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Cpm Holdings, Inc. (CPM) SEC Filing 10-Q Quarterly report for the period ending Saturday, June 30, 2012

Cpm Holdings, Inc.

CIK: 1512574 Ticker: CPM


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
Commission file number: 333-172207
CPM Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
06-1612494
(I.R.S. Employer
Identification No.)
 
 
 
2975 Airline Circle, Waterloo, Iowa
(Address of principal executive offices)
 
50703
(Zip Code)
(319) 464-8275
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o 
Non-accelerated filer þ
(Do not check if a smaller reporting company)
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at August 14, 2012
Common Stock, $0.001 par value per share
 
936,913 shares
 




CPM Holdings, Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 2012
TABLE OF CONTENTS
 
 
BEGINNING
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.1
 EX-31.2
 EX-32
 

2



CPM Holdings, Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 2012

PART I. Financial Information
Item 1. Financial Statements.
CPM Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands, except per share information)
 
September 30,
2011
 
June 30,
2012
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
81,288

 
$
72,489

Restricted customer deposits
 
26,853

 
30,989

Accounts receivable, net
 
48,570

 
52,259

Inventories
 
54,026

 
75,285

Costs and estimated earnings in excess of billings on uncompleted contracts
 
24,585

 
22,674

Prepaid expenses and other current assets
 
4,004

 
5,533

Deferred taxes
 
1,523

 
1,592

Total current assets
 
240,849

 
260,821

Property, plant and equipment, net
 
17,547

 
16,606

Trademarks
 
54,178

 
53,917

Goodwill
 
140,086

 
137,721

Other intangibles, net
 
58,882

 
48,720

Total assets
 
$
511,542

 
$
517,785

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$

 
$

Accounts payable
 
31,869

 
31,443

Accrued expenses
 
44,401

 
60,782

Billings in excess of costs and estimated earnings on uncompleted contracts
 
59,812

 
51,023

Total current liabilities
 
136,082

 
143,248

Long-term debt, less current portion
 
172,796

 
159,986

Deferred taxes
 
27,233

 
27,876

Other liabilities
 
2,616

 
2,303

Total liabilities
 
338,727

 
333,413

 
 
 
 
 
Commitments and contingencies
 


 

 
 
 
 
 
Equity
 
 
 
 
Parent Company stockholders’ equity
 
 
 
 
Common stock, $.001 par value, authorized shares 1,100,000; shares issued and outstanding 936,913
 
1

 
1

Additional paid-in capital
 
83,105

 
83,382

Retained earnings
 
84,456

 
102,942

Accumulated other comprehensive loss
 
(7,003
)
 
(11,416
)
Total Parent Company stockholders’ equity
 
160,559

 
174,909

Noncontrolling interest
 
12,256

 
9,463

Total equity
 
172,815

 
184,372

Total liabilities and equity
 
$
511,542

 
$
517,785

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3



CPM Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
Three months ended
 
Nine months ended
 
June 30,
 
June 30,
(dollars in thousands)
2011
 
2012
 
2011
 
2012
Net sales
$
129,130

 
$
99,123

 
$
305,554

 
$
336,522

Cost of goods sold
90,055

 
66,500

 
217,205

 
234,898

Gross profit
39,075

 
32,623

 
88,349

 
101,624

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
16,224

 
14,350

 
39,539

 
41,852

Amortization expense
2,668

 
2,625

 
7,977

 
8,068

Management fees
500

 
500

 
1,625

 
2,237

Total operating expenses
19,392

 
17,475

 
49,141

 
52,157

Income from operations
19,683

 
15,148

 
39,208

 
49,467

 
 
 
 
 
 
 
 
Other expense (income)
 
 
 
 
 
 
 
Interest expense
6,174

 
5,095

 
18,176

 
16,749

Interest income
(418
)
 
(593
)
 
(1,585
)
 
(1,912
)
Total other expense
5,756

 
4,502

 
16,591

 
14,837

Income before income taxes
13,927

 
10,646

 
22,617

 
34,630

Income tax expense
4,690

 
3,259

 
7,839

 
13,972

Net income
9,237

 
7,387

 
14,778

 
20,658

Less: Net income attributable to noncontrolling interest
2,425

 
43

 
4,834

 
2,172

Net income attributable to Parent Company
$
6,812

 
$
7,344

 
$
9,944

 
$
18,486

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4



CPM Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity and Comprehensive Income (Loss)
(Unaudited)

 
Parent Company Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Additional Paid-in Capital
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
Parent Company Stockholders' Equity
 
Noncontrolling Interest in Subsidiary
 
 
 
Common Stock
 
 
Retained Earnings
 
 
 
 
Total Equity
(dollars in thousands)
Shares
 
Amount
 
 
 
 
 
 
Balances at September 30, 2010
936,913

 
$
1

 
$
82,478

 
$
67,965

 
$
(5,958
)
 
$
144,486

 
$
4,893

 
$
149,379

Stock-based compensation

 

 
627

 

 

 
627

 

 
627

Comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment

 

 

 

 
(1,045
)
 
(1,045
)
 
377

 
(668
)
Net income

 

 

 
16,491

 

 
16,491

 
6,986

 
23,477

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
15,446

 
7,363

 
22,809

Balances at September 30, 2011
936,913

 
1


83,105


84,456


(7,003
)
 
160,559

 
12,256

 
172,815

Stock-based compensation

 

 
277

 

 

 
277

 

 
277

Dividends

 

 

 

 

 

 
(5,015
)
 
(5,015
)
Comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment

 

 

 

 
(4,413
)
 
(4,413
)
 
50

 
(4,363
)
Net income

 

 

 
18,486

 

 
18,486

 
2,172

 
20,658

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
14,073

 
2,222

 
16,295

Balances at June 30, 2012
936,913

 
$
1

 
$
83,382

 
$
102,942

 
$
(11,416
)
 
$
174,909

 
$
9,463

 
$
184,372

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5



CPM Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine months ended
 
June 30,
(dollars in thousands)
2011
 
2012
Net cash provided by operating activities
$
48,540

 
$
12,692

 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(1,917
)
 
(2,054
)
Proceeds on sales of property, plant and equipment
428

 
129

Net cash used in investing activities
(1,489
)
 
(1,925
)
 
 
 
 
Cash flows from financing activities
 
 
 
Payments of long-term debt

 
(14,262
)
Proceeds from revolving credit facilities

 
82,238

Payments on revolving credit facilities

 
(82,238
)
Payments of dividends

 
(5,015
)
Net cash used in financing activities

 
(19,277
)
Effect of foreign exchange rate changes on cash and cash equivalents
3,301

 
(289
)
Net increase (decrease) in cash and cash equivalents
50,352

 
(8,799
)
 
 
 
 
Cash and cash equivalents
 
 
 
Beginning of period
58,691

 
81,288

End of period
$
109,043

 
$
72,489

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)


1.
Basis of Presentation
The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The interim consolidated financial statements and notes are presented as permitted by the requirements for Quarterly Reports on Form 10-Q.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to such rules and regulations. These interim consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements and related notes for the fiscal year ended September 30, 2011 included on Form 10-K, filed with the SEC.
During the quarter ended June 30, 2012, the Company identified certain errors related to the elimination of intercompany sales that resulted in consolidated net sales and cost of goods sold being overstated. The cumulative impact of the correction was recorded as a reduction in net sales and cost of sales of $8.0 million during the three month and nine month periods ending June 30, 2012, of which $7.3 million was in the Engineered Process System reporting segment. These corrections had no impact on gross profit or net income, and there is no impact on the consolidated balance sheets, equity statements or cash flow statements for any of the prior periods. The Company has evaluated the impact on prior periods under the guidance in ASC 250-10 (SEC Staff Accounting Bulletin No. 99 “Materiality”) and concluded these matters are not material to any of the prior periods.
2.
Description of Business
CPM Holdings, Inc. (the “Company” or “CPM” or “Parent”), is engaged in the design, production and marketing of process systems, equipment and parts and services utilized primarily in the agricultural and food producing/processing industries. The Company’s businesses fall into three reporting segments: Process Equipment, Engineered Process Systems and All Other.
The Process Equipment segment manufactures and sells process machinery and other equipment utilized primarily in the agricultural and food producing/processing industries. Products include the manufacture of mills, flakers, and dryers.
The Engineered Process Systems segment sells engineering, design and layout services along with outsourced process equipment for oilseed processing, biodiesel and edible oil refining industries.
The All Other segment designs, manufactures and sells process machinery for the plastics compounding, two-piece beverage container and other industries.
Operations are worldwide and include production and sales facilities in the United States, the Netherlands, United Kingdom, Germany, Singapore, China, Brazil and Argentina.
3.
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its controlled, majority owned subsidiaries. The Company classifies noncontrolling interest as part of consolidated net income (loss) and includes the accumulated amount of noncontrolling interest as part of equity. Noncontrolling interest primarily relates to the minority shareholder of Wuhan Crown Friendship Edible Oil Engineering Co., Ltd., the Company's joint venture in China. Significant intercompany accounts and transactions have been eliminated in consolidation.

7

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)

Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, restricted customer deposits, accounts receivable, prepaid expenses and other current assets, accounts payable and long-term debt. The carrying values approximated fair value for cash and cash equivalents, restricted customer deposits, accounts receivable, prepaid expenses and other current assets, accounts payable and the revolving credit facility loan because of the short term nature of these instruments. The fair value of the senior notes, as determined by management based on the quoted market price for the same or similar issues of debt (classified as level 2) is approximately $186,000 and $171,000 at September 30, 2011 and June 30, 2012, respectively.
Use of Estimates
The preparation of the Company’s consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (the "FASB") issued ASU 2011-05, Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement - referred to as the statement of comprehensive income - or in two separate, but consecutive, statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts - net income and other comprehensive income, would need to be displayed under either alternative. The new requirements are effective for public entities for fiscal years beginning after December 15, 2011 and interim and annual periods thereafter. The Company believes this pronouncement will not have a material impact on its financial position or results of operations and is currently evaluating the impact on the form and content of the Company's financial statements and related disclosures.
In September 2011, the FASB issued FASB ASU No. 2011-08, “Testing Goodwill for Impairment,” which is now codified under FASB ASC Topic 350, “Intangibles - Goodwill and Other.” This new guidance allows an entity to first assess qualitative factors to evaluate if the existence of events or circumstances leads to a determination that it is necessary to perform the current two-step test. After assessing the totality of events or circumstances, if it is determined it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. Otherwise, the entity is required to perform Step 1 of the impairment test. An entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to Step 1 of the two-step impairment test, and then resume performing the qualitative assessment in any subsequent period. Reporting units with zero or negative carrying amounts continue to be required to perform a qualitative assessment in place of Step 1 of the impairment test. FASB ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company has not elected early adoption and is currently evaluating the impact of this pronouncement on the Company's financial statements and related disclosures. The Company does not expect this pronouncement to have a material impact on the financial statements and related disclosures.
4.
Selected Consolidated Financial Statement Information
Inventories
 
September 30,
2011
 
June 30,
2012
Raw materials
$
13,869

 
$
16,542

Work-in-process
7,412

 
17,450

Finished goods
32,745

 
41,293

 
$
54,026

 
$
75,285


8

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)

Accrued Warranties
 
Twelve months ended September 30, 2011
 
Nine months ended
June 30,
2012
Accrued warranties
 
 
 
Beginning of period
$
2,089

 
$
1,706

Warranty liability assumed in acquisition
345

 

Settlements made
(1,160
)
 
(973
)
Change in liability related to product warranties issued
432

 
1,975

End of period
$
1,706

 
$
2,708


Accrued warranties are included as a component of accrued expenses on the accompanying balance sheets.
Contracts in Progress
 
September 30,
2011
 
June 30,
2012
Costs incurred on uncompleted contracts
$
365,906

 
$
475,337

Estimated earnings on uncompleted contracts
85,011

 
117,795

Less: Billings on contracts in progress
(486,144
)
 
(621,481
)
 
$
(35,227
)
 
$
(28,349
)
These amounts are included in the consolidated financial statements as follows:
 
September 30,
2011
 
June 30,
2012
Costs and estimated earnings in excess of billings on uncompleted contracts
$
24,585

 
$
22,674

Billings in excess of costs and estimated earnings on uncompleted contracts
(59,812
)
 
(51,023
)
 
$
(35,227
)
 
$
(28,349
)
5.
Acquisitions
2011 Acquisition
On September 13, 2011, the Company purchased Kimba Germany GMBH, Cimbria SKET GMBH and a 51% holding in MDV Magdeburg-Dessauer GMBH (altogether referred to as "Sket") for $23,252. Direct acquisition costs totaling $443 in fiscal 2011 and $41 in fiscal 2012 were expensed as incurred. Sket provides engineered solutions and process equipment in preparation, refining and oleochemical processing and compliments the Company's existing businesses by broadening product portfolios, engineering capabilities, application expertise, and worldwide market coverage. The acquisition was funded through available cash. The pro forma impact of the Sket acquisition was not significant to the results of the Company for the fiscal year ended September 30, 2011. The Sket results have been included in the Company’s results of operations since the date of acquisition. The estimated fair value of assets acquired and liabilities assumed are as follows:

9

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)

Cash
 
$
2,952

Accounts receivable
 
7,935

Costs in excess of billings
 
3,641

Property, plant and equipment
 
243

Goodwill
 
14,532

Other intangibles
 
5,794

Accounts payable
 
(5,728
)
Accrued expenses
 
(2,774
)
Billings in excess of costs
 
(1,449
)
Deferred taxes
 
(1,894
)
 
 
$
23,252

The goodwill is not deductible for tax purposes. We believe this acquisition resulted in goodwill as it broadens product portfolios, engineering capabilities, application expertise, and worldwide market coverage. The identifiable other intangibles for Sket include trade names, customer relationships, customer contracts, and software and are amortized over a period of one to ten years with a weighted average useful life of seven years.
6.
Debt
The Company’s debt at September 30, 2011 and June 30, 2012, consists of the following:
 
September 30,
2011
 
June 30,
2012
Senior Notes, net of unamortized discount
$
172,796

 
$
159,986

Revolving credit facility loan

 

 
172,796

 
159,986

Less: Amounts due within one year

 

 
$
172,796

 
$
159,986

In August 2009, the Company issued $200,000 of Senior Notes due September 1, 2014 at 98.101% of par (the “Senior Notes”), resulting in an original issue discount of $3,798. The original issue discount, net of accumulated amortization was $2,139 and $1,524 at September 30, 2011 and June 30, 2012, respectively. The original issue discount is being amortized using the effective interest method over the term of the debt. The Senior Notes bear interest at 10.625% per year and provide for semi-annual interest payments, in arrears, due on March 1 and September 1. All principal will be paid at maturity. The net proceeds from the offering were used to retire the remaining outstanding borrowings on the previous term loan and revolving credit facility, which provided for a term loan of $210,000 and a revolving credit facility up to $30,000.
The Senior Notes are subject to certain covenants and restrictions, such as restrictions on the payment of dividends, incurrence of certain additional indebtedness, issuance of preferred stock or entering into certain merger transactions, as defined by the Senior Notes Offering Memorandum. The Senior Notes are collateralized by a second priority interest in the Company’s U.S. current assets and a first priority interest in substantially all of the Company’s U.S. other assets. The Senior Notes are also guaranteed by the Company’s U.S. subsidiaries.
The Senior Notes contain an optional redemption feature whereby the Company can redeem all or a portion of the Senior Notes, including applicable premiums for early redemptions as defined in the agreement. In addition, the Senior Notes have a change of control provision which gives each holder the right to require the Company to purchase all or a portion of such holders’ Senior Notes upon a change in control, as defined in the agreement, at a purchase price equal to 101% of the principal amount plus accrued interest to the date of purchase.
During 2011, the Company repurchased Senior Notes having a face value of $25,065 in the open market. As a result of the repurchases, the Company recorded a loss of $2,012 which represents the difference between the acquired debt's purchase price of $26,765 and its carrying value of $24,753. This loss is included in interest expense in the

10

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)

consolidated statements of operations. At the time of the repurchases, the Company also wrote off $836 of unamortized deferred financing costs related to the repurchased debt.
During the nine months ended June 30, 2012, the Company repurchased Senior Notes having a face value of $13,425 in the open market. As a result of the repurchases, the Company recorded a loss of $1,000 which represents the difference between the acquired debt's purchase price of $14,262 and its carrying value of $13,262. This loss is included in interest expense in the consolidated statements of operations. At the time of the repurchases, the Company also wrote off $441 of unamortized deferred financing costs related to the repurchased debt.
In November 2009, the Company entered into a Credit Agreement (the “Credit Agreement”) with certain financial institutions which provides for a revolving credit facility consisting of a revolving credit loan and letters of credit in an aggregate amount of up to $14,500, including swing line loans in the principal amount of $5,000. The swing line loans are sub-facilities of the revolving credit facility used for daily fluctuations on borrowings. There were no loans outstanding under the revolving credit facility as of September 30, 2011 and June 30, 2012, respectively. The availability under the facility is subject to a borrowing base, which is based on the eligible receivables, inventory and certain other commitments of the Company’s U.S. subsidiaries. The credit available for borrowing was limited by the borrowing base to $14,500 and $6,253 on September 30, 2011 or June 30, 2012. The Credit Agreement expires on April 20, 2013.
At the Company’s option, borrowings under the revolving credit facility are either Base Rate loans, bearing interest at a rate equal to the greater of (a) the lender’s prime rate (3.25% at June 30, 2012), (b) the LIBOR rate (0.24% at June 30, 2012) plus 1.00% or (c) the federal funds rate (0.09% at June 30, 2012) plus 0.50%; or Eurodollar loans, bearing interest at the adjusted LIBOR rate (0.3% at June 30, 2012). Interest on the Base Rate loans is payable on the last day of each calendar month. Interest on the Eurodollar loans is payable on the last day of each interest period relating to such loan, but not to exceed six months. An applicable margin is added for the Base Rate loans and Eurodollar loans ranging from 2.75% and 4.25%, based on the Company’s fixed charge coverage ratio at the end of a given period, as further defined in the Credit Agreement.
Commitment fees on the revolving credit facility range from 0.625% to 0.75% per year payable quarterly in amounts. Commitment fees on the letters of credit vary, as further defined in the Credit Agreement, and range from 3.75% to 4.25% (or 2.00% if cash collateralized) payable quarterly. Total commitment fees under the revolving credit facility were $41 and $10 for the three month periods ending June 30, 2011, and 2012, respectively, and $100 and $40 for the nine month periods ending June 30, 2011 and 2012, respectively. Outstanding letters of credit were $4,183 and $8,247 at September 30, 2011 and June 30, 2012, respectively. In conjunction with entering into the Credit Agreement in fiscal 2010, the Company paid $914 in costs capitalized as deferred financing fees, consisting of legal, accounting and deal fees directly related to consummation of the Credit Agreement.
Borrowings under the revolving credit facility are subject to certain restrictive financial covenants, including a fixed charge coverage ratio. The Credit Agreement also includes a subjective acceleration clause which permits the financial institution to accelerate the due date of the facility under certain circumstances, including, but not limited to, material adverse effect on the Company’s financial status or otherwise. Borrowings under the Credit Agreement are collateralized by a first priority security interest in substantially all U.S. current assets of the Company and are guaranteed by the Company’s U.S. subsidiaries. The Credit Agreement also requires the Company to maintain all of its U.S. lockbox accounts, disbursement accounts and other operating accounts with the lenders.
7.
Income Taxes
The Company recognizes the financial statement effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. We have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on the Company's effective tax rate in future periods. The Company does not expect a significant change in the liability for unrecognized tax benefits in the next 12 months.
The Company files tax returns as prescribed by tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and foreign jurisdictions. The Company is potentially subject to income tax examinations for the fiscal years 2008 through 2011.

11

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)

8.
Commitments and Contingencies
Environmental Health and Safety Matters
We are subject to a variety of environmental standards imposed by federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air, water and land, the management and disposal of hazardous substances and wastes and the responsibility to investigate and cleanup contaminated sites that are or were owned, leased, operated or used by us or our predecessors. In the opinion of management, the ultimate disposition of matters arising from these environmental standards will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Litigation
The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters, individually and in aggregate, will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
9.
Segment Data
The Company identified three reportable segments: Process Equipment, Engineered Process Systems and All Other. Segment selection was based on the internal organizational structure, management of operations and performance evaluation by the chief operating decision maker.
Corporate and Unallocated includes corporate expenses determined to be nonallocable to the segments, interest income, interest expense and income taxes. Assets included in Corporate and Unallocated principally are cash and cash equivalents, certain prepaid expenses and other current assets, and deferred taxes. Segment allocated assets are primarily accounts receivable, inventories, property, plant and equipment, goodwill and intangible assets, and certain other assets. Reconciling items included in Corporate and Unallocated are created based on accounting differences between segment reporting and the consolidated, external reporting as well as internal allocation methodologies.
Segment detail is summarized as follows:

12

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)

 
 
Process
Equipment
Segment
 
Engineered
Process
Systems
Segment
 
All Other
 
Corporate
and
Unallocated
 
Total
Company
Three months ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
Net sales
 
50,323

 
68,240

 
10,567

 

 
129,130

Income (loss) before income taxes
 
9,511

 
10,415

 
871

 
(6,870
)
 
13,927

Depreciation and amortization
 
699

 
1,941

 
831

 
896

 
4,367

Capital expenditures
 
1,052

 
36

 
19

 

 
1,107

Nine months ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
Net sales
 
120,689

 
153,795

 
31,070

 

 
305,554

Income (loss) before income taxes
 
20,296

 
19,920

 
2,724

 
(20,323
)
 
22,617

Depreciation and amortization
 
2,231

 
5,831

 
2,455

 
2,611

 
13,128

Capital expenditures
 
1,351

 
99

 
153

 
314

 
1,917

Three months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
Net sales
 
43,723

 
39,969

 
15,431

 

 
99,123

Income (loss) before income taxes
 
9,105

 
4,533

 
3,134

 
(6,126
)
 
10,646

Depreciation and amortization
 
620

 
2,376

 
360

 
1,180

 
4,536

Capital expenditures
 
524

 
116

 
274

 

 
914

Nine months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
Net sales
 
123,600

 
170,910

 
42,012

 

 
336,522

Income (loss) before income taxes
 
24,881

 
22,280

 
6,915

 
(19,446
)
 
34,630

Depreciation and amortization
 
1,860

 
7,324

 
1,068

 
2,505

 
12,757

Capital expenditures
 
1,254

 
321

 
468

 
11

 
2,054

Total assets at June 30, 2012
 
225,785

 
231,058

 
32,040

 
28,902

 
517,785

10.
Related Party Transactions
The Company has a management advisory agreement with GGEP Management, L.L.C. and GGEP Management Ltd. (“Gilbert”) which are related parties. The agreement requires an annual management fee of up to $2,500 per year for management services provided, plus certain fees and expenses. Expense under the management agreement was $500 for the three month periods ended June 30, 2011 and 2012, respectively and $1,625 and $2,237 for the nine month periods ended June 30, 2011 and 2012 respectively. The Company had $500 of management fees included in current liabilities at September 30, 2011 and June 30, 2012, respectively.

13

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)

11.
Guarantor Subsidiary Financial Information
The Senior Notes issued in August 2009 (Note 6) have been guaranteed, fully and unconditionally, except for customary release provisions, on a joint and several basis, by its 100% owned U.S. domestic subsidiaries. The following condensed consolidating balance sheets at September 30, 2011 and June 30, 2012, the condensed consolidating statements of operations for the three and nine month periods ended June 30, 2011 and 2012, and the condensed consolidating statements of cash flows for the nine month periods ended June 30, 2011 and 2012 have been prepared in accordance with the requirements for presentation of Rule 3-10(f) of Regulation S-X promulgated under the Securities Act. These condensed consolidating statements reflect CPM Holdings, Inc. as the issuer of the Senior Notes, the Company’s wholly owned U.S. domestic subsidiaries as the guarantors presented on a combined basis, the Company’s non-guarantor subsidiaries presented on a combined basis, and consolidating and eliminating adjustments, to combine such entities on a consolidated basis.
During the quarter ended June 30, 2012, the Company made immaterial corrections to prior period condensed consolidating balance sheets and condensed consolidating statements of cash flows to conform with current period presentation. In the September 30, 2011 condensed consolidating balance sheets, the corrections consisted of a change in the presentation of long-term deferred taxes and income taxes receivable of the Parent Issuer. In the condensed consolidating statements of cash flows for the nine months ended June 30, 2011, the Company corrected the classification of cash dividends received by the Guarantor Subsidiaries from the Non-Guarantor subsidiaries to present them as cash flows from operating activities of the Guarantor Subsidiaries. These amounts were previously classified as cash flows from financing activities of the Guarantor Subsidiaries. These corrections had no impact on the Company's consolidated financial statements. The Company has concluded that these matters are immaterial to the guarantor subsidiary financial statement information presented in current and prior periods.




14

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)


Condensed Consolidating Balance Sheet
September 30, 2011
(dollars in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
564

 
$
80,724

 
$

 
$
81,288

Restricted customer deposits
 

 
4,183

 
22,670

 

 
26,853

Accounts receivable, net
 
2,260

 
58,707

 
36,184

 
(48,581
)
 
48,570

Inventories
 

 
25,635

 
28,391

 

 
54,026

Costs and estimated earnings in excess of billings on uncompleted contracts
 

 
4,717

 
19,868

 

 
24,585

Prepaid expenses and other current assets
 
2,202

 
1,296

 
2,708

 
(2,202
)
 
4,004

Deferred taxes
 

 
1,350

 
173

 

 
1,523

Total current assets
 
4,462

 
96,452

 
190,718

 
(50,783
)
 
240,849

Property, plant and equipment, net
 

 
11,825

 
5,722

 

 
17,547

Investment in subsidiaries
 
323,506

 
65,968

 

 
(389,474
)
 

Deferred taxes
 
1,187

 

 

 
(1,187
)
 

Trademarks
 

 
53,778

 
400

 

 
54,178

Goodwill
 

 
116,693

 
23,393

 

 
140,086

Other intangibles, net
 
5,748

 
45,485

 
7,649

 

 
58,882

Total assets
 
$
334,903

 
$
390,201

 
$
227,882

 
$
(441,444
)
 
$
511,542

Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$

 
$
16,540

 
$
63,910

 
$
(48,581
)
 
$
31,869

Accrued expenses
 
1,548

 
20,055

 
25,000

 
(2,202
)
 
44,401

Billings in excess of costs and estimated earnings on uncompleted contracts
 

 
12,264

 
47,548

 

 
59,812

Total current liabilities
 
1,548

 
48,859

 
136,458

 
(50,783
)
 
136,082

Long-term debt
 
172,796

 

 

 

 
172,796

Deferred taxes
 

 
15,220

 
13,200

 
(1,187
)
 
27,233

Other liabilities
 

 
2,616

 

 

 
2,616

Total liabilities
 
174,344

 
66,695

 
149,658

 
(51,970
)
 
338,727

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
Total Parent Company stockholders’ equity
 
160,559

 
323,506

 
65,968

 
(389,474
)
 
160,559

Noncontrolling interest
 

 

 
12,256

 

 
12,256

Total equity
 
160,559

 
323,506

 
78,224

 
(389,474
)
 
172,815

Total liabilities and equity
 
$
334,903

 
$
390,201

 
$
227,882

 
$
(441,444
)
 
$
511,542


15

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)


Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2011
(dollars in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$

 
$
51,493

 
$
84,171

 
$
(6,534
)
 
$
129,130

Cost of goods sold
 

 
36,429

 
60,160

 
(6,534
)
 
90,055

Gross profit
 

 
15,064

 
24,011

 

 
39,075

Operating expenses
 
77

 
7,174

 
12,141

 

 
19,392

Income (loss) from operations
 
(77
)
 
7,890

 
11,870

 

 
19,683

Interest expense (income), net
 
6,071

 
94

 
(409
)
 

 
5,756

Income (loss) before income taxes
 
(6,148
)
 
7,796

 
12,279

 

 
13,927

Income tax expense (benefit)
 
(2,237
)
 
2,724

 
4,203

 

 
4,690

Income (loss) before equity in income (loss) of subsidiaries
 
(3,911
)
 
5,072

 
8,076

 

 
9,237

Equity in income (loss) of subsidiaries
 
10,723

 
5,651

 

 
(16,374
)
 

Net income (loss)
 
6,812

 
10,723

 
8,076

 
(16,374
)
 
9,237

Less: Net income attributable to noncontrolling interest
 

 

 
2,425

 

 
2,425

Net income (loss) attributable to Parent Company
 
$
6,812

 
$
10,723

 
$
5,651

 
$
(16,374
)
 
$
6,812



Condensed Consolidating Statement of Operations
Nine Months Ended June 30, 2011
(dollars in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$

 
$
125,606

 
$
199,066

 
$
(19,118
)
 
$
305,554

Cost of goods sold
 

 
90,333

 
145,990

 
(19,118
)
 
217,205

Gross profit
 

 
35,273

 
53,076

 

 
88,349

Operating expenses
 
232

 
22,457

 
26,452

 

 
49,141

Income (loss) from operations
 
(232
)
 
12,816

 
26,624

 

 
39,208

Interest expense (income), net
 
18,286

 
(151
)
 
(1,544
)
 

 
16,591

Income (loss) before income taxes
 
(18,518
)
 
12,967

 
28,168

 

 
22,617

Income tax expense (benefit)
 
(6,536
)
 
4,658

 
9,717

 

 
7,839

Income (loss) before equity in income (loss) of subsidiaries
 
(11,982
)
 
8,309

 
18,451

 

 
14,778

Equity in income (loss) of subsidiaries
 
21,926

 
13,617

 

 
(35,543
)
 

Net income (loss)
 
9,944

 
21,926

 
18,451

 
(35,543
)
 
14,778

Less: Net income attributable to noncontrolling interest
 

 

 
4,834

 

 
4,834

Net income (loss) attributable to Parent Company
 
$
9,944

 
$
21,926

 
$
13,617

 
$
(35,543
)
 
$
9,944



16

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)

Condensed Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2011
(dollars in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
 
$
(18,519
)
 
$
42,332

 
$
33,824

 
$
(9,097
)
 
$
48,540

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
 

 
(1,280
)
 
(637
)
 

 
(1,917
)
Proceeds on sales of property, plant, and equipment
 

 
349

 
79

 

 
428

Net cash used in investing activities
 

 
(931
)
 
(558
)
 

 
(1,489
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
Proceeds from (payments of) dividends
 

 

 
(9,097
)
 
9,097

 

Advances from (to) consolidated subsidiaries
 
18,519

 
(22,845
)
 
4,326

 

 

Net cash provided by (used in) financing activities
 
18,519

 
(22,845
)
 
(4,771
)
 
9,097

 

Effect of foreign exchange rate changes on cash and cash equivalents
 

 

 
3,301

 

 
3,301

Net increase in cash and cash equivalents
 

 
18,556

 
31,796

 

 
50,352

Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
Beginning of period
 

 
2,930

 
55,761

 

 
58,691

End of period
 
$

 
$
21,486

 
$
87,557

 
$

 
$
109,043


17

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)


Condensed Consolidating Balance Sheet
June 30, 2012
(dollars in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$

 
$
21,236

 
$
51,253

 
$

 
$
72,489

Restricted customer deposits
 

 
438

 
30,551

 

 
30,989

Accounts receivable, net
 
2,260

 
60,515

 
55,717

 
(66,233
)
 
52,259

Inventories
 

 
40,587

 
34,698

 

 
75,285

Costs and estimated earnings in excess of billings on uncompleted contracts
 

 
4,730

 
17,944

 

 
22,674

Prepaid expenses and other current assets
 
8,165

 
984

 
4,549

 
(8,165
)
 
5,533

Deferred taxes
 

 
1,419

 
173

 

 
1,592

Total current assets
 
10,425

 
129,909

 
194,885

 
(74,398
)
 
260,821

Property, plant and equipment, net
 

 
11,170

 
5,436

 

 
16,606

Investment in subsidiaries
 
325,321

 
68,264

 

 
(393,585
)
 

Deferred taxes
 
1,187

 

 

 
(1,187
)
 

Trademarks
 

 
53,514

 
403

 

 
53,917

Goodwill
 

 
115,030

 
22,691

 

 
137,721

Other intangibles, net
 
3,924

 
39,049

 
5,747

 

 
48,720

Total assets
 
$
340,857

 
$
416,936

 
$
229,162

 
$
(469,170
)
 
$
517,785

Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$

 
$

 
$

 
$

 
$

Accounts payable
 

 
34,025

 
63,651

 
(66,233
)
 
31,443

Accrued expenses
 
5,962

 
27,992

 
34,993

 
(8,165
)
 
60,782

Billings in excess of costs and estimated earnings on uncompleted contracts
 

 
11,350

 
39,673

 

 
51,023

Total current liabilities
 
5,962

 
73,367

 
138,317

 
(74,398
)
 
143,248

Long-term debt, net of current portion
 
159,986

 

 

 

 
159,986

Deferred taxes
 

 
15,945

 
13,118

 
(1,187
)
 
27,876

Other liabilities
 

 
2,303

 

 

 
2,303

Total liabilities
 
165,948

 
91,615

 
151,435

 
(75,585
)
 
333,413

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
Total Parent Company stockholders’ equity
 
174,909

 
325,321

 
68,264

 
(393,585
)
 
174,909

Noncontrolling interest
 

 

 
9,463

 

 
9,463

Total equity
 
174,909

 
325,321

 
77,727

 
(393,585
)
 
184,372

Total liabilities and equity
 
$
340,857

 
$
416,936

 
$
229,162

 
$
(469,170
)
 
$
517,785


18

CPM Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(dollars in thousands, except per share information)


Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2012

(dollars in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$

 
$
50,178

 
$
67,949

 
$
(19,004
)
 
$
99,123

Cost of goods sold
 

 
35,254

 
50,250

 
(19,004
)
 
66,500

Gross profit
 

 
14,924

 
17,699

 

 
32,623

Operating expenses
 
92

 
8,546

 
8,837

 

 
17,475

Income (loss) from operations
 
(92
)
 
6,378

 
8,862

 

 
15,148

Interest expense (income), net
 
5,000

 
71

 
(569
)
 

 
4,502

Income (loss) before income taxes
 
(5,092
)
 
6,307

 
9,431

 

 
10,646

Income tax expense (benefit)
 
(1,818
)
 
1,440

 
3,637

 

 
3,259

Income (loss) before equity in income (loss) of subsidiaries
 
(3,274
)
 
4,867

 
5,794

 

 
7,387

Equity in income (loss) of subsidiaries
 
10,618

 
5,751

 

 
(16,369
)
 

Net income (loss)
 
7,344

 
10,618

 
5,794

 
(16,369
)
 
7,387

Less: Net income attributable to noncontrolling interest
 

 

 
43

 

 
43

Net income (loss) attributable to Parent Company
 
$
7,344

 
$
10,618

 
$
5,751

 
$
(16,369
)
 
$
7,344



Condensed Consolidating Statement of Operations
Nine Months Ended June 30, 2012
(dollars in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$

 
$
145,044

 
$
221,014

 
$
(29,536
)
 
$
336,522

Cost of goods sold
 

 
103,614

 
160,820

 
(29,536
)
 
234,898

Gross profit
 

 
41,430

 
60,194

 

 
101,624

Operating expenses
 
277

 
24,075

 
27,805

 

 
52,157

Income (loss) from operations
 
(277
)
 
17,355

 
32,389

 

 
49,467

Interest expense (income), net
 
16,427

 
234

 
(1,824
)
 

 
14,837

Income (loss) before income taxes
 
(16,704
)
 
17,121

 
34,213

 

 
34,630

Income tax expense (benefit)
 
(5,963
)
 
6,080

 
13,855

 

 
13,972

Income (loss) before equity in income (loss) of subsidiaries
 
(10,741
)
 
11,041

 
20,358