Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - PMFG, Inc.Financial_Report.xls
EX-32 - EX-32 - PMFG, Inc.pmfg-ex32_201412278.htm
EX-31.1 - EX-31.1 - PMFG, Inc.pmfg-ex311_201412276.htm
EX-31.2 - EX-31.2 - PMFG, Inc.pmfg-ex312_201412277.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 27, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-34156

 

PMFG, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

51-0661574

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

14651 North Dallas Parkway, Suite 500, Dallas, Texas 75254

(Address of principal executive offices)

(214) 357-6181

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

þ

 

 

 

 

Non-accelerated filer

 

¨         (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

The number of shares of the registrant’s common stock outstanding on January 31, 2015, was 21,303,573.

 

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

  

Page
Number

Forward-Looking Statements

  

3

 

PART I: FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements

  

4

 

Consolidated Balance Sheets at December 27, 2014 (unaudited) and June 28, 2014

  

4

 

Unaudited Consolidated Statements of Operations for the three and six months ended December 27, 2014 and December 28, 2013

  

5

 

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended December 27, 2014 and December 28, 2013

  

6

 

Unaudited Consolidated Statement of Equity for the six months ended December 27, 2014

  

7

 

Unaudited Consolidated Statements of Cash Flows for the six months ended December 27, 2014 and December 28, 2013

  

8

 

Notes to Consolidated Financial Statements (unaudited)

  

10

 

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

  

21

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

30

 

Item 4. Controls and Procedures

  

30

 

PART II: OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

30

 

Item 1A. Risk Factors

  

30

 

Item 6. Exhibits

  

31

 

SIGNATURES

  

32

 

 

 

2


 

Forward-Looking Statements

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact contained in this Report are forward-looking statements. You should not place undue reliance on these statements. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and our industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:

·

adverse changes in the current global economic or political environment or in the markets in which we operate, including the natural gas infrastructure, power generation, and petrochemical and processing industries;

·

compliance with United States and foreign laws and regulations, including export control and economic sanctions laws and regulations, which are complex, change frequently and have tended to become more stringent over time;

·

changes in existing environmental legislation or regulations;

·

risks associated with our indebtedness, the terms of our credit agreements and our ability to raise additional capital;

·

changes in competition;

·

changes in demand for our products;

·

our ability to realize the full value of our backlog and the timing of our receipt of revenue under contracts included in backlog;

·

risks associated with our product warranties; and

·

changes in the price, supply or demand for natural gas, bio fuel, oil or coal.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with the Securities and Exchange Commission (the “SEC”), including the information in “Item 1A. Risk Factors” of Part I to our Annual Report on Form 10-K for the year ended June 28, 2014. There may be other factors that may cause our actual results to differ materially from the forward-looking statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. We undertake no obligation to publicly update or revise forward-looking statements, except to the extent required by law.

 

 

 

3


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PMFG, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

December 27,

 

 

June 28,

 

 

 

2014

 

 

2014

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,141

 

 

$

27,274

 

Restricted cash

 

 

14,464

 

 

 

15,570

 

Accounts receivable - trade, net of allowance for doubtful accounts of

   $285 and $216 at December 27, 2014 and June 28, 2014

 

 

33,815

 

 

 

26,256

 

Inventories, net

 

 

9,814

 

 

 

10,833

 

Costs and earnings in excess of billings on uncompleted contracts

 

 

24,204

 

 

 

19,854

 

Deferred income taxes

 

 

477

 

 

 

477

 

Other current assets

 

 

4,458

 

 

 

4,570

 

Total current assets

 

 

111,373

 

 

 

104,834

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

32,111

 

 

 

31,633

 

Intangible assets, net

 

 

11,495

 

 

 

11,870

 

Goodwill

 

 

16,076

 

 

 

16,076

 

Deferred income taxes

 

 

2,083

 

 

 

2,097

 

Other assets

 

 

662

 

 

 

713

 

Total assets

 

$

173,800

 

 

$

167,223

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

24,379

 

 

$

19,914

 

Current maturities of long-term debt

 

 

2,406

 

 

 

2,408

 

Billings in excess of costs and earnings on uncompleted contracts

 

 

12,415

 

 

 

8,848

 

Commissions payable

 

 

2,111

 

 

 

2,422

 

Income taxes payable

 

 

455

 

 

 

463

 

Deferred income taxes

 

 

235

 

 

 

304

 

Accrued product warranties

 

 

2,448

 

 

 

2,527

 

Customer deposits

 

 

2,572

 

 

 

3,129

 

Accrued liabilities and other

 

 

11,121

 

 

 

9,710

 

Total current liabilities

 

 

58,142

 

 

 

49,725

 

Long-term debt

 

 

12,941

 

 

 

14,149

 

Deferred income taxes

 

 

4,157

 

 

 

4,157

 

Other long-term liabilities

 

 

1,666

 

 

 

1,720

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock – authorized, 50,000,000 shares of $0.01 par value; issued

   and outstanding, 21,266,380 and 21,062,721 shares at December 27, 2014

   and June 28, 2014, respectively

 

 

213

 

 

 

211

 

Preferred stock – authorized, 5,000,000 shares of $0.01 par value; no shares

   outstanding at December 27, 2014 or June 28, 2014

 

 

-

 

 

 

-

 

Additional paid-in capital

 

 

98,358

 

 

 

97,545

 

Accumulated other comprehensive loss

 

 

(2,724

)

 

 

(587

)

Accumulated deficit

 

 

(4,704

)

 

 

(5,270

)

Total PMFG, Inc.'s stockholders' equity

 

 

91,143

 

 

 

91,899

 

Noncontrolling interest

 

 

5,751

 

 

 

5,573

 

Total equity

 

 

96,894

 

 

 

97,472

 

Total liabilities and equity

 

$

173,800

 

 

$

167,223

 

See accompanying notes to consolidated financial statements.

 

4


 

PMFG, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

 

 

 

Three months ended

 

 

Six months ended

 

 

 

December 27,

 

 

December 28,

 

 

December 27,

 

 

December 28,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

(unaudited)

 

 

(unaudited)

 

Revenue

 

$

40,920

 

 

$

29,613

 

 

$

86,179

 

 

$

58,684

 

Cost of goods sold

 

 

28,123

 

 

 

21,486

 

 

 

58,548

 

 

 

40,849

 

Gross profit

 

 

12,797

 

 

 

8,127

 

 

 

27,631

 

 

 

17,835

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

3,837

 

 

 

3,125

 

 

 

7,718

 

 

 

6,638

 

Engineering and project management

 

 

3,224

 

 

 

2,372

 

 

 

6,590

 

 

 

4,898

 

General and administrative

 

 

6,313

 

 

 

4,207

 

 

 

11,770

 

 

 

9,535

 

 

 

 

13,374

 

 

 

9,704

 

 

 

26,078

 

 

 

21,071

 

Operating income (loss)

 

 

(577

)

 

 

(1,577

)

 

 

1,553

 

 

 

(3,236

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

19

 

 

 

14

 

 

 

34

 

 

 

32

 

Interest expense

 

 

(486

)

 

 

(268

)

 

 

(817

)

 

 

(706

)

Foreign exchange gain (loss)

 

 

54

 

 

 

(269

)

 

 

100

 

 

 

(472

)

Other income

 

 

32

 

 

 

6

 

 

 

306

 

 

 

71

 

 

 

 

(381

)

 

 

(517

)

 

 

(377

)

 

 

(1,075

)

Income (loss) before income taxes

 

 

(958

)

 

 

(2,094

)

 

 

1,176

 

 

 

(4,311

)

Income tax expense

 

 

(115

)

 

 

(831

)

 

 

(409

)

 

 

(184

)

Net income (loss)

 

$

(1,073

)

 

$

(2,925

)

 

$

767

 

 

$

(4,495

)

Net income attributable to noncontrolling interest

 

 

277

 

 

 

89

 

 

 

201

 

 

 

100

 

Net income (loss) attributable to PMFG, Inc.

 

$

(1,350

)

 

$

(3,014

)

 

$

566

 

 

$

(4,595

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,268

 

 

 

21,101

 

 

 

21,250

 

 

 

21,089

 

Options outstanding

 

 

 

 

 

 

 

 

3

 

 

 

 

Restricted stock units

 

 

 

 

 

 

 

 

76

 

 

 

 

Diluted

 

 

21,268

 

 

 

21,101

 

 

 

21,329

 

 

 

21,089

 

Basic earnings (loss) per common share

 

$

(0.06

)

 

$

(0.14

)

 

$

0.03

 

 

$

(0.22

)

Diluted earnings (loss) per common share

 

$

(0.06

)

 

$

(0.14

)

 

$

0.03

 

 

$

(0.22

)

See accompanying notes to consolidated financial statements.

 

 

 

5


 

PMFG, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

 

 

Three months ended

 

 

Six months ended

 

 

 

December 27,

 

 

December 28,

 

 

December 27,

 

 

December 28,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

(unaudited)

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,073

)

 

$

(2,925

)

 

$

767

 

 

$

(4,495

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(1,477

)

 

 

(18

)

 

 

(2,160

)

 

 

1,315

 

Other comprehensive income (loss)

 

 

(1,477

)

 

 

(18

)

 

 

(2,160

)

 

 

1,315

 

Comprehensive loss

 

 

(2,550

)

 

 

(2,943

)

 

 

(1,393

)

 

 

(3,180

)

Net income attributable to noncontrolling interest

 

 

277

 

 

 

89

 

 

 

201

 

 

 

100

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(92

)

 

 

14

 

 

 

(23

)

 

 

40

 

Comprehensive income attributable to noncontrolling interests

 

 

185

 

 

 

103

 

 

 

178

 

 

 

140

 

Comprehensive loss attributable to PMFG, Inc.

 

$

(2,735

)

 

$

(3,046

)

 

$

(1,571

)

 

$

(3,320

)

See accompanying notes to consolidated financial statements.

 

 

 

6


 

PMFG, Inc. and Subsidiaries

Consolidated Statement of Equity

(In thousands)

(unaudited)

 

 

 

Common

Stock

Shares

 

 

Common

Stock

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Loss

 

 

Total

Stockholders'

Equity

 

 

Non

Controlling

Interest

 

 

Total

Equity

 

Balance at June 28, 2014

 

 

21,063

 

 

$

211

 

 

$

97,545

 

 

$

(5,270

)

 

$

(587

)

 

$

91,899

 

 

$

5,573

 

 

$

97,472

 

Net income

 

 

 

 

 

 

 

 

 

 

 

566

 

 

 

 

 

 

566

 

 

 

201

 

 

 

767

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,137

)

 

 

(2,137

)

 

 

(23

)

 

 

(2,160

)

Stock-based compensation,

   net of forfeitures

 

 

203

 

 

 

2

 

 

 

813

 

 

 

 

 

 

 

 

 

815

 

 

 

 

 

 

815

 

Balance at December 27, 2014

 

 

21,266

 

 

$

213

 

 

$

98,358

 

 

$

(4,704

)

 

$

(2,724

)

 

$

91,143

 

 

$

5,751

 

 

$

96,894

 

See accompanying notes to consolidated financial statements.

 

 

 

7


 

PMFG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Six months ended

 

 

 

December 27,

 

 

December 28,

 

 

 

2014

 

 

2013

 

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

767

 

 

$

(4,495

)

Adjustments to reconcile net income (loss) to

   net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,357

 

 

 

1,225

 

Stock-based compensation

 

 

815

 

 

 

610

 

Bad debt expense

 

 

150

 

 

 

6

 

Inventory valuation reserve

 

 

(15

)

 

 

(68

)

Provision for warranty expense

 

 

688

 

 

 

482

 

Gain on disposal of property

 

 

 

 

 

(325

)

Foreign exchange (gain) loss

 

 

(100

)

 

 

472

 

Change in fair value of interest rate swap

 

 

9

 

 

 

(4

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,930

)

 

 

(290

)

Inventories

 

 

964

 

 

 

(2,254

)

Costs and earnings in excess of billings on uncompleted contracts

 

 

(4,463

)

 

 

(5,088

)

Other assets

 

 

115

 

 

 

(804

)

Accounts payable

 

 

4,435

 

 

 

2,767

 

Billings in excess of costs and earnings on  uncompleted contracts

 

 

3,552

 

 

 

5,374

 

Commissions payable

 

 

(311

)

 

 

268

 

Income taxes

 

 

(50

)

 

 

995

 

Product warranties

 

 

(767

)

 

 

(340

)

Accrued liabilities and other

 

 

127

 

 

 

557

 

Net cash used in operating activities:

 

 

(657

)

 

 

(912

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

(Increase) decrease in restricted cash

 

 

730

 

 

 

(55

)

Purchases of property and equipment

 

 

(1,648

)

 

 

(8,794

)

Net proceeds from sale of property

 

 

3

 

 

 

521

 

Net cash used in investing activities

 

 

(915

)

 

 

(8,328

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payment of debt

 

 

(2,816

)

 

 

(533

)

Proceeds from short-term debt

 

 

1,606

 

 

 

1,634

 

Proceeds from long-term debt

 

 

 

 

 

9,311

 

Payments of deferred consideration

 

 

(226

)

 

 

(37

)

Equity contribution from noncontrolling interest

 

 

 

 

 

1,607

 

Net cash provided by (used in) financing activities

 

 

(1,436

)

 

 

11,982

 

Consolidated Statements of Cash Flows continued on next page

 

 

 

8


 

PMFG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows—Continued

(In thousands)

 

 

 

Six months ended

 

 

 

December 27,

 

 

December 28,

 

 

 

2014

 

 

2013

 

 

 

(unaudited)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(125

)

 

 

398

 

Net increase (decrease) in cash and cash equivalents

 

 

(3,133

)

 

 

3,140

 

Cash and cash equivalents at beginning of period

 

 

27,274

 

 

 

53,020

 

Cash and cash equivalents at end of period

 

$

24,141

 

 

$

56,160

 

Supplemental information on cash flow:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

13

 

 

$

518

 

Interest paid

 

$

713

 

 

$

550

 

See accompanying notes to consolidated financial statements.

 

 

 

9


PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—Unaudited

December 27, 2014

 

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of PMFG, Inc. and subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. References to “Company,” “we,” “us” and “our” refer to PMFG, Inc. and its subsidiaries. The consolidated financial statements of the Company as of December 27, 2014 and for the three and six months ended December 27, 2014 and December 28, 2013 are unaudited and, in the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations of the Company for the interim periods have been included and are of a normal recurring nature. The results of operations for such interim periods are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended June 28, 2014.

Each of the Company’s interim reporting periods ends on the Saturday closest to the last day of the corresponding quarterly calendar period. References to “fiscal 2015” and “fiscal 2014” refer to fiscal years ended June 27, 2015 and June 28, 2014, respectively. The second quarters of fiscal 2015 and fiscal 2014 ended on December 27, 2014, and December 28, 2013, respectively.

Basis of Consolidation

The Company’s financial statements for all periods presented are consolidated to include the accounts of all wholly owned and majority-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The Company is the majority owner of Peerless Propulsys China Holdings LLC (“Peerless Propulsys”). The Company’s 60% equity investment in Peerless Propulsys entitles it to 80% of the earnings of Peerless Propulsys. Peerless Propulsys is the sole owner of Peerless China Manufacturing Co. Ltd. (“PCMC”). The non-controlling interest of Peerless Propulsys is reported as a separate component on the Consolidated Balance Sheets and Consolidated Statements of Operations.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash balances, including restricted cash, held within and outside the United States are as follows (in thousands):

 

 

 

December 27,

 

 

June 28,

 

 

 

2014

 

 

2014

 

Domestic

 

$

18,832

 

 

$

19,351

 

International

 

 

19,773

 

 

 

23,493

 

Total

 

$

38,605

 

 

$

42,844

 

The Company maintains cash balances in bank accounts that normally exceed Federal Deposit Insurance Corporation insured limits. As of December 27, 2014 and June 28, 2014, cash held in the United States exceeded federally insured limits by $9.2 million and $9.1 million, respectively. The Company has not experienced any losses related to this cash concentration.

The Company had restricted cash balances of $14.5 million and $15.6 million as of December 27, 2014 and June 28, 2014, respectively. Foreign restricted cash balances were $4.5 million and $5.6 million as of December 27, 2014 and June 28, 2014, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the ordinary course of business and to secure the term loans and letters of credit as required under the terms of our existing Credit Agreement.

Accounts Receivable

The Company’s accounts receivable are due from companies in various industries. Credit is extended based on an evaluation of the customer’s financial condition. Generally, collateral is not required except on credit extended to international customers. Accounts receivable are generally due within 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts outstanding longer than contractual payment terms are considered past due.

 

 

 

10


PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—Unaudited

December 27, 2014

 

The Company records an allowance on a specific basis by considering a number of factors, including the length of time the accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and the condition of the customer’s industry and the economy as a whole. The Company writes off accounts receivable when they become uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts in the period the payment is received.

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

 

 

 

Six months ended

 

 

 

December 27,

 

 

December 28,

 

 

 

2014

 

 

2013

 

Balance at beginning of period

 

$

216

 

 

$

300

 

Bad debt expense

 

 

150

 

 

 

6

 

Accounts written off

 

 

(81

)

 

 

 

Balance at end of period

 

$

285

 

 

$

306

 

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 and records a provision for obsolete and slow-moving inventory based on historical usage and estimated future usage. In assessing the ultimate realization of its inventory, the Company is required to make judgments as to future demand requirements. As actual future demand or market conditions may vary from those projected by the Company, adjustments to inventory valuations may be required.

Property, Plant and Equipment

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

 

Buildings and improvements

 

5 - 40 years

Equipment

 

3 - 10 years

Furniture and Fixtures

 

3 - 15 years

Routine maintenance costs are expensed as incurred. Major improvements that extend the life, increase the capacity or improve the safety or the efficiency of property owned are capitalized. Major improvements to leased buildings are capitalized as leasehold improvements and amortized over the shorter of the estimated life or the remaining lease term.

In September 2013, the Company exited its leased manufacturing and office facility in Zhenjiang, China. The property was leased from the noncontrolling interest owner of Peerless Propulsys. Early termination of the lease resulted in $0.2 million of expense included in costs of goods sold in the six months ended December 28, 2013.

Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable and exceeds its fair value. If conditions indicate an asset might be impaired, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. The impairment would be measured by the amount by which the asset exceeds its fair value, typically represented by the discounted cash flows associated with the asset.

Goodwill and Other Intangible Assets

Goodwill relates primarily to acquisitions and represents the difference between the purchase price and the fair value of the net assets acquired. Goodwill is not amortized; however, it is measured at the reporting unit level 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 estimated fair value of goodwill is less than the carrying value, goodwill is impaired and is written down to its estimated fair value.

11


PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—Unaudited

December 27, 2014

 

Intangible assets subject to amortization include licensing agreements, customer relationships and acquired sales order backlog. These intangible assets are amortized over their estimated useful lives based on a pattern in which the economic benefit of the respective intangible asset is realized. Intangible assets considered to have indefinite lives include trade names and design guidelines. The Company evaluates the recoverability of indefinite lived intangible assets annually, in the fourth quarter, or whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. The Company uses the market and income approach methods to determine whether impairment exists.

Fair Value of Financial Instruments

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

Revenue Recognition

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

The Company provides certain products under long-term, generally fixed-priced, contracts that may extend over multiple financial periods, where revenue and cost of sales are recognized in accordance with accounting rules relating to construction-type and production-type contracts. Amounts recognized in revenue are calculated using the percentage of cost completed (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. Change orders affecting the contract amount are considered only after receipt of a legally binding agreement. Incremental costs related to change orders are included in the estimate of total costs upon the earlier of receipt of the change order or the Company’s committed purchase obligation. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract. Approximately 80% of the Company’s revenue is accounted for using the percentage-of-completion accounting method.

Many of the Company’s customer contracts define events of default related to product performance and/or timing of delivery, as well as remedies for such events of default. Anticipated events of default and estimated remedies, such as those provided under liquidated damages clauses, are accounted for as reductions in revenue in the period in which the potential default is first identified and the damages can be reasonably estimated. Historically, the impact of liquidated damages has not been material to the Company’s consolidated financial position, results of operations, or cash flows. Anticipated losses on percentage-of-completion contracts are recorded in full in the period in which they become evident.

The Company typically bills customers upon the occurrence of project milestones. Cumulative revenue recognized may be less or greater than cumulative costs and profits billed at any point during a contract’s term. The resulting difference is recognized as “costs and earnings in excess of billings on uncompleted contracts” or “billings in excess of costs and earnings on uncompleted contracts” on the Consolidated Balance Sheets.

Contracts that are considered short-term in nature and require less product customization are accounted for under the completed contract method. Revenue under the completed contract method is recognized upon shipment of the product.

Pre-contract, Start-up and Commissioning Costs

The Company does not consider the realization of any individual sales order as probable prior to order acceptance. Therefore, pre-contract costs incurred prior to sales order acceptance are included as a component of operating expenses when incurred. Some of the Company’s contracts require the installation and placing in service of the product after it is distributed to the end user. The costs of start-up and commissioning and the related revenue associated with the relevant percentage of completion of these projects are recognized in the period incurred. Estimates are based on historical experience and expectation of future conditions.

12


PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—Unaudited

December 27, 2014

 

Warranty Costs

The Company provides to its customers product warranties for specific products during a defined period of time, generally less than 18 months after shipment of the product. Warranties cover the failure of a product to perform after it has been placed in service. The Company reserves for estimated future warranty costs in the period in which the revenue is recognized based on historical experience, expectation of future conditions, and the extent of 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 Company’s financial statements or tax returns. In the event that actual results differ from these estimates, the Company’s provision for income taxes could be materially impacted.

At December 27, 2014, the Company had $16.5 million of operating loss carry forwards, primarily in the United States and the United Kingdom. The portion attributable to the United States is available for carryover to future periods, subject to certain limitations with expirations beginning in fiscal 2034. The operating loss carryforward from the United Kingdom has no expiration. A valuation allowance of $5.6 million has been established to reduce the credits 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 months ended December 27, 2014, 175,487 restricted stock units with performance and service-based restrictions were excluded from the calculation of dilutive securities because they were anti-dilutive.  Options to acquire 14,000 shares of common stock were excluded from the calculation of dilutive securities for the three months ended December 27, 2014 because they were anti-dilutive.  For the three and six months ended December 28, 2013, 72,339 restricted stock units with performance and service-based restrictions were excluded from the calculation of dilutive securities because they were anti-dilutive. Options to acquire 37,200 shares of common stock were excluded from the calculation of dilutive securities for the three and six months ended December 28, 2013 because they were anti-dilutive. Warrants to acquire 839,063 shares of common stock were excluded from the calculation of dilutive securities for the three and six months ended December 28, 2013, because they were anti-dilutive. All warrants expired 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.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, we plan to adopt the new guidance beginning in

13


PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—Unaudited

December 27, 2014

 

fiscal 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance and management is currently evaluating which transition approach to use. Management is assessing the expected impact of this new guidance on our consolidated financial statements.

 

 

2. INVENTORIES

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

 

 

 

December 27,

 

 

June 28,

 

 

 

2014

 

 

2014

 

Raw materials

 

$

6,923

 

 

$

6,250

 

Work in progress

 

 

3,211

 

 

 

4,840

 

Finished goods

 

 

502

 

 

 

580

 

 

 

 

10,636

 

 

 

11,670

 

Reserve for obsolete and slow-moving inventory

 

 

(822

)

 

 

(837

)

 

 

$

9,814

 

 

$

10,833

 

 

 

3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

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

 

 

 

December 27,

 

 

June 28,

 

 

 

2014

 

 

2014

 

 

 

 

 

 

 

 

 

 

Costs incurred on uncompleted contracts and estimated earnings

 

$

105,566

 

 

$

97,551

 

Less billings to date

 

 

(93,777

)

 

 

(86,545

)

 

 

$

11,789

 

 

$

11,006

 

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

 

 

 

December 27,

 

 

June 28,

 

 

 

2014

 

 

2014

 

Costs and earnings in excess of billings on uncompleted contracts

 

$

24,204

 

 

$

19,854

 

Billings in excess of costs and earnings on uncompleted contracts

 

 

(12,415

)

 

 

(8,848

)

 

 

$

11,789

 

 

$

11,006

 

 

 

4. GOODWILL AND OTHER INTANGIBLE ASSETS

The goodwill acquired with the purchase of Combustion Components Associates, Inc. (CCA) in fiscal 2014 is allocated to and assessed at the Environmental Systems segment, and the remaining goodwill is assessed at the Process Products segment.

Goodwill

There were no changes in the carrying amount of goodwill for the six months ended December 27, 2014.

14


PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements—Unaudited

December 27, 2014

 

Acquisition-Related Intangibles

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

 

 

 

Weighted

Average

Estimated

Remaining

Useful

Life (Years)

 

Gross Value

Dec. 27, 2014

 

 

Accumulated

Amortization

 

 

Net Book

Value

Dec. 27, 2014

 

 

Gross Value

June 28, 2014

 

 

Accumulated

Amortization

 

 

Net Book

Value

June 28, 2014

 

Design guidelines

 

Indefinite

 

$

4,060

 

 

$

 

 

$

4,060

 

 

$

4,060

 

 

$

 

 

$

4,060

 

Customer relationships

 

7

 

 

8,840

 

 

 

(4,487

)

 

 

4,353

 

 

 

8,840

 

 

 

(4,112

)

 

 

4,728

 

Trade names

 

Indefinite

 

 

3,082

 

 

 

 

 

 

3,082

 

 

 

3,082

 

 

 

 

 

 

3,082

 

 

 

 

 

$

15,982

 

 

$

(4,487

)

 

$

11,495

 

 

$

15,982

 

 

$

(4,112

)

 

$

11,870

 

 

Amortization expense on finite-lived intangible assets was $0.2 million for each of the three months ended December 27, 2014 and December 28, 2013. Amortization expense of finite-lived intangibles assets for the six months ended December 27, 2014 and December 28, 2013 was $0.4 million and $0.3 million, respectively. Estimated aggregate finite-lived intangible asset amortization expense for the next five years is as follows (in thousands):

 

 

Fiscal Year

 

 

 

 

2015

 

$

300

 

2016

 

 

600

 

2017

 

 

599

 

2018

 

 

594

 

2019

 

 

594

 

 

 

5. ACCRUED PRODUCT WARRANTIES

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

 

 

 

Six months ended

 

 

 

December 27,

 

 

December 28,

 

 

 

2014

 

 

2013

 

Balance at beginning of period

 

$

2,527

 

 

$

2,241

 

Provision for warranty expenses

 

 

688

 

 

 

482

 

Warranty charges

 

 

(767

)

 

 

(340

)

Balance at end of period

 

$

2,448

 

 

$

2,383

 

 

 

6. ACCRUED LIABILITIES AND OTHER

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

 

 

 

December 27,

 

 

June 28,

 

 

 

2014

 

 

2014

 

Accrued compensation

 

$

2,783

 

 

$

2,735

 

Accrued services

 

 

5,074

 

 

 

3,839

 

Subsidiary short term debt

 

 

1,606

 

 

 

1,608

 

Deferred consideration

 

 

86

 

 

 

567

 

Other

 

 

1,572

 

 

 

961