Data of this Form 10-K. Share and per share data for
fiscal 2007 and 2008 has been adjusted for our holding company reorganization in August 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Amounts in thousands, except per share amounts) |
|
Operating results: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
121,794 |
|
|
$ |
116,775 |
|
|
$ |
158,006 |
|
|
$ |
140,496 |
|
|
$ |
75,141 |
|
Cost of goods sold |
|
|
83,387 |
|
|
|
74,340 |
|
|
|
109,403 |
|
|
|
99,216 |
|
|
|
51,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
38,407 |
|
|
|
42,435 |
|
|
|
48,603 |
|
|
|
41,280 |
|
|
|
23,798 |
|
Operating expenses |
|
|
37,083 |
|
|
|
34,087 |
|
|
|
39,176 |
|
|
|
29,123 |
|
|
|
15,547 |
|
Loss on impairment of intangibles (2) |
|
|
3,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(2,227 |
) |
|
|
8,348 |
|
|
|
9,427 |
|
|
|
12,157 |
|
|
|
8,251 |
|
Other income (expense) (3) (4) |
|
|
5,005 |
|
|
|
(11,315 |
) |
|
|
(5,824 |
) |
|
|
366 |
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
|
2,778 |
|
|
|
(2,967 |
) |
|
|
3,603 |
|
|
|
12,523 |
|
|
|
8,840 |
|
Income tax benefit (expense) |
|
|
3,083 |
|
|
|
(1,215 |
) |
|
|
(707 |
) |
|
|
(4,168 |
) |
|
|
(2,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
5,861 |
|
|
|
(4,182 |
) |
|
|
2,896 |
|
|
|
8,355 |
|
|
|
5,912 |
|
Less net earnings (loss) attributable to
noncontrolling interest |
|
|
112 |
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings(loss) attributable to PMFG, Inc. |
|
|
5,749 |
|
|
|
(4,163 |
) |
|
|
2,896 |
|
|
|
8,355 |
|
|
|
5,912 |
|
Dividends on preferred stock |
|
|
(722 |
) |
|
|
(1,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) applicable to PMFG, Inc. common stockholders |
|
$ |
5,027 |
|
|
$ |
(5,207 |
) |
|
$ |
2,896 |
|
|
$ |
8,355 |
|
|
$ |
5,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
0.28 |
|
|
$ |
(0.38 |
) |
|
$ |
0.22 |
|
|
$ |
0.64 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
16,662 |
|
|
|
13,716 |
|
|
|
13,181 |
|
|
|
13,062 |
|
|
|
12,853 |
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
July 2, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Financial position: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
43,908 |
|
|
$ |
48,000 |
|
|
$ |
40,247 |
|
|
$ |
42,334 |
|
|
$ |
30,622 |
|
Current assets |
|
|
81,139 |
|
|
|
82,306 |
|
|
|
87,691 |
|
|
|
96,946 |
|
|
|
64,106 |
|
Total assets |
|
|
140,709 |
|
|
|
143,081 |
|
|
|
153,180 |
|
|
|
166,736 |
|
|
|
68,671 |
|
Current liabilities |
|
|
37,231 |
|
|
|
34,306 |
|
|
|
47,444 |
|
|
|
54,612 |
|
|
|
33,484 |
|
Long-term debt, net of current portion |
|
|
9,971 |
|
|
|
16,221 |
|
|
|
49,180 |
|
|
|
56,000 |
|
|
|
|
|
Total liabilities (5) |
|
|
55,668 |
|
|
|
85,934 |
|
|
|
107,222 |
|
|
|
123,805 |
|
|
|
35,134 |
|
Stockholders equity (6) |
|
|
85,041 |
|
|
|
57,147 |
|
|
|
45,958 |
|
|
|
42,931 |
|
|
|
33,537 |
|
|
|
|
(1) |
|
Operating results include the Nitram acquisition beginning in the fourth quarter of fiscal
2008. |
|
(2) |
|
Operating expenses for fiscal 2011 include a charge of $3,551 related to an impairment loss on
intangible assets of design guidelines. See Note G to our Consolidated Financial Statements. |
|
(3) |
|
Other income (expense) in fiscal 2011 and fiscal 2010 includes a gain of $6,681 and a charge of
$(6,681), respectively, related to the change in the fair value of the derivative liability
associated with the convertible preferred stock sold in September 2009. |
|
(4) |
|
Other income (expense) in fiscal 2011, 2010 and 2009 includes interest expense related to the
debt associated with the Nitram acquisition. |
|
(5) |
|
The decrease in liabilities in fiscal 2011 primarily relates to the change in the fair
value of the derivative liability, with additional decreases in outstanding debt. |
|
(6) |
|
The increase in our stockholders equity in fiscal 2011 resulted primarily from the conversion
of preferred stock to common stock during the year and our net earnings for the year. |
28
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is intended to help the reader understand PMFG, Inc., our operations and our
present business environment. MD&A is provided as a supplement to and should be read in
conjunction with our consolidated financial statements and the accompanying notes thereto
contained in Item 8. Financial Statements and Supplementary Data of this report. This overview
summarizes the MD&A, which includes the following sections:
|
|
|
Our Business a general description of our business and the key drivers of product
demand. |
|
|
|
|
Critical Accounting Policies and Estimates a discussion of accounting policies that
require critical judgments and estimates. |
|
|
|
|
Results of Operations an analysis of our Companys consolidated and reporting segment
results of operations for the three years presented in our consolidated financial
statements. |
|
|
|
|
Liquidity; Capital Resources and Financial Position an analysis of cash flows;
aggregate contractual obligations; foreign exchange exposure; and an overview of financial
position. |
This discussion includes forward-looking statements that are subject to risks, uncertainties
and other factors described in Part I, Item 1A of this report. These factors can cause actual
results for future periods, including fiscal 2012, to differ materially from those experienced in,
or implied by, these forward-looking statements.
Our Business
General
We are a leading provider of custom-engineered systems and products designed to help ensure
that the delivery of energy is safe, efficient and clean. We primarily serve the markets for power
generation, natural gas infrastructure and refining and petrochemical processing. We offer a broad
range of separation and filtration products, selective catalytic reduction (SCR) systems and
other complementary products including specialty heat exchangers, pulsation dampeners and
silencers. Our primary customers include equipment manufacturers, engineering contractors and
operators of power facilities.
Our products and systems are marketed worldwide through both internal and external sales
representatives. In fiscal 2011, approximately 38% of our revenue resulted from the delivery of
products and services outside the United States. As a result of global demand for our products and
our increased sales resources outside of the United States, we expect our international sales will
continue to increase as a percentage of our consolidated revenue in the future.
We believe that our success depends on our ability to understand the complex operational
demands of our customers and deliver systems and products that meet or exceed the indicated design
specifications. Our success further depends on our ability to provide such products in a
cost-effective manner and within the time frames established with our customers.
29
Our systems and products can be separated into two broad groups: process products and
environmental systems.
|
|
|
Process Products - includes separation and filtration systems and products that improve
the efficiency, reduce maintenance, and extend the life of energy collection and
distribution infrastructure by removing liquid contaminants from gases, removing solid
contaminants from gasses or liquids, and separating different liquids. |
|
|
|
|
Environmental Systems - includes systems and products utilized to abate air and noise
pollution. |
The following table sets forth the percentage of revenue related to our process products and
environmental products, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Process products |
|
|
73 |
% |
|
|
77 |
% |
|
|
78 |
% |
Environmental systems |
|
|
27 |
% |
|
|
23 |
% |
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
Key Drivers of Product Demand
We believe the long-term demand for energy will significantly exceed existing capacity.
Despite a generally weak global economy throughout 2010 and 2011, the demand for energy has risen.
However, during the same period, this demand has not resulted in a significant increase in the
construction of new power generation facilities. Domestically, the increased demand has largely
been absorbed by excess capacity that existed within the industry. Internationally, we believe
political uncertainties, economic conditions, and uncertainty as to the long-term solutions have
dampened the pace of new construction.
We believe the growth in long-term demand for energy will drive the need for additional energy
infrastructure. Incremental energy supply will come from new construction, retrofitting existing
facilities to improve efficiency, and bringing older facilities back on line. At the same time,
increased environmental awareness is resulting in the adoption of stricter environmental
regulations not only in the United States, but in a number of other countries. In response to the
demand for cleaner, more environmentally responsible power generation, power providers and
industrial power consumers are building new facilities that use cleaner fuels, such as natural gas,
and in certain countries nuclear power facilities.
Significant uncertainty continues to revolve around the role that nuclear power facilities
will play in meeting the long-term demand for energy needs. Cost overruns, financing constraints,
safety concerns and government regulations are challenges that must be addressed related to the
construction of new nuclear power facilities and the recommissioning of existing facilities. We
believe nuclear power will continue to represent a significant source of power.
These market trends will drive the demand for both our separation/filtration products as well
as our SCR systems, creating significant opportunities for us. We face strong competition from
numerous other providers of custom-engineered systems and products. We, along with other companies
that provide alternative products and solutions, are affected by a number of factors, including,
but not limited to, global economic conditions, level of capital spending by companies engaged in
energy production, processing, transportation, storage and distribution, as well as current and
anticipated environmental regulations.
30
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require management to make estimates, judgments, and
assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Because of the use of estimates inherent in the financial reporting process,
actual results could differ from those estimates. We believe that our most critical accounting
policies and estimates related to the following:
|
|
|
|
|
Estimate Description |
|
Judgment and/or Uncertainty |
|
Potential Impact if Results Differ |
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 use the
percentage-of-completion
accounting method.
Under such methodology,
the contractually agreed
upon revenue is
recognized over the life
of the contract based on
the relationship of
costs incurred to date
in relation to the
estimated aggregate
costs to be incurred
over the contract term.
The
percentage-of-completion
methodology generally
results in the
recognition of
reasonably consistent
profit margins over the
life of a contract.
Cumulative revenue
recognized may be less
or greater than
cumulative costs and
profits billed at any
point during a
contracts term. The
resulting difference is
recognized as costs and
earnings in excess of
billings on uncompleted
contracts or billings
in excess of costs and
earnings on uncompleted
contracts.
Allowance for Doubtful
Accounts
|
|
Considerable management
judgment and experience is
necessary to estimate the
aggregate amount of costs
that will ultimately be
incurred related to a
project. Such cost
estimates include
material, subcontractor,
labor, delivery, start-up,
and warranty costs.
We continually update our
estimates of costs and the
status of each project.
|
|
A number of internal and external
factors, including labor rates,
plant utilization factors, future
material prices, changes in
customer specifications,
manufacturing defects and delays,
as well as other factors can
affect the ultimate costs.
The impact of revisions in
contract estimates is recognized
on a cumulative basis in the
period in which the revisions are
made.
Changes in cost estimates may
result in the recognition of
revenue in a period other than
which such revenue is earned, as
well as inconsistent profit
margins over the life of a
contract. |
|
|
|
|
|
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 on historical
collection trends,
current economic
factors, and the
assessment of
collectability of
specific accounts.
|
|
Considerable management
judgment is necessary in
determining whether a
receivable will be
collectible based on a
customers potential
inability to pay.
In making such
determination, management
evaluates the age of the
outstanding balance,
evaluation of the
customers current and
past financial condition
and related credit scores,
recent payment history,
current economic
environment, and
discussions with the
customer.
|
|
Bad debt expense totaled $220,
$742, and $(165) in fiscal 2011,
2010, and 2009, respectively. As
a percentage of revenue, the bad
debt expense was 0.2%, 0.6%, and
(0.1)% in fiscal 2011, 2010, and
2009, respectively.
The impact of a 100 basis point
increase or decrease in bad debt
expense would be approximately
$1,220. |
31
|
|
|
|
|
Estimate Description |
|
Judgment and/or Uncertainty |
|
Potential Impact if Results Differ |
Product Warranties |
|
|
|
|
|
|
|
|
|
We provide our customers
with product warranties
for specific products
during a defined period
of time, generally less
than 18 months after
shipment of the product.
Warranties cover the
failure of a product to
perform after it has
been placed in service.
In general, our warranty
agreements require us to
repair or replace
defective products
during the warranty
period at no cost to the
customer.
To the extent such
defects arise as a
result of subcontracted
work, we may have the
ability to recover a
portion or all of the
cost of repairs incurred
during the warranty
period.
|
|
We record an estimate of
costs to be incurred in
the future for product
warranties based on both
known claims and
historical experience.
Such estimates also
include expectations with
regard to applicability
and enforceability of
back-up concurrent
supplier warranties in
place.
|
|
Warranty expense totaled $2,392,
$3,324, and $443 in fiscal 2011,
2010, and 2009, respectively. As
a percentage of revenue, the
warranty expense was 2.0%, 2.8%,
and 0.3% in fiscal 2011, 2010,
and 2009, respectively.
The increase in warranty expense
in fiscal 2010 compared to fiscal
2009 largely reflects costs
related to two specific customer
contracts.
The impact of a 100 basis point
increase or decrease in warranty
costs would be approximately
$1,220. |
|
|
|
|
|
Goodwill and Intangible
Assets |
|
|
|
|
|
|
|
|
|
Our goodwill and
intangible assets result
primarily from
acquisitions. Intangible
assets include licensing
agreements and customer
relationships with
finite lives, as well as
trademarks and design
guidelines with
indefinite lives.
Intangible assets with
indefinite lives and
goodwill are evaluated
at the reporting unit
level for potential
impairment at least
annually to ensure that
the carrying value is
recoverable.
|
|
Considerable management
judgment is necessary to
initially value intangible
assets upon acquisition
and to evaluate those
assets and goodwill for
impairment going forward.
We determine fair value
using widely accepted
valuation techniques
including discounted cash
flows, market multiple
analyses, and relief from
royalty analyses.
Assumptions used in our
valuations, such as
forecasted growth rates
and our cost of capital,
are consistent with our
internal projections and
operating plans.
|
|
We believe that the assumptions
used in valuing our intangible
assets and in our impairment
analysis are reasonable, but
variations in any of our
assumptions may result in
different calculations of fair
value that could result in a
material impairment charge.
The fair value of our Process
Products segment exceeds its
related carrying value by
approximately $11,100 or 15%.
Increasing our discount rate by
25 basis points would not have
resulted in an impairment charge.
The terminal revenue growth rate
utilized in calculating the fair
value (5.4%) is dependent on our
ability to meet internal
projections and operating plans,
as well as other factors and
assumptions. |
32
|
|
|
|
|
Estimate Description |
|
Judgment and/or Uncertainty |
|
Potential Impact if Results Differ |
A perpetual trademark or
design guideline is
impaired if its book
value exceeds its
estimated fair value.
Our goodwill, which
relates entirely to the
Process Products
segment, is evaluated
for potential impairment
if the book value of its
reporting unit exceeds
its estimated fair
value.
Amortizing intangible
assets are only
evaluated for impairment
upon a significant
change in the operating
environment. If an
evaluation of the
undiscounted cash flows
indicates impairment,
the asset is written
down to its estimated
fair value, which is
generally based on
discounted cash flows.
In the fourth quarter of
fiscal 2011, we
completed our annual
impairment testing using
the methods described
above and recognized an
impairment charge of
$3,551 related to the
design guidelines.
Our goodwill and
intangible net assets
totaled $49,810 as of
July 2, 2011.
|
|
We believe that a
trademark and/or design
guideline has an
indefinite life if it has
a history of strong sales
and cash flow performance
that we expect to continue
for the foreseeable
future. Determining the
expected life of a
trademark and/or design
guideline requires
considerable management
judgment and is based on
an evaluation of a number
of factors including
competitive environment,
trademark and product
history, and anticipated
future product demand.
|
|
The fair value and carrying value
of our trademarks and design
guidelines was the same as of
July 2, 2011, after the
recognition of the non-cash
impairment charge of $3,551 in
fiscal 2011. Negative changes to
the assumptions related to
royalty, growth, or discount
rates could result in additional
impairments. |
|
|
|
|
|
Other Intangibles |
|
|
|
|
|
|
|
|
|
In July 2010, the
Company entered into a
manufacturing license
agreement with CEFCO
Global Clean Energy, LLC
(CEFCO), granting the
Company exclusive
manufacturing rights in
the continental United
States to manufacture
equipment and process
units incorporating the
CEFCO technology. In
addition, the Company
entered into a lab test
agreement under which
the Company agreed to
build a test unit to
support the commercial
viability of the CEFCO
technology.
|
|
The fair value of the
license agreement and
amounts ultimately payable
to CEFCO are largely
dependent on the
commercial viability of
the CEFCO technology and
the demand for such
technology in the market
place.
While further testing of
the CEFCO technology
remains to be completed,
management believes that
the CEFCO technology will
result in a commercially
viable product with
sufficient demand to
recover the costs incurred
to date.
|
|
To the extent no commercially
viable product results from the
development of the CEFCO
technology, extended delays in
product introduction, or product
demand is less than expected, the
Company may be unable to recover
all or some of the costs deferred
as of July 2, 2011. |
33
|
|
|
|
|
Estimate Description |
|
Judgment and/or Uncertainty |
|
Potential Impact if Results Differ |
The Company has deferred
a total of $2,947 of
funds advanced to CEFCO
or incurred under the
lab test agreement. Such
amounts, will reduce the
aggregate obligations
owed to CEFCO under the
license agreement, and
will be recognized as
expense over the
exclusive license
period. |
|
|
|
|
|
|
|
|
|
Income Taxes |
|
|
|
|
|
|
|
|
|
A liability for
uncertain tax positions
is recorded to the
extent a tax position
taken or expected to be
taken in a tax return
does not meet certain
recognition or
measurement criteria.
A valuation allowance is
recorded against a
deferred tax asset if it
is more likely than not
that the asset will not
be realized.
At July 2, 2011, our
liability for uncertain
tax positions, including
accrued interest, was
$618 and our valuation
allowance was $0.
|
|
Considerable management
judgment is necessary to
assess the inherent
uncertainties related to
the interpretations of
complex tax laws,
regulations, and taxing
authority rulings, as well
as to the expiration of
statutes of limitations in
the jurisdictions in which
we operate.
Additionally, several
factors are considered in
evaluating the
realizability of our
deferred tax assets,
including the remaining
years available for
carryforward, the tax laws
for the applicable
jurisdictions, the future
profitability of the
specific business units,
and tax planning
strategies.
|
|
Our judgments and estimates
concerning uncertain tax
positions may change as a result
of evaluation of new information,
such as the outcome of tax audits
or changes to or further
interpretation of tax laws and
regulations. Our judgments and
estimates concerning
realizability of deferred tax
assets could change if any of the
evaluation factors change.
If such changes take place, there
is a risk that our effective tax
rate could increase or decrease
in any period, impacting our net
earnings. |
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (the FASB) issued Accounting Standards
Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 clarifies existing fair value measurement and
disclosure requirements by amending certain fair value measurement principles and requiring
additional disclosures regarding fair value measurements. ASU 2011-04 is effective for the Company
beginning in the third quarter of fiscal 2012. We are currently evaluating the impact that ASU
2011-04 will have on our consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update 2011-05, Presentation of
Comprehensive Income (ASU 2011-05). ASU 2011-05 requires that all non-owner changes in
shareholders equity be presented either in a single continuous statement of comprehensive income
or in two separate but continuous statements. If presented in two separate statements, the first
statement should present total net income and its components followed immediately by a second
statement of total other comprehensive income, its components and the total comprehensive income.
ASU 2011-05 is effective for us in the first quarter of fiscal 2013. We are currently evaluating
the impact that ASU 2011-05 will have on its consolidated financial statements.
34
Results of Operations Consolidated
The following summarizes our consolidated statements of operations as a percentage of net
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Net revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
68.5 |
|
|
|
63.7 |
|
|
|
69.2 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
31.5 |
|
|
|
36.3 |
|
|
|
30.8 |
|
Operating expenses |
|
|
33.4 |
|
|
|
29.2 |
|
|
|
24.8 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(1.9 |
) |
|
|
7.1 |
|
|
|
6.0 |
|
Other income (expense) |
|
|
4.1 |
|
|
|
(9.7 |
) |
|
|
(3.7 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
|
2.2 |
|
|
|
(2.6 |
) |
|
|
2.3 |
|
Income tax benefit (expense) |
|
|
2.5 |
|
|
|
(1.0 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
4.7 |
% |
|
|
(3.6 |
)% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
Less net earnings attributable to noncontrolling interest |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to PMFG, Inc. |
|
|
4.6 |
|
|
|
(3.6 |
) |
|
|
1.8 |
|
Dividends on preferred stock |
|
|
(0.6 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) applicable to PMFG, Inc. common stockholders |
|
|
4.0 |
% |
|
|
(4.5 |
)% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold includes manufacturing and distribution costs for products sold. The
manufacturing and distribution costs include material, direct and indirect labor, manufacturing
overhead, depreciation, sub-contract work, inbound and outbound freight, purchasing, receiving,
inspection, warehousing, internal transfer costs and other costs of our manufacturing and
distribution processes. Cost of goods sold also includes the costs of commissioning the equipment
and warranty related costs.
Operating expenses include sales and marketing expenses, engineering and project management
expenses and general and administrative expenses which are further described below.
|
|
|
Sales and marketing expenses - include payroll, employee benefits, stock-based
compensation and other employee-related costs associated with sales and marketing
personnel. Sales and marketing expenses also include travel and entertainment,
advertising, promotions, trade shows, seminars and other programs and sales commissions
paid to independent sales representatives. |
|
|
|
|
Engineering and project management expenses - include payroll, employee benefits,
stock-based compensation and other employee-related costs associated with engineering,
project management and field service personnel. Additionally, engineering and project
management expenses include the cost of sub-contracted engineering services. |
|
|
|
|
General and administrative expenses - include payroll, employee benefits, stock-based
compensation and other employee-related costs and costs associated with executive
management, finance, human resources, information systems and other administrative
employees. General and
administrative costs also include board of director compensation and expenses, facility
costs, insurance, audit fees, legal fees, reporting expense, professional services and other
administrative fees. |
35
Revenue. We classify revenue as domestic or international based upon the origination of the
order. Revenue generated by orders originating from within the United States is classified as
domestic revenue, regardless of where the product is shipped or where it will eventually be
installed. Revenue generated by orders originating from a country other than the United States is
classified as international revenue. The following summarizes consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
|
|
|
|
Fiscal |
|
|
|
|
|
|
Fiscal |
|
|
|
|
|
|
2011 |
|
|
% of Total |
|
|
2010 |
|
|
% of Total |
|
|
2009 |
|
|
% of Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
75,223 |
|
|
|
61.8 |
% |
|
$ |
75,814 |
|
|
|
64.9 |
% |
|
$ |
104,613 |
|
|
|
66.2 |
% |
International |
|
|
46,571 |
|
|
|
38.2 |
% |
|
|
40,961 |
|
|
|
35.1 |
% |
|
|
53,393 |
|
|
|
33.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
121,794 |
|
|
|
100.0 |
% |
|
$ |
116,775 |
|
|
|
100.0 |
% |
|
$ |
158,006 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2011, total revenue increased $5,019 or 4.3%, compared to fiscal 2010. Domestic
revenue was essentially flat in comparison to prior year as increased sales of environmental
products offset decreased sales of process products. The decrease in process products is largely
attributed to the overlap of several marine projects completed in fiscal 2010. Marine-related
projects are highly dependent on the timing of construction and refurbishing of the United States
naval fleet and therefore will vary significantly from period to period. International revenue
increased $5,610 or 13.7%, in fiscal 2011 when compared to fiscal 2010. The increase in
international revenue was the result of a combination of growth in the Asian and South American
markets. This growth is resulting from both an increase in demand and our strategic decision to
increase our sales focus on the international markets.
For fiscal 2010, total revenue decreased $41,231 or 26.1%, compared to fiscal 2009. Domestic
revenue decreased $28,799 or 27.5% in fiscal 2010 when compared to fiscal 2009. International
revenue decreased $12,432 or 23.3%, in fiscal 2010 when compared to fiscal 2009. The decrease in
revenue was primarily the result of the impact of a weak global business environment.
Gross Profit. Our gross profit during any particular period may be impacted by several
factors, primarily sales volume, shifts in our product mix, material cost changes, warranty,
start-up and commissioning costs. Shifts in the geographic composition of our sales also can have
a significant impact on our reported margins. The following summarizes revenue, cost of goods sold
and gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
% of |
|
|
Fiscal |
|
|
% of |
|
|
Fiscal |
|
|
% of |
|
|
|
2011 |
|
|
Revenue |
|
|
2010 |
|
|
Revenue |
|
|
2009 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
121,794 |
|
|
|
100.0 |
% |
|
$ |
116,775 |
|
|
|
100.0 |
% |
|
$ |
158,006 |
|
|
|
100.0 |
% |
Cost of goods sold |
|
|
83,387 |
|
|
|
68.5 |
% |
|
|
74,340 |
|
|
|
63.7 |
% |
|
|
109,403 |
|
|
|
69.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
38,407 |
|
|
|
31.5 |
% |
|
$ |
42,435 |
|
|
|
36.3 |
% |
|
$ |
48,603 |
|
|
|
30.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2011, our gross profit decreased $4,028, or 9.5%, compared to fiscal 2010. The
gross profit, as a percentage of revenue, was 31.5% in fiscal 2011 compared to 36.3% in fiscal
2010. The decrease in gross profit as a percentage of revenue primarily related to increased
pricing pressure on our domestic sales, as well as changes in our product mix within our reporting
segments. As noted above, revenue from the sale of marine products, which typically sell at higher
margins, declined in fiscal 2011 compared to the prior year.
For fiscal 2010, our gross profit decreased $6,168, or 12.7%, compared to fiscal 2009. The
decrease in fiscal 2010 gross profit was due to declining gross revenue resulting from the weakened
global economic environment as well as an increase in costs of goods sold due to significant
warranty claims. Our gross profit, as a percentage of revenue, was 36.3% in fiscal 2010 compared
to 30.8% in fiscal 2009. Expense of $6,104 in fiscal 2009 relating to the amortization of Nitrams
backlog and fair value adjustment of Nitram inventory negatively impacted the 2009 gross profit as
a percentage of revenue. Additionally, during 2010, we experienced an increase in demand for our
nuclear and marine products, which typically sell at higher margins.
36
In fiscal 2010, the Company had significant warranty claims associated with two sales orders.
Based on our extensive historical performance, we believe these types of occurrences to be
infrequent in nature and have no expectation of a similar recurrence in future periods.
Operating Expenses. The following summarizes operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
% of |
|
|
Fiscal |
|
|
% of |
|
|
Fiscal |
|
|
% of |
|
|
|
2011 |
|
|
Revenue |
|
|
2010 |
|
|
Revenue |
|
|
2009 |
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
11,864 |
|
|
|
9.7 |
% |
|
$ |
11,230 |
|
|
|
9.6 |
% |
|
$ |
15,915 |
|
|
|
10.1 |
% |
Engineering and project management |
|
|
8,504 |
|
|
|
7.0 |
% |
|
|
7,907 |
|
|
|
6.8 |
% |
|
|
8,109 |
|
|
|
5.1 |
% |
General and administrative |
|
|
16,715 |
|
|
|
13.7 |
% |
|
|
14,950 |
|
|
|
12.8 |
% |
|
|
15,152 |
|
|
|
9.6 |
% |
Loss on impairment of intangibles |
|
|
3,551 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
40,634 |
|
|
|
33.4 |
% |
|
$ |
34,087 |
|
|
|
29.2 |
% |
|
$ |
39,176 |
|
|
|
24.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2011, our operating expenses increased $6,547 or 19.2% over fiscal 2010. As a
percentage of revenue, these expenses were 33.4% in fiscal 2011 and 29.2% in fiscal 2010. Our
sales and marketing expenses increased $634 in fiscal 2011 compared to fiscal 2010 primarily due to
increased commission and other selling related expenses associated with higher revenue in fiscal
2011. Our engineering and project management expenses increased $597 in fiscal 2011 compared to
fiscal 2010 primarily due to an increase in employee wages and benefits. General and
administrative expenses increased $1,765 in fiscal 2011 compared to fiscal 2010, primarily due to
increased professional fees related to tax and information technology initiatives, legal fees, and
costs related to the replacement of an executive officer. Fiscal 2011 operating expenses also
included a $3,551 impairment loss on intangibles related to design guidelines.
For fiscal 2010, our operating expenses decreased $5,089 or 13.0% over fiscal 2009. As a
percentage of revenue, these expenses were 29.2% in fiscal 2010 and 24.8% in fiscal 2009. Our
sales and marketing expenses decreased $4,685 in fiscal 2010 compared to fiscal 2009 primarily due
to the reduction in commissions and other sales related expenses associated with reduced revenue.
Our engineering and project management expense decreased $202 in fiscal 2010 compared to fiscal
2009 due to fewer support activities required because of the decrease in revenue in fiscal 2010.
Our general and administrative expenses decreased $202 in fiscal 2010 compared to fiscal 2009. The
decrease in general and administrative expense in fiscal 2010 was primarily due to classification
of $498 of interest charges related to outstanding letters of credit in interest expense during
fiscal 2010. In fiscal 2009, similar charges were classified as bank fees and included in general
and administrative expense.
37
Other Income and Expense. The following summarizes other income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
35 |
|
|
$ |
28 |
|
|
$ |
123 |
|
Interest expense |
|
|
(2,337 |
) |
|
|
(3,368 |
) |
|
|
(6,132 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
(1,303 |
) |
|
|
|
|
Foreign exchange gain (loss) |
|
|
606 |
|
|
|
463 |
|
|
|
(354 |
) |
Change in fair value of derivative liability |
|
|
6,681 |
|
|
|
(6,681 |
) |
|
|
|
|
Other income (expense), net |
|
|
20 |
|
|
|
(454 |
) |
|
|
539 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
5,005 |
|
|
$ |
(11,315 |
) |
|
$ |
(5,824 |
) |
|
|
|
|
|
|
|
|
|
|
For fiscal 2011, total other income and expense, net changed by $16,320 or 144.2% from $11,315
of expense to $5,005 of income. In fiscal 2010, the Company recorded a charge of $6,681 related to
the change in the fair value of the derivative liability associated with the convertible preferred
stock sold in September 2009. That charge reversed in fiscal 2011 as the result of the conversion
of the preferred stock. In fiscal 2011, the convertible preferred shares were converted to common
stock at a conversion price of $8.00 per share. Interest expense decreased $1,031 or 30.6% to
$2,337 in fiscal 2011 on a lower average balance outstanding compared to the prior year.
For fiscal 2010, total expense increased $5,491 or 94.3% from $5,824 to $11,315. The increase
was primarily due to a recorded charge of $6,681 to reflect changes in the fair value of our
derivative liability and the write off of $1,303 of deferred finance charges associated with the
subordinated term debt that was extinguished in September 2009. The increase in other expense is
partially offset by a reduction in interest expense of $2,764 achieved by extinguishing $20,000 of
subordinated term debt and reducing our senior term debt by $15,779 during the year. Other income
in fiscal 2009 is related to the Companys proportional share of income from its equity method
investee in Japan of $435.
Income Taxes: Fiscal 2011 resulted in income tax benefit of $3,083 compared to income tax
expense of $1,215 and $707 in fiscal 2010 and 2009, respectively. The effective tax rates vary
from statutory rates because of the impact by the fair value adjustment of the derivative liability
in fiscal 2011 and 2010, which is not a deductible item for tax purposes. Additionally, fiscal
2011 effective tax rates vary from statutory rates because of amended previous tax filing to
reflect deductions for research and development expenditures. The effective rate in fiscal 2009
was impacted by increased profits of our foreign subsidiaries which have a lower tax rate than the
United States and increased domestic production credits. For further information related to income
taxes, see Note S to our consolidated financial statements included in Item 8 of this Form 10-K.
Net Earnings (Loss): Our net earnings increased from a net loss of $(4,182), or (3.6) % of
revenue for fiscal 2010, to earnings of $5,861, or 4.7% of revenue, for fiscal 2011. Basic earnings
per share attributable to our common shareholders increased from a net loss of $(0.38) per share
for fiscal
2010, to net earnings of $0.29 per share for fiscal 2011. Diluted earnings per share
attributable to our common shareholders increased from a net loss of $(0.38) per share for fiscal
2010, to net earnings of $0.28 per share for fiscal 2011.
Our net loss for fiscal 2010 was $(4,182), or (3.6)% of revenue, which was a decrease by
$7,078 compared to net earnings of $2,896, or 1.8% of revenue, for fiscal 2009. Basic and diluted
earnings per share attributable to our common shareholders decreased from net earnings of $0.22 per
share for fiscal 2009, to a net loss of $(0.38) per share for fiscal 2010.
38
Results of Operations Segments
We have two reporting segments: Process Products and Environmental Systems.
Process Products
The Process Products segment produces specialized systems and products that remove
contaminants from gases and liquids, improving efficiency, reducing maintenance and extending the
life of energy infrastructure. The segment also includes industrial silencing equipment to control
noise pollution on a wide range of industrial processes and heat transfer equipment to conserve
energy in many industrial processes and in petrochemical processing. Process Products represented
73.0%, 77.1% and 78.0% of our revenue in fiscal years 2011, 2010 and 2009, respectively.
Process Products revenue and operating income for the prior three fiscal years are presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
88,876 |
|
|
$ |
90,083 |
|
|
$ |
123,261 |
|
Operating income |
|
|
11,825 |
|
|
|
16,328 |
|
|
|
17,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income as % of revenue |
|
|
13.3 |
% |
|
|
18.1 |
% |
|
|
14.4 |
% |
Revenue from Process Products segment was essentially flat in fiscal 2011 compared to the
prior year as increased revenue from separation and filtration equipment offset decreases in marine
and heat exchanger projects. Process Products revenue decreased by $33,178, or 26.9%, in fiscal
2010 compared to fiscal 2009, primarily attributable to the weak global economy.
Process Products operating income decreased by $4,503 or 27.6% in fiscal 2011 compared to
fiscal 2010. Process Products operating income in fiscal 2010 decreased by $1,373 compared to
fiscal 2009. The decreased operating income was primarily due to decreased revenue. As a
percentage of Process Products revenue, operating income was 13.3%, 18.1% and 14.4% in fiscal 2011,
2010 and 2009, respectively. The decrease in operating income as a percentage of revenue during
2011 is primarily attributable to external pricing pressures of the global market and a shift in
our product mix from premium separators to lower margin standard models. The increase in operating
income as a percentage of revenue during fiscal 2010, compared to fiscal 2009, is primarily
attributable to $6,104 of amortization expense recorded in fiscal 2009, which did not recur in
fiscal 2010, offset by an increase of $1,932 related to warranty charges in 2010. The amortization
was associated with the backlog and fair value adjustment to inventory from the Nitram acquisition.
Environmental Systems
The primary product of our Environmental Systems business is selective catalytic reduction
systems, which we refer to as SCR systems. SCR systems are integrated systems, with instruments,
controls and related valves and piping. Our SCR systems convert nitrogen oxide, or NOx, into
nitrogen and water, reducing air pollution and helping our customers comply with environmental
regulations. Environmental Systems represented 27.0%, 22.9% and 22.0% of our revenue in fiscal
years 2011, 2010 and 2009, respectively.
39
Environmental Systems revenue and operating income for the prior three fiscal years are
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
32,918 |
|
|
$ |
26,692 |
|
|
$ |
34,745 |
|
Operating income |
|
|
6,214 |
|
|
|
6,970 |
|
|
|
6,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income as % of revenue |
|
|
18.9 |
% |
|
|
26.1 |
% |
|
|
19.8 |
% |
Environmental Systems revenue increased by $6,226, or 23.3% during fiscal 2011 compared to
fiscal 2010. The increase is primarily due to the completion of several non-power related projects
in fiscal 2011. Environmental Systems revenue decreased by $8,053, or 23.2%, in fiscal 2010
compared to fiscal 2009. The decrease is primarily due to several large projects which had revenue
recognized during fiscal 2009 and was not replicated in fiscal 2010.
Environmental Systems operating income decreased $756 in fiscal 2011 compared to fiscal 2010.
As a percentage of revenue, operating income decreased in 2011 compared to 2010, from 26.1% to
18.9%. The decrease in Environmental Systems operating income and operating income as a percentage
of revenue is primarily due to increased external pricing pressures during fiscal 2011 combined
with an increase in contract-related charges.
Environmental Systems operating income increased $92 in fiscal 2010 compared to fiscal 2009.
As a percentage of revenue, operating income increased in 2010 from 19.8% to 26.1%. The increase
in Environmental Systems operating income and operating income as a percentage of revenue is
primarily attributable to $1,663 less selling and engineering expenses during fiscal 2010 compared
to fiscal 2009. The reduction of selling and engineering expenses was the result of managements
cost reduction efforts as a response to the global economic crisis and lower sales volumes.
Corporate Level Expenses
Corporate level expenses excluded from our segment operating results were $20,266, $14,950 and
$15,152, for fiscal years 2011, 2010 and 2009, respectively.
For fiscal 2011, our corporate level expenses increased $5,316, or 35.6%, compared to fiscal
2010. The increase in corporate level expenses in fiscal 2011 was primarily due to the $3,551
impairment of intangible assets, increased professional fees related to tax and information
technology initiatives, legal fees, and costs related to the replacement of an executive officer.
For fiscal 2010, our
corporate level expenses decreased $202, or 1.3%, compared to fiscal 2009. The decrease in
corporate level expenses in fiscal 2010 was primarily due to classification of $498 of interest
charges related to outstanding letters of credit in interest expense during fiscal 2010. In fiscal
2009, similar charges were classified as bank fees and included in general and administrative
expense.
Contingencies
In June 2010, we received notice from a customer claiming approximately $9,100 in repair costs
associated with four heat exchangers sold by Alco Products, a division of Nitram, in 2006 prior to
the Companys acquisition of Nitram. The customer requested reimbursement for the repair costs
pursuant to Alco Products warranty obligations under the terms and conditions of the purchase
order. We are in the process of assessing the validity of the claim and have notified our various
insurance carriers, including the Nitram insurance carrier and the selling stockholders of Nitram
of this claim. We believe if any valid claim exists, we are entitled to be indemnified by the
Nitram sellers pursuant to the terms of the Nitram acquisition agreement for any amounts that are
paid by us in connection with such claim. At this time, we cannot estimate any potential range of
loss that may result from this asserted claim as we are still investigating its merits and the
facts and circumstances surrounding the claim. No amount has been accrued on the financial
statements for this claim as of July 2, 2011. At this time, no lawsuit has been filed by the
customer.
40
We completed the acquisition of Nitram in April 2008. As a result of the acquisition, we are
liable for the operations of Nitram and its subsidiaries because these entities are our
wholly-owned subsidiaries. In connection with the Nitram acquisition, we acquired indirect
ownership of Burgess-Manning, Inc. (Burgess-Manning). In April 2008, Burgess-Manning filed with
the Office of Foreign Assets Control (OFAC) a voluntary disclosure concerning certain activities
in support of its majority-owned, separately incorporated U.K. subsidiary, Burgess-Manning Europe,
Ltd. (BMEL), which potentially implicated the Iranian Transactions Regulations (ITR).
During the period 2004 to 2007, BMEL sold a number of industrial separators to Iranian
customers. The industrial separators produced by BMEL and sold for Iranian customers were not of
U.S. origin and had no U.S. content. During part of this period most of BMELs accounting work was
outsourced to the U.S. headquarters office of Burgess-Manning. Burgess-Manning believes there are
valid arguments to support the permissibility of the activities involved, nevertheless, out of an
abundance of caution, Burgess-Manning filed a voluntary self disclosure with OFAC for its
consideration. Burgess-Manning took steps to ensure there would be no recurrence of these issues,
hiring an outside accounting firm in the U.K. and giving to this firm the accounting work that
Burgess-Manning did previously. Burgess-Manning has provided no accounting support to BMEL since
January 2006.
We cannot predict the response of the OFAC, the outcome of any related proceeding or the
likelihood that future proceedings will be instituted against us. In the event that there is an
adverse ruling in any proceeding, we may be required to pay fines and penalties. As of September 9,
2011, we have not received any response from OFAC.
In connection with our acquisition of Nitram and the related financing transactions,
environmental site assessments were performed on both our existing manufacturing properties and
Nitrams properties in Cisco, Texas and Wichita Falls, Texas. These assessments involved visual
inspection, testing of soil and groundwater, interviews with site personnel and a review of
publicly available records. The results of these assessments indicated groundwater concerns at the
Jacksboro Highway facility in Wichita Falls and the Cisco facility. Additional sampling and
evaluation of the groundwater concerns determined that levels of impact did not exceed applicable
regulatory standards and that further investigation and remediation was not required. Based on the
report from our environmental
consultant, the Company does not anticipate any additional estimated loss as a result of the
environmental conditions at its facilities. At the Vermont Street facility in Wichita Falls, the
results of these assessments indicated soil and groundwater contamination. Further investigation
was conducted and soil remediation was completed in July 2009. We will continue to monitor
groundwater at the site for an additional five years. The Company does expect to incur additional
costs and fees as part of the continued monitoring activities and reporting requirements at its
Vermont Street facility. The Company believes the cost of the monitoring will be approximately $10
per year until complete. The Company may incur additional one-time costs in calendar year 2011
related to the installation of four new test wells at the Vermont Street facility and the
preparation of environmental reports, which the Company believes may cost approximately $90 in the
aggregate. We are seeking reimbursement for the cost of the remediation under our purchase
agreement with Nitrams former stockholders in the amount of $655. Funds have been deposited into
an escrow account that may be used to reimburse us for these costs.
41
Under the purchase agreement for the Nitram acquisition, we have rights to indemnification
from the Nitram selling stockholders for claims relating to breach of representations and
warranties or covenants and certain other claims, including litigation costs and damages. We
previously placed $10,920 of the purchase price for the Nitram acquisition in escrow for purposes
of securing and satisfying the indemnification obligations of the Nitram selling stockholders. The
escrow amount, less any amounts previously paid and any outstanding claims by us, was released to
the selling stockholders in five installments from October 8, 2008 to October 30, 2009. Prior to
October 30, 2009, we made claims against the Nitram selling stockholders totaling approximately
$1,998 and a total of $1,388 was withheld from the escrow release pending resolution. Following
the final escrow release in October 2009, we have made additional indemnification claims against
the Nitram selling stockholders for approximately $9,500 related to customer warranty dispute and
environmental matters. The Nitram selling stockholders have not agreed to pay the claims made by
us and the parties are currently in the process of discussing the various claims. At this time,
the Company does not believe it will have any additional losses or claims against the former Nitram
selling stockholders that are in excess of the amounts previously claimed or accrued as discussed.
We are involved, from time to time, in various litigation, claims and proceedings,
arising in the normal course of business that are not expected to have any material effect
on the financial condition of the Company.
Backlog
Our backlog of uncompleted orders was approximately $89,000 at July, 2, 2011, compared to
$96,000 at June 30, 2010. Backlog has been calculated under our customary practice of including
incomplete orders for products that are deliverable in future periods but that could be changed or
cancelled. Of our backlog at July 2, 2011, we estimate approximately 80% will be completed during
fiscal year 2012.
Financial Position
Assets. Total assets decreased by $2,372 or 1.7%, from $143,081 at June 30, 2010 to $140,709
at July 2, 2011. We held cash and cash equivalents of $19,538, of which $6,633 was restricted as
collateral for stand-by letters of credit and bank guarantees, had working capital of $43,908 and a
current liquidity ratio of 2.2-to-1.0 at July 2, 2011. This compares with cash and cash
equivalents of $30,139 at June 30, 2010, of which $5,868 was restricted, working capital of $48,000
and a current liquidity ratio of 2.4-to-1.0 at June 30, 2010. The decrease in our assets is
primarily related to the decrease in cash and cash equivalents, with additional decreases in
intangibles and inventory, offset by an increase in accounts
receivable, cost and earnings in excess of billings, income taxes receivable, and property,
plant and equipment.
Liabilities and Stockholders Equity. Total liabilities decreased by $30,266 or 35.2%, from
$85,934 at June 30, 2010 to $55,668 at July 2, 2011. The decrease in liabilities primarily relates
to the change in the fair value of the derivative liability, with additional decreases in debt and
other accrued liabilities. This was offset by an increase in accounts payable. The increase in
our stockholders equity of $27,894, or 48.8%, from $57,147 at June 30, 2010 to $85,041 at July 2,
2011 resulted primarily from the conversion of Preferred Stock to common stock during the year and
our net earnings for the year. Our debt (total liabilities)-to-equity ratio decreased to
0.7-to-1.0 at July 2, 2011 from 1.5-to-1.0 at June 30, 2010, reflecting debt payments and the
conversion of Preferred Stock to common stock during fiscal 2011.
42
Preferred Stock Conversions
During fiscal year ended July 2, 2011, holders of Preferred Stock converted 21,140 shares of
Preferred Stock into 2,642,500 shares of the Companys common stock.
Liquidity and Capital Resources
Our cash and cash equivalents were $19,538 as of July 2, 2011, of which $6,633 was restricted
as collateral for stand-by letters of credit and bank guarantees, compared to $30,139 at June 30,
2010, of which $5,868 was restricted. Net cash provided by operating activities during fiscal 2011
was $1,331, compared to $8,498 and $16,105 during fiscal 2010 and fiscal 2009, respectively.
Because we are engaged in the business of manufacturing systems, our progress billing
practices are event-oriented rather than date-oriented and vary from contract to contract. We
typically bill our customers upon the occurrence of project milestones. Billings to customers
affect the balance of billings in excess of costs and earnings on uncompleted contracts or the
balance of costs and earnings in excess of billings on uncompleted contracts, as well as the
balance of accounts receivable. Consequently, we focus on the net amount of these accounts, along
with accounts payable, to determine our management of working capital. At July 2, 2011, the
balance of these working capital accounts was $25,384 compared to $25,266 at June 30, 2010,
reflecting an increase of our investment in these working capital items of $118. 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.
In addition to our change in working capital, our cash flow provided by operations was
comprised primarily of our net earnings of $5,861 adjusted by $6,681 for the change in fair value
of the derivative liability, the impairment loss of $3,551 for intangibles, and other expense items
which did not generate a use of current year cash. Increases in accounts receivable, cost and
earnings in excess of billings, and accounts payable, offset by decreases in product warranties and
income taxes, and changes to other balance sheet items, used an additional $7,040.
Net cash used in investing activities was $6,308 for fiscal 2011, compared to net cash used in
investing activities of $1,192 and $4,968 for fiscal 2010 and 2009, respectively. The use of cash
during fiscal 2011 related primarily to the purchase of equipment and the investment in the CEFCO
manufacturing license agreement. The net cash used in fiscal 2010 related primarily to the
acquisition of Mitech, Inc. (Mitech) and an increase in
restricted cash, partially offset by the proceeds from the liquidation of
our equity method investment. The net cash used in 2009 related primarily to purchasing property
and equipment, an increase in restricted cash, and additional costs associated with the acquisition
of Nitram.
Net cash used in financing activities was $7,357 for fiscal 2011, compared to net cash used of
$1,146 for fiscal 2010 and net cash used of $4,000 for fiscal 2009. Financing activities in 2011
consisted primarily of payment of long-term debt of $7,650 and dividends of $722 on preferred stock
offset by proceeds from the sale of common stock and excess tax benefits from stock options
exercised. Financing activities in 2010 consisted primarily of proceeds of $35,163 from the
issuance of common stock, preferred stock and warrants, and $35,779 used in the payment of
long-term debt. Cash used in financing activities in 2009 was for the payment of long-term debt.
As a result of the above factors, our cash and cash equivalents during fiscal 2011 decreased
$11,366 compared to an increase of $6,533 during fiscal 2010 and an increase of $6,294 in fiscal
2009.
43
Credit Facilities
Concurrently with the closing of the Nitram acquisition, we entered into a revolving credit
and term loan agreement, dated April 30, 2008 (the Senior Secured Credit Agreement), with
Comerica Bank, as administrative agent and several other financial institutions. The Senior
Secured Credit Agreement provides for a $40,000 term loan and a $20,000 revolving credit facility.
At the acquisition closing, we borrowed $40,000 under the senior term loan and borrowed an
additional $20,000 pursuant to a subordinated secured term loan. The proceeds from the senior and
subordinated term loans, together with cash on-hand, were used to fund our acquisition of Nitram
and related transaction costs. On September 4, 2009, the subordinated term loan was repaid in full
using the proceeds from the private placement of preferred stock and warrants and available cash.
On September 12, 2011, we amended the Senior Secured Credit Agreement to extend the maturity
date of the revolving credit facility to April 30, 2013. This amendment also waives any
noncompliance or default with the current financial covenants, including the consolidated fixed
charge coverage ratio.
The senior term loan matures on January 1, 2016. Interest on the senior term loan, as
amended, is payable quarterly at a floating rate per annum equal to either (a) for prime rate
loans, a margin of between 225 and 375 basis points based on our consolidated total leverage
(CTL) ratio plus the higher of (1) the administrative agents prime rate, or (2) the federal
funds effective rate (as determined in accordance with the Senior Secured Credit Agreement) plus a
margin of 100 basis points, or (b) for LIBOR rate loans, the adjusted LIBOR rate (as determined in
accordance with the Senior Secured Credit Agreement) plus a margin of between 325 and 475 basis
points based on our CTL ratio. The Senior Secured Credit Agreement requires quarterly principal
payments on the senior term loan of $650 commencing April 3, 2011, with the balance of the senior
term loan due at maturity. The Senior Secured Credit Agreement also requires additional principal
payments of the senior term loan based upon our cash flow that began in the 2009 fiscal year, the
net proceeds of certain asset sales and dispositions and the issuance by the Company of additional
equity securities or subordinated debt.
The revolving credit facility, as amended, matures on April 30, 2013. Interest under the
revolving credit facility, as amended, is payable quarterly at a floating rate per annum equal to
either (a) for prime rate loans, a margin of between 225 and 350 basis points based on our CTL
ratio plus the higher of (1) the administrative agents prime rate, or (2) the federal funds
effective rate (as determined in accordance with the Senior Secured Credit Agreement) plus a margin
of 100 basis points, or (b) for LIBOR rate loans, the adjusted LIBOR rate (as determined in
accordance with the Senior Secured Credit Agreement) plus a margin of between 300 and 450 basis
points based on our CTL ratio. Under this
revolving credit facility, we have a maximum borrowing availability equal to the lesser of (a)
$20,000 or (b) 75% of eligible accounts receivable plus 45% of eligible inventory (not to exceed
50% of the borrowing base).
The senior term loan and any borrowings under the revolving credit facility are secured by a
first lien on substantially all assets of our company and contain financial and other covenants,
including restrictions on additional debt, dividends, capital expenditures and acquisitions and
dispositions, as well as other customary covenants.
44
As required by the Senior Secured Credit Agreement, the Company entered into a LIBOR interest
rate cap transaction with respect to the senior term loan, with a notional amount of $20,000 (the
Hedging Transaction). The Hedging Transaction became effective on August 15, 2008 and that will
terminate on April 2, 2012. Under the terms of the Hedging Transaction, the counterparty is
required to pay to us, on the first business day of each quarter, an amount equal to the greater of
$0 and the product of (i) the outstanding notional amount of the Hedging Transaction during the
prior quarter, (ii) the difference between the three month LIBOR rate at the beginning of the prior
quarter and 3.70% and (iii) the quotient of the number of days in the prior quarter over 360. The
notional amount of the Hedging Transaction amortized $5,000 each on October 1, 2010, 2009 and 2008
and will amortize in the amount of $4,500 on October 3, 2011 and the remaining $500 upon
termination on April 2, 2012. As long as the counterparty makes the payments required under the
Hedging Transaction, we will have a maximum annual LIBOR interest rate exposure equal to the sum of
3.70% and a margin of 375 to 500 basis points based on our CTL ratio, for the term of the Hedging
Transaction.
Our U.K. subsidiary has a debenture agreement used to facilitate issuances of letters of
credit and bank guarantees of £6,000 ($9,645) at July 2, 2011 and £4,700 ($7,083) at June 30, 2010.
This facility was secured by substantially all of the assets of our U.K. subsidiary and by a cash
deposit of £3,301 ($5,306) at July 2, 2011 and £2,850 ($4,258) at June 30, 2010, which is recorded
as restricted cash on the consolidated balance sheet. At July 2, 2011, there was £3,222 ($5,180)
outstanding under stand-by letters of credit and bank guarantees under this debenture agreement. At
June 30, 2010, there was £2,658 ($4,006) outstanding under stand-by letters of credit and bank
guarantees under this debenture agreement. There are no amounts outstanding under our U.K.
subsidiarys debenture agreement at July 2, 2011 or June 30, 2010.
We believe we maintain adequate liquidity to support existing operations and planned growth
over the next 12 months.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of July 2, 2011.
Tabular Disclosure of Contractual Obligations
The following table summarizes the indicated contractual obligations and other commitments of
the Company as of July 2, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
After 5 |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
Debt Term Loans (1) |
|
$ |
14,275 |
|
|
$ |
3,283 |
|
|
$ |
6,004 |
|
|
$ |
4,988 |
|
|
$ |
|
|
Purchase obligations (2) |
|
|
23,840 |
|
|
|
23,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits |
|
|
618 |
|
|
|
|
|
|
|
618 |
|
|
|
|
|
|
|
|
|
Stand-by letters of credit (3) |
|
|
9,999 |
|
|
|
7,074 |
|
|
|
2,266 |
|
|
|
531 |
|
|
|
128 |
|
Operating lease obligations |
|
|
6,100 |
|
|
|
1,063 |
|
|
|
2,040 |
|
|
|
1,909 |
|
|
|
1,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
obligations |
|
$ |
54,832 |
|
|
$ |
35,260 |
|
|
$ |
10,928 |
|
|
$ |
7,428 |
|
|
$ |
1,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) |
|
Term debt obligations include interest calculated based on the rates in effect on July 2, 2011. |
|
2) |
|
Purchase obligations in the table above represent the value of open purchase orders as of
July 2, 2011. We believe that some of these obligations could be cancelled for payment of a
nominal penalty, or no penalty. |
|
3) |
|
The stand-by letters of credit include $4,818 issued under our $20,000 revolving credit
facility and $5,180 outstanding under the debenture agreement in the U.K. |
45
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Our primary market risk exposures are in the areas of interest rate risk and foreign currency
exchange rate risk.
Interest Rate Risk
We are subject to interest rate risk on outstanding borrowings under our Senior Secured Credit
Agreement, which bears interest at a variable rate. At July 2, 2011, we had $12,571 of outstanding
borrowings under this Agreement. Currently we have an interest rate cap transaction with a
notional amount of $5,000, or 39.8% of our variable rate debt. This cap transaction complies with
our obligation under our Senior Secured Credit Agreement.
To assess exposure to interest rate changes, we performed a sensitivity analysis assuming a
hypothetical 100 basis point increase or decrease in interest rates on borrowings under our Senior
Secured Credit Agreement. Our analysis indicates that the effect on fiscal 2011 income before
taxes of such an increase and decrease in interest rates would be approximately $164.
Foreign Currency Risk
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 principally in the local currency and therefore provide a natural hedge against
currency fluctuations. The impact of currency exchange rate movements on inter-company
transactions has historically been immaterial. We did not have any currency derivatives
outstanding as of, or during the fiscal year ended July 2, 2011.
46
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
PMFG, Inc.
We have audited the accompanying consolidated balance sheets of PMFG, Inc. (a Delaware corporation)
and Subsidiaries (the Company, formerly Peerless Mfg. Co.) as of July 2, 2011 and June 30, 2010,
and the related consolidated statements of operations, stockholders equity and comprehensive
income, and cash flows for each of the three years in the period ended July 2, 2011. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PMFG, Inc. and Subsidiaries as of July 2, 2011 and
June 30, 2010, and the results of their operations and their cash flows for each of the three years
in the period ended July 2, 2011 in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), PMFG Inc. and Subsidiaries internal control over financial reporting as of
July 2, 2011, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
September 14, 2011 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Dallas, Texas
September 14, 2011
47
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
PMFG, Inc.
We have audited PMFG, Inc. (a Delaware Corporation) and Subsidiaries (the Company, formerly
Peerless Mfg. Co.) internal control over financial reporting as of July 2, 2011, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, PMFG, Inc. and Subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of July 2, 2011, based on criteria established in
Internal ControlIntegrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of July 2, 2011 and June
30, 2010, and the related consolidated statements of operations, stockholders equity and
comprehensive income, and cash flows for each of the three years in the period ended July 2, 2011
and our report dated September 14, 2011 expressed an unqualified opinion on those consolidated
financial statements.
/s/ GRANT THORNTON LLP
Dallas, Texas
September 14, 2011
48
PMFG, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,905 |
|
|
$ |
24,271 |
|
Restricted cash |
|
|
6,633 |
|
|
|
5,868 |
|
Accounts receivable trade, net of
allowance for doubtful accounts of $600 and
and $886, at July 2, 2011 and June 30, 2010,
respectively |
|
|
30,567 |
|
|
|
27,310 |
|
Inventories, net |
|
|
6,556 |
|
|
|
7,220 |
|
Costs and earnings in excess of billings
on uncompleted contracts |
|
|
16,991 |
|
|
|
13,560 |
|
Income taxes receivable |
|
|
3,061 |
|
|
|
|
|
Deferred income taxes |
|
|
1,952 |
|
|
|
2,067 |
|
Other current assets |
|
|
2,474 |
|
|
|
2,010 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
81,139 |
|
|
|
82,306 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
8,854 |
|
|
|
7,506 |
|
Intangible assets, net |
|
|
20,108 |
|
|
|
21,781 |
|
Goodwill |
|
|
29,702 |
|
|
|
29,702 |
|
Other assets |
|
|
906 |
|
|
|
1,786 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
140,709 |
|
|
$ |
143,081 |
|
|
|
|
|
|
|
|
49
PMFG, Inc. and Subsidiaries
Consolidated Balance Sheets Continued
(Amounts in thousands, except share data)
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
17,308 |
|
|
$ |
10,180 |
|
Current maturities of long-term debt |
|
|
2,600 |
|
|
|
4,000 |
|
Billings in excess of costs and earnings
on uncompleted contracts |
|
|
4,866 |
|
|
|
5,424 |
|
Commissions payable |
|
|
2,186 |
|
|
|
1,932 |
|
Income taxes payable |
|
|
281 |
|
|
|
717 |
|
Accrued product warranties |
|
|
2,575 |
|
|
|
2,480 |
|
Customer deposits |
|
|
1,938 |
|
|
|
2,481 |
|
Accrued liabilities and other |
|
|
5,477 |
|
|
|
7,092 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
37,231 |
|
|
|
34,306 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
|
9,971 |
|
|
|
16,221 |
|
Deferred income taxes |
|
|
7,135 |
|
|
|
8,548 |
|
Derivative liability |
|
|
|
|
|
|
25,916 |
|
Other non-current liabilities |
|
|
1,331 |
|
|
|
943 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock authorized, 5,000,000 shares of $0.01 par value;
0 and 21,140 shares issued and outstanding at
July 2, 2011 and June 30, 2010, respectively |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock authorized, 50,000,000
shares of $0.01 par value; issued and
outstanding, 17,597,186 and 14,734,323
shares at July 2, 2011 and June 30, 2010, respectively |
|
|
176 |
|
|
|
147 |
|
Additional paid-in capital |
|
|
48,657 |
|
|
|
27,240 |
|
Accumulated other comprehensive loss |
|
|
(1,331 |
) |
|
|
(2,283 |
) |
Retained earnings |
|
|
36,170 |
|
|
|
31,142 |
|
|
|
|
|
|
|
|
Total PFMG, Inc.s stockholders equity |
|
|
83,672 |
|
|
|
56,246 |
|
Noncontrolling interest |
|
|
1,369 |
|
|
|
901 |
|
|
|
|
|
|
|
|
Total equity |
|
|
85,041 |
|
|
|
57,147 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
140,709 |
|
|
$ |
143,081 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
50
PMFG, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Revenue |
|
$ |
121,794 |
|
|
$ |
116,775 |
|
|
$ |
158,006 |
|
Cost of goods sold |
|
|
83,387 |
|
|
|
74,340 |
|
|
|
109,403 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
38,407 |
|
|
|
42,435 |
|
|
|
48,603 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
11,864 |
|
|
|
11,230 |
|
|
|
15,915 |
|
Engineering and project management |
|
|
8,504 |
|
|
|
7,907 |
|
|
|
8,109 |
|
General and administrative |
|
|
16,715 |
|
|
|
14,950 |
|
|
|
15,152 |
|
Loss on impairment of intangibles |
|
|
3,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,634 |
|
|
|
34,087 |
|
|
|
39,176 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(2,227 |
) |
|
|
8,348 |
|
|
|
9,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
35 |
|
|
|
28 |
|
|
|
123 |
|
Interest expense |
|
|
(2,337 |
) |
|
|
(3,368 |
) |
|
|
(6,132 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
(1,303 |
) |
|
|
|
|
Foreign exchange gain (loss) |
|
|
606 |
|
|
|
463 |
|
|
|
(354 |
) |
Change in fair value of derivative liability |
|
|
6,681 |
|
|
|
(6,681 |
) |
|
|
|
|
Other income (expense), net |
|
|
20 |
|
|
|
(454 |
) |
|
|
539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,005 |
|
|
|
(11,315 |
) |
|
|
(5,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
|
2,778 |
|
|
|
(2,967 |
) |
|
|
3,603 |
|
Income tax benefit (expense) |
|
|
3,083 |
|
|
|
(1,215 |
) |
|
|
(707 |
) |
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
5,861 |
|
|
$ |
(4,182 |
) |
|
$ |
2,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net earnings (loss) attributable to noncontrolling interest |
|
$ |
112 |
|
|
$ |
(19 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to PMFG, Inc. |
|
$ |
5,749 |
|
|
$ |
(4,163 |
) |
|
$ |
2,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock |
|
$ |
(722 |
) |
|
$ |
(1,044 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to PMFG, Inc.
common shareholders |
|
$ |
5,027 |
|
|
$ |
(5,207 |
) |
|
$ |
2,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS (LOSS) PER SHARE |
|
$ |
0.29 |
|
|
$ |
(0.38 |
) |
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS (LOSS) PER SHARE |
|
$ |
0.28 |
|
|
$ |
(0.38 |
) |
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
51
PMFG, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity and Comprehensive Income
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
PMFG, Inc.s |
|
|
Non |
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders |
|
|
Controlling |
|
|
Total |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
|
Interest |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
|
13,024 |
|
|
$ |
130 |
|
|
$ |
9,018 |
|
|
$ |
33,453 |
|
|
$ |
330 |
|
|
$ |
42,931 |
|
|
$ |
|
|
|
$ |
42,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,896 |
|
|
|
|
|
|
|
2,896 |
|
|
|
|
|
|
|
2,896 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,038 |
) |
|
|
(1,038 |
) |
|
|
|
|
|
|
(1,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,858 |
|
|
|
|
|
|
|
1,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants |
|
|
55 |
|
|
|
1 |
|
|
|
1,128 |
|
|
|
|
|
|
|
|
|
|
|
1,129 |
|
|
|
|
|
|
|
1,129 |
|
Stock options expense |
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
13,079 |
|
|
|
131 |
|
|
|
10,186 |
|
|
|
36,349 |
|
|
|
(708 |
) |
|
|
45,958 |
|
|
|
|
|
|
|
45,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,163 |
) |
|
|
|
|
|
|
(4,163 |
) |
|
|
(19 |
) |
|
|
(4,182 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,575 |
) |
|
|
(1,575 |
) |
|
|
|
|
|
|
(1,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,738 |
) |
|
|
(19 |
) |
|
|
(5,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants |
|
|
131 |
|
|
|
1 |
|
|
|
950 |
|
|
|
|
|
|
|
|
|
|
|
951 |
|
|
|
|
|
|
|
951 |
|
Stock option expense |
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
15 |
|
Stock options exercised |
|
|
29 |
|
|
|
|
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
128 |
|
|
|
|
|
|
|
128 |
|
Income tax benefit related to stock
options exercised |
|
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
54 |
|
Issuance of common stock |
|
|
1,495 |
|
|
|
15 |
|
|
|
15,907 |
|
|
|
|
|
|
|
|
|
|
|
15,922 |
|
|
|
|
|
|
|
15,922 |
|
Equity contribution from noncontrolling interest in subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
920 |
|
|
|
920 |
|
Preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,044 |
) |
|
|
|
|
|
|
(1,044 |
) |
|
|
|
|
|
|
(1,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
14,734 |
|
|
|
147 |
|
|
|
27,240 |
|
|
|
31,142 |
|
|
|
(2,283 |
) |
|
|
56,246 |
|
|
|
901 |
|
|
|
57,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,749 |
|
|
|
|
|
|
|
5,749 |
|
|
|
112 |
|
|
|
5,861 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
952 |
|
|
|
952 |
|
|
|
36 |
|
|
|
988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,701 |
|
|
|
148 |
|
|
|
6,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants |
|
|
99 |
|
|
|
1 |
|
|
|
1,357 |
|
|
|
1 |
|
|
|
|
|
|
|
1,359 |
|
|
|
|
|
|
|
1,359 |
|
Stock options exercised |
|
|
122 |
|
|
|
2 |
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
442 |
|
|
|
|
|
|
|
442 |
|
Income tax
benefit related to stock options exercised |
|
|
|
|
|
|
|
|
|
|
411 |
|
|
|
|
|
|
|
|
|
|
|
411 |
|
|
|
|
|
|
|
411 |
|
Issuance of common stock |
|
|
2,642 |
|
|
|
26 |
|
|
|
19,209 |
|
|
|
|
|
|
|
|
|
|
|
19,235 |
|
|
|
|
|
|
|
19,235 |
|
Equity contribution from noncontrolling interest in subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320 |
|
|
|
320 |
|
Preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(722 |
) |
|
|
|
|
|
|
(722 |
) |
|
|
|
|
|
|
(722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 2, 2011 |
|
|
17,597 |
|
|
$ |
176 |
|
|
$ |
48,657 |
|
|
$ |
36,170 |
|
|
$ |
(1,331 |
) |
|
$ |
83,672 |
|
|
$ |
1,369 |
|
|
$ |
85,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
PMFG, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
5,861 |
|
|
$ |
(4,182 |
) |
|
$ |
2,896 |
|
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,584 |
|
|
|
2,962 |
|
|
|
7,553 |
|
Loss on impairment of intangibles |
|
|
3,551 |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,359 |
|
|
|
966 |
|
|
|
1,169 |
|
Excess tax benefit of stock-based compensation |
|
|
(411 |
) |
|
|
(54 |
) |
|
|
|
|
Bad debt expense |
|
|
220 |
|
|
|
742 |
|
|
|
(165 |
) |
Inventory valuation reserve |
|
|
401 |
|
|
|
968 |
|
|
|
169 |
|
Provision for warranty expense |
|
|
2,392 |
|
|
|
3,324 |
|
|
|
443 |
|
Change in fair value of derivative liability |
|
|
(6,681 |
) |
|
|
6,681 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
1,303 |
|
|
|
|
|
Gain on sale of property |
|
|
|
|
|
|
(44 |
) |
|
|
|
|
Foreign exchange gain (loss) |
|
|
(606 |
) |
|
|
(463 |
) |
|
|
354 |
|
Deferred tax benefit |
|
|
(1,299 |
) |
|
|
(532 |
) |
|
|
(3,362 |
) |
Changes in operating assets and liabilities net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,400 |
) |
|
|
1,012 |
|
|
|
8,141 |
|
Inventories |
|
|
264 |
|
|
|
1,146 |
|
|
|
6,381 |
|
Costs and earnings in excess of billings on uncompleted contracts |
|
|
(3,324 |
) |
|
|
8,034 |
|
|
|
2,746 |
|
Other current assets |
|
|
(464 |
) |
|
|
359 |
|
|
|
95 |
|
Other assets |
|
|
163 |
|
|
|
(301 |
) |
|
|
280 |
|
Accounts payable |
|
|
7,128 |
|
|
|
(5,537 |
) |
|
|
(7,720 |
) |
Billings in excess of costs and earnings on uncompleted contracts |
|
|
(558 |
) |
|
|
(2,809 |
) |
|
|
1,463 |
|
Commissions payable |
|
|
254 |
|
|
|
(832 |
) |
|
|
1,146 |
|
Income taxes |
|
|
(3,087 |
) |
|
|
(275 |
) |
|
|
457 |
|
Product warranties |
|
|
(2,297 |
) |
|
|
(1,599 |
) |
|
|
(425 |
) |
Accrued liabilities and other |
|
|
(1,719 |
) |
|
|
(2,371 |
) |
|
|
(5,516 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities: |
|
|
1,331 |
|
|
|
8,498 |
|
|
|
16,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in restricted cash |
|
|
(442 |
) |
|
|
(2,125 |
) |
|
|
(1,828 |
) |
Purchases of property and equipment |
|
|
(2,919 |
) |
|
|
(757 |
) |
|
|
(1,822 |
) |
Advance payment of license agreement |
|
|
(2,947 |
) |
|
|
|
|
|
|
|
|
Proceeds from liqidation of equity method investment |
|
|
|
|
|
|
2,439 |
|
|
|
|
|
Business acquisition, net of cash acquired |
|
|
|
|
|
|
(749 |
) |
|
|
(1,318 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(6,308 |
) |
|
|
(1,192 |
) |
|
|
(4,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
15,922 |
|
|
|
|
|
Net proceeds from issuance of preferred stock and warrants |
|
|
|
|
|
|
19,235 |
|
|
|
|
|
Payment of debt |
|
|
(7,650 |
) |
|
|
(35,779 |
) |
|
|
(4,000 |
) |
Payment of debt issuance costs |
|
|
(158 |
) |
|
|
(552 |
) |
|
|
|
|
Payment of dividends on preferred stock |
|
|
(722 |
) |
|
|
(1,044 |
) |
|
|
|
|
Equity contribution from noncontrolling interest |
|
|
320 |
|
|
|
920 |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
442 |
|
|
|
98 |
|
|
|
|
|
Excess tax benefits from stock-based payment arrangements |
|
|
411 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(7,357 |
) |
|
|
(1,146 |
) |
|
|
(4,000 |
) |
Consolidated Statements of Cash Flows continued on next page.
53
PMFG, Inc. and Subsidiaries
Consolidated Statements of Cash Flows Continued
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
968 |
|
|
|
373 |
|
|
|
(843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(11,366 |
) |
|
|
6,533 |
|
|
|
6,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
24,271 |
|
|
|
17,738 |
|
|
|
11,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
12,905 |
|
|
$ |
24,271 |
|
|
$ |
17,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information on cash flow: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
1,300 |
|
|
$ |
1,407 |
|
|
$ |
3,010 |
|
Interest paid |
|
|
1,492 |
|
|
|
3,014 |
|
|
|
5,233 |
|
See accompanying notes to consolidated financial statements.
During fiscal 2011, holders of Preferred Stock converted 21,140 shares of Preferred Stock into
2,642,500 shares of the Companys common stock. This was a non cash financing activity and as
a result, the Company is no longer obligated to pay quarterly dividends on the converted
shares of Preferred Stock.
54
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Holding Company Reorganization and Stock Conversion
On August 15, 2008, the Company completed a holding company reorganization. In the reorganization,
Peerless Mfg. Co. (Peerless), a Texas corporation, became a wholly owned subsidiary of PMFG, Inc.
(PMFG), a newly formed Delaware corporation. Shareholders of Peerless received two shares of
common stock of PMFG for each outstanding share of common stock of Peerless held prior to the
reorganization. As a result, the reorganization had the effect of a two-for-one stock split. The
Companys business, operations and management did not change as a result of the holding company
reorganization.
References to Company refer to (a) PMFG, Inc. and its subsidiaries after the holding company
reorganization and (b) Peerless Mfg. Co. and its subsidiaries prior to the holding company
reorganization, in each case unless the context requires otherwise. Additionally, references to
PMFG refer to PMFG, Inc. and references to Peerless refer to Peerless Mfg. Co., in each case
unless the context requires otherwise.
Nature of Operations
The Company is a leading provider of custom-engineered systems and products designed to help ensure
that the delivery of energy is safe, efficient and clean. The Company primarily serves the markets
for power generation, natural gas infrastructure and refining and petrochemical processing. The
Company offers a broad range of systems and products through its two reportable segments: Process
Products and Environmental Systems. Process Products includes separation and filtration products
which remove contaminants from gases and liquids, improving efficiency, reducing maintenance and
extending the life of energy infrastructure. In addition, products in the Process Products segment
include pulsation dampeners and heat exchangers. The Process Products segment also includes
industrial silencing equipment to control noise pollution on a wide range of industrial processes
and heat transfer equipment to conserve energy in many industrial processes and in petrochemical
processing. The Companys Environmental Systems segment includes selective catalytic reduction
systems, or SCR, which convert nitrogen oxide into nitrogen and water, reducing air pollution and
helping customers comply with environmental regulations.
The Companys products are manufactured within company-owned facilities located in Texas, as well
as through global subcontractor agreements. Customers include equipment manufacturers, engineering
contractors and operators of power plants. On July 15, 2010, the Company formed a new wholly-owned
subsidiary, Peerless Asia Pacific Pte. Ltd. (Peerless Asia Pacific), which replaced the former
Peerless Mfg. Co. regional sales office in Singapore. Beginning in fiscal 2010, the Company began
additional manufacturing operations in China through Peerless Manufacturing (Zhenjiang) Co., Ltd.
(PMZ), a wholly-owned subsidiary of Peerless Propulsys China Holdings LLC (Peerless Propulsys),
our majority-owned subsidiary.
55
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Basis of Consolidation
The Companys financial statements for all periods presented are consolidated to include the
accounts of all wholly-owned and majority-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation. The Company is the majority owner
of Peerless Propulsys. The Companys 60% equity investment in Peerless Propulsys entitles it to
80% of the earnings. Peerless Propulsys is the sole owner of PMZ. The non-controlling interest of
Peerless Propulsys is reported as a separate component on the Consolidated Balance Sheets and
Consolidated Statement of Operations.
In addition to the wholly-owned and majority-owned subsidiaries, the Company had a 40% interest in
a joint venture located in Japan, which was presented as an equity method investment at June 30,
2009. During the year ended June 30, 2010, the joint venture began the process of being formally
dissolved and the Company liquidated its interest and recorded a gain on the liquidation of equity
investments in the Consolidated Statements of Operations.
Beginning in fiscal year 2011, the Companys fiscal year, which previously ended as of the last day
of the month each June, changed to a new fiscal year, which is comprised of either 52 or 53 weeks.
The Companys fiscal year end will be the Saturday closest to June 30; therefore, the fiscal year
end date will vary slightly each year. In a 52 week fiscal year, each of the Companys quarterly
periods will be comprised of 13 weeks, consisting of two four week periods and one five week
period. In a 53 week fiscal year, three of the Companys quarterly periods will be comprised of 13
weeks and one quarter will be comprised of 14 weeks. References to fiscal 2011, fiscal 2010
and fiscal 2009 refer to fiscal years ended July 2, 2011, June 30, 2010 and June 30, 2009,
respectively.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash equivalents.
The Company maintains cash balances in bank accounts that normally exceed Federal Deposit Insurance
Corporation insured limits. As of July 2, 2011, cash held in the United States exceeded federally
insured limits by $8,798. As of July 2, 2011 and June 30, 2010, the Company had $9,893 and $8,873,
respectively, in foreign bank balances outside the United Sates. The Company has not experienced
any losses related to this cash concentration.
The Company had restricted cash balances of $6,633 and $5,868 as of July 2, 2011 and June 30, 2010,
respectively. Foreign restricted cash balances were $5,306 and $4,258 as of July 2, 2011 and June
30, 2010, respectively. Cash balances were restricted to collateralize letters of credit and
financial institution guarantees issued in the normal course of business.
56
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Accounts Receivable
The Companys accounts receivable are due from companies in various industries. Credit is extended
based on an evaluation of the customers financial condition. Generally, collateral is not
required except
on credit extended to international customers. Accounts receivable are generally due within 30
days and are stated at amounts due from customers net of an allowance for doubtful accounts.
Accounts outstanding longer than contractual payment terms are considered past due. The Company
records an allowance on a specific basis by considering a number of factors, including the length
of time the accounts receivable are past due, the Companys previous loss history, the customers
current ability to pay its obligation to the Company and the condition of the industry and the
economy as a whole. The Company writes off accounts receivable when they become uncollectible.
Payments subsequently received on such receivables are credited to
the allowance for doubtful accounts in the period
the payment is received.
The Company had $785 and $1,262 of retention receivables included in accounts receivable trade
at July 2, 2011 and June 30, 2010, respectively.
Changes in the Companys allowance for doubtful accounts in the last two fiscal years are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
Balance at beginning of year |
|
$ |
886 |
|
|
$ |
460 |
|
Bad debt expense |
|
|
220 |
|
|
|
742 |
|
Accounts written off |
|
|
(506 |
) |
|
|
(316 |
) |
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
600 |
|
|
$ |
886 |
|
|
|
|
|
|
|
|
Inventories
The Company values its inventory using the lower of weighted average cost or market. The Company
regularly reviews the value of inventory on hand, using specific aging categories, and records a
provision for obsolete and slow-moving inventory based on historical usage and estimated future
usage. In assessing the ultimate realization of its inventory, the Company is required to make
judgments as to future demand requirements. As actual future demand or market conditions may vary
from those projected by the Company, adjustments to inventory valuations may be required.
Property, Plant and Equipment
Depreciation of property, plant and equipment is calculated using the straight-line method over a
period considered adequate to depreciate the total cost over the useful lives of the assets, as
follows:
|
|
|
|
|
Buildings and improvements |
|
5 - 40 years |
Equipment |
|
3 - 10 years |
Furniture and fixtures |
|
3 - 15 years |
Routine maintenance costs are expensed as incurred. Major improvements that extend the life,
increase the capacity or improve the safety or the efficiency of property owned are capitalized.
Major improvements to leased buildings are capitalized as leasehold improvements and amortized over
the shorter of the estimated life or the lease term.
57
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Goodwill and Other Intangible Assets
The goodwill relates primarily to the acquisition of Nitram Energy, Inc. and Subsidiaries
(Nitram) and represents the difference between the purchase price and the fair value of the net
assets acquired. Goodwill is not amortized, however, it is measured at the reporting unit level
for impairment annually, or more frequently if conditions indicate an earlier review is necessary.
The fair value of goodwill is determined based on discounted cash flow projections. If the
estimated fair value of goodwill is less than the carrying value, goodwill is impaired and is
written down to its estimated fair value.
Intangible assets subject to amortization include licensing agreements and customer relationships.
These intangible assets are amortized over their estimated useful lives based on a pattern in which
the economic benefit of the respective intangible asset is realized. Intangible assets considered
to have indefinite lives include trade names and design guidelines. The Company evaluates the
recoverability of indefinite lived intangible assets annually or whenever events or changes in
circumstances indicate that an intangible assets carrying amount may not be recoverable. The
Company uses the income approach method to determine whether impairment exists.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable and exceeds its
fair value. If conditions indicate an asset might be impaired, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual disposition. The
impairment would be measured by the amount by which the asset exceeds its fair value, typically
represented by the discounted cash flows associated with the asset.
Convertible Redeemable Preferred Stock
The Companys Series A convertible redeemable preferred stock (Preferred Stock) host contract
contains redemption options which place redemption outside of the Companys control. The Preferred
Stock was classified as temporary equity, outside of permanent stockholders equity, on the
Consolidated Balance Sheets and Consolidated Statements of Equity.
The Company considered the conversion rights and redemption options of the Preferred Stock to be an embedded derivative and,
as a result, the fair value of the embedded derivative was deemed to be a derivative liability on the Consolidated Balance Sheets (the Derivative Liability). Because the Derivative Liability had a
fair value in excess of the net proceeds received by the Company from the Preferred Stock
transaction at the date of issuance, no amounts have been assigned to the Preferred Stock in the
allocation of proceeds. Changes in fair value of the Derivative Liability are included in other
income (expense) in the Consolidated Statements of Operations and are not taxable or deductible for
income tax purposes.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade receivables, other current assets,
accounts payable and accrued expenses approximate fair value due to the short maturity of these
instruments. As
the Companys debt bears interest at floating rates, the Company estimates that the carrying
amounts of its debt at July 2, 2011 and June 30, 2010, approximate fair value.
58
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Revenue Recognition
The Company provides products under long-term, generally fixed-priced, contracts that may extend
over multiple financial periods. In connection with these contracts, the Company uses the
percentage-of-completion method of accounting for long-term contracts that contain enforceable
rights regarding services to be provided and received by the contracting parties, the consideration
to be exchanged and the manner and terms of settlement, assuming reasonably dependable estimates of
revenue and expenses can be made. The percentage-of-completion method generally results in the
recognition of reasonably
consistent profit margins over the life of a contract. Amounts recognized in revenue are calculated
using the percentage of construction cost completed, generally on a cumulative cost to total cost
basis. Cumulative revenue recognized may be less or greater than cumulative costs and profits
billed at any point during a contracts term. The resulting difference is recognized as costs and
earnings in excess of billings on uncompleted contracts or billings in excess of costs and
earnings on uncompleted contracts on the Consolidated Balance Sheets.
Contracts that are considered short-term in nature are accounted for under the completed contract
method. Because of the short-term nature of these contracts, the completed contract method
accurately reflects the economic substance of these contracts. Revenue under the completed
contract method is recognized upon shipment of the product.
Pre-contract, Start-up and Commissioning Costs
The Company does not consider the realization of any individual sales order as probable prior to
order acceptance. Therefore, pre-contract costs incurred prior to sales order acceptance are
included as a component of operating expenses when incurred. Some of the Companys contracts call
for the installation and placing in service of the product after it is distributed to the end user.
The costs associated with the start-up and commissioning of these projects are estimated and
recorded in cost of
goods sold in the period in which the revenue is recognized. Estimates are based on historical
experience and expectation of future conditions.
Warranty Costs
The Company provides to its customers product warranties for specific products during a defined
period of time, generally less than 18 months after shipment of the product. Warranties cover the
failure of a product to perform after it has been placed in service. The Company reserves for
estimated future warranty costs in the period in which the revenue is recognized based on
historical experience, expectation of future conditions, and the extent of backup concurrent
supplier warranties in place. Warranty costs are included in the costs of goods sold.
59
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Debt Issuance Costs
Certain costs associated with the issuance of debt instruments are capitalized and included in
other non-current assets on our Consolidated Balance Sheets. These costs are amortized to interest
expense over the terms of the related debt agreements on an effective interest method basis.
Amortization of debt issuance costs included in interest expense was $875, $598 and $768 in fiscal
years 2011, 2010 and 2009, respectively. During fiscal year 2010, the Company pre-paid the
remaining balance of its subordinated term debt. Unamortized debt issuance costs associated with
the subordinated term debt in the amount of $1,303 were recorded as a loss on extinguishment of
debt on the Consolidated Statements of Operations for the year ended June 30, 2010. Unamortized
debt issuance costs at July 2, 2011 and June 30, 2010 were $879 and $1,596, respectively.
Stock-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and recognizes that cost ratably over
the vesting period.
Shipping and Handling Costs
Shipping and handling fees billed to customers are reported as revenue. Shipping and handling
costs incurred are reported as cost of goods sold. Shipping and handling fees included in revenue
were $949, $507 and $401 for fiscal years 2011, 2010 and 2009, respectively. Shipping and handling
costs included in cost of goods sold were $1,564, $408 and $1,260 for fiscal years 2011, 2010 and
2009, respectively.
Advertising Costs
Advertising costs are charged to operating expenses under the sales and marketing category in the
periods incurred. Advertising costs were approximately $213, $127 and $129 in fiscal years 2011,
2010 and 2009, respectively.
Design, Research and Development
Design, research and development costs are charged to operating expenses under the engineering and
project management category in the periods incurred. Design, research and development costs were
approximately $467, $509 and $449 in fiscal years 2011, 2010 and 2009, respectively.
Income Taxes
The Company utilizes the asset and liability approach in its reporting for income taxes. Deferred
income tax assets and liabilities are computed for differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount more
likely than not to be realized. Income tax related interest and penalties are included in income
tax expense. The Company recognizes in its financial statements the impact of a tax position
taken or expected to be taken in a tax return, if that position is more likely than not of being
sustained upon examination by the relevant taxing authority, based on the technical merits of the
position.
60
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
The Company is required to estimate income taxes in each jurisdiction in which it operates. This
process involves estimating actual current tax exposure together with assessing temporary
differences resulting from different treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities and are included in the Companys
consolidated balance sheets. Judgment is required in assessing the future tax consequences of
events that have been recognized in the Companys financial statements or tax returns. In the
event that actual results differ from these estimates, the Companys provision for income taxes
could be materially impacted. The Companys effective income tax rate varies primarily due to
changes in the fair value of the Derivative Liability, which are not taxable or deductible for
income tax purposes and research and development expenditures, for which a nonrefundable credit can
be taken for income tax purposes.
Earnings (Loss) Per Common Share
The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable
to common stockholders by the weighted average number of common shares outstanding. The Company has
determined that the Preferred Stock represents a participating security because holders of the
Preferred Stock have rights to participate in any dividends on an as-converted basis; therefore,
basic earnings per common share is calculated using the two class method. Under the two class
method, earnings after dividends are allocated to each class of participating security and earnings
per common share is calculated on the earnings allocated to common stock. Diluted earnings per
common share include the dilutive effect of stock options and warrants granted using the treasury
stock method.
Foreign Currency
All balance sheet accounts of foreign operations are translated into U.S. dollars at the fiscal
year-end rate of exchange. Consolidated Statements of Operations items are translated at the
weighted average exchange rates for the fiscal years ended July 2, 2011, June 30, 2010 and June 30,
2009. The resulting translation adjustments are recorded directly to accumulated other
comprehensive income, a separate component of stockholders equity. Gains and losses from foreign
currency transactions, such as those resulting from the settlement of foreign receivables or
payables, are included in the Consolidated Statements of Operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period.
61
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE A. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Because of the use of estimates inherent in the financial reporting process, actual results could
differ from those estimates.
NOTE B. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (the FASB) issued Accounting Standards
Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 clarifies existing fair value measurement and
disclosure requirements by amending certain fair value measurement principles and requiring
additional disclosures regarding fair value measurements. ASU 2011-04 is effective for the Company
beginning in the third quarter of fiscal 2012. The Company is currently evaluating the impact that
ASU 2011-04 will have on its consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive
Income (ASU 2011-05). ASU 2011-05 requires that all non-owner changes in shareholders equity be
presented either in a single continuous statement of comprehensive income or in two separate but
continuous statements. If presented in two separate statements, the first statement should present
total net income and its components followed immediately by a second statement of total other
comprehensive income, its components and the total comprehensive income. ASU 2011-05 is effective
for the Company in the first quarter of fiscal 2013. The Company is currently evaluating the
impact that ASU 2011-05 will have on its consolidated financial statements.
NOTE C. CONCENTRATIONS OF CREDIT RISK
The Company monitors the creditworthiness of its customers. Significant portions of the Companys
sales are to customers who place large orders for custom systems and customers whose activities are
related to the electrical generation and oil and gas industries. Some customers are located
outside the United States. The Company generally requires progress payments, but may extend credit
to some customers. The Companys exposure to credit risk is affected to some degree by conditions
within the electrical generation and oil and gas industries. When sales are made to smaller
international businesses, the Company generally requires progress payments or an appropriate
guarantee of payment, such as a letter of credit from a financial institution.
The Company is not dependent upon any single customer or group of customers in either of its two
primary business segments. The custom-designed and project-specific nature of its business can
cause year-to-year variances in its major customers.
62
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE D. ACQUISITIONS
Nitram
On April 30, 2008, the Company acquired all of the outstanding common stock of Nitram Energy, Inc.
and Subsidiaries (Nitram) for $64,428. Nitram was the parent company of Burgess-Manning, Inc.,
Bos-Hatten, Inc. and Alco Products, an unincorporated division. The acquisition expanded our
product lines in the areas of custom-designed gas/liquid and gas/solid separators, pulsation
dampeners, silencers and custom-designed shell and tube heat exchangers. These products are
primarily sold into the oil/natural gas, chemical/petrochemical and power generation industries.
Nitrams results of operations have been included in the Companys consolidated financial
statements from the date of acquisition.
Included in the Nitram purchase, the Company acquired a 40% investment in Burgess Miura Co., Ltd, a
joint venture in Japan. Income (loss) from the investment was $(20) and $435 for fiscal years 2010
and 2009, respectively, and is recorded in Other Income. During fiscal 2010, the Companys
interest in the joint venture was liquidated. The Company received proceeds from the liquidation
of $2,439, net of $266 in taxes withheld, which resulted in a $30 gain recorded to Other income
(expense) on the Consolidated Statements of Operations. Accumulated foreign currency translation
adjustments of $523 were recognized in the Consolidated Statement of Operations as a component of
foreign exchange gain during the year ended June 30, 2010. Nitrams results of operations are
included in the Companys Process Products segment.
Mitech
On January 1, 2010, the Company acquired its former sales representative in Canada, Mitech, Inc.,
for $749. The purchase price of $749 was attributed to customer relationships, and $270 was
recorded to goodwill as an adjustment to deferred tax liabilities. Mitechs results of operations
are included in the Companys Process Products segment.
63
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE E. INVENTORIES
Principal components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
3,261 |
|
|
$ |
4,443 |
|
Work in progress |
|
|
3,382 |
|
|
|
3,164 |
|
Finished goods |
|
|
389 |
|
|
|
361 |
|
|
|
|
|
|
|
|
|
|
|
7,032 |
|
|
|
7,968 |
|
|
|
|
|
|
|
|
|
|
Reserve for obsolete and slow-moving inventory |
|
|
(476 |
) |
|
|
(748 |
) |
|
|
|
|
|
|
|
|
|
$ |
6,556 |
|
|
$ |
7,220 |
|
|
|
|
|
|
|
|
NOTE F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Buildings & improvements |
|
$ |
3,604 |
|
|
$ |
3,409 |
|
Equipment |
|
|
10,703 |
|
|
|
9,101 |
|
Furniture and fixtures |
|
|
6,407 |
|
|
|
5,357 |
|
|
|
|
|
|
|
|
|
|
|
20,714 |
|
|
|
17,867 |
|
Less accumulated depreciation |
|
|
(12,346 |
) |
|
|
(10,625 |
) |
|
|
|
|
|
|
|
|
|
|
8,368 |
|
|
|
7,242 |
|
Construction in progress |
|
|
222 |
|
|
|
|
|
Land |
|
|
264 |
|
|
|
264 |
|
|
|
|
|
|
|
|
|
|
$ |
8,854 |
|
|
$ |
7,506 |
|
|
|
|
|
|
|
|
Depreciation expense for property, plant and equipment for the fiscal years ended July 2, 2011,
June 30, 2010 and June 30, 2009 totaled $1,646, $1,557 and $1,638, respectively. The amount of
depreciation allocated to cost of goods sold for the fiscal years ended July 2, 2011, June 30, 2010
and June 30, 2009 totaled $719, $776 and $834, respectively.
64
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE G. INTANGIBLE ASSETS
Acquisition-Related Intangibles
Acquisition-related intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Estimated |
|
Gross Value |
|
|
|
|
|
|
Gross Value |
|
|
Amortization |
|
|
|
|
|
|
Amortization |
|
|
Net |
|
|
|
Useful Life |
|
at Beginning |
|
|
|
|
|
|
at End |
|
|
at Beginning |
|
|
Amortization |
|
|
at End |
|
|
Book |
|
|
|
(Years) |
|
of Year |
|
|
Adjustments |
|
|
of Year |
|
|
of Year |
|
|
expense |
|
|
of Year |
|
|
Value |
|
Fiscal 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Design guidelines |
|
Indefinite |
|
$ |
10,491 |
|
|
$ |
(3,551 |
) |
|
$ |
6,940 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,940 |
|
Customer relationships |
|
13 |
|
|
6,890 |
|
|
|
|
|
|
|
6,890 |
|
|
|
(1,575 |
) |
|
|
(629 |
) |
|
|
(2,204 |
) |
|
|
4,686 |
|
Trade names |
|
Indefinite |
|
|
4,729 |
|
|
|
|
|
|
|
4,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,729 |
|
Licensing agreements |
|
5 |
|
|
2,199 |
|
|
|
|
|
|
|
2,199 |
|
|
|
(953 |
) |
|
|
(440 |
) |
|
|
(1,393 |
) |
|
|
806 |
|
Acquired backlog |
|
0.7 |
|
|
6,489 |
|
|
|
|
|
|
|
6,489 |
|
|
|
(6,489 |
) |
|
|
|
|
|
|
(6,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,798 |
|
|
$ |
(3,551 |
) |
|
$ |
27,247 |
|
|
$ |
(9,017 |
) |
|
$ |
(1,069 |
) |
|
$ |
(10,086 |
) |
|
$ |
17,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Design guidelines |
|
Indefinite |
|
$ |
10,491 |
|
|
$ |
|
|
|
$ |
10,491 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10,491 |
|
Customer relationships |
|
13 |
|
|
6,141 |
|
|
|
749 |
|
|
|
6,890 |
|
|
|
(963 |
) |
|
|
(612 |
) |
|
|
(1,575 |
) |
|
|
5,315 |
|
Trade names |
|
Indefinite |
|
|
4,729 |
|
|
|
|
|
|
|
4,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,729 |
|
Licensing agreements |
|
5 |
|
|
2,199 |
|
|
|
|
|
|
|
2,199 |
|
|
|
(513 |
) |
|
|
(440 |
) |
|
|
(953 |
) |
|
|
1,246 |
|
Acquired backlog |
|
0.7 |
|
|
6,489 |
|
|
|
|
|
|
|
6,489 |
|
|
|
(6,489 |
) |
|
|
|
|
|
|
(6,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,049 |
|
|
$ |
749 |
|
|
$ |
30,798 |
|
|
$ |
(7,965 |
) |
|
$ |
(1,052 |
) |
|
$ |
(9,017 |
) |
|
$ |
21,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of fiscal 2011, the Company recognized a non-cash impairment charge related
to design guidelines of $3,551. The impairment resulted from a decline in the sales and related
profitability of certain products purchased in the Nitram transaction. Design guidelines were
impaired to their fair value as determined using a profit split method estimating relief from
royalties based on the relative contribution of the design guidelines to the Process Products
segment. Key assumptions in the relief from royalties calculation
include a 2% assumed royalty rate and a 17.75% discount rate.
65
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE G. INTANGIBLE ASSETS CONTINUED
During fiscal 2010, the Company acquired Mitech, Inc., a former sales representative in Canada.
The entire purchase price of $749 was attributed to customer relationships, with an additional $269
recorded to goodwill as an adjustment to deferred tax liabilities. Amortization expense of $1,069,
$1,052, and $5,013 were recorded to the Consolidated Statement of Operations for the fiscal years
2011, 2010, and 2009, respectively. All acquisition-related intangible assets are allocated to the
Companys Process
Products segment. The estimated amortization expense for each of the next five fiscal years is as
follows:
|
|
|
|
|
2012 |
|
$ |
1,005 |
|
2013 |
|
|
922 |
|
2014 |
|
|
555 |
|
2015 |
|
|
480 |
|
2016 |
|
|
405 |
|
CEFCO Licensing Agreement
In July 2010, the Company entered into the CEFCO Process Manufacturing License Agreement (the
License Agreement) with CEFCO Global Clean Energy, LLC, a Texas limited liability company
(CEFCO). Pursuant to the License Agreement and subject to the terms and conditions set forth
therein, the Company was granted exclusive manufacturing rights in the continental United States to
manufacture equipment and process units incorporating CEFCOs multi-stage apparatus used in the
selective capture and removal of purified carbon gas, including NOx, SOx, CO2 and Hg, and the
sequential capture and
removal of mercury, metal, and particulate aerosols. The captured pollutants may subsequently be
converted into various high-grade end products through chemical conversion in a recirculating and
regenerating system and may then be commercially sold by an end-user or operator.
The Company advanced $1,100 to CEFCO at the inception of License Agreement. Pursuant to a related
lab testing arrangement with CEFCO, an additional $1,847 was advanced under the License Agreement
in fiscal 2011 through the funding of costs to construct and operate a scaled version of the CEFCO
processing technology. As of fiscal 2011, $2,947 was included in intangibles, net. Amortization
of the CEFCO licensing agreement will be recognized over the life of the licensing agreement (10
years) commencing after the initial sale, construction and commissioning of a full scale version of
the CEFCO processing technology.
NOTE H. ACCRUED LIABILITIES AND OTHER
The components of accrued liabilities and other are as follows:
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Accrued start-up and commissioning expense |
|
$ |
794 |
|
|
$ |
1,169 |
|
Accrued compensation |
|
|
1,733 |
|
|
|
3,999 |
|
Accrued professional expenses |
|
|
2,510 |
|
|
|
1,679 |
|
Other |
|
|
440 |
|
|
|
245 |
|
|
|
|
|
|
|
|
|
|
$ |
5,477 |
|
|
$ |
7,092 |
|
|
|
|
|
|
|
|
66
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE I. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The components of uncompleted contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Costs incurred on uncompleted contracts and
estimated earnings |
|
$ |
64,457 |
|
|
$ |
56,176 |
|
Less billings to date |
|
|
(52,332 |
) |
|
|
(48,040 |
) |
|
|
|
|
|
|
|
|
|
$ |
12,125 |
|
|
$ |
8,136 |
|
|
|
|
|
|
|
|
The components of uncompleted contracts are reflected in the consolidated balance sheets as
follows:
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Costs and earnings in excess of billings on
uncompleted contracts |
|
$ |
16,991 |
|
|
$ |
13,560 |
|
Billings in excess of costs and earnings on
uncompleted contracts |
|
|
(4,866 |
) |
|
|
(5,424 |
) |
|
|
|
|
|
|
|
|
|
$ |
12,125 |
|
|
$ |
8,136 |
|
|
|
|
|
|
|
|
NOTE J. LONG-TERM DEBT
Outstanding long-term obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
Maturities |
|
|
2011 |
|
|
2010 |
|
Senior secured credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Term loan |
|
|
2016 |
|
|
$ |
12,571 |
|
|
$ |
20,221 |
|
Revolving credit facility |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
|
12,571 |
|
|
|
20,221 |
|
Less current
maturities |
|
|
|
|
|
|
(2,600 |
) |
|
|
(4,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
|
|
|
|
$ |
9,971 |
|
|
$ |
16,221 |
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the sale of 1,495,000 shares of common stock in the Companys registered
secondary common stock offering in March 2010, the Company received $15,922 of net proceeds after
deducting underwriter fees and commissions and estimated legal and accounting fees. In accordance
with the terms of the Companys senior term loan, as amended, the Company used 50% of the net
proceeds to repay a portion of the senior term loan.
67
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE J. LONG-TERM DEBT CONTINUED
At
July 2, 2011, the Company was not in compliance with all covenants in its Credit Agreement. On
September 12, 2011, the Company entered into an amendment to its Credit Agreement (the Seventh
Amendment) to extend the maturity date of the revolving credit facility to April 30, 2013, to
waive any noncompliance or default by the Company with its current financial covenants and to
reduce the Consolidated Fixed Charge Coverage (FCC) ratio
covenants through the end of fiscal 2012.
Interest on the senior term loan is payable quarterly, calculated on either a base or LIBOR rate
per annum, at the Companys option (5.75% at July 2, 2011 and 5.25% at June 30, 2010). The Credit
Agreement requires payments on the senior term loan of equal quarterly principal installments of
$650, to be paid on
the first day of each fiscal quarter, with the balance of the senior term loan due at maturity.
At July 2, 2011, there was $9,165 borrowing availability after the borrowing base was adjusted for
$4,818 in outstanding letters of credit. At July 2, 2011 and June 30, 2010 there were no
outstanding borrowings under the revolving credit facility.
The senior term loan and any borrowings under the revolving credit facility are secured by a first
lien on substantially all assets of the Company. In addition to the CTL and FCC ratio covenants,
the Credit Agreement contains other covenants, including restrictions on additional debt,
dividends, capital expenditures, acquisitions and dispositions.
The Company entered into a LIBOR interest rate cap transaction with respect to its senior term
loan, with a notional amount of $20,000 (the Interest Rate Cap Transaction). The Interest Rate
Cap Transaction became effective on August 15, 2008 and will terminate on April 2, 2012. Under the
terms of the Interest Rate Cap Transaction, the counterparty will pay to the Company, on the first
business day of each quarter, an amount equal to the greater of $0 and the product of (i) the
outstanding notional amount of the Interest Rate Cap Transaction during the prior quarter, (ii) the
difference between the three month LIBOR rate at the beginning of the prior quarter and 3.70% and
(iii) the quotient of the number of days in the prior
quarter over 360. The notional amount of the Interest Rate Cap Transaction amortized $5,000 on
October 1, 2010, 2009 and 2008 and will amortize $4,500 on October 3, 2011 and the remaining $500
upon termination on April 2, 2012. As long as the counterparty makes the payments required under
the Interest Rate Cap Transaction, the Company will have a maximum annual LIBOR interest rate exposure
equal to the sum of 3.70% and a margin of 375 to 500 basis points, based on its CTL ratio, for the
term of the Interest Rate Cap Transaction. At July 2, 2011 the Interest Rate Cap Transaction has
an estimated fair market value of $0.
The Companys U.K. subsidiary has a debenture agreement used to facilitate issuances of letters of
credit and bank guarantees of £6,000 ($9,645) at July 2, 2011 and £4,700 ($7,083) at June 30, 2010.
This facility was secured by substantially all of the assets of the Companys U.K. subsidiary and
by a cash deposit of £3,301 ($5,306) at July 2, 2011 and £2,850 ($4,258) at June 30, 2010, which is
recorded as restricted cash on the consolidated balance sheets. At July 2, 2011, there was £3,222
($5,180) outstanding under stand-by letters of credit and bank guarantees under this debenture
agreement. At June 30, 2010, there was £2,658 ($4,006) outstanding under stand-by letters of credit
and bank guarantees under this debenture agreement. There are no amounts outstanding under the
U.K. subsidiarys debenture agreement at July 2, 2011 or June 30, 2010.
68
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE K. 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.
Product warranty activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
2,480 |
|
|
$ |
1,242 |
|
|
$ |
1,224 |
|
Provision for warranty expense |
|
|
2,392 |
|
|
|
3,324 |
|
|
|
443 |
|
Warranty charges |
|
|
(2,297 |
) |
|
|
(2,086 |
) |
|
|
(425 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
2,575 |
|
|
$ |
2,480 |
|
|
$ |
1,242 |
|
|
|
|
|
|
|
|
|
|
|
The increase in warranty expense in fiscal 2010 compared to fiscal 2009 largely reflects costs
related to two specific customer contracts.
NOTE L. COMMITMENTS AND CONTINGENCIES
The Company leases office space, office equipment and other personal property under operating
leases expiring at various dates. Management expects that, in the normal course of business,
leases that expire will be renewed or replaced by other leases. The Company recognizes escalating
lease payments on the straight-line basis. Total rent expense incurred under operating leases was
$969, $1,050 and $676 for fiscal 2011, 2010 and 2009, respectively.
At July 2, 2011, future minimum rental commitments under all operating leases are as follows:
|
|
|
|
|
Operating Leases |
|
Total |
|
Fiscal Year |
|
Amount |
|
2012 |
|
$ |
1,063 |
|
2013 |
|
|
1,048 |
|
2014 |
|
|
992 |
|
2015 |
|
|
1,006 |
|
2016 |
|
|
903 |
|
Thereafter |
|
|
1,088 |
|
|
|
|
|
|
|
$ |
6,100 |
|
|
|
|
|
69
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE L. COMMITMENTS AND CONTINGENCIES CONTINUED
In June 2010, the Company received notice from a customer claiming approximately $9,100 in repair
costs associated with four heat exchangers sold by Alco Products, a division of Nitram, in 2006
prior to the Companys acquisition of Nitram. The customer requested reimbursement for the repair
costs pursuant to Alco Products warranty obligations under the terms and conditions of the
purchase order. The Company is in the process of assessing the validity of the claim and has
notified the Nitram insurance carrier and the selling stockholders of Nitram of this claim. The
Company believes if any valid claim exists, the Company is entitled to be indemnified by the Nitram
selling stockholders pursuant to the terms of the Nitram acquisition agreement for any amounts that
are paid by the Company in connection with such claim. At this time, the Company cannot estimate
any potential range of loss that may result from this asserted claim as the claim is in its early
stages and the Company is still investigating its merits and the facts and circumstances
surrounding the claim. No amount has been accrued in the financial statements for this claim as
of July 2, 2011. At this time, no lawsuit has been filed by the customer.
On June 19, 2007, Martin-Manatee Power Partners, LLC (MMPP) filed a complaint against the Company
in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida. In the
complaint, MMPP asserted claims for breach of contract and express warranty, breach of implied warranty and indemnification against the Company. MMPPs claims arise out of an incident in September 2005 when an electric fuel gas start-up heater, which was a component of a fuel gas
heater skid supplied by the Company to MMPP, allegedly ruptured, resulting in a fire. In the
complaint, MMPP did not make a specific demand for damages.
The Companys insurance carriers have agreed to defend the claims asserted by MMPP,
pursuant to reservation of rights letters issued on September 5, 2007, and have retained
counsel to defend the Company. MMPP made a demand for damages in the amount of $2,500,
which it claims represents its net costs incurred related to this incident. As of the July
2, 2011, the Company has recorded an accrual of $100 related to the insurance deductible as
a component of its warranty liability. The Company and its insurers have reached an
agreement in principle with MMPP to settle this matter and are in the process of finalizing
the settlement agreement. The parties expect to file a request for voluntary dismissal
with the District Court before the end of the first quarter of fiscal year 2012. The
settlement amount will be paid by the Companys insurers, less the cost of the $100
deductible, which will be paid by the Company.
In April 2008, Burgess-Manning, Inc., a subsidiary of Nitram, made a voluntary disclosure to the
Office of Foreign Assets Control (OFAC) regarding sales of industrial separators to Iran. The
Company cannot predict the response of OFAC, the outcome of any related proceeding or the
likelihood that future proceedings will be instituted against the Company. In the event that there
is an adverse ruling in any proceeding, the Company may be required to pay fines and penalties.
70
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE L. COMMITMENTS AND CONTINGENCIES CONTINUED
In connection with the Companys acquisition of Nitram and the related financing transactions,
environmental site assessments were performed on both its existing manufacturing properties and
Nitrams properties in Cisco, Texas and Wichita Falls, Texas. These assessments involved visual
inspection, testing of soil and groundwater, interviews with site personnel and a review of
publicly available records. The results of these assessments indicated soil and groundwater
contamination at the
Vermont Street facility in Wichita Falls and groundwater concerns at the Jacksboro Highway facility
in Wichita Falls and the Cisco facilities. Additional sampling and evaluation of the groundwater
concerns at Jacksboro Highway and Cisco facilities indicated levels of impact did not exceed
applicable regulatory standards and that further investigation and remediation was not required.
Soil remediation at the Vermont Street facility in Wichita Falls was completed in July 2009 and the
Company will continue to monitor groundwater at and near the site for an additional five years. The
total costs accrued are $175 at July 2, 2011, which have been discounted using a rate of 3.25%. The
Company may incur additional one-time costs related to the installation of four new test wells and
the preparation of environmental reports, which the Company estimates will be $90. The Company
believes that the cost of the monitoring will be approximately $10 per year until complete. The
Company expects that the monitoring will continue for a period not to exceed five years. The
Company is seeking reimbursement for the full cost of the remediation and ongoing and future
monitoring activities under our purchase agreement with Nitrams former stockholders in the amount
of $655. Funds have been deposited into an escrow account that may be used to reimburse these
costs.
Under the contract for the Nitram acquisition, the Company has certain rights to indemnification
against the selling stockholders for claims relating to breach of representation and certain other
claims, including litigation costs and damages. The Nitram selling stockholders previously placed
$10,920 of the purchase price in escrow to reimburse the Company for breach of representation and
certain other claims. The escrow amount, less any claim amounts made by the Company or amounts paid
to third parties as agreed upon by the Company and sellers, was released to the seller in five
installments on each of October 8, 2008, January 30, 2009, April 30, 2009, July 30, 2009 and
October 30, 2009. Certain claims made by the Company against the escrow are subject to a deductible
equal to one percent of the purchase price paid by the Company for the Nitram acquisition. Prior
to the final escrow payment release on October 30, 2009, the Company had filed claims with the
sellers relating to environmental matters and indemnification for breach of representations and
warranties of the Nitram purchase agreement, totaling approximately $1,998 against the escrow, and
a total of $1,388 was withheld from the escrow releases, which represents the Companys claims,
less the one percent deductible, estimated at $610. Following the final escrow release in October
2009, the Company has made additional claims directly against the selling stockholders under the
terms of the Nitram acquisition agreement totaling approximately $9,500, related to the customer
warranty dispute for the four Alco Products heat exchangers and other environmental matters. The
sellers have objected to the claims made by the Company and the parties are currently in the
process of negotiating the various claims. The Company does not believe it will have any
additional losses or claims against the former Nitram selling stockholders that are in excess of
the amounts already claimed or accrued as previously discussed.
From time to time the Company is involved in various litigation matters arising in the ordinary
course of its business. The Company accrues for its litigation contingencies when losses are both
probable and reasonably estimable.
71
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE M. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND WARRANTS
On September 4, 2009, the Company issued and sold 21,140 shares of Preferred Stock, par value $0.01
per share, and attached warrants to certain accredited investors (each a Purchaser and
collectively, the
Purchasers) for an aggregate purchase price of $21,140 (the Offering). The Company and each
Purchaser entered into a securities purchase agreement (the Purchase Agreement) in connection
with the Offering. The Offering was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the Securities Act). The Company used the $19,235 net
proceeds received from the Offering and available cash to repay all of the Companys outstanding
indebtedness under its subordinated term loan.
Preferred Stock
The terms, rights, obligations and preferences of the Preferred Stock are set forth in the
Certificate of Designations of the Preferred Stock (the Certificate of Designations) filed with
the Secretary of State of the State of Delaware on September 4, 2009.
Holders of the Preferred Stock are entitled to quarterly dividends at an annual rate of 6.0%. All
dividends are cumulative and compound quarterly and may be paid, at the option of the Company, in
cash or common stock, or a combination of the two. The Company paid $722 and $1,044 of cash
dividends during fiscal 2011 and fiscal 2010, respectively.
During
fiscal year 2011, holders of Preferred Stock converted all of the
outstanding shares of Preferred Stock into
2,642,500 shares of the Companys common stock. Each share of Preferred Stock converted into 125
shares of the Companys common stock, for a conversion rate of $8.00 per common share.
Warrants
The warrants entitle the holders to purchase 50% of the number of shares of common stock that may
be obtained upon conversion of the Preferred Stock, or 1,321,250 shares. The warrants have a
five-year term and became exercisable on March 4, 2010. The exercise price is equal to the closing
bid price of the common stock on September 3, 2009, or $10.56, and is not subject to anti-dilution
protection, except in the case of stock splits and dividends.
Initial Accounting
Under the initial accounting, the Company separated the Preferred Stock instrument into component
parts of the Preferred Stock host contract, the warrants and the Derivative Liability which
reflected the redemption and conversion rights of the Purchasers and the Company. The Company
estimated the fair value of each component as of the date of issuance and allocated net proceeds
initially to the fair value of the Derivative Liability, with any remaining net proceeds allocated
to the warrants, as paid-in-capital, and to Preferred Stock, as temporary equity.
72
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE M. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND WARRANTS CONTINUED
At September 4, 2009, the fair value of the Derivative Liability exceeded the net proceeds received
by the Company from the Preferred Stock issuance. Therefore, the Derivative Liability was recorded
at the amount of the net proceeds, and no value was assigned to the Preferred Stock host contract
or the warrants. The following is a summary of the proceeds from the issuance of the Preferred
Stock and the initial accounting of the issuance:
|
|
|
|
|
|
|
|
|
|
Cash proceeds from preferred stock issuance |
|
$ |
21,140 |
|
Transaction costs |
|
|
(1,905 |
) |
|
|
|
|
Net proceeds from preferred stock issuance |
|
$ |
19,235 |
|
|
|
|
|
|
|
|
|
|
Fair value of derivative liability |
|
$ |
19,235 |
|
Preferred Stock/temporary equity (relative fair value) |
|
|
|
|
Warrant/Equity (relative fair value) |
|
|
|
|
|
|
|
|
Net fair value of preferred stock, derivative and warrants |
|
$ |
19,235 |
|
|
|
|
|
See note Q for discussion of subsequent fair value adjustments.
NOTE N. COMMON STOCK
On February 25, 2010, the Company entered into an underwriting agreement with Needham & Company,
LLC (the Underwriter) and commenced a secondary public offering of shares of common stock. On
March 3, 2010, the Company closed the offering, which resulted in the sale of 1,495,000 shares of
common stock, par value $0.01 per share, at a price of $11.50 per share, which included the full
exercise of the Underwriters over allotment option to purchase 195,000 shares. Net proceeds of
$15,922 from the offering after deducting underwriting discounts, commissions and estimated
offering expenses were recorded to common stock and additional paid-in capital. In accordance with
the terms of its senior loan agreement, as amended, 50% of the net proceeds repaid a portion of the
outstanding senior term loan. The balance of the net proceeds is available for working capital and
other general corporate purposes.
NOTE O. STOCK-BASED COMPENSATION
The Company has three stock incentive plans. In December 1995, the Company adopted a stock option
and restricted stock plan (the 1995 Plan), which provided for a maximum of 960,000 shares of
common stock to be issued. In January 2002, the Company adopted a stock option and restricted
stock plan (the 2001 Plan), which provided for a maximum of 1,000,000 shares of common stock to
be issued. In November 2007, the Company adopted a stock option and restricted stock plan (the
2007 Plan), which provides for a maximum of 1,800,000 shares of common stock to be issued.
Shares are available for grant only under the 2007 Plan.
73
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE O. STOCK-BASED COMPENSATION CONTINUED
Restricted Stock
Under all plans, restricted stock awards are subject to a risk of forfeiture until the awards vest.
Awards made to employees generally vest ratably over four years. Awards made to non-employee
directors generally vest on the grant date. The fair value of the restricted stock awards is based
upon the market price of the underlying common stock as of the date of the grant and is amortized
over the applicable vesting period using the straight-line method.
A summary of the restricted stock award activity under the plans for the fiscal years 2011, 2010
and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011 |
|
|
Fiscal 2010 |
|
|
Fiscal 2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
|
Grant Date |
|
|
|
No. of Shares |
|
|
Fair Value |
|
|
No. of Shares |
|
|
Fair Value |
|
|
No. of Shares |
|
|
Fair Value |
|
Balance at beginning of period |
|
|
158,599 |
|
|
$ |
11.66 |
|
|
|
105,247 |
|
|
$ |
8.78 |
|
|
|
111,288 |
|
|
$ |
8.78 |
|
New Grants |
|
|
118,223 |
|
|
|
15.56 |
|
|
|
147,550 |
|
|
|
9.30 |
|
|
|
32,758 |
|
|
|
8.74 |
|
Vested |
|
|
(106,152 |
) |
|
|
12.95 |
|
|
|
(78,052 |
) |
|
|
10.43 |
|
|
|
(37,335 |
) |
|
|
8.84 |
|
Forfeited |
|
|
(19,517 |
) |
|
|
13.00 |
|
|
|
(16,146 |
) |
|
|
15.03 |
|
|
|
(1,464 |
) |
|
|
15.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
151,153 |
|
|
$ |
13.63 |
|
|
|
158,599 |
|
|
$ |
11.66 |
|
|
|
105,247 |
|
|
$ |
14.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense recognized in fiscal 2011, 2010 and 2009 was $1,359, $966 and $1,169,
respectively. As of July 2, 2011, the total remaining unrecognized compensation cost related to
unvested stock awards was $1,505. The weighted average remaining requisite service period of the
unvested stock awards was 1.77 years.
Stock Options
Under all stock incentive plans, stock options vest ratably over four years and expire ten years
from the date of grant. Under all plans, stock options are granted to employees at exercise prices
equal to the fair market value of the Companys common stock at the date of grant. The Company
recognizes stock option compensation expense over the requisite service period of the individual
grants, which equals the vesting period.
For the Companys stock-based compensation plans, the fair value of each stock option grant is
estimated at the date of grant using the Black-Scholes option pricing model. Black-Scholes utilizes
assumptions related to volatility, the risk-free interest rate, the dividend yield (which is
assumed to be zero, as the Company has not paid, nor anticipates paying cash dividends) and
employee exercise behavior. Expected volatilities utilized in the model are based mainly on the
historical volatility of the Companys stock price and other factors.
The Company did not grant any stock options during fiscal 2011, fiscal 2010, or fiscal 2009. The
Company uses newly issued shares of common stock to satisfy option exercises.
74
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE O. STOCK-BASED COMPENSATION CONTINUED
The Company recognized stock-based compensation costs from the vesting of stock options in the
amounts of $15 and $40 for the fiscal years 2010 and 2009, respectively, and related tax-benefits
of $5 and $14 for the fiscal years 2010 and 2009, respectively.
The Company presents cash flows from the exercise of stock options resulting from tax benefits in
excess of recognized cumulative compensation cost (excess tax benefits) as financing cash flows in
the Consolidated Statements of Cash Flows. For fiscal years 2011, 2010 and 2009, $411, $54 and $0,
respectively, of such excess tax benefits were classified as financing cash flows.
A summary of the option activity under the Companys stock-based compensation plans for the fiscal
years ended July 2, 2011 and June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011 |
|
|
Fiscal 2010 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
No. of Options |
|
|
Price |
|
|
No. of Options |
|
|
Price |
|
Balance at beginning of year |
|
|
176,858 |
|
|
$ |
3.80 |
|
|
|
207,948 |
|
|
$ |
3.74 |
|
Exercised |
|
|
(121,658 |
) |
|
|
3.62 |
|
|
|
(30,090 |
) |
|
|
3.40 |
|
Forfeited before vesting |
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
|
|
4.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
55,200 |
|
|
$ |
4.19 |
|
|
|
176,858 |
|
|
$ |
3.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
55,200 |
|
|
$ |
4.19 |
|
|
|
176,858 |
|
|
$ |
3.80 |
|
Options outstanding and exercisable at July 2, 2011 had a weighted average remaining term of 3.99
years and an aggregate intrinsic value of $874 based upon the closing price of the Companys common
stock on July 2, 2011. Options outstanding and exercisable at June 30, 2010 had a weighted average
remaining term of 3.88 years and an aggregate intrinsic value of $2,016 based upon the closing
price of the Companys common stock on June 30, 2010. A summary of the stock options exercised
during the fiscal years ended July 2, 2011, June 30, 2010 and June 30, 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Total cash received |
|
$ |
442 |
|
|
$ |
98 |
|
|
$ |
|
|
Income tax benefits |
|
|
411 |
|
|
|
54 |
|
|
|
|
|
Total intrinsic value of options exercised |
|
|
1,567 |
|
|
|
326 |
|
|
|
|
|
The Company had 45,544 unvested options at the beginning of fiscal 2009 of which 30,544 vested
during fiscal 2009. The Company had 15,000 unvested options at the beginning of fiscal 2010 of
which 14,000 vested and 1,000 forfeited during fiscal 2010.
75
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE P. STOCKHOLDER RIGHTS PLAN
On August 15, 2008, PMFG adopted a new stockholder rights plan. The new rights plan replaced the
Peerless rights plan, which was adopted in May 2007 and terminated in connection with the holding
company reorganization. The terms of the new stockholder rights plan are substantially similar to
the terms of the previous rights plan.
Stockholders of record at the close of business on August 15, 2008 received a dividend distribution
of one right for each share of common stock outstanding on that date. The rights generally will
become exercisable and allow the holder to acquire the Companys common stock at a discounted price
if a person or group (other than certain institutional investors specified in the rights plan)
acquires beneficial ownership of 20% or more of the Companys outstanding common stock. Rights
held by those that exceed the 20% threshold will be void.
The rights plan also includes an exchange option. In general, after the rights become exercisable,
the Board of Directors may, at its discretion, effect an exchange of part or all of the rights
(other than rights that have become void) for shares of the Companys common stock. Under this
option, the Company would issue one share of common stock for each right, subject to adjustment in
certain circumstances. The Board of Directors may, at its discretion, redeem all outstanding rights
for $0.001 per right at any time prior to the time the rights become exercisable. The rights will
expire on August 15, 2018, unless earlier redeemed, exchanged or amended by the Board of Directors.
NOTE Q. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value maximize the use of observable inputs and minimize the use of
unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs,
of which the first two are considered observable and the last unobservable.
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes
for transactions in active exchange markets involving identical assets. |
|
|
|
|
Level 2 Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical
or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant
value drivers are observable in active markets. These are
typically obtained from readily-available pricing sources for comparable instruments. |
|
|
|
|
Level 3 Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect
the reporting entitys own beliefs about the assumptions that market participants would use in pricing the asset or liability,
based on the best information available in the circumstances. |
76
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE Q. FAIR VALUE MEASUREMENTS CONTINUED
The Company considers the conversion rights and redemption options of the Preferred Stock to be
embedded derivatives and, as a result, the fair value of the Derivative Liability is reported on
the Consolidated Balance Sheets. The Company values the Derivative Liability using a Monte Carlo
simulation which contains significant unobservable, or Level 3, inputs. The use of valuation
techniques requires the Company to make various key assumptions for inputs into the model,
including assumptions about the expected behavior of the Preferred Stock holders and expected
future volatility of the price of the Companys common stock. During fiscal 2011, holders of the
Preferred Stock converted their preferred shares into the Companys common stock, effectively
eliminating the derivative liability of the conversion and redemption features. For the year ended
July 2, 2011, a decrease in fair value of $6,681 was recorded to other income in the Consolidated
Statements of Operations.
Recurring financial assets and liabilities measured at fair value on a recurring basis are
summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Derivatives related to conversion and redemption rights |
|
$ |
(25,916 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(25,916 |
) |
Interest Rate Cap |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
The following is a summary of changes to fair value measurements using Level 3 inputs during the
fiscal year ended July 2, 2011:
|
|
|
|
|
Balance, June 30, 2010 |
|
$ |
(25,916 |
) |
Change in fair value of derivative liability |
|
|
6,681 |
|
Preferred stock conversion |
|
|
19,235 |
|
|
|
|
|
Balance, July 2, 2011 |
|
$ |
|
|
|
|
|
|
The company reflected a writedown of its design guidelines to fair value based on Level 3 inputs as
further described in Note G.
NOTE R. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution pension plan under Section 401(k) of the Internal
Revenue Code for eligible employees who have completed at least 90 days of service. Company
contributions are voluntary and at the discretion of the Board of Directors. The Companys
contribution expense for the fiscal years ended July 2, 2011, June 30, 2010 and June 30, 2009 was
$589, $116 and $482, respectively.
77
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE S. INCOME TAXES
The Companys earnings (loss) before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
United States |
|
$ |
1,201 |
|
|
$ |
(3,208 |
) |
|
$ |
730 |
|
International |
|
|
1,577 |
|
|
|
241 |
|
|
|
2,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,778 |
|
|
$ |
(2,967 |
) |
|
$ |
3,603 |
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes are provided for the temporary differences between the financial reporting bases and
the tax bases of the Companys assets and liabilities. The temporary differences that give rise to
the deferred tax assets or liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
186 |
|
|
$ |
333 |
|
Accrued liabilities |
|
|
1,342 |
|
|
|
1,446 |
|
Accounts receivable |
|
|
168 |
|
|
|
294 |
|
Net operating loss carry-forwards |
|
|
206 |
|
|
|
211 |
|
Stock based compensation |
|
|
256 |
|
|
|
252 |
|
Deferred rent |
|
|
82 |
|
|
|
79 |
|
Other |
|
|
|
|
|
|
39 |
|
|
|
$ |
2,240 |
|
|
$ |
2,654 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
(1,184 |
) |
|
$ |
(1,227 |
) |
Intangible assets |
|
|
(6,178 |
) |
|
|
(7,841 |
) |
Equity method investment |
|
|
|
|
|
|
|
|
Other |
|
|
(61 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
(7,423 |
) |
|
|
(9,135 |
) |
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(5,183 |
) |
|
$ |
(6,481 |
) |
|
|
|
|
|
|
|
Deferred tax assets and liabilities included in the consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
July 2, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset, net |
|
$ |
1,952 |
|
|
$ |
2,067 |
|
Non-current deferred tax liability, net |
|
|
(7,135 |
) |
|
|
(8,548 |
) |
|
|
|
|
|
|
|
|
|
$ |
(5,183 |
) |
|
$ |
(6,481 |
) |
|
|
|
|
|
|
|
78
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE S. INCOME TAXES CONTINUED
The expense for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Current tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2,286 |
|
|
$ |
(1,566 |
) |
|
$ |
(3,124 |
) |
State |
|
|
(65 |
) |
|
|
(107 |
) |
|
|
(141 |
) |
Foreign |
|
|
(436 |
) |
|
|
(74 |
) |
|
|
(804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,785 |
|
|
|
(1,747 |
) |
|
|
(4,069 |
) |
Deferred tax benefit |
|
|
1,298 |
|
|
|
532 |
|
|
|
3,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,083 |
|
|
$ |
(1,215 |
) |
|
$ |
(707 |
) |
|
|
|
|
|
|
|
|
|
|
The income tax expense varies from the federal statutory rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Income tax (expense) benefit at federal statutory rate |
|
$ |
(945 |
) |
|
$ |
1,009 |
|
|
$ |
(1,225 |
) |
Decrease (increase) in income tax expense
resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State tax, net of federal benefit |
|
|
(43 |
) |
|
|
(67 |
) |
|
|
(93 |
) |
Gain (loss) on change in fair value of derivative liability |
|
|
2,272 |
|
|
|
(2,271 |
) |
|
|
|
|
Effect of lower tax rate on foreign income |
|
|
49 |
|
|
|
14 |
|
|
|
174 |
|
Domestic Production and other permanent items |
|
|
(47 |
) |
|
|
102 |
|
|
|
399 |
|
Research and development expenditure credits |
|
|
2,054 |
|
|
|
|
|
|
|
|
|
Changes in
uncertain tax positions |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
137 |
|
|
|
(2 |
) |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
$ |
3,083 |
|
|
$ |
(1,215 |
) |
|
$ |
(707 |
) |
|
|
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
224 |
|
|
$ |
194 |
|
|
$ |
287 |
|
Adjustments for tax positions of prior years |
|
|
394 |
|
|
|
30 |
|
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
618 |
|
|
$ |
224 |
|
|
$ |
194 |
|
|
|
|
|
|
|
|
|
|
|
The Company is subject to income taxes in the U.S. federal jurisdiction and various states and
foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation
of the related tax laws and regulations and require significant judgment to apply. With few
exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income
tax examinations by authorities for the tax years before 2008.
79
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE S. INCOME TAXES CONTINUED
The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense
and penalties in income tax expense for all periods presented. During the fiscal years ended July
2, 2011, June 30, 2010 and June 30, 2009, the Company recognized $14, $(23) and $24 in interest and
penalties. The Company had accrued $64 and $53 for the payment of interest and penalties at July
2, 2011 and June 30, 2010, respectively.
The Company has elected to treat foreign earnings as permanently reinvested outside the U.S. and
has not provided U.S. tax expense on those earnings.
NOTE T. EARNINGS PER SHARE
Basic earnings per share have been computed by dividing net earnings by the weighted average number
of common shares outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if options and warrants were exercised into common stock. Restricted
stock is considered a participating security and is included in the computation of basic earnings
per share as if vested. Preferred Stock participates in the income of the Company. Earnings per
share is calculated by applying the two class method in which undistributed earnings of the Company
are allocated between the Preferred Stock and Common Stock to arrive at earnings per share of
common stock. The following table sets forth the computation for basic and diluted earnings per
share for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Net earnings (loss) attributable to PMFG, Inc.
common shareholders |
|
$ |
5,027 |
|
|
$ |
(5,207 |
) |
|
$ |
2,896 |
|
Less net earnings allocated to preferred shareholders |
|
|
(416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) allocated to common shareholders |
|
$ |
4,611 |
|
|
$ |
(5,207 |
) |
|
$ |
2,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
16,091 |
|
|
|
13,716 |
|
|
|
12,961 |
|
Effect of dilutive options and restricted stock |
|
|
571 |
|
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
16,662 |
|
|
|
13,716 |
|
|
|
13,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
0.29 |
|
|
$ |
(0.38 |
) |
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
0.28 |
|
|
$ |
(0.38 |
) |
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
Because holders of Preferred Stock do not participate in losses, the loss was not allocated to
Preferred Stock for fiscal year 2010. Diluted earnings per common share include the dilutive
effect of stock options and warrants granted using the treasury stock method. Options to acquire
94,263 shares of common stock equivalents and warrants to purchase 349,473 shares of common stock
equivalents were omitted from the calculation of dilutive securities for fiscal 2010 because they
were anti-dilutive.
80
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE U. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two reportable segments: Process Products and Environmental Systems. The Nitram
acquisition is included in the Process Products segment. The main product of the Environmental
Systems segment is its Selective Catalytic Reduction Systems, referred to as SCR systems. These
environmental control systems are used for air pollution abatement and converting nitrogen oxide
(NOx) emissions from exhaust gases caused by burning hydrocarbon fuels such as coal, gasoline,
natural gas and oil. Along with the SCR Systems, this segment offers systems to reduce other
pollutants such as carbon monoxide (CO) and particulate matter. The Company combines these systems
with other components, such as instruments, controls and related valves and piping to offer its
customers a totally integrated system. The Process Products segment produces various types of
separators and filters used for removing liquids and solids from gases and air. The segment also
includes industrial silencing equipment to control noise pollution on a wide range of industrial
processes and heat transfer equipment to conserve energy in many industrial processes and in
petrochemical processing.
Segment profit and loss is based on revenue less direct expenses of the segment before allocation
of general, administrative, research and development costs. All inter-company transfers between
segments have been eliminated. The Company allocates all costs associated with the manufacture,
sale and design of its products to the appropriate segment. Segment information and reconciliation
to operating profit for the fiscal years ended July 2, 2011, June 30, 2010 and June 30, 2009 are
presented below. The Company does not allocate general and administrative expenses (reconciling
items), assets, expenditures for assets or depreciation of
corporate assets on a segment basis for internal management reporting; therefore this information is not presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
Fiscal |
|
|
Fiscal |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Environmental |
|
$ |
32,918 |
|
|
$ |
26,692 |
|
|
$ |
34,745 |
|
Process Products |
|
|
88,876 |
|
|
|
90,083 |
|
|
|
123,261 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
121,794 |
|
|
$ |
116,775 |
|
|
$ |
158,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Environmental |
|
$ |
6,214 |
|
|
$ |
6,970 |
|
|
$ |
6,878 |
|
Process Products |
|
|
11,825 |
|
|
|
16,328 |
|
|
|
17,701 |
|
Reconciling items |
|
|
(20,266 |
) |
|
|
(14,950 |
) |
|
|
(15,152 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
(2,227 |
) |
|
$ |
8,348 |
|
|
$ |
9,427 |
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers based on the location of the customer is as follows for the fiscal
years ended July 2, 2011, June 30, 2010 and June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
United States |
|
|
International |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
$ |
75,223 |
|
|
$ |
46,571 |
|
|
$ |
121,794 |
|
2010 |
|
|
75,814 |
|
|
|
40,961 |
|
|
|
116,775 |
|
2009 |
|
|
104,613 |
|
|
|
53,393 |
|
|
|
158,006 |
|
81
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE U. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION CONTINUED
Identifiable long-lived assets of geographic areas are those assets related to the Companys
operations in each area as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
United States |
|
|
International |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
$ |
7,466 |
|
|
$ |
1,388 |
|
|
$ |
8,854 |
|
2010 |
|
|
6,421 |
|
|
|
1,085 |
|
|
|
7,506 |
|
2009 |
|
|
8,233 |
|
|
|
232 |
|
|
|
8,465 |
|
For the fiscal years 2011, 2010, or 2009, there were no sales to a single customer located outside
the United States that accounted for 10% or more of the Companys consolidated revenue.
82
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
NOTE V. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following tables represent the quarterly consolidated financial data of the Company for fiscal
2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011 |
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
26,961 |
|
|
$ |
26,294 |
|
|
$ |
33,985 |
|
|
$ |
34,554 |
|
|
$ |
121,794 |
|
Gross profit |
|
|
8,741 |
|
|
|
8,126 |
|
|
|
10,696 |
|
|
|
10,844 |
|
|
|
38,407 |
|
Operating expenses |
|
|
8,785 |
|
|
|
8,375 |
|
|
|
9,866 |
|
|
|
13,608 |
|
|
|
40,634 |
|
Operating income (loss) |
|
|
(44 |
) |
|
|
(249 |
) |
|
|
830 |
|
|
|
(2,764 |
) |
|
|
(2,227 |
) |
Net earnings (loss) |
|
|
(5,963 |
) |
|
|
6,839 |
|
|
|
4,962 |
|
|
|
23 |
|
|
|
5,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(0.43 |
) |
|
$ |
0.37 |
|
|
$ |
0.28 |
|
|
$ |
0.00 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(0.43 |
) |
|
$ |
0.36 |
|
|
$ |
0.27 |
|
|
$ |
0.00 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 |
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
31,331 |
|
|
$ |
24,529 |
|
|
$ |
32,221 |
|
|
$ |
28,694 |
|
|
$ |
116,775 |
|
Gross profit |
|
|
11,767 |
|
|
|
8,268 |
|
|
|
11,677 |
|
|
|
10,723 |
|
|
|
42,435 |
|
Operating expenses |
|
|
8,804 |
|
|
|
8,080 |
|
|
|
8,137 |
|
|
|
9,066 |
|
|
|
34,087 |
|
Operating income |
|
|
2,963 |
|
|
|
188 |
|
|
|
3,540 |
|
|
|
1,657 |
|
|
|
8,348 |
|
Net earnings (loss) |
|
|
(2,091 |
) |
|
|
(5,921 |
) |
|
|
5,736 |
|
|
|
(1,906 |
) |
|
|
(4,182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(0.16 |
) |
|
$ |
(0.47 |
) |
|
$ |
0.33 |
|
|
$ |
(0.15 |
) |
|
$ |
(0.38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(0.16 |
) |
|
$ |
(0.47 |
) |
|
$ |
0.32 |
|
|
$ |
(0.15 |
) |
|
$ |
(0.38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
43,656 |
|
|
$ |
39,105 |
|
|
$ |
37,651 |
|
|
$ |
37,594 |
|
|
$ |
158,006 |
|
Gross profit |
|
|
11,277 |
|
|
|
12,279 |
|
|
|
11,764 |
|
|
|
13,283 |
|
|
|
48,603 |
|
Operating expenses |
|
|
10,362 |
|
|
|
10,408 |
|
|
|
9,429 |
|
|
|
8,977 |
|
|
|
39,176 |
|
Operating income |
|
|
915 |
|
|
|
1,871 |
|
|
|
2,335 |
|
|
|
4,306 |
|
|
|
9,427 |
|
Net earnings from discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
(666 |
) |
|
|
494 |
|
|
|
441 |
|
|
|
2,627 |
|
|
|
2,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(0.05 |
) |
|
$ |
0.04 |
|
|
$ |
0.03 |
|
|
$ |
0.20 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(0.05 |
) |
|
$ |
0.04 |
|
|
$ |
0.03 |
|
|
$ |
0.20 |
|
|
$ |
0.22 |
|
83
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive
officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act)) as of the end of the period covered by this Form 10-K. Based on that
evaluation, our chief executive officer and chief financial officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this report and were
designed to provide reasonable assurance of achieving their objectives.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over
financial reporting is a process designed under the supervision of our chief executive officer and
our chief financial officer, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in accordance with generally accepted
accounting principles.
Management has assessed the effectiveness of the Companys internal control over financial
reporting as of July 2, 2011. In making this assessment, management used the criteria described in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on managements assessment, we concluded that internal control over
financial reporting was effective as of July 2, 2011. Our independent registered public accounting
firm, Grant Thornton LLP, has audited the effectiveness of our internal control over financial
reporting, as stated in their attestation report which is included herein.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during the fourth
quarter of the period covered by this Form 10-K that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
84
Limitations on Controls
Management does not expect that our disclosure control and our internal control over financial
reporting will prevent or detect all misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions or that the degree of compliance with policies and procedures may
deteriorate. Any control system, no matter how well designed and operated, is based upon certain
assumptions and can only provide reasonable, not absolute, assurance that its objectives will be
met. Further, no evaluation of controls can provide absolute assurance that misstatements due to
errors or fraud will not occur or that all control issues and instances of fraud, if any within the
Company, have been detected. Notwithstanding the foregoing, the Companys disclosure controls and
procedures are designed to provide reasonable assurance of achieving their objectives and our
principal executive officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this report.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION. |
None.
85
PART III
|
|
|
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The information required by Item 10 with respect to our executive officers is included under
the caption Executive Officers of the Registrant in Item 1 of Part I of this Form 10-K and is
incorporated herein by reference. The information required by Item 10 with respect to our
directors and director nominees is incorporated herein by reference to the information included
under the caption Election of Directors in our Proxy Statement for the 2011 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
The information required by Item 10 with respect to compliance with Section 16(a) of the
Exchange Act is incorporated herein by reference to the information included under the caption
Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement for the 2011
Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
The information required by Item 10 with respect to our audit committee and our audit
committee financial expert is incorporated herein by reference to the information included under
the caption Board Meetings, Committees and Compensation in our Proxy Statement for the 2011
Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
The information required by Item 10 with respect to our Code of Conduct for Directors and
Employees is incorporated herein by reference to the information included under the caption Code
of Conduct in our Proxy Statement for the 2011 Annual Meeting of Stockholders to be filed pursuant
to Regulation 14A. Our Code of Conduct for Directors and Employees is posted on our website at
www.peerlessmfg.com in the Investor Relations section under Corporate Governance and is
available in print to any stockholder who requests a copy. The code applies to our principal
executive officer, principal financial officer, principal accounting officer and others performing
similar functions. If we make any substantive amendments to the code, or grant any waivers to the
code for any of our executive officers or directors, we will disclose the amendment or waiver on
our website.
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION. |
The information required by Item 11 is incorporated herein by reference to the information
included under the captions Compensation Discussion and Analysis, Executive Compensation and
Board Meetings, Committees and Compensation in our Proxy Statement for the 2011 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS. |
The information required by Item 12 is incorporated herein by reference to the information
included under the caption Security Ownership of Management and Certain Beneficial Owners and
Executive Compensation in our Proxy Statement for the 2011 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A.
86
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. |
The information required by Item 13 is incorporated herein by reference to the information
included under the caption Executive Compensation Certain Relationships and Related
Transactions in our Proxy Statement for the 2011 Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The information required by Item 14 is incorporated herein by reference to the information
included under the caption Independent Registered Public Accounting Firm in our Proxy Statement
for the 2011 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
87
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
The following audited consolidated financial statements are filed as part of this Form 10-K under
Item 8. Financial Statements and Supplementary Data.
|
|
|
|
|
Financial Statements: |
|
|
|
|
|
|
|
|
|
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at July 2, 2011 and June 30, 2010 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations for the years ended July 2, 2011, June 30, 2010 and June 30,
2009 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Stockholders Equity and Comprehensive Income for the years ended
July 2, 2011, June 30, 2010 and June 30, 2009 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended July 2, 2011, June 30, 2010 and June 30,
2009 |
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
|
|
Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting regulation of the SEC have
been omitted because of the absence of the conditions under which they would be required or because
the information required is included in the consolidated financial statements or notes thereto.
Exhibits:
|
|
|
|
|
Exhibit |
|
|
No. |
|
Exhibit Description |
|
2.1 |
|
|
Stock Purchase Agreement dated April 7, 2008, by and among Peerless Mfg. Co.,
Nitram Energy, Inc. and the shareholders of Nitram Energy, Inc. (filed as Exhibit
2.1 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on April 9, 2008
and incorporated herein by reference). |
|
|
|
|
|
|
2.2 |
|
|
Agreement and Plan of Merger by and among Peerless Mfg. Co., PMFG, Inc. and PMFG
Merger Sub, Inc., dated January 10, 2008 (included as Annex A to the proxy
statement/prospectus that is a part of our Registration Statement on Form S-4
(File No. 333-148577) filed on January 10, 2008 and incorporated herein by
reference). |
|
|
|
|
|
|
3.1 |
|
|
Second Amended and Restated Certificate of Incorporation (included as Annex A to
the definitive proxy statement filed by PMFG, Inc. on April 21, 2010 and
incorporated herein by reference). |
|
|
|
|
|
|
3.2 |
|
|
Bylaws, as amended and restated (filed as Exhibit 3.2 to the Current Report on
Form 8-K filed by PMFG, Inc. on August 15, 2008 and incorporated herein by
reference). |
|
|
|
|
|
|
3.3 |
|
|
Certificate of Designations of Series A Convertible Preferred Stock (filed as
Exhibit 3.1 to the Current Report on Form 8-K filed by PMFG, Inc. on September 8,
2009 and incorporated herein by reference). |
|
|
|
|
|
|
4.1 |
|
|
Rights Agreement, dated August 15, 2008, between PMFG, Inc. and Mellon Investor
Services LLC, as Rights Agent (filed as Exhibit 4.1 to the Registration Statement
on Form 8-A (File No. 001-34156) filed by PMFG, Inc. on August 15, 2008 and
incorporated herein by reference). |
88
|
|
|
|
|
Exhibit |
|
|
No. |
|
Exhibit Description |
|
10.1 |
|
|
Revolving Credit and Term Agreement, dated April 30, 2008, between Peerless Mfg.
Co., PMC Acquisition, Inc., PMFG, Inc., Comerica Bank and other lenders a party
thereto (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by Peerless
Mfg. Co. on May 5, 2008 and incorporated herein by reference). |
|
|
|
|
|
|
10.2 |
|
|
Consent and First Amendment to Credit Agreement, dated September 4, 2009, between
Peerless Mfg. Co., PMC Acquisition, Inc., Nitram Energy, Inc., Bos-Hatten, Inc.,
Burgess-Manning, Inc., Burman Management, Inc., Comerica Bank and other lenders a
party thereto (filed as Exhibit 10.3 to the Current Report on Form 8-K filed by
PMFG, Inc. on September 8, 2009 and incorporated herein by reference). |
|
|
|
|
|
|
10.3 |
|
|
Second Amendment to Credit Agreement, dated September 9, 2009, between Peerless
Mfg. Co., PMFG, Inc., Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning,
Inc., Burman Management, Inc., Comerica Bank and other lenders a party thereto
(filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on
September 14, 2009 and incorporated herein by reference). |
|
|
|
|
|
|
10.4 |
|
|
Third Amendment to Credit Agreement, dated July 12, 2010, between PMFG, Inc.,
Peerless Mfg. Co., PMC Acquisition, Inc., Comerica Bank and other lenders a party
thereto (filed as Exhibit 10.4 to the Annual Report on Form 10-K filed by PMFG,
Inc. on September 13, 2010 and incorporated herein by reference). |
|
|
|
|
|
|
10.5 |
|
|
Fourth Amendment to Credit Agreement, dated December 29, 2010, between Peerless
Mfg. Co., Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman
Management, Inc., PMFG, Inc., Comerica Bank and other lenders a party thereto
(filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on
December 20, 2010 and incorporated herein by reference). |
|
|
|
|
|
|
10.6 |
|
|
Fifth Amendment to Credit Agreement, dated February 8, 2011, between Peerless Mfg.
Co., Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman
Management, Inc., PMFG, Inc., Comerica Bank and other lenders a party thereto
(filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on
February 8, 2011 and incorporated herein by reference). |
|
|
|
|
|
|
10.7 |
|
|
Sixth Amendment to Credit Agreement, dated May 6, 2011, between Peerless Mfg. Co.,
Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman Management,
Inc., PMFG, Inc., Comerica Bank and other lenders a party thereto (filed as
Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on May 6, 2011
and incorporated herein by reference). |
|
|
|
|
|
|
10.8 |
|
|
Seventh Amendment to Credit Agreement, dated September 12, 2011, between Peerless
Mfg. Co., Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman
Management, Inc., PMFG, Inc., Comerica Bank and other lenders a party thereto. |
89
|
|
|
|
|
Exhibit |
|
|
No. |
|
Exhibit Description |
|
10.9 |
|
|
Securities Purchase Agreement dated September 4, 2009, by and among PMFG, Inc. and
certain accredited investors (filed as Exhibit 10.2 to the Current Report on Form
8-K filed by PMFG, Inc. on September 8, 2009 and incorporated herein by
reference). |
|
|
|
|
|
|
10.10 |
* |
|
Employment Agreement, dated July 12, 2010, between Peerless Mfg. Co. and John H.
Conroy (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG,
Inc. on December 14, 2010 and incorporated herein by reference.) |
|
|
|
|
|
|
10.11 |
|
|
Form of Common Stock Purchase Warrant dated September 4, 2009, filed as Exhibit
10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on September 8, 2009
and incorporated herein by reference). |
|
|
|
|
|
|
10.12 |
* |
|
Employment Agreement, dated April 25, 2011, between Peerless Mfg. Co. and Mr.
Ronald L. McCrummen (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, filed on April 25, 2011). |
|
|
|
|
|
|
10.13 |
* |
|
Letter Agreement, dated May 24, 2011, between Peerless Mfg. Co. and Mr. Henry G.
Schopfer (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG,
Inc. on May 27, 2011 and incorporated herein by reference). |
|
|
10.14 |
* |
|
Assignment and Assumption Agreement, dated August 15, 2008, between Peerless Mfg.
Co. and PMFG, Inc. (filed as Exhibit 10.4 to the Companys Current Report on Form
8-K filed by PMFG, Inc. on August 15, 2008 and incorporated herein by reference). |
|
|
|
|
|
|
10.15 |
* |
|
Amended and Restated Employment Agreement, dated March 1, 2010 between Peerless
Mfg. Co. and Peter J. Burlage (filed as Exhibit 10.1 to the Current Report on Form
8-K filed by PMFG, Inc. on March 1, 2010 and incorporated herein by reference). |
|
|
|
|
|
|
10.16 |
* |
|
Employment Agreement, dated November 3, 2009, between Peerless Mfg. Co. and Warren
Hayslip (filed as Exhibit 10.1 to the Current Report Form 8-K filed by PMFG, Inc.
on November 4, 2010, and incorporated herein by reference). |
|
|
|
|
|
|
10.17 |
* |
|
1995 Stock Option and Restricted Stock Plan for Employees of Peerless Mfg. Co., as
amended and restated (filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on August 15, 2008 and incorporated herein by reference). |
|
|
|
|
|
|
10.18 |
* |
|
2001 Stock Option and Restricted Stock Plan for Employees of Peerless Mfg. Co., as
amended and restated (filed as Exhibit 10.2 to the Companys Current Report on
Form 8-K filed on August 15, 2008 and incorporated herein by reference). |
|
|
|
|
|
|
10.19 |
* |
|
PMFG, Inc. 2007 Stock Incentive Plan, as amended and restated (filed as Exhibit
10.3 to the Companys Current Report on Form 8-K filed by PMFG, Inc. on August 15,
2008 and incorporated herein by reference). |
90
|
|
|
|
|
Exhibit |
|
|
No. |
|
Exhibit Description |
|
10.20 |
* |
|
Form of Non-Employee Director Stock Option Agreement under the 2001 Stock Option
and Restricted Stock Plan for Employees of Peerless Mfg. Co., as amended and
restated (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by
Peerless Mfg. Co. on February 9, 2005 and incorporated herein by reference). |
|
|
|
|
|
|
10.21 |
* |
|
Form of Executive Stock Option Agreement under the 2001 Stock Option and
Restricted Stock Plan for Employees of Peerless Mfg. Co., as amended and restated
(filed as Exhibit 10.3 to the Current Report on Form 8-K filed by Peerless Mfg.
Co. on February 9, 2005 and incorporated herein by reference). |
|
|
|
|
|
|
10.22 |
* |
|
Form of Restricted Stock Agreement under the 2001 Stock Option and Restricted
Stock Plan for Employees of Peerless Mfg. Co., as amended and restated (filed as
Exhibit 10.1 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on
November 4, 2005 and incorporated herein by reference). |
|
|
|
|
|
|
10.23 |
* |
|
Form of Nonqualified Stock Option Award Agreement under the PMFG, Inc. 2007 Stock
Incentive Plan, modified as of August 15, 2008 to substitute PMFG, Inc. for
Peerless Mfg. Co. as a result of the holding company reorganization (filed as
Exhibit 10.2 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on
November 16, 2007 and incorporated herein by reference). |
|
|
|
|
|
|
10.24 |
* |
|
Form of Restricted Stock Award Agreement for Employees under the PMFG, Inc. 2007
Stock Incentive Plan, modified as of August 15, 2008 to substitute PMFG, Inc. for
Peerless Mfg. Co. as a result of the holding company reorganization (filed as
Exhibit 10.3 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on
November 16, 2007 and incorporated herein by reference). |
|
|
|
|
|
|
10.25 |
* |
|
Form of Restricted Stock Award Agreement for Non-Employee Directors under the
PMFG, Inc. 2007 Stock Incentive Plan, modified as of August 15, 2008 to substitute
PMFG, Inc. for Peerless Mfg. Co. as a result of the holding company reorganization
(filed as Exhibit 10.4 to the Current Report on Form 8-K filed by Peerless Mfg.
Co. on November 16, 2007 and incorporated herein by reference). |
|
|
|
|
|
|
10.26 |
* |
|
Form of Director and Officer Indemnification Agreement (filed as Exhibit 10.1 to
our Registration Statement on Form S-4 (File No. 333-148577) filed on January 10,
2008 and incorporated herein by reference. |
|
|
|
|
|
|
10.27 |
|
|
CEFCO Process Manufacturing License Agreement, dated July 12, 2010 (filed as
Exhibit 10.1 to the Current Report on Form 8-K filed on July 12, 2010 and
incorporated herein by reference). |
|
|
|
|
|
|
21.1 |
|
|
Subsidiaries of PMFG, Inc. |
|
|
|
|
|
|
23.1 |
|
|
Consent of Grant Thornton LLP. |
|
|
|
|
|
|
31.1 |
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer. |
|
|
|
|
|
|
31.2 |
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer. |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. |
|
|
|
* |
|
Management contract, compensatory plan or arrangement |
91
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
Date: September 14, 2011 |
PMFG, INC.
|
|
|
By: |
/s/ Peter J. Burlage
|
|
|
|
Peter J. Burlage |
|
|
|
President and Chief Executive Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated on
September 14, 2011.
|
|
|
|
|
/s/ Sherrill Stone
Sherrill Stone
|
|
|
|
Chairman of the Board |
|
|
|
|
|
/s/ Peter J. Burlage
Peter J. Burlage
|
|
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer) |
|
|
|
|
|
/s/ Ronald L. McCrummen
Ronald L. McCrummen
|
|
|
|
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
|
|
|
/s/ Kenneth R. Hanks
Kenneth R. Hanks
|
|
|
|
Director |
|
|
|
|
|
/s/ Robert McCashin
Robert McCashin
|
|
|
|
Director |
|
|
|
|
|
|
|
|
|
Director |
|
|
|
|
|
/s/ Howard G. Westerman, Jr.
Howard G. Westerman, Jr.
|
|
|
|
Director |
92
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit |
|
|
No. |
|
Exhibit Description |
|
2.1 |
|
|
Stock Purchase Agreement dated April 7, 2008, by and among Peerless Mfg. Co.,
Nitram Energy, Inc. and the shareholders of Nitram Energy, Inc. (filed as Exhibit
2.1 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on April 9, 2008
and incorporated herein by reference). |
|
|
|
|
|
|
2.2 |
|
|
Agreement and Plan of Merger by and among Peerless Mfg. Co., PMFG, Inc. and PMFG
Merger Sub, Inc., dated January 10, 2008 (included as Annex A to the proxy
statement/prospectus that is a part of our Registration Statement on Form S-4
(File No. 333-148577) filed on January 10, 2008 and incorporated herein by
reference). |
|
|
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3.1 |
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Second Amended and Restated Certificate of Incorporation (included as Annex A to
the definitive proxy statement filed by PMFG, Inc. on April 21, 2010 and
incorporated herein by reference). |
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3.2 |
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Bylaws, as amended and restated (filed as Exhibit 3.2 to the Current Report on
Form 8-K filed by PMFG, Inc. on August 15, 2008 and incorporated herein by
reference). |
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3.3 |
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Certificate of Designations of Series A Convertible Preferred Stock (filed as
Exhibit 3.1 to the Current Report on Form 8-K filed by PMFG, Inc. on September 8,
2009 and incorporated herein by reference). |
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4.1 |
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Rights Agreement, dated August 15, 2008, between PMFG, Inc. and Mellon Investor
Services LLC, as Rights Agent (filed as Exhibit 4.1 to the Registration Statement
on Form 8-A (File No. 001-34156) filed by PMFG, Inc. on August 15, 2008 and
incorporated herein by reference). |
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10.1 |
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Revolving Credit and Term Agreement, dated April 30, 2008, between Peerless Mfg.
Co., PMC Acquisition, Inc., PMFG, Inc., Comerica Bank and other lenders a party
thereto (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by Peerless
Mfg. Co. on May 5, 2008 and incorporated herein by reference). |
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10.2 |
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Consent and First Amendment to Credit Agreement, dated September 4, 2009, between
Peerless Mfg. Co., PMC Acquisition, Inc., Nitram Energy, Inc., Bos-Hatten, Inc.,
Burgess-Manning, Inc., Burman Management, Inc., Comerica Bank and other lenders a
party thereto (filed as Exhibit 10.3 to the Current Report on Form 8-K filed by
PMFG, Inc. on September 8, 2009 and incorporated herein by reference). |
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10.3 |
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Second Amendment to Credit Agreement, dated September 9, 2009, between Peerless
Mfg. Co., PMFG, Inc., Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning,
Inc., Burman Management, Inc., Comerica Bank and other lenders a party thereto
(filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on
September 14, 2009 and incorporated herein by reference). |
93
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Exhibit |
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No. |
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Exhibit Description |
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10.4 |
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Third Amendment to Credit Agreement, dated July 12, 2010, between PMFG, Inc.,
Peerless Mfg. Co., PMC Acquisition, Inc., Comerica Bank and other lenders a party
thereto (filed as Exhibit 10.4 to the Annual Report on Form 10-K filed by PMFG,
Inc. on September 13, 2010 and incorporated herein by reference). |
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10.5 |
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Fourth Amendment to Credit Agreement, dated December 29, 2010, between Peerless
Mfg. Co., Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman
Management, Inc., PMFG, Inc., Comerica Bank and other lenders a party thereto
(filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on
December 20, 2010 and incorporated herein by reference). |
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10.6 |
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Fifth Amendment to Credit Agreement, dated February 8, 2011, between Peerless Mfg.
Co., Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman
Management, Inc., PMFG, Inc., Comerica Bank and other lenders a party thereto
(filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on
February 8, 2011 and incorporated herein by reference). |
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10.7 |
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Sixth Amendment to Credit Agreement, dated May 6, 2011, between Peerless Mfg. Co.,
Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman Management,
Inc., PMFG, Inc., Comerica Bank and other lenders a party thereto (filed as
Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on May 6, 2011
and incorporated herein by reference). |
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10.8 |
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Seventh Amendment to Credit Agreement, dated September 12, 2011, between Peerless
Mfg. Co., Nitram Energy, Inc., Bos-Hatten, Inc., Burgess-Manning, Inc., Burman
Management, Inc., PMFG, Inc., Comerica Bank and other lenders a party thereto. |
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10.9 |
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Securities Purchase Agreement dated September 4, 2009, by and among PMFG, Inc. and
certain accredited investors (filed as Exhibit 10.2 to the Current Report on Form
8-K filed by PMFG, Inc. on September 8, 2009 and incorporated herein by
reference). |
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10.10 |
* |
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Employment Agreement, dated July 12, 2010, between Peerless Mfg. Co. and John H.
Conroy (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG,
Inc. on December 14, 2010 and incorporated herein by reference.) |
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10.11 |
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Form of Common Stock Purchase Warrant dated September 4, 2009, filed as Exhibit
10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on September 8, 2009
and incorporated herein by reference). |
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10.12 |
* |
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Employment Agreement, dated April 25, 2011, between Peerless Mfg. Co. and Mr.
Ronald L. McCrummen (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, filed on April 25, 2011). |
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10.13 |
* |
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Letter Agreement, dated May 24, 2011, between Peerless Mfg. Co. and Mr. Henry G.
Schopfer (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG,
Inc. on May 27, 2011 and incorporated herein by reference). |
94
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Exhibit |
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No. |
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Exhibit Description |
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10.14 |
* |
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Assignment and Assumption Agreement, dated August 15, 2008, between Peerless Mfg.
Co. and PMFG, Inc. (filed as Exhibit 10.4 to the Companys Current Report on Form
8-K filed by PMFG, Inc. on August 15, 2008 and incorporated herein by reference). |
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10.15 |
* |
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Amended and Restated Employment Agreement, dated March 1, 2010 between Peerless
Mfg. Co. and Peter J. Burlage (filed as Exhibit 10.1 to the Current Report on Form
8-K filed by PMFG, Inc. on March 1, 2010 and incorporated herein by reference). |
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10.16 |
* |
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Employment Agreement, dated November 3, 2009, between Peerless Mfg. Co. and Warren
Hayslip (filed as Exhibit 10.1 to the Current Report Form 8-K filed by PMFG, Inc.
on November 4, 2010, and incorporated herein by reference). |
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10.17 |
* |
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1995 Stock Option and Restricted Stock Plan for Employees of Peerless Mfg. Co., as
amended and restated (filed as Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on August 15, 2008 and incorporated herein by reference). |
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10.18 |
* |
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2001 Stock Option and Restricted Stock Plan for Employees of Peerless Mfg. Co., as
amended and restated (filed as Exhibit 10.2 to the Companys Current Report on
Form 8-K filed on August 15, 2008 and incorporated herein by reference). |
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10.19 |
* |
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PMFG, Inc. 2007 Stock Incentive Plan, as amended and restated (filed as Exhibit
10.3 to the Companys Current Report on Form 8-K filed by PMFG, Inc. on August 15,
2008 and incorporated herein by reference). |
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10.20 |
* |
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Form of Non-Employee Director Stock Option Agreement under the 2001 Stock Option
and Restricted Stock Plan for Employees of Peerless Mfg. Co., as amended and
restated (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by
Peerless Mfg. Co. on February 9, 2005 and incorporated herein by reference). |
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10.21 |
* |
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Form of Executive Stock Option Agreement under the 2001 Stock Option and
Restricted Stock Plan for Employees of Peerless Mfg. Co., as amended and restated
(filed as Exhibit 10.3 to the Current Report on Form 8-K filed by Peerless Mfg.
Co. on February 9, 2005 and incorporated herein by reference). |
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10.22 |
* |
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Form of Restricted Stock Agreement under the 2001 Stock Option and Restricted
Stock Plan for Employees of Peerless Mfg. Co., as amended and restated (filed as
Exhibit 10.1 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on
November 4, 2005 and incorporated herein by reference). |
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10.23 |
* |
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Form of Nonqualified Stock Option Award Agreement under the PMFG, Inc. 2007 Stock
Incentive Plan, modified as of August 15, 2008 to substitute PMFG, Inc. for
Peerless Mfg. Co. as a result of the holding company reorganization (filed as
Exhibit 10.2 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on
November 16, 2007 and incorporated herein by reference). |
95
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Exhibit |
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No. |
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Exhibit Description |
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10.24 |
* |
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Form of Restricted Stock Award Agreement for Employees under the PMFG, Inc. 2007
Stock Incentive Plan, modified as of August 15, 2008 to substitute PMFG, Inc. for
Peerless Mfg. Co. as a result of the holding company reorganization (filed as
Exhibit 10.3 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on
November 16, 2007 and incorporated herein by reference). |
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10.25 |
* |
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Form of Restricted Stock Award Agreement for Non-Employee Directors under the
PMFG, Inc. 2007 Stock Incentive Plan, modified as of August 15, 2008 to substitute
PMFG, Inc. for Peerless Mfg. Co. as a result of the holding company reorganization
(filed as Exhibit 10.4 to the Current Report on Form 8-K filed by Peerless Mfg.
Co. on November 16, 2007 and incorporated herein by reference). |
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10.26 |
* |
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Form of Director and Officer Indemnification Agreement (filed as Exhibit 10.1 to
our Registration Statement on Form S-4 (File No. 333-148577) filed on January 10,
2008 and incorporated herein by reference. |
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10.27 |
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CEFCO Process Manufacturing License Agreement, dated July 12, 2010 (filed as
Exhibit 10.1 to the Current Report on Form 8-K filed on July 12, 2010 and
incorporated herein by reference). |
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21.1 |
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Subsidiaries of PMFG, Inc. |
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23.1 |
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Consent of Grant Thornton LLP. |
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31.1 |
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Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer. |
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31.2 |
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Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer. |
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32.1 |
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Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. |
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* |
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Management contract, compensatory plan or arrangement |
96