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EXCEL - IDEA: XBRL DOCUMENT - PMFG, Inc. | Financial_Report.xls |
EX-32 - EX-32 - PMFG, Inc. | d642696dex32.htm |
EX-31.2 - EX-31.2 - PMFG, Inc. | d642696dex312.htm |
EX-31.1 - EX-31.1 - PMFG, Inc. | d642696dex311.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 28, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34156
PMFG, INC.
(Exact name of registrant as specified in its charter)
Delaware | 51-0661574 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
14651 North Dallas Parkway, Suite 500, Dallas, Texas 75254
(Address of principal executive offices)
(214) 357-6181
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of the registrants common stock outstanding on February 1, 2014, was 21,098,145.
Table of Contents
2
Table of Contents
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact contained in this Report are forward-looking statements. You should not place undue reliance on these statements. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and our industry in general. Statements that include the words expect, intend, plan, believe, project, forecast, estimate, may, should, anticipate and similar statements of a future or forward-looking nature identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:
| adverse changes in the current global economic or political environment or in the markets in which we operate, including the natural gas infrastructure, power generation, and petrochemical and processing industries; |
| compliance with United States and foreign laws and regulations, including export control and economic sanctions laws and regulations, which are complex, change frequently and have tended to become more stringent over time; |
| changes in current environmental legislation or regulations; |
| risks associated with our indebtedness, the terms of our credit agreements and our ability to raise additional capital; |
| changes in competition; |
| changes in demand for our products; |
| our ability to identify and execute on growth and market opportunities, including through acquisitions and strategic partnerships; |
| our ability to realize the full value of our backlog and the timing of our receipt of revenue under contracts included in backlog; |
| risks associated with our product warranties; and |
| changes in the price, supply or demand for natural gas, bio fuel, oil or coal. |
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with the Securities and Exchange Commission (the SEC), including the information in Item 1A. Risk Factors of Part I to our Annual Report on Form 10-K for the year ended June 29, 2013 and Part II of this Report. There may be other factors that may cause our actual results to differ materially from the forward-looking statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. We undertake no obligation to publicly update or revise forward-looking statements, except to the extent required by law.
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Table of Contents
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 28, 2013 |
June 29, 2013 |
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(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 56,160 | $ | 53,020 | ||||
Restricted cash |
5,503 | 5,029 | ||||||
Accounts receivable - trade, net of allowance for doubtful accounts of $306 at December 28, 2013 and $300 at June 29, 2013 |
22,859 | 22,509 | ||||||
Inventories, net |
8,812 | 6,488 | ||||||
Costs and earnings in excess of billings on uncompleted contracts |
21,638 | 16,544 | ||||||
Income taxes receivable |
667 | 1,152 | ||||||
Deferred income taxes |
304 | 304 | ||||||
Other current assets |
4,278 | 3,427 | ||||||
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Total current assets |
120,221 | 108,473 | ||||||
Property, plant and equipment, net |
30,876 | 24,031 | ||||||
Intangible assets, net |
15,849 | 16,180 | ||||||
Goodwill |
30,429 | 30,429 | ||||||
Other assets |
973 | 998 | ||||||
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Total assets |
$ | 198,348 | $ | 180,111 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
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Accounts payable |
$ | 17,661 | $ | 14,899 | ||||
Current maturities of long-term debt |
2,043 | | ||||||
Billings in excess of costs and earnings on uncompleted contracts |
11,618 | 6,277 | ||||||
Commissions payable |
2,031 | 1,763 | ||||||
Income taxes payable |
849 | 339 | ||||||
Accrued product warranties |
2,383 | 2,241 | ||||||
Customer deposits |
2,682 | 2,566 | ||||||
Accrued liabilities and other |
6,698 | 5,386 | ||||||
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Total current liabilities |
45,965 | 33,471 | ||||||
Long-term debt |
15,467 | 8,719 | ||||||
Deferred income taxes |
4,136 | 4,135 | ||||||
Other long-term liabilities |
1,857 | 1,900 | ||||||
Commitments and contingencies |
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Preferred stock authorized, 5,000,000 shares of $0.01 par value; no shares outstanding at December 28, 2013 or June 29, 2013 |
| | ||||||
Stockholders equity: |
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Common stock authorized, 50,000,000 shares of $0.01 par value; issued and outstanding, 21,098,145 and 20,966,426 shares at December 28, 2013 and June 29, 2013, respectively |
211 | 210 | ||||||
Additional paid-in capital |
97,243 | 96,634 | ||||||
Accumulated other comprehensive loss |
(729 | ) | (2,004 | ) | ||||
Retained earnings |
28,519 | 33,114 | ||||||
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Total PMFG, Inc.s stockholders equity |
125,244 | 127,954 | ||||||
Noncontrolling interest |
5,679 | 3,932 | ||||||
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Total equity |
130,923 | 131,886 | ||||||
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Total liabilities and equity |
$ | 198,348 | $ | 180,111 | ||||
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See accompanying notes to consolidated financial statements.
4
Table of Contents
Consolidated Statements of Operations
(In thousands, except per share amounts)
Three months ended | Six months ended | |||||||||||||||
December 28, | December 29, | December 28, | December 29, | |||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenue |
$ | 29,613 | $ | 31,452 | $ | 58,684 | $ | 64,429 | ||||||||
Cost of goods sold |
21,486 | 19,923 | 40,849 | 41,508 | ||||||||||||
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Gross profit |
8,127 | 11,529 | 17,835 | 22,921 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
3,125 | 3,936 | 6,638 | 7,003 | ||||||||||||
Engineering and project management |
2,372 | 2,377 | 4,898 | 4,701 | ||||||||||||
General and administrative |
4,207 | 4,356 | 9,535 | 9,897 | ||||||||||||
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9,704 | 10,669 | 21,071 | 21,601 | |||||||||||||
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Operating income (loss) |
(1,577 | ) | 860 | (3,236 | ) | 1,320 | ||||||||||
Other income (expense): |
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Interest income |
14 | 7 | 32 | 17 | ||||||||||||
Interest expense |
(268 | ) | (210 | ) | (706 | ) | (315 | ) | ||||||||
Loss on extinguishment of debt |
| | | (291 | ) | |||||||||||
Foreign exchange gain (loss) |
(269 | ) | 117 | (472 | ) | 35 | ||||||||||
Other income |
6 | 32 | 71 | 33 | ||||||||||||
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(517 | ) | (54 | ) | (1,075 | ) | (521 | ) | |||||||||
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Income (loss) before income taxes |
(2,094 | ) | 806 | (4,311 | ) | 799 | ||||||||||
Income tax expense |
(831 | ) | (213 | ) | (184 | ) | (212 | ) | ||||||||
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Net income (loss) |
(2,925 | ) | 593 | (4,495 | ) | 587 | ||||||||||
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Net income attributable to noncontrolling interest |
89 | 127 | 100 | 432 | ||||||||||||
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Net income (loss) attributable to PMFG, Inc. |
$ | (3,014 | ) | $ | 466 | $ | (4,595 | ) | $ | 155 | ||||||
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Weighted-average common shares outstanding: |
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Basic |
21,101 | 20,920 | 21,089 | 20,919 | ||||||||||||
Diluted |
21,101 | 20,935 | 21,089 | 20,934 | ||||||||||||
Basic income (loss) per common share |
$ | (0.14 | ) | $ | 0.02 | $ | (0.22 | ) | $ | 0.01 | ||||||
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Diluted income (loss) per common share |
$ | (0.14 | ) | $ | 0.02 | $ | (0.22 | ) | $ | 0.01 | ||||||
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See accompanying notes to consolidated financial statements.
5
Table of Contents
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Three months ended | Six months ended | |||||||||||||||
December 28, | December 29, | December 28, | December 29, | |||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Net income (loss) |
$ | (2,925 | ) | $ | 593 | $ | (4,495 | ) | $ | 587 | ||||||
Other comprehensive income (loss) : |
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Foreign currency translation adjustment |
(18 | ) | 217 | 1,315 | 652 | |||||||||||
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Other comprehensive income (loss) |
(18 | ) | 217 | 1,315 | 652 | |||||||||||
Comprehensive income (loss) |
(2,943 | ) | 810 | (3,180 | ) | 1,239 | ||||||||||
Net income attributable to noncontrolling interest |
89 | 127 | 100 | 432 | ||||||||||||
Other comprehensive income: |
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Foreign currency translation adjustment |
14 | 14 | 40 | 23 | ||||||||||||
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Comprehensive income attributable to noncontrolling interests |
103 | 141 | 140 | 455 | ||||||||||||
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Comprehensive income (loss) attributable to PMFG, Inc. |
$ | (3,046 | ) | $ | 669 | $ | (3,320 | ) | $ | 784 | ||||||
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See accompanying notes to consolidated financial statements
6
Table of Contents
Consolidated Statement of Equity
(In thousands)
(unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | Non | |||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Stockholders | Controlling | Total | ||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Equity | Interest | Equity | |||||||||||||||||||||||||
Balance at June 29, 2013 |
20,966 | $ | 210 | $ | 96,634 | $ | 33,114 | $ | (2,004 | ) | $ | 127,954 | $ | 3,932 | $ | 131,886 | ||||||||||||||||
Net loss |
| | | (4,595 | ) | | (4,595 | ) | 100 | (4,495 | ) | |||||||||||||||||||||
Foreign currency translation adjustment |
| | | | 1,275 | 1,275 | 40 | 1,315 | ||||||||||||||||||||||||
Stock grants, net of forfeitures |
132 | 1 | 609 | | | 610 | | 610 | ||||||||||||||||||||||||
Equity contribution from noncontrolling interest in subsidiary |
| | | | | | 1,607 | 1,607 | ||||||||||||||||||||||||
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Balance at December 28, 2013 |
21,098 | $ | 211 | $ | 97,243 | $ | 28,519 | $ | (729 | ) | $ | 125,244 | $ | 5,679 | $ | 130,923 | ||||||||||||||||
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See accompanying notes to consolidated financial statements
7
Table of Contents
Consolidated Statements of Cash Flows
(In thousands)
Six months ended | ||||||||
December 28, | December 29, | |||||||
2013 | 2012 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: |
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Net income (loss) |
$ | (4,495 | ) | $ | 587 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
1,225 | 1,397 | ||||||
Amortization of deferred finance charges |
127 | 76 | ||||||
Stock-based compensation |
610 | 404 | ||||||
Bad debt expense |
6 | 1,010 | ||||||
Inventory valuation reserve |
(68 | ) | (59 | ) | ||||
Provision for warranty expense |
482 | 652 | ||||||
Loss on extinguishment of debt |
| 291 | ||||||
Gain on disposal of property |
(325 | ) | (74 | ) | ||||
Foreign currency exchange gain (loss) |
472 | (35 | ) | |||||
Change in fair value of interest rate swap |
(4 | ) | | |||||
Changes in operating assets and liabilities: |
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Accounts receivable |
(290 | ) | 7,144 | |||||
Inventories |
(2,254 | ) | (309 | ) | ||||
Costs and earnings in excess of billings on uncompleted contracts |
(5,088 | ) | (1,746 | ) | ||||
Other current assets |
(931 | ) | 781 | |||||
Accounts payable |
2,767 | (990 | ) | |||||
Billings in excess of costs and earnings on uncompleted contracts |
5,374 | 1,057 | ||||||
Commissions payable |
268 | 221 | ||||||
Income taxes |
995 | 2,202 | ||||||
Product warranties |
(340 | ) | (1,270 | ) | ||||
Accrued liabilities and other |
557 | (980 | ) | |||||
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Net cash provided by (used in) operating activities: |
(912 | ) | 10,359 | |||||
Cash flows from investing activities: |
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(Increase) decrease in restricted cash |
(55 | ) | (370 | ) | ||||
Purchases of property and equipment |
(8,794 | ) | (2,224 | ) | ||||
Net proceeds from sale of property |
521 | 135 | ||||||
Business acquisition, net of cash received |
| (1,344 | ) | |||||
Payments of deferred consideration |
(37 | ) | | |||||
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Net cash used in investing activities |
(8,365 | ) | (3,803 | ) | ||||
Cash flows from financing activities: |
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Payment of long-term debt |
(533 | ) | | |||||
Payment of debt issuance costs |
| (963 | ) | |||||
Proceeds from short-term debt |
1,634 | 1,583 | ||||||
Proceeds from long-term debt |
9,311 | | ||||||
Equity contribution from noncontrolling interest |
1,607 | 947 | ||||||
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Net cash provided by financing activities |
12,019 | 1,567 |
Consolidated Statements of Cash Flows continued on next page
8
Table of Contents
PMFG, Inc. and Subsidiaries
Consolidated Statements of Cash Flows Continued
(In thousands)
Six months ended |
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December 28, | December 29, | |||||||
2013 | 2012 | |||||||
(unaudited) | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
398 | 206 | ||||||
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Net increase in cash and cash equivalents |
3,140 | 8,329 | ||||||
Cash and cash equivalents at beginning of period |
53,020 | 52,286 | ||||||
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Cash and cash equivalents at end of period |
$ | 56,160 | $ | 60,615 | ||||
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Supplemental information on cash flow: |
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Income taxes received |
$ | 518 | $ | 2,475 | ||||
Interest paid |
$ | 550 | $ | 205 |
See accompanying notes to consolidated financial statements
9
Table of Contents
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of PMFG, Inc. and subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. References to Company, we, us and our refer to PMFG, Inc. and its subsidiaries. The consolidated financial statements of the Company as of December 28, 2013 and for the three and six months ended December 28, 2013 and December 29, 2012 are unaudited and, in the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations of the Company for the interim periods have been included and are of a normal recurring nature. The results of operations for such interim periods are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys latest Annual Report on Form 10-K for the fiscal year ended June 29, 2013.
Each of the Companys interim reporting periods ends on the Saturday closest to the last day of the corresponding quarterly calendar period. References to fiscal 2014 and fiscal 2013 refer to fiscal years ended June 28, 2014 and June 29, 2013, respectively. The second quarters of fiscal 2014 and fiscal 2013 ended on December 28, 2013, and December 29, 2012, respectively.
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 China Holdings LLC (Peerless Propulsys). The Companys 60% equity investment in Peerless Propulsys entitles it to 80% of the earnings. Peerless Propulsys is the sole owner of Peerless China Manufacturing Co. Ltd. (PCMC), formerly known as Peerless Manufacturing (Zhenjiang) Co. Ltd. The non-controlling interest of Peerless Propulsys is reported as a separate component on the Consolidated Balance Sheets and Consolidated Statements of Operations.
Cash and Cash Equivalents
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 December 28, 2013, cash held in banks in the United States exceeded federally insured limits by $35.5 million. The Company has not experienced any losses related to this cash concentration.
The Company had restricted cash balances of $5.5 million and $5.0 million as of December 28, 2013 and June 29, 2013, respectively. Foreign restricted cash balances were $5.5 million and $4.7 million as of December 28, 2013 and June 29, 2013, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the normal course of business.
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. 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.
10
Table of Contents
PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Company records an allowance for doubtful accounts based on a specific identification, taking into consideration a number of factors, including the length of time the accounts receivable are past due, the 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 are deemed to be uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts in the period the payment is received.
Changes in the Companys allowance for doubtful accounts are as follows (in thousands):
Six months ended | ||||||||
December 28, | December 29, | |||||||
2013 | 2012 | |||||||
Balance at beginning of period |
$ | 300 | $ | 650 | ||||
Bad debt expense |
6 | 1,010 | ||||||
Accounts written off |
| (1,359 | ) | |||||
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Balance at end of period |
$ | 306 | $ | 301 | ||||
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Inventories
The Company values its inventories using the lower of weighted average cost or market. The Company regularly reviews the value of inventories on hand, using specific aging categories, and records a provision for obsolete and slow-moving inventory based on historical and estimated future usage. In assessing the ultimate realization of its inventory, the Company is required to make judgments as to future demand requirements. As actual future demand or market conditions may vary from those projected by the Company, adjustments to inventory valuations may be required.
Property, Plant and Equipment
Depreciation of property, plant and equipment is calculated using the straight-line method over a period considered adequate to depreciate the total cost over the useful lives of the assets, as follows:
Buildings and improvements |
5 - 40 years | |||
Equipment |
3 - 10 years | |||
Furniture and fixtures |
3 - 15 years |
Routine maintenance costs are expensed as incurred. Major improvements that extend the life, increase the capacity or improve the safety or the efficiency of property owned are capitalized. Major improvements to leased buildings are capitalized as leasehold improvements and amortized over the shorter of the estimated life or the remaining lease term.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and exceeds its fair value. If conditions indicate an asset might be impaired, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. The impairment would be measured by the amount by which the asset exceeds its fair value, typically represented by the discounted cash flows associated with the asset.
11
Table of Contents
PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Goodwill and Other Intangible Assets
Goodwill represents the difference between the purchase price and the fair value of the net assets acquired upon acquisition. Goodwill is not amortized, however, it is measured at the reporting unit level to test for impairment annually, in the fourth quarter, or more frequently if conditions indicate an earlier review is necessary. A discounted future cash flow analysis is primarily used to determine whether impairment exists. If the fair value of a reporting unit is less than the carrying amount, then the Company writes down goodwill to its estimated fair value.
Intangible assets subject to amortization include licensing agreements, customer relationships and acquired sales order backlog. These intangible assets are amortized over their estimated useful lives based on a pattern in which the economic benefit of the respective intangible asset is realized. Intangible assets considered to have indefinite lives include trade names and design guidelines. The Company evaluates the recoverability of indefinite lived intangible assets annually, in the fourth quarter, or whenever events or changes in circumstances indicate that an intangible assets carrying amount may not be recoverable. The Company uses the market and income approach methods to determine whether impairment exists.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade receivables, other current assets, accounts payable and accrued expenses approximate fair value due to the short maturity of these instruments. The carrying amount of the Companys debt approximates fair value as the debt bears interest at floating market rates.
Revenue Recognition
The Company recognizes revenue, net of sales taxes, from product sales or services provided when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.
The Company provides certain products under long-term, generally fixed-priced, contracts that may extend over multiple financial periods, where revenue and cost of sales are recognized in accordance with accounting rules relating to construction-type and production-type contracts. Amounts recognized in revenue are calculated using the percentage of cost completed (i.e., cumulative cost incurred to date in comparison to the estimated total cost at completion). This method requires the Company to make estimates regarding the total costs of the project at completion, which impacts the amount of gross margin the Company recognizes in each reporting period. The Company routinely reviews its estimates relating to estimated total costs at completion and recognizes changes in those estimates as they are determined. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract. Anticipated losses on these contracts are recorded in full in the period in which they become evident. Cumulative revenue recognized may be less or greater than cumulative costs and profits billed at any point during a 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 and require less product customization are accounted for under the completed contract method. Revenue under the completed contract method is recognized upon shipment of the product.
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Table of Contents
PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Pre-contract, Start-up and Commissioning Costs
The Company does not consider the realization of any individual sales order as probable prior to order acceptance. Therefore, pre-contract costs incurred prior to sales order acceptance are included as a component of operating expenses when incurred. Some of the Companys contracts require the installation and placing in service of the product after it is distributed to the end user. The costs of start-up and commissioning and the related revenue associated with the relevant percentage of completion of these projects are recognized in the period incurred.
Warranty Costs
The Company provides warranties for specific products during a defined period of time, generally less than 18 months after shipment of the product. Warranties cover the failure of a product to perform after it has been placed in service. The Company reserves for estimated future warranty costs in the period in which the revenue is recognized based on historical experience, expectation of future conditions, and the extent of concurrent supplier warranties in place. Warranty costs are included in cost of goods sold in the Consolidated Statements of Operations.
Income Taxes
The Company utilizes the asset and liability approach in its reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income tax related interest and penalties are included in income tax expense. The Company recognizes in its financial statements the impact of a tax position taken or expected to be taken in a tax return, if that position is more likely than not of being sustained upon examination by the relevant taxing authority, based on the technical merits of the position.
The Company is required to estimate income taxes in each jurisdiction in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Judgment is required in assessing the future tax consequences of events that have been recognized in the 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.
For the six months ended December 28, 2013, income tax expense was 4% of the loss before income taxes. The rate varies from the statutory rate because of the blend of taxable income in some state and foreign taxing jurisdictions and permanent differences and taxable losses in the United States for which no tax benefit has been recognized. At December 28, 2013, the Company had $5.1 million of operating loss carry forwards primarily in the United States available for carryover to future periods, subject to certain limitations and expiring beginning in fiscal 2032. A valuation allowance of $1.3 million has been established to reduce the computed benefits to the estimated future realization of the tax related benefit.
Earnings (Loss) Per Common Share
The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable to PMFG, Inc. stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share include the dilutive effect of stock options, restricted stock units and warrants granted using the treasury stock method. For the three and six months ended December 28, 2013, 72,339 restricted stock units with performance and service based restrictions and options to acquire 37,200 shares of common stock were omitted from the
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Table of Contents
PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
calculation of dilutive securities because they were anti-dilutive. Warrants to acquire 839,063 shares of common stock were omitted from the calculation of dilutive securities for the three and six months ended December 28, 2013 and the three and six months ended December 29, 2012 because they were anti-dilutive.
The warrants entitle the holders to purchase common stock for $10.56 per share, through a cashless exercise. The warrants expire on September 4, 2014.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.
2. INVENTORIES
Principal components of inventories are as follows (in thousands):
December 28, | June 29, | |||||||
2013 | 2013 | |||||||
Raw materials |
$ | 6,214 | 3,729 | |||||
Work in progress |
2,402 | 2,516 | ||||||
Finished goods |
378 | 493 | ||||||
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|
|||||
8,994 | 6,738 | |||||||
Reserve for obsolete and slow-moving inventory |
(182 | ) | (250 | ) | ||||
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|
|||||
$ | 8,812 | $ | 6,488 | |||||
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3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The components of uncompleted contracts are as follows (in thousands):
December 28, | June 29, | |||||||
2013 | 2013 | |||||||
Costs incurred on uncompleted contracts and estimated earnings |
$ | 82,145 | $ | 70,389 | ||||
Less billings to date |
(72,125 | ) | (60,122 | ) | ||||
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|
|||||
$ | 10,020 | $ | 10,267 | |||||
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Table of Contents
PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS - CONTINUED
The components of uncompleted contracts are reflected in the Consolidated Balance Sheets as follows (in thousands):
December 28, | June 29, | |||||||
2013 | 2013 | |||||||
Costs and earnings in excess of billings on uncompleted contracts |
$ | 21,638 | $ | 16,544 | ||||
Billings in excess of costs and earnings on uncompleted contracts |
(11,618 | ) | (6,277 | ) | ||||
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|
|
|||||
$ | 10,020 | $ | 10,267 | |||||
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4. GOODWILL AND OTHER INTANGIBLE ASSETS
All goodwill and other intangible assets are allocated to the Process Products segment. Goodwill is not deductible for income tax purposes.
Goodwill
There were no changes in the carrying amount of goodwill for the six months ended December 28, 2013.
Acquisition-Related Intangibles
Acquisition-related intangible assets are as follows (in thousands):
Weighted Average Estimated Useful Life (Years) |
Gross Value Dec 28, 2013 |
Accumulated Amortization |
Net Book Value Dec 28, 2013 |
Gross Value June 29, 2013 |
Accumulated Amortization |
Net Book Value June 29, 2013 |
||||||||||||||||||||
Design guidelines |
Indefinite | $ | 6,940 | $ | | $ | 6,940 | $ | 6,940 | $ | | $ | 6,940 | |||||||||||||
Customer relationship |
8 | 7,940 | (3,760 | ) | $ | 4,180 | 7,940 | (3,429 | ) | 4,511 | ||||||||||||||||
Trade names |
Indefinite | 4,729 | | $ | 4,729 | 4,729 | | 4,729 | ||||||||||||||||||
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$ | 19,609 | $ | (3,760 | ) | $ | 15,849 | $ | 19,609 | $ | (3,429 | ) | $ | 16,180 | |||||||||||||
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Table of Contents
PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
4. GOODWILL AND OTHER INTANGIBLE ASSETS - CONTINUED
Amortization expense on finite-lived intangible assets was $0.2 million and $0.3 million for the three months ended December 28, 2013 and December 29, 2012, respectively. Amortization expense on finite-lived intangible assets for the six months ended December 28, 2013 and December 29, 2012 was $0.3 million and $0.6 million, respectively. Estimated aggregate finite-lived intangible asset amortization expense for the next five years is as follows (in thousands):
Fiscal Year |
||||
2014 |
$ | 660 | ||
2015 |
585 | |||
2016 |
510 | |||
2017 |
509 | |||
2018 |
504 |
5. ACCRUED PRODUCT WARRANTIES
Accrued product warranty activity is as follows (in thousands):
Six months ended | ||||||||
December 28, | December 29, | |||||||
2013 | 2012 | |||||||
Balance at beginning of period |
$ | 2,241 | $ | 2,615 | ||||
Provision for warranty expenses |
482 | 652 | ||||||
Warranty charges |
(340 | ) | (1,270 | ) | ||||
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|
|||||
Balance at end of period |
$ | 2,383 | $ | 1,997 | ||||
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6. ACCRUED LIABILITIES AND OTHER
The components of accrued liabilities and other are as follows (in thousands):
December 28, | June 29, | |||||||
2013 | 2013 | |||||||
Accrued start-up and commissioning expense |
$ | 230 | $ | 230 | ||||
Accrued compensation |
1,820 | 2,393 | ||||||
Accrued professional expenses |
2,319 | 1,819 | ||||||
PCMC short-term debt |
1,643 | | ||||||
Other |
686 | 944 | ||||||
|
|
|
|
|||||
$ | 6,698 | $ | 5,386 | |||||
|
|
|
|
In July 2013, the Company obtained short-term financing from Bank of China Limited. The financing provides for borrowings up to ¥10 million ($1.6 million) at an interest rate of 6.6%. Interest is payable quarterly. All amounts outstanding are due July 2014.
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PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
7. DEBT
Outstanding long-term debt obligations are as follows (in thousands):
December 28, | June 29, | |||||||||||
Maturities | 2013 | 2013 | ||||||||||
Term loan A |
2019 | $ | 981 | $ | 604 | |||||||
Term loan B |
2022 | 9,466 | 8,115 | |||||||||
Subsidiary loan |
2017 | 7,063 | | |||||||||
|
|
|
|
|||||||||
Total long-term debt |
17,510 | 8,719 | ||||||||||
Less current maturites |
(2,043 | ) | | |||||||||
|
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|
|||||||||
Total long-term debt, net of current portion |
|
$ | 15,467 | $ | 8,719 | |||||||
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|
In September 2012, the Company entered into a Credit Agreement (the Credit Agreement) with Citibank, N.A., as administrative agent and other financial institutions party thereto. The Credit Agreement provides for, among other things, revolving credit commitments of $30.0 million to be used for working capital and general corporate purposes, term loan commitments of $2.0 million to be used for the purchase of equipment for a manufacturing facility in Denton, Texas (Term Loan A) and term loan commitments of $10.0 million to fund the construction of the Denton facility (Term Loan B). All borrowings and other obligations of the Company are guaranteed by substantially all of its domestic subsidiaries and are secured by substantially all of the assets of the Company.
The revolving credit facility under the Credit Agreement will terminate on September 30, 2015, and all revolving credit loans mature on that date. Under the revolving credit facility, the Company has a maximum borrowing availability equal to the lesser of (a) $30.0 million or (b) the sum of 80% of eligible accounts receivable plus 50% of eligible inventory plus 100% of the cash amount held in a special collateral account less a foreign currency letter of credit reserve. At December 28, 2013, there were no outstanding borrowings and approximately $5.6 million of outstanding letters of credit under the Credit Agreement, leaving the Company with approximately $5.9 million of available capacity for additional borrowings and letters of credit under the Credit Agreement.
The term loan commitments expire 18 months after the date of the Credit Agreement. Beginning June 30, 2014, the Company is required to make quarterly principal payments on the term loans that were incurred during that 18-month period. The Credit Agreement also requires the Company to maintain an interest rate protection agreement with respect to at least 50% of the aggregate outstanding principal amount of the term loans.
Interest on all loans must generally be paid quarterly. Interest rates on term loans use floating rates plus 1/2 of 1% up to 2%, plus a margin of between 0 to 75 basis points based upon the Companys consolidated funded debt to consolidated EBITDA for the trailing four consecutive fiscal quarters.
At December 28, 2013, the Company was required to maintain a Consolidated Total Leverage Ratio (CTL) not to exceed 1.75 to 1.00 and a Debt Service Coverage Ratio (DSC) of not less than 1.50 to 1.00. The CTL ratio is calculated as the ratio of the Companys aggregate total liabilities to the sum of the excess of the Companys total assets over its total liabilities as each is determined on a consolidated basis in accordance with generally accepted accounting principles. The DSC ratio is calculated as the ratio of the Companys consolidated EBITDA less certain
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Table of Contents
PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
7. DEBT CONTINUED
restricted cash payments, capitalized expenditures and taxes to the Companys consolidated fixed charges, which is the sum of the Companys current maturities of long-term debt and the amount of cash paid for interest on a trailing 12 month basis. The Credit Agreement also contains other covenants, including restrictions on additional debt, dividends, capital expenditures, acquisitions and dispositions. At December 28, 2013, the Company was not in compliance with limitations on capital expenditures and the DSC ratio. Subsequent to December 28, 2013, the Company obtained a limited waiver of the covenants. The limit on the capital expenditure was increased and the defined calculation of the DSC was adjusted so the Company was in compliance with its debt covenants.
On September 30, 2013, the Company and its subsidiary, Peerless Mfg. Co., entered into an amendment to the Credit Agreement. The Amendment allows the Company to permit maturity dates on letters of credit provided by the Company to its customers beyond the term of the Credit Agreement and to allow unsecured parent guarantees to be issued on behalf of its foreign subsidiaries up to a maximum aggregate value of $10.0 million.
In July 2013, the Companys subsidiary in China entered into a loan agreement with The Peoples Bank of China. The loan agreement provides for a loan commitment of ¥45.0 million ($7.4 million) to fund the construction of a manufacturing facility in Zhenjiang, China. The loan is guaranteed by PCMCs property, plant and equipment. The loan matures on September 30, 2018. At December 28, 2013, there was an outstanding borrowing of ¥43.0 million ($7.1 million). Beginning June 20, 2014, the Company is required to make semi-annual principal payments on the loan. Interest rates use floating rates as established by The Peoples Bank of China. The rate at December 28, 2013 was 7.0%. The loan agreement also contains covenants, including restrictions on additional debt, dividends, acquisitions and dispositions. At December 28, 2013, the Company was in compliance with all of its debt covenants.
The Companys U.K. subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of £6.0 million ($9.9 million) at December 28, 2013 and £6.0 million ($9.1 million) at June 29, 2013. This facility was secured by substantially all of the assets of the Companys U.K. subsidiary and by a cash deposit of £1.9 million ($3.0 million) at December 28, 2013 and £2.1 million ($3.2 million) at June 29, 2013, which is recorded as restricted cash on the Consolidated Balance Sheets. At December 28, 2013, there was £4.4 million ($7.2 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. At June 29, 2013, there was £4.4 million ($6.8 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.
The Companys German subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of 4.8 million ($6.6 million) at December 28, 2013 and 4.8 million ($6.2 million) at June 29, 2013. This facility is secured by substantially all of the assets of the Companys German subsidiary and by a cash deposit of 0.9 million ($1.3 million) at December 28, 2013 and 0.7 million ($0.9 million) at June 29, 2013, which is recorded as restricted cash on the Consolidated Balance Sheets. At December 28, 2013, there was 3.1 million ($4.3 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. At June 29, 2013, there was 2.7 million ($3.5 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.
The Companys subsidiary in Singapore had bank guarantees of $0.6 million at December 28, 2013 and June 29, 2013. These guarantees are secured with a protective line of credit issued by the Company to Citibank. The Companys subsidiary in China had bank guarantees of $1.2 million and $0.6 million at December 28, 2013 and June 29, 2013, respectively, secured by $1.2 million and $0.6 million of restricted cash balances.
18
Table of Contents
PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
8. COMMITMENTS AND CONTINGENCIES
Litigation
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. Prior to the final escrow payment release in October 2009, the Company made claims relating to environmental matters and indemnification for breach of representations and warranties of the Nitram purchase agreement, totaling approximately $2.0 million against the escrow, and a total of $1.4 million was withheld from the release of the escrow amount, which represents the Companys claims, less the one percent deductible, estimated at $0.6 million. The sellers have objected to the claims made by the Company and the parties are currently in the process of negotiating the various claims. The Company does not currently believe it will have additional losses or claims against the former Nitram stockholders that are in excess of the amounts already claimed or accrued.
From time to time the Company is involved in various litigation matters arising in the ordinary course of its business. The Company accrues for its litigation contingencies when losses are both probable and reasonably estimable.
9. STOCK-BASED COMPENSATION
The following information represents the Companys grants of stock-based compensation to employees and directors during the six months ended December 28, 2013 and December 29, 2012 (in thousands, except share amounts):
Six months ended | ||||||||||||||||
December 28, | December 29, | |||||||||||||||
2013 | 2012 | |||||||||||||||
Grant Type |
Number of Shares Granted |
Fair Value of Grant |
Number of Shares Granted |
Fair Value of Grant |
||||||||||||
Stock to directors |
40,430 | $ | 300 | 36,000 | $ | 291 | ||||||||||
Restricted stock awards |
101,410 | 752 | 110,377 | 894 | ||||||||||||
Restricted stock units |
77,460 | 575 | | |
The stock granted to the Board of Directors vests immediately, therefore the entire amount of fair value was recognized as expense at the time of grant. The compensation expense for the restricted stock awards granted in fiscal year 2014 is recognized over a three-year vesting period whereas the awards granted in fiscal year 2013 are recognized over a four-year vesting period. The compensation expense is based on the fair value of the awards on the grant date, net of forfeitures.
In July 2013, the Company also awarded restricted stock units (RSUs), which are subject to both service and performance conditions, to the executive officers of the Company. The fair value of the RSUs is based on the probability of the performance condition being achieved on the date of grant. The actual number of shares that will ultimately vest is dependent on the Companys performance during the performance period, which is a year from the date of grant, against established metrics and could range from 0% to 200% of the number of units originally granted. The RSUs have a cliff vesting of three years from the date of grant. The Company recognizes compensation expense for the RSUs based upon managements determination of the potential likelihood of achievement of the performance conditions at each reporting date in fiscal 2014, net of forfeitures.
19
Table of Contents
PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
9. STOCK-BASED COMPENSATION CONTINUED
The Company recognized $0.6 million and $0.4 million of stock-based compensation expense in the six months ended December 28, 2013 and December 29, 2012, respectively. For the three months ended December 28, 2013 and December 29, 2012, the Company recognized $0.1 million of stock-based compensation expense.
10. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Derivative Financial Instruments
The Company has entered into interest rate swap agreements that effectively convert the interest rates on the long-term debt issued under the Senior Credit facility from floating to fixed rates. The following table summarizes the interest rate agreements in effect as of December 28, 2013 (in thousands):
Fixed Interest Rate |
Expiration Date | Notional Amounts | ||||||
1.95% |
September 30, 2022 | $ | 9,000 | |||||
1.50% |
September 30, 2019 | 1,000 |
The swap agreements are recorded as an asset or liability in the Consolidated Balance Sheets at fair value, with the change in fair value recorded as interest expense within the Consolidated Statements of Operations.
The Company is exposed to market risk under these arrangements due to the possibility of interest rates on the term loans under the Credit Agreement declining to below the rates on the interest rate swap agreements. Credit risk under these arrangements is believed to be remote as the counterparty to the interest rate swap agreements is a major financial institution; however, if the counterparty to the derivative instrument arrangements becomes unable to fulfill its obligations to the Company, the financial benefits of the arrangements may be lost.
The derivatives recorded at fair value in the Companys Consolidated Balance Sheets were (in thousands):
Derivative Assets | Derivative Liabilities | |||||||||||||||
December 28, | June 29, | December 28, | June 29, | |||||||||||||
2013 | 2013 | 2013 | 2013 | |||||||||||||
Interest rate swap contracts |
$ | 164 | $ | 160 | $ | | $ | |
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
| Level 1 Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
| Level 2 Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments. |
| Level 3 Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting 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. |
20
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PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
10. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS - CONTINUED
A summary of derivative assets and liabilities measured at fair value on a recurring basis is as follows (in thousands):
Fair Value as of December 28, 2013 |
Level 1 | Level 2 | Level 3 | |||||||||||||
Asset - Interest rate swap contracts |
$ | 164 | $ | | $ | 164 | $ | |
The fair value of the interest rate swaps is determined based on the notional amounts of the swaps and the forward LIBOR curve relative to the fixed interest rates under the swap agreements. The Company classifies these instruments in Level 2 because quoted market prices can be corroborated utilizing observable benchmark market rates at commonly quoted intervals, observable current and forward commodity market prices on active exchanges, and observable market transactions of spot currency rates and forward currency prices.
11. SEGMENT INFORMATION
The Company has two reportable segments: Process Products and Environmental Systems. The Process Products segment produces various types of separators and filters used for removing liquids and solids from gases and air. The segment also includes industrial silencing equipment to control noise pollution on a wide range of industrial processes and heat transfer equipment to conserve energy in many industrial processes and in petrochemical processing. The main product of the Environmental Systems segment is its Selective Catalytic Reduction Systems, referred to as SCR Systems. These environmental control systems are used for air pollution abatement and converting nitrogen oxide (NOx) emissions from exhaust gases caused by burning hydrocarbon fuels such as coal, gasoline, natural gas and oil. Along with the SCR Systems, this segment offers systems to reduce other pollutants such as carbon monoxide (CO) and particulate matter. The Company combines these systems with other components, such as instruments, controls and related valves and piping to offer its customers a totally integrated system.
The Company allocates all costs associated with the manufacture, sale and design of its products to the appropriate segment. Segment profit and loss is based on revenue less direct expenses of the segment before general and administrative expenses. The Company does not allocate general and administrative expenses, assets, or expenditures for assets on a segment basis for internal management reporting, therefore, this information is not presented. Segment information and reconciliation to operating income (loss) for the three and six months ended December 28, 2013 and December 29, 2012 are presented below (in thousands).
21
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PMFG, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements - Unaudited
December 28, 2013
11. SEGMENT INFORMATION CONTINUED
Three months ended | Six months ended | |||||||||||||||
December 28, | December 29, | December 28, | December 29, | |||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenue: |
||||||||||||||||
Process Products |
$ | 24,255 | $ | 28,480 | $ | 48,766 | $ | 57,195 | ||||||||
Environmental Systems |
5,358 | 2,972 | 9,918 | 7,234 | ||||||||||||
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$ | 29,613 | $ | 31,452 | $ | 58,684 | $ | 64,429 | |||||||||
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Operating income (loss): |
||||||||||||||||
Process Products |
$ | 1,270 | $ | 4,710 | $ | 4,039 | $ | 10,090 | ||||||||
Environmental Systems |
1,360 | 506 | 2,260 | 1,127 | ||||||||||||
Corporate and other unallocated expenses |
(4,207 | ) | (4,356 | ) | (9,535 | ) | (9,897 | ) | ||||||||
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|
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$ | (1,577 | ) | $ | 860 | $ | (3,236 | ) | $ | 1,320 | |||||||
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22
Table of Contents
PMFG, Inc. and Subsidiaries
December 28, 2013
Item 2. 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 to supplement and should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes thereto contained in Item 1. Financial Statements of this report. This overview summarizes the MD&A, which includes the following sections:
| Our Business a general description of our business and the key drivers of product demand. |
| Results of Operations an analysis of our Companys consolidated and reporting segment results of operations for the three and six month periods presented in our consolidated unaudited financial statements. |
| Liquidity, Capital Resources and Financial Position an analysis of cash flows, aggregate contractual obligations, foreign currency exposure and an overview of our financial position. |
This discussion includes forward-looking statements that are subject to risks, uncertainties and other factors described in this and other reports we file with the Securities and Exchange Commission (the SEC), including the information in Item 1A. Risk Factors of Part I to our Annual Report for the year ended June 29, 2013. These factors could cause our actual results for future periods to differ materially from those experienced in, or implied by, these forward-looking statements.
Our Business
We are a leading provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. We primarily serve the markets for natural gas infrastructure, power generation and refining and petrochemical processing. We offer a broad range of separation and filtration products, Selective Catalytic Reduction Systems (SCR Systems), and other complementary products including heat exchangers, pulsation dampeners and silencers. Our primary customers include equipment manufacturers, engineering contractors and operators of power facilities.
Our products and systems are marketed worldwide. The percentage of revenue generated from outside the United States was approximately 45% in the six months ended December 28, 2013 compared to 53% in the six months ended December 29, 2012. As a result of global demand for our products and our increased sales resources outside of the United States, we expect our international revenue will continue to be a significant percentage of our consolidated revenue in the future.
We believe our success depends on our ability to understand the complex operational demands of our customers and deliver systems and products that meet or exceed the indicated design specifications. Our success further depends on our ability to provide such products in a cost-effective manner and within the time frames established with our customers. Our gross profit during any particular period may be impacted by several factors, primarily shifts in our product mix, material cost changes, and warranty costs. Shifts in the geographic composition of our revenue also can have a significant impact on our reported margins.
We have two reporting segments: Process Products and Environmental Systems. The Process Products segment produces specialized systems and products that remove contaminants from gases and liquids, improving efficiency, reducing maintenance and extending the life of energy infrastructure. The segment also includes industrial silencing equipment to control noise pollution on a wide range of industrial processes and heat transfer equipment to conserve energy in many industrial processes and in petrochemical processing. The primary product of our Environmental Systems business is SCR Systems. SCR Systems are integrated systems, with instruments, controls and related valves and piping. Our SCR Systems convert nitrogen oxide into nitrogen and water, reducing air pollution and helping our customers comply with environmental regulations.
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PMFG, Inc. and Subsidiaries
December 28, 2013
Key Drivers of Product Demand
We believe demand for our products is driven by the increasing demand for energy in both developed and emerging markets, coupled with the global trend towards increasingly restrictive environmental regulations. These trends should stimulate investment in new power generation facilities and related infrastructure, and in upgrading existing facilities.
With a shift to cleaner, more environmentally responsible power generation, power providers and industrial power consumers are building new facilities that use cleaner fuels, such as natural gas, nuclear technology and renewable resources. In developed markets, natural gas is increasingly becoming one of the energy sources of choice. We supply product offerings throughout the entire natural gas infrastructure value chain and believe the expansion of natural gas infrastructure will drive growth of our process products and the global market for our SCR Systems for natural-gas-fired power plants.
Despite existing concerns over safety and government regulations related to the construction of new nuclear power facilities and the re-licensing of existing facilities, we believe rising nuclear capacity utilization rates and concerns about energy security and emissions will drive the increase for nuclear power generation, both domestically and internationally. China is expected to lead the global expansion of nuclear power generation growth. Re-licensing of existing nuclear facilities in the United States and Europe also will contribute to product demand.
We believe these market trends will drive the demand for both our separation/filtration products and our 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.
Critical Accounting Policies
See the Companys critical accounting policies as described in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations, in Part II of our Annual Report on Form 10-K for the year ended June 29, 2013. Since the date of that report, there have been no material changes to our critical accounting policies.
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December 28, 2013
Results of Operations
The following summarizes our Consolidated Statements of Operations as a percentage of revenue:
Three months ended | Six months ended | |||||||||||||||
December 28, | December 29, | December 28, | December 29, | |||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of goods sold |
72.6 | 63.3 | 69.6 | 64.4 | ||||||||||||
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Gross profit |
27.4 | 36.7 | 30.4 | 35.6 | ||||||||||||
Operating expenses |
32.8 | 33.9 | 35.9 | 33.5 | ||||||||||||
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Operating income (loss) |
(5.4 | ) | 2.8 | (5.5 | ) | 2.1 | ||||||||||
Other expense, net |
(1.7 | ) | (0.2 | ) | (1.8 | ) | (0.8 | ) | ||||||||
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Income (loss) before income taxes |
(7.1 | ) | 2.6 | (7.3 | ) | 1.3 | ||||||||||
Income tax benefit (expense) |
(2.8 | ) | (0.7 | ) | (0.3 | ) | (0.3 | ) | ||||||||
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Net income (loss) |
(9.9 | )% | 1.9 | % | (7.6 | )% | 1.0 | % | ||||||||
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Net income attributable to noncontrolling interest |
0.3 | 0.4 | 0.2 | 0.7 | ||||||||||||
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Net income (loss) attributable to PMFG, Inc. |
(10.2 | )% | 1.5 | % | (7.8 | )% | 0.3 | % | ||||||||
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Cost of goods sold includes manufacturing and distribution costs for products sold. The manufacturing and distribution costs include material, direct and indirect labor, manufacturing overhead, depreciation, sub-contract work, inbound and outbound freight, purchasing, receiving, inspection, warehousing, internal transfer costs and other costs of our manufacturing and distribution processes. Cost of goods sold also includes the costs of commissioning the equipment and warranty-related costs. Operating expenses include sales and marketing expenses, engineering and project management expenses and general and administrative expenses which are further described below.
| Sales and marketing expenses - include payroll, employee benefits, stock-based compensation and other employee-related costs associated with sales and marketing personnel. Sales and marketing expenses also include travel and entertainment, advertising, promotions, trade shows, seminars and other programs and sales commissions paid to independent sales representatives. |
| Engineering and project management expenses - include payroll, employee benefits, stock-based compensation and other employee-related costs associated with engineering, project management and field service personnel. Additionally, engineering and project management expenses include the cost of sub-contracted engineering services. |
| General and administrative expenses - include payroll, employee benefits, stock-based compensation and other employee-related costs and costs associated with executive management, finance, human resources, information systems and other administrative employees. General and administrative costs also include board of director compensation and expenses, facility costs, insurance, audit fees, legal fees, professional services and other administrative fees. |
Quarter Ended December 28, 2013 Compared to Quarter Ended December 29, 2012
Revenue. We classify revenue as domestic or international based upon the origination of the order. Revenue generated by orders originating from within the United States is classified as domestic revenue, regardless of where the product is shipped or where it will eventually be installed. Revenue generated by orders originating from a country other than the United States is classified as international revenue. International revenue was approximately 41% and 53% of consolidated revenue in the quarters ended December 28, 2013 and December 29, 2012, respectively.
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December 28, 2013
The following summarizes consolidated revenue (in thousands):
Three months ended | ||||||||||||||||
December 28, 2013 |
% of Total Revenue |
December 29, 2012 |
% of Total Revenue |
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Domestic |
$ | 17,444 | 58.9 | % | $ | 14,883 | 47.3 | % | ||||||||
International |
12,169 | 41.1 | % | 16,569 | 52.7 | % | ||||||||||
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Total |
$ | 29,613 | 100.0 | % | $ | 31,452 | 100.0 | % | ||||||||
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Total revenue decreased $1.8 million, or 5.8%, to $29.6 million in the second quarter of fiscal 2014 compared to the same period in fiscal 2013. Improved revenue in our Environmental Systems segment was more than offset by the decline in the Process Products segment. Revenue from the Process Products segment was negatively impacted in the second quarter of fiscal 2014 by sluggish demand in Europe, Middle East and Africa (EMEA) and the Americas, as well as customer-driven delays on certain projects currently in backlog.
Gross Profit. Our gross profit during any particular period may be impacted by several factors, primarily revenue volume, shifts in our product mix, material cost changes, warranty, start-up and commissioning costs. Shifts in the geographic composition of our revenue also can have a significant impact on our reported margins. The following summarizes revenue, cost of goods sold and gross profit (in thousands):
Three months ended | ||||||||||||||||
December 28, 2013 |
% of Total Revenue |
December 29, 2012 |
% of Total Revenue |
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Revenue |
$ | 29,613 | 100.0 | % | $ | 31,452 | 100.0 | % | ||||||||
Cost of goods sold |
21,486 | 72.6 | % | 19,923 | 63.3 | % | ||||||||||
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Gross profit |
$ | 8,127 | 27.4 | % | $ | 11,529 | 36.7 | % | ||||||||
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Gross profit in the second quarter of fiscal 2014 decreased $3.4 million, or 29.5 percent, compared to the same period in fiscal 2013. The decrease in gross profit in fiscal 2014 is attributed to lower revenue and margin deterioration on projects completed and in process. Gross profit as a percent of revenue decreased to 27.4 percent in the current quarter from 36.7 percent in the second quarter of fiscal 2013. Included in cost of goods sold for fiscal 2014 is approximately $471,000 of non-recurring restructuring costs related to the closure of a manufacturing plant in Texas and the relocation of the fabrication activities to our other plants in Texas. The gross profit also was impacted by cost overruns on certain projects completed in the quarter and, to a lesser extent, the slower than planned ramp up of the manufacturing facility in Denton, Texas, that began fabrication in July of 2013.
Operating Expenses. The following summarizes operating expenses (in thousands):
Three months ended | ||||||||||||||||
December 28, 2013 |
% of Total Revenue |
December 29, 2012 |
% of Total Revenue |
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Sales and marketing |
$ | 3,125 | 10.6 | % | $ | 3,936 | 12.5 | % | ||||||||
Engineering and project management |
2,372 | 8.0 | % | 2,377 | 7.6 | % | ||||||||||
General and administrative |
4,207 | 14.2 | % | 4,356 | 13.8 | % | ||||||||||
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Total |
$ | 9,704 | 32.8 | % | $ | 10,669 | 33.9 | % | ||||||||
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Operating expenses decreased $1.0 million, or 9.0%, for the second quarter of fiscal 2014 compared to the same period in fiscal 2013. The decrease in operating expenses primarily relates to lower sales commissions and other selling related expenses.
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December 28, 2013
Other Income and Expense. The following summarizes other income and expense (in thousands):
Three months ended | ||||||||
December 28, 2013 |
December 29, 2012 |
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Interest income |
$ | 14 | $ | 7 | ||||
Interest expense |
(268 | ) | (210 | ) | ||||
Foreign exchange gain (loss) |
(269 | ) | 117 | |||||
Other income (expense), net |
6 | 32 | ||||||
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Total other income (expense) |
$ | (517 | ) | $ | (54 | ) | ||
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Income Taxes. Our effective income tax rates were (39.7%) and 26.4% for the quarters ended December 28, 2013 and December 29, 2012, respectively. The negative tax rate for the quarter ended December 28, 2013 is the result of a mix of profits and losses in different taxing jurisdictions and not recognizing the tax benefit associated with current period losses in the United States.
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 82% and 91% of our revenue in the quarters ended December 28, 2013 and December 29, 2012, respectively.
The following summarizes the Process Products segment revenue and operating income (in thousands):
Three months ended | ||||||||
December 28, | December 29, | |||||||
2013 | 2012 | |||||||
Revenue |
$ | 24,255 | $ | 28,480 | ||||
Operating income |
1,270 | 4,710 | ||||||
Operating income as % of revenue |
5.2 | % | 16.5 | % |
Process Products revenue decreased $4.2 million, or 14.8%, to $24.3 million in the second quarter of fiscal 2014, compared to the second quarter of fiscal 2013. The Process Products segment revenue was negatively impacted by sluggish demand in EMEA and the Americas, as well as customer-driven delays on certain projects currently in backlog.
Process Products operating income for the second quarter of fiscal 2014 decreased $3.4 million, or 73.0%, compared to the second quarter of fiscal 2013 on lower revenue and lower relative gross profit. Included in fiscal 2014 cost of goods sold are non-recurring restructuring costs related to the closure of a manufacturing plant in Texas and the relocation of the fabrication activities to our other facilities in Texas. In addition, the Company incurred unanticipated cost overruns and penalties of approximately $1.0 million on three unrelated projects in the quarter. The overruns in material and labor, as well as expediting fees, could not be passed through to the customers. Finally, the hiring and on boarding of personnel at the new manufacturing facility in Texas has progressed slower than anticipated.
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December 28, 2013
Environmental Systems
The primary product of our Environmental Systems business is SCR Systems. SCR Systems are integrated systems, with instruments, controls and related valves and piping. Our SCR Systems convert nitrogen oxide, or NOx, into nitrogen and water, reducing air pollution and helping our customers comply with environmental regulations. Environmental Systems represented 18% and 9% of our revenue in the quarters ended December 28, 2013 and December 29, 2012, respectively. Environmental Systems revenue continues to increase as a percentage of our consolidated revenue as the segment benefits from an increase in domestic demand for environmental system solutions.
The following summarizes the Environmental Systems segment revenue and operating income (in thousands):
Three months ended | ||||||||
December 28, | December 29, | |||||||
2013 | 2012 | |||||||
Revenue |
$ | 5,358 | $ | 2,972 | ||||
Operating income |
1,360 | 506 | ||||||
Operating income as % of revenue |
25.4 | % | 17.0 | % |
Environmental Systems revenue increased $2.4 million, or 80.3%, to $5.4 million in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. Our SCR projects tend to be larger in scope and longer in duration than systems and solutions included in the Process Products segment. Further, the costs are incurred inconsistently throughout the fabrication process which increases the variability of segment revenue from period to period. The higher revenue in fiscal 2014 reflects the timing of incurring project related costs on the Environmental Systems projects we were awarded during calendar 2013.
Environmental Systems operating income for the second quarter of fiscal 2014 increased $0.9 million compared to the second quarter of fiscal 2013. As a percentage of revenue, operating income increased to 25.4% in the second quarter of fiscal 2014 compared to 17.0%, in the second quarter of fiscal 2013. The increase in segment operating income as a percentage of revenue reflects the relative profitability of projects in process and the positive impact on segment profitability of fixed sales and marketing costs being leveraged over higher revenue in the quarter.
Six Months Ended December 28, 2013 Compared to Six Months Ended December 29, 2012
Results of Operations Consolidated
Revenue. The following table summarizes consolidated revenue (in thousands):
Six months ended | ||||||||||||||||
December 28, 2013 |
% of Total Revenue |
December 29, 2012 |
% of Total Revenue |
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Domestic |
$ | 32,017 | 54.6 | % | $ | 30,143 | 46.8 | % | ||||||||
International |
26,667 | 45.4 | % | 34,286 | 53.2 | % | ||||||||||
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Total |
$ | 58,684 | 100.0 | % | $ | 64,429 | 100.0 | % | ||||||||
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For the six months ended December 28, 2013, total revenue decreased $5.7 million, or 8.9%. Domestic revenue increased $1.9 million, or 6.2%, in the six months ended December 28, 2013 when compared to the same period last year on stronger Environmental System revenue, but that was more than offset by a decrease in international revenue of $7.6 million, or 22.2%.
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December 28, 2013
Gross Profit. The following table summarizes revenue, cost of goods sold, and gross profit (in thousands):
Six months ended | ||||||||||||||||
December 28, 2013 |
% of Total Revenue |
December 29, 2012 |
% of Total Revenue |
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Revenue |
$ | 58,684 | 100.0 | % | $ | 64,429 | 100.0 | % | ||||||||
Cost of goods sold |
40,849 | 69.6 | % | 41,508 | 64.4 | % | ||||||||||
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Gross profit |
$ | 17,835 | 30.4 | % | $ | 22,921 | 35.6 | % | ||||||||
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Gross profit decreased $5.1 million on lower revenue and lower relative gross profit in the six months ended December 28, 2013 compared to the six months ended December 29, 2012. Gross profit, as a percentage of revenue, decreased to 30.4% for the six months ended December 28, 2013 compared to 35.6% for the six months ended December 29, 2012. The decrease in gross profit as a percentage of revenue during the six months ended December 28, 2013, relates to margin deterioration on projects completed and or in process and one-time restructuring related costs. That margin deterioration was most notable in the second quarter.
Operating Expenses. The following table summarizes operating expenses (in thousands):
Six months ended | ||||||||||||||||
December 28, 2013 |
% of Total Revenue |
December 29, 2012 |
% of Total Revenue |
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Sales and marketing |
$ | 6,638 | 11.3 | % | $ | 7,003 | 10.9 | % | ||||||||
Engineering and project management |
4,898 | 8.3 | % | 4,701 | 7.3 | % | ||||||||||
General and administrative |
9,535 | 16.2 | % | 9,897 | 15.4 | % | ||||||||||
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Total |
$ | 21,071 | 35.9 | % | $ | 21,601 | 33.5 | % | ||||||||
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Operating expenses held constant in the six months ended December 28, 2013 compared to the six months ended December 29, 2012. As a percentage of revenue, operating expenses increased on lower revenue to 35.9% for the six months ended December 28, 2013, from 33.5% in the same period in fiscal 2013.
Other Income and Expense. The following table summarizes other income and expenses (in thousands):
Six months ended | ||||||||
December 28, 2013 |
December 29, 2012 |
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Interest income |
$ | 32 | $ | 17 | ||||
Interest expense |
(706 | ) | (315 | ) | ||||
Loss on extinguishment of debt |
| (291 | ) | |||||
Foreign exchange gain (loss) |
(472 | ) | 35 | |||||
Other income (expense), net |
71 | 33 | ||||||
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Total other income (expense) |
$ | (1,075 | ) | $ | (521 | ) | ||
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For the six months ended December 28, 2013, other expense was $1.1 million, an increase of $0.6 million from $0.5 million for the six months ended December 29, 2012. In the first quarter of fiscal 2013, we recorded a loss on the extinguishment of debt associated with paying off our outstanding term loan. There was no similar activity in fiscal 2014. The higher level of interest expense reflects borrowings related to the Companys two new manufacturing facilities. The six months ended December 28, 2013 reported a loss on foreign currency translation of $0.5 million, driven largely by movements in the euro and U.S. dollar relative to the British pound, compared to a gain of $35,000 for the six months ended December 29, 2012.
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December 28, 2013
Income Taxes: Our effective income tax rates were (4.3)% and 26.5% for the six months ended December 28, 2013 and December 31, 2012, respectively. For the six months ended December 28, 2013, our effective tax rate was impacted by the blend of taxable income in some State and foreign taxing jurisdictions and permanent differences and taxable losses in the United States which recognized no tax benefit. For the six months ended December 29, 2012, the effective tax rate was impacted by increased profits of our foreign subsidiaries which have a lower relative effective tax rate, as well as positive adjustments to the previously filed tax returns.
Net Earnings (loss). For the six months ended December 28, 2013, we had a net loss of ($4.5) million, a decrease of $5.1 million compared to net earnings of $0.6 million in the six months ended December 29, 2012. The net loss was the result of lower revenue and margin flowing thru to the net loss.
Basic and diluted earnings (loss) per share attributable to our common stockholders decreased to a loss of $(0.22) per share for the six months ended December 28, 2013, from earnings of $0.01 per share for the six months ended December 29, 2012.
Results of Operations Segments
Process Products
Our Process Products segment represented 83% and 89% of our revenue for the six months ended December 28, 2013 and December 29, 2012, respectively. The following table summarizes Process Products revenue and operating income (in thousands):
Six months ended | ||||||||
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2013 | 2012 | |||||||
Revenue |
$ | 48,766 | $ | 57,195 | ||||
Operating income |
4,039 | 10,090 | ||||||
Operating income as % of revenue |
8.3 | % | 17.6 | % |
Process Products revenue decreased by $8.4 million, or 14.7%, in the six months ended December 28, 2013 when compared to the six months ended December 29, 2012. Process Products segment revenue was negatively impacted by sluggish demand in the EMEA and the Americas, as well as customer-driven delays on certain projects currently in backlog. Revenue in the Process Products segment was also impacted in fiscal 2014 by the transition of our manufacturing facilities in North America and Asia.
Process Products operating income in the six months ended December 28, 2013 decreased by $6.1 million compared to the six months ended December 29, 2012. As a percentage of Process Products revenue, operating income was 8.3% in the six months ended December 28, 2013 compared to 17.6% in the same period last year. Process Products segment profitability was negatively impacted during the six months ended December 28, 2013 by non-recurring restructuring costs related to the closure of a manufacturing plant in Texas and by cost overruns on certain projects. The Process Products segment was also negatively impacted in fiscal 2014 by transition costs and manufacturing inefficiencies as we began fabrication in new manufacturing facilities in Denton, Texas and Zhenjiang, China.
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PMFG, Inc. and Subsidiaries
December 28, 2013
Environmental Systems
Our Environmental Systems segment represented 17% and 11% of our revenue for the six months ended December 28, 2013 and December 29, 2012, respectively. The following table summarizes Environmental Systems revenue and operating income (in thousands):
Six months ended | ||||||||
December 28, | December 29, | |||||||
2013 | 2012 | |||||||
Revenue |
$ | 9,918 | $ | 7,234 | ||||
Operating income |
2,260 | 1,127 | ||||||
Operating income as % of revenue |
22.8 | % | 15.6 | % |
Revenue from Environmental Systems increased $2.7 million, or 37.1%, in the six months ended December 28, 2013, when compared to the six months ended December 29, 2012.
Environmental Systems operating income as a percentage of revenue in the six months ended December 28, 2013 increased to 22.8%, compared to 15.6% for the six months ended December 29, 2012. The increase in operating income as a percentage of revenue reflects the relative profitability of the projects in process and the positive impact on segment profitability of fixed operating costs being leveraged on higher revenue.
General and Administrative Expenses
General and administrative expenses include those related to the corporate office, as well as general and administrative costs of international locations. General and administrative expenses decreased $0.4 million, or 3.7%, in the six months ended December 28, 2013 in comparison to the prior year. Increases in personnel-related and public company costs in the period were more than offset by lower bad debt expense.
Contingencies
From time to time we are involved in various litigation matters arising in the ordinary course of our business. We do not believe the disposition of any current matter will have a material adverse effect on our consolidated financial position or results of operations.
Net Bookings and Backlog
The following table shows the activity and balances related to our backlog for the six months ended December 28, 2013 and December 29, 2012 (in millions):
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December 29, 2012 |
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Backlog at beginning of period |
$ | 84.2 | $ | 99.9 | ||||
Net bookings |
72.2 | 52.4 | ||||||
Revenue recognized |
(58.7 | ) | (64.4 | ) | ||||
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Backlog at end of period |
$ | 97.7 | $ | 87.9 | ||||
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December 28, 2013
Backlog includes contractual purchase orders for products that are deliverable in future periods less revenue recognized on such orders to date. Our backlog increased $13.5 million from June 29, 2013 to $97.7 million at December 28, 2013. The increase in backlog reflects the relative strength in bookings in comparison to the prior year. Included in the backlog as of December 29, 2012 was approximately $12.5 million related to two customer contracts which were cancelled in the fourth quarter of fiscal 2013. The Company anticipates approximately 90% of the backlog as of December 28, 2013 will be recognized as revenue over the next 12 months.
Financial Position
Assets. Total assets increased by $18.2 million, or 10.1%, from $180.1 million at June 29, 2013 to $198.3 million at December 28, 2013. On December 28, 2013, we held cash, including restricted cash, and cash equivalents of $61.7 million, had working capital of $74.3 million and a current liquidity ratio of 2.6-to-1.0. This compares with cash, including restricted cash, and cash equivalents of $58.0 million, working capital of $75.0 million, and a current liquidity ratio of 3.2-to-1.0 at June 29, 2013.
Liabilities and Equity. Total liabilities increased by $19.2 million, or 39.8%, from $48.2 million at June 29, 2013 to $67.4 million at December 28, 2013. The increase in our total liabilities is attributed to an increase in long-term debt associated with the construction of manufacturing facilities in Denton, Texas and Zhenjiang, China, in addition to an increase in accounts payable, billings in excess of costs and earnings on uncompleted contracts and other accrued liabilities.
Liquidity and Capital Resources
Because we are engaged in the business of manufacturing systems, our progress billing practices are event-oriented rather than date-oriented and vary from contract to contract. Generally, a contract will either allow for amounts to be billed upon shipment or on a progress-basis based on the attainment of certain milestones. We typically invoice our customers upon the occurrence of project milestones. Billings to customers affect the balance of billings in excess of costs and earnings on uncompleted contracts or the balance of costs and earnings in excess of billings on uncompleted contracts, as well as the balance of accounts receivable. Consequently, we focus on the net amount of these accounts, along with accounts payable, to determine our management of working capital. At December 28, 2013, the balance of these working capital accounts was $12.9 million compared to $17.9 million at June 29, 2013, reflecting a decrease of our investment in these working capital items of $5.0 million.
Many of our customers require bank letters of credit or other forms of financial guarantees to secure progress payments and performance. Such letters of credit and guarantees are issued under various bank and financial institution arrangements (see Note 7 of Item 1 in the Notes to the Consolidated Financial Statements). As of December 28, 2013 and June 29, 2013, we had outstanding letters of credit and bank guarantees of $18.9 million and $18.1 million, respectively.
Our cash and cash equivalents were $61.7 million as of December 28, 2013, compared to $58.0 million at June 29, 2013, of which $5.5 million and $5.0 million were restricted as collateral for stand-by letters of credit and bank guarantees at December 28, 2013, and June 29, 2013, respectively. During the six months ended December 28, 2013, cash used in operating activities was $0.9 million compared to cash provided by operating activities of $10.4 million for the six months ended December 29, 2012.
Cash used in investing activities was $8.4 million for the six months ended December 28, 2013, compared to cash used in investing activities of $3.8 million for the six months ended December 29, 2012. Cash used in investing activities during the six months ended December 28, 2013 primarily related to construction costs incurred to date on our manufacturing facilities under construction in Denton, Texas and Zhenjiang, China. Cash used in investing activities during the six months ended December 29, 2012 primarily related to the purchase of property, plant and equipment.
Cash provided by financing activities during the six months ended December 28, 2013 was $12.0 million compared to cash provided by financing activities of $1.6 million during the six months ended December 29, 2012. The cash provided by financing activities for the six months ended December 28, 2013 primarily consisted of
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proceeds from long-term debt as we drew on our construction term loan and the equity contribution from the non-controlling interest in our China subsidiary, offset by a payment of our long term debt. The cash provided by financing activities for the six months ended December 29, 2012 primarily consisted of proceeds from short-term debt.
As a result of the events described above, our cash and cash equivalents during the six months ended December 28, 2013 increased by $3.1 million compared to an increase of $8.3 million during the six months ended December 29, 2012
The Company was not in compliance with the debt service coverage ratio required under the Credit Agreement as described in Note 7 to the consolidated financial statements. Subsequent to December 28, 2013 the Company obtained a limited waiver of the covenant. Compliance with this financial covenant in the future is dependent on an improvement in the Companys profitability when compared to the six month period ended December 28, 2013.
We believe we maintain adequate liquidity and the capacity to enter into letters of credit and guarantees to support existing operations and planned growth over the next 12 months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risk exposures from those disclosed in Item 7A of Part II of our Annual Report on Form 10-K for the year ended June 29, 2013.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information related to the Company (including its consolidated subsidiaries) that is required to be disclosed in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms.
The Companys management has evaluated, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, the effectiveness of these disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the SEC under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures were effective in ensuring that all information required to be disclosed in this Report has been recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Additionally, based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Report, the Companys disclosure controls and procedures were effective in ensuring that all material information required to be filed in this Report has been accumulated and communicated to the Companys management, including its principal executive and principal financial officers, in a timely fashion to allow decisions regarding required disclosures.
Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. The Companys controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. Notwithstanding the foregoing, the Companys disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.
During the six months ended December 28, 2013, there have been no changes in the Companys internal control over financial reporting, or in other factors, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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We are involved, from time to time, in various litigation, claims and proceedings arising in the normal course of business that are not expected to have any material effect on the financial condition of the Company.
There have been no material changes in our risk factors from those disclosed in Item 1A of Part I of our Annual Report on 10-K for the year ended June 29, 2013.
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The following exhibits are filed as part of this report.
Exhibit |
Exhibit Description | |
10.1 | First Amendment to Credit Agreement, dated September 30, 2013, among PMFG, Inc., Peerless Mfg. Co., Citibank N.A. and other lenders party thereto (Filed as Exhibit 10.1 to the Current Report on Form 8-k filed by PMFG, Inc. on October 3, 2013 and incorporated herein by reference). | |
31.1 | Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer. | |
31.2 | Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer. | |
32 | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. | |
101.INS | XBRL Report Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Label Linkbase Document | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PMFG, INC. | ||
Date: February 6, 2014 | /s/ Peter J. Burlage | |
| ||
Peter J. Burlage | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: February 6, 2014 | /s/ Ronald L McCrummen | |
| ||
Ronald L. McCrummen Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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