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PMFG > SEC Filings for PMFG > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for PMFG, INC.

Form 10-Q for PMFG, INC.


9-May-2013

Quarterly Report


Item 2. 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 to supplement - and should be read in conjunction with - our unaudited consolidated financial statements and the accompanying notes thereto contained in "Item 1. Financial Statements" of this report. This overview summarizes the MD&A, which includes the following sections:

Our Business - a general description of our business and the key drivers of product demand.

Results of Operations - an analysis of our Company's consolidated and reporting segment results of operations for the three and nine month periods presented in our consolidated unaudited financial statements.

Liquidity, Capital Resources and Financial Position - an analysis of cash flows; aggregate contractual obligations; foreign currency exposure; and an overview of financial position.

This discussion includes forward-looking statements that are subject to risks, uncertainties and other factors described in this and other reports we file with the Securities and Exchange Commission (the "SEC"), including the information in "Item 1A. Risk Factors" of Part I to our Annual Report for the year ended June 30, 2012. These factors could cause our actual results for future periods to differ materially from those experienced in, or implied by, these forward-looking statements.

Our Business

We are a leading provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. We primarily serve the markets for natural gas infrastructure, power generation and refining and petrochemical processing. We offer a broad range of separation and filtration products, Selective Catalytic Reduction Systems ("SCR Systems"), and other complementary products including heat exchangers, pulsation dampeners and silencers. Our primary customers include equipment manufacturers, engineering contractors and operators of power facilities.

Our products and systems are marketed worldwide. Revenue generated from outside the United States was approximately 49% in the nine months ended March 30, 2013 compared to 47% in the nine months ended March 31, 2012. 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 be a significant percentage of our consolidated revenue in the future.

We believe our success depends on our ability to understand the complex operational demands of our customers and deliver systems and products that meet or exceed the indicated design specifications. Our success further depends on our ability to provide such products in a cost-effective manner and within the time frames established with our customers. Our gross profit during any particular period may be impacted by several factors, primarily shifts in our product mix, material cost changes, and warranty costs. Shifts in the geographic composition of our sales also can have a significant impact on our reported margins.

We have two reporting segments: Process Products and Environmental Systems. The Process Products segment produces specialized systems and products that remove contaminants from gases and liquids, improving efficiency, reducing maintenance and extending the life of energy infrastructure. The segment also includes industrial silencing equipment to control noise pollution on a wide range of industrial processes and heat transfer equipment to conserve energy in many industrial processes and in petrochemical processing. The primary product of our Environmental Systems business is SCR Systems. SCR Systems are integrated systems, with instruments, controls and related valves and piping. Our SCR Systems convert nitrogen oxide into nitrogen and water, reducing air pollution and helping our customers comply with environmental regulations.


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PMFG, Inc. and Subsidiaries

March 30, 2013

Key Drivers of Product Demand

We believe demand for our products is driven by the increasing demand for energy in both developed and emerging markets, coupled with the global trend towards increasingly restrictive environmental regulations. These trends should stimulate investment in new power generation facilities and related infrastructure, and in upgrading existing facilities.

With a shift to cleaner, more environmentally responsible power generation, power providers and industrial power consumers are building new facilities that use cleaner fuels, such as natural gas, nuclear technology, and renewable resources. In developed markets, natural gas is increasingly becoming one of the energy sources of choice. We supply product offerings throughout the entire natural gas infrastructure value chain and believe the expansion of natural gas infrastructure will drive growth of our process products and the global market for our SCR Systems for natural-gas-fired power plants.

Despite existing concerns over safety and government regulations related to the construction of new nuclear power facilities and the re-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 is expected to lead the global expansion of nuclear power generation growth. Re-commissioning of existing nuclear facilities in the United States and Europe also will contribute to product demand.

We believe these market trends will drive the demand for both our separation/filtration products and our SCR Systems, creating significant opportunities for us. We face strong competition from numerous other providers of custom-engineered systems and products. We, along with other companies that provide alternative products and solutions, are affected by a number of factors, including, but not limited to, global economic conditions, level of capital spending by companies engaged in energy production, processing, transportation, storage and distribution, as well as current and anticipated environmental regulations.

Recent Developments

On April 1, 2013, the Board of Directors amended the Rights Agreement, dated as of August 15, 2008 (the "Rights Agreement"), by and between PMFG, Inc. and Computershare Shareowner Services, LLC, (formerly known as Mellon Investor Services LLC), as Rights Agent. The Amendment provides that the rights issued pursuant to the Rights Agreement will expire on June 29, 2013 unless exchanged or redeemed prior to that date.

Critical Accounting Policies

See the Company's critical accounting policies as described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in Part II of our Annual Report on Form 10-K for the year ended June 30, 2012. Since the date of that report, there have been no material changes to our critical accounting policies.


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PMFG, Inc. and Subsidiaries

March 30, 2013

Results of Operations

The following summarizes our Consolidated Statements of Operations as a
percentage of revenue:



                                                Three months ended                      Nine months ended
                                          March 30,            March 31,          March 30,           March 31,
                                             2013                2012                2013               2012
Net revenue                                     100.0 %             100.0 %             100.0 %            100.0 %
Cost of goods sold                               69.3                71.4                66.1               69.4

Gross profit                                     30.7                28.6                33.9               30.6
Operating expenses                               27.8                25.2                31.5               29.6

Operating income                                  2.9                 3.4                 2.4                1.0
Other expense, net                               (0.5 )              (1.4 )              (0.7 )             (1.9 )

Income before income taxes                        2.4                 2.0                 1.7               (0.9 )
Income tax benefit (expense)                     (0.4 )               0.9                (0.4 )              0.8

Net income (loss)                                 2.0 %               2.9 %               1.3 %             (0.1 )%

Net income (loss) attributable to
noncontrolling interest                           0.4                  -                  0.6               (0.1 )

Net income (loss) attributable to
PMFG, Inc.                                        1.6 %               2.9 %               0.7 %             (0.0 )%

Cost of goods sold includes manufacturing and distribution costs for products sold. The manufacturing and distribution costs include material, direct and indirect labor, manufacturing overhead, depreciation, sub-contract work, inbound and outbound freight, purchasing, receiving, inspection, warehousing, internal transfer costs and other costs of our manufacturing and distribution processes. Cost of goods sold also includes the costs of commissioning the equipment and warranty related costs. Operating expenses include sales and marketing expenses, engineering and project management expenses and general and administrative expenses which are further described below.

Sales and marketing expenses-include payroll, employee benefits, stock-based compensation and other employee-related costs associated with sales and marketing personnel. Sales and marketing expenses also include travel and entertainment, advertising, promotions, trade shows, seminars and other programs and sales commissions paid to independent sales representatives.

Engineering and project management expenses - include payroll, employee benefits, stock-based compensation and other employee-related costs associated with engineering, project management and field service personnel. Additionally, engineering and project management expenses include the cost of sub-contracted engineering services.

General and administrative expenses-include payroll, employee benefits, stock-based compensation and other employee-related costs and costs associated with executive management, finance, human resources, information systems and other administrative employees. General and administrative costs also include board of director compensation and expenses, facility costs, insurance, audit fees, legal fees, professional services and other administrative fees.

Quarter Ended March 30, 2013 Compared to Quarter Ended March 31, 2012

Results of Operations - Consolidated

Revenue. We classify revenue as domestic or international based upon the origination of the order. Revenue generated by orders originating from within the United States is classified as domestic revenue, regardless of where the product is shipped or where it will eventually be installed. Revenue generated by orders originating from a country other than the United States is classified as international revenue. International revenue was approximately 40% and 50% of consolidated revenue in the quarters ended March 30, 2013 and March 31, 2012, respectively.


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                          PMFG, Inc. and Subsidiaries

                                 March 30, 2013



The following summarizes consolidated revenue (in thousands):



                                             Three months ended
                        March 30,       % of Total        March 31,       % of Total
                          2013           Revenue            2012           Revenue
       Domestic        $    20,849             59.6 %    $    17,592             49.6 %
       International        14,121             40.4 %         17,906             50.4 %

       Total           $    34,970            100.0 %    $    35,498            100.0 %

Total revenue decreased $0.5 million, or 1.5%, to $35.0 million in the third quarter of fiscal 2013 compared to the same period in fiscal 2012. Reduced revenue in our Process Products segment was partially offset by growth in the Environmental Systems segment resulting in consolidated revenue remaining relatively flat for the quarter.

Gross Profit. Our gross profit during any particular period may be impacted by several factors, primarily revenue volume, shifts in our product mix, material cost changes, warranty, start-up and commissioning costs. Shifts in the geographic composition of our revenue also can have a significant impact on our reported margins. The following summarizes revenue, cost of goods sold and gross profit (in thousands):

                                                Three months ended
                           March 30,       % of Total        March 31,       % of Total
                             2013           Revenue            2012           Revenue
     Revenue              $    34,970            100.0 %    $    35,498            100.0 %
     Cost of goods sold        24,223             69.3 %         25,352             71.4 %

     Gross profit         $    10,747             30.7 %    $    10,146             28.6 %

Gross profit in the third quarter of fiscal 2013 increased $0.6 million compared to the same period in fiscal 2012. The increase in gross profit, as a percentage of revenue, during the third quarter of fiscal 2013 compared to the same period last year was due to a change in product mix and a one-time acceleration of an anticipated loss on a specific project in the comparable quarter in the prior year. During the third quarter of fiscal 2013 we amended our policy applicable to U.S.-based employees related to the accumulation of paid time off. The impact of the change was a one-time benefit to costs of goods sold of $0.2 million. The improvement in gross margin as a percentage of revenue was dampened by the provision for estimated warranty costs, which increased $0.4 million over the prior year.

Operating Expenses. The following summarizes operating expenses (in thousands):

                                                                  Three months ended
                                           March 30,        % of Total          March 31,        % of Total
                                             2013             Revenue             2012             Revenue
Sales and marketing                       $     3,278               9.4 %      $     2,481               7.0 %
Engineering and project management              2,335               6.7 %            2,342               6.6 %
General and administrative                      4,112              11.8 %            4,111              11.6 %

Total                                     $     9,725              27.9 %      $     8,934              25.2 %

Operating expenses increased $0.8 million, or 8.9%, for the third quarter of fiscal 2013 compared to the same period in fiscal 2012. As a percentage of revenue, these expenses increased to 27.9% during the third quarter of fiscal 2013, from 25.2% during the same period last year. The increase in operating expense was partially offset by a one-time benefit of $0.3 million related to the policy change note above.

Our sales and marketing expenses increased $0.8 million in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012, primarily due to higher commissions' expense and increased costs associated with additional sales resources located in China. Our engineering and project management and our general and administrative expenses essentially stayed constant in the third quarter of fiscal 2013 compared to the same period in fiscal 2012.


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PMFG, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements - Unaudited

March 30, 2013

Other Income and Expense. The following summarizes other income and expense (in thousands):

                                                 Three months ended
                                            March 30,          March 31,
                                               2013              2012
           Interest income                  $       12        $         6
           Interest expense                       (148 )             (142 )
           Loss on extinguishment of debt           -                (347 )
           Foreign exchange gain (loss)            (32 )               16
           Other income (expense), net              (1 )              (17 )

           Total other income (expense)     $     (169 )      $      (484 )

For the third quarter of fiscal 2013, total other income and expense was a net expense of $0.2 million compared to $0.5 million in the third quarter of fiscal 2012. In the third quarter of fiscal 2012, we recorded a loss on the extinguishment of debt associated with paying off our outstanding term loan. There was no similar activity in the third quarter of fiscal 2013.

Income Taxes. Our effective income tax rates were 18.3% and (39.1%) for the quarters ended March 30, 2013 and March 31, 2012, respectively. For the third quarter of fiscal 2013, the effective tax rate was impacted by increased profits of our foreign subsidiaries that have a lower relative effective tax rate. For the third quarter of fiscal 2012, the effective tax rate was impacted by permanent differences for research and development credits that were enacted into United States law during the quarter.

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 78% and 91% of our revenue in the quarters ended March 30, 2013 and March 31, 2012, respectively.

The following summarizes Process Products revenue and operating income (in thousands):

                                                  Three months ended
                                              March 30,        March 31,
                                                 2013            2012
           Revenue                            $   27,397      $    32,367
           Operating income                        3,593            4,972
           Operating income as % of revenue         13.1 %           15.4 %

Process Products revenue decreased $5.0 million, or 15.4%, to $27.4 million in the third quarter of fiscal 2013, compared to the third quarter of fiscal 2012. The decrease in the current quarter resulted from lower demand in the United States in early fiscal 2013 for separation and filtration equipment partially offset by increased demand in Asia. Revenue was further impacted by customer-driven delays on certain projects in backlog.


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PMFG, Inc. and Subsidiaries

March 30, 2013

Process Products operating income for the third quarter of fiscal 2013 decreased $1.4 million, or 27.7%, compared to the third quarter of fiscal 2012. The decrease in operating income in the third quarter of fiscal 2013 was primarily a result of decreased revenue and higher warranty expense in the current period. As a percentage of revenue, operating income decreased to 13.1% from 15.4% for the quarters ended March 30, 2013 and March 31, 2012, respectively.

Environmental Systems

The primary product of our Environmental Systems business is SCR Systems. SCR Systems are integrated systems, with instruments, controls and related valves and piping. Our SCR Systems convert nitrogen oxide, or NOx, into nitrogen and water, reducing air pollution and helping our customers comply with environmental regulations. Environmental Systems represented 22% and 9% of our revenue in the quarters ended March 30, 2013 and March 31, 2012, respectively.

The following summarizes Environmental Systems revenue and operating income (in thousands):

                                                  Three months ended
                                              March 30,        March 31,
                                                 2013            2012
           Revenue                            $    7,573      $     3,131
           Operating income                        1,541              351
           Operating income as % of revenue         20.3 %           11.2 %

Environmental Systems revenue increased $4.4 million, or 141.9%, to $7.6 million in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012. The higher revenue resulted from SCR System orders booked in early fiscal 2013 that have accelerated delivery time tables.

Environmental Systems operating income for the third quarter of fiscal 2013 increased $1.2 million compared to the third quarter of fiscal 2012. As a percentage of revenue, operating income increased to 20.3% in the third quarter of fiscal 2013 compared to 11.2%, in the third quarter of fiscal 2012. The increase in operating income as a percentage of revenue is primarily attributable to lower relative selling and engineering expenses at higher levels of revenue.


Table of Contents

PMFG, Inc. and Subsidiaries

March 30, 2013

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