UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended June 29, 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 No. 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)
Registrant’s telephone number, including area code: (214) 357-6181
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Each Exchange on Which Registered | |
| Common Stock, $0.01 par value per share |
The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 website, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| 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 aggregate value of the voting stock held by non-affiliates of the registrant as of December 29, 2012 was approximately $164.4 million.
The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of August 30, 2013 was 21,033,806.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the Registrant’s definitive Proxy Statement for its 2013 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
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This Annual Report on Form 10-K (the “Form 10-K”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact contained in this Form 10-K are forward-looking statements. You should not place undue reliance on these statements. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and our industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:
| • | 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 realize the full value of our backlog and the timing of revenue recognition 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 “Part I—Item 1A—Risk Factors” of this Form 10-K, and elsewhere in this Form 10-K. There may be other factors that cause our actual results to differ materially from the forward-looking statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. We undertake no obligation to publicly update or revise forward-looking statements, except to the extent required by law.
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PMFG, Inc. (“PMFG”) was incorporated as a Delaware corporation on August 15, 2008 as part of a holding company reorganization. In the reorganization, Peerless Mfg. Co. (“Peerless”), a Texas corporation, became a wholly owned subsidiary of PMFG. Under SEC rules, PMFG is a successor registrant to Peerless Mfg. Co.
As used in this Form 10-K, references to “Company,” “we,” “us” and “our” refer to (a) PMFG, Inc. and its subsidiaries after the holding company reorganization and (b) Peerless Mfg. Co. and its subsidiaries prior to the holding company reorganization, in each case unless the context requires otherwise. Additionally, references to “PMFG” refer to PMFG, Inc. and references to “Peerless” refer to Peerless Mfg. Co., in each case unless the context requires otherwise.
Our fiscal year end is the Saturday closest to June 30; therefore, the fiscal year end date will vary slightly each year. In a 52-week fiscal year, each of our quarterly periods will be comprised of 13 weeks, consisting of two four week periods and one five week period. In a 53-week fiscal year, three of our quarterly periods will be comprised of 13 weeks and one quarter will be comprised of 14 weeks.
References in this Form 10-K to fiscal 2013, fiscal 2012 and fiscal 2011 refer to our 52-week fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011, respectively.
| ITEM 1. | BUSINESS. |
Overview
We are a global 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 (“SCR”) systems, turbine emission exhaust systems and other complementary products, including heat exchangers, pulsation dampeners, water treatment systems and silencers. Our separation and filtration products remove contaminants from gases and liquids, resulting in improved efficiency, reduced maintenance and extended life of energy infrastructure. Our SCR systems convert nitrogen oxide, or NOx, into nitrogen and water, reducing air pollution and helping our power and industrial customers comply with environmental regulations. Our primary customers include equipment manufacturers, engineering contractors and owner-operators of energy infrastructure.
We have two reporting segments: Process Products and Environmental Systems. The Process Products segment includes separation and filtration, silencing and heat exchanger products and complementary products and services. The primary product of our Environmental Systems segment is SCR systems. We have provided more than 800 SCR systems and we believe we are one of the largest suppliers of these systems. The Process Products and Environmental Systems segments accounted for 84% and 16% of total revenue, respectively, for fiscal 2013, 87% and 13% of total revenue, respectively, for fiscal year 2012, and 73% and 27% of total revenue, respectively, for fiscal year 2011.
We have been in business for 80 years and believe we succeed in winning customer orders because of the relationships we have developed over our years of service, the long history of performance and reliability of our systems and products, our ability to deliver products in compliance with our customers’ needs and our advanced technical engineering capabilities on complex projects. We work
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closely with our customers to design, custom-engineer and fabricate our systems and products to meet their specific needs. Our customers include some of the largest natural gas processors, transmission and distribution companies, refiners, power generators, boiler manufacturers, compressor manufacturers and engineering and construction companies in the world. Reliable product performance, timely delivery, customer satisfaction and advanced engineering are critical in maintaining our competitive position.
A demand for energy in both developed and emerging countries, coupled with the global trend toward stricter environmental regulations, drives demand for our systems and products. These trends stimulate investment, both in new power generation facilities, refineries and related infrastructure and in upgrading older facilities to extend their useful lives. Further, in response to demand for cleaner, more environmentally responsible power generation, power providers and industrial power consumers are building new facilities that use cleaner eco-fuels, such as natural gas and bio fuels. Power providers in international and domestic markets also are upgrading and relicensing existing facilities and building new facilities that use nuclear power generation technology. We believe we are positioned to benefit from the increased use of both natural gas and nuclear technology.
Our products and systems are marketed worldwide. Revenue generated from outside the United States was approximately 47% in fiscal 2013, compared to 47% and 38% in fiscal 2012 and 2011, respectively. We expect our international sales to continue to be an increasingly important part of our business.
Our business strategy is to continue to pursue opportunities in high-growth international markets, capitalize on opportunities to deliver complete systems, use our technological capabilities to address a broader range of pollutants, further expand our technical expertise by investing in engineering talent and improve our manufacturing processes. In addition to our organic growth strategies, we will maintain an outward view of the industry and pursue strategic acquisitions. We believe these efforts will improve our financial performance and better position our company to compete globally.
Recent Developments
In an effort to increase our global manufacturing capacity and efficiency to meet anticipated future growth, we completed construction of an 80,000 square foot manufacturing facility in Denton, Texas and are in the process of constructing an approximately 175,000 square foot manufacturing facility in Zhenjiang, China. Both of these facilities will replace smaller existing facilities in those same cities. The new facility in Denton, Texas began manufacturing operation in July 2013. The new facility in Zhenjiang, China is expected to begin manufacturing operations during the first quarter of fiscal 2014.
We believe the global demand for equipment to serve the nuclear power generation in the future will create significant growth opportunities for the Company. This belief contributed to our decision on the timing and design of the new facilities in Texas and China. We are in the process of establishing research and development capabilities in China which will support all of our products. In addition, we have entered into a development agreement with a key customer to assist in the design and development of certain systems specific to nuclear power generation facilities.
In response to feedback from stockholders, as well as trends in compensation and governance practices, the Board of Directors adopted a number of changes to the Company’s governance and compensation practices, including adoption of a director resignation policy, elimination of the Stockholder Rights Plan and adoption of performance-based long-term incentive compensation awards for the Company’s executive officers.
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Our Industry
We primarily serve the natural gas infrastructure, power generation and oil refining and petrochemical processing markets. The U.S. Energy Information Administration (“EIA”) projects worldwide energy consumption to increase by 56% from 2010 to 2040, with the most rapid growth expected in emerging economies outside of the Organization for Economic Cooperation and Development (“OECD”) led by China and India. Over the long term, increases in worldwide energy consumption drive demand for the energy infrastructure products we provide. In the short term, a variety of factors affect demand for energy infrastructure, including general economic conditions, current and anticipated environmental regulations and the level of capital spending by companies engaged in energy production, processing, transportation, storage and distribution.
Natural gas infrastructure
The natural gas industry consists of the production, processing, transportation, storage and distribution of natural gas. Natural gas is primarily used for electricity generation, residential and commercial heating, industrial process and transportation uses. The International Energy Association (“IEA”) projects a pronounced shift in OECD countries away from oil and coal towards natural gas and renewables. The EIA estimates that worldwide natural gas consumption will increase 64% from 2010 to 2040, as natural gas continues to be the fuel of choice for the electric power and industrial sectors in many of the world’s regions. The largest production increases from 2010 to 2040 are expected to occur in non-OECD Europe and Eurasia, the OECD Americas and the Middle East. Natural gas delivery is a complex process that refines raw natural gas for industrial, commercial or residential uses. Initially, raw natural gas is extracted from the earth and cleansed of contaminants such as dirt and water at the well site. The natural gas is then transported through a gathering facility to a processing facility, where it is processed to meet quality standards set by pipeline and distribution companies, such as specified levels of solids, liquids and other gases. After processing, the natural gas is transmitted for storage or through an extensive network of pipelines to consumers.
The natural gas infrastructure network in the United States can transport natural gas to nearly any location in the contiguous 48 states. This network, which consists of more than 300,000 miles of interstate and intrastate pipelines, more than 530 natural gas processing plants, approximately 400 storage facilities and 1 LNG import facility, delivered more than 24 trillion cubic feet of natural gas in 2011 to over 500 gas-fired power plants and over 1,200 local distribution companies that support over 71 million industrial, residential and commercial customers. This infrastructure continually undergoes maintenance and expansion upgrades to meet demand and new government regulations.
Internationally, natural gas infrastructure in the high-growth, non-OECD nations is receiving significant investment, as production, transmission and processing capacity is below demand expectations for these nations. In a 2012 report, the IEA cited that China’s natural gas demand increased from 900 billion cubic feet in 2000 to around 4,600 billion cubic feet in 2011. The EIA projects demand for natural gas in China to continue to grow about 5% per year over the next 20 years. China had nearly 21,000 miles of natural gas pipelines with a capacity of 3.5 trillion cubic feet at the end of 2009 and plans to construct 14,000 miles of new pipelines between 2009 and 2015. Our separation and filtration and silencing products are used throughout the natural gas infrastructure network.
Power generation
Power generation encompasses a broad range of activities related to the production of electricity. The primary types of fuel used to generate electricity are coal, natural gas and nuclear. In 2012, coal accounted for 37% of United States power generation, followed by natural gas (30%) and nuclear (19%).
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In the United States, concerns about potential environmental regulations enhance the attractiveness of natural gas-fired power plants compared to coal-fired power plants, which generally have higher pollutant emission rates than natural gas-powered plants. Natural gas-fired power plants have lower initial capital needs and they are more flexible in terms of operating times than coal plants. To meet the expected surge in energy demand, many countries, including France, Spain and the United States, are relicensing existing nuclear facilities while developing countries such as China, India and South Africa are building additional nuclear facilities. Our products currently support both natural gas and nuclear power generation markets, providing separation and/or filtration equipment, silencing equipment and SCR pollution reduction systems to natural gas power generation stations, as well as separation equipment to nuclear power generation stations.
Refining, oil production and petrochemical processing
Refining, oil production and petrochemical processing involves the producing, refining and processing of fuels and chemicals for use in a variety of applications, such as gasoline, fertilizers and plastics. In response to increasing international demand for petrochemicals and refined products, companies are producing more products from new sources, constructing new refineries and petrochemical processing facilities as well as expanding existing facilities, creating opportunities for both our Process Products and our Environmental Systems. In many cases, these new and expanded facilities must comply with stricter environmental regulations, which influence both choice of fuel and demand for systems to control exhaust emissions. These facilities use a broad range of our products and systems, including our SCR pollution reduction systems, water processing systems and our separation and filtration products.
Market Opportunity
We believe a number of trends in the natural gas infrastructure, power generation, oil production, and refining and petrochemical processing markets create significant opportunities for us. These trends include:
Increasing Worldwide Dependence on Natural Gas Requires Substantial Infrastructure Investment.
According to the EIA, worldwide marketed energy consumption is expected to increase by nearly 56% from 2010 to 2040. The most rapid growth is expected in emerging economies outside the OECD, led by China and India. The less-developed economies, which are driving worldwide energy demand growth, will require substantial infrastructure investment as they grow. Rapid industrialization in countries such as China and India is straining existing power generation capacity. Manufacturing growth in these locations also will require additional energy, while consumer demand is expected to rise with increased urbanization and higher standards of living. According to the IEA’s World Energy Outlook 2012, from 2010 to 2035 global natural gas supply infrastructure investment to support this demand growth is projected to be approximately $8 trillion from 2011 to 2035.
New Production Technologies and the Increased Global Price of Crude Oil is Shifting the Supply and Demand Dynamics of Natural Gas and Oil.
The success of new production technologies like hydraulic fracturing and horizontal drilling have doubled the estimated amount of natural gas resources that can be produced economically around the world, from 400 trillion cubic meters (“tcm”) from conventional resources to over 800 tcm from all conventional and unconventional resources like shale gas. These abundant supplies that can now be developed and produced at a relatively low cost have significantly increased the attractiveness of natural gas as a fuel choice worldwide. Domestically, increased natural gas reserves provide a path for increased
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United States energy independence from foreign oil as well as a cleaner, competitively priced and reliable alternative to coal as a fuel source for electricity generation. Internationally, the same opportunity exists given the wide dispersion of natural gas resources around the world as well as the substantial growth of LNG transport further globalizing the market for natural gas.
High oil prices globally have made the production of crude oil from unconventional sources, like oil sands deposits, more economical. The two primary methods of crude oil production are surface mining and extraction techniques such as steam-assisted gravity drainage (“SAGD”) to access the oil from oil sands. The world’s largest oil sands deposits are located in Canada and Venezuela, with combined deposits approximately equal to the world’s total reserves of conventional crude oil. Only 20% of all oil sand resources are recoverable through surface mining, while the remaining 80% are recoverable through enhanced drilling methods, including SAGD. In order to produce the large quantities of steam needed for the SAGD process, specialized equipment is required, including our separation and filtration products.
Increasingly Stringent Emissions Standards Spur Demand for Our Products.
The United States Environmental Protection Agency (“EPA”) and other government regulators are adopting stricter environmental requirements, including the recent adoption of the Mercury and Air Toxics Standards in December 2011. Regulators have identified the harmful byproducts of burning coal in power generation facilities as a primary target of new rules. These include NOX and SO2 (sulfur dioxide) emissions, mercury and other hazardous pollutants which are byproducts of natural gas and coal-fired power plants and have the potential to cause serious respiratory conditions, harm vegetation and contribute to greenhouse gas production. To address the dangers of power generation plant emissions, the EPA’s Mercury and Air Toxics Standards provide non-compliant power plants three years to meet new emissions requirements.
Power plants that do not meet new emissions standards must be retrofitted with pollution control equipment, most often with systems like those we provide, if they are to continue operating. The resulting retirement of significant amounts of coal-fired capacity, combined with growth in electricity demand, may necessitate the construction of additional power plants that must also be equipped with pollution control systems like those we provide. ICF International expects that new regulations could force coal-fired power plant closures of up to 20% of the current electrical generating capacity in the United States.
Internationally, governmental agencies are also enacting new regulations to reduce emissions from power generation facilities. For example, Saudi Arabia and most OECD nations have adopted regulations to reduce or control NOX emissions. The new regulations require new facilities to incorporate improved NOX emission control capabilities into their designs and some existing facilities to be retrofitted to comply with these regulations.
Shift to Cleaner Energy Sources.
In response to demand for cleaner, more environmentally responsible power generation, power providers are building new facilities that use cleaner energy, including natural gas, nuclear technology and renewable power. In the United States, concerns about potential environmental regulations have contributed to slowed construction of proposed coal-fired plants. However, natural gas has increasingly become a preferred fossil fuel in power generation due to its favorable environmental profile compared to traditional coal combustion. From the 1990s into the 21st century, natural gas-fired power plants have constituted the vast majority of new power generation capacity built in the United States. At present, 223 gigawatts of new generating capacity will be needed between 2010 and 2035, with natural gas-fired plants accounting for an estimated 60% of this additional capacity. Further, reliable natural gas power generation
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will also play an increasingly important role in providing back-up power to growing supplies of intermittent renewable power. As an alternative energy source that is one of the least carbon-intensive fuels available, nuclear power generation is also expected to grow. According to the International Atomic Energy Agency, global nuclear capacity is projected to grow from a base of 375 gigawatts in 2010 up to 803 gigawatts by 2030. Capacity expansion in Asia, led by China, represents the bulk of these increases. As a leading provider of products and systems used in new construction of natural gas and nuclear power generation facilities, we are well positioned to capitalize on the growing global adoption of clean energy sources in power generation.
Advanced Age of the United States Coal-Fired Plants and Worldwide Nuclear Plants Will Require New Plants and Capital Investment to Maintain Current Output.
Coal-fired power plants are generally designed with an expected useful life of approximately 40 years and their construction and refurbishment is capital intensive. The average age of coal-fired power plants in the United States is 42 years, and more than one-quarter of the existing fleet was built in the 1950s. Similarly, the average age of the world’s operating nuclear power generation fleet is 26 years with many plants reaching the end of their original design lives. Internationally, nuclear power generation capacity is anticipated to grow on average at 2.9% per year. The majority of new nuclear capacity additions are expected to be built in non-OECD countries, however, as public skepticism has tempered widespread adoption of nuclear energy in many developed nations. Natural gas is the fuel source most likely to benefit from a switch away from coal and nuclear because of its relative abundance, environmental benefits compared to other fossil fuels and lower capital cost. Furthermore, coal and nuclear plants can take more than five years for permitting and construction, while most natural gas plants can be permitted and erected in approximately two years. Newly constructed natural gas-fired power plants in the United States, with few exceptions, will be required to use SCR systems like those we produce to comply with environmental regulations.
Natural Gas is Well-Positioned to Capture New Infrastructure Investments to Support Global Energy Demand.
Natural gas plays a major role in most sectors of the modern economy including power generation, industrial, commercial and residential markets. Further, global uncertainties affecting the energy sector represent opportunities for natural gas. When replacing other fossil fuels for power generation, reliable natural gas generation can lead to significantly lower emissions at significantly lower capital costs. It can also help diversify energy supply and improve energy security both domestically and abroad. In order to meet an expected 50% rise in energy demand by 2035, several non-OECD countries have committed to increasing their reliance on natural gas as a cleaner energy source relative to coal. China’s current five year plan for the period 2011-2015, for example, aims to increase the share of the country’s energy mix met by natural gas from 3.8% in 2008 to 8.3% by 2015, corresponding to an expected tripling of natural gas use from 2008 to 2015.
According to the Interstate Natural Gas Association of America, energy demand in the United States and Canada through the year 2030 will require approximately $133 billion to $210 billion of new investment in infrastructure, including $108 billion to $163 billion to build an estimated 29,000 to 62,000 miles of additional natural gas pipelines and $16 billion to $25 billion for storage infrastructure investment. Internationally, the EIA estimates that approximately 77% of the world’s natural gas reserves are located in the Middle East, Eurasia, Central America and South America, where pipeline systems, compressor stations and LNG storage facilities are generally less developed than the systems in North America. Consequently, new pipeline systems and the related facilities will need to be constructed in these regions to transport and store natural gas. The EIA expects world liquefaction capacity for natural
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gas to increase from eight trillion cubic feet in 2008 to 19 trillion cubic feet in 2035. Additionally, as known reserves of traditional natural gas are depleted, development of other resources, such as deep offshore reserves, will increase, which will require more complex infrastructure. In total, worldwide gas supply infrastructure investment is projected to be approximately $8 trillion from 2011 to 2035.
Our Competitive Strengths
We believe the following competitive strengths differentiate us from our competitors and position us well to capitalize on global energy trends:
Strong, Competitive Position in Attractive Global End Markets.
We believe we are a leading global provider of custom-engineered systems and products and have established a strong, competitive position in attractive global markets by reliably providing custom-engineered, quality systems and products to our customers. We utilize our engineering know-how to offer our customers complete systems and subsystems. Complete fully engineered systems generally have higher profit margins than components and we believe allow us to develop longer-term, preferred supplier relationships with customers. We consider many of our systems and products to be innovative and technologically advanced. We continually seek to improve our existing systems and products and develop new systems and products. We believe our history of performance has allowed us to gain substantial market share and a lead position in some of our products. For example, we have provided more than 800 SCR systems for various industry clients that include emissions reductions of facilities that generate more than 100,000 megawatts of electric power capability. We believe we have provided more SCR systems than any other supplier of SCR systems.
Strong Reputation for Quality and Reliability with a Diverse Base of Longstanding Customer Relationships.
We have developed strong customer relationships by using our technical sales, engineering and manufacturing resources to deliver quality systems and products and by providing a high level of customer service. We focus our efforts on consistently and reliably meeting our customers’ needs with respect to system and product performance and timely delivery. We believe we have established long-term preferred supplier relationships with many of our customers. Further, we serve a diverse client base with no single customer representing more than 10% of revenue in fiscal years 2013, 2012, and 2011.
Substantial Engineering and Technical Expertise.
We believe that we compete most effectively in providing solutions that require a high level of complex design and engineering expertise. We currently employ approximately 80 qualified engineers with backgrounds in chemical, mechanical, industrial, structural, process and civil engineering. We believe that our customers depend on our engineering and technical expertise and experience in designing complex systems to meet their individual needs. We regularly employ sophisticated computer and physical modeling programs, including advanced computational fluid dynamic modeling, to verify the performance criteria of designs prior to manufacturing our systems and products. We continue to invest in research and development to further broaden our capabilities. We also believe our patented products and proprietary know-how developed over years of industry experience provides us with a competitive advantage.
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Broad Suite of Mission Critical Technologies and Products.
We offer an extensive line of systems and products that our customers rely on to meet their production goals and regulatory requirements. We believe we can advance our proprietary technologies to further broaden our portfolio of systems and products and expand our market potential. For example, we have utilized the experience and expertise gained from our SCR systems to broaden the application of our environmental control technology to address renewable and alternative fuels, such as bio fuels. We are also applying our separation technologies to a wider range of fluids such as molten sulfur and petroleum products. As we continue to broaden our line of high quality systems and products, we believe we are better able to meet our customers’ needs, enter new markets and add new customers.
Established Network of Subcontractors.
We employ subcontractors at various locations around the world to meet our customers’ needs in a timely manner, meet local content requirements and reduce costs. Subcontractors generally perform the majority of our manufacturing for international customers, other than those located in China. We also utilize subcontractors in North America, primarily to add additional non-proprietary manufacturing capacity. We believe the reach of our network of subcontractors expands the benefit of our internal capabilities, improves the timeliness of our delivery and achieves more competitive pricing, which improves our market position. We also believe our network of subcontractors provides us with significant scalability of resources, allowing us to maintain efficient operations and accommodate large or urgent orders, and enhances our reliability, as we can more timely and appropriately shift work in the event that any particular subcontractor is unable to meet demand at any given time.
Our Business Strategy
Our objective is to enhance our position as a leading global provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. The key elements of our strategy to achieve this goal are:
Capitalize on High-Growth International Markets.
We believe we have established a strong international presence, with physical offices on three continents and sales representatives in 34 countries. International sales represented approximately 47%, 47% and 38% of our total revenue for fiscal years 2013, 2012 and 2011, respectively. The current international markets for our systems and products are substantial and we believe that these markets are growing more rapidly than our domestic markets due to the significant growth in the use of natural gas, nuclear power and the demand for additional power generation in China, Latin America, the Middle East and Europe. We believe we are well-positioned to capitalize on this growth. To exploit these opportunities, we are dedicating additional sales and marketing resources to our international operations. For example, through our majority-owned joint venture, Peerless Propulsys China Holdings LLC, we have established sales operations and expanded our manufacturing operations in China. We opened a branch office in the United Arab Emirates in 2013 to further establish our presence in the Middle East.
Expand and Diversify Product Offering to Better Meet Our Customers’ Needs.
We believe we have opportunities to further expand and diversify our technology and product offerings in related markets both through internal technology development and strategic acquisitions to meet additional needs of our customers. For example, we have taken the expertise gained from our SCR systems and have applied it to systems for alternative fuel sources, such as bio fuels. We also have expanded the applications of our separation and filtration technology to liquids such as molten sulfur and petroleum products. We continue to pursue additional avenues for expansion and diversification. By expanding our product and technology offerings, we believe we can broaden our customer base and capture additional market share.
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Invest in Additional Manufacturing Capacity and Global Supply Chain Capabilities.
We are expanding our manufacturing capacity both in the United States and China. Other initiatives will include improving the efficiency of our manufacturing operations, as well as ensuring we have developed high quality, responsive and efficient relationships with our vendors and subcontractors within and around the countries in which we operate. We believe these supply chain initiatives will help ensure that we continue to deliver high quality products within the timeframe established by our customers, while maintaining competitive pricing.
Continue to Offer Technology Solutions that Support Increasingly Stringent Environmental Applications.
We believe a significant portion of our clients’ future capital expenditures will be driven by increasingly demanding environmental requirements. We have structured our business to provide systems and products that are designed to allow our customers to comply with changing regulatory standards. We continue to improve our product and system offerings to meet the changes in these standards as well as the changes in demand for our products and systems as new standards are implemented.
Pursue Selective Acquisitions.
We believe strategic acquisitions will help us to broaden our product offerings, expand our markets, advance our research and development capabilities and provide opportunities to lower raw material costs and leverage the cost of our corporate overhead. We continually review potential acquisitions and believe we have established a diligent process for identifying acquisition opportunities.
Our Systems and Products
We classify our systems and products into two broad groups consistent with our reportable segments: Process Products and Environmental Systems. Below is a brief description of our primary offerings for each of our segments.
Process Products
Our Process Products segment accounted for 84% of total revenue in fiscal 2013, compared to 87% of total revenue in fiscal 2012 and 73% of total revenue in fiscal 2011. Our separation and filtration systems and products improve efficiency, reduce maintenance and extend the life of energy infrastructure by removing liquid contaminants from gases, removing solid contaminants from gases or liquids and separating different liquids. Our separation and filtration systems and products are applied in the natural gas infrastructure, oil production, power generation, refining and petrochemical processing and other specialized industries. In addition, products in our Process Products segment include pulsation dampeners and heat exchangers. The segment also includes industrial silencing equipment to control noise pollution on a wide range of industrial equipment. Our Process Products systems and products include:
| • | Vane Separators. Also known as mist extractors, these devices remove liquids from vapor or gas streams and can be used within vertical or horizontal pressure vessels, directly within ductwork systems or mounted to bulkheads. |
| • | Centrifugal Separators. We offer three types of centrifugal separators: swirl tubes, which operate in both horizontal and vertical pressure vessels, and cyclones, which operate in vertical pressure vessels, and tuyeres, which operate primarily within in-line horizontal pressure vessels. These devices remove both solid particles and liquid droplets from vapor or gas streams. |
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| • | Filter Separators. Our filter separators are typically used in natural gas pipelines to remove solid and liquid particles from gas streams. This product combines our separation and filtration technologies into one product. |
| • | Three-Phase Separators. We offer a horizontal gas scrubber, which is a device that separates large liquid volumes from gas and is typically used for well head test separators. We can design the scrubber for three phase applications—oil, water and gas. |
| • | Absolute Separators. Our absolute separator is designed for maximum separation efficiency of submicron liquid droplets and aerosols. Our customers use absolute separators primarily within refineries and chemical plants to protect critical down-stream process equipment. |
| • | Fuel Gas Conditioning Systems. Our fuel gas conditioning systems remove particulate matter, hydrocarbon and water droplets from fuel gas, which contaminants can disrupt the gas systems of combustion turbine engines. Our fuel gas conditioning systems may also include bulk liquid removal, pressure regulation and temperature control. These systems are usually applied in electric power generating plants and gas compression systems. |
| • | Gas Filters. Our gas filters remove solid particles, such as dust, dirt, scale and rust, from a flowing pressurized gas stream. |
| • | Nuclear Plant Steam Separators. Nuclear power generators use our separators, also known as steam dryers, as the final stage of steam/water separation within a reactor vessel or steam generator vessel. These devices remove water droplets from the process steam to maximize thermal efficiency in the steam turbine and minimize erosion and corrosion of steam loop piping. Our customers also use similar separators between the high pressure and low pressure turbines to increase thermal efficiency. |
| • | Inlet Air Treatment Systems. Military ships and commercial maritime vessels use our vane separators, along with coalescer panels and filters, to protect gas turbines and air intake ducts by separating sea spray, salts and other solid particles. |
| • | Pulsation Dampeners. Gas compressors produce pulsations in the attached piping system, which can reduce compressor efficiency, cause severe damage to compressor cylinders and cause cracking in pipes and vessels. Our customers apply our pulsation dampeners to the suction and discharge of each compressor cylinder to reduce pulsation levels to acceptable limits. |
| • | Heat Exchangers. We offer custom engineered heat transfer equipment. Our products include double-pipe and multi-tube hairpin exchangers and shell-and-tube exchangers. |
| • | Industrial Silencers. Our industrial silencing equipment controls noise pollution associated with a wide range of industrial processes. Our silencing products include vent and blowdown silencers, blower silencers, engine silencers, gas turbine silencers, compressor silencers and vacuum pump silencers. |
| • | Skimovex Oily Water Treatment Systems. Offshore and onshore production and processing facilities require treatment systems to remove oil and contaminants from both produced and run off water streams. Our oily water treatment systems include plate pack separators and induced air/gas flotation. Our plate pack separators include options for downflow and crossflow plate pack, steel tank for both atmospheric and pressurized operation and below grade installation in concrete basin. Our induced air/gas flotation is used to aerate the liquid in order to facilitate decontamination. |
Environmental Systems
Our Environmental Systems segment accounted for 16% of total revenue in fiscal 2013, compared to 13% of total revenue in fiscal 2012 and 27% of total revenue in fiscal 2011. We design, engineer, fabricate and sell environmental control systems and products for air and noise pollution abatement. Our environmental control systems and products are applied in the natural gas infrastructure, power generation, refining and petrochemical processing and other specialized industries. Examples of these systems and products include:
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| • | SCR Systems. Our SCR systems are our primary pollution control product. These systems convert NOX emissions produced by burning hydrocarbon and organic fuels such as coal, gasoline, natural gas, wood, grass and grain, into nitrogen and water vapor. Our system operates by injecting an ammonia reagent into the exhaust gas and mixing the reagent with the exhaust gas prior to passing it through a catalyst. We supply SCR systems for a variety of applications, including both simple cycle and combined cycle gas power plants, package boilers, process heaters, internal combustion engines and other combustion sources. |
| • | Oxidation Systems. Our oxidation systems oxidize carbon monoxide and a variety of volatile organic compounds into carbon dioxide without the use of any additional chemical reagent. The catalyst is the only component used to accelerate the oxidation reaction. The oxidation system is separate from the SCR system and is typically located upstream of the SCR system. |
Customers
Our customers are geographically diversified and our systems and products are not dependent upon any single customer or group of customers. The loss of any single customer or group of customers would not have a material adverse effect on our business as a whole. However, the custom-designed and project-specific nature of our business can cause significant variances in sales to specific customers from year to year. No single customer accounted for more than 10% of the Company’s consolidated revenue in fiscal 2013, 2012 or 2011.
We sell the majority of our separation and filtration systems and products, including gas separators, filters and conditioning systems, to gas producers, gas gathering, transmission and distribution companies, chemical manufacturers and refiners, either directly or through contractors engaged to build plants and pipelines. We also sell these products to manufacturers of compressors, turbines and nuclear and conventional steam generating equipment. We sell our marine separation and filtration systems primarily to shipbuilders. We also sell our heat exchangers and pulsation dampeners to power generation owners and operators, refiners, petrochemical processors and specialty industrial users.
We sell our environmental control systems and products to power generators, engineering and construction companies, heat recovery steam generator manufacturers, boiler manufacturers, refiners, petrochemical plants and others who desire or may be required by environmental regulations to reduce NOx emissions and ground level ozone, of which NOx is a precursor.
Sales and Marketing
We believe our sales and marketing efforts have helped establish our reputation for providing innovative engineering solutions and meeting our customers’ needs in a timely, cost-efficient manner. The sales and marketing of our systems and products largely depends upon the type of offering, type of market and extent of engineering involvement in the sales cycle.
We market our products worldwide through independent sales representatives who sell on a commission basis. These independent representatives, substantially all of whom have technical backgrounds, work in conjunction with our application engineers. We also sell our products directly to customers through our internal sales force. Our promotional and marketing activities include direct sales contacts, participation in trade shows, an internet website, advertising in trade magazines and distribution of product brochures.
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Competition
The markets we serve are highly competitive and fragmented. We believe no single company competes with us across the full range of our systems and products. Competition in the markets we serve is based on a number of considerations, including price, timeliness of delivery, technology, applications experience, know-how, reputation, product warranties and service. We believe our reputation, service and technical engineering capabilities differentiate us from many of our competitors, including those competitors who often offer products at a lower price.
We believe our primary competitors for our separation and filtration systems and products include Anderson Separators Company, King Tool Company, NATCO Group (Cameron), PECO-Facet, a subsidiary of CLARCOR, Inc., Pall Corporation and Koch Industries. We believe our primary competitors for our environmental control systems and products include Envirokinetics, Hitachi Zosen Corporation, Applied Utility Systems (Johnson Matthey), Global Power Equipment Group, Inc. and Universal Silencer. While no single company competes with us in all of our product lines, various companies compete with us in one or more product lines. Some of these competitors have substantially greater sales and assets and greater access to capital than we do.
Net Bookings and Backlog
The following table shows the activity and balances related to our backlog for the fiscal years 2013 and 2012 (in millions):
| Fiscal 2013 | Fiscal 2012 | |||||||
| Backlog at beginning of period |
$ | 99.9 | $ | 89.0 | ||||
| Net bookings |
130.8 | 152.6 | ||||||
| Acquired backlog |
— | 5.0 | ||||||
| Removed from backlog |
(12.5 | ) | (11.4 | ) | ||||
| Revenue recognized |
(134.0 | ) | (135.3 | ) | ||||
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| Backlog at end of period |
$ | 84.2 | $ | 99.9 | ||||
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Our backlog of uncompleted orders was approximately $84.2 million at June 29, 2013, compared to $99.9 million at June 30, 2012. Backlog includes contractual purchase orders that are deliverable in future periods less revenue recognized on such orders to date. Of our backlog at June 29, 2013, we estimate approximately 80% will be completed during fiscal 2014. Orders in backlog are subject to change, delays, or cancellation by our customers.
During fiscal 2013, the Company removed from backlog cancelled customer purchase orders totaling $12.5 million related to a project in Latin America. The purchase orders were received in fiscal 2012. Cancellation of the purchase orders directly related to the customer’s decision to redesign the facility and make changes to planned construction resources. We currently anticipate having an opportunity to bid on the project if or when it moves forward. The project removed from backlog in fiscal 2012 relates to an environmental project in the United States. This purchase order was received in the fall of fiscal 2010 as part of a multi-unit order.
Raw Materials
We purchase raw materials and component parts essential to our business from a number of reliable suppliers. From time to time, we are exposed to rapid increases in raw material costs and temporary disruptions in supply, including steel and other component parts that we purchase. We believe raw materials and component parts will be available in sufficient quantities to meet our anticipated demand for at least the next 12 months.
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Environmental Regulations
Our operations are subject to a number of federal, state and local laws and regulations relating to the protection of the environment. In connection with our acquisition of Nitram Energy, Inc. (“Nitram”) and the related financing transactions, environmental site assessments were performed on our then existing manufacturing properties, as well as those owned by Nitram. As a result of the findings of such investigation we subsequently remediated the soil at a facility which was sold during fiscal 2013 and are continuing to monitor the groundwater at that site. We have an accrued liability of $0.1 million at June 29, 2013 for the estimated remaining costs relating to these environmental matters. We are seeking reimbursement for the full cost of the remediation and ongoing and future monitoring activities under our purchase agreement with former stockholders of Nitram.
Employees
As of June 29, 2013, we employed approximately 450 full-time employees, including our employees at our joint venture in China. Excluding our employees at our joint venture in China, none of our employees are represented by a labor union or are subject to a collective bargaining agreement. We did not experience any significant labor difficulties during fiscal 2013. We believe our employee relations are good.
Intellectual Property
We rely on a combination of patent, trademark, copyright and trade secret laws, employee and third-party nondisclosure/confidentiality agreements and license agreements to protect our intellectual property. We sell most of our products under a number of registered trade names, brand names and registered trademarks, which we believe are widely recognized in the industry. All of the Company’s filed and issued United States patents have a duration of 20 years from the issuance date and the expiration dates of these patents range from 2014 through 2031. The Company does not consider any particular patent or intellectual property to be critical to the Company’s long-term performance.
We anticipate we may apply for additional patents in the future as we develop new products and processes. Any issued patents that cover our proprietary technology may not provide us with substantial protection or be commercially beneficial to us. The issuance of a patent is not conclusive as to its validity or its enforceability. If we are unable to protect our technologies or confidential information, our competitors could commercialize our technologies. Competitors may also be able to design around our patents. In addition, we may face claims that our products, services or operations infringe patents or misappropriate other intellectual property rights of others.
With respect to proprietary know-how, we rely on trade secret protection and confidentiality agreements. Monitoring the unauthorized use of our proprietary technology is difficult and the steps we have taken may not prevent unauthorized use of such technology. The disclosure or misappropriation of our trade secrets and other proprietary information could harm our ability to protect our rights and our competitive position.
Research and Development
Our research and development expenses were $0.7 million for fiscal 2013, $0.6 million for fiscal 2012 and $0.5 million for fiscal 2011. We believe we have additional opportunities for growth by developing new technologies and products that offer our clients greater performance. We also continue to support research and development to improve existing products and manufacturing methods.
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Website Information
Our corporate website is located at www.peerlessmfg.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) available free of charge through our website as soon as reasonably practicable after we electronically file the reports with, or furnish them to, the SEC. Our website provides access to reports filed by our directors, executive officers and certain significant stockholders pursuant to Section 16 of the Exchange Act. In addition, our corporate governance policies, corporate code of conduct and charters for the standing committees of our Board of Directors are available on our website. The information on our website is not incorporated by reference into this Form 10-K. In addition, the SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements and other information that we file electronically with the SEC.
Executive Officers of the Registrant
As of June 29, 2013 our executive officers were as follows:
| Name |
Age | Position with the Company | ||||
| Melissa G. Beare |
38 | Vice President, General Counsel and Secretary | ||||
| Peter J. Burlage |
49 | President and Chief Executive Officer | ||||
| John H. Conroy |
48 | Vice President, Engineering and Product Development | ||||
| Ronald L McCrummen |
48 | Executive Vice President and Chief Financial Officer | ||||
| Sean P. McMenamin |
48 | Vice President, Manufacturing and Supply Chain | ||||
| Jon P. Segelhorst |
43 | Vice President, Sales and Market Business Units | ||||
| David Taylor |
48 | Vice President, Asia Pacific | ||||
Melissa G. Beare joined the Company in December 2008 as Vice President and General Counsel. Prior to joining the Company, Ms. Beare served as the Assistant General Counsel of Advanced Neuromodulation Systems, Inc., a subsidiary of St. Jude Medical, Inc., from 2004 through 2008. Prior to that, she was an attorney at Jones Day and at Hughes and Luce, LLP in Dallas, Texas, working in their respective corporate practices. Ms. Beare earned her B.A. from the University of Texas at Austin and holds a J.D. from the University of Texas at Austin School of Law. Ms. Beare is licensed to practice law in the State of Texas.
Peter J. Burlage joined the Company in 1992. Mr. Burlage has served as our President and Chief Executive Officer and a member of our Board of Directors since June 2006. He served as Executive Vice President and Chief Operating Officer from October 2005 to June 2006 and Vice President, Environmental Systems from January 2001 to October 2005. Mr. Burlage also served as Vice President of Engineering from 2000 to 2001 and SCR Division Manager from 1997 to 2000. Mr. Burlage earned his B.S. in Mechanical Engineering from the University of Texas, Arlington and M.B.A. from Baylor University.
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John H. Conroy joined the Company in July 2010. Mr. Conroy has served as our Vice President of Engineering and Product Development since December 2010. He served as our Director of Business & Product Development for the CEFCO project from July 2010 to December 2010. Prior to joining the Company, Mr. Conroy served as the General Manager of Red Hawk Texas from 2008 to 2010, an operating division of United Technologies (UTC). Prior to his tenure at Red Hawk, Mr. Conroy served as President from 2004 to 2008 and VP-Engineering from 2002 to 2004 of Forney Corporation, a subsidiary of UTC. Mr. Conroy earned his B.S. in Chemical Engineering from the University of California, Berkeley and M.B.A. from Southern Methodist University.
Ronald L. McCrummen joined the Company in April 2011 as our Executive Vice President and Chief Financial Officer. Prior to joining Peerless, Mr. McCrummen was the Senior Vice President and Chief Accounting Officer of Dean Foods, Inc. from 2004 until November 2010. Prior to his tenure at Dean Foods he served as a partner of Ernst & Young, LLP from 1998 until 2004. Mr. McCrummen is a certified public accountant and holds a B.S. in Business Administration and Accounting from St. Louis University.
Sean P. McMenamin joined the Company in 2001. Mr. McMenamin became our Vice President of Manufacturing and Supply Chain in December, 2010. Prior to that time, Mr. McMenamin served as our Vice President, Operations Control since April 2010 and our Vice President, Environmental Systems since January 2006. Mr. McMenamin earned his B.S. in Mechanical Engineering from the New Jersey Institute of Technology and M.B.A. in Finance from Lehigh University.
Jon P. Segelhorst joined the Company in August 2006. Mr. Segelhorst became our Vice President, Sales and Market Business Units in April 2010. Prior to that time, he served as our Vice President, Pressure Products since January 2007. He served as General Manager of our Pressure Products business from August 2006 to January 2007. Prior to joining the Company, Mr. Segelhorst managed surge protection and DSL product lines for Corning Cable Systems, a telecommunications equipment company, from 1996 to 2007. Mr. Segelhorst earned his B.S. in Mechanical Engineering from the University of Texas at Austin and M.B.A. from Baylor University.
David Taylor joined the Company in 1988. Mr. Taylor was named our Vice President, Asia Pacific in 2010. Prior to that time, Mr. Taylor served as our Vice President of Separation Systems since 2000. He has served in a variety of engineering, sales and management positions since joining the Company. From 1997 through 1999, Mr. Taylor served as Director of Sales and Engineering in our Singapore office in support of our Asia Pacific operations and resumed responsibility for our Asia Pacific operations in July 2004. Mr. Taylor earned his B.S. in Mechanical Engineering from Southern Methodist University.
| ITEM 1A. | RISK FACTORS. |
In evaluating the Company, the factors described below should be considered carefully. The occurrence of one or more of these events could significantly and adversely affect our business, prospects, financial condition, results of operations and cash flows.
Industry
The current economic uncertainty in domestic and global markets and the volatility of the credit markets may continue to negatively impact us.
The domestic and international economies experienced a significant recession in 2009 and 2010, which included an increase in credit restrictions in the global financial markets. Market conditions in fiscal 2013 indicate a continued slow and uneven economic recovery, with U.S. indicators pointing to expectations of continued dampened growth of real gross domestic product. The International Monetary
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Fund’s World Economic Outlook for 2013 indicates global growth is projected to remain subdued at about the 3 percent level from 2012. The risk of a more protracted recession around the euro area remains and new risks have emerged, including a longer growth slowdown in the emerging economies and the possibility that the unwinding of monetary policy stimulus in the U.S. leads to a sustained capital flow reversal. A global recession and the resulting domestic and international credit restrictions would have an effect on the markets that we serve and the ability of financial institutions to provide credit. Our customers are dependent on the financial institutions to provide liquidity for capital programs and operating capital. We expect our revenue, earnings and liquidity to be impacted to the extent that global credit restrictions impact the markets we serve.
Changes in the price, supply or demand for natural gas could have an adverse impact on sales of our separation and filtration systems and products and our operating results.
A large portion of our Process Product business is driven by the construction of natural gas infrastructure. Increased demand for natural gas may result in the construction of additional infrastructure. Higher prices of natural gas, while beneficial to exploration activities and the financing of new projects, can adversely impact the demand for natural gas. Excess supply could negatively impact the price of natural gas, which could discourage spending on related capital projects.
Changes in the power generation industry could have an adverse impact on sales of our environmental control systems and products and our operating results.
The demand for our environmental control systems and products depends in part on the continued construction of new power generation and related facilities and the retrofitting of existing facilities. The power generation industry is cyclical and has experienced periods of slow or no growth in the past. Any change in the power generation industry that results in a decrease in new construction or refurbishing of power plants, in particular natural gas facilities, could have a material adverse impact on our environmental systems segment’s revenue and our results of operations.
Changes in current environmental legislation and regulatory standards could have an adverse impact on the sale of our environmental control systems and products and on our operating results.
Our Environmental Systems business is primarily driven by capital spending by our customers to comply with laws and regulations governing the discharge of pollutants into the environment or otherwise relating to the protection of the environment or human health. These laws include U.S. federal statutes such as the Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 , the Clean Water Act, the Clean Air Act, the Clean Air Interstate Rule, the Utility and Boiler MACT Rules, the Cross-State Air Pollution Rule , which is being challenged in the U.S. courts system, and the regulations implementing these statutes, as well as similar laws and regulations at state and local levels and in other countries. These U.S. laws and regulations may change and other countries may not adopt similar laws and regulations. Despite the EPA’s recent adoption of stricter pollution standards, the interplay between the judicial system and the EPA instills uncertainty. Our business may be adversely impacted by an unfavorable court ruling or to the extent that other regulations requiring the reduction of NOX emissions are repealed, amended, implementation dates delayed, or to the extent that regulatory authorities reduce enforcement due to a complicated legal, political and economic environment.
We are subject to United States and foreign laws and regulations including export control and economic sanctions laws and regulations. These regulations are complex, change frequently and have become more stringent over time. Implementing compliance with the requirements of any new or amended U.S. or foreign laws and regulations as well as failure to comply with any laws and regulations could adversely affect our results of operations, financial condition and our strategic objectives.
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As a result of our global operations, we face a variety of special United States and international legal and compliance risks, in addition to the risks of our domestic business. These federal, state and local laws, regulations and policies are complex, change frequently, have tended to become more stringent over time and increase our cost of doing business. These laws and regulations include, but are not limited to, environmental, health and safety regulations, data privacy requirements, international labor laws, anti-corruption and bribery laws such as the United States Foreign Corrupt Practices Act and U.K. Bribery Act, and trade sanctions laws and regulations. In the event new laws and regulations are enacted or existing laws are amended, implementing compliance with such new or amended laws may result in a loss of revenue, increased costs of doing business and a change to our strategic objectives, all of which could adversely affect our results of operations. In addition, we are subject to the risk that we, our affiliated entities or their respective officers, directors, employees and agents may take action determined to be in violation of any of these laws. An actual or alleged violation could result in substantial fines, sanctions, civil or criminal penalties, debarment from government contracts, curtailment of operations in certain jurisdictions, competitive or reputational harm, litigation or regulatory action and other consequences that might adversely affect our results of operations, financial condition or strategic objectives.
Litigation against us could be costly and time consuming to defend.
We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes and employment claims made by our current or former employees. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, financial condition and results of operations. In addition, legal claims that have not yet been asserted against us may be asserted in the future.
Products and Customers
Competition could result in lower revenue, decreased margins and loss of market share.
We operate in highly competitive markets worldwide and contracts for our systems and products are generally awarded on a competitive basis. We face competition from potential new competitors that in some cases face low barriers to entry, specialized competitors that focus on competing with only one of our systems or products and low cost competitors that are able to produce similar systems and products for less. Competition could result in not only a reduction in our revenue, but also may lower the prices we can charge for our systems and products and reduce our market share. To remain competitive we must be able to anticipate and respond quickly to our customers’ needs and enhance and upgrade our existing systems and products to meet those needs. We also must be able to price our systems and products competitively and make timely delivery of our systems and products. Our competitors may develop less expensive or more efficient systems and products, may be willing to charge lower prices in order to increase market share and may be better equipped to make deliveries to customers on a timelier basis. Some of our competitors have more capital and resources than we do and may be better able to take advantage of market opportunities or adapt more quickly to changes in customer requirements. In addition, despite increased market demand, we may not be able to realize higher prices for our systems and products because we have competitors that use cost-plus pricing and do not set prices in accordance with market demand.
Customers may cancel or delay projects. Our backlog may not be indicative of our future revenue.
Customers may cancel or delay projects for reasons beyond our control. Our orders generally contain cancellation provisions which permit us to recover our costs in the event a customer cancels an order. If a customer cancels an order, we may not realize the full amount of revenue included in our
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backlog and may encounter difficulty in recovering our costs. If projects are delayed, the timing of our revenue could be affected and projects may remain in our backlog for extended periods of time. Revenue recognition occurs over long periods of time and is subject to unanticipated delays. Relatively large orders received in any given quarter may cause fluctuations in the levels of our quarterly backlog because the backlog in that quarter may reach levels that may not be sustained in subsequent quarters. As a result, our backlog may not be indicative of our future revenue.
Changes in our product mix can have a significant impact on our profit margins.
Some of our products have higher profit margins than others. Consequently, changes in the product mix of our sales from quarter-to-quarter or from year-to-year can have a significant impact on our reported profit margins. Some of our products also have a much higher internally manufactured cost component. Therefore, changes in product mix from quarter-to-quarter or from year-to-year can have a significant impact on our reported margins through a change in our manufacturing costs and specifically in our manufacturing costs as a percentage of revenue.
A significant portion of our accounts receivable are related to large contracts from customers in the same markets, which increases our exposure to credit risk.
We monitor the credit worthiness of our customers. Significant portions of our sales are to customers who place large orders for custom systems and products and whose activities are related to the power generation, natural gas infrastructure and refining and petrochemical processing markets. As a result, our exposure to credit risk is affected to some degree by conditions within these markets and governmental and political conditions. We attempt to reduce our exposure to credit risk by requiring progress payments and letters of credit. However, unanticipated events that affect our customers could have a materially adverse impact on our operating results.
Our systems and products could be subject to product liability claims, patent infringement claims and/or other litigation, which could adversely affect our financial condition and results of operations and harm our business reputation.
We manufacture systems and products that create exposure to product liability claims, breach of contract claims and litigation. If our systems and products are not properly manufactured or designed, personal injuries or property damage could result, which could subject us to claims for damages. The costs associated with defending product liability claims and payment of damages could be substantial. It is also possible that our products could be subject to patent infringement claims by third parties, which could require us to modify the design of our products, obtain a license of that technology and/or expose us to costly disputes and litigation. Our reputation and our business could also be adversely affected by all such claims, whether or not successful, and such claims could lead to decreased demand for our systems and products.
Our insurance policies may not cover all claims against us or may be insufficient to cover such claims.
We may be subject to breach of contract claims or product liability claims for personal injury and property damage. We maintain insurance coverage against these and other risks associated with our business. However, this insurance may not protect us against liability from some kinds of events, including events involving losses resulting from business interruption. We cannot assure that our insurance will be adequate in risk coverage or policy limits to cover all losses or liabilities that we may incur. Moreover, we cannot assure that we will be able in the future to maintain insurance at levels of risk coverage or policy limits that we deem adequate. Any future damages caused by our systems and products that are not covered by insurance or are in excess of policy limits could have a material adverse effect on our financial condition and results of operations.
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Currency fluctuations may reduce profits on our foreign sales or increase our costs, either of which could adversely affect our financial results.
A significant portion of our consolidated revenue is generated outside the United States. Consequently, we are subject to fluctuations in foreign currency exchange rates. Translation losses resulting from currency fluctuations may adversely affect the profits from our operations and have a negative impact on our financial results. Foreign currency fluctuations may also make our systems and products more expensive for our customers, which could have a negative impact on our revenue. In addition, we purchase some foreign-made products directly and through our subcontractors. Due to the multiple currencies involved in our business, foreign currency positions are partially offset and are netted against one another to reduce exposure. We cannot assure that fluctuations in foreign currency exchange rates will not make these products more expensive to purchase. Increases in our direct or indirect costs of purchasing these products could negatively impact our financial results if we are not able to pass those increased costs on to our customers.
Foreign exchange gain (loss) totaled $(0.1) million, $(0.9) million, and $0.6 million for fiscal years 2013, 2012, and 2011, respectively. As a percentage of revenue, foreign exchange gain (loss) was (0.1)%, (0.7)% and 0.5% in fiscal years 2013, 2012, and 2011, respectively.
Our business is subject to risks of terrorist acts, acts of war, political unrest, public health concerns, labor disputes and natural disasters.
Terrorist acts, acts of war, political unrest, public health concerns, labor disputes or national disasters may disrupt our operations, as well as those of our customers. These types of acts have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist activities, military or security operations or natural disasters could weaken the domestic and global economies and create additional uncertainties, thus forcing our customers to reduce their capital spending, or cancel or delay already planned construction projects, which could have a material adverse impact on our business, operating results and financial condition, including loss of sales or customers.
Manufacturing and Procurement
During fiscal 2014 we will begin manufacturing operations in two newly constructed facilities and exit two other manufacturing facilities. Difficulties in the opening or closure of these facilities could negatively impact our financial results.
During fiscal 2014, we will initiate manufacturing operations at newly constructed facilities located in Denton, Texas and Zhenjiang, China. These facilities will replace existing manufacturing facilities located within the respective cities. Unanticipated delays in construction or difficulties encountered during the facility transitions could negatively impact our ability to meet customer delivery expectations or could result in higher than expected manufacturing costs. Many of our contracts include financial penalties for failure to meet contractual delivery commitments, as well as limit our ability to recover cost overruns. Such costs, if incurred, would negatively impact our gross margin.
Our industry has experienced shortages in the availability of skilled workers. Any difficulty we experience replacing or adding qualified personnel could adversely affect our business.
Our operations require the services of employees with technical training and related experience, including certified welders. As a result, our operations depend on the continuing availability of qualified employees. Our industry has experienced shortages of workers with the necessary skills. If we should suffer any material loss of these employees to competitors, or be unable to employ additional or replacement personnel with the requisite level of training and experience, our operations could be adversely affected. A significant increase in the wages paid to these workers by other employers could result in a reduction in our workforce, increases in wage rates, or both.
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Our customers may require us to perform portions of our projects in their local countries.
Some foreign countries have regulations requiring, and some customers in foreign countries prefer, a certain degree of local content be included in projects destined for installation in their country. These requirements and preferences may require us to outsource significant functions to manufacturers in foreign countries or otherwise to establish manufacturing capabilities in foreign countries. These requirements may negatively impact our profit margins and present project management issues.
Our ability to conduct business outside the United States may be adversely affected by factors outside of our control and our revenue and profits from international sales could be adversely impacted.
Because we manufacture and sell our products and services worldwide, our business is subject to risks associated with doing business internationally. Revenue generated outside the United States represented 47%, 47% and 38% of our consolidated revenue during fiscal 2013, 2012 and 2011, respectively. Our operations and earnings throughout the world have been, and may in the future be, affected from time to time in varying degrees by a number of factors, including changes in foreign laws and regulations, regional economic uncertainty, political instability, customs and tariffs, government sanctions, inability to obtain export licenses, unexpected changes in regulatory requirements, difficulty in collecting international accounts receivable, difficulty in enforcement of contractual obligations governed by non-U.S. law and fluctuations in foreign currency exchange rates and tax rates. The likelihood of the occurrence and the overall effect on our business vary from country to country and are not predictable. These factors may result in a decline in revenue or profitability or could adversely affect our ability to expand our business outside of the United States and may impact our ability to deliver our products and collect our receivables.
Our systems and products are covered by warranties. Unanticipated warranty costs for defective systems and products could adversely affect our financial condition and results of operations and reputation. In addition, an increase in the number of systems we sell compared to individual products that our customers use as components in other systems, may increase our warranty costs.
We offer warranty periods of various lengths to our customers depending upon the specific system or product and terms of the customer agreement. Among other things, warranties require us to repair or replace faulty systems or products. We have received warranty claims in the past. While we continually monitor our warranty claims and provide a reserve for estimated warranty issues on an on-going basis, an unanticipated claim could have a material adverse impact on our results of operations. In some cases, we may be able to recover a portion of our warranty cost from a subcontractor if the subcontractor supplied the defective product or performed the service. However, this recovery may not always be possible. The need to repair or replace systems and products with design or manufacturing defects could temporarily delay the sale of new systems and products, reduce our profits, cause us to suffer a loss and could adversely affect our reputation. Furthermore, average warranty costs for complete systems are higher than warranty costs for individual products that our customers use as components in other less complex systems. As a result, our transition to offering more complete systems may increase our warranty costs.
Warranty expense totaled $1.9 million, $1.0 million, and $2.4 million for fiscal years 2013, 2012, and 2011, respectively. As a percentage of revenue, warranty expense was 1.4%, 0.8% and 2.0% in fiscal years 2013, 2012, and 2011, respectively.
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If actual costs for our projects with fixed-price contracts exceed our original estimates or if we are required to pay liquidated damages due to late delivery, our profits will be reduced or we may suffer losses.
The majority of our contracts are fixed-price contracts from which we have limited ability to recover cost overruns. Because of the large scale and long-term nature of our contracts, unanticipated cost increases may occur as a result of several factors, including:
| • | increases in cost or shortages of components, materials or labor; |
| • | errors in estimates or bidding; |
| • | unanticipated technical problems; |
| • | variations in productivity; |
| • | required project modifications not initiated by the customer; and |
| • | suppliers’ or subcontractors’ failure to perform. |
In addition to increasing costs, these factors could lead to “hold backs” by our customers impacting our cash flow negatively and also could delay delivery of our products. Our contracts often provide for liquidated damages for late delivery. Unanticipated costs, such as liquidated damages that we are required to pay in the case of late delivery, could negatively impact our profits.
Increasing costs for manufactured components and raw materials, such as steel, may adversely affect our profitability.
We use a broad range of manufactured components and raw materials in our products, primarily raw steel and steel-related components. Rapid increases in the costs for these components and materials or temporary disruptions in supply could increase our operating costs and adversely affect our profit margins.
Our use of subcontractors may reduce our ability to deliver products within the committed delivery timetables and within the design requirements.
Our global customer base and product demand requires that we utilize a global network of subcontractors. While we believe our established network provides the Company a competitive advantage, it exposes the Company to manufacturing delays, cost overruns, and quality aspects which are in large part outside of the Company’s direct control. We have developed processes to select, communicate and monitor the work flow, costs and product quality of our subcontractors, however we could be adversely affected by project delays, cost overruns and substandard products developed by our subcontractors.
Capital and Liquidity
Our financing agreements may be insufficient to meet the operational and strategic needs of the Company; further, an inability to achieve financial covenants in such financial agreements could negatively impact our liquidity and cost of such financing agreements.
We entered into our Senior Secured Credit Agreement (the “Senior Credit Agreement”) in September 2012 which consists of a $2 million secured term A loan, a $10 million secured term B loan and a $30 million secured revolving credit line. The revolving credit facility of our Senior Credit Agreement includes both financial and non-financial covenants that may limit our ability to purchase capital equipment, pay dividends, enter into strategic transactions, or enter into certain other agreements. The revolving credit facility of our Senior Credit Agreement requires that the eligible collateral, primarily
21
accounts receivable and inventory, exceed the balances outstanding, which include the unexpired letters of credit and bank guarantees. Further, the revolving credit facility of our Senior Credit Agreement and subsidiary debenture agreements require that we restrict a portion of our cash balances in relationship to the unexpired letters of credit and bank guarantees. Our European subsidiaries currently have debenture agreements in place that support short-term working capital needs, as well as provide letters of credit and bank guarantees for issuance to customers and suppliers. As of June 29, 2013 we had $2.3 million available for borrowing or letters of credit under our Senior Credit Agreement and $5.0 million available for letters of credit under the subsidiary debenture agreements.
Failure to comply with the covenants in our financing agreements could negatively impact our liquidity and cost of our financing agreements.
Our Senior Credit Agreement includes covenants and collateral requirements. Failure to comply with any of the covenants or lack of sufficient collateral could reduce or eliminate our ability to borrow money or obtain letters of credit and bank guarantees under the revolving credit facility of our Senior Credit Agreement. Under these circumstances, we may not have sufficient working capital, access to capital markets, or other resources to satisfy our debt and other obligations.
As of June 29, 2013, we were in compliance with the covenants. Any failure in the future to remain in compliance with any material provision or covenant of our Senior Credit Agreement could result in a default which could, absent a waiver or amendment, among other things, require immediate repayment of outstanding indebtedness under our Senior Credit Agreement.
Our financial performance may vary significantly from period to period, making it difficult to estimate future revenue.
Our revenue and earnings have varied in the past and are likely to vary in the future. Our contracts generally stipulate customer-specific delivery terms and may have contract cycles of a year or more, which subjects these contracts to many factors beyond our control. In addition, contracts that are significantly larger in size than our typical contracts tend to have a greater impact on our operating results. Furthermore, as a significant portion of our operating costs are fixed, an unanticipated decrease in our revenue, a delay or cancellation of orders in backlog, or a decrease in the demand for our products, may have a significant impact on our operating results. Therefore, our operating results may be subject to significant variations and our operating performance in any period may not be indicative of our future performance.
Changes in billing terms can increase our exposure to working capital and credit risk.
We sell our systems and products under contracts that allow us to either bill upon the completion of certain agreed upon milestones, or upon actual shipment of the system or product. We attempt to negotiate progress-billing milestones on large contracts to help us manage working capital and to reduce the credit risk associated with these large contracts. Consequently, shifts in the billing terms of the contracts in our backlog from period to period can increase our requirement for working capital and can increase our exposure to credit risk.
We intend to continue to pursue acquisition opportunities, which may subject us to considerable business and financial risk.
We evaluate potential acquisitions on an ongoing basis. We may not be successful in identifying acquisition opportunities, assessing the value, strengths and weaknesses of these opportunities and consummating acquisitions on acceptable terms. Furthermore, suitable acquisition opportunities may not be made available or known to us. In addition, we may compete for acquisition targets with companies having greater financial resources than we do. Borrowings necessary to finance acquisitions may not be available on terms acceptable to us, or at all. Future acquisitions also may result in potentially dilutive issuances of equity securities.
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If we are unable to successfully implement our acquisition strategy or address the risks associated with acquisitions, or if we encounter unforeseen expenses, difficulties, complications or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, our growth and ability to compete may be impaired, we may fail to achieve acquisition synergies and we may be required to focus resources on integration of operations rather than on our primary business.
The concentration of ownership of our common stock may result in significant movement in the trading value of our common stock in the event a single shareholder or group of shareholders purchases or sells our common stock
As of June 30, 2013 five shareholders individually reported an ownership position greater than five percent of our outstanding common stock. In the aggregate these five shareholders own greater than 50 percent of our outstanding common stock. This concentration of share ownership, combined with the relative illiquidity of our common stock, could result in significant decrease in the trading value of our common stock should one of more of those shareholders decide to reduce their ownership position.
Provisions of our charter documents and Delaware law could discourage a takeover that individual stockholders may consider favorable or the removal of all current directors and management.
Some provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that individual stockholders may consider favorable or the removal of our current management.
Delaware law may discourage, delay or prevent someone from acquiring or merging with us. As a result, our stock price may decrease and stockholders might not receive a change of control premium over the then-current market price of the common stock.
Our certificate of incorporation contains a “blank check” preferred stock provision. Blank check preferred stock enables our Board of Directors, without stockholder approval, to designate and issue additional series and classes of preferred stock with such dividend rights, liquidation preferences, conversion rights, terms of redemption, voting or other rights, including the right to issue convertible securities with no limitation on conversion, as our Board of Directors may determine, including rights to dividends and proceeds in a liquidation that are senior to the common stock. These provisions may have the effect of making it more difficult or expensive for a third party to acquire or merge with us which could adversely affect the market price of the common stock and the voting and other rights of the holders of common stock.
We may not be able to successfully enforce our rights to indemnification against Nitram’s selling stockholders for claims relating to breach of representation and certain other claims, including litigation costs and damages.
In April 2008, we completed the acquisition of all outstanding shares of Nitram for an aggregate purchase price of approximately $65 million. We have outstanding claims against the selling stockholders under the terms of the Nitram acquisition agreement in the amount of $10.5 million relating to a customer warranty dispute and environmental matters. The sellers have not agreed to pay for the claims and we are currently in the process of discussing the various claims with the sellers, which could have the effect of delaying or ultimately preventing all or a portion of, our reimbursement for such claims and damages. Our ability to collect any portion of these outstanding claims is not assured.
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The limited liquidity for our common stock could affect your ability to sell your shares at a satisfactory price.
Our common stock is relatively illiquid. As of August 30, 2013, we had 21,033,806 shares of common stock outstanding. The average daily trading volume in our common stock, as reported by the NASDAQ Global Select Market, for the 50 trading days ending on August 30, 2013 was approximately 40,000 shares. A more active public market for our common stock may not develop, which could adversely affect the trading price and liquidity of our common stock. Moreover, a thin trading market for our stock could cause the market price for our common stock to fluctuate significantly more than the stock market as a whole. Without a larger float, our common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile. In addition, in the absence of an active public trading market, stockholders may be unable to liquidate your shares of our common stock at a satisfactory price.
The market price of our common stock may be volatile or may decline regardless of our operating performance.
The market price of our common stock has experienced, and may continue to experience, substantial volatility. During the period beginning June 30, 2012 through June 29, 2013, the price of our common stock on the NASDAQ Global Select Market ranged from a low of $5.45 to a high of $9.19 per share. We expect our common stock to continue to be subject to fluctuations. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance.
We do not plan to pay cash dividends on our common stock in the foreseeable future. As a result, investors must look solely to stock appreciation for a return on their investment in our common stock.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to retain any future earnings to support our operations and growth. Additionally, our Senior Credit Agreement restricts the payment of dividends. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
Issuance of shares under our stock incentive plan or in connection with transactions will dilute current stockholders.
Pursuant to our 2007 Stock Incentive Plan, we are authorized to grant options and other stock awards for up to 1,800,000 shares to our officers, employees, directors and consultants. As of June 29, 2013 there were 1,200,345 shares of our common stock reserved for future issuance under our stock incentive plans. Stockholders will incur dilution upon exercise or issuance of any stock awards under our stock incentive plans. In addition, if we raise additional funds by issuing additional common stock, or securities convertible into or exchangeable or exercisable for common stock, or if we use our securities as consideration for future acquisitions or investments, further dilution to our existing stockholders will result, and new investors could have rights superior to existing stockholders.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
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| ITEM 2. | PROPERTIES. |
We own and lease office, manufacturing and warehousing facilities in various locations. Our principal facilities are described in the following table.
| Location |
Approximate Sq. Footage |
General Use | ||||
| Owned: |
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| Cisco, Texas (1) |
67,000 | Manufacturing | ||||
| Denton, Texas (3) |
80,000 | Manufacturing | ||||
| Wichita Falls, Texas |
128,000 | Manufacturing | ||||
| Leased: |
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| Dallas, Texas |
30,000 | Corporate office | ||||
| Orchard Park, New York |
18,000 | Sales, engineering and administration | ||||
| Dubai, United Arab Emirates |
2,500 | Sales | ||||
| Dusseldorf, Germany |
2,500 | Sales, engineering and administration | ||||
| Essex, United Kingdom |
6,000 | Sales, engineering and administration | ||||
| Singapore |
3,600 | Sales, engineering and administration | ||||
| Zhenjiang, China (2) |
51,000 | Manufacturing, engineering, R&D and administration | ||||
| (1) | Subsequent to June 29, 2013 we announced the pending closure of this facility. We currently anticipate the completion of the transition process during the second quarter of fiscal 2014. |
| (2) | We are constructing an approximately 200,000 square foot manufacturing, office and R&D complex in Zhenjiang, China that will replace our existing leased facility there. We anticipate manufacturing activities to commence in the first quarter of fiscal 2014. |
| (3) | In July 2013, we sold our previous 22,000 square foot manufacturing facility in Denton, Texas. |
| ITEM 3. | LEGAL PROCEEDINGS. |
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.
| ITEM 4. | REMOVED AND RESERVED |
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market Information
Our common stock is traded on the NASDAQ Stock Market under the symbol “PMFG.” The table below sets forth the reported high and low sales prices for our common stock, as reported on the NASDAQ Stock Market for the periods indicated.
| Fiscal Year |
High | Low | ||||||||
| 2012 |
First Quarter | $ | 22.47 | $ | 14.70 | |||||
| Second Quarter | 23.18 | 14.80 | ||||||||
| Third Quarter | 27.30 | 14.65 | ||||||||
| Fourth Quarter | 15.07 | 7.41 | ||||||||
| 2013 |
First Quarter | $ | 9.19 | $ | 6.86 | |||||
| Second Quarter | 8.11 | 5.74 | ||||||||
| Third Quarter | 9.09 | 6.03 | ||||||||
| Fourth Quarter | 6.92 | 5.45 | ||||||||
Number of Holders
As of August 30, 2013, there were approximately 62 holders of record of our common stock.
Dividends
We did not pay cash dividends on our common stock in fiscal 2013, 2012 or 2011. We paid $0.7 million in cash dividends on our preferred stock in fiscal 2011. We had no preferred stock issued or outstanding during fiscal years 2012 and 2013 and paid no preferred dividends. Cash dividends may be paid on our common stock, from time to time, as our Board of Directors deems appropriate after consideration of our continued growth rate, operating results, financial condition, cash requirements and other related factors. Additionally, our Senior Credit Agreement contains restrictions on our ability to pay dividends based on satisfaction of certain performance measures and compliance with other conditions. Our ability to comply with these performance measures and conditions may be affected by events beyond our control. A breach of any of the covenants (including financial covenant ratios) contained in our debt agreement could result in a default under the debt agreement. Any defaults under our Senior Credit Agreement could prohibit us from paying any dividends.
Stock Repurchase
We did not repurchase any of our common stock in fiscal 2013 or 2012. Additionally, we do not have a stock repurchase program.
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| ITEM 6. | SELECTED FINANCIAL DATA. |
The following table summarizes certain selected financial data that should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
| Fiscal | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| (Amounts in thousands, except per share amounts) | ||||||||||||||||||||
| Operating results: |
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| Revenue |
$ | 133,892 | $ | 135,318 | $ | 121,794 | $ | 116,775 | $ | 158,006 | ||||||||||
| Cost of goods sold |
87,092 | 94,083 | 83,387 | 74,340 | 109,403 | |||||||||||||||
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| Gross profit |
46,800 | 41,235 | 38,407 | 42,435 | 48,603 | |||||||||||||||
| Operating expenses |
42,457 | 40,760 | 37,083 | 34,087 | 39,176 | |||||||||||||||
| Loss on impairment of intangibles (1) |
3,525 | — | 3,551 | — | — | |||||||||||||||
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| Operating income (loss) |
818 | 475 | (2,227 | ) | 8,348 | 9,427 | ||||||||||||||
| Other income (expense) (2) (3) |
(835 | ) | (2,518 | ) | 5,005 | (11,315 | ) | (5,824 | ) | |||||||||||
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| Earnings (loss) before income taxes |
(17 | ) | (2,043 | ) | 2,778 | (2,967 | ) | 3,603 | ||||||||||||
| Income tax benefit (expense) |
(1,471 | ) | 1,005 | 3,083 | (1,215 | ) | (707 | ) | ||||||||||||
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| Net earnings (loss) |
(1,488 | ) | (1,038 | ) | 5,861 | (4,182 | ) | 2,896 | ||||||||||||
| Less net earnings (loss) attributable to noncontrolling interest |
592 | (62 | ) | 112 | (19 | ) | — | |||||||||||||
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| Net earnings (loss) attributable to PMFG, Inc. |
(2,080 | ) | (976 | ) | 5,749 | (4,163 | ) | 2,896 | ||||||||||||
| Dividends on preferred stock |
— | — | (722 | ) | (1,044 | ) | — | |||||||||||||
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| Earnings (loss) applicable to PMFG, Inc. common stockholders |
$ | (2,080 | ) | $ | (976 | ) | $ | 5,027 | $ | (5,207 | ) | $ | 2,896 | |||||||
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| Diluted earnings (loss) per share |
$ | (0.10 | ) | $ | (0.05 | ) | $ | 0.28 | $ | (0.38 | ) | $ | 0.22 | |||||||
| Weighted average shares outstanding: |
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| Diluted |
20,930 | 18,810 | 16,662 | 13,716 | 13,181 | |||||||||||||||
| As of | ||||||||||||||||||||
| June 29, 2013 |
June 30, 2012 |
July 2, 2011 |
June 30, 2010 |
June 30, 2009 |
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| Financial position: |
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| Working capital |
$ | 75,002 | $ | 77,267 | $ | 43,908 | $ | 48,000 | $ | 40,247 | ||||||||||
| Current assets |
108,473 | 122,286 | 81,139 | 82,306 | 87,691 | |||||||||||||||
| Total assets |
180,111 | 183,279 | 140,709 | 143,081 | 153,180 | |||||||||||||||
| Current liabilities |
33,471 | 45,019 | 37,231 | 34,306 | 47,444 | |||||||||||||||
| Long-term debt, net of current portion |
8,719 | — | 9,971 | 16,221 | 49,180 | |||||||||||||||
| Total liabilities (4) |
48,225 | 52,393 | 55,668 | 85,934 | 107,222 | |||||||||||||||
| Stockholders’ equity (5) |
131,886 | 130,886 | 85,041 | 57,147 | 45,958 | |||||||||||||||
| (1) | Operating expenses for fiscal 2013 and fiscal 2011 include charges of $3,525 and $3,551, respectively, related to impairment losses on intangible assets. See Note F to our Consolidated Financial Statements. |
| (2) | Other income (expense) in fiscal 2011 and fiscal 2010 includes a gain of $6,681 and a charge of $(6,681), respectively, related to the change in the fair value of the derivative liability associated with the convertible preferred stock sold in September 2009. |
| (3) | Other income (expense) in fiscal 2013, 2012, 2011, 2010 and 2009 includes interest expense related to the debt associated with the Nitram acquisition. |
| (4) | The decrease in liabilities in fiscal 2011 primarily relates to the change in the fair value of the derivative liability, with additional decreases in outstanding debt. |
| (5) | The increase in our stockholders’ equity in fiscal 2012 resulted primarily from the public offering, and the increase in our stockholders’ equity in fiscal 2011 resulted primarily from the conversion of preferred stock to common stock during the year and our net earnings for the year. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand PMFG, Inc., our operations and our present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes thereto contained in “Item 8. Financial Statements and Supplementary Data” of this report. This overview summarizes the MD&A, which includes the following sections:
| • | Our Business – a general description of our business and the key drivers of product demand. |
| • | Critical Accounting Policies and Estimates – a discussion of accounting policies that require critical judgments and estimates. |
| • | Results of Operations – an analysis of our Company’s consolidated and reporting segment results of operations for the three years presented in our consolidated financial statements. |
| • | Liquidity; Capital Resources and Financial Position – an analysis of cash flows; aggregate contractual obligations; foreign exchange exposure; and an overview of financial position. |
This discussion includes forward-looking statements that are subject to risks, uncertainties and other factors described in Part I, Item 1A of this report. These factors can cause actual results for future periods, including fiscal 2014, to differ materially from those disclosed in, or implied by, these forward-looking statements.
Our Business
General
We are a leading provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. We primarily serve the markets for natural gas infrastructure, power generation and refining and petrochemical processing. We offer a broad range of separation and filtration products, SCR systems, and other complementary products including specialty heat exchangers, pulsation dampeners and silencers. Our primary customers include equipment manufacturers, engineering contractors and operators of power facilities.
Our products and systems are marketed worldwide. 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. Revenue generated from outside the United States was approximately 47% for fiscal 2013. As a result of global demand for our products and our increased sales resources outside of the United States, we expect our international sales will continue to represent 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 sales also can have a significant impact on our reported margins.
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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, or NOx, into nitrogen and water, reducing air pollution and helping our customers comply with environmental regulations.
The following table sets forth the percentage of revenue related to our process products and environmental products, respectively:
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Process Products |
84 | % | 87 | % | 73 | % | ||||||
| Environmental Systems |
16 | % | 13 | % | 27 | % | ||||||
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| 100 | % | 100 | % | 100 | % | |||||||
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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-commissioning 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 and India are expected to lead the global expansion of nuclear power generation growth. Recommissioning of existing nuclear facilities in the United States and Europe also will contribute to product demand.
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.
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. We believe that our most critical accounting policies and estimates related to the following:
| Estimate Description |
Judgment and/or Uncertainty |
Potential Impact if Results Differ | ||
| Revenue Recognition |
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| We provide products under long-term, generally fixed-priced, contracts that may extend up to 18 months or longer in duration. Approximately 80% of our revenue is accounted for using the percentage-of-completion accounting method.
Under such methodology, the contractually agreed upon revenue is recognized over the life of the contract based on the relationship of costs incurred to date to the estimated aggregate costs to be incurred over the contract term.
The percentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract.
Cumulative revenue recognized may be less or greater than cumulative amounts 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.” |
Considerable management judgment and experience is necessary to estimate the aggregate amount of costs that will ultimately be incurred related to a project. Such cost estimates include material, subcontractor, labor, delivery, and start-up costs.
We continually update our estimates of costs and the status of each project. |
A number of internal and external factors, including labor rates, plant utilization factors, future material prices, changes in customer specifications, manufacturing defects and delays, as well as other factors can affect the ultimate costs.
The impact of revisions in contract estimates is recognized on a cumulative basis in the period in which the revisions are made. Such revisions may result in inconsistent profit margins over the life of the contract. | ||
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| Allowance for Doubtful Accounts |
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| We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments.
On an on-going basis, we evaluate the collectability of accounts receivable based on historical collection trends, current economic factors, and the assessment of collectability of specific accounts. |
Considerable management judgment is necessary in determining whether a receivable will be collectible based on a customer’s potential inability to pay.
In making such determination, management evaluates the age of the outstanding balance, evaluation of the customer’s current and past financial condition and related credit scores, recent payment history, current economic environment, and discussions with the customer. |
Bad debt expense totaled $1.2 million in fiscal 2013 and $0.2 million in fiscal 2012 and 2011. As a percentage of revenue, the bad debt expense was 0.9%, 0.2%, and 0.2% in fiscal 2013, 2012, and 2011, respectively.
The impact of a 100 basis point increase or decrease in bad debt expense would be approximately $1.3 million in fiscal 2013. | ||
| Product Warranties |
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| We provide our customers with product warranties for specific products during a defined period of time, generally less than 18 months after shipment of the product. Warranties cover the failure of a product to perform after it has been placed in service.
In general, our warranty agreements require us to repair or replace defective products during the warranty period at no cost to the customer.
To the extent such defects arise as a result of subcontracted work, we may have the ability to recover a portion or all of the cost of repairs incurred during the warranty period. |
We record an estimate of costs to be incurred in the future for product warranties based on both known claims and historical experience.
Such estimates also include expectations with regard to applicability and enforceability of back-up concurrent supplier warranties in place. |
Warranty expense totaled $1.9 million, $1.0 million and $2.4 million in fiscal 2013, 2012, and 2011, respectively. As a percentage of revenue, the warranty expense was 1.4%, 0.8%, and 2.0% in fiscal 2013, 2012, and 2011, respectively.
The impact of a 100 basis point increase or decrease in warranty costs would be approximately $1.3 million in fiscal 2013. | ||
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| Goodwill and Intangible Assets |
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| Our goodwill and intangible assets result primarily from acquisitions. Intangible assets include licensing agreements and customer relationships with finite lives, as well as trademarks and design guidelines with indefinite lives.
Intangible assets with indefinite lives and goodwill are evaluated at the reporting unit level for potential impairment at least annually, or earlier if an indicator of impairment exists, to ensure that the carrying value is recoverable.
A perpetual trademark or design guideline is impaired if its book value exceeds its estimated fair value. Our goodwill, which relates entirely to the Process Products segment, is evaluated for potential impairment if the book value of its reporting unit exceeds its estimated fair value.
Amortizing intangible assets are only evaluated for impairment upon a significant change in the operating environment. If an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted cash flows.
In the fourth quarter of fiscal 2013, we completed our annual impairment testing using the methods described above and concluded there was no impairment of our goodwill or other intangible assets with an indefinite life.
Our goodwill and intangible net assets totaled $46.6 million as of June 29, 2013 |
Considerable management judgment is necessary to initially value intangible assets upon acquisition and to evaluate those assets and goodwill for impairment going forward. We determine fair value using widely accepted valuation techniques including discounted cash flows, market multiple analyses, and relief from royalty analyses. Assumptions used in our valuations, such as forecasted growth rates and our cost of capital, are consistent with our internal projections and operating plans.
We believe that a trademark and/or design guideline has an indefinite life if it has a history of strong sales and cash flow performance that we expect to continue for the foreseeable future. Determining the expected life of a trademark and/or design guideline requires considerable management judgment and is based on an ongoing evaluation of a number of factors including competitive environment, trademark and product history, and anticipated future product demand. |
We believe the assumptions used in valuing our intangible assets and in our impairment analysis are reasonable, but variations in any of our assumptions may result in different calculations of fair value that could result in a material impairment charge.
At June 29, 2013 the fair value of our Process Products segment exceeds its related carrying value by approximately $6 million or 5%. Increasing our discount rate by 25 basis points would not have resulted in an impairment charge. The terminal revenue growth rate utilized in calculating the fair value (5.0%) is dependent on our ability to meet internal projections and operating plans, as well as other factors and assumptions.
At June 29, 2013, the fair value of our trade names exceeded their carrying value by approximately $0.5 million or 11% and the fair value of our design guidelines exceeded their carrying value by approximately $0.2 million or 3%. Negative changes to the assumptions related to royalty, growth, or discount rates could result in impairments. | ||
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| Income Taxes |
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| A liability for uncertain tax positions is recorded to the extent a tax position taken or expected to be taken in a tax return does not meet certain recognition or measurement criteria.
A valuation allowance is recorded against a deferred tax asset if it is more likely than not that the asset will not be realized.
At June 29, 2013 our liability for uncertain tax positions, including accrued interest, was $1.4 million and our valuation allowance was $1.3 million. |
Considerable management judgment is necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulations, and taxing authority rulings, as well as to the expiration of statutes of limitations in the jurisdictions in which we operate.
Additionally, several factors are considered in evaluating the realizability of our deferred tax assets, including the remaining years available for carryforward, the tax laws for the applicable jurisdictions, the future profitability of the specific business units, and tax planning strategies. |
Our judgments and estimates concerning uncertain tax positions may change as a result of evaluation of new information, such as the outcome of tax audits or changes to or further interpretation of tax laws and regulations. Our judgments and estimates concerning realizability of deferred tax assets could change if any of the evaluation factors change.
If such changes take place, there is a risk that our effective tax rate could increase or decrease in any period, impacting our net earnings. | ||
Recent Accounting Pronouncements
In July 2012 the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update related to “Testing Indefinite-Lived Intangibles for Impairment.” The purpose of the update is to simplify the guidance for testing indefinite-lived intangible assets for impairment and the update permits entities to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Unless an entity determines, through its qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset is impaired, it would not be required to calculate the fair value of the asset. This standard is effective for annual and interim impairment tests of indefinite-lived intangible assets performed in fiscal years beginning after September 15, 2012, and early adoption is permitted. This standard did not have an impact on our annual indefinite-lived asset impairment testing process in fiscal 2013 as we did not elect to perform a qualitative assessment.
Results of Operations—Consolidated
The following summarizes our Consolidated Statements of Operations as a percentage of net revenue
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Net revenue |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of goods sold |
65.0 | 69.5 | 68.5 | |||||||||
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| Gross profit |
35.0 | 30.5 | 31.5 | |||||||||
| Operating expenses |
34.3 | 30.1 | 33.4 | |||||||||
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| Operating income (loss) |
0.7 | 0.4 | (1.9 | ) | ||||||||
| Other income (expense) |
(0.7 | ) | (1.9 | ) | 4.1 | |||||||
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| Earnings (loss) before income taxes |
0.0 | (1.5 | ) | 2.2 | ||||||||
| Income tax benefit |
-1.1 | 0.7 | 2.5 | |||||||||
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| Net earnings (loss) |
-1.1 | % | (0.8 | )% | 4.7 | % | ||||||
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| Less net earnings (loss) attributable to noncontrolling interest |
0.4 | (0.1 | ) | 0.1 | ||||||||
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| Net earnings (loss) attributable to PMFG, Inc. |
-1.5 | (0.7 | ) | 4.6 | ||||||||
| Dividends on preferred stock |
0.0 | — | (0.6 | ) | ||||||||
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| Earnings (loss) applicable to PMFG, Inc. common stockholders |
-1.5 | % | (0.7 | )% | 4.0 | % | ||||||
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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.
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Operating expenses include sales and marketing expenses, engineering and project management expenses and general and administrative expenses which are further described below.
| • | Sales and marketing expenses—include payroll, employee benefits, stock-based compensation and other employee-related costs associated with sales and marketing personnel. Sales and marketing expenses also include travel and entertainment, advertising, promotions, trade shows, seminars and other programs and sales commissions paid to independent sales representatives. |
| • | Engineering and project management expenses—include payroll, employee benefits, stock-based compensation and other employee-related costs associated with engineering, project management and field service personnel. Additionally, engineering and project management expenses include the cost of sub-contracted engineering services. |
| • | General and administrative expenses—include payroll, employee benefits, stock-based compensation and other employee-related costs and costs associated with executive management, finance, human resources, information systems and other administrative employees. General and administrative costs also include board of director compensation and expenses, facility costs, insurance, audit fees, legal fees, reporting expense, professional services and other administrative fees. |
Revenue. We classify revenue as domestic or international based upon the origination of the order. Revenue generated by orders originating from within the United States is classified as domestic revenue, regardless of where the product is shipped or where it will eventually be installed. Revenue generated by orders originating from a country other than the United States is classified as international revenue. The following summarizes consolidated revenue (in thousands):
| Fiscal | % of | Fiscal | % of | Fiscal | % of | |||||||||||||||||||
| 2013 | Total | 2012 | Total | 2011 | Total | |||||||||||||||||||
| Domestic |
$ | 70,986 | 53.0 | % | $ | 71,479 | 52.8 | % | $ | 75,223 | 61.8 | % | ||||||||||||
| International |
62,906 | 47.0 | % | 63,839 | 47.2 | % | 46,571 | 38.2 | % | |||||||||||||||
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| Total |
$ | 133,892 | 100.0 | % | $ | 135,318 | 100.0 | % | $ | 121,794 | 100.0 | % | ||||||||||||
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For fiscal 2013, total revenue decreased $1.4 million or 1.1%, compared to fiscal 2012. Domestically, lower revenue in our Process Products segment was partially offset by growth in our Environmental Systems segment. The net decrease in domestic revenue is $0.5 million in fiscal 2013 when compared to the prior fiscal year. International revenue decreased $0.9 million as increases in Asia and, to a lesser extent, in Europe, were offset by year over year decreases in revenue from Latin America and Canada.
For fiscal 2012, total revenue increased $13.5 million or 11.1%, compared to fiscal 2011. Domestically, Environmental Systems revenue was down as the primary purchasers of our SCR systems await finalization of Cross-State Air Pollution Rules. That decline was offset in part by a year over year increase in Process Products led by our pressure products offerings. These two offsetting forces combined for a net decrease in domestic revenue of $3.7 million in fiscal 2012 when compared to the prior fiscal year. International revenue increased $17.3 million or 37.1%, in fiscal 2012 compared to fiscal 2011. The acquisition of Burgess Manning GmbH contributed $8.3 million of revenue in fiscal 2012. Additional increases in international revenue were a combination of growth in Latin America, the Middle East and Asia. This growth is resulting from both an increase in demand and our strategic decision to increase our sales focus on the international markets.
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Gross Profit. Our gross profit during any particular period may be impacted by several factors, primarily sales volume, shifts in our product mix, material cost changes, warranty, start-up and commissioning costs. Shifts in the geographic composition of our revenue also can have a significant impact on our reported margins. The following summarizes revenue, cost of goods sold and gross profit (in thousands):
| Fiscal | % of | Fiscal | % of | Fiscal | % of | |||||||||||||||||||
| 2013 | Revenue | 2012 | Revenue | 2011 | Revenue | |||||||||||||||||||
| Revenue |
$ | 133,892 | 100.0 | % | $ | 135,318 | 100.0 | % | $ | 121,794 | 100.0 | % | ||||||||||||
| Cost of goods sold |
87,092 | 65.0 | % | 94,083 | 69.5 | % | 83,387 | 68.5 | % | |||||||||||||||
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| Gross profit |
$ | 46,800 | 35.0 | % | $ | 41,235 | 30.5 | % | $ | 38,407 | 31.5 | % | ||||||||||||
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For fiscal 2013, our gross profit increased $5.6 million, or 13.5%, compared to fiscal 2012. Gross profit, as a percentage of revenue, was 35.0% in fiscal 2013 compared to 30.5% in fiscal 2012. The improvement in our gross profit as a percentage of revenue related to changes in our product and geographic mix within our reporting segments, as well as the impact of certain contracts cancelled by customers in fiscal 2013.
For fiscal 2012, our gross profit increased $2.8 million, or 7.4%, compared to fiscal 2011, on higher revenue. Gross profit, as a percentage of revenue, was 30.5% in fiscal 2012 compared to 31.5% in fiscal 2011. During fiscal 2012, gross profit was negatively impacted by $0.4 million of charges related to the closure and sale of our manufacturing facility in Abilene, Texas. The remaining decrease in gross profit as a percentage of revenue related to changes in our product mix within our reporting segments and an anticipated loss related to a specific Process Products contract.
Operating Expenses. The following summarizes operating expenses (in thousands):
| Fiscal | % of | Fiscal | % of | Fiscal | % of | |||||||||||||||||||
| 2013 | Revenues | 2012 | Revenues | 2011 | Revenues | |||||||||||||||||||
| Sales and marketing |
$ | 14,353 | 10.7 | % | $ | 12,222 | 9.0 | % | $ | 11,864 | 9.7 | % | ||||||||||||
| Engineering and project management |
9,406 | 7.0 | % | 9,144 | 6.8 | % | 8,504 | 7.0 | % | |||||||||||||||
| General and administrative |
18,698 | 14.0 | % | 19,394 | 14.3 | % | 16,715 | 13.7 | % | |||||||||||||||
| Loss on impairment of intangibles |
3,525 | 2.6 | % | — | 0.0 | % | 3,551 | 2.9 | % | |||||||||||||||
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| Total operating expenses |
$ | 45,982 | 34.3 | % | $ | 40,760 | 30.1 | % | $ | 40,634 | 33.4 | % | ||||||||||||
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For fiscal 2013, our operating expenses increased compared to fiscal 2012, primarily as a result of a decision to write off the deferred royalty advances under the CEFCO licensing agreement. As a result of delays in CEFCO’s ability to identify and fund a pilot test location utilizing the CEFCO technology combined with uncertainties related to the future demand for clean coal technology applications, management concluded that it is no longer probable that the future cash flow under the CEFCO licensing agreement will exceed the amounts funded by the Company to date. Accordingly, a non-cash impairment charge of $3.5 million to operating expense was recognized in fiscal 2013 to write off all amounts advanced to date under the license agreement. However, we are continuing to support the efforts of CEFCO to identify a pilot location, as well as discuss alternative applications for the technology. In addition, we are continuing to support the efforts of CEFCO and a third party to commercialize the sulfur capture module that represents a portion of the larger CEFCO technology. We are currently unable to assess the likelihood or timing of such future revenue opportunities.
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Our sales and marketing expenses increased $2.1 million in fiscal 2013 compared to fiscal 2012 primarily due to increased commission and increased cost associated with additional sales resources located in China. Our engineering and project management expenses increased $0.3 million in fiscal 2013 compared to fiscal 2012. General and administrative expenses decreased by $0.7 million in fiscal 2013 compared to fiscal 2012. The reduced expenses in fiscal 2013 is primarily due to the expense of $2.1 million for accelerated vesting of restricted stock in fiscal 2012 partially offset by a write off of a customer receivable in the current year.
For fiscal 2012, our operating expenses remained flat compared to fiscal 2011. As a percentage of revenue, these expenses were 30.1% in fiscal 2012 and 33.4% in fiscal 2011. Our sales and marketing expenses increased $0.4 million in fiscal 2012 compared to fiscal 2011 primarily due to increased commission and other selling related expenses associated with higher revenue in fiscal 2012. Our engineering and project management expenses increased $0.6 million in fiscal 2012 compared to fiscal 2011 primarily due to an increase in employee wages and benefits. General and administrative expenses increased $2.7 million in fiscal 2012 compared to fiscal 2011, primarily due to the accelerated vesting of previously unvested restricted stock awards, increased costs of maintaining foreign offices, and additional costs associated with the acquisition of Burgess Manning GmbH. Fiscal 2011 operating expenses also included a $3.6 million impairment loss on intangibles related to design guidelines.
Other Income and Expense. The following summarizes other income and expenses (in thousands):
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Interest income |
$ | 50 | $ | 16 | $ | 35 | ||||||
| Interest expense |
(492 | ) | (1,267 | ) | (2,337 | ) | ||||||
| Loss on extinguishment of debt |
(291 | ) | (347 | ) | — | |||||||
| Foreign exchange gain (loss) |
(135 | ) | (915 | ) | 606 | |||||||
| Change in fair value of derivative liability |
— | — | 6,681 | |||||||||
| Other income (expense), net |
33 | (5 | ) | 20 | ||||||||
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| Total other income (expense), net |
$ | (835 | ) | $ | (2,518 | ) | $ | 5,005 | ||||
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For fiscal 2013, total other income and expense, net changed by $1.7 million from $2.5 million of expense to $0.8 million of expense. Interest expense during fiscal 2013 decreased by $0.8 million compared to fiscal 2012 due to lower average debt balances outstanding and the capitalization of $0.2 million of interest associated with the Denton, Texas manufacturing facility constructed during the year. A $0.3 million write off of deferred financing charges associated with the extinguished senior term loan was recognized in fiscal 2013. Fiscal 2013 reported a loss on foreign currency translation of $0.1 million compared to a loss of $0.9 million for fiscal 2012, both of which were driven largely by changes in the exchange rates of the Canadian dollar and the euro relative to the U.S. dollar.
For fiscal 2012, total other income and expense, net changed by $7.5 million from $5 million of income to $2.5 million of expense. The increase in other expense is primarily attributable to $6.7 million change in the fair value of our derivative liability associated with the conversion and redemption features of our preferred stock during fiscal 2011. Interest expense during fiscal 2012 decreased by $1.1 million compared to fiscal 2011 on lower average debt balances outstanding. A $0.3 million write off of deferred financing charges associated with the extinguished senior term loan was recognized in fiscal 2012. Fiscal 2012 reported a loss on foreign currency translation of $0.9 million compared to a gain of $0.6 million for fiscal 2011, both of which were driven largely by changes in the exchange rates of the Canadian dollar and the euro relative to the U.S. dollar.
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Income Taxes: Fiscal 2013 resulted in income tax expense of $1.5 million compared to income tax benefit of $1.0 million and $3.1 million in fiscal 2012 and 2011, respectively. For fiscal 2013, the effective tax rates vary from statutory rates because we established a valuation allowance against deferred tax assets and increased our reserve for uncertain tax positions. This was offset in part by research and development expenditure credits and increased profits of our foreign subsidiaries which have a lower tax rate than the United States. For further information related to income taxes, see Note R to our consolidated financial statements included in Item 8 of this Form 10-K.
Net Earnings (Loss): Our net loss increased from $(1.0) million, or (0.8) % of revenue for fiscal 2012, to a net loss of $(1.5) million, or (1.1) % of revenue, for fiscal 2013. Basic and diluted loss per share attributable to our common shareholders increased from net loss attributable to our common shareholders of $(0.05) per share for fiscal 2012 to a net loss attributable to our common shareholders of $(0.10) per share for fiscal 2013.
Our net earnings decreased from $5.9 million, or 4.8 % of revenue for fiscal 2011, to a net loss of $(1.0) million, or (0.8) % of revenue, for fiscal 2012. Basic earnings per share attributable to our common shareholders decreased from net earnings attributable to our common shareholders of $0.29 per share for fiscal 2011, to a net loss attributable to our common shareholders of $(0.05) per share for fiscal 2012. Diluted earnings per share attributable to our common shareholders decreased from net earnings attributable to our common shareholders of $0.28 per share for fiscal 2011, to a net loss attributable to our common shareholders of $(0.05) per share for fiscal 2012.
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 84.2%, 87.3% and 73.0% of our revenue in fiscal years 2013, 2012 and 2011, respectively.
Process Products revenue and operating income for the prior three fiscal years are presented below (in thousands):
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Revenue |
$ | 112,703 | $ | 118,147 | $ | 88,876 | ||||||
| Operating income |
19,006 | 16,711 | 11,825 | |||||||||
| Operating income as % of revenue |
16.9 | % | 14.1 | % | 13.3 | % | ||||||
Process Products revenue decreased by $5.4 million or 4.6%, in fiscal 2013 compared to fiscal 2012. Reduced revenue for fiscal 2013 resulted from lower demand in the United States for separation and filtration equipment and customer driven delays on products in our backlog offset in part by increased demand in Asia. Process Products revenue increased by $29.3 million or 32.9%, in fiscal 2012, compared to fiscal 2011. The acquisition of Burgess Manning GmbH contributed $8.3 million of revenue in fiscal 2012. Additional revenue growth for fiscal 2012 resulted from increased pressure product sales in Asia and the Middle East driven by our continued focused sales efforts in those regions.
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Process Products operating income increased by $2.3 million or 13.7% in fiscal 2013 compared to fiscal 2012. As a percentage of Process Products revenue, operating income was 16.9%, 14.1% and 13.3% in fiscal 2013, 2012 and 2011, respectively. The increase in operating income as a percentage of revenue is attributed to a change in the geographic mix and increased focus on manufacturing costs, as well as the impact of certain contracts cancelled by a customer in Latin America. Cancellation of the contracts directly related to the customer’s decision to redesign the facility and make changes to planned construction resources. Process Products operating income increased by $4.9 million or 41.3% in fiscal 2012 compared to fiscal 2011. The increase in operating income in fiscal 2012 was primarily on the strength of increased revenue in the segment.
Environmental Systems
The primary product of our Environmental Systems business is selective catalytic reduction systems, which we refer to as SCR systems. SCR systems are integrated systems, with instruments, controls and related valves and piping. Our SCR systems convert nitrogen oxide, or NOx, into nitrogen and water, reducing air pollution and helping our customers comply with environmental regulations. Environmental Systems represented 16%, 13% and 27% of our revenue in fiscal years 2013, 2012 and 2011, respectively.
Environmental Systems revenue and operating income for the prior three fiscal years are presented below (in thousands):
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Revenue |
$ | 21,189 | $ | 17,171 | $ | 32,918 | ||||||
| Operating income |
4,035 | 3,158 | 6,214 | |||||||||
| Operating income as % of revenue |
19.0 | % | 18.4 | % | 18.9 | % | ||||||
Revenue from Environmental Systems increased $4.0 million, or 23.4% during fiscal 2013 compared to fiscal 2012. The higher Environmental Systems revenue resulted from SCR System orders booked in early fiscal 2013. Revenue from Environmental Systems decreased by $15.7 million, or 47.8% during fiscal 2012 compared to fiscal 2011. The decrease is primarily due to decreased construction of new gas-fired power generation facilities. Because of the large project nature of our Environmental Systems segment revenue can vary significantly from period to period.
Environmental Systems operating income in fiscal 2013 increased $0.9 million compared to fiscal 2012. As a percentage of revenue, operating income increased slightly to 19.0% for fiscal 2013 from 18.4% for fiscal 2012, primarily attributable to lower relative selling and engineering expenses at higher levels of revenue. Environmental Systems operating income decreased $3.1 million in fiscal 2012 compared to fiscal 2011. As a percentage of revenue, operating income decreased in 2012 compared to 2011, from 18.9% to 18.4%. The decrease in Environmental Systems operating income and operating income as a percentage of revenue is primarily due to increased selling and engineering costs as a percentage of the reduced amount of revenue.
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Corporate Level Expenses
Corporate level expenses excluded from our segment operating results were $18.7 million, $19.4 million and $16.7 million, for fiscal years 2013, 2012 and 2011, respectively.
Corporate level expenses include those related to the corporate office, as well as general and administrative costs of international subsidiaries. Corporate level expenses decreased $0.7 million or 3.6% in fiscal 2013 compared to fiscal 2012. The reduced expenses in fiscal 2013 is primarily due to the expense of $2.1 million for accelerated vesting of restricted stock in fiscal 2012 that was not replicated in fiscal 2013, partially offset by a write off of a customer receivable and increased costs of maintaining foreign offices. For fiscal 2013, operating expenses included a $3.5 million impairment of intangible assets that was excluded from our segment operating results.
For fiscal 2012, our corporate level expenses increased $2.7 million, or 16.0%, compared to fiscal 2011. The increase was the result of the accelerated vesting of restricted stock awards and the increased cost of maintaining foreign offices, higher employee-related costs and higher professional fees, and acquisition costs related to the German subsidiary. For fiscal 2011, operating expenses included a $3.6 million impairment of intangible assets that was excluded from our segment operating results.
Contingencies
In June 2010, the Company received notice from a customer claiming approximately $9.1 million in repair costs associated with four heat exchangers sold by Alco Products, a division of Nitram, in 2006 prior to the Company’s acquisition of Nitram. The customer requested reimbursement for the repair costs pursuant to Alco Products’ warranty obligations under the terms and conditions of the purchase order. The Company has not received sufficient information to assess the validity of the claim and has notified the Nitram insurance carrier and the selling stockholders of Nitram of this claim. The Company believes if any valid claim exists, the Company is entitled to be indemnified by Nitram selling stockholders pursuant to the terms of the Nitram acquisition agreement for any amounts that are paid by the Company in connection with such claim. At this time, the Company cannot estimate any potential range of loss that may result from this asserted claim as the Company has not received sufficient information to assess the validity of the claim. No amount has been accrued in the financial statements for this claim as of June 29, 2013. At this time, the Company has not been notified that any lawsuit has been filed by the customer.
Our operations are subject to a number of federal, state and local laws and regulations relating to the protection of the environment. In connection with our acquisition of Nitram and the related financing transactions, environmental site assessments were performed on our then existing manufacturing properties, as well as those owned by Nitram. As a result of the findings of such investigation we subsequently remediated the soil and performed additional groundwater monitoring and testing at a facility which was sold during fiscal 2013. We intend to terminate the environmental assessment as we believe all required remediation has been completed. We have an accrued liability of $0.1 million at June 29, 2013, for the estimated remaining costs relating to these environmental matters. We are seeking reimbursement for the full cost of the remediation and any ongoing and future monitoring activities under our purchase agreement with Nitram’s former stockholders.
Under the contract for the Nitram acquisition, the Company has certain rights to indemnification against the selling stockholders for claims relating to breach of representation and certain other claims, including litigation costs and damages. The Nitram selling stockholders previously placed $10.9 million of the purchase price in escrow to reimburse the Company for indemnification and certain other claims. The escrow amount, less any claim amounts made by the Company or amounts paid to third parties as agreed upon by the Company and sellers, was released to the sellers in five installments. Prior to the final escrow payment release on October 30, 2009, the Company made claims to the sellers relating to environmental matters and indemnification for breach of representations and warranties of the Nitram
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purchase agreement, totaling approximately $2.0 million against the escrow, and a total of $1.4 million was withheld from the payment of the escrow amount, which represents the Company’s claims, less a one percent deductible, estimated at $0.6 million. Following the final escrow release, the Company made additional claims directly against the selling stockholders under the terms of the Nitram acquisition agreement totaling approximately $9.5 million, related to the customer warranty dispute for the four Alco Products heat exchangers and other environmental matters. The sellers have objected to the claims made by the Company and the parties are currently in the process of negotiating the various claims. The Company does not 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.
Net Bookings and Backlog
The following table shows the activity and balances related to our backlog for the fiscal years ended and as of June 29, 2013 and June 30, 2012 (in millions):
| Fiscal 2013 |
Fiscal 2012 |
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| Backlog at beginning of period |
$ | 99.9 | $ | 89.0 | ||||
| Net bookings |
130.8 | 152.6 | ||||||
| Acquired backlog |
— | 5.0 | ||||||
| Removed from backlog |
(12.5 | ) | (11.4 | ) | ||||
| Revenue recognized |
(134.0 | ) | (135.3 | ) | ||||
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| Backlog at end of period |
$ | 84.2 | $ | 99.9 | ||||
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Our backlog was approximately $84.2 million at June 29, 2013, compared to $99.9 million at June 30, 2012. At June 29, 2013 and June 30, 2012, approximately 70% and 85%, respectively, of our backlog related to Process Products sales orders with the balance pertaining to Environmental Systems sales orders. Backlog includes contractual purchase orders for products that are deliverable in future periods less revenue recognized on such orders to date. Of our backlog at June 29, 2013, we estimate approximately 80% of the revenue related to our existing backlog will be recognized in the next 12 months. Orders in backlog are subject to change, delays or cancellation by our customers.
In fiscal 2013, the Company removed from backlog customer cancelled purchase orders totaling $12.5 million. The purchase orders were received in fiscal 2012. Cancellation of the purchase orders resulted in cancellation penalties which were recognized in revenue during fiscal 2013.
Financial Position
Assets. Total assets decreased by $3.2 million or 1.7%, from $183.3 million at June 30, 2012 to $180.1 million at June 29, 2013 We held cash and cash equivalents of $58.0 million, of which $5.0 million was restricted as collateral for stand-by letters of credit and bank guarantees, had working capital of $75.0 million and a current liquidity ratio of 3.2-to-1.0 at June 29, 2013. This compares with cash and cash equivalents of $60.2 million at June 30, 2012, of which $7.9 million was restricted, working capital of $77.3 million and a current liquidity ratio of 2.7-to-1.0 at June 30, 2012.
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Liabilities and Stockholders’ Equity. Total liabilities decreased by $4.2 million or 8.0%, from $52.4 million at June 30, 2012 to $48.2 million at June 29, 2013. The decrease in liabilities is attributed to a decrease in accounts payable, customer deposits, billings in excess of cost, compensation, warranty and other accrued liabilities, partially offset by an increase in long-term debt. The increase in our stockholders’ equity of $1.0 million, or 0.8%, from $130.9 million at June 30, 2012 to $131.9 million at June 29, 2013 is primarily attributable to increase in our noncontrolling interest from capital contributions to our joint venture in China. Our debt (total liabilities)-to-equity ratio was 0.4-to-1.0 at June 29, 2013 and at June 30, 2012.
Liquidity and Capital Resources
Our cash and cash equivalents were $58.0 million as of June 29, 2013, of which $5.0 million was restricted as collateral for stand-by letters of credit and bank guarantees, compared to $60.2 million at June 30, 2012, of which $7.9 million was restricted. Net cash provided by operating activities during fiscal 2013 was $5.4 million, compared to $15.6 million and $1.3 million during fiscal 2012 and fiscal 2011, respectively.
Because we are engaged in the business of manufacturing systems, our progress billing practices are event-oriented rather than date-oriented and vary from contract to contract. We typically bill our customers upon the occurrence of project milestones. Billings to customers affect the balance of billings in excess of costs and earnings on uncompleted contracts or the balance of costs and earnings in excess of billings on uncompleted contracts, as well as the balance of accounts receivable. Consequently, we focus on the net amount of these accounts, along with accounts payable, to determine our management of working capital. At June 29, 2013, the balance of these working capital accounts was $17.9 million compared to $16.7 million at June 30, 2012, reflecting an increase of our investment in these working capital items of $1.2 million. Generally, a contract will either allow for amounts to be billed upon shipment or on a progress basis based on the attainment of certain milestones. In addition to our change in working capital, our cash flow provided by operations was comprised primarily of our net loss of $(1.5) million adjusted by other expense items which did not generate a use of current year cash.
Net cash used in investing activities was $14.5 million for fiscal 2013, compared to net cash used in investing activities of $7.0 million and $6.3 million for fiscal 2012 and 2011, respectively. The use of cash during fiscal 2013 primarily related to the construction costs of our manufacturing facilities in Denton, Texas and Zhenjiang, China. The use of cash during fiscal 2012 primarily related to the acquisition of Burgess Manning GmbH, purchases of property and equipment and an increase in restricted cash. The net cash used in fiscal 2011 related primarily to the purchase of equipment and the investment in the CEFCO manufacturing license agreement.
Net cash provided by financing activities was $9.8 million for fiscal 2013, compared to net cash provided by financing activities of $31.7 million in fiscal 2012 and used in financing activities of $7.4 million in fiscal 2011. Cash provided by financing activities for fiscal 2013 was primarily the proceeds from long-term debt used to build our Denton, Texas manufacturing facility. The cash provided by financing activities for fiscal 2012 related to the proceeds from the our public offering of 2,990,000 shares of common stock in February 2012, partially offset by the principal payment of extinguishment of long-term debt. The cash used in financing activities for fiscal 2011 consisted primarily of payment of long-term debt of $7.7 million and dividends of $0.7 million on preferred stock offset by proceeds from the sale of common stock and excess tax benefits from stock options exercised.
As a result of the above factors, our cash and cash equivalents during fiscal 2013 increased $0.7 million compared to an increase of $39.4 million during fiscal 2012 and a decrease of $11.4 million in fiscal 2011.
41
Credit Facilities
In September 2012, the Company refinanced its senior term loan under the Company’s Senior Secured Credit Agreement with a new 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 new manufacturing facility in Denton, Texas (“Term Loan A”) and term loan commitments of $10.0 million to fund the construction of the new 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 June 29, 2013, there were no outstanding borrowings and approximately $6.6 million of outstanding letters of credit under the revolving credit facility, leaving the Company with approximately $2.3 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. Term Loan A matures in 2019 and Term Loan B matures in 2022. The Credit Agreement also requires the Company to maintain an interest rate protection agreement with respect to at least 50% of the aggregate outstanding principal amount of the term loans.
Interest on all loans must generally be paid quarterly. Interest rates on term loans use floating rates plus 1/2 of 1% up to 2%, plus a margin of between 0 to 75 basis points based upon the Company’s consolidated funded debt to consolidated EBITDA for the trailing four consecutive fiscal quarters.
At June 29, 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 Company’s aggregate total liabilities to the sum of the excess of the Company’s total assets over its total liabilities as each is determined on a consolidated basis in accordance with generally accepted accounting principles. The DSC ratio is calculated as the ratio of the Company’s consolidated EBITDA less certain restricted cash payments, capitalized expenditures and taxes to the Company’s consolidated fixed charges, which is the sum of the Company’s current maturities of long-term debt and the amount of cash paid for interest on a trailing twelve month basis. The Credit Agreement also contains other covenants, including restrictions on additional debt, dividends, capital expenditures, acquisitions and dispositions. At June 29, 2013, the Company was in compliance with all of its debt covenants.
The Company’s U.K. subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of £6.0 million ($9.1 million) at June 29, 2013 and £6.0 million ($9.4 million) at June 30, 2012. This facility was secured by substantially all of the assets of the Company’s U.K. subsidiary and by a cash deposit of £2.1 million ($3.2 million) at June 29, 2013 and £4.1 million ($6.4 million) at June 30, 2012, which is recorded as restricted cash on the Consolidated Balance Sheet. At June 29, 2013, there was £4.4 million ($6.8 million) outstanding under stand-by letters of credit and bank guarantees under this debenture agreement. June 30, 2012, there was £5.9 million ($9.3 million) outstanding under stand-by letters of credit and bank guarantees under this debenture agreement. There were no borrowings outstanding under the U.K. subsidiary’s debenture agreement at June 29, 2013 or June 30, 2012.
42
The Company’s German subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of €4.8 million ($6.2 million) at June 29, 2013 and €4.8 million ($6.0 million) at June 30, 2012. This facility is secured by substantially all of the assets of the Company’s German subsidiary and by a cash deposit of €0.7 million ($0.9 million) at June 29, 2013 and €1.1 million ($1.4 million) at June 30, 2012, which is recorded as restricted cash on the Consolidated Balance Sheets. 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. At June 30, 2012, there was €3.5 million ($4.4 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.
The Company’s subsidiary in Singapore had bank guarantees of $0.6 million and $0.3 million at June 29, 2013 and June 30, 2012, respectively. These guarantees are secured with deposits held by the institution issuing the guarantee. The Company’s joint venture in China had bank guarantees of $0.6 million at June 29, 2013, secured by $0.6 million of restricted cash balances. There were no outstanding guarantees at June 30, 2012.
We believe we maintain adequate liquidity to support existing operations and planned growth over the next 12 months.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 29, 2013.
Tabular Disclosure of Contractual Obligations
The following table summarizes the indicated contractual obligations and other commitments of the Company as of June 29, 2013 (in thousands):
| Payments Due by Period | ||||||||||||||||||||
| Less Than | 1 to 3 | 3 to 5 | After 5 | |||||||||||||||||
| Contractual Obligations |
Total | 1 Year | Years | Years | Years | |||||||||||||||
| Construction contract—new manufacturing facility (1) |
$ | 4,521 | $ | 4,521 | $ | — | $ | — | $ | — | ||||||||||
| Purchase obligations (2) |
16,205 | 16,205 | — | — | — | |||||||||||||||
| Unrecognized tax benefits |
1,447 | — | 1,447 | — | — | |||||||||||||||
| Stand-by letters of credit (3) |
18,143 | 11,746 | 4,974 | 1,119 | 304 | |||||||||||||||
| Operating lease obligations |
6,241 | 1,734 | 3,237 | 1,057 | 213 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total contractual obligations |
$ | 46,557 | $ | 34,206 | $ | 9,658 | $ | 2,176 | $ | 517 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 1) | Construction contract for new 175,000 square foot manufacturing facility and administration offices located in Zhenjiang, China. Construction of the facility began in December 2012. |
| 2) | Purchase obligations in the table above represent the value of open purchase orders as of June 29, 2013. We believe that some of these obligations could be cancelled for payment of a nominal penalty, or no penalty. |
| 3) | The stand-by letters of credit include $6.6 million issued under our $30.0 million revolving credit facility, $6.8 million outstanding under our debenture agreement in the U.K.,$3.5 million outstanding under our debenture agreement in Germany, $0.6 million outstanding bank guarantee in Singapore and $0.6 million outstanding guarantee in China. |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Our primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk.
43
Interest Rate Risk
We are subject to interest rate risk on outstanding borrowings under our Credit Agreement, which bears interest at a variable rate. At June 29, 2013, we had $8.7 million outstanding borrowings under this Agreement.
To reduce the volatility of earnings and cash flows that arise from changes in interest rates, we manage interest rate risk through the use of interest rate swap agreements. These swap agreements allow us to manage our exposure to interest rate changes for the term loans under our Credit Agreement by fixing the LIBOR interest rates specified in the Credit Agreement until the indicated expiration dates. When the term loan commitments of our Senior Credit Facility expire in March 2014, we anticipate approximately 80% of our outstanding term loans under the Senior Credit Facility will be covered by the swap agreements.
We are exposed to market risk under these arrangements due to the possibility of interest rates on the term loans under our Credit Agreement declining below the designated rates on our interest rate derivative agreements. We believe the credit risk under these arrangements is remote since the counterparty to our interest rate derivative agreements is a major financial institution. However, if the counterparty to our derivative arrangements becomes unable to fulfill their obligation to us, we would not receive the financial benefits of these swap agreements.
Foreign Currency Risk
Our market risk includes the potential loss arising from adverse changes in foreign currency exchange rates. Certain sales and expenses in foreign countries are transacted in currencies other than the United States dollar, our reporting currency. Our foreign currency exchange rate risk is primarily limited to the Canadian dollar, the British pound and the euro. We naturally hedge a portion of our foreign currency exposure through the use of suppliers and subcontractors in the countries in which we sell products, and by incurring liabilities denominated in the local currency in which our foreign subsidiaries are located. We did not have any currency derivatives outstanding as of, or during the fiscal year ended June 29, 2013
44
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
PMFG, Inc.
We have audited the accompanying consolidated balance sheets of PMFG, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 29, 2013, and June 30, 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended June 29, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PMFG, Inc. and subsidiaries as of June 29, 2013, and June 30, 2012, and the results of their operations and their cash flows for each of the three years in the period ended June 29, 2013, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 29, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 6, 2013, expressed an unmodified opinion.
/s/ GRANT THORNTON LLP
Dallas, Texas
September 6, 2013
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
PMFG, Inc.
We have audited the internal control over financial reporting of PMFG, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 29, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (Management’s Report). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 29, 2013, based on criteria established in Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended June 29, 2013, and our report dated September 6, 2013, expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Dallas, Texas
September 6, 2013
46
PMFG, Inc. and Subsidiaries
(Amounts in thousands)
| June 29, | June 30, | |||||||
| 2013 | 2012 | |||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 53,020 | $ | 52,286 | ||||
| Restricted cash |
5,029 | 7,927 | ||||||
| Accounts receivable—trade, net of allowance for doubtful accounts of $300 and $650, at June 29, 2013 and June 30, 2012, respectively |
22,509 | 32,428 | ||||||
| Inventories, net |
6,488 | 6,478 | ||||||
| Costs and earnings in excess of billings on uncompleted contracts |
16,544 | 14,635 | ||||||
| Income taxes receivable |
1,152 | 4,101 | ||||||
| Deferred income taxes |
304 | 1,191 | ||||||
| Other current assets |
3,427 | 3,240 | ||||||
|
|
|
|
|
|||||
| Total current assets |
108,473 | 122,286 | ||||||
| Property, plant and equipment, net |
24,031 | 9,522 | ||||||
| Intangible assets, net |
16,180 | 20,731 | ||||||
| Goodwill |
30,429 | 30,429 | ||||||
| Other assets |
998 | 311 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 180,111 | $ | 183,279 | ||||
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
47
PMFG, Inc. and Subsidiaries
Consolidated Balance Sheets—Continued
(Amounts in thousands, except share data)
| June 29, | June 30, | |||||||
| 2013 | 2012 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 14,899 | $ | 18,539 | ||||
| Current maturities of long-term debt |
— | — | ||||||
| Billings in excess of costs and earnings on uncompleted contracts |
6,277 | 11,797 | ||||||
| Commissions payable |
1,763 | 1,437 | ||||||
| Income taxes payable |
339 | 595 | ||||||
| Accrued product warranties |
2,241 | 2,615 | ||||||
| Customer deposits |
2,566 | 3,241 | ||||||
| Accrued liabilities and other |
5,386 | 6,795 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
33,471 | 45,019 | ||||||
| Long-term debt, net of current portion |
8,719 | — | ||||||
| Deferred income taxes |
4,135 | 6,180 | ||||||
| Other non-current liabilities |
1,900 | 1,194 | ||||||
| Commitments and contingencies |
||||||||
| Preferred stock – authorized, 5,000,000 shares of $0.01 par value; no shares issued and outstanding at June 29, 2013 and June 30, 2012 |
— | — | ||||||
| Stockholders’ equity: |
||||||||
| Common stock—authorized, 50,000,000 shares of $0.01 par value; issued and outstanding, 20,966,426 and 20,773,878 shares at June 29, 2013 and June 30, 2012, respectively |
210 | 208 | ||||||
| Additional paid-in capital |
96,634 | 96,072 | ||||||
| Accumulated other comprehensive loss |
(2,004 | ) | (1,913 | ) | ||||
| Retained earnings |
33,114 | 35,194 | ||||||
|
|
|
|
|
|||||
| Total PFMG, Inc.’s stockholders’ equity |
127,954 | 129,561 | ||||||
| Noncontrolling interest |
3,932 | 1,325 | ||||||
|
|
|
|
|
|||||
| Total equity |
131,886 | 130,886 | ||||||
|
|
|
|
|
|||||
| Total liabilities and equity |
$ | 180,111 | $ | 183,279 | ||||
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
48
PMFG, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Revenue |
$ | 133,892 | $ | 135,318 | $ | 121,794 | ||||||
| Cost of goods sold |
87,092 | 94,083 | 83,387 | |||||||||
|
|
|
|
|
|
|
|||||||
| Gross profit |
46,800 | 41,235 | 38,407 | |||||||||
| Operating expenses: |
||||||||||||
| Sales and marketing |
14,353 | 12,222 | 11,864 | |||||||||
| Engineering and project management |
9,406 | 9,144 | 8,504 | |||||||||
| General and administrative |
18,698 | 19,394 | 16,715 | |||||||||
| Loss on impairment of intangibles |
3,525 | — | 3,551 | |||||||||
|
|
|
|
|
|
|
|||||||
| 45,982 | 40,760 | 40,634 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Operating income (loss) |
818 | 475 | (2,227 | ) | ||||||||
| Other income (expense): |
||||||||||||
| Interest income |
50 | 16 | 35 | |||||||||
| Interest expense |
(492 | ) | (1,267 | ) | (2,337 | ) | ||||||
| Loss on extinguishment of debt |
(291 | ) | (347 | ) | — | |||||||
| Foreign exchange gain (loss) |
(135 | ) | (915 | ) | 606 | |||||||
| Change in fair value of derivative liability |
— | — | 6,681 | |||||||||
| Other income (expense), net |
33 | (5 | ) | 20 | ||||||||
|
|
|
|
|
|
|
|||||||
| (835 | ) | (2,518 | ) | 5,005 | ||||||||
|
|
|
|
|
|
|
|||||||
| Earnings (loss) before income taxes |
(17 | ) | (2,043 | ) | 2,778 | |||||||
| Income tax benefit (expense) |
(1,471 | ) | 1,005 | 3,083 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net earnings (loss) |
$ | (1,488 | ) | $ | (1,038 | ) | $ | 5,861 | ||||
|
|
|
|
|
|
|
|||||||
| Less net earnings (loss) attributable to noncontrolling interest |
$ | 592 | $ | (62 | ) | $ | 112 | |||||
|
|
|
|
|
|
|
|||||||
| Net earnings (loss) attributable to PMFG, Inc. |
$ | (2,080 | ) | $ | (976 | ) | $ | 5,749 | ||||
|
|
|
|
|
|
|
|||||||
| Dividends on preferred stock |
$ | — | $ | — | $ | (722 | ) | |||||
|
|
|
|
|
|
|
|||||||
| Net earnings (loss) attributable to PMFG, Inc. common shareholders |
$ | (2,080 | ) | $ | (976 | ) | $ | 5,027 | ||||
|
|
|
|
|
|
|
|||||||
| BASIC EARNINGS (LOSS) PER SHARE |
$ | (0.10 | ) | $ | (0.05 | ) | $ | 0.29 | ||||
|
|
|
|
|
|
|
|||||||
| DILUTED EARNINGS (LOSS) PER SHARE |
$ | (0.10 | ) | $ | (0.05 | ) | $ | 0.28 | ||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to consolidated financial statements.
49
Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Net income (loss) |
$ | (1,488 | ) | $ | (1,038 | ) | $ | 5,861 | ||||
| Other comprehensive income (loss): |
||||||||||||
| Foreign currency translation adjustment |
(76 | ) | (564 | ) | 988 | |||||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive income (loss) |
(76 | ) | (564 | ) | 988 | |||||||
| Comprehensive income (loss) |
(1,564 | ) | (1,602 | ) | 6,849 | |||||||
| Net income (loss) |
592 | (62 | ) | 112 | ||||||||
| Other comprehensive income (loss): |
||||||||||||
| Foreign currency translation adjustment |
15 | 18 | 36 | |||||||||
|
|
|
|
|
|
|
|||||||
| Comprehensive income (loss) attributable to noncontrolling interests |
607 | (44 | ) | 148 | ||||||||
|
|
|
|
|
|
|
|||||||
| Comprehensive income (loss) attributable to PMFG, Inc. |
$ | (2,171 | ) | $ | (1,558 | ) | $ | 6,701 | ||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to consolidated financial statements
50
PMFG, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Amounts in thousands)
| Accumulated | Total | |||||||||||||||||||||||||||||||
| Additional | Other | PMFG, Inc.’s | Non | |||||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | Stockholders’ | Controlling | Total | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Income (Loss) | Equity | Interest | Equity | |||||||||||||||||||||||||
| Balance at June 30, 2010 |
14,734 | 147 | 27,240 | 31,142 | (2,283 | ) | 56,246 | 901 | 57,147 | |||||||||||||||||||||||
| Net earnings |
5,749 | 5,749 | 112 | 5,861 | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment |
952 | 952 | 36 | 988 | ||||||||||||||||||||||||||||
| Restricted stock grants |
99 | 1 | 1,357 | 1 | 1,359 | 1,359 | ||||||||||||||||||||||||||
| Stock options exercised |
122 | 2 | 440 | 442 | 442 | |||||||||||||||||||||||||||
| Income tax benefit related to stock options exercised |
411 | 411 | 411 | |||||||||||||||||||||||||||||
| Issuance of common stock |
2,642 | 26 | 19,209 | 19,235 | 19,235 | |||||||||||||||||||||||||||
| Equity contribution from noncontrolling interest in subsidiary |
— | 320 | 320 | |||||||||||||||||||||||||||||
| Preferred stock dividends |
(722 | ) | (722 | ) | (722 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at July 2, 2011 |
17,597 | $ | 176 | $ | 48,657 | $ | 36,170 | $ | (1,331 | ) | $ | 83,672 | $ | 1,369 | $ | 85,041 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net earnings (loss) |
(976 | ) | (976 | ) | (62 | ) | (1,038 | ) | ||||||||||||||||||||||||
| Foreign currency translation adjustment |
(582 | ) | (582 | ) | 18 | (564 | ) | |||||||||||||||||||||||||
| Restricted stock grants |
74 | 1 | 3,070 | 3,071 | 3,071 | |||||||||||||||||||||||||||
| Stock options exercised |
8 | — | 31 | 31 | 31 | |||||||||||||||||||||||||||
| Warrants exercised |
105 | 1 | (1 | ) | — | — | ||||||||||||||||||||||||||
| Issuance of common stock |
2,990 | 30 | 44,273 | 44,303 | 44,303 | |||||||||||||||||||||||||||
| Income tax benefit related to stock options exercised |
42 | 42 | 42 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at June 30, 2012 |
20,774 | $ | 208 | $ | 96,072 | $ | 35,194 | $ | (1,913 | ) | $ | 129,561 | $ | 1,325 | $ | 130,886 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net earnings (loss) |
(2,080 | ) | (2,080 | ) | 592 | (1,488 | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment |
(91 | ) | (91 | ) | 15 | (76 | ) | |||||||||||||||||||||||||
| Restricted stock grants |
143 | 1 | 510 | 511 | 511 | |||||||||||||||||||||||||||
| Stock options exercised |
6 | — | 19 | 19 | 19 | |||||||||||||||||||||||||||
| Income tax benefit related to stock options exercised |
34 | 34 | 34 | |||||||||||||||||||||||||||||
| Equity contribution from noncontrolling interest in subsidiary |
2,000 | 2,000 | ||||||||||||||||||||||||||||||
| Other |
43 | 1 | (1 | ) | — | — | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at June 29, 2013 |
20,966 | $ | 210 | $ | 96,634 | $ | 33,114 | $ | (2,004 | ) | $ | 127,954 | $ | 3,932 | $ | 131,886 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
See accompanying notes to consolidated financial statements
51
PMFG, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net earnings (loss) |
$ | (1,488 | ) | $ | (1,038 | ) | $ | 5,861 | ||||
| Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |
||||||||||||
| Depreciation and amortization |
2,879 | 3,395 | 3,584 | |||||||||
| Loss on impairment of intangibles |
3,525 | — | 3,551 | |||||||||
| Stock-based compensation |
511 | 3,071 | 1,359 | |||||||||
| Excess tax benefit of stock-based compensation |
(34 | ) | (42 | ) | (411 | ) | ||||||
| Bad debt expense |
1,184 | 247 | 220 | |||||||||
| Inventory valuation reserve |
66 | 295 | 401 | |||||||||
| Provision for warranty expense |
1,864 | 1,032 | 2,392 | |||||||||
| Change in fair value of derivative instrument |
— | — | (6,681 | ) | ||||||||
| Change in fair value of interest rate swap |
(160 | ) | — | — | ||||||||
| Loss on extinguishment of debt |
291 | 347 | — | |||||||||
| Loss (gain) on sale of property |
(74 | ) | 135 | — | ||||||||
| Foreign exchange loss (gain) |
(135 | ) | 915 | (606 | ) | |||||||
| Deferred tax expense (benefit) |
(1,158 | ) | (572 | ) | (1,299 | ) | ||||||
| Changes in operating assets and liabilities net of acquisitions: |
||||||||||||
| Accounts receivable |
8,750 | (153 | ) | (3,400 | ) | |||||||
| Inventories |
(71 | ) | 17 | 264 | ||||||||
| Costs and earnings in excess of billings on uncompleted contracts |
(1,886 | ) | 4,748 | (3,324 | ) | |||||||
| Other current assets |
(197 | ) | (656 | ) | (464 | ) | ||||||
| Other assets |
— | — | 163 | |||||||||
| Accounts payable |
(3,629 | ) | (699 | ) | 7,128 | |||||||
| Billings in excess of costs and earnings on uncompleted contracts |
(5,497 | ) | 6,931 | (558 | ) | |||||||
| Commissions payable |
326 | (749 | ) | 254 | ||||||||
| Income taxes |
2,727 | (653 | ) | (3,087 | ) | |||||||
| Product warranties |
(2,238 | ) | (1,075 | ) | (2,297 | ) | ||||||
| Accrued liabilities and other |
(121 | ) | 79 | (1,719 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by operating activities: |
5,435 | 15,575 | 1,331 | |||||||||
| Cash flow from investing activities: |
||||||||||||
| Decrease (increase) in restricted cash |
2,821 | (1,416 | ) | (442 | ) | |||||||
| Purchases of property and equipment |
(16,127 | ) | (3,386 | ) | (2,919 | ) | ||||||
| Advance payment of license agreement |
— | (578 | ) | (2,947 | ) | |||||||
| Net proceeds from sale of property |
135 | 906 | — | |||||||||
| Business acquisition, net of cash acquired |
(1,296 | ) | (2,487 | ) | — | |||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in investing activities |
(14,467 | ) | (6,961 | ) | (6,308 | ) | ||||||
| Cash flows from financing activities: |
||||||||||||
| Net proceeds from issuance of common stock |
— | 44,303 | — | |||||||||
| Net proceeds from long-term debt |
8,719 | — | — | |||||||||
| Payment of debt |
— | (12,571 | ) | (7,650 | ) | |||||||
| Payment of debt issuance costs |
(963 | ) | (93 | ) | (158 | ) | ||||||
| Payment of deferred consideration costs |
— | (57 | ) | — | ||||||||
| Payment of dividends on preferred stock |
— | — | (722 | ) | ||||||||
| Equity contribution from noncontrolling interest |
2,000 | — | 320 | |||||||||
| Proceeds from exercise of stock options |
19 | 31 | 442 | |||||||||
| Excess tax benefits from stock-based payment arrangements |
34 | 42 | 411 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) in financing activities |
9,809 | 31,655 | (7,357 | ) | ||||||||
Consolidated Statements of Cash Flows continued on next page.
52
PMFG, Inc. and Subsidiaries
Consolidated Statements of Cash Flows – Continued
(Amounts in thousands)
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents |
(43 | ) | (888 | ) | 968 | |||||||
|
|
|
|
|
|
|
|||||||
| Net increase (decrease) in cash and cash equivalents |
734 | 39,381 | (11,366 | ) | ||||||||
| Cash and cash equivalents at beginning of year |
52,286 | 12,905 | 24,271 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at end of year |
$ | 53,020 | $ | 52,286 | $ | 12,905 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental information on cash flow: |
||||||||||||
| Income taxes paid (received) |
$ | (1,263 | ) | $ | — | $ | 1,300 | |||||
| Interest paid, net of capitalized interest of $0.2 million, $0.0 million and $0.0 million at June 29, 2013, June 30, 2012 and July 2, 2011, respectively |
459 | 943 | 1,492 | |||||||||
During fiscal 2012, holders of warrants exchanged 482,188 warrant shares for 105,403 shares of the Company’s common stock in cashless exercises.
In November 2011, $1.5 million was recorded as deferred consideration as part of the Burgess Manning GmbH acquisition that was due to the seller within 12 months from the date of acquisition. Substantially all of this amount was paid during fiscal 2013. The $2.5 million, presented as an investing activity from the business acquisition in fiscal 2012, represents the purchase consideration for Burgess Manning GmbH of $5.8 million, less deferred consideration, net of $1.8 million of cash acquired.
See accompanying notes to consolidated financial statements.
53
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE A. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations
PMFG, Inc. (the “Company” or “PMFG”) is a leading provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. The Company primarily serves the markets for natural gas infrastructure, power generation and refining and petrochemical processing. The Company offers a broad range of separation and filtration products, selective catalytic reduction (“SCR”) systems, turbine emission exhaust and silencing systems and other complementary products, including specialty heat exchangers, pulsation dampeners and silencers. The Company’s separation and filtration products remove contaminants from gases and liquids, resulting in improved efficiency, reduced maintenance and extended life of energy infrastructure. The Company’s SCR systems convert nitrogen oxide, or NOx, into nitrogen and water, reducing air pollution and helping the Company’s power and industrial customers comply with environmental regulations. The Company’s primary customers include equipment manufacturers, engineering contractors and owner-operators of energy infrastructure. The Company has two reporting segments: Process Products and Environmental Systems. The Process Products segment includes separation and filtration, silencing and heat exchanger products and complementary products and services. The primary product of the Company’s Environmental Systems segment is SCR systems. The Company’s products are manufactured within company-owned facilities located in Texas and a leased facility in China, as well as through global subcontractor agreements.
Basis of Consolidation
The Company was incorporated as a Delaware corporation on August 15, 2008 as part of a holding company reorganization. In the reorganization, Peerless Mfg. Co. (“Peerless”), a Texas corporation, became a wholly owned subsidiary of PMFG.
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and include the accounts of all wholly-owned and majority-owned subsidiaries for all periods presented. 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. Peerless Propulsys is the sole owner of Peerless China Manufacturing Co. Ltd. (“PCMC”). The noncontrolling interest of Peerless Propulsys is reported as a separate component on the Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income.
54
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE A. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED |
The Company’s fiscal year end is the Saturday closest to June 30; therefore, the fiscal year end date will vary slightly each year. In a 52-week fiscal year, each of the Company’s quarterly periods will be comprised of 13 weeks, consisting of two four week periods and one five week period. In a 53-week fiscal year, three of the Company’s quarterly periods will be comprised of 13 weeks and one quarter will be comprised of 14 weeks. References to “fiscal 2013”, “fiscal 2012” and “fiscal 2011” refer to the 52-week fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011, respectively.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
The Company maintains cash balances in bank accounts that exceed Federal Deposit Insurance Corporation insured limits. As of June 29, 2013, cash held in the United States exceeded federally insured limits by $38.3 million. As of June 29, 2013 and June 30, 2012, the Company had $15.6 million and $21.3 million, respectively, in financial institutions outside the United Sates. The Company has not experienced any losses related to these cash concentrations.
The Company had restricted cash balances of $5.0 million and $7.9 million as of June 29, 2013 and June 30, 2012, respectively. Foreign restricted cash balances were $4.7 million and $7.8 million as of June 29, 2013 and June 30, 2012, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the normal course of business.
Accounts Receivable
The Company’s accounts receivable are due from customers 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. 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.
The Company had $0.7 million and $0.6 million of retention receivables included in accounts receivable – trade at June 29, 2013 and June 30, 2012, respectively.
55
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE A. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED |
Changes in the Company’s allowance for doubtful accounts in the last two fiscal years are as follows (in thousands):
| Fiscal 2013 |
Fiscal 2012 |
|||||||
| Balance at beginning of year |
$ | 650 | $ | 600 | ||||
| Bad debt expense |
1,184 | 247 | ||||||
| Accounts written off |
(1,534 | ) | (197 | ) | ||||
|
|
|
|
|
|||||
| Balance at end of year |
$ | 300 | $ | 650 | ||||
|
|
|
|
|
|||||
Inventories
The Company values its inventories using the lower of weighted average cost or market. The Company regularly reviews the value of inventory 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 lease term.
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 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.
56
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE A. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED |
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.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and exceeds its fair value. If conditions indicate an asset might be impaired, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. The impairment would be measured by the amount by which the asset exceeds its fair value, typically represented by the discounted cash flows associated with the asset.
Convertible Redeemable Preferred Stock
Prior to conversion in 2011, the Company’s Series A convertible redeemable preferred stock (“Preferred Stock”) host contract contained redemption options which placed redemption outside of the Company’s control. The Preferred Stock was classified as temporary equity, outside of permanent stockholders’ equity, on the Consolidated Balance Sheets and Consolidated Statements of Equity. The Company considered the conversion rights and redemption options of the Preferred Stock to be an embedded derivative and, as a result, the fair value of the embedded derivative was deemed to be a derivative liability on the Consolidated Balance Sheets (the “Derivative Liability”). Because the Derivative Liability had a fair value in excess of the net proceeds received by the Company from the Preferred Stock transaction at the date of issuance, no amounts were assigned to the Preferred Stock in the allocation of proceeds. Changes in fair value of the Derivative Liability are included in other income (expense) in the Consolidated Statements of Operations and are not taxable or deductible for income tax purposes.
Accumulated Other Comprehensive Income (Loss)
The Company presents adjustments resulting from the foreign currency translation of its operations in China, the United Kingdom and Germany as other comprehensive income (loss).
Derivative instruments
The Company may use derivative financial instruments to manage exposures to interest rate fluctuations on floating rate debt agreements. The Company recognizes derivatives as assets or liabilities on the Consolidated Balance Sheets, measures those financial instruments at fair value, and recognizes changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures.
57
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE A. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED |
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 Company estimates the carrying amount of its debt at June 29, 2013 approximates fair value, as the Company’s debt bears interest at floating 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. In connection with these contracts, the Company uses the percentage-of-completion method of accounting for long-term contracts that contain enforceable rights regarding services to be provided and received by the contracting parties, the consideration to be exchanged, and the manner and terms of settlement. Amounts recognized in revenue are calculated using the percentage of cost completed, generally on a cumulative cost to total cost basis. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract, however changes in estimated total costs can impact profit margins from period to period. Anticipated losses on contracts are recorded in full in the period in which they become evident. Cumulative revenue recognized may be less or greater than amounts 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 are accounted for under the completed contract method. Because of the short-term nature of these contracts, the completed contract method accurately reflects the economic substance of these contracts. Revenue under the completed contract method is recognized upon shipment of the product.
Pre-contract, Start-up and Commissioning Costs
The Company does not consider the realization of any individual sales order as probable prior to order acceptance. Therefore, pre-contract costs incurred prior to sales order acceptance are included as a component of operating expenses when incurred. Some of the Company’s contracts call for the installation and placing in service of the product after it is distributed to the end user. The costs associated with the start-up and commissioning of these projects are estimated and recorded in cost of goods sold in the period in which the revenue is recognized. Estimates are based on historical experience and expectation of future conditions.
58
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE A. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED |
Warranty Costs
The Company provides to its customers product warranties for specific products during a defined period of time, generally less than 18 months after shipment of the product. Warranties cover the failure of a product to perform after it has been placed in service. The Company reserves for estimated future warranty costs in the period in which the revenue is recognized based on historical experience, expectation of future conditions, and the extent of backup concurrent supplier warranties in place. Warranty costs are included in costs of goods sold.
Debt Issuance Costs
Certain costs associated with the issuance of debt instruments are capitalized and included in other non-current assets on the Consolidated Balance Sheets. These costs are amortized to interest expense over the terms of the related debt agreements on a straight-line basis. Amortization of debt issuance costs included in interest expense was $0.2 million, $0.3 million and $0.9 million in fiscal years 2013, 2012 and 2011, respectively. In addition, a loss on early extinguishment of debt of $0.3 million and $0.3 million was recognized in fiscal 2013 and fiscal 2012, respectively.
Stock-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes that cost ratably over the vesting period.
Shipping and Handling Costs
Shipping and handling fees billed to customers are reported as revenue. Shipping and handling costs incurred are reported as cost of goods sold. Shipping and handling costs included in cost of goods sold were $1.4 million, $1.4 million and $1.6 million for fiscal years 2013, 2012 and 2011, respectively.
Advertising Costs
Advertising costs are charged to operating expenses under the sales and marketing category in the periods incurred. Advertising costs were approximately $0.2 million for each of the fiscal years 2013, 2012 and 2011.
Design, Research and Development
Design, research and development costs are charged to operating expenses under the engineering and project management category in the period incurred. Design, research and development costs were approximately $0.7 million, $0.6 million and $0.5 million in fiscal years 2013, 2012 and 2011, respectively.
59
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE A. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED |
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 financial statement purposes. These differences result in deferred tax assets and liabilities and are included in the Company’s Consolidated Balance Sheets. 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.
Earnings (Loss) Per Common Share
The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable to common stockholders by the weighted average number of common shares outstanding. The Company has determined the preferred stock outstanding during fiscal 2011 represented a participating security because holders of the preferred stock have rights to participate in any dividends on an as-converted basis; therefore, basic earnings per common share is calculated using the two class method for that year. Under the two class method, earnings after dividends are allocated to each class of participating security and earnings per common share is calculated on the earnings allocated to common stock. Diluted earnings per common share include the dilutive effect of stock options and warrants granted using the treasury stock method.
Foreign Currency
All balance sheet accounts of foreign operations are translated into U.S. dollars at the fiscal year-end rate of exchange. Consolidated Statements of Operations items are translated at the weighted average exchange rates for the fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011 The resulting translation adjustments are recorded directly to accumulated other comprehensive income, a separate component of stockholders’ equity. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, are included in the Consolidated Statements of Operations.
60
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE A. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates, under different assumptions or conditions.
Considerable management judgment and experience is necessary to estimate the aggregate amount of costs that will ultimately be incurred related to a project. Such cost estimates include material, subcontractor, labor, delivery and start-up costs. Considerable management judgment is also necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulation, and taxing authority rulings, as well as to the expiration of statutes of limitations in the jurisdiction in which the Company operates. A valuation allowance is recorded against a deferred tax asset if it is more likely than not that the asset will not be realized.
New Accounting Pronouncements
In July 2012 the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update related to “Testing Indefinite-Lived Intangibles for Impairment.” The purpose of the update is to simplify the guidance for testing indefinite-lived intangible assets for impairment and the update permits entities to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Unless an entity determines, through its qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset is impaired, it would not be required to calculate the fair value of the asset. This standard is effective for annual and interim impairment tests of indefinite-lived intangible assets performed in fiscal years beginning after September 15, 2012, and early adoption is permitted. This standard did not have an impact on the Company’s annual indefinite-lived asset impairment testing process in fiscal 2013 as the Company did not elect to perform a qualitative assessment.
| NOTE B. | CONCENTRATIONS OF CREDIT RISK |
The Company monitors the creditworthiness of its customers. Significant portions of the Company’s sales are to customers who place large orders for custom systems and customers whose activities are related to the electrical generation and oil and gas industries. Some customers are located outside the United States. The Company generally requires progress payments, but may extend credit to some customers. The Company’s exposure to credit risk is affected to some degree by conditions within the electrical generation and oil and gas industries. When sales are made to smaller international businesses, the Company generally requires progress payments or an appropriate guarantee of payment, such as a letter of credit from a financial institution.
61
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE B. | CONCENTRATIONS OF CREDIT RISK – CONTINUED |
The Company is not dependent upon any single customer or group of customers in either of its two primary business segments. The custom-designed and project-specific nature of its business can result in significant fluctuations in revenue attributed to specific customers, industries, and reporting segments from period to period.
| NOTE C. | ACQUISITIONS |
Burgess Manning GmbH
In November 2011, the Company acquired all of the outstanding shares of Burgess Manning GmbH for $5.8 million. Approximately four million dollars was paid in cash at closing from cash on hand. The remaining balance was paid during fiscal 2013. The purchase price of $5.8 million was allocated to assets acquired, including identifiable intangibles, and liabilities assumed based on their estimated fair values. Of the acquired intangible assets, $1.1 million was assigned to customer relationships, which will be amortized over a ten-year period, and $0.3 million was assigned to acquired backlog, which was fully amortized during fiscal 2012. The excess of the purchase price over the fair value of the net assets acquired represents goodwill of $0.7 million. The results of operations for Burgess Manning GmBH are included in the Company’s Process Products segment.
| NOTE D. | INVENTORIES |
Principal components of inventories are as follows (in thousands):
| June 29, | June 30, | |||||||
| 2013 | 2012 | |||||||
| Raw materials |
$ | 3,729 | $ | 2,991 | ||||
| Work in progress |
2,516 | 3,330 | ||||||
| Finished goods |
493 | 341 | ||||||
|
|
|
|
|
|||||
| 6,738 | 6,662 | |||||||
| Reserve for obsolete and slow-moving inventories |
(250 | ) | (184 | ) | ||||
|
|
|
|
|
|||||
| $ | 6,488 | $ | 6,478 | |||||
|
|
|
|
|
|||||
62
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE E. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment are summarized as follows (in thousands):
| June 29, | June 30, | |||||||
| 2013 | 2012 | |||||||
| Buildings and improvements |
$ | 5,448 | $ | 2,741 | ||||
| Equipment |
12,059 | 7,325 | ||||||
| Furniture and fixtures |
5,757 | 7,911 | ||||||
|
|
|
|
|
|||||
| 23,264 | 17,977 | |||||||
| Less accumulated depreciation |
(17,083 | ) | (11,009 | ) | ||||
|
|
|
|
|
|||||
| 6,181 | 6,968 | |||||||
| Construction in progress |
14,972 | 590 | ||||||
| Land |
2,878 | 1,964 | ||||||
|
|
|
|
|
|||||
| $ | 24,031 | $ | 9,522 | |||||
|
|
|
|
|
|||||
Depreciation expense for property, plant and equipment for the fiscal years 2013, 2012 and 2011 totaled $1.7 million, $1.7 million and $1.6 million, respectively. The amount of depreciation allocated to cost of goods sold was $0.7 million for each of the fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011.
During the fourth quarter of fiscal 2012, the Company closed and sold its production facility in Abilene, Texas. The disposal of the related property, plant and equipment, which had a carrying value of $1.0 million, resulted in net sale proceeds of $0.9 million. The Company recorded a loss on disposal of $0.1 million which is included in cost of goods sold in the Consolidated Statement of Operations for fiscal year 2012.
| NOTE F. | 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 fiscal 2013.
63
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE F. | GOODWILL AND OTHER INTANGIBLE ASSETS – CONTINUED |
Acquisition-Related Intangibles
Acquisition-related intangible assets are as follows (in thousands):
| Weighted | ||||||||||||||||||||||||||||||
| Average | Accumulated | Accumulated | ||||||||||||||||||||||||||||
| Remaining | Gross Value | Gross Value | Amortization | Amortization | Net | |||||||||||||||||||||||||
| Useful Life | at Beginning | at End | at Beginning | Amortization | at End | Book | ||||||||||||||||||||||||
| (Years) | of Year | Adjustments | of Year | of Year | expense | of Year | Value | |||||||||||||||||||||||
| Fiscal 2013 |
||||||||||||||||||||||||||||||
| Design guidelines |
Indefinite | $ | 6,940 | — | $ | 6,940 | $ | — | $ | — | $ | — | $ | 6,940 | ||||||||||||||||
| Customer relationships |
8 | 7,940 | — | 7,940 | (2,769 | ) | (660 | ) | (3,429 | ) | 4,511 | |||||||||||||||||||
| Trade names |
Indefinite | 4,729 | — | 4,729 | — | — | — | 4,729 | ||||||||||||||||||||||
| Licensing agreements |
0 | 2,199 | — | 2,199 | (1,833 | ) | (366 | ) | (2,199 | ) | — | |||||||||||||||||||
| Acquired backlog |
0 | 6,801 | — | 6,801 | (6,801 | ) | — | (6,801 | ) | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| $ | 28,609 | $ | — | $ | 28,609 | $ | (11,403 | ) | $ | (1,026 | ) | $ | (12,429 | ) | $ | 16,180 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Fiscal 2012 |
||||||||||||||||||||||||||||||
| Design guidelines |
Indefinite | $ | 6,940 | $ | — | $ | 6,940 | $ | — | $ | — | $ | — | $ | 6,940 | |||||||||||||||
| Customer relationships |
9 | 6,890 | 1,050 | 7,940 | (2,204 | ) | (565 | ) | (2,769 | ) | 5,171 | |||||||||||||||||||
| Trade names |
Indefinite | 4,729 | — | 4,729 | — | — | — | 4,729 | ||||||||||||||||||||||
| Licensing agreements |
0.8 | 2,199 | — | 2,199 | (1,393 | ) | (440 | ) | (1,833 | ) | 366 | |||||||||||||||||||
| Acquired backlog |
0 | 6,489 | 312 | 6,801 | (6,489 | ) | (312 | ) | (6,801 | ) | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| $ | 27,247 | $ | 1,362 | $ | 28,609 | $ | (10,086 | ) | $ | (1,317 | ) | $ | (11,403 | ) | $ | 17,206 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Amortization expense of $1.0 million, $1.3 million, and $1.1 million was recorded to the Consolidated Statements of Operations for the fiscal years 2013, 2012 and 2011, respectively. In fiscal years 2013, 2012 and 2011, amortization expense allocated to general and administrative expense were $1.0 million, $1.0 million and $1.1 million, respectively. The estimated amortization expense for each of the next five fiscal years is as follows (in thousands):
| Fiscal Year | ||||
| 2014 |
$ | 660 | ||
| 2015 |
585 | |||
| 2016 |
510 | |||
| 2017 |
509 | |||
| 2018 |
504 | |||
CEFCO Licensing Agreement
In July 2010, the Company entered into the CEFCO Process Manufacturing License Agreement (the “License Agreement”) with CEFCO Global Clean Energy, LLC (“CEFCO”). Pursuant to the License Agreement, the Company was granted exclusive rights to manufacture equipment and process units incorporating CEFCO’s multi-stage apparatus used in the selective capture and removal of purified carbon gas, including NOx, SOx, CO2 and Hg, and the sequential capture and removal of mercury, metal, and particulate aerosols that would be installed in the continental United States. The License Agreement expires 10 years from the initial commercial sale of a CEFCO unit, which has not yet occurred.
64
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE F. | GOODWILL AND OTHER INTANGIBLE ASSETS – CONTINUED |
Under the License Agreement the Company agreed to construct and provide lab scale testing of the CEFCO technology. In November 2011, the Company announced the successful completion of large scale prototype tests associated with the first two pollution control modules of the CEFCO processing equipment. The lab scale testing was completed by the Company prior to the end of fiscal 2012.
The Company paid $1.1 million to CEFCO at the inception of the License Agreement, as well as deferred an additional $2.4 million of costs incurred related to the construction and testing of a scaled version of the technology. Such expenditures represent advances on future payments due under the License Agreement. No amounts were paid to CEFCO or incurred and deferred under the License Agreement in fiscal 2013.
The Company is continuing to support the sales and marketing efforts of CEFCO, as well as discuss alternative applications for the technology. In addition, the Company is continuing to support the efforts of CEFCO and a third party to commercialize the sulfur capture module that represents a portion of the larger CEFCO technology. However, we are currently unable to assess the likelihood or timing of future such revenue opportunities.
As a result of delays in CEFCO’s ability to identify and fund a commercial installation utilizing the CEFCO technology together with uncertainties related to the future demand for clean coal technology applications, management concluded that it is no longer probable that the future cash flow from the Licensing Agreement will exceed the amounts deferred by the Company to date. Accordingly, a non-cash impairment charge of $3.5 million to operating expense was recognized in the fourth quarter of fiscal 2013 to write off all amounts previously advanced under the License Agreement.
There was no impairment of goodwill or other intangible assets with an indefinite life.
| NOTE G. | ACCRUED LIABILITIES AND OTHER |
The components of accrued liabilities and other are as follows (in thousands):
| June 29, | June 30. | |||||||
| 2013 | 2012 | |||||||
| Accrued start-up and commissioning expense |
$ | 230 | $ | 363 | ||||
| Accrued compensation |
2,393 | 2,562 | ||||||
| Accrued professional expenses |
1,819 | 1,871 | ||||||
| Deferred consideration related to |
||||||||
| Burgess Manning GmbH acquisition |
36 | 1,375 | ||||||
| Other |
908 | 624 | ||||||
|
|
|
|
|
|||||
| $ | 5,386 | $ | 6,795 | |||||
|
|
|
|
|
|||||
65
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE H. | COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS |
The components of uncompleted contracts are as follows (in thousands):
| June 29, | June 30, | |||||||
| 2013 | 2012 | |||||||
| Costs incurred on uncompleted contracts and estimated earnings |
$ | 70,389 | $ | 64,503 | ||||
| Less billings to date |
(60,122 | ) | (61,665 | ) | ||||
|
|
|
|
|
|||||
| $ | 10,267 | $ | 2,838 | |||||
|
|
|
|
|
|||||
The components of uncompleted contracts are reflected in the Consolidated Balance Sheets as follows (in thousands):
| June 29, | June 30, | |||||||
| 2013 | 2012 | |||||||
| Costs and earnings in excess of billings on uncompleted contracts |
$ | 16,544 | $ | 14,635 | ||||
| Billings in excess of costs and earnings on uncompleted contracts |
(6,277 | ) | (11,797 | ) | ||||
|
|
|
|
|
|||||
| $ | 10,267 | $ | 2,838 | |||||
|
|
|
|
|
|||||
| NOTE I. | LONG-TERM DEBT |
Outstanding long-term obligations are as follows (in thousands):
| June 29, | June 30, | |||||||||||
| Maturities | 2013 | 2012 | ||||||||||
| Term loan A |
2019 | $ | 604 | $ | — | |||||||
| Term loan B |
2022 | 8,115 | ||||||||||
| Less current maturities |
— | — | ||||||||||
|
|
|
|
|
|||||||||
| Total long-term debt, net of current portion |
$ | 8,719 | $ | — | ||||||||
|
|
|
|
|
|||||||||
In September 2012, the Company entered into a new 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 new manufacturing facility in Denton, Texas (“Term Loan A”) and term loan commitments of $10.0 million to fund the construction of the new 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
66
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE I. | LONG-TERM DEBT – CONTINUED |
collateral account less a foreign currency letter of credit reserve. At June 29, 2013, there were no outstanding borrowings and approximately $6.6 million of outstanding letters of credit under the Credit Agreement, leaving the Company with approximately $2.3 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 at least quarterly. Interest rates on term loans use LIBOR floating rates plus 1/2 of 1% up to 2%, plus a margin of between 0 to 75 basis points based upon the Company’s consolidated funded debt to consolidated EBITDA for the trailing four consecutive fiscal quarters.
At June 29, 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 Company’s aggregate total liabilities to the sum of the excess of the Company’s total assets over its total liabilities as each is determined on a consolidated basis in accordance with generally accepted accounting principles. The DSC ratio is calculated as the ratio of the Company’s consolidated EBITDA less certain restricted cash payments, capitalized expenditures and taxes to the Company’s consolidated fixed charges, which is the sum of the Company’s current maturities of long-term debt and the amount of cash paid for interest on a trailing twelve month basis. The Credit Agreement also contains other covenants, including restrictions on additional debt, dividends, capital expenditures, acquisitions and dispositions. At June 29, 2013, the Company was in compliance with all of its debt covenants.
The Company’s U.K. subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of £6.0 million ($9.1 million) at June 29, 2013 and £6.0 million ($9.4 million) at June 30, 2012. This facility was secured by substantially all of the assets of the Company’s U.K. subsidiary and by a cash deposit of £2.1 million ($3.2 million) at June 29, 2013 and £4.1 million ($6.4 million) at June 30, 2012, which is recorded as restricted cash on the Consolidated Balance Sheet. At June 29, 2013, there was £4.4 million ($6.8 million) outstanding under stand-by letters of credit and bank guarantees under this debenture agreement. At June 30, 2012, there was £5.9 million ($9.3 million) outstanding under stand-by letters of credit and bank guarantees under this debenture agreement. There were no borrowings outstanding under the U.K. subsidiary’s debenture agreement at June 29, 2013 or June 30, 2012.
The Company’s German subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of €4.8 million ($6.2 million) at June 29, 2013 and €4.8 million ($6.0 million) at June 30, 2012. This facility is secured by substantially all of the assets of the Company’s German subsidiary and by a cash deposit of €0.7 million ($0.9 million) at June 29, 2013 and €1.1 million ($1.4 million) at June 30, 2012, which is recorded as restricted cash on the Consolidated Balance Sheets. 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. At June 30, 2012, there was €3.5 million ($4.4 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.
67
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE I. | LONG-TERM DEBT – CONTINUED |
The Company’s Singaporean subsidiary had bank guarantees of $0.6 million and $0.3 million at June 29, 2013 and June 30, 2012, respectively. These guarantees are secured with deposits held by the institution issuing the guarantee. The Company’s joint venture in China had bank guarantees of $0.6 million at June 29, 2013, secured by $0.6 million of restricted cash balances. There were no outstanding guarantees at June 30, 2012.
| NOTE J. | PRODUCT WARRANTIES |
The Company warrants that its products will be free from defects in materials and workmanship and will conform to agreed-upon specifications at the time of delivery and typically for a period of 12 to 18 months from the date of customer acceptance, depending upon the specific product and terms of the customer agreement. Typical warranties require the Company to repair or replace defective products during the warranty period at no cost to the customer. The Company attempts to obtain back-up concurrent warranties for major component parts from its suppliers. The Company provides for the estimated cost of product warranties based on historical experience by product type, expectation of future conditions and the extent of back-up concurrent supplier warranties in place, at the time the product revenue is recognized. Revision to the estimated product warranties is made when necessary, based on changes in these factors.
A rollforward of the product warranty is as follows (in thousands):
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Balance at beginning of period |
$ | 2,615 | $ | 2,575 | $ | 2,480 | ||||||
| Provision for warranty expense |
1,864 | 1,032 | 2,392 | |||||||||
| Warranty charges |
(2,238 | ) | (992 | ) | (2,297 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Balance at end of period |
$ | 2,241 | $ | 2,615 | $ | 2,575 | ||||||
|
|
|
|
|
|
|
|||||||
| NOTE K. | COMMITMENTS AND CONTINGENCIES |
The Company leases office space, office equipment and other personal property under operating leases expiring at various dates. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. The Company recognizes escalating lease payments on a straight-line basis. Total rent expense incurred under operating leases was $1.3 million, $1.1 million and $1.0 million for fiscal 2013, 2012 and 2011, respectively.
68
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE K. | COMMITMENTS AND CONTINGENCIES – CONTINUED |
At June 29, 2013, future minimum rental commitments under all operating leases are as follows (in thousands):
| Total | ||||
| Fiscal Year |
Amount | |||
| 2014 |
$ | 1,734 | ||
| 2015 |
1,663 | |||
| 2016 |
1,574 | |||
| 2017 |
824 | |||
| 2018 |
233 | |||
| Thereafter |
213 | |||
|
|
|
|||
| $ | 6,241 | |||
|
|
|
|||
In June 2010, the Company received notice from a customer claiming approximately $9.1 million in repair costs associated with four heat exchangers sold by Alco Products, a division of Nitram, in 2006 prior to the Company’s acquisition of Nitram. The customer requested reimbursement for the repair costs pursuant to Alco Products’ warranty obligations under the terms and conditions of the purchase order. The Company has notified the Nitram insurance carrier and the selling stockholders of Nitram of this claim. At this time, the Company cannot estimate any potential range of loss that may result from this asserted claim as the Company has not received sufficient information to assess the validity of the claim. No amount has been accrued in the financial statements for this claim as of June 29, 2013. At this time, the Company has not been notified that any lawsuit has been filed by the customer.
The Company’s operations are subject to a number of federal, state and local laws and regulations relating to the protection of the environment. In connection with the acquisition of Nitram and the related financing transactions, environmental site assessments were performed on the Company’s then existing manufacturing properties, as well as those owned by Nitram. As a result of the findings of such investigation the Company subsequently remediated the soil and performed additional groundwater monitoring and testing at a facility which was sold during fiscal 2013. The Company intends to terminate the environmental assessments as the Company believes all required remediation has been completed. The Company has an accrued liability of $0.1 million at June 29, 2013 for the estimated remaining costs relating to the conclusion of these environmental matters. The Company is seeking reimbursement for the full cost of the remediation and any ongoing and future monitoring activities under its purchase agreement with Nitram’s former stockholders.
Under the contract for the Nitram acquisition, the Company has certain rights to indemnification against the selling stockholders for claims relating to breach of representation and certain other claims, including litigation costs and damages. The Nitram selling stockholders previously placed $10.9 million of the purchase price in escrow to reimburse the Company for indemnification and certain other claims. The escrow amount, less any claim amounts made by the Company or amounts paid to third parties as agreed upon by the Company and sellers, was released to the sellers in five installments. Certain claims made by the Company against the escrow are subject to a deductible equal to one percent of the purchase price paid by the Company for the Nitram acquisition. Prior to the final escrow payment release on October 30, 2009, the Company had made claims to the sellers relating to environmental matters and indemnification for breach of representations and warranties of the Nitram purchase agreement, totaling approximately
69
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE K. | COMMITMENTS AND CONTINGENCIES – CONTINUED |
$2.0 million against the escrow, and a total of $1.4 million was withheld from the payment of the escrow amount, which represents the Company’s claims, less the one percent deductible, estimated at $0.6 million. Following the final escrow release in October 2009, the Company made additional claims directly against the selling stockholders under the terms of the Nitram acquisition agreement totaling approximately $9.5 million, related to the customer warranty dispute for the four Alco Products heat exchangers and other environmental matters. The sellers have objected to the claims made by the Company. 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.
The Company has entered into certain non-cancelable agreements to construct a manufacturing facility in Zhenjiang, China. The total obligation is $10.3 million and the remaining cost to be incurred as of June 29, 2013 is $4.5 million.
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.
| NOTE L. | CONVERTIBLE REDEEMABLE PREFERRED STOCK AND WARRANTS |
On September 4, 2009, the Company issued and sold 21,140 shares of Preferred Stock, par value $0.01 per share, and attached warrants to certain accredited investors (each a “Purchaser” and collectively, the “Purchasers”) for an aggregate purchase price of $21.1 million (the “Offering”). All of the 21,140 shares of Preferred Stock were converted to common stock during fiscal 2011.
The warrants entitled the holders to purchase an aggregate of 1,321,250 shares, of which 839,063 warrants remain outstanding as of June 29, 2013. The warrants, which have an exercise price of $10.56 per share, expire on September 4, 2014. During fiscal 2012, holders of warrants, in cashless exercises, exchanged 482,188 warrant shares for 105,403 shares of the Company’s common stock. No warrants were tendered in fiscal 2013.
| NOTE M. | COMMON STOCK |
In February 2012, the Company completed a secondary public offering of common stock, which resulted in the sale of 2,990,000 shares of common stock, par value $0.01 per share, at a price of $16.00 per share. Net proceeds of $44.3 million from the offering after deducting underwriting discounts, commissions and estimated offering expenses were recorded to common stock and additional paid-in capital.
| NOTE N. | STOCK-BASED COMPENSATION |
In January 2002, the Company adopted a stock option and restricted stock plan (the “2001 Plan”), which provided for a maximum of 1,000,000 shares of common stock to be issued. In November 2007, the Company adopted a stock option and restricted stock plan (the “2007 Plan”), which provides for a maximum of 1,800,000 shares of common stock to be issued. Shares are available for grant only under the 2007 Plan.
70
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE N. | STOCK-BASED COMPENSATION – CONTINUED |
Restricted Stock
Under the 2007 Plan, restricted stock awards are subject to a risk of forfeiture until the awards vest. Awards made to employees generally vest ratably over four years. Awards made to non-employee directors vest on the grant date. The fair value of the restricted stock awards is based upon the market price of the underlying common stock as of the date of the grant and is amortized over the applicable vesting period using the straight-line method.
A summary of the restricted stock award activity under the plans for the fiscal years 2013, 2012 and 2011 is as follows (in thousands):
| Fiscal 2013 | Fiscal 2012 | Fiscal 2011 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Number of | Grant Date | Number of | Grant Date | Number of | Grant Date | |||||||||||||||||||
| Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | |||||||||||||||||||
| Balance at beginning of period |
— | $ | — | 151,153 | $ | 13.63 | 158,599 | $ | 11.66 | |||||||||||||||
| New Grants |
146,377 | 8.10 | 74,438 | 21.24 | 118,223 | 15.56 | ||||||||||||||||||
| Vested |
(62,782 | ) | 8.10 | (224,441 | ) | 16.16 | (106,152 | ) | 12.95 | |||||||||||||||
| Forfeited |
(3,250 | ) | 8.10 | (1,150 | ) | 12.65 | (19,517 | ) | 13.00 | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance at end of period |
80,345 | $ | 8.10 | — | $ | — | 151,153 | $ | 13.63 | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
Stock compensation expense recognized in fiscal 2013, 2012 and 2011 was $0.5 million, $3.1 million and $1.4 million, respectively. In October 2011, a stockholder reported an increase in its beneficial ownership to approximately 69% of the Company’s common stock, in a filing with the Securities and Exchange Commission. This change in beneficial ownership constituted a change in control as defined in the Company’s 2007 Plan, resulting in the acceleration of vesting of approximately 146,000 unvested stock awards. The acceleration of vesting resulted in a charge of $2.1 million during fiscal 2012, which was recorded consistent with the employee’s compensation expense. As of June 29, 2013, the unrecognized compensation costs totaled $0.7 million.
Stock Options
The Company previously utilized stock options as compensation for employees and directors. No stock options were granted in fiscal 2013, 2012 or 2011.
71
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE N. | STOCK-BASED COMPENSATION – CONTINUED |
A summary of the option activity under the Company’s stock-based compensation plans for the fiscal years ended June 29, 2013 and June 30, 2012 is as follows (in thousands):
| Fiscal 2013 | Fiscal 2012 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Number of | Exercise | |||||||||||||
| Options | Price | Options | Price | |||||||||||||
| Balance at beginning of year |
43,200 | $ | 4.32 | 55,200 | $ | 4.19 | ||||||||||
| Exercised |
(6,000 | ) | 3.16 | (8,000 | ) | 6.11 | ||||||||||
| Forfeited after vesting |
— | — | (4,000 | ) | 3.40 | |||||||||||
|
|
|
|
|
|||||||||||||
| Balance at end of year |
37,200 | $ | 4.73 | 43,200 | $ | 4.32 | ||||||||||
|
|
|
|
|
|||||||||||||
| Exercisable at end of year |
37,200 | $ | 4.73 | 43,200 | $ | 4.32 | ||||||||||
Options outstanding and exercisable at June 29, 2013 had a weighted average remaining term of 2.07 years and an aggregate intrinsic value of $0.1 million based upon the closing price of the Company’s common stock on June 29, 2013. Options outstanding and exercisable at June 30, 2012 had a weighted average remaining term of 3.12 years and an aggregate intrinsic value of $0.2 million based upon the closing price of the Company’s common stock on June 30, 2012.
| NOTE O. | STOCKHOLDER RIGHTS PLAN |
On August 15, 2008, the Company adopted a stockholder rights plan. Stockholders of record at the close of business on August 15, 2008 received a dividend distribution of one right for each share of common stock outstanding on that date. In July 2013 the Board of Directors elected to amend the stockholder rights plan to accelerate the expiration date to June 29, 2013. No gain or loss was recognized as a result of the acceleration of the remaining term.
| NOTE P. | DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS |
Derivative Financial Instruments
The Company has interest rate swap agreements in place. These swap agreements allow the Company to manage its exposure to interest rate variability on the term loan borrowings under the Company’s Credit Agreement by fixing the LIBOR component of interest rates specified in the term loans at the interest rates noted below until the indicated expiration dates of these interest rate swap agreements.
The following table summarizes the various interest rate agreements in effect as of June 29, 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 Statement of Operations.
72
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE P. | DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS – CONTINUED |
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 Company’s Consolidated Balance Sheets were (in thousands):
| Derivative Assets | Derivative Liabilities | |||||||||||||||
| June 29, | June 30, | June 29, | June 30, | |||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Interest rate swap contracts |
$ | 160 | $ | — | $ | — | $ | — | ||||||||
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
| • | Level 2 — Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments. |
| • | Level 3 — Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. |
A summary of derivative assets and liabilities measured at fair value on a recurring basis is as follows (in thousands):
| Fair Value | ||||||||||||||||
| as of | ||||||||||||||||
| June 29, 2013 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Asset—Interest rate swap contracts |
$ | 160 | $ | — | $ | 160 | $ | — | ||||||||
73
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE P. | DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS – CONTINUED |
The fair value of the interest rate swaps is determined based on the notional amounts of the swaps and the forward LIBOR curve relative to the fixed interest rates under the swap agreements. The Company classifies these instruments in Level 2 because quoted market prices can be corroborated utilizing observable benchmark market rates at commonly quoted intervals, observable current and forward commodity market prices on active exchanges, and observable market transactions of spot currency rates and forward currency prices.
| NOTE Q. | EMPLOYEE BENEFIT PLANS |
The Company sponsors a defined contribution pension plan under Section 401(k) of the Internal Revenue Code for eligible employees who have completed at least 90 days of service. Company contributions are voluntary and at the discretion of the Board of Directors. The Company’s contribution expense was $0.6 million for each of the fiscal years ended June 29, 2013, June 20, 2012 and July 2, 2011.
| NOTE R. | INCOME TAXES |
The Company’s earnings (loss) before income taxes are as follows (in thousands):
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| United States |
$ | (2,928 | ) | $ | (4,383 | ) | $ | 1,201 | ||||
| International |
2,911 | 2,340 | 1,577 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | (17 | ) | $ | (2,043 | ) | $ | 2,778 | |||||
|
|
|
|
|
|
|
|||||||
74
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE R. | INCOME TAXES – CONTINUED |
Deferred taxes are provided for the temporary differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities. The temporary differences that give rise to the deferred tax assets or liabilities are as follows (in thousands):
| June 29, | June 30, | |||||||
| 2013 | 2012 | |||||||
| Deferred tax assets |
||||||||
| Inventories |
$ | 90 | $ | 68 | ||||
| Accrued liabilities |
805 | 1,046 | ||||||
| Accounts receivable |
97 | 116 | ||||||
| Net operating loss carry-forwards |
1,592 | 408 | ||||||
| Stock based compensation |
72 | — | ||||||
| Foreign tax credit |
85 | 60 | ||||||
| Deferred rent |
76 | 84 | ||||||
| Research and development credits |
1,724 | 399 | ||||||
| Other |
1 | 4 | ||||||
| Valuation allowance |
(1,265 | ) | — | |||||
|
|
|
|
|
|||||
| $ | 3,277 | $ | 2,185 | |||||
| Deferred tax liabilities |
||||||||
| Property, plant and equipment |
$ | (864 | ) | $ | (967 | ) | ||
| Intangible assets |
(5,829 | ) | (6,161 | ) | ||||
| Other |
(415 | ) | (46 | ) | ||||
|
|
|
|
|
|||||
| (7,108 | ) | (7,174 | ) | |||||
|
|
|
|
|
|||||
| Net deferred tax liability |
$ | (3,831 | ) | $ | (4,989 | ) | ||
|
|
|
|
|
|||||
Deferred tax assets and liabilities included in the Consolidated Balance Sheets are as follows (in thousands):
| June 29, | June 30, | |||||||
| 2013 | 2012 | |||||||
| Current deferred tax asset |
$ | 304 | $ | 1,191 | ||||
| Non-current deferred tax liability |
(4,135 | ) | (6,180 | ) | ||||
|
|
|
|
|
|||||
| $ | (3,831 | ) | $ | (4,989 | ) | |||
|
|
|
|
|
|||||
75
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE R. | INCOME TAXES – CONTINUED |
The expense for income taxes consists of the following (in thousands):
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Current tax (expense) benefit |
||||||||||||
| Federal |
$ | (1,471 | ) | $ | 1,017 | $ | 2,286 | |||||
| State |
(76 | ) | (69 | ) | (65 | ) | ||||||
| Foreign |
(1,082 | ) | (584 | ) | (436 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| (2,629 | ) | 364 | 1,785 | |||||||||
| Deferred tax benefit |
||||||||||||
| Federal |
1,166 | 576 | 1,308 | |||||||||
| State |
(5 | ) | (5 | ) | (5 | ) | ||||||
| Foreign |
(3 | ) | 70 | (5 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| 1,158 | 641 | 1,298 | ||||||||||
|
|
|
|
|
|
|
|||||||
| $ | (1,471 | ) | $ | 1,005 | $ | 3,083 | ||||||
|
|
|
|
|
|
|
|||||||
The income tax expense varies from the federal statutory rate due to the following (in thousands):
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Income tax (expense) benefit at federal statutory rate |
$ | 6 | $ | 695 | $ | (945 | ) | |||||
| Decrease (increase) in income tax expense resulting from: |
||||||||||||
| State tax, net of federal benefit |
(52 | ) | (45 | ) | (43 | ) | ||||||
| Gain (loss) on change in fair value of derivative liability |
— | — | 2,272 | |||||||||
| Effect of lower tax rate on foreign income |
163 | 305 | 49 | |||||||||
| Domestic Production and other permanent items |
(135 | ) | (157 | ) | (47 | ) | ||||||
| Research and development expenditure credits |
539 | 260 | 2,054 | |||||||||
| Changes in uncertain tax positions |
(787 | ) | (53 | ) | (394 | ) | ||||||
| Other |
60 | — | 137 | |||||||||
| Valuation allowance |
(1,265 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Income tax (expense) benefit |
$ | (1,471 | ) | $ | 1,005 | $ | 3,083 | |||||
|
|
|
|
|
|
|
|||||||
76
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE R. | INCOME TAXES – CONTINUED |
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Beginning balance |
$ | 660 | $ | 618 | $ | 224 | ||||||
| Additions for tax positions of current year |
193 | — | — | |||||||||
| Additions for tax positions of prior years |
865 | 42 | 394 | |||||||||
| Settlements |
(271 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Ending balance |
$ | 1,447 | $ | 660 | $ | 618 | ||||||
|
|
|
|
|
|
|
|||||||
The Company is subject to income taxes in the U.S. federal jurisdiction and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by authorities for the tax years before 2008.
As of June 29, 2013, the Company had $1.9 million of federal net operating loss (“NOL”) carryforwards available to offset future taxable income expiring in 2033, $0.2 million of New York state NOL carryforwards expiring in 2033, $0.7 million of Canadian NOL carryforwards expiring in 2033, and a $2.3 million United Kingdom NOL carryforward that has no expiration. The Company has a $0.2 million tax credit available to offset Texas margin tax expiring in 2028. The Company also has $1.7 million of United States federal research and development income tax credits and $0.1 million of foreign tax credits that have expirations between 2020 and 2023.
The Company records a valuation allowance to the extent it is more likely than not deferred tax assets will not be recovered. In fiscal 2013, the Company established a valuation allowance of $1.3 million against net deferred income tax assets exclusive of deferred income tax liabilities relating to indefinite-lived intangibles.
The Company has elected to treat foreign earnings as permanently reinvested outside the U.S. and has not provided U.S. tax expense on those earnings.
| NOTE S. | EARNINGS PER SHARE |
Basic earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if options and warrants were exercised into common stock. Restricted stock is considered a participating security and is included in the computation of basic earnings per share as if vested. Preferred Stock participates in the income of the Company. Earnings per share is calculated by applying the two class method in which undistributed earnings of the Company are allocated between the Preferred Stock and Common Stock to arrive at earnings per share of common stock. The following table sets forth the computation for basic and diluted earnings per share for the periods indicated (in thousands, except per share amounts).
77
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE S. | EARNINGS PER SHARE – CONTINUED |
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Net earnings (loss) attributable to PMFG, Inc. common shareholders |
$ | (2,080 | ) | $ | (976 | ) | $ | 5,027 | ||||
| Less net earnings allocated to preferred shareholders |
— | — | (416 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Net earnings (loss) allocated to common shareholders |
$ | (2,080 | ) | $ | (976 | ) | $ | 4,611 | ||||
|
|
|
|
|
|
|
|||||||
| Basic weighted average common shares outstanding |
20,930 | 18,810 | 16,091 | |||||||||
| Effect of dilutive options and restricted stock |
— | — | 571 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted weighted average common shares outstanding |
20,930 | 18,810 | 16,662 | |||||||||
|
|
|
|
|
|
|
|||||||
| Basic earnings (loss) per share |
$ | (0.10 | ) | $ | (0.05 | ) | $ | 0.29 | ||||
|
|
|
|
|
|
|
|||||||
| Diluted earnings (loss) per share |
$ | (0.10 | ) | $ | (0.05 | ) | $ | 0.28 | ||||
|
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|
|
|
|
|
|||||||
| NOTE T. | INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION |
Diluted earnings per common share include the dilutive effect of stock options and warrants granted using the treasury stock method. Options to acquire 37,200 and 19,380 shares of common stock equivalents were omitted from the calculation of dilutive securities for fiscal years 2013 and 2012, respectively, because they were anti-dilutive. Warrants to acquire 839,063 shares of common stock were omitted from the calculation of dilutive securities for fiscal year 2012 and fiscal 2013 because they were anti-dilutive.
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 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.
78
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE T. | INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION – CONTINUED |
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 allocation of general and administrative costs. The Company does not allocate general and administrative expenses (“reconciling items”), 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 profit for the fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011 are presented below (in thousands):
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Revenue |
||||||||||||
| Environmental |
$ | 21,189 | $ | 17,171 | $ | 32,918 | ||||||
| Process Products |
112,703 | 118,147 | 88,876 | |||||||||
|
|
|
|
|
|
|
|||||||
| Consolidated |
$ | 133,892 | $ | 135,318 | $ | 121,794 | ||||||
|
|
|
|
|
|
|
|||||||
| Operating income (loss) |
||||||||||||
| Environmental |
$ | 4,035 | $ | 3,158 | $ | 6,214 | ||||||
| Process Products |
19,006 | 16,711 | 11,825 | |||||||||
| Reconciling items |
(22,223 | ) | (19,394 | ) | (20,266 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Consolidated |
$ | 818 | $ | 475 | $ | (2,227 | ) | |||||
|
|
|
|
|
|
|
|||||||
Revenue from external customers based on the location of the customer is as follows for the fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011 (in thousands):
| Fiscal Year |
United States |
International | Consolidated | |||||||||
| 2013 |
$ | 70,986 | $ | 62,906 | $ | 133,892 | ||||||
| 2012 |
71,479 | 63,839 | 135,318 | |||||||||
| 2011 |
75,223 | 46,571 | 121,794 | |||||||||
Identifiable long-lived assets of geographic areas are those assets related to the Company’s operations in each area as follows (in thousands):
| Fiscal Year |
United States |
International | Consolidated | |||||||||
| 2013 |
$ | 16,415 | $ | 7,616 | $ | 24,031 | ||||||
| 2012 |
7,993 | 1,529 | 9,522 | |||||||||
| 2011 |
7,466 | 1,388 | 8,854 | |||||||||
As of June 29, 2013, the Company’s subsidiary in China accounted for approximately 90% of the international long-lived assets.
For the fiscal years 2013, 2012 or 2011, there were no sales to a single customer that accounted for 10% or more of the Company’s consolidated revenue.
79
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE U. | QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) |
The following tables represent the quarterly consolidated financial data of the Company for fiscal 2013, 2012 and 2011 (in thousands, except per share amounts):
| Fiscal 2013 | ||||||||||||||||||||
| First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Total | ||||||||||||||||
| Revenue |
$ | 32,977 | $ | 31,452 | $ | 34,970 | $ | 34,493 | $ | 133,892 | ||||||||||
| Gross profit |
11,392 | 11,529 | 10,747 | 13,132 | 46,800 | |||||||||||||||
| Operating expenses |
10,932 | 10,669 | 9,725 | 14,656 | 45,982 | |||||||||||||||
| Operating income (loss) |
460 | 860 | 1,022 | (1,524 | ) | 818 | ||||||||||||||
| Net earnings (loss) |
(6 | ) | 593 | 697 | (2,772 | ) | (1,488 | ) | ||||||||||||
| Basic earnings (loss) per share |
||||||||||||||||||||
| Net earnings (loss) |
($0.01 | ) | $ | 0.02 | $ | 0.03 | ($0.13 | ) | ($0.10 | ) | ||||||||||
| Diluted earnings (loss) per share |
||||||||||||||||||||
| Net earnings (loss) |
($0.01 | ) | $ | 0.02 | $ | 0.03 | ($0.13 | ) | ($0.10 | ) | ||||||||||
| Fiscal 2012 | ||||||||||||||||||||
| First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Total | ||||||||||||||||
| Revenue |
$ | 29,088 | $ | 37,721 | $ | 35,498 | $ | 33,011 | $ | 135,318 | ||||||||||
| Gross profit |
8,708 | 12,476 | 10,146 | 9,905 | 41,235 | |||||||||||||||
| Operating expenses |
9,855 | 11,498 | 8,934 | 10,473 | 40,760 | |||||||||||||||
| Operating income (loss) |
(1,147 | ) | 978 | 1,212 | (568 | ) | 475 | |||||||||||||
| Net earnings (loss) |
(1,170 | ) | 42 | 1,013 | (923 | ) | (1,038 | ) | ||||||||||||
| Basic earnings (loss) per share |
. | |||||||||||||||||||
| Net earnings (loss) |
($0.07 | ) | $ | 0.00 | $ | 0.05 | ($0.04 | ) | ($0.05 | ) | ||||||||||
| Diluted earnings (loss) per share |
||||||||||||||||||||
| Net earnings (loss) |
($0.07 | ) | $ | 0.00 | $ | 0.05 | ($0.04 | ) | ($0.05 | ) | ||||||||||
| Fiscal 2011 | ||||||||||||||||||||
| First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Total | ||||||||||||||||
| Revenue |
$ | 26,961 | $ | 26,294 | $ | 33,985 | $ | 34,554 | $ | 121,794 | ||||||||||
| Gross profit |
8,741 | 8,126 | 10,696 | 10,844 | 38,407 | |||||||||||||||
| Operating expenses |
8,785 | 8,375 | 9,866 | 13,608 | 40,634 | |||||||||||||||
| Operating income (loss) |
(44 | ) | (249 | ) | 830 | (2,764 | ) | (2,227 | ) | |||||||||||
| Net earnings (loss) |
(5,963 | ) | 6,839 | 4,962 | 23 | 5,861 | ||||||||||||||
| Basic earnings (loss) per share |
||||||||||||||||||||
| Net earnings (loss) |
($0.43 | ) | $ | 0.37 | $ | 0.28 | $ | 0.00 | $ | 0.29 | ||||||||||
| Diluted earnings (loss) per share |
||||||||||||||||||||
| Net earnings (loss) |
($0.43 | ) | $ | 0.36 | $ | 0.27 | $ | 0.00 | $ | 0.28 | ||||||||||
80
PMFG, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| NOTE V. | SUBSEQUENT EVENTS |
In July 2013, the Company sold a manufacturing facility located in Denton, Texas. The carrying value of the facility at June 29, 2013 was $0.2 million. A gain on sale of the facility of approximately $0.4 million is expected to be recognized in the first quarter of fiscal 2014.
Subsequent to June 29, 2013, management announced the pending closure of the facility located in Cisco, Texas. The Company anticipates the completion of the transition process during the second quarter of fiscal 2014.
81
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Form 10-K. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report and were designed to provide reasonable assurance of achieving their objectives.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our chief executive officer and our chief financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of June 29, 2013. In making this assessment, management used the criteria described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s assessment, we concluded that internal control over financial reporting was effective as of June 29, 2013.
Our independent registered public accounting firm, Grant Thornton LLP, has audited the effectiveness of our internal control over financial reporting, as stated in their attestation report which is included herein.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during the fourth quarter of the period covered by this Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Management does not expect that our disclosure control and our internal control over financial reporting will prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate. Any control system, no matter how well designed and operated, is based upon certain assumptions and can only provide reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to errors or fraud will not occur or that all control
82
issues and instances of fraud, if any within the Company, have been detected. Notwithstanding the foregoing, the Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
| ITEM 9B. | OTHER INFORMATION. |
None.
83
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The information required by Item 10 with respect to our executive officers is included under the caption “Executive Officers of the Registrant” in Item 1 of Part I of this Form 10-K and is incorporated herein by reference. The information required by Item 10 with respect to our directors and director nominees is incorporated herein by reference to the information included under the caption “Election of Directors” in our Proxy Statement for the 2013 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
The information required by Item 10 with respect to compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the information included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2013 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
The information required by Item 10 with respect to our audit committee and our audit committee financial expert is incorporated herein by reference to the information included under the caption “Board Meetings, Committees and Compensation” in our Proxy Statement for the 2013 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
The information required by Item 10 with respect to our Code of Conduct for Directors and Employees is incorporated herein by reference to the information included under the caption “Corporate Governance” in our Proxy Statement for the 2013 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. Our Code of Conduct for Directors and Employees is posted on our website at www.peerlessmfg.com in the Investor Relations section under “Corporate Governance” and is available in print to any stockholder who requests a copy. The code applies to our principal executive officer, principal financial officer, principal accounting officer and others performing similar functions. If we make any substantive amendments to the code, or grant any waivers to the code for any of our executive officers or directors, we will disclose the amendment or waiver on our website.
| ITEM 11. | EXECUTIVE COMPENSATION. |
The information required by Item 11 is incorporated herein by reference to the information included under the captions “Compensation Discussion and Analysis,” “Executive Compensation” and “Board Meetings, Committees and Compensation” in our Proxy Statement for the 2013 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The information required by Item 12 is incorporated herein by reference to the information included under the caption “Security Ownership of Management and Certain Beneficial Owners” and “Executive Compensation” in our Proxy Statement for the 2013 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
84
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. |
The information required by Item 13 is incorporated herein by reference to the information included under the caption “Executive Compensation — Certain Relationships and Related Transactions” in our Proxy Statement for the 2013 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The information required by Item 14 is incorporated herein by reference to the information included under the caption “Independent Registered Public Accounting Firm” in our Proxy Statement for the 2013 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
85
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
The following audited consolidated financial statements are filed as part of this Form 10-K under Item 8. “Financial Statements and Supplementary Data”.
| Financial Statements: |
||||
| 45 | ||||
| Consolidated Balance Sheets at June 29, 2013 and June 30, 2012 |
47 | |||
| 49 | ||||
| 50 | ||||
| 51 | ||||
| 52 | ||||
| 54 | ||||
Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting regulation of the SEC have been omitted because of the absence of the conditions under which they would be required or because the information required is included in the consolidated financial statements or notes thereto.
Exhibits:
| Exhibit |
Exhibit Description | |
| 2.1 | Stock Purchase Agreement dated April 7, 2008, by and among Peerless Mfg. Co., Nitram Energy, Inc. and the shareholders of Nitram Energy, Inc. (filed as Exhibit 2.1 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on April 9, 2008 and incorporated herein by reference). | |
| 2.2 | Agreement and Plan of Merger by and among Peerless Mfg. Co., PMFG, Inc. and PMFG Merger Sub, Inc., dated January 10, 2008 (included as Annex A to the proxy statement/prospectus that is a part of our Registration Statement on Form S-4 (File No. 333-148577) filed on January 10, 2008 and incorporated herein by reference). | |
| 2.3 | Share Purchase Agreement between Rainer Diekmann and Peerless Europe Ltd., dated as of November 4, 2011 (filed as Exhibit 2.1 to the Current Report on Form 8-K filed by PMFG, Inc. on November 8, 2011 and incorporated herein by reference). | |
| 3.1 | Second Amended and Restated Certificate of Incorporation (included as Annex A to the definitive proxy statement filed by PMFG, Inc. on April 21, 2010 and incorporated herein by reference). | |
| 3.2 | Bylaws, as amended and restated (filed as Exhibit 3.2 to the Current Report on Form 8-K filed by PMFG, Inc. on August 15, 2008 and incorporated herein by reference). | |
| 4.1 | Rights Agreement, dated August 15, 2008, between PMFG, Inc. and Mellon Investor Services LLC, as Rights Agent (filed as Exhibit 4.1 to the Registration Statement on Form 8-A (file no. 001-34156) filed by PMFG, Inc. on August 15, 2008 and incorporated herein by reference) | |
86
| Exhibit |
Exhibit Description | |
| 4.2 | Amendment No.1 to the Rights Agreement, dated April 2, 2013, between PMFG, Inc. and Computershare Shareowner Services LLC, as Rights Agent (filed as Exhibit 4.1 to the Current Report on Form 8-K filed by PMFG, Inc. on April 2, 2013 and incorporated herein by reference). | |
| 10.1 | Credit Agreement, dated September 7, 2012, between PMFG, Inc. and Peerless Mfg. Co, Citibank N.A. and other lenders a party thereto (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on September 11, 2012 and incorporated herein by reference). | |
| 10.2 | Securities Purchase Agreement dated September 4, 2009, by and among PMFG, Inc. and certain accredited investors (filed as Exhibit 10.2 to the Current Report on form 8-K filed by PMFG, Inc. on September 8, 2009 and incorporated herein by reference). | |
| 10.3 | Form of Common Stock Purchase Warrant dated September 4, 2009, filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on September 8, 2009 and incorporated herein by reference). | |
| 10.4* | Assignment and Assumption Agreement, dated August 15, 2008, between Peerless Mfg. Co. and PMFG, Inc. (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed by PMFG, Inc. on August 15, 2008 and incorporated herein by reference). | |
| 10.5* | Amended and Restated Employment Agreement, dated March 1, 2010 between Peerless Mfg. Co. and Peter J. Burlage (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on March 1, 2010 and incorporated herein by reference). | |
| 10.6* | 2001 Stock Option and Restricted Stock Plan for Employees of Peerless Mfg. Co., as amended and restated (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 15, 2008 and incorporated herein by reference). | |
| 10.7* | PMFG, Inc. 2007 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed by PMFG, Inc. on August 15, 2008 and incorporated herein by reference). | |
| 10.8* | Amendment No. 1 to PMFG, Inc. 2007 Stock Incentive Plan, dated November 17, 2011 (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed November 18, 2011 and incorporated herein by reference). | |
| 10.9* | Form of Restricted Stock Award Agreement under the 2007 Stock Incentive Plan for Employees of PMFG, Inc. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on July 24, 2013 and incorporated herein by reference). | |
| 10.10* | Form of Restricted Stock Award Agreement under the 2007 Stock Incentive Plan for Non-Employee Directors (filed as Exhibit 10.2 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on July 24, 2013 and incorporated herein by reference). | |
| 10.11* | Form of Restricted Stock Unit Award Agreement under the 2007 Stock Incentive Plan for Employees of PMFG, Inc. (filed as Exhibit 10.4 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on July 24, 2013 and incorporated herein by reference). | |
87
| Exhibit No. |
Exhibit Description | |
| 10.12* | Form of Director and Officer Indemnification Agreement (filed as Exhibit 10.1 to the Registration Statement on Form S-4 (File No. 333-148577) filed by PMFG, Inc. on January 10, 2008 and incorporated herein by reference). | |
| 10.13 | CEFCO Process Manufacturing License Agreement, dated July 12, 2010 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on July 12, 2010 and incorporated herein by reference). | |
| 10.14 | Contract of Sale, dated September 14, 2011, between Peerless Mfg. Co. and SSAE Development, LLC (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on September 15, 2011 and incorporated herein by reference). | |
| 10.15 | AIA Document A101-2007 Standard Contract for Construction, dated March 12, 2012, between Peerless Mfg. Co. and Schwob Building Company, Ltd. (filed as Exhibit 10.01 to the Current Report on Form 8-K filed by PMFG, Inc. on March 14, 2012 and incorporated herein by reference). | |
| 21.1† | Subsidiaries of PMFG, Inc. | |
| 23.1† | Consent of Independent Registered Public Accounting Firm. | |
| 31.1† | Rule 13a – 14(a)/15d – 14(a) Certification of Chief Executive Officer. | |
| 31.2† | Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer. | |
| 32.1† | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. | |
| 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 Presentation Linkbase Document | |
| 101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | |
| * | Management contract, compensatory plan or arrangement. |
| † | Indicates furnished herewith |
88
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| PMFG, INC. | ||||||
| Date: September 6, 2013 | /s/ Ronald L. McCrummen | |||||
| Ronald L. McCrummen | ||||||
| Executive Vice President and Chief Financial Officer | ||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on September 6, 2013.
| /s/ Sherrill Stone |
Chairman of the Board | |
| Sherrill Stone | ||
| /s/ Peter J. Burlage |
President, Chief Executive Officer and Director | |
| Peter J. Burlage | (Principal Executive Officer) | |
| /s/ Ronald L. McCrummen |
Executive Vice President and Chief Financial Officer | |
| Ronald L. McCrummen | (Principal Financial and Accounting Officer) | |
| /s/ Kenneth R. Hanks |
Director | |
| Kenneth R. Hanks | ||
| /s/ Robert McCashin |
Director | |
| Robert McCashin | ||
| /s/ R. Clayton Mulford |
Director | |
| R. Clayton Mulford | ||
| /s/ Howard G. Westerman, Jr. |
Director | |
| Howard G. Westerman, Jr. | ||
89
| Exhibit |
Exhibit Description | |
| 2.1 | Stock Purchase Agreement dated April 7, 2008, by and among Peerless Mfg. Co., Nitram Energy, Inc. and the shareholders of Nitram Energy, Inc. (filed as Exhibit 2.1 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on April 9, 2008 and incorporated herein by reference). | |
| 2.2 | Agreement and Plan of Merger by and among Peerless Mfg. Co., PMFG, Inc. and PMFG Merger Sub, Inc., dated January 10, 2008 (included as Annex A to the proxy statement/prospectus that is a part of our Registration Statement on Form S-4 (File No. 333-148577) filed on January 10, 2008 and incorporated herein by reference). | |
| 2.3 | Share Purchase Agreement between Rainer Diekmann and Peerless Europe Ltd., dated as of November 4, 2011 (filed as Exhibit 2.1 to the Current Report on Form 8-K filed by PMFG, Inc. on November 8, 2011 and incorporated herein by reference). | |
| 3.1 | Second Amended and Restated Certificate of Incorporation (included as Annex A to the definitive proxy statement filed by PMFG, Inc. on April 21, 2010 and incorporated herein by reference). | |
| 3.2 | Bylaws, as amended and restated (filed as Exhibit 3.2 to the Current Report on Form 8-K filed by PMFG, Inc. on August 15, 2008 and incorporated herein by reference). | |
| 4.1 | Rights Agreement, dated August 15, 2008, between PMFG, Inc. and Mellon Investor Services LLC, as Rights Agent (filed as Exhibit 4.1 to the Registration Statement on Form 8-A (file no. 001-34156) filed by PMFG, Inc. on August 15, 2008 and incorporated herein by reference) | |
| 4.2 | Amendment No.1 to the Rights Agreement, dated April 2, 2013, between PMFG, Inc. and Computershare Shareowner Services LLC, as Rights Agent (filed as Exhibit 4.1 to the Current Report on Form 8-K filed by PMFG, Inc. on April 2, 2013 and incorporated herein by reference). | |
| 10.1 | Credit Agreement, dated September 7, 2012, between PMFG, Inc. and Peerless Mfg. Co, Citibank N.A. and other lenders a party thereto (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on September 11, 2012 and incorporated herein by reference). | |
| 10.2 | Securities Purchase Agreement dated September 4, 2009, by and among PMFG, Inc. and certain accredited investors (filed as Exhibit 10.2 to the Current Report on form 8-K filed by PMFG, Inc. on September 8, 2009 and incorporated herein by reference). | |
| 10.3 | Form of Common Stock Purchase Warrant dated September 4, 2009, filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on September 8, 2009 and incorporated herein by reference). | |
| 10.4* | Assignment and Assumption Agreement, dated August 15, 2008, between Peerless Mfg. Co. and PMFG, Inc. (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed by PMFG, Inc. on August 15, 2008 and incorporated herein by reference). | |
90
| Exhibit |
Exhibit Description | |
| 10.5* | Amended and Restated Employment Agreement, dated March 1, 2010 between Peerless Mfg. Co. and Peter J. Burlage (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on March 1, 2010 and incorporated herein by reference). | |
| 10.6* | 2001 Stock Option and Restricted Stock Plan for Employees of Peerless Mfg. Co., as amended and restated (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 15, 2008 and incorporated herein by reference). | |
| 10.7* | PMFG, Inc. 2007 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed by PMFG, Inc. on August 15, 2008 and incorporated herein by reference). | |
| 10.8* | Amendment No. 1 to PMFG, Inc. 2007 Stock Incentive Plan, dated November 17, 2011 (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed November 18, 2011 and incorporated herein by reference). | |
| 10.9* | Form of Restricted Stock Award Agreement under the 2007 Stock Incentive Plan for Employees of PMFG, Inc. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on July 24, 2013 and incorporated herein by reference). | |
| 10.10* | Form of Restricted Stock Award Agreement under the 2007 Stock Incentive Plan for Non-Employee Directors (filed as Exhibit 10.2 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on July 24, 2013 and incorporated herein by reference). | |
| 10.11* | Form of Restricted Stock Unit Award Agreement under the 2007 Stock Incentive Plan for Employees of PMFG, Inc. (filed as Exhibit 10.4 to the Current Report on Form 8-K filed by Peerless Mfg. Co. on July 24, 2013 and incorporated herein by reference). | |
| 10.12* | Form of Director and Officer Indemnification Agreement (filed as Exhibit 10.1 to the Registration Statement on Form S-4 (File No. 333-148577) filed by PMFG, Inc. on January 10, 2008 and incorporated herein by reference). | |
| 10.13 | CEFCO Process Manufacturing License Agreement, dated July 12, 2010 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on July 12, 2010 and incorporated herein by reference). | |
| 10.14 | Contract of Sale, dated September 14, 2011, between Peerless Mfg. Co. and SSAE Development, LLC (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PMFG, Inc. on September 15, 2011 and incorporated herein by reference). | |
| 10.15 | AIA Document A101-2007 Standard Contract for Construction, dated March 12, 2012, between Peerless Mfg. Co. and Schwob Building Company, Ltd. (filed as Exhibit 10.01 to the Current Report on Form 8-K filed by PMFG, Inc. on March 14, 2012 and incorporated herein by reference). | |
91
| Exhibit No. |
Exhibit Description | |
| 21.1† | Subsidiaries of PMFG, Inc. | |
| 23.1† | Consent of Independent Registered Public Accounting Firm. | |
| 31.1† | Rule 13a – 14(a)/15d – 14(a) Certification of Chief Executive Officer. | |
| 31.2† | Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer. | |
| 32.1† | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. | |
| 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 Presentation Linkbase Document | |
| 101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | |
| * | Management contract, compensatory plan or arrangement. |
| † | Indicates furnished herewith |
92
EXHIBIT 21.1
SUBSIDIARIES OF PMFG, INC.
| Name | Domicile | Ownership | ||
| Peerless Propulsys China Holdings LLC | Delaware | 60% | ||
| Bos-Hatten, Inc. | New York | 100% | ||
| Nitram Energy, Inc. | New York | 100% | ||
| Burgess-Manning, Inc. | Texas | 100% | ||
| BurMan Management, Inc. | Texas | 100% | ||
| Peerless Mfg. Co. | Texas | 100% | ||
| PMC Acquisition, Inc. | Texas | 100% | ||
| Peerless Manufacturing Canada, Ltd. | Canada | 100% | ||
| Peerless Manufacturing (Zhenjiang) Co., Ltd. | China | 100% | ||
| Burgess-Manning GmbH | Germany | 100% | ||
| Burgess Manning, (India) Pvt., Ltd. | India | 51% | ||
| Skimovex B.V. | Netherlands | 100% | ||
| Peerless Asia Pacific Pte. Ltd. | Singapore | 100% | ||
| Burgess-Manning Europe Limited | United Kingdom | 100% | ||
| Peerless Europe Ltd. | United Kingdom | 100% | ||
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated September 6, 2013, with respect to the consolidated financial statements and internal control over financial reporting included in the Annual Report of PMFG, Inc. on Form 10-K for the year ended June 29, 2013. We hereby consent to the incorporation by reference of said reports in the Registration Statements of PMFG, Inc. on Forms S-3 (File No. 333-177358, effective November 28, 2011; File No. 333-162065, effective November 25, 2009; File No. 333-162064, effective November 25, 2009; File No. 333-152482, effective August 21, 2009) and on Forms S-8 (File No. 333-17229, effective August 15, 2008; File No. 333-76754, effective August 15, 2008, and File No. 333-147536, effective August 15, 2008).
/s/ GRANT THORNTON LLP
Dallas, Texas
September 6, 2013
EXHIBIT 31.1
RULE 13a – 14(a)/15d – 14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Peter J. Burlage, certify that:
| 1. | I have reviewed this annual report on Form 10-K of PMFG, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) and 15d-15(f) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter, the registrant’s fourth fiscal quarter in the case of an annual report, that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: September 6, 2013 | /s/ Peter J. Burlage | |||
| Peter J. Burlage | ||||
| President and Chief Executive Officer |
EXHIBIT 31.2
RULE 13a – 14(a)/15d – 14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Ronald L. McCrummen, certify that:
| 1. | I have reviewed this annual report on Form 10-K of PMFG, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter, the registrant’s fourth fiscal quarter in the case of an annual report, that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: September 6, 2013 | /s/ Ronald L. McCrummen | |||
| Ronald L. McCrummen | ||||
| Executive Vice President and Chief Financial Officer |
EXHIBIT 32.1
SECTION 1350 CERTIFICATIONS
Each of the undersigned officers of the Company certifies that pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code:
| (1) | The Annual Report on Form 10-K of the Company for the period ended June 29, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. |
| Date: September 6, 2013 | /s/ Peter J. Burlage | |||
| Peter J. Burlage | ||||
| President and Chief Executive Officer | ||||
| /s/ Ronald L. McCrummen | ||||
|
| ||||
| Ronald L. McCrummen | ||||
| Executive Vice President and Chief Financial Officer | ||||
The foregoing Certification is being furnished solely pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
|
Earnings Per Share - Additional Infromation (Detail)
In Thousands, unless otherwise specified |
12 Months Ended | |
|---|---|---|
|
Jun. 29, 2013
|
Jun. 30, 2012
|
|
|
Stock Options
|
||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Common stock equivalents | 37,200 | 19,380 |
|
Warrant
|
||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Common stock equivalents | 839,063 | 839,063 |
|
Derivative Financial Instruments and Fair Value Measurements - Additional Information (Detail) (Fair Value, Inputs, Level 3 [Member], USD $)
|
Jun. 29, 2013
|
|---|---|
|
Fair Value, Inputs, Level 3 [Member]
|
|
| Fair Value Measurements [Line Items] | |
| Financial assets or liabilities measured at fair value | $ 0 |
|
Summary of Earnings (Loss) Before Income Tax (Detail) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | ||
|---|---|---|---|
|
Jun. 29, 2013
|
Jun. 30, 2012
|
Jul. 02, 2011
|
|
| Income Tax Examination [Line Items] | |||
| Earnings (loss) before income taxes | $ (17) | $ (2,043) | $ 2,778 |
|
United States
|
|||
| Income Tax Examination [Line Items] | |||
| Earnings (loss) before income taxes | (2,928) | (4,383) | 1,201 |
|
Foreign [Member]
|
|||
| Income Tax Examination [Line Items] | |||
| Earnings (loss) before income taxes | $ 2,911 | $ 2,340 | $ 1,577 |
|
Subsequent Events - Additional Information (Detail) (Subsequent Event [Member], USD $)
In Millions, unless otherwise specified |
12 Months Ended |
|---|---|
|
Jun. 29, 2013
|
|
|
Subsequent Event [Member]
|
|
| Subsequent Event [Line Items] | |
| Sale of manufacturing facility, carrying value | $ 0.2 |
| Gain on sale of manufacturing facility | $ 0.4 |
|
LONG-TERM DEBT
|
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Jun. 29, 2013
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LONG-TERM DEBT |
Outstanding long-term obligations are as follows (in thousands):
In September 2012, the Company entered into a new 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 new manufacturing facility in Denton, Texas (“Term Loan A”) and term loan commitments of $10.0 million to fund the construction of the new 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 June 29, 2013, there were no outstanding borrowings and approximately $6.6 million of outstanding letters of credit under the Credit Agreement, leaving the Company with approximately $2.3 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 at least quarterly. Interest rates on term loans use LIBOR floating rates plus 1/2 of 1% up to 2%, plus a margin of between 0 to 75 basis points based upon the Company’s consolidated funded debt to consolidated EBITDA for the trailing four consecutive fiscal quarters. At June 29, 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 Company’s aggregate total liabilities to the sum of the excess of the Company’s total assets over its total liabilities as each is determined on a consolidated basis in accordance with generally accepted accounting principles. The DSC ratio is calculated as the ratio of the Company’s consolidated EBITDA less certain restricted cash payments, capitalized expenditures and taxes to the Company’s consolidated fixed charges, which is the sum of the Company’s current maturities of long-term debt and the amount of cash paid for interest on a trailing twelve month basis. The Credit Agreement also contains other covenants, including restrictions on additional debt, dividends, capital expenditures, acquisitions and dispositions. At June 29, 2013, the Company was in compliance with all of its debt covenants. The Company’s U.K. subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of £6.0 million ($9.1 million) at June 29, 2013 and £6.0 million ($9.4 million) at June 30, 2012. This facility was secured by substantially all of the assets of the Company’s U.K. subsidiary and by a cash deposit of £2.1 million ($3.2 million) at June 29, 2013 and £4.1 million ($6.4 million) at June 30, 2012, which is recorded as restricted cash on the Consolidated Balance Sheet. At June 29, 2013, there was £4.4 million ($6.8 million) outstanding under stand-by letters of credit and bank guarantees under this debenture agreement. At June 30, 2012, there was £5.9 million ($9.3 million) outstanding under stand-by letters of credit and bank guarantees under this debenture agreement. There were no borrowings outstanding under the U.K. subsidiary’s debenture agreement at June 29, 2013 or June 30, 2012. The Company’s German subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of €4.8 million ($6.2 million) at June 29, 2013 and €4.8 million ($6.0 million) at June 30, 2012. This facility is secured by substantially all of the assets of the Company’s German subsidiary and by a cash deposit of €0.7 million ($0.9 million) at June 29, 2013 and €1.1 million ($1.4 million) at June 30, 2012, which is recorded as restricted cash on the Consolidated Balance Sheets. 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. At June 30, 2012, there was €3.5 million ($4.4 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. The Company’s Singaporean subsidiary had bank guarantees of $0.6 million and $0.3 million at June 29, 2013 and June 30, 2012, respectively. These guarantees are secured with deposits held by the institution issuing the guarantee. The Company’s joint venture in China had bank guarantees of $0.6 million at June 29, 2013, secured by $0.6 million of restricted cash balances. There were no outstanding guarantees at June 30, 2012. |
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Details of Property, Plant and Equipment (Detail) (USD $)
In Thousands, unless otherwise specified |
Jun. 29, 2013
|
Jun. 30, 2012
|
|---|---|---|
| Property, Plant and Equipment [Line Items] | ||
| Property, plant and equipment | $ 23,264 | $ 17,977 |
| Less accumulated depreciation | (17,083) | (11,009) |
| Property Plant and Equipment, Gross | 6,181 | 6,968 |
| Construction in progress | 14,972 | 590 |
| Property, plant and equipment, net | 24,031 | 9,522 |
|
Buildings & improvements [Member]
|
||
| Property, Plant and Equipment [Line Items] | ||
| Property, plant and equipment | 5,448 | 2,741 |
|
Equipment [Member]
|
||
| Property, Plant and Equipment [Line Items] | ||
| Property, plant and equipment | 12,059 | 7,325 |
|
Furniture and fixtures [Member]
|
||
| Property, Plant and Equipment [Line Items] | ||
| Property, plant and equipment | 5,757 | 7,911 |
|
Land [Member]
|
||
| Property, Plant and Equipment [Line Items] | ||
| Property, plant and equipment | $ 2,878 | $ 1,964 |
|
CONCENTRATIONS OF CREDIT RISK
|
12 Months Ended | ||
|---|---|---|---|
|
Jun. 29, 2013
|
|||
| Risks And Uncertainties [Abstract] | |||
| CONCENTRATIONS OF CREDIT RISK |
The Company monitors the creditworthiness of its customers. Significant portions of the Company’s sales are to customers who place large orders for custom systems and customers whose activities are related to the electrical generation and oil and gas industries. Some customers are located outside the United States. The Company generally requires progress payments, but may extend credit to some customers. The Company’s exposure to credit risk is affected to some degree by conditions within the electrical generation and oil and gas industries. When sales are made to smaller international businesses, the Company generally requires progress payments or an appropriate guarantee of payment, such as a letter of credit from a financial institution. The Company is not dependent upon any single customer or group of customers in either of its two primary business segments. The custom-designed and project-specific nature of its business can result in significant fluctuations in revenue attributed to specific customers, industries, and reporting segments from period to period. |
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DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
|
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Jun. 29, 2013
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| Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS |
Derivative Financial Instruments The Company has interest rate swap agreements in place. These swap agreements allow the Company to manage its exposure to interest rate variability on the term loan borrowings under the Company’s Credit Agreement by fixing the LIBOR component of interest rates specified in the term loans at the interest rates noted below until the indicated expiration dates of these interest rate swap agreements. The following table summarizes the various interest rate agreements in effect as of June 29, 2013 (in thousands):
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 Statement 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 Company’s Consolidated Balance Sheets were (in thousands):
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.
A summary of derivative assets and liabilities measured at fair value on a recurring basis is as follows (in thousands):
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. |
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|
Convertible Redeemable Preferred Stock and Warrants - Additional Information (Detail) (USD $)
|
1 Months Ended | 12 Months Ended | |
|---|---|---|---|
|
Sep. 04, 2009
|
Jun. 29, 2013
|
Jun. 30, 2012
|
|
| Temporary Equity [Line Items] | |||
| Number of shares issued and sold | 21,140 | ||
| Par value per share of preferred stock | $ 0.01 | ||
| Aggregate purchase price | $ 21,100,000 | ||
| Preferred stock converted to common stock | 21,140 | ||
| Warrant entitled to purchase | 1,321,250 | ||
| Outstanding warrants | 839,063 | ||
| Exercise Price of Warrants | 10.56 | ||
| Warrants expire date | Sep. 04, 2014 | ||
| Warrants issued | $ 0 | ||
| Exchange of warrants, exchanged | 482,188 | ||
|
Warrant
|
|||
| Temporary Equity [Line Items] | |||
| Preferred stock converted to common stock | 105,403 | ||
|
Goodwill and Other Intangible Assets - Additional Information (Detail) (USD $)
|
12 Months Ended | ||
|---|---|---|---|
|
Jun. 29, 2013
|
Jun. 30, 2012
|
Jul. 02, 2011
|
|
| Finite And Indefinite Lived Intangible Assets [Line Items] | |||
| Amortization expense | $ 1,026,000 | $ 1,317,000 | $ 1,100,000 |
| Impairment charges on intangibles | 3,525,000 | 3,551,000 | |
|
General and Administrative Expense [Member]
|
|||
| Finite And Indefinite Lived Intangible Assets [Line Items] | |||
| Amortization expense | 1,000,000 | 1,000,000 | 1,100,000 |
|
Cefco Process Manufacturing License Agreement [Member]
|
|||
| Finite And Indefinite Lived Intangible Assets [Line Items] | |||
| Advanced amount of CEFCO at inception of License Agreement | 1,100,000 | ||
| Impairment charges on intangibles | 3,500,000 | ||
| Additional costs incurred | $ 2,400,000 | ||
|
PRODUCT WARRANTIES
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Jun. 29, 2013
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| Guarantees [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PRODUCT WARRANTIES |
The Company warrants that its products will be free from defects in materials and workmanship and will conform to agreed-upon specifications at the time of delivery and typically for a period of 12 to 18 months from the date of customer acceptance, depending upon the specific product and terms of the customer agreement. Typical warranties require the Company to repair or replace defective products during the warranty period at no cost to the customer. The Company attempts to obtain back-up concurrent warranties for major component parts from its suppliers. The Company provides for the estimated cost of product warranties based on historical experience by product type, expectation of future conditions and the extent of back-up concurrent supplier warranties in place, at the time the product revenue is recognized. Revision to the estimated product warranties is made when necessary, based on changes in these factors. A rollforward of the product warranty is as follows (in thousands):
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Industry Segment and Geographic Information - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | ||
|---|---|---|---|
|
Jun. 29, 2013
Segment
|
Jun. 30, 2012
|
Jul. 02, 2011
|
|
| Segment Reporting Disclosure [Line Items] | |||
| Number of reportable segments | 2 | ||
| Sales to customer, amount | $ 133,892 | $ 135,318 | $ 121,794 |
| Sales to customer, percentage | 10.00% | 10.00% | 10.00% |
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China [Member]
|
|||
| Segment Reporting Disclosure [Line Items] | |||
| Long-lived assets, percentage | 90.00% | ||
|
Allowance for Doubtful Accounts (Detail) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | ||
|---|---|---|---|
|
Jun. 29, 2013
|
Jun. 30, 2012
|
Jul. 02, 2011
|
|
| Accounting Policies [Abstract] | |||
| Balance at beginning of period | $ 650 | $ 600 | |
| Bad debt expense | 1,184 | 247 | 220 |
| Accounts written off | (1,534) | (197) | |
| Balance at end of period | $ 300 | $ 650 | $ 600 |
|
Deferred Tax Assets and Liabilities Included in the Consolidated Balance Sheets (Detail) (USD $)
In Thousands, unless otherwise specified |
Jun. 29, 2013
|
Jun. 30, 2012
|
|---|---|---|
| Income Tax Disclosure [Abstract] | ||
| Current deferred tax asset | $ 304 | $ 1,191 |
| Non-current deferred tax liability | (4,135) | (6,180) |
| Net deferred tax liability | $ (3,831) | $ (4,989) |
|
Estimated Aggregate Finite-Lived Intangible Asset Amortization Expense (Detail) (USD $)
In Thousands, unless otherwise specified |
Jun. 29, 2013
|
|---|---|
| Goodwill And Intangible Assets Disclosure [Abstract] | |
| 2014 | $ 660 |
| 2015 | 585 |
| 2016 | 510 |
| 2017 | 509 |
| 2018 | $ 504 |
|
LONG-TERM DEBT (Tables)
|
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Jun. 29, 2013
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding Long-Term Debt Obligations | Outstanding long-term obligations are as follows (in thousands):
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EARNINGS PER SHARE
|
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Jun. 29, 2013
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| Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EARNINGS PER SHARE |
Basic earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if options and warrants were exercised into common stock. Restricted stock is considered a participating security and is included in the computation of basic earnings per share as if vested. Preferred Stock participates in the income of the Company. Earnings per share is calculated by applying the two class method in which undistributed earnings of the Company are allocated between the Preferred Stock and Common Stock to arrive at earnings per share of common stock. The following table sets forth the computation for basic and diluted earnings per share for the periods indicated (in thousands, except per share amounts).
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INCOME TAXES
|
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 29, 2013
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| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INCOME TAXES |
The Company’s earnings (loss) before income taxes are as follows (in thousands):
Deferred taxes are provided for the temporary differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities. The temporary differences that give rise to the deferred tax assets or liabilities are as follows (in thousands):
Deferred tax assets and liabilities included in the Consolidated Balance Sheets are as follows (in thousands):
The expense for income taxes consists of the following (in thousands):
The income tax expense varies from the federal statutory rate due to the following (in thousands):
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
The Company is subject to income taxes in the U.S. federal jurisdiction and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by authorities for the tax years before 2008. As of June 29, 2013, the Company had $1.9 million of federal net operating loss (“NOL”) carryforwards available to offset future taxable income expiring in 2033, $0.2 million of New York state NOL carryforwards expiring in 2033, $0.7 million of Canadian NOL carryforwards expiring in 2033, and a $2.3 million United Kingdom NOL carryforward that has no expiration. The Company has a $0.2 million tax credit available to offset Texas margin tax expiring in 2028. The Company also has $1.7 million of United States federal research and development income tax credits and $0.1 million of foreign tax credits that have expirations between 2020 and 2023. The Company records a valuation allowance to the extent it is more likely than not deferred tax assets will not be recovered. In fiscal 2013, the Company established a valuation allowance of $1.3 million against net deferred income tax assets exclusive of deferred income tax liabilities relating to indefinite-lived intangibles. The Company has elected to treat foreign earnings as permanently reinvested outside the U.S. and has not provided U.S. tax expense on those earnings. |
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QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) (Tables)
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Jun. 29, 2013
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| Quarterly Financial Information Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Quarterly Consolidated Financial Information | The following tables represent the quarterly consolidated financial data of the Company for fiscal 2013, 2012 and 2011 (in thousands, except per share amounts):
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PROPERTY, PLANT AND EQUIPMENT (Tables)
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Jun. 29, 2013
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| Property Plant And Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Details of Property, Plant and Equipment | Property, plant and equipment are summarized as follows (in thousands):
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COMMITMENTS AND CONTINGENCIES (Tables)
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Jun. 29, 2013
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| Commitments And Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Leases Future Minimum Rental Commitments | At June 29, 2013, future minimum rental commitments under all operating leases are as follows (in thousands):
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NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
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12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 29, 2013
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nature of Operations | Nature of Operations PMFG, Inc. (the “Company” or “PMFG”) is a leading provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. The Company primarily serves the markets for natural gas infrastructure, power generation and refining and petrochemical processing. The Company offers a broad range of separation and filtration products, selective catalytic reduction (“SCR”) systems, turbine emission exhaust and silencing systems and other complementary products, including specialty heat exchangers, pulsation dampeners and silencers. The Company’s separation and filtration products remove contaminants from gases and liquids, resulting in improved efficiency, reduced maintenance and extended life of energy infrastructure. The Company’s SCR systems convert nitrogen oxide, or NOx, into nitrogen and water, reducing air pollution and helping the Company’s power and industrial customers comply with environmental regulations. The Company’s primary customers include equipment manufacturers, engineering contractors and owner-operators of energy infrastructure. The Company has two reporting segments: Process Products and Environmental Systems. The Process Products segment includes separation and filtration, silencing and heat exchanger products and complementary products and services. The primary product of the Company’s Environmental Systems segment is SCR systems. The Company’s products are manufactured within company-owned facilities located in Texas and a leased facility in China, as well as through global subcontractor agreements. |
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| Basis of Consolidation | Basis of Consolidation The Company was incorporated as a Delaware corporation on August 15, 2008 as part of a holding company reorganization. In the reorganization, Peerless Mfg. Co. (“Peerless”), a Texas corporation, became a wholly owned subsidiary of PMFG. The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and include the accounts of all wholly-owned and majority-owned subsidiaries for all periods presented. 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. Peerless Propulsys is the sole owner of Peerless China Manufacturing Co. Ltd. (“PCMC”). The noncontrolling interest of Peerless Propulsys is reported as a separate component on the Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income.
The Company’s fiscal year end is the Saturday closest to June 30; therefore, the fiscal year end date will vary slightly each year. In a 52-week fiscal year, each of the Company’s quarterly periods will be comprised of 13 weeks, consisting of two four week periods and one five week period. In a 53-week fiscal year, three of the Company’s quarterly periods will be comprised of 13 weeks and one quarter will be comprised of 14 weeks. References to “fiscal 2013”, “fiscal 2012” and “fiscal 2011” refer to the 52-week fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011, respectively. |
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| Cash and Cash Equivalents | Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances in bank accounts that exceed Federal Deposit Insurance Corporation insured limits. As of June 29, 2013, cash held in the United States exceeded federally insured limits by $38.3 million. As of June 29, 2013 and June 30, 2012, the Company had $15.6 million and $21.3 million, respectively, in financial institutions outside the United Sates. The Company has not experienced any losses related to these cash concentrations. The Company had restricted cash balances of $5.0 million and $7.9 million as of June 29, 2013 and June 30, 2012 respectively. Foreign restricted cash balances were $4.7 million and $7.8 million as of June 29, 2013 and June 30, 2012, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the normal course of business. |
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| Accounts Receivable | Accounts Receivable The Company’s accounts receivable are due from customers 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. 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. The Company had $0.7 million and $0.6 million of retention receivables included in accounts receivable – trade at June 29, 2013 and June 30, 2012, respectively.
Changes in the Company’s allowance for doubtful accounts in the last two fiscal years are as follows (in thousands):
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| Inventories | Inventories The Company values its inventories using the lower of weighted average cost or market. The Company regularly reviews the value of inventory 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. |
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| Property, Plant and Equipment | 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:
Routine maintenance costs are expensed as incurred. Major improvements that extend the life, increase the capacity or improve the safety or the efficiency of property owned are capitalized. Major improvements to leased buildings are capitalized as leasehold improvements and amortized over the shorter of the estimated life or the lease term. |
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| Goodwill and Other Intangible Assets | 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 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.
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. |
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| Long-Lived Assets | 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. |
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| Convertible Redeemable Preferred Stock | Convertible Redeemable Preferred Stock Prior to conversion in 2011, the Company’s Series A convertible redeemable preferred stock (“Preferred Stock”) host contract contained redemption options which placed redemption outside of the Company’s control. The Preferred Stock was classified as temporary equity, outside of permanent stockholders’ equity, on the Consolidated Balance Sheets and Consolidated Statements of Equity. The Company considered the conversion rights and redemption options of the Preferred Stock to be an embedded derivative and, as a result, the fair value of the embedded derivative was deemed to be a derivative liability on the Consolidated Balance Sheets (the “Derivative Liability”). Because the Derivative Liability had a fair value in excess of the net proceeds received by the Company from the Preferred Stock transaction at the date of issuance, no amounts were assigned to the Preferred Stock in the allocation of proceeds. Changes in fair value of the Derivative Liability are included in other income (expense) in the Consolidated Statements of Operations and are not taxable or deductible for income tax purposes. |
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| Derivative instruments | Derivative instruments The Company may use derivative financial instruments to manage exposures to interest rate fluctuations on floating rate debt agreements. The Company recognizes derivatives as assets or liabilities on the Consolidated Balance Sheets, measures those financial instruments at fair value, and recognizes changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures. |
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| Accumulated Other Comprehensive Income (Loss) | Accumulated Other Comprehensive Income (Loss) The Company presents adjustments resulting from the foreign currency translation of its operations in China, the United Kingdom and Germany as other comprehensive income (loss). |
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| Fair Value of Financial Instruments | 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 Company estimates the carrying amount of its debt at June 29, 2013 approximates fair value, as the Company’s debt bears interest at floating rates. |
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| Revenue Recognition | 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. In connection with these contracts, the Company uses the percentage-of-completion method of accounting for long-term contracts that contain enforceable rights regarding services to be provided and received by the contracting parties, the consideration to be exchanged, and the manner and terms of settlement. Amounts recognized in revenue are calculated using the percentage of cost completed, generally on a cumulative cost to total cost basis. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract, however changes in estimated total costs can impact profit margins from period to period. Anticipated losses on contracts are recorded in full in the period in which they become evident. Cumulative revenue recognized may be less or greater than amounts 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 are accounted for under the completed contract method. Because of the short-term nature of these contracts, the completed contract method accurately reflects the economic substance of these contracts. Revenue under the completed contract method is recognized upon shipment of the product. |
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| Pre-contract, Start-up and Commissioning Costs | 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 call for the installation and placing in service of the product after it is distributed to the end user. The costs associated with the start-up and commissioning of these projects are estimated and recorded in cost of goods sold in the period in which the revenue is recognized. Estimates are based on historical experience and expectation of future conditions. |
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| Warranty Costs | Warranty Costs The Company provides to its customers product warranties for specific products during a defined period of time, generally less than 18 months after shipment of the product. Warranties cover the failure of a product to perform after it has been placed in service. The Company reserves for estimated future warranty costs in the period in which the revenue is recognized based on historical experience, expectation of future conditions, and the extent of backup concurrent supplier warranties in place. Warranty costs are included in costs of goods sold. |
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| Debt Issuance Costs | Debt Issuance Costs Certain costs associated with the issuance of debt instruments are capitalized and included in other non-current assets on the Consolidated Balance Sheets. These costs are amortized to interest expense over the terms of the related debt agreements on a straight-line basis. Amortization of debt issuance costs included in interest expense was $0.2 million, $0.3 million and $0.9 million in fiscal years 2013, 2012 and 2011, respectively. In addition, a loss on early extinguishment of debt of $0.3 million and $0.3 million was recognized in fiscal 2013 and fiscal 2012, respectively. |
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| Stock-Based Compensation | Stock-Based Compensation The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes that cost ratably over the vesting period. |
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| Shipping and Handling Costs | Shipping and Handling Costs Shipping and handling fees billed to customers are reported as revenue. Shipping and handling costs incurred are reported as cost of goods sold. Shipping and handling costs included in cost of goods sold were $1.4 million, $1.4 million and $1.6 million for fiscal years 2013, 2012 and 2011, respectively. |
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| Advertising Costs | Advertising Costs Advertising costs are charged to operating expenses under the sales and marketing category in the periods incurred. Advertising costs were approximately $0.2 million for each of the fiscal years 2013, 2012 and 2011. |
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| Design, Research and Development | Design, Research and Development Design, research and development costs are charged to operating expenses under the engineering and project management category in the period incurred. Design, research and development costs were approximately $0.7 million, $0.6 million and $0.5 million in fiscal years 2013, 2012 and 2011, respectively. |
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| Income Taxes | 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 financial statement purposes. These differences result in deferred tax assets and liabilities and are included in the Company’s Consolidated Balance Sheets. 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. |
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| Earnings (Loss) Per Common Share | Earnings (Loss) Per Common Share The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable to common stockholders by the weighted average number of common shares outstanding. The Company has determined the preferred stock outstanding during fiscal 2011 represented a participating security because holders of the preferred stock have rights to participate in any dividends on an as-converted basis; therefore, basic earnings per common share is calculated using the two class method for that year. Under the two class method, earnings after dividends are allocated to each class of participating security and earnings per common share is calculated on the earnings allocated to common stock. Diluted earnings per common share include the dilutive effect of stock options and warrants granted using the treasury stock method. |
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| Foreign Currency | Foreign Currency All balance sheet accounts of foreign operations are translated into U.S. dollars at the fiscal year-end rate of exchange. Consolidated Statements of Operations items are translated at the weighted average exchange rates for the fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011 The resulting translation adjustments are recorded directly to accumulated other comprehensive income, a separate component of stockholders’ equity. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, are included in the Consolidated Statements of Operations. |
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| Use of Estimates | Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates, under different assumptions or conditions. Considerable management judgment and experience is necessary to estimate the aggregate amount of costs that will ultimately be incurred related to a project. Such cost estimates include material, subcontractor, labor, delivery and start-up costs. Considerable management judgment is also necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulation, and taxing authority rulings, as well as to the expiration of statutes of limitations in the jurisdiction in which the Company operates. A valuation allowance is recorded against a deferred tax asset if it is more likely than not that the asset will not be realized. |
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| New Accounting Pronouncements | New Accounting Pronouncements In July 2012 the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update related to “Testing Indefinite-Lived Intangibles for Impairment.” The purpose of the update is to simplify the guidance for testing indefinite-lived intangible assets for impairment and the update permits entities to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Unless an entity determines, through its qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset is impaired, it would not be required to calculate the fair value of the asset. This standard is effective for annual and interim impairment tests of indefinite-lived intangible assets performed in fiscal years beginning after September 15, 2012, and early adoption is permitted. This standard did not have an impact on the Company’s annual indefinite-lived asset impairment testing process in fiscal 2013 as the Company did not elect to perform a qualitative assessment. |
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Accrued Product Warranty Activity (Detail) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | ||
|---|---|---|---|
|
Jun. 29, 2013
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Jun. 30, 2012
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Jul. 02, 2011
|
|
| Guarantees [Abstract] | |||
| Balance at beginning of period | $ 2,615 | $ 2,575 | $ 2,480 |
| Provision for warranty expense | 1,864 | 1,032 | 2,392 |
| Warranty charges | (2,238) | (992) | (2,297) |
| Balance at end of period | $ 2,241 | $ 2,615 | $ 2,575 |
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Stockholder Rights Plan - Additional Information (Detail)
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12 Months Ended |
|---|---|
|
Jun. 29, 2013
|
|
| Equity [Abstract] | |
| Dividend distribution received by shareholders | One right for each share of common stock outstanding on that date |
| Right expiration date | Aug. 15, 2008 |
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Product Warranties - Additional Information (Detail)
|
12 Months Ended |
|---|---|
|
Jun. 29, 2013
|
|
| Guarantees [Abstract] | |
| Product warranty period minimum | 12 months |
| Product warranty period maximum | 18 months |
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INCOME TAXES (Tables)
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12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 29, 2013
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| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Earnings (Loss) Before Income Tax | The Company’s earnings (loss) before income taxes are as follows (in thousands):
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| Schedule of Deferred Assets and Liabilities | The temporary differences that give rise to the
deferred tax assets or liabilities are as follows (in
thousands):
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| Deferred Tax Assets and Liabilities Included in the Consolidated Balance Sheets | Deferred tax assets and liabilities included in the Consolidated Balance Sheets are as follows (in thousands):
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| Expense for Income Taxes | The expense for income taxes consists of the following (in thousands):
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| Effective Tax Reconciliation | The income tax expense varies from the federal statutory rate due to the following (in thousands):
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| Unrecognized Tax Benefits Rollforward | A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
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|
Stock Based Compensation - Additional Information (Detail) (USD $)
In Millions, except Share data, unless otherwise specified |
12 Months Ended | 12 Months Ended | ||||
|---|---|---|---|---|---|---|
|
Jun. 29, 2013
|
Jun. 30, 2012
|
Jul. 02, 2011
|
Jun. 29, 2013
Stock option and restricted stock plan (the "2001 Plan") [Member]
|
Jun. 29, 2013
Stock option and restricted stock plan (the "2007 Plan") [Member]
|
Oct. 31, 2011
Restricted Stock [Member]
|
|
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||||
| Common stock, shares issued | 1,000,000 | 1,800,000 | ||||
| Common stock, shares issued, description | Shares are available for grant only under the 2007 Plan | |||||
| Stock compensation expense recognized | $ 0.5 | $ 3.1 | $ 1.4 | |||
| Percentage of increase in owner | 69.00% | |||||
| Acceleration of vesting unvested stock awards | 146,000 | |||||
| Employee's compensation expense | 2.1 | |||||
| Total unrecognized compensation costs | 0.7 | |||||
| Options outstanding and exercisable, weighted average remaining term | 2 years 26 days | 3 years 1 month 13 days | ||||
| Aggregate intrinsic value based upon the closing price of the Company's common stock | $ 0.1 | $ 0.2 | ||||
|
EMPLOYEE BENEFIT PLANS
|
12 Months Ended | ||
|---|---|---|---|
|
Jun. 29, 2013
|
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| Postemployment Benefits [Abstract] | |||
| EMPLOYEE BENEFIT PLANS |
The Company sponsors a defined contribution pension plan under Section 401(k) of the Internal Revenue Code for eligible employees who have completed at least 90 days of service. Company contributions are voluntary and at the discretion of the Board of Directors. The Company’s contribution expense was $0.6 million for each of the fiscal years ended June 29, 2013, June 20, 2012 and July 2, 2011. |
|
Consolidated Statements of Cash Flows (Parenthetical) (USD $)
|
1 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|
|
Nov. 30, 2011
|
Jun. 29, 2013
|
Jun. 30, 2012
|
Jul. 02, 2011
|
|
| Statement Of Cash Flows [Abstract] | ||||
| Capitalized interest | $ 200,000 | $ 0 | $ 0 | |
| Exchange of warrants, exchanged | 482,188 | |||
| Common stock exchange for warrants | 105,403 | |||
| Purchase consideration paid during the year | 1,500,000 | |||
| Investing activity from business acquisition | 2,500,000 | 1,296,000 | 2,487,000 | |
| Preliminary purchase consideration | 5,800,000 | |||
| Cash acquired from business acquisition | $ 1,800,000 | |||
|
ACQUISITIONS
|
12 Months Ended | ||
|---|---|---|---|
|
Jun. 29, 2013
|
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| Business Combinations [Abstract] | |||
| ACQUISITIONS |
Burgess Manning GmbH In November 2011, the Company acquired all of the outstanding shares of Burgess Manning GmbH for $5.8 million. Approximately four million dollars was paid in cash at closing from cash on hand. The remaining balance was paid during fiscal 2013. The purchase price of $5.8 million was allocated to assets acquired, including identifiable intangibles, and liabilities assumed based on their estimated fair values. Of the acquired intangible assets, $1.1 million was assigned to customer relationships, which will be amortized over a ten-year period, and $0.3 million was assigned to acquired backlog, which was fully amortized during fiscal 2012. The excess of the purchase price over the fair value of the net assets acquired represents goodwill of $0.7 million. The results of operations for Burgess Manning GmBH are included in the Company’s Process Products segment. |
|
Summary of Various Interest Rate Agreements (Detail) (Interest Rate Swap [Member], USD $)
|
6 Months Ended |
|---|---|
|
Jun. 29, 2013
|
|
|
1.95 % Fixed Interest Rate Due In September 30, 2022 [Member]
|
|
| Derivative [Line Items] | |
| Expiration Date | Sep. 30, 2022 |
| Notional Amounts | $ 9,000 |
|
1.50 % Fixed Interest Rate Due In September 30, 2019 [Member]
|
|
| Derivative [Line Items] | |
| Expiration Date | Sep. 30, 2019 |
| Notional Amounts | $ 1,000 |
|
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 29, 2013
|
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations PMFG, Inc. (the “Company” or “PMFG”) is a leading provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. The Company primarily serves the markets for natural gas infrastructure, power generation and refining and petrochemical processing. The Company offers a broad range of separation and filtration products, selective catalytic reduction (“SCR”) systems, turbine emission exhaust and silencing systems and other complementary products, including specialty heat exchangers, pulsation dampeners and silencers. The Company’s separation and filtration products remove contaminants from gases and liquids, resulting in improved efficiency, reduced maintenance and extended life of energy infrastructure. The Company’s SCR systems convert nitrogen oxide, or NOx, into nitrogen and water, reducing air pollution and helping the Company’s power and industrial customers comply with environmental regulations. The Company’s primary customers include equipment manufacturers, engineering contractors and owner-operators of energy infrastructure. The Company has two reporting segments: Process Products and Environmental Systems. The Process Products segment includes separation and filtration, silencing and heat exchanger products and complementary products and services. The primary product of the Company’s Environmental Systems segment is SCR systems. The Company’s products are manufactured within company-owned facilities located in Texas and a leased facility in China, as well as through global subcontractor agreements. Basis of Consolidation The Company was incorporated as a Delaware corporation on August 15, 2008 as part of a holding company reorganization. In the reorganization, Peerless Mfg. Co. (“Peerless”), a Texas corporation, became a wholly owned subsidiary of PMFG. The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and include the accounts of all wholly-owned and majority-owned subsidiaries for all periods presented. 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. Peerless Propulsys is the sole owner of Peerless China Manufacturing Co. Ltd. (“PCMC”). The noncontrolling interest of Peerless Propulsys is reported as a separate component on the Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income.
The Company’s fiscal year end is the Saturday closest to June 30; therefore, the fiscal year end date will vary slightly each year. In a 52-week fiscal year, each of the Company’s quarterly periods will be comprised of 13 weeks, consisting of two four week periods and one five week period. In a 53-week fiscal year, three of the Company’s quarterly periods will be comprised of 13 weeks and one quarter will be comprised of 14 weeks. References to “fiscal 2013”, “fiscal 2012” and “fiscal 2011” refer to the 52-week fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011, respectively. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances in bank accounts that exceed Federal Deposit Insurance Corporation insured limits. As of June 29, 2013, cash held in the United States exceeded federally insured limits by $38.3 million. As of June 29, 2013 and June 30, 2012, the Company had $15.6 million and $21.3 million, respectively, in financial institutions outside the United Sates. The Company has not experienced any losses related to these cash concentrations. The Company had restricted cash balances of $5.0 million and $7.9 million as of June 29, 2013 and June 30, 2012, respectively. Foreign restricted cash balances were $4.7 million and $7.8 million as of June 29, 2013 and June 30, 2012, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the normal course of business. Accounts Receivable The Company’s accounts receivable are due from customers 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. 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. The Company had $0.7 million and $0.6 million of retention receivables included in accounts receivable – trade at June 29, 2013 and June 30, 2012, respectively.
Changes in the Company’s allowance for doubtful accounts in the last two fiscal years are as follows (in thousands):
Inventories The Company values its inventories using the lower of weighted average cost or market. The Company regularly reviews the value of inventory 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:
Routine maintenance costs are expensed as incurred. Major improvements that extend the life, increase the capacity or improve the safety or the efficiency of property owned are capitalized. Major improvements to leased buildings are capitalized as leasehold improvements and amortized over the shorter of the estimated life or the lease term. 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 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.
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. Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and exceeds its fair value. If conditions indicate an asset might be impaired, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. The impairment would be measured by the amount by which the asset exceeds its fair value, typically represented by the discounted cash flows associated with the asset. Convertible Redeemable Preferred Stock Prior to conversion in 2011, the Company’s Series A convertible redeemable preferred stock (“Preferred Stock”) host contract contained redemption options which placed redemption outside of the Company’s control. The Preferred Stock was classified as temporary equity, outside of permanent stockholders’ equity, on the Consolidated Balance Sheets and Consolidated Statements of Equity. The Company considered the conversion rights and redemption options of the Preferred Stock to be an embedded derivative and, as a result, the fair value of the embedded derivative was deemed to be a derivative liability on the Consolidated Balance Sheets (the “Derivative Liability”). Because the Derivative Liability had a fair value in excess of the net proceeds received by the Company from the Preferred Stock transaction at the date of issuance, no amounts were assigned to the Preferred Stock in the allocation of proceeds. Changes in fair value of the Derivative Liability are included in other income (expense) in the Consolidated Statements of Operations and are not taxable or deductible for income tax purposes. Accumulated Other Comprehensive Income (Loss) The Company presents adjustments resulting from the foreign currency translation of its operations in China, the United Kingdom and Germany as other comprehensive income (loss). Derivative instruments The Company may use derivative financial instruments to manage exposures to interest rate fluctuations on floating rate debt agreements. The Company recognizes derivatives as assets or liabilities on the Consolidated Balance Sheets, measures those financial instruments at fair value, and recognizes changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures.
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 Company estimates the carrying amount of its debt at June 29, 2013 approximates fair value, as the Company’s debt bears interest at floating 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. In connection with these contracts, the Company uses the percentage-of-completion method of accounting for long-term contracts that contain enforceable rights regarding services to be provided and received by the contracting parties, the consideration to be exchanged, and the manner and terms of settlement. Amounts recognized in revenue are calculated using the percentage of cost completed, generally on a cumulative cost to total cost basis. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract, however changes in estimated total costs can impact profit margins from period to period. Anticipated losses on contracts are recorded in full in the period in which they become evident. Cumulative revenue recognized may be less or greater than amounts 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 are accounted for under the completed contract method. Because of the short-term nature of these contracts, the completed contract method accurately reflects the economic substance of these contracts. Revenue under the completed contract method is recognized upon shipment of the product. Pre-contract, Start-up and Commissioning Costs The Company does not consider the realization of any individual sales order as probable prior to order acceptance. Therefore, pre-contract costs incurred prior to sales order acceptance are included as a component of operating expenses when incurred. Some of the Company’s contracts call for the installation and placing in service of the product after it is distributed to the end user. The costs associated with the start-up and commissioning of these projects are estimated and recorded in cost of goods sold in the period in which the revenue is recognized. Estimates are based on historical experience and expectation of future conditions.
Warranty Costs The Company provides to its customers product warranties for specific products during a defined period of time, generally less than 18 months after shipment of the product. Warranties cover the failure of a product to perform after it has been placed in service. The Company reserves for estimated future warranty costs in the period in which the revenue is recognized based on historical experience, expectation of future conditions, and the extent of backup concurrent supplier warranties in place. Warranty costs are included in costs of goods sold. Debt Issuance Costs Certain costs associated with the issuance of debt instruments are capitalized and included in other non-current assets on the Consolidated Balance Sheets. These costs are amortized to interest expense over the terms of the related debt agreements on a straight-line basis. Amortization of debt issuance costs included in interest expense was $0.2 million, $0.3 million and $0.9 million in fiscal years 2013, 2012 and 2011, respectively. In addition, a loss on early extinguishment of debt of $0.3 million and $0.3 million was recognized in fiscal 2013 and fiscal 2012, respectively. Stock-Based Compensation The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes that cost ratably over the vesting period. Shipping and Handling Costs Shipping and handling fees billed to customers are reported as revenue. Shipping and handling costs incurred are reported as cost of goods sold. Shipping and handling costs included in cost of goods sold were $1.4 million, $1.4 million and $1.6 million for fiscal years 2013, 2012 and 2011, respectively. Advertising Costs Advertising costs are charged to operating expenses under the sales and marketing category in the periods incurred. Advertising costs were approximately $0.2 million for each of the fiscal years 2013, 2012 and 2011. Design, Research and Development Design, research and development costs are charged to operating expenses under the engineering and project management category in the period incurred. Design, research and development costs were approximately $0.7 million, $0.6 million and $0.5 million in fiscal years 2013, 2012 and 2011, respectively.
Income Taxes The Company utilizes the asset and liability approach in its reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax 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 financial statement purposes. These differences result in deferred tax assets and liabilities and are included in the Company’s Consolidated Balance Sheets. 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. Earnings (Loss) Per Common Share The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable to common stockholders by the weighted average number of common shares outstanding. The Company has determined the preferred stock outstanding during fiscal 2011 represented a participating security because holders of the preferred stock have rights to participate in any dividends on an as-converted basis; therefore, basic earnings per common share is calculated using the two class method for that year. Under the two class method, earnings after dividends are allocated to each class of participating security and earnings per common share is calculated on the earnings allocated to common stock. Diluted earnings per common share include the dilutive effect of stock options and warrants granted using the treasury stock method. Foreign Currency All balance sheet accounts of foreign operations are translated into U.S. dollars at the fiscal year-end rate of exchange. Consolidated Statements of Operations items are translated at the weighted average exchange rates for the fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011 The resulting translation adjustments are recorded directly to accumulated other comprehensive income, a separate component of stockholders’ equity. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, are included in the Consolidated Statements of Operations.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates, under different assumptions or conditions. Considerable management judgment and experience is necessary to estimate the aggregate amount of costs that will ultimately be incurred related to a project. Such cost estimates include material, subcontractor, labor, delivery and start-up costs. Considerable management judgment is also necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulation, and taxing authority rulings, as well as to the expiration of statutes of limitations in the jurisdiction in which the Company operates. A valuation allowance is recorded against a deferred tax asset if it is more likely than not that the asset will not be realized. New Accounting Pronouncements In July 2012 the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update related to “Testing Indefinite-Lived Intangibles for Impairment.” The purpose of the update is to simplify the guidance for testing indefinite-lived intangible assets for impairment and the update permits entities to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Unless an entity determines, through its qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset is impaired, it would not be required to calculate the fair value of the asset. This standard is effective for annual and interim impairment tests of indefinite-lived intangible assets performed in fiscal years beginning after September 15, 2012, and early adoption is permitted. This standard did not have an impact on the Company’s annual indefinite-lived asset impairment testing process in fiscal 2013 as the Company did not elect to perform a qualitative assessment. |
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STOCK-BASED COMPENSATION (Tables)
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Jun. 29, 2013
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| Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted Stock Award Activity | A summary of the restricted stock award activity under the plans for the fiscal years 2013, 2012 and 2011 is as follows (in thousands):
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| Option Activity Under the Company's Stock-Based Compensation Plans | A summary of the option activity under the Company’s stock-based compensation plans for the fiscal years ended June 29, 2013 and June 30, 2012 is as follows (in thousands):
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INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
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Jun. 29, 2013
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| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION |
Diluted earnings per common share include the dilutive effect of stock options and warrants granted using the treasury stock method. Options to acquire 37,200 and 19,380 shares of common stock equivalents were omitted from the calculation of dilutive securities for fiscal years 2013 and 2012, respectively, because they were anti-dilutive. Warrants to acquire 839,063 shares of common stock were omitted from the calculation of dilutive securities for fiscal year 2012 and fiscal 2013 because they were anti-dilutive. 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 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 allocation of general and administrative costs. The Company does not allocate general and administrative expenses (“reconciling items”), 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 profit for the fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011 are presented below (in thousands):
Revenue from external customers based on the location of the customer is as follows for the fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011 (in thousands):
Identifiable long-lived assets of geographic areas are those assets related to the Company’s operations in each area as follows (in thousands):
As of June 29, 2013, the Company’s subsidiary in China accounted for approximately 90% of the international long-lived assets. For the fiscal years 2013, 2012 or 2011, there were no sales to a single customer that accounted for 10% or more of the Company’s consolidated revenue. |
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NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)
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Jun. 29, 2013
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for Doubtful Accounts | Changes in the Company’s allowance for doubtful accounts in the last two fiscal years are as follows (in thousands):
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| Depreciation of 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:
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Stock Based Compensation Plans (Detail) (USD $)
In Thousands, except Per Share data, unless otherwise specified |
12 Months Ended | |
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Jun. 29, 2013
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Jun. 30, 2012
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| Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] | ||
| Balance at beginning of year, options | 43,200 | 55,200 |
| Stock options exercised | (6,000) | (8,000) |
| Number of options, forfeited after vesting | (4,000) | |
| Balance at end of year, shares | 37,200 | 43,200 |
| Number of options, exercisable at end of year | 37,200 | 43,200 |
| Balance at beginning of year | $ 4.32 | $ 4.19 |
| Exercised | $ 3.16 | $ 6.11 |
| Forfeited after vesting | $ 3.40 | |
| Balance at end of year | $ 4.73 | $ 4.32 |
| Exercisable at end of year | $ 4.73 | $ 4.32 |