10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 29, 2014

OR

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

For the transition period from                      to                     

Commission File Number 001-34156

PMFG, INC.

(Exact name of registrant as specified in its charter)

Delaware	51-0661574
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(Address of principal executive offices)

(214) 357-6181

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	¨	Accelerated filer	þ
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

The number of shares of the registrant’s common stock outstanding on May 1, 2014, was 21,094,530.

TABLE OF CONTENTS

	Page Number
Forward-Looking Statements		3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 29, 2014 (unaudited) and June 29, 2013		4
Unaudited Consolidated Statements of Operations for the three and nine months ended March  29, 2014 and March 30, 2013		5
Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended March  29, 2014 and March 30, 2013		6
Unaudited Consolidated Statement of Equity for the nine months ended March 29, 2014		7
Unaudited Consolidated Statements of Cash Flows for the nine months ended March  29, 2014 and March 30, 2013		8
Notes to Consolidated Financial Statements (unaudited)		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		40
Item 4. Controls and Procedures		40
PART II: OTHER INFORMATION
Item 1. Legal Proceedings		41
Item 1A. Risk Factors		41
Item 6. Exhibits		42
SIGNATURES		43

2

FORWARD-LOOKING STATEMENTS

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

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

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

• changes in current environmental legislation or regulations;

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

• changes in competition;

• changes in demand for our products;

• our ability to identify and execute on growth and market opportunities, including through acquisitions and strategic partnerships;

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

• risks associated with our product warranties; and

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

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with the Securities and Exchange Commission (the “SEC”), including the information in “Item 1A. Risk Factors” of Part I to our Annual Report on Form 10-K for the year ended June 29, 2013 and Part II of this Report. There may be other factors that may cause our actual results to differ materially from the forward-looking statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. We undertake no obligation to publicly update or revise forward-looking statements, except to the extent required by law.

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PMFG, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	March 29, 2014			June 29, 2013
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	42,573		$	53,020
Restricted cash		4,919			5,029
Accounts receivable - trade, net of allowance for doubtful accounts of $310 at March 29, 2014 and $300 at June 29, 2013		29,473			22,509
Inventories, net		10,994			6,488
Costs and earnings in excess of billings on uncompleted contracts		19,119			16,544
Income taxes receivable		1,450			1,152
Deferred income taxes		304			304
Other current assets		4,949			3,427
Total current assets		113,781			108,473
Property, plant and equipment, net		31,348			24,031
Intangible assets, net		18,444			16,180
Goodwill		35,919			30,429
Other assets		838			998
Total assets	$	200,330		$	180,111
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	21,736		$	14,899
Current maturities of long-term debt		2,210			—
Billings in excess of costs and earnings on uncompleted contracts		12,019			6,277
Commissions payable		1,575			1,763
Income taxes payable		1,089			339
Accrued product warranties		2,462			2,241
Customer deposits		2,946			2,566
Accrued liabilities and other		7,957			5,386
Total current liabilities		51,994			33,471
Long-term debt		15,160			8,719
Deferred income taxes		4,136			4,135
Other long-term liabilities		1,835			1,900
Commitments and contingencies
Preferred stock – authorized, 5,000,000 shares of $0.01 par value; no shares outstanding at March 29, 2014 or June 29, 2013		—			—
Stockholders’ equity:
Common stock – authorized, 50,000,000 shares of $0.01 par value; issued and outstanding, 21,094,530 and 20,966,426 shares at March 29, 2014 and June 29, 2013, respectively		211			210
Additional paid-in capital		97,388			96,634
Accumulated other comprehensive loss		(761	)		(2,004	)
Retained earnings		24,738			33,114
Total PMFG, Inc. stockholders’ equity		121,576			127,954
Noncontrolling interest		5,629			3,932
Total equity		127,205			131,886
Total liabilities and equity	$	200,330		$	180,111

See accompanying notes to consolidated financial statements.

4

PMFG, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

	Three months ended						Nine months ended
	March 29,			March 30,			March 29,			March 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Revenue	$	32,273		$	34,970		$	90,958		$	99,399
Cost of goods sold		24,231			24,223			65,080			65,731
Gross profit		8,042			10,747			25,878			33,668
Operating expenses:
Sales and marketing		3,489			3,278			10,127			10,282
Engineering and project management		2,726			2,335			7,624			7,036
General and administrative		5,444			4,112			14,979			14,008
		11,659			9,725			32,730			31,326
Operating income (loss)		(3,617	)		1,022			(6,852	)		2,342
Other income (expense):
Interest income		31			12			63			29
Interest expense		(436	)		(148	)		(1,142	)		(463	)
Loss on extinguishment of debt		—			—			—			(291	)
Foreign exchange gain (loss)		(194	)		(32	)		(666	)		3
Other income (loss)		13			(1	)		84			33
		(586	)		(169	)		(1,661	)		(689	)
Income (loss) before income taxes		(4,203	)		853			(8,513	)		1,653
Income tax expense (benefit)		439			(156	)		254			(367	)
Net income (loss)	$	(3,764	)	$	697		$	(8,259	)	$	1,286
Net income attributable to noncontrolling interest		17			152			117			584
Net income (loss) attributable to PMFG, Inc.	$	(3,781	)	$	545		$	(8,376	)	$	702
Weighted-average common shares outstanding:
Basic		21,097			20,920			21,092			20,919
Diluted		21,097			20,936			21,092			20,935
Basic income (loss) per common share	$	(0.18	)	$	0.03		$	(0.40	)	$	0.03
Diluted income (loss) per common share	$	(0.18	)	$	0.03		$	(0.40	)	$	0.03

See accompanying notes to consolidated financial statements.

5

PMFG, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

	Three months ended						Nine months ended
	March 29,			March 30,			March 29,			March 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Net income (loss)	$	(3,764	)	$	697		$	(8,259	)	$	1,286
Other comprehensive income (loss):
Foreign currency translation adjustment		(99	)		(749	)		1,216			(97	)
Other comprehensive income (loss)		(99	)		(749	)		1,216			(97	)
Comprehensive income (loss)		(3,863	)		(52	)		(7,043	)		1,189
Net income attributable to noncontrolling interest		17			152			117			584
Other comprehensive loss:
Foreign currency translation adjustment		(67	)		(2	)		(27	)		—
Comprehensive income (loss) attributable to noncontrolling interest		(50	)		150			90			584
Comprehensive income (loss) attributable to PMFG, Inc.	$	(3,813	)	$	(202	)	$	(7,133	)	$	605

See accompanying notes to consolidated financial statements

6

PMFG, Inc. and Subsidiaries

Consolidated Statement of Equity

(In thousands)

(unaudited)

										Accumulated
					Additional					Other			Total			Non
	Common Stock				Paid-in		Retained			Comprehensive			Stockholders’			Controlling			Total
	Shares		Amount		Capital		Earnings			Income (Loss)			Equity			Interest			Equity
Balance at June 29, 2013		20,966	$	210	$	96,634	$	33,114		$	(2,004	)	$	127,954		$	3,932		$	131,886
Net loss		—		—		—		(8,376	)		—			(8,376	)		117			(8,259	)
Foreign currency translation adjustment		—		—		—		—			1,243			1,243			(27	)		1,216
Stock grants, net of forfeitures		128		1		754		—			—			755			—			755
Equity contribution from noncontrolling interest in subsidiary		—		—		—		—			—			—			1,607			1,607
Balance at March 29, 2014		21,094	$	211	$	97,388	$	24,738		$	(761	)	$	121,576		$	5,629		$	127,205

See accompanying notes to consolidated financial statements

7

PMFG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	Nine months ended
	March 29,			March 30,
	2014			2013
	(unaudited)
Cash flows from operating activities:
Net income (loss)	$	(8,259	)	$	1,286
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of business acquisition:
Depreciation and amortization		1,851			1,926
Amortization of deferred finance charges		184			132
Stock-based compensation		755			460
Bad debt expense		64			1,008
Inventory valuation reserve		(65	)		19
Provision for warranty expense		726			1,666
Loss on extinguishment of debt		—			291
Gain on disposal of property		(325	)		(74	)
Foreign currency exchange gain (loss)		666			(3	)
Change in fair value of interest rate swap		99			—
Changes in operating assets and liabilities, net of business acquisition:
Accounts receivable		(5,024	)		9,894
Inventories		(4,353	)		(693	)
Costs and earnings in excess of billings on uncompleted contracts		(2,193	)		(3,243	)
Other current assets		(1,617	)		(44	)
Accounts payable		6,438			459
Billings in excess of costs and earnings on uncompleted contracts		4,958			(2,330	)
Commissions payable		(188	)		341
Income taxes		452			1,775
Product warranties		(705	)		(1,466	)
Accrued liabilities and other		1,012			(1,644	)
Net cash provided by (used in) operating activities:		(5,524	)		9,760
Cash flows from investing activities:
Increase in restricted cash		(6	)		(422	)
Purchases of property and equipment		(9,172	)		(9,912	)
Net proceeds from sale of property		521			135
Business acquisition, net of cash received		(8,891	)		(1,363	)
Payments of deferred consideration		(37	)		—
Net cash used in investing activities		(17,585	)		(11,562	)
Cash flows from financing activities:
Payment of long-term debt		(533	)		—
Payment of debt issuance costs		—			(963	)
Proceeds from short-term debt		1,634			—
Proceeds from long-term debt		9,311			5,129
Equity contribution from noncontrolling interest		1,607			2,000
Net cash provided by financing activities		12,019			6,166

Consolidated Statements of Cash Flows continued on next page

8

PMFG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

	Nine months ended
	March 29,			March 30,
	2014			2013
	(unaudited)
Effect of exchange rate changes on cash and cash equivalents		643			85
Net (decrease) increase in cash and cash equivalents		(10,447	)		4,449
Cash and cash equivalents at beginning of period		53,020			52,286
Cash and cash equivalents at end of period	$	42,573		$	56,735
Supplemental information on cash flow:
Income tax refunds received	$	399		$	2,475
Interest paid	$	908		$	442

See accompanying notes to consolidated financial statements

9

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of PMFG, Inc. and subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. References to “Company,” “we,” “us” and “our” refer to PMFG, Inc. and its subsidiaries. The consolidated financial statements of the Company as of March 29, 2014 and for the three and nine months ended March 29, 2014 and March 30, 2013 are unaudited and, in the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations of the Company for the interim periods have been included and are of a normal recurring nature. The results of operations for such interim periods are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended June 29, 2013.

Each of the Company’s interim reporting periods ends on the Saturday closest to the last day of the corresponding quarterly calendar period. References to “fiscal 2014” and “fiscal 2013” refer to fiscal years ended June 28, 2014 and June 29, 2013, respectively. The third quarters of fiscal 2014 and fiscal 2013 ended on March 29, 2014 and March 30, 2013, respectively.

Basis of Consolidation

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

Cash and Cash Equivalents

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

	March 29, 2014
Domestic	$	23,090
International		24,402
	$	47,492

The Company maintains cash balances in bank accounts that normally exceed Federal Deposit Insurance Corporation insured limits. As of March 29, 2014, cash held in banks in the United States exceeded federally insured limits by $21.2 million. The Company has not experienced any losses related to this cash concentration.

10

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

The Company had restricted cash balances of $4.9 million and $5.0 million as of March 29, 2014 and June 29, 2013, respectively. Foreign restricted cash balances were $4.9 million and $4.7 million as of March 29, 2014 and June 29, 2013, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the ordinary course of business.

Accounts Receivable

The Company’s accounts receivable are due from companies in various industries. Credit is extended based on an evaluation of the customer’s financial condition. Generally, collateral is not required. 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 for doubtful accounts based on a specific identification, taking into consideration a number of factors, including the length of time the accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and the condition of the industry and the economy as a whole. The Company writes off accounts receivable when they are deemed to be uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts in the period the payment is received.

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

	Nine months ended
	March 29,			March 30,
	2014			2013
Balance at beginning of period	$	300		$	650
Bad debt expense		64			1,008
Acquired - CCA		26			—
Accounts written off		(80	)		(1,358	)
Balance at end of period	$	310		$	300

Inventories

The Company values its inventories using the lower of weighted average cost or market. The Company regularly reviews the value of inventories on hand, using specific aging categories, and records a provision for obsolete and slow-moving inventory based on historical and estimated future usage. In assessing the ultimate realization of its inventory, the Company is required to make judgments as to future demand requirements. As actual future demand or market conditions may vary from those projected by the Company, adjustments to inventory valuations may be required.

Property, Plant and Equipment

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

Buildings and improvements	5 - 40 years
Equipment	3 - 10 years
Furniture and fixtures	3 - 15 years

11

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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

Long-Lived Assets

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

Goodwill and Other Intangible Assets

Goodwill represents the difference between the purchase price and the fair value of the net assets acquired upon acquisition. Goodwill is not amortized, however, it is measured at the reporting unit level to test for impairment annually, in the fourth quarter, or more frequently if conditions indicate an earlier review is necessary. A discounted future cash flow analysis is primarily used to determine whether impairment exists. If the fair value of a reporting unit is less than the carrying amount, then the Company writes down goodwill to its estimated fair value.

Intangible assets subject to amortization include licensing agreements, customer relationships and acquired sales order backlog. These intangible assets are amortized over their estimated useful lives based on a pattern in which the economic benefit of the respective intangible asset is realized. Intangible assets considered to have indefinite lives include trade names and design guidelines.

Fair Value of Financial Instruments

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

Revenue Recognition

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

The Company provides certain products under long-term, generally fixed-priced, contracts that may extend over multiple financial periods, where revenue and cost of sales are recognized in accordance with accounting rules relating to construction-type and production-type contracts. Amounts recognized in revenue are calculated using the percentage of cost completed (i.e., cumulative cost incurred to date in comparison to the estimated total cost at completion). This method requires the Company to make estimates regarding the total costs of the project at completion, which impacts the amount of gross margin the Company recognizes in each reporting period. Changes in estimated total costs are reflected in the computation of percentage-of-completion when such changes are identified and can be reasonably estimated. Change orders affecting the contract amount are considered only after receipt of a legally binding agreement. Incremental costs related to change orders are included in the estimate of total costs upon the earlier of receipt of the change order or the Company’s committed purchase obligation. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract.

12

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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

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

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

Pre-contract, Start-up and Commissioning Costs

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

Warranty Costs

The Company provides warranties for specific products during a defined period of time, generally less than 18 months after shipment of the product. Warranties cover the failure of a product to perform after it has been placed in service. The Company reserves for estimated future warranty costs in the period in which the revenue is recognized based on historical experience, expectation of future conditions, and the extent of concurrent supplier warranties in place. Warranty costs are included in “cost of goods sold” in the Consolidated Statements of Operations.

Income Taxes

The Company utilizes the asset and liability approach in its reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income tax related interest and penalties are included in income tax expense. The Company recognizes in its financial statements the impact of a tax position taken or expected to be taken in a tax return, if that position is “more likely than not” of being sustained upon examination by the relevant taxing authority, based on the technical merits of the position.

13

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

The Company is required to estimate income taxes in each jurisdiction in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In the event that actual results differ from these estimates, the Company’s provision for income taxes could be materially impacted.

For the nine months ended March 29, 2014, income tax expense was 3.0% of the loss before income taxes. The rate varies from the statutory rate because of the blend of taxable income in some state and foreign taxing jurisdictions and permanent differences and taxable losses in the United States for which no tax benefit has been recognized. At March 29, 2014, the Company had $5.1 million of operating loss carry forwards primarily in the United States available for carryover to future periods, subject to certain limitations and expiring beginning in fiscal 2032. A valuation allowance of $1.3 million has been established to reduce the computed benefits to the estimated future realization of the tax related benefit.

Earnings (Loss) Per Common Share

The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable to PMFG, Inc. stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share include the dilutive effect of stock options, restricted stock units and warrants granted using the treasury stock method. For the three and nine months ended March 29, 2014, 72,339 restricted stock units with performance and service based restrictions were omitted from the calculation of dilutive securities because they were anti-dilutive. Options to acquire 37,200 shares of common stock were omitted from the calculation of dilutive securities for the three and nine months ended March 29, 2014 because they were anti-dilutive. Warrants to acquire 839,063 shares of common stock were omitted from the calculation of dilutive securities for the three and nine months ended March 29, 2014 and the three and nine months ended March 30, 2013 because they were anti-dilutive. The warrants entitle the holders to purchase common stock for $10.56 per share, through a cashless exercise. The warrants expire on September 4, 2014.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

14

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

2. ACQUISITIONS

On March 28, 2014, the Company acquired substantially all of the assets of Combustion Components Associates, Inc. (“CCA”), a leading provider of in-furnace and post-combustion control technologies. CCA technology is used to improve efficiency and reduce emissions at utility power plants, pulp and paper mills, chemical plants, oil refineries and other industrial facilities. The purchase price was approximately $8.9 million in cash plus performance-based contingent payments. Additional cash consideration will be paid if the Company recognizes revenue from certain customer projects specified in the purchase agreement. The contingent payment is 5% of the aggregate revenue recognized by the Company in connection with the specified projects. The preliminary allocation of consideration paid for the acquisition includes $0.6 million of contingent liabilities reported in current liabilities.

The Company funded the purchase of CCA with cash on hand. The assets acquired and liabilities assumed, including a preliminary allocation of purchase price, have been included in the Consolidated Balance Sheet as of March 29, 2014. The financial results of the acquisition will be included in the Environmental Systems segment in future periods.

The following table summarizes the consideration paid for the CCA acquisition and presents the preliminary allocation of these amounts to the net tangible and identifiable intangible assets based on their estimated fair values as of the respective acquisition dates. This allocation requires the significant use of estimates and is based on the information that was available to management at the time these condensed consolidated financial statements were prepared.

Current assets	$	2,444
Property, plant and equipment		325
Identifiable intangible assets		2,760
Goodwill		5,490
Total assets acquired	$	11,019
Current liabilities	$	(2,128	)
Net assets acquired	$	8,891

The Company determined the purchase price allocation for the acquisition based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed. The fair value of the assets acquired and liabilities assumed in the acquisition remain subject to adjustment.

Acquired intangible assets of $2.8 million consisted of customer projects currently in backlog, customer relationships, and trade names and design guidelines. The amortization period for these intangible assets ranges from 6 months to 10 years. As the acquisition was completed on March 28, 2014, no amortization expense related to these intangible assets was recognized during the three months ended March 29, 2014.

The acquisition of CCA extends the Company’s ability to deliver a broader portfolio of combustion and air pollution products and services to commercial, industrial and utility power-generation customers both domestically and internationally. The goodwill associated with the acquisition will be deductible for tax purposes.

The following unaudited pro forma information has been provided for illustrative purposes only and is not necessarily indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor are they necessarily indicative of future results.

15

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

2. ACQUISITIONS - CONTINUED

	Three months ended					Nine months ended
	March 29, 2014			March 30, 2013		March 29, 2014			March 30, 2013
Revenue	$	34,973		$	38,270	$	100,557		$	108,099
Net income (loss)		(2,968	)		789		(7,162	)		1,588
Net income (loss) attributable to PMFG, Inc		(2,985	)		637		(7,279	)		1,004
Basic earnings per common share	$	(0.14	)	$	0.03	$	(0.35	)	$	0.05
Diluted earnings per common share	$	(0.14	)	$	0.03	$	(0.35	)	$	0.05

The pro forma combined results for the three and nine months ended March 29, 2014 and March 30, 2013 have been prepared by adjusting the Company’s historical results to include the acquisition as if it occurred on July 1, 2012. These pro forma combined historical results were then adjusted for an increase in amortization expense due to the incremental intangible assets recorded related to the acquisition. The pro forma results of operations also include adjustments to reflect the impact of $0.7 million of acquisition related costs as of July 1, 2012. The pro forma results do not include any adjustments to eliminate the impact of cost savings or other synergies that may result from the acquisition. As noted above, the pro forma results of operations do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future.

The Company recognized approximately $576,000 of acquisition-related costs that were expensed during the three months ended March 29, 2014. These acquisition costs are included in general and administrative expenses in the condensed Consolidated Statements of Operations for the three months ended March 29, 2014.

3. INVENTORIES

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

	March 29,			June 29,
	2014			2013
Raw materials	$	6,676			3,729
Work in progress		4,009			2,516
Finished goods		406			493
Acquired - CCA		88			—
		11,179			6,738
Reserve for obsolete and slow-moving inventory		(185	)		(250	)
	$	10,994		$	6,488

16

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

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

	March 29,			June 29,
	2014			2013
Costs incurred on uncompleted contracts and estimated earnings	$	100,599		$	70,389
Less billings to date		(93,499	)		(60,122	)
	$	7,100		$	10,267

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

	March 29,			June 29,
	2014			2013
Costs and earnings in excess of billings on uncompleted contracts	$	19,119		$	16,544
Billings in excess of costs and earnings on uncompleted contracts		(12,019	)		(6,277	)
	$	7,100		$	10,267

5. GOODWILL AND OTHER INTANGIBLE ASSETS

The reporting units used in assessing goodwill are the same as the Company’s reportable segments, Process Products and Environmental Systems. The goodwill acquired with the purchase of CCA is allocated and assessed at the Environmental Systems segment, and the remaining goodwill is assessed at the Process Products segment.

Goodwill

The following table shows the activity and balances related to goodwill from June 30, 2013 through March 29, 2014 (in thousands):

Balance as of June 29, 2013	$	30,429
Goodwill acquired:
Preliminary allocation of purchase price related to CCA		5,490
Balance as of March 29, 2014	$	35,919

Acquisition-Related Intangibles

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

17

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

5. GOODWILL AND OTHER INTANGIBLE ASSETS - CONTINUED

	Weighted Average Estimated Useful Life (Years)	Gross Value March 29, 2014		Accumulated Amortization			Net Book Value March 29, 2014		Gross Value June 29, 2013		Accumulated Amortization			Net Book Value June 29, 2013
Design guidelines	Indefinite	$	8,290	$	—		$	8,290	$	6,940	$	—		$	6,940
Customer relationships	8		8,840		(3,925	)	$	4,915		7,940		(3,429	)		4,511
Trade names	Indefinite		5,179		—		$	5,179		4,729		—			4,729
Backlog	0.5		60		—		$	60		—		—			—
		$	22,369	$	(3,925	)	$	18,444	$	19,609	$	(3,429	)	$	16,180

Amortization expense on finite-lived intangible assets was $0.2 million and $0.3 million for the three months ended March 29, 2014 and March 30, 2013, respectively. Amortization expense on finite-lived intangible assets for the nine months ended March 29, 2014 and March 30, 2013 was $0.5 million and $0.8 million, respectively. Estimated aggregate finite-lived intangible asset amortization expense for the next five years is as follows (in thousands):

Fiscal Year
2014	$	713
2015		705
2016		600
2017		599
2018		594

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. In determining whether the events or changes in circumstances in the third quarter of the fiscal year provided an indication that certain long-lived assets may not be recoverable and therefore warrant the acceleration of the annual evaluation to be completed in the fourth quarter of the fiscal year, the Company took into consideration both short- and long-term indicators. Such consideration included the year-to-date trend in customer bookings, relative quote activity, short- and long-term industry and market segment indicators and longer-term financial forecasts in addition to the consideration of the year to date operating losses against year to date. Management concluded that acceleration of the impairment evaluation was not required and will be completed in the fourth quarter.

18

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

6. ACCRUED PRODUCT WARRANTIES

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

	Nine months ended
	March 29,			March 30,
	2014			2013
Balance at beginning of period	$	2,241		$	2,615
Provision for warranty expenses		726			1,666
Acquired - CCA		200			—
Warranty charges		(705	)		(1,466	)
Balance at end of period	$	2,462		$	2,815

7. ACCRUED LIABILITIES AND OTHER

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

	March 29,		June 29,
	2014		2013
Accrued start-up and commissioning expense	$	230	$	230
Accrued compensation		2,574		2,393
Accrued professional expenses		3,144		1,819
Subsidiary short-term debt		1,610		—
Other		399		944
	$	7,957	$	5,386

In July 2013, the Company obtained short-term financing from Bank of China Limited. The financing provides for borrowings up to ¥10 million ($1.6 million) at an interest rate of 6.6%. Interest is payable quarterly. All amounts outstanding are due July 2014 and are expected to be repaid with cash on hand.

8. DEBT

Outstanding long-term debt obligations are as follows (in thousands):

			March 29,			June 29,
	Maturities		2014			2013
Term loan A		2019	$	981		$	604
Term loan B		2022		9,466			8,115
Subsidiary loan		2017		6,923			—
Total long-term debt				17,370			8,719
Less current maturites				(2,210	)		—
Total long-term debt, net of current portion			$	15,160		$	8,719

19

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

8. DEBT - CONTINUED

In September 2012, the Company entered into a Credit Agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent and other financial institutions party thereto. The Credit Agreement provides for, among other things, revolving credit commitments of $30.0 million to be used for working capital and general corporate purposes, term loan commitments of $2.0 million used for the purchase of equipment for a manufacturing facility in Denton, Texas (“Term Loan A”) and term loan commitments of $10.0 million used to fund the construction of the Denton facility (“Term Loan B”). All borrowings and other obligations of the Company are guaranteed by substantially all of its domestic subsidiaries and are secured by substantially all of the assets of the Company.

The revolving credit facility under the Credit Agreement will terminate on September 30, 2015, and all revolving credit loans mature on that date. Under the revolving credit facility, the Company has a maximum borrowing availability equal to the lesser of (a) $30.0 million or (b) the sum of 80% of eligible accounts receivable plus 50% of eligible inventory plus 100% of the cash amount held in a special collateral account less a foreign currency letter of credit reserve. At March 29, 2014, there were no outstanding borrowings and approximately $6.4 million of outstanding letters of credit under the Credit Agreement.

Beginning June 30, 2014, the Company is required to make quarterly principal payments on the term loans. 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 March 29, 2014, 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, as defined in the Credit Agreement, 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 12 month basis.

Under the Credit Agreement, as amended, capital expenditures are limited to (a) those made in connection with the new manufacturing facility in Denton, Texas; (b) those made in connection with the new manufacturing facility in China, not to exceed $12.5 million; and (c) $3.0 million of other capital expenditures in any fiscal year plus any amounts below $3.0 million of expenditures from the immediately preceding fiscal year. The Credit Agreement also contains other covenants, including restrictions on additional debt, dividends, capital expenditures, acquisitions and dispositions.

At March 29, 2014, the Company was not in compliance with the minimum DSC covenant in the Credit Agreement primarily as a result of the operating loss reported in the nine-month period ended March 29, 2014. Subsequent to March 29, 2014, the Company obtained an amendment to the Credit Agreement that brought the Company into compliance as of March 29, 2014. Pursuant to the amendment, if the DSC is less than 1.50 to 1.00 as of the end of any fiscal quarter, the Company must deposit and maintain cash in a blocked collateral account (to which only the administrative agent under the Credit Agreement has access) in an aggregate amount equal to the greater of (a) $10.0 million or (b) the sum of (i) the aggregate principal amount of all revolving credit and swing line loans outstanding under the Credit Agreement, plus (ii) 100% of the undrawn face amount of all performance-related letters of credit outstanding under the Credit Agreement, plus (iii) 30% (subject to upward adjustment) of the undrawn face amount of all warranty-related letters of credit outstanding under the Credit Agreement, plus (iv) $3.0 million, less (v) all term loan principal payments made on or after March 29, 2014. The Company may withdraw the cash in the collateral account when it achieves a DSC of at least 1.50 to 1.00 as of the end of a subsequent fiscal quarter, so long as no default or borrowing base deficiency then exists.

20

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

8. DEBT - CONTINUED

In July 2013, the Company’s subsidiary in China entered into a loan agreement with Bank of China Limited. The loan agreement provides for a loan commitment of ¥45.0 million ($7.2 million) to fund the construction of a manufacturing facility in Zhenjiang, China. The loan is guaranteed by PCMC’s property, plant and equipment. The loan matures on September 30, 2018. At March 29, 2014, there was an outstanding borrowing of ¥43.0 million ($6.9 million). Beginning June 20, 2014, the Company is required to make semi-annual principal payments on the loan which will be paid using cash on hand in China. Interest rates use floating rates as established by The People’s Bank of China. The rate at March 29, 2014 was 7.2%. The loan agreement also contains covenants, including restrictions on additional debt, dividends, acquisitions and dispositions. At March 29, 2014, the Company’s subsidiary was in compliance with all of its debt covenants. The Company’s subsidiary in China had bank guarantees of $0.8 million and $0.6 million at March 29, 2014 and June 29, 2013, respectively, secured by $0.8 million and $0.6 million of restricted cash balances.

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 ($10.0 million) at March 29, 2014 and £6.0 million ($9.1 million) at June 29, 2013. This facility was secured by substantially all of the assets of the Company’s U.K. subsidiary, a protective letter of credit issued by the Company to HSBC Bank and a cash deposit of £1.8 million ($3.0 million) at March 29, 2014 and £2.1 million ($3.2 million) at June 29, 2013, which is recorded as restricted cash on the Consolidated Balance Sheets. At March 29, 2014, there was £4.7 million ($7.8 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. At June 29, 2013, there was £4.4 million ($6.8 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.

The Company’s German subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of €4.8 million ($6.6 million) at March 29, 2014 and €4.8 million ($6.2 million) at June 29, 2013. This facility is secured by substantially all of the assets of the Company’s German subsidiary and by a cash deposit of €0.8 million ($1.1 million) at March 29, 2014 and €0.7 million ($0.9 million) at June 29, 2013, which is recorded as restricted cash on the Consolidated Balance Sheets. At March 29, 2014, there was €3.2 million ($4.4 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. At June 29, 2013, there was €2.7 million ($3.5 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.

The Company’s subsidiary in Singapore had bank guarantees of $0.7 million and $0.6 million at March 29, 2014 and June 29, 2013, respectively. These guarantees are secured with a protective letter of credit issued by the Company to Citibank.

9. COMMITMENTS AND CONTINGENCIES

Litigation

Under the contract for the Nitram acquisition, the Company has certain rights to indemnification from the selling stockholders for claims relating to breach of representations and certain other claims, including litigation costs and damages. Prior to the final escrow payment in October 2009, the Company made claims relating to environmental matters and indemnification for breach of representations and warranties in the Nitram purchase agreement, totaling approximately $2.0 million. Of this amount, $1.4 million was not released from escrow. This amount represents the Company’s claims, less the deductible of $0.6 million. The sellers have objected to the claims made by the Company and the parties are currently negotiating the 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.

21

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

9. COMMITMENTS AND CONTINGENCIES - CONTINUED

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.

10. STOCK-BASED COMPENSATION

The following information represents the Company’s grants of stock-based compensation to employees and directors during the nine months ended March 29, 2014 and March 30, 2013 (in thousands, except share amounts):

	Nine months ended
	March 29,				March 30,
	2014				2013
Grant Type	Number of Shares Granted		Fair Value of Grant		Number of Shares Granted		Fair Value of Grant
Stock to directors		40,430	$	300		36,000	$	291
Restricted stock awards		101,410		752		110,377		894
Restricted stock units		77,460		575		—		—

The stock granted to the members of the Board of Directors vested upon grant, therefore the fair value amount was recognized as expense at the time of grant. The compensation expense for the restricted stock awards granted to officers and other employees in fiscal year 2014 is recognized over a three-year vesting period whereas the awards granted to such persons in fiscal year 2013 are recognized over a four-year vesting period. The compensation expense is based on the fair value of the awards on the grant date, net of forfeitures.

In July 2013, the Company also awarded restricted stock units (“RSUs”), which are subject to both service and performance conditions, to some of the officers of the Company. The fair value of the RSUs is based on the probability of the performance condition being achieved on the date of grant. The actual number of shares that are eligible to vest is determined based on the Company’s performance during the performance period, which is a year from the date of grant, against established metrics and could range from 0% to 200% of the number of units originally granted. The RSUs that are issuable based on the one year performance period cliff vest on the third anniversary of the grant date subject to the continued employment of the grantee. The Company recognizes compensation expense for the RSUs based upon management’s determination of the potential likelihood of achievement of the performance conditions at each reporting date in fiscal 2014, net of estimated forfeitures.

The Company recognized $0.8 million and $0.5 million of stock-based compensation expense in the nine months ended March 29, 2014 and March 30, 2013, respectively. For the three months ended March 29, 2014 and March 30, 2013, the Company recognized $0.2 million and $0.1 million, respectively, of stock-based compensation expense.

11. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

The Company has entered into interest rate swap agreements that effectively convert the interest rates on the long-term debt issued under the Senior Credit facility from floating to fixed rates. The following table summarizes the interest rate agreements in effect as of March 29, 2014 (in thousands):

Fixed Interest Rate	Expiration Date		Notional Amounts
1.95%		September 30, 2022	$	9,000
1.50%		September 30, 2019		1,000

22

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

11. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS - CONTINUED

The swap agreements are recorded as an asset or liability in the Consolidated Balance Sheets at fair value, with the change in fair value recorded as interest expense within the Consolidated Statements of Operations.

The Company is exposed to market risk under these arrangements due to the possibility of interest rates on the term loans under the Credit Agreement declining below the rates in 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 becomes unable to fulfill its obligations to the Company, the financial benefits of the arrangements may not be realized.

The derivatives recorded at fair value in the Company’s Consolidated Balance Sheets were (in thousands):

	Derivative Assets				Derivative Liabilities
	March 29,		June 29,		March 30,		June 29,
	2014		2013		2014		2013
Interest rate swap contracts	$	61	$	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 March 29, 2014		Level 1		Level 2		Level 3
Asset - Interest rate swap contracts	$	61	$	—	$	61	$	—

23

PMFG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements - Unaudited

March 29, 2014

11. 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.

12. SEGMENT INFORMATION

The Company has two reportable segments: Process Products and Environmental Systems. The Process Products segment produces various types of separation and filtration equipment 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 Environmental Systems segment designs, engineers and installs highly efficient systems for combustion modification, fuel conversions and post-combustion nitrogen oxide (NOx) control for both new and existing sources. These environmental control systems are used for air pollution abatement and converting burners to accommodate alternative sources of fuel. System applications include Selective Catalytic Reduction (“SCR”) systems and Selective Non-Catalytic Reduction (“SNCR”) systems. The financial results of the CCA acquisition will be included in the Environmental Systems segment in future periods (see Note 2).

The Company allocates all costs associated with the manufacture, sale and design of its products to the appropriate segment. Segment profit and loss is based on revenue less direct expenses of the segment before general and administrative expenses. The Company does not allocate general and administrative expenses, assets, or expenditures for assets on a segment basis for internal management reporting, therefore, this information is not presented. Segment information and reconciliation to operating income (loss) for the three and nine months ended March 29, 2014 and March 30, 2013 are presented below (in thousands).

	Three months ended						Nine months ended
	March 29,			March 30,			March 29,			March 30,
	2014			2013			2014			2013
Revenue:
Process Products	$	24,170		$	27,397		$	72,937		$	84,592
Environmental Systems		8,103			7,573			18,021			14,807
	$	32,273		$	34,970		$	90,958		$	99,399
Operating income (loss):
Process Products	$	24		$	3,593		$	4,063		$	13,679
Environmental Systems		1,803			1,541			4,064			2,671
Corporate and other unallocated expenses		(5,444	)		(4,112	)		(14,979	)		(14,008	)
	$	(3,617	)	$	1,022		$	(6,852	)	$	2,342

24

PMFG, Inc. and Subsidiaries

March 29, 2014

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 our financial position.

This discussion includes forward-looking statements that are subject to risks, uncertainties and other factors described in this and other reports we file with the Securities and Exchange Commission (the “SEC”), including the information in “Item 1A. Risk Factors” of Part I to our Annual Report for the year ended June 29, 2013. These factors could cause our actual results for future periods to differ materially from those experienced in, or implied by, these forward-looking statements.

Our Business

We are a leading provider of custom-engineered systems and products designed to help ensure that the delivery of energy is safe, efficient and clean. We primarily serve the markets for natural gas infrastructure, power generation and refining and petrochemical processing. With the recent acquisition of substantially all of the assets of Combustion Components Associates, Inc. (“CCA”), the Company expanded the markets it serves to include industrial and utility industries. We offer a broad range of separation and filtration products, Selective Catalytic Reduction (“SCR”) systems, Selective Non-Catalytic Reduction (“SNCR”) systems, low emissions burner and related combustion systems and other complementary products including heat transfer equipment, pulsation dampeners and silencers. Our primary customers include original equipment manufacturers, engineering contractors, commercial and industrial companies and operators of power facilities.

Our products and systems are marketed worldwide. The percentage of revenue generated from outside the United States was approximately 42% in the nine months ended March 29, 2014 compared to 49% in the nine months ended March 30, 2013. The decline in revenue generated outside the United States from 2013 to 2014 is attributed to decreased demand from certain markets including Canada, Latin America and the Middle East, as well as from increased demand for the Company’s environmental system applications, which are primarily deployed in the United States. As a result of the global demand for our products and our increased sales resources outside of the United States, we expect our international revenue will continue to be a significant percentage of our consolidated revenue in the future. International markets, and in particular emerging markets such as Latin America, India, Northern Africa and China, will be subject to significant variations in demand from period to period.

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

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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 Environmental Systems segment designs, engineers and installs highly efficient systems for combustion modification, fuel conversions and post-combustion nitrogen oxide (NOx) control for both new and existing sources. These environmental control systems are used for air pollution abatement and converting burners to accommodate alternative sources of fuel. System applications include combustion systems, SCR systems and SNCR systems.

Key Drivers of Product Demand

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

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

Despite existing concerns over safety and government regulations related to the construction of new nuclear power facilities and the re-licensing of existing facilities, we believe rising nuclear capacity utilization rates and concerns about energy security and emissions will drive the increase for nuclear power generation, both domestically and internationally. China is expected to lead the global expansion of nuclear power generation growth. Re-licensing of existing nuclear facilities in the United States and Europe also will contribute to product demand.

We believe these market trends will drive the demand for both our separation/filtration products and our Environmental and Combustion 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 March 28, 2014, the Company completed the acquisition of substantially all of the assets of CCA. CCA is a leading provider of in-furnace and post-combustion control technologies. CCA technology is used to improve efficiency and reduce emissions at utility power plants, pulp and paper mills, chemical plants, oil refineries and other industrial facilities. The purchase price was $8.9 million in cash plus contingent performance-based payments. Additional cash consideration will be paid if the Company recognizes revenue from certain customer projects specified in the purchase agreement. The contingent payment is 5% of the aggregate recognized revenue by the Company in connection with the specified projects. The additional cash consideration, if any, is not expected revenue to be material to the Company’s financial position, results of operations or cash flows. The financial results of the CCA acquisition will be included in the Environmental Systems segment in future periods.

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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,” and Note A to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” in Part II of our Annual Report on Form 10-K for the year ended June 29, 2013. Since the date of that report, there have been no material changes to our critical accounting policies.

Results of Operations

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

	Three months ended						Nine months ended
	March 29,			March 30,			March 29,			March 30,
	2014			2013			2014			2013
Net revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		75.1			69.3			71.5			66.1
Gross profit		24.9			30.7			28.5			33.9
Operating expenses		36.1			27.8			36.0			31.5
Operating income (loss)		(11.2	)		2.9			(7.5	)		2.4
Other expense, net		(1.8	)		(0.5	)		(1.8	)		(0.7	)
Income (loss) before income taxes		(13.0	)		2.4			(9.3	)		1.7
Income tax benefit (expense)		1.4			(0.4	)		0.3			(0.4	)
Net income (loss)		(11.6	)%		2.0	%		(9.1	)%		1.3	%
Net income attributable to noncontrolling interest		0.1			0.4			0.1			0.6
Net income (loss) attributable to PMFG, Inc.		(11.7	)%		1.6	%		(9.2	)%		0.7	%

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.

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Quarter Ended March 29, 2014 Compared to Quarter Ended March 30, 2013

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 37% and 40% of consolidated revenue in the quarters ended March 29, 2014 and March 30, 2013, respectively. The decline in total and relative revenue generated outside the United States from 2013 to 2014 is attributed to decreased demand from certain markets including Canada, Latin America and the Middle East, as well as from increased demand for the Company’s environmental system applications, which are primarily deployed in the United States. The decline in the noted markets is believed by management to be cyclical rather than a long-term shift in market demand.

The following summarizes consolidated revenue (in thousands):

	Three months ended
	March 29, 2014		% of Total Revenue			March 30, 2013		% of Total Revenue
Domestic	$	20,381		63.2	%	$	20,849		59.6	%
International		11,892		36.8	%		14,121		40.4	%
Total	$	32,273		100.0	%	$	34,970		100.0	%

Total revenue decreased $2.7 million, or 7.7%, to $32.3 million in the third quarter of fiscal 2014 compared to the same period in fiscal 2013, as higher revenue from our Environmental Systems segment partially offset lower revenue from our Process Products segment. Additional detail on the year over year change by product category is as follows (in thousands):

Proces products systems
Separation and filtration equipment	$	(2,101	)
Silencer and heat transfer equipment		(1,126	)
Environmental systems		530
	$	(2,697	)

The Company’s environmental systems are primarily marketed in the United States, where pending changes in air pollution regulations and increased demand for natural gas power generation is driving demand for our products. As the acquisition of CCA was completed on March 28, 2014, it did not contribute to the increased revenue in our Environmental Systems segment in the periods presented.

The lower revenue from our Process Products segment resulted from lower demand for our silencer and heat transfer equipment, reduced demand for separation and filtration equipment in certain markets and to a lesser extent delays in the design and fabrication process in the China market. The lower demand for silencer and heat transfer equipment is attributed to a highly competitive market environment and a lack of sufficient differentiation with regard to technical capabilities, cost or delivery time. The lower revenue from separation and filtration equipment primarily resulted from lower relative revenue from the Middle East and China. In the Middle East, the Company is overlapping a significant contract which was largely completed in the prior year. In China, the Company has experienced lower bookings and revenue flow-through attributed to the transition of governmental leadership and restriction on liquidity requirements of many of our customers.

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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 29, 2014		% of Total Revenue			March 30, 2013		% of Total Revenue
Revenue	$	32,273		100.0	%	$	34,970		100.0	%
Cost of goods sold		24,231		75.1	%		24,223		69.3	%
Gross profit	$	8,042		24.9	%	$	10,747		30.7	%

Gross profit in the third quarter of fiscal 2014 decreased $2.7 million, or 25.2%, compared to the same period in fiscal 2013. The decrease in gross profit resulted from lower revenue, cost overruns on specific projects, and inefficiencies in the start-up of our new manufacturing facilities in Denton, Texas and Zhenjiang, China, partially offset by a change in estimated future warranty obligations. These factors are summarized as follows (in thousands):

Decline in revenue	$	(699	)
Change in estimated future warranty obligations		770
Cost overruns on projects completed or in process		(1,730	)
Underabsorption of facility costs		(981	)
Other		(65	)
Decrease in gross profit	$	(2,705	)

The Company offers a broad range of products that have a wide range of anticipated profit margin due in part to technological or material complexity, scope of product, extent of service to be performed and competitive nature of a particular product or project. As a result, the product, customer and geographical mix from period to period will result in changes in the profit dollars and as a percentage of revenue.

The Company completed construction and began operation of two manufacturing facilities in the second half of calendar 2013. The Company is continuing to experience cost overruns and inefficiencies in the plant operations resulting from training and utilization of new personnel and processes, increased supervisory and quality assurance personnel responsive to current and anticipated future projects, and higher depreciation and occupancy costs. As these facilities mature and additional work is moved through the facilities, these cost overruns and inefficiencies are expected to decline.

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

	Three months ended
	March 29, 2014		% of Total Revenue			March 30, 2013		% of Total Revenue
Sales and marketing	$	3,489		10.8	%	$	3,278		9.4	%
Engineering and project management		2,726		8.4	%		2,335		6.7	%
General and administrative		5,444		16.9	%		4,112		11.8	%
Total	$	11,659		36.1	%	$	9,725		27.9	%

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PMFG, Inc. and Subsidiaries

March 29, 2014

Operating expenses increased $1.9 million, or 19.9%, for the third quarter of fiscal 2014 compared to the same period in fiscal 2013. The increase in operating expenses resulted from increase in personnel and occupancy costs in our Europe, Middle East and Africa (“EMEA”) region largely associated with the sales, engineering, and project management office opened in Dubai in the spring of 2013, increased personnel costs in the Americas region in support of our nuclear power generation product line and commitments under a joint development agreement entered into with a major OEM customer in the nuclear power generation industry, costs associated with the integration of a consistent enterprise resource planning (“ERP”) software product across our European locations and costs associated with the acquisition of CCA. The Company was notified in April 2014 of the OEM’s intent to defer further investment under the joint development agreement as a result of an anticipated delay in the identified market opportunity. The change in operating expenses in the third quarter of fiscal 2014 compared to the same period in fiscal 2013 is summarized as follows (in thousands):

Incremental personnel and occupancy costs related to Dubai office	$	584
Incremental personnel costs in support of nuclear product line and joint development agreement		307
Implementation of ERP system in European locations		152
Due diligence and transaction advisor fees related to the CCA acquisition		576
Other		315
	$	1,934

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

	Three months ended
	March 29, 2014			March 30, 2013
Interest income	$	31		$	12
Interest expense		(436	)		(148	)
Foreign exchange gain (loss)		(194	)		(32	)
Other income (expense), net		13			(1	)
Total other income (expense)	$	(586	)	$	(169	)

Income Taxes. Our effective income tax rates were 10.4% and 18.3% for the quarters ended March 29, 2014 and March 30, 2013, respectively. The lower tax rate for the quarter ended March 29, 2014 is the result of a mix profits and losses in different taxing jurisdictions.

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 75% and 78% of our consolidated revenue in the quarters ended March 29, 2014 and March 30, 2013, respectively.

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The following summarizes the Process Products segment revenue, gross profit and operating income for the three month periods ended March 29, 2014 and March 30, 2013 (in thousands):

	Three months ended
	March 29,			March 30,
	2014			2013
Revenue	$	24,170		$	27,397
Gross profit		5,304			8,418
Operating income		24			3,593
Operating income as % of revenue		0.1	%		13.1	%

Process Products revenue decreased $3.2 million, or 11.8%, to $24.2 million in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. The lower revenue from our Process Products segment resulted from lower demand for our silencer and heat transfer equipment, overlap of significant contract which was largely completed in the prior year and to a lesser extent delays in the design and fabrication process in the China market. The lower demand for silencer and heat transfer equipment is attributed to a highly competitive market environment and a lack of sufficient differentiation with regard to technical capabilities, cost or delivery time. The lower revenue from separation and filtration equipment primarily resulted from lower relative revenue from the Middle East and China. In the Middle East, the Company is overlapping a significant contract which was largely completed in the prior year. In China, the Company has experienced lower bookings and revenue flow-through attributed to the transition of governmental leadership and restriction on liquidity requirements of many of our customers. The decline in Process Products revenue was partially offset by an increase of $2.1 million in revenue from separation equipment utilized in nuclear power generation facilities.

Additional detail on the year-over-year change by product category is as follows (in thousands):

Separation and filtration equipment	$	(2,101	)
Silencer and heat transfer equipment		(1,126	)
	$	(3,227	)

Process Products gross profit for the third quarter of fiscal 2014 decreased $3.1 million, or 37.0%, compared to the third quarter of fiscal 2013. The decrease in gross profit resulted from lower revenue, cost overruns on specific projects and inefficiencies in the start-up of our new manufacturing facilities in Denton, Texas and Zhenjiang, China, partially offset by a change in estimated future warranty obligations quantified as follows (in thousands):

Decline in revenue	$	(991	)
Change in estimated future warranty obligations		442
Cost overruns on projects completed or in process		(1,597	)
Underabsorption of facility costs		(904	)
Other		(64	)
	$	(3,114	)

Process Products operating income for the third quarter of fiscal 2014 decreased $3.6 million, or 99.3%, driven by the $3.1 million reduction in gross profit and $0.5 million increase in operating costs. The increase in operating expenses resulted from increase in personnel and occupancy costs in our EMEA region largely associated with the sales, engineering and project management office that opened in Dubai in the spring of 2013, increased personnel costs in the Americas region in support of our nuclear power generation product line and commitments under a joint development agreement entered into with a major OEM customer in the nuclear power generation industry.

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PMFG, Inc. and Subsidiaries

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Environmental Systems

The Environmental Systems segment designs, engineers and installs highly efficient systems for combustion modification, fuel conversions and post-combustion NOx control for both new and existing sources. These environmental control systems are used for air pollution abatement and converting burners to accommodate alternative sources of fuel. System applications include SCR systems, combustion systems and SNCR systems. The Environmental Systems segment represented 25% and 22% of our consolidated revenue in the quarters ended March 29, 2014 and March 30, 2013, respectively.

The following summarizes the Environmental Systems segment revenue, gross profit and operating income for the three month periods ended March 29, 2014 and March 30, 2013 (in thousands):

	Three months ended
	March 29,			March 30,
	2014			2013
Revenue	$	8,103		$	7,573
Gross profit		2,738			2,329
Operating income		1,803			1,541
Operating income as % of revenue		22.3	%		20.3	%

Environmental Systems revenue increased $0.5 million, or 7.0%, to $8.1 million in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. The Company’s environmental systems are primarily marketed in the United States, where stringent air pollution regulations, pending changes in regulation and increased demand for natural gas power generation is driving demand for our products. As the acquisition of CCA was completed on March 28, 2014, it did not contribute to the increased revenue in our Environmental Systems segment. Management anticipates that increased regulation of air pollution combined with the expansion of products and services acquired in the CCA transaction, will increase the revenue generated domestically and internationally in future periods.

Gross profit in the Environmental Systems increased $0.4 million or 17.6% to $2.7 million in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. The increase in gross profit resulted from higher revenue, lower estimated future warranty obligations, and higher relative profit on projects completed or in process (in thousands):

Increase in revenue	$	163
Change in estimated future warranty obligations		328
Other		(82	)
	$	409

Environmental Systems operating income for the third quarter of fiscal 2014 increased $0.3 million compared to the third quarter of fiscal 2013. The increase in operating income is attributable to higher gross profit partially offset by increased personnel costs in support of current and planned growth within this product line.

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Nine Months Ended March 29, 2014 Compared to Nine Months Ended March 30, 2013

Results of Operations – Consolidated

Revenue. The following table summarizes consolidated revenue (in thousands):

	Nine months ended
	March 29, 2014		% of Total Revenue			March 30, 2013		% of Total Revenue
Domestic	$	52,399		57.6	%	$	50,993		51.3	%
International		38,559		42.4	%		48,406		48.7	%
Total	$	90,958		100.0	%	$	99,399		100.0	%

For the nine months ended March 29, 2014, total revenue decreased $8.4 million, or 8.5%, as higher revenue from our Environmental Systems segment partially offset lower revenue from our Process Products segment. Additional detail on the year-over-year change by product category is as follows (in thousands):

Process products systems
Separation and filtration equipment	$	(6,746	)
Silencer and heat transfer equipment		(4,909	)
Environmental systems		3,214
	$	(8,441	)

The Company’s environmental systems are primarily marketed in the United States, where stringent air pollution regulations, pending changes in regulation and increased demand for natural gas power generation is driving demand for our products. As the acquisition of CCA was completed on March 28, 2014, it did not contribute to the increased revenue in our Environmental Systems segment.

The lower revenue from our Process Products segment resulted from lower demand for our silencer and heat transfer equipment, overlap of significant contract which was largely completed in the prior year, and to a lesser extent delays in the design and fabrication process in the China market. The lower demand for silencer and heat transfer equipment is attributed to a highly competitive market environment and a lack of sufficient differentiation with regard to technical capabilities, cost or delivery time. The lower revenue from separation and filtration equipment primarily resulted from lower relative revenue from the Middle East and China. In the Middle East, the Company is overlapping a significant contract which was largely completed in the prior year. In China, the Company has experienced lower bookings and revenue flow-through attributed to the transition of governmental leadership and restriction on liquidity requirements of many of our customers. Domestic revenue increased $1.4 million, or 2.8%, in the nine months ended March 29, 2014 when compared to the same period last year on stronger Environmental System revenue. The increase in domestic revenue was offset by a decrease in international revenue of $9.8 million, or 20.3%.

Gross Profit. The following table summarizes revenue, cost of goods sold, and gross profit (in thousands):

	Nine months ended
	March 29, 2014		% of Total Revenue			March 30, 2014		% of Total Revenue
Revenue	$	90,958		100.0	%	$	99,399		100.0	%
Cost of goods sold		65,080		71.5	%		65,731		66.1	%
Gross profit	$	25,878		28.5	%	$	33,668		33.9	%

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PMFG, Inc. and Subsidiaries

March 29, 2014

Gross profit decreased $7.8 million on lower revenue and lower relative gross profit in the nine months ended March 29, 2014 compared to the nine months ended March 30, 2013. Gross profit, as a percentage of revenue, decreased to 28.5% for the nine months ended March 29, 2014 compared to 33.9% for the nine months ended March 30, 2013. That margin deterioration was most notable in the second and third quarters. The decrease in gross profit resulted from lower revenue, cost overruns on specific projects, exit costs related to the closure of two manufacturing facilities in the United States and one in China, inefficiencies in the start-up of our new manufacturing facilities in Denton, Texas and Zhenjiang, China, partially offset by a change in estimated future warranty obligations. These factors are summarized as follows (in thousands):

Decline in revenue	$	(2,610	)
Change in estimated future warranty obligations		940
Cost overruns on projects completed or in process		(3,208	)
Underabsorption of facility costs		(2,426	)
Exit costs related to facility closures		(486	)
	$	(7,790	)

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

	Nine months ended
	March 29, 2014		% of Total Revenue			March 30, 2013		% of Total Revenue
Sales and marketing	$	10,127		11.1	%	$	10,282		10.3	%
Engineering and project management		7,624		8.4	%		7,036		7.1	%
General and administrative		14,979		16.5	%		14,008		14.1	%
Total	$	32,730		36.0	%	$	31,326		31.5	%

Operating expenses increased $1.4 million, or 4.5%, in the nine months ended March 29, 2014 compared to the nine months ended March 30, 2013. As a percentage of revenue, operating expenses increased on lower revenue to 36.0% for the nine months ended March 29, 2014 from 31.5% in the same period in fiscal 2013. The increase in operating expenses resulted from increased personnel and occupancy costs in our EMEA region largely associated with the sales, engineering and project management office that opened in Dubai in the spring of 2013, increased personnel costs in the Americas region in support of our nuclear power generation product line and commitments under a joint development agreement entered into with a major OEM customer in the nuclear power generation industry, costs associated with the integration of a consistent enterprise resource planning (“ERP”) software product across our European locations, and costs associated with the acquisition of CCA quantified, partially offset by lower bad debt expense. These factors are summarized as follows (in thousands):

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PMFG, Inc. and Subsidiaries

March 29, 2014

Incremental personnel and occupancy costs related to Dubai office	$	842
Incremental personnel costs in support of nuclear product line and joint development agreement		372
Implementation of ERP system in European locations		180
Due diligence and transaction advisor fees related to the CCA acquisition		576
Lower bad debt expense		(944	)
Other		378
	$	1,404

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

	Nine months ended
	March 29, 2014			March 30, 2013
Interest income	$	63		$	29
Interest expense		(1,142	)		(463	)
Loss on extinguishment of debt		—			(291	)
Foreign exchange gain (loss)		(666	)		3
Other income (expense), net		84			33
Total other income (expense)	$	(1,661	)	$	(689	)

For the nine months ended March 29, 2014, other expense was $1.7 million, an increase of $1.0 million from $0.7 million for the nine months ended March 30, 2013. In the first quarter of fiscal 2013, we recorded a loss on the extinguishment of debt associated with paying in full our existing term loan. There was no similar activity in fiscal 2014. The higher level of interest expense reflects borrowings related to the Company’s two new manufacturing facilities. The nine months ended March 29, 2014 reported a loss on foreign currency translation of $0.7 million, driven largely by movements in the euro and U.S. dollar relative to the British pound, compared to a gain of $3,000 for the nine months ended March 30, 2013.

Income Taxes: Our effective income tax rates were 3.0% and 22.2% for the nine months ended March 29, 2014 and March 30, 2013, respectively. For the nine months ended March 29, 2014, our effective tax rate was impacted by the blend of taxable income in some state and foreign taxing jurisdictions and permanent differences and taxable losses in the United States which recognized no tax benefit. For the nine months ended March 30, 2013 the effective tax rate was impacted by increased profits of our foreign subsidiaries which have a lower relative effective tax rate, as well as positive adjustments to the previously filed tax returns.

Net Earnings (loss). For the nine months ended March 29, 2014, we had a net loss of $8.3 million, a decrease of $9.6 million compared to net earnings of $1.3 million in the nine months ended March 30, 2013. The net loss was the result of lower revenue and margin flowing through to the net loss.

Basic and diluted earnings (loss) per share attributable to our common stockholders was a loss of $0.40 per share for the nine months ended March 29, 2014 compared to earnings of $0.03 per share for the nine months ended March 30, 2013.

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Results of Operations – Segments

Process Products

Our Process Products segment represented 80% and 85% of our revenue for the nine months ended March 29, 2014 and March 30, 2013, respectively. The following table summarizes Process Products revenue, gross profit and operating income for the nine month periods ended March 29, 2014 and March 30, 2013 (in thousands):

	Nine months ended
	March 29,			March 30,
	2014			2013
Revenue	$	72,937		$	84,592
Gross profit		19,440			28,649
Operating income		4,063			13,679
Operating income as % of revenue		5.6	%		16.2	%

Process Products revenue decreased by $11.7 million, or 13.8%, in the nine months ended March 29, 2014 when compared to the nine months ended March 30, 2013. The lower revenue from our Process Products segment resulted from lower demand for our silencer and heat transfer equipment, overlap of a significant contract which was largely completed in the prior year, and to a lesser extent delays in the design and fabrication process in the China market. It is further noted that the increase in revenue generated in the United States from separation equipment utilized in the nuclear power generation industry was almost entirely offset by a decline of similar products in China. We continue to expect demand for nuclear power generation equipment in China, but current delays on timing of projects will have significant impact on revenue.

Additional detail on the year over year change by product category is as follows (in thousands):

Separation and filtration equipment	$	(6,746	)
Silencer and heat transfer equipment		(4,909	)
	$	(11,655	)

Process Products gross profit for the nine month period ended March 29, 2014 decreased $9.2 million, or 32.1%, compared to the prior year. The decrease in gross profit resulted from lower revenue, change in geographical mix of products, cost overruns on specific projects, inefficiencies in the start-up of our new manufacturing facilities in Denton, Texas and Zhenjiang, China, exit costs related to the closure of two manufacturing facilities in the United States and one in China, partially offset by a change in estimated future warranty obligations. These factors are summarized as follows (in thousands):

Decline in revenue	$	(3,700	)
Impact of product and geographical mix		(350	)
Change in estimated future warranty obligations		679
Cost overruns on project completed and in process		(3,192	)
Underabsorption of facility costs		(2,160	)
Exit costs related to facility closures		(486	)
	$	(9,209	)

Process Products operating income for the nine month period ended March 29, 2014 decreased $9.6 million driven by the $9.2 million reduction in gross profit and $0.4 million increase in operating costs. The increase in operating expenses resulted from increased personnel and occupancy costs in our EMEA region largely associated with the sales, engineering and project management office opened in Dubai in the spring of 2013, increased personnel costs in the Americas region in support of our nuclear power generation product line and commitments under a joint development agreement entered into with a major OEM customer in the nuclear power generation industry.

36

PMFG, Inc. and Subsidiaries

March 29, 2014

Environmental Systems

Our Environmental Systems segment represented 20% and 15% of our revenue for the nine months ended March 29, 2014 and March 30, 2013, respectively. The following table summarizes Environmental Systems revenue, gross profit and operating income (in thousands):

	Nine months ended
	March 29,			March 30,
	2014			2013
Revenue	$	18,021		$	14,807
Gross profit		6,438			5,019
Operating income		4,064			2,671
Operating income as % of revenue		22.6	%		18.0	%

Revenue from Environmental Systems increased $3.2 million, or 21.7%, in the nine months ended March 29, 2014 compared to the prior year. Operating income increased $1.4 million, or 52.2%, in the nine months ended March 29, 2014, when compared to the prior year. As a percentage of revenue, operating income increased to 22.6% in 2014 compared to 18.0% in the prior year. The increase in operating income resulted from higher revenue, lower estimated future warranty obligations, higher relative profit on projects completed or in process, partially offset by higher sales and marketing related costs, quantified as follows (in thousands):

Increase in revenue	$	1,089
Change in estimated future warranty obligations		261
Other		43
	$	1,393

Contingencies

From time to time we are involved in various litigation matters arising in the ordinary course of our business. We do not believe the disposition of any current matter will have a material adverse effect on our consolidated financial position, cash flows or results of operations.

37

PMFG, Inc. and Subsidiaries

March 29, 2014

Net Bookings and Backlog

The following table shows the activity and balances related to our backlog for the nine months ended March 29, 2014 and March 30, 2013 (in millions):

	Nine months ended
	March 29, 2014			March 30, 2013
Backlog at beginning of period	$	84.2		$	99.9
Net bookings		111.0			87.2
Acquired backlog		3.0			—
Removed from backlog		—			(12.5	)
Revenue recognized		(91.0	)		(99.4	)
Backlog at end of period	$	107.2		$	75.2

Backlog includes contractual purchase orders for products that are deliverable in future periods less revenue recognized on such orders to date. Approximately 30% of the consolidated backlog at March 29, 2014 relates to Environmental Systems projects compared to 15% at March 30, 2013. Year to date net bookings has increased $23.8 million or nearly 30% providing an indication of the improving demand for the Company’s products both domestically and internationally. The increase in net bookings by product category is as follows (in millions):

Separation and filtration equipment	$	12.7
Silencer and heat transfer equipment		—
Environmental systems		11.1
	$	23.8

The increase in bookings for separation and filtration equipment is being driven by the growth in separation equipment to be utilized in nuclear power generation facilities, separation and filtration equipment utilized in both natural gas infrastructure and oil/petrochemical producing and refining, as well as oily water separation equipment. The EMEA region, which has shown lower demand over recent periods, is contributing approximately 42% of the year-over-year growth in net bookings. Included in the backlog as of March 30, 2013 was approximately $12.5 million related to two customer contracts which were cancelled in the fourth quarter of fiscal 2013. They are shown above as removed to improve the comparability of the data. The Company anticipates approximately 90% of the backlog as of March 29, 2014 will be recognized as revenue over the next 12 months.

Financial Position

Assets. Total assets increased by $20.2 million, or 11.2%, from $180.1 million at June 29, 2013 to $200.3 million at March 29, 2014. On March 29, 2014, we held cash, including restricted cash, and cash equivalents of $47.5 million, had working capital of $61.8 million and a current liquidity ratio of 2.2-to-1.0. This compares with cash, including restricted cash, and cash equivalents of $58.0 million, working capital of $75.0 million, and a current liquidity ratio of 3.2-to-1.0 at June 29, 2013.

38

PMFG, Inc. and Subsidiaries

March 29, 2014

Liabilities and Equity. Total liabilities increased by $24.9 million, or 51.6%, from $48.2 million at June 29, 2013 to $73.1 million at March 29, 2014. The increase in our total liabilities is attributed to an increase in long-term debt associated with the construction of manufacturing facilities in Denton, Texas and Zhenjiang, China, in addition to an increase in accounts payable, billings in excess of costs and earnings on uncompleted contracts and other accrued liabilities.

Liquidity and Capital Resources

Because we are engaged in the business of manufacturing systems, our progress billing practices are event-oriented rather than date-oriented and vary from contract to contract. Generally, a contract will either allow for amounts to be billed upon shipment or on a progress-basis based on the attainment of certain milestones. We typically invoice our customers upon the occurrence of project milestones. Billings to customers affect the balance of billings in excess of costs and earnings on uncompleted contracts or the balance of costs and earnings in excess of billings on uncompleted contracts, as well as the balance of accounts receivable. Consequently, we focus on the net amount of these accounts, along with accounts payable, to determine our management of working capital. At March 29, 2014, the balance of these working capital accounts was $14.8 million compared to $17.9 million at June 29, 2013, reflecting a decrease of our investment in these working capital items of $3.0 million.

Many of our customers require bank letters of credit or other forms of financial guarantees to secure progress payments and performance. Such letters of credit and guarantees are issued under various bank and financial institution arrangements (see Note 7 of Item 1 in the Notes to the Consolidated Financial Statements). As of March 29, 2014 and June 29, 2013, we had outstanding letters of credit and bank guarantees of $14.6 million and $18.1 million, respectively.

Our cash and cash equivalents were $47.5 million as of March 29, 2014, compared to $58.0 million at June 29, 2013, of which $4.9 million and $5.0 million were restricted as collateral for stand-by letters of credit and bank guarantees at March 29, 2014, and June 29, 2013, respectively. Cash and cash equivalents held in financial institutions outside the United States totaled $24.4 million and $19.6 million at March 29, 2014 and June 29, 2013, respectively, to support the existing operations and planned growth of our operating locations outside the United States. The Company has elected to treat foreign earnings as permanently reinvested outside the U.S. and has not recognized the U.S. tax expense, if any, on those earnings. During the nine months ended March 29, 2014, cash used in operating activities was $5.5 million compared to cash provided by operating activities of $9.8 million for the nine months ended March 30, 2013.

Cash used in investing activities was $17.6 million for the nine months ended March 29, 2014, compared to cash used in investing activities of $11.6 million for the nine months ended March 30, 2013. Cash used in investing activities during the nine months ended March 29, 2014 included cash consideration paid for the acquisition of substantially all of the assets of CCA on March 28, 2014 and construction costs incurred to date on our new manufacturing facilities in Denton, Texas and Zhenjiang, China. The construction of both facilities has been completed, with only minor remaining capital expenditures expected in future periods for land improvements and finish work related the adjoining office complex in Zhenjiang.

Cash provided by financing activities during the nine months ended March 29, 2014 was $12.0 million compared to cash provided by financing activities of $6.2 million during the nine months ended March 30, 2013. The cash provided by financing activities for the nine months ended March 29, 2014 primarily consisted of proceeds from long-term debt as we drew on our construction term loan and the equity contribution from the non-controlling interest in our China subsidiary, offset by a payment of our long term debt. The cash provided by financing activities for the nine months ended March 30, 2013 primarily consisted of proceeds from short-term debt.

As a result of the events described above, our cash and cash equivalents during the nine months ended March 29, 2014 decreased by $10.4 million compared to an increase of $4.4 million during the nine months ended March 30, 2013.

39

PMFG, Inc. and Subsidiaries

March 29, 2014

At March 29, 2014, the Company was not in compliance with the minimum DSC covenant in the Credit Agreement as described in Note 8 to the consolidated financial statements included in this Report. Subsequent to March 29, 2014, the Company obtained an amendment to the Credit Agreement that brought the Company into compliance as of March 29, 2014. Pursuant to the amendment, if the DSC is less than 1.50 to 1.00 as of the end of any fiscal quarter, the Company must deposit and maintain cash in a blocked collateral account (to which only the administrative agent under the Credit Agreement has access) in an aggregate amount equal to the greater of (a) $10.0 million or (b) the sum of (i) the aggregate principal amount of all revolving credit and swing line loans outstanding under the Credit Agreement, plus (ii) 100% of the undrawn face amount of all performance-related letters of credit outstanding under the Credit Agreement, plus (iii) 30% (subject to upward adjustment) of the undrawn face amount of all warranty-related letters of credit outstanding under the Credit Agreement, plus (iv) $3.0 million, less (v) all term loan principal payments made on or after March 29, 2014. The Company may withdraw the cash in the collateral account when it achieves a DSC of at least 1.50 to 1.00 as of the end of a subsequent fiscal quarter, so long as no default or borrowing base deficiency then exists.

The Company believes its unrestricted cash and cash equivalents together with expected cash flow from operations will be sufficient to meet the liquidity and capital requirements of the Company for the next 12 months including our ability to meet all customer and supplier commitments, as well as meet all repayment obligations under financing agreements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risk exposures from those disclosed in Item 7A of Part II of our Annual Report on Form 10-K for the year ended June 29, 2013.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information related to the Company (including its consolidated subsidiaries) that is required to be disclosed in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

The Company’s management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of these disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the SEC under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective in ensuring that all information required to be disclosed in this Report has been recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Additionally, based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective in ensuring that all material information required to be filed in this Report has been accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, in a timely fashion to allow decisions regarding required disclosures.

Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. The Company’s controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. Notwithstanding the foregoing, the Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

40

PMFG, Inc. and Subsidiaries

March 29, 2014

During the nine months ended March 29, 2014, there have been no changes in the Company’s internal control over financial reporting, or in other factors, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. 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 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Item 1A of Part I of our Annual Report on 10-K for the year ended June 29, 2013

41

Item 6. Exhibits

The following exhibits are filed as part of this report.

Exhibit No.	Exhibit Description
10.1*	Amended and Restated Employment Agreement, dated February 7, 2014, between PMFG, Inc., 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 February 7, 2014 and incorporated herein by reference).
10.2†	Asset Purchase Agreement, dated March 18, 2014, by and among Combustion Components Associates, Inc., R. Gifford Broderick and Peerless Mfg. Co.
10.3†	Second Amendment to Credit Agreement, dated May 7, 2014, among PMFG, Inc., the lenders party thereto and Citibank, N.A. as administrative agent for the lenders.
31.1	Rule 13a – 14(a)/15d – 14(a) Certification of Chief Executive Officer.
31.2	Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer.
32	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
101.INS	XBRL Report Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

*Management contract, compensatory plan or arrangement.

† Indicates furnished herewith.

42

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PMFG, INC.
Date: May 8, 2014	/s/ Peter J. Burlage
	Peter J. Burlage
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: May 8, 2014	/s/ Ronald L McCrummen
	Ronald L. McCrummen Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

43

EX-10.2

Exhibit 10.2

ASSET PURCHASE AGREEMENT

This ASSET PURCHASE AGREEMENT, dated as of March 18, 2014 (this “Agreement”), by and among, Combustion Components Associates, Inc., a Connecticut corporation (“Seller”), R. Gifford Broderick, the sole owner of the capital stock of Seller (the “Shareholder”), and Peerless Mfg. Co., a Texas corporation (“Buyer”). Seller, Buyer and the Shareholder are each referred to herein as a “Party” and, collectively, as the “Parties.”

RECITALS

A. Seller is engaged in the business of engineering, designing, manufacturing and installing low emission combustion systems and emission control technologies for stationary utility and industrial boilers and other stationary sources (such business, as currently operated by Seller, the “Business”);

B. Seller has agreed to sell and assign to Buyer, and Buyer has agreed to purchase and accept from Seller, the Purchased Assets (as hereafter defined) free and clear of any and all Encumbrances, except the Permitted Encumbrances (as hereafter defined); and

C. The Shareholder has agreed to cause Seller to sell to Buyer the Purchased Assets.

Accordingly, the Parties agree as follows:

ARTICLE I

DEFINITIONS AND TERMS

Section 1.1 Certain Definitions. In addition to the terms defined elsewhere herein, the following terms have the meanings set forth below:

“Affiliate” means, with respect to any Person, any other Person that, directly or indirectly, controls, or is controlled by, or is under common control with, such Person. For purposes of this definition, the term “control” (including the correlative meanings of the terms “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract, as trustee or executor, or otherwise. For the avoidance of doubt, an Affiliate of a Person does not include an employee or independent contractor of such Person.

“Ancillary Agreements” means the Assignment Agreements, the Bill of Sale, the Severance Agreement, the Escrow Agreement, and the Intellectual Property Assignment Agreement.

“Assumed Environmental Liabilities” means the Environmental Liabilities relating to the Leased Real Property.

“Assumed IP WIP Liabilities” means the portion of any Losses arising from any actual or alleged infringement or violation of the Intellectual Property of any Person occurring after the Closing with respect to a Pre-Closing Product in an amount equal to (a) the aggregate of such Losses multiplied by (b) the difference of (i) one hundred percent (100%) minus (ii) the percentage of completion corresponding to such Pre-Closing Product as set forth on the Percentage Complete Schedule.

“Business Day” means any day other than a Saturday, Sunday or any day that the Federal Reserve Bank of Dallas, Texas is closed.

“Buyer’s Warranty Work Costs” means, with respect to any Warranty Work, Buyer’s cost of labor (including pro-rata costs of employee benefits and Buyer’s portion of employment Taxes) plus direct costs of all materials incurred in connection with such Warranty Work, reduced by the amount of any insurance proceeds or other amounts recovered from third parties with respect to such Warranty Work.

“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and all rules and regulations promulgated thereunder.

“CERCLIS” means the Comprehensive Environmental Response, Compensation and Liability Information System, as provided for by 40 C.F.R. § 300.5, as amended, and all rules and regulations promulgated thereunder.

“Closing” means the consummation of the purchase and sale of the Purchased Assets as contemplated by this Agreement.

“Code” means the Internal Revenue Code of 1986, as amended.

“Confidential Information” means, with respect to a Person, any information concerning the businesses and affairs of such Person, including any trade secrets or confidential business or technical information of such Person or its products, customers, licensees, suppliers or development or alliance partners or vendors, regardless of when or how such Person may have acquired such information, product development methods and business techniques, work plans, formulas, test results and information, applications, algorithms, technical information, manufacturing information, design information, cost or pricing information, know-how, technology, prototypes, ideas, inventions, improvements, training, sales volume, service and business manuals, unpublished promotional materials, development partnerships and other alliances, customer lists, prospective customer lists and other business information, materials and property; provided, however, that such Confidential Information will not include information that (i) has become generally available and publicly known through no wrongful act or breach of any obligation of confidentiality by any of the Parties or any of their Affiliates or any of their respective employees, officers, directors, representatives or agents or (ii) was approved in writing for release by the disclosing Party.

2

“Confidentiality Agreement” means the Confidentiality Agreement by and between Seller and Buyer, dated as of June 13, 2013 and amended as of February 27, 2014.

“Consent” means any notice to, any filing, registration, designation or declaration with, or any authorization, action, consent, Order, writ, Permit, exemption, waiver or approval of any Government Entity or other Person.

“Contracts” means all agreements, contracts, leases and subleases, purchase orders, arrangements, commitments and licenses, franchises, letters of intent, memoranda of understanding, promises, obligations, rights, instruments, documents, indentures, mortgages, deeds of trust, security interests, conveyances to secure Debt, notes, deeds, loans, warranties, guarantees, bids, proposals, and other similar arrangements whether written or oral, as amended.

“Debt” means, as of any date of determination, without duplication, all Liabilities and obligations of Seller for or in respect of (a) borrowed money or other interest-bearing indebtedness, (b) leases required to be capitalized in accordance with GAAP, (c) the deferred purchase price of property or services, any conditional sale obligations and any title retention agreement, including any “earnout” or similar payments or any noncompete payments, (d) the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction, and (e) any off-balance sheet financial obligations in the nature of indebtedness, including synthetic leases and project financing. For purposes of this Agreement, Debt includes the aggregate amount of any accrued interest, accreted value, breakage costs, prepayment premiums or penalties related thereto, unpaid fees or other costs or expenses associated with the prepayment or termination of any Debt. For the avoidance of doubt, Debt will not include any accounts payable to any Person.

“Employees” means all persons employed by Seller as of the Closing.

“Encumbrance” means, with respect to any property or asset, any lien, pledge, charge, claim, encumbrance, security interest, option, mortgage, easement, usufruct, or deed of trust, hypothecation, assignment, preemptive purchase right, or other adverse claim of any kind in respect of such property or asset.

“Environmental Law” means all Laws, regulations, Orders, codes, licenses, Permits, judgments, decrees, and injunctions concerning pollution or protection of the environment, sanitation, public and worker health and safety, including Laws relating to wetlands, emissions, discharges, Releases, or threatened Releases of Hazardous Materials, pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes into ambient air, surface water, groundwater, or lands or otherwise relating to the manufacture, generation, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials, substances or wastes, including CERCLA, CERCLIS, the Solid Waste Disposal Act, the Clean Air Act, the Federal Water Pollution Control Act, the Toxic Substance Control Act, the Occupational Safety and Health Act, the Emergency Planning and Community Right to Know Act and similar federal, state, provincial, municipal or local Laws.

3

“Environmental Liabilities” means any and all Liabilities or Remedial Actions arising in connection with or in any way relating to the Real Property, the Purchased Assets, the Business or any activities or operations of Seller at any time occurring or conducted at the Real Property, the presence of any Hazardous Materials on, about or under the Real Property or migrating thereto or therefrom, or any Releases or threatened Releases of Hazardous Materials from the Real Property (including any removal and offsite disposal of Hazardous Materials from the Real Property), which arise under or in connection with any applicable Environmental Law, including any and all Liabilities arising in connection with or relating to any investigation, remediation or other response or any Legal Proceeding, including any Legal Proceeding relating to actual, suspected or alleged personal injury, property damages or damages to natural resources.

“ERISA” means the Employment Retirement Income Security Act of 1974, as amended.

“Escrow Agent” means Compass Bank.

“Escrow Agreement” means that certain Escrow Agreement, to be dated as of the Closing Date, by and among Buyer, the Escrow Agent and Seller, in the form attached hereto as Exhibit B.

“Escrow Amount” means $2,500,000.

“Escrow Fund” means the fund established pursuant to the Escrow Agreement following the deposit of the Escrow Amount by Buyer with the Escrow Agent.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

“GAAP” means United States generally accepted accounting principles, consistently applied.

“Government Entity” means any foreign, federal, state, local or other political subdivision thereof or entity, court, agency, administrative body or other government entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

“Gross Margin” means the gross sales proceeds from a project less the costs and expenses incurred or paid on the following items in connection with such project: (i) engineering, project management, design/draftsmen, and technician labor, (ii) hardware, materials, and supplies, (iii) freight, (iv) travel-related expenses, (v) third party services, (vi) royalty payments, and (vii) commissions.

4

“Hazardous Material” or “Hazardous Materials” means any (a) chemical, material or substance defined as or included in the definition of “hazardous substances”, “hazardous wastes”, “hazardous materials”, “extremely hazardous waste”, “acutely hazardous waste”, “radioactive waste”, “biohazardous waste”, “pollutant”, “toxic pollutant”, “contaminant”, “restricted hazardous waste”, “infectious waste”, “toxic substances” or any other term or expression intended to define, list, regulate or classify substances by reason of properties harmful to health, safety or the indoor or outdoor environment (including harmful properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, “TCLP toxicity” or “EP toxicity” or words of similar import) as defined in, the subject of, or that could give rise to Liability under, any Environmental Law, (b) oil, petroleum, petroleum fraction, petroleum additive (including methyl tertiary butyl ether) or petroleum derived substance, (c) flammable substances or explosives, (d) radioactive materials, (e) asbestos or asbestos-containing materials, (f) urea formaldehyde foam insulation, (g) polychlorinated biphenyls, and (h) lead-based paint, including, in each case, any mixture or solution thereof.

“Intellectual Property” means the rights associated with or arising out of any of the following: (a) domestic and foreign patents and patent applications, including all reissues, divisionals, continuations, continuations-in-part, revisions, renewals, extensions, reexaminations or other pre- or post-grant forms thereof, and any other indicia of ownership of an invention or discovery issued or recognized by any Government Entity (collectively, “Patents”), (b) rights in trade secrets, Confidential Information and other non-public information (whether or not patentable), including ideas, formulas, compositions, inventor’s notes, discoveries, improvements, know how, manufacturing and production processes and techniques, testing information, research and development information, inventions, invention disclosures, blueprints, drawings, specifications, designs, roadmaps, software, proposals, technical data, business and marketing plans, market surveys, market know-how and customer lists and information (“Trade Secrets”), (c) all copyrights, copyrightable works, rights in software, databases and data collections, moral rights, mask works, including all registrations and applications for registration of any of the foregoing, and corresponding or equivalent rights in works of authorship issued or recognized by any Government Entity (collectively, “Copyrights”), (d) all trademarks, service marks, logos, trade dress, trade names and other indicia of source or origin of goods or services issued or recognized by any Government Entity, including all registrations and applications to register the foregoing anywhere in the world and all goodwill associated therewith (collectively, “Trademarks”), (e) all internet electronic addresses, uniform resource locators and alphanumeric designations associated therewith and all registrations for any of the foregoing (collectively, “Internet Domain Names”), and (f) any similar, corresponding or equivalent rights to any of the foregoing anywhere in the world recognized by any Government Entity.

“Intellectual Property Assignment Agreement(s)” means one or more Intellectual Property assignment agreements in the forms attached hereto as Exhibits C1-C3.

5

“Knowledge of Seller” or any similar phrase means the collective knowledge of those officers of Seller listed on Schedule 1.1(a), who will each be deemed to have “Knowledge” of a particular fact or other matter if such individual is actually aware of such fact or matter as of the date of this Agreement, without any inquiry obligation with respect to Section 4.13 and after reasonable inquiry with respect to the other Sections of Article IV.

“Law” means any law, statute, ordinance, rule, regulation, code or Order, enacted, issued, promulgated, enforced or entered by a Government Entity (including CERCLA, CERCLIS, the Code, Environmental Laws and ERISA).

“Legal Proceeding” means any judicial, administrative or arbitration action, suit, proceeding (public, private, civil or criminal), demand, hearing, claim, complaint, dispute, audit or investigation.

“Liabilities” means any and all debts, liabilities and obligations of any kind, whether accrued or not accrued, known or unknown, asserted or unasserted, matured or unmatured, conditional or unconditional, patent or latent, liquidated or unliquidated, determined or determinable, absolute or contingent, due or to become due, written or oral, whenever or however arising (including, whether arising out of any Law or Contract, or tort based on negligence or strict liability) and whether or not the same would be required by GAAP to be reflected in financial statements or disclosed in the notes thereto.

“Losses” means any and all damages, losses, charges, Liabilities, claims, demands, actions, suits, proceedings, payments, judgments, settlements, assessments, deficiencies, obligations, Taxes, interest, penalties and costs and expenses (including removal costs, remediation costs, closure costs, fines, penalties and expenses of investigation and ongoing monitoring, reasonable attorneys’ fees and reasonable out of pocket disbursements).

“Net Working Capital” means, (a) the accounts receivable of Seller identified on Schedule 2.5(a) to the extent included in the Purchased Assets, minus (b) the accounts payable of Seller identified on Schedule 2.5(a) to the extent included in the Assumed Liabilities.

“Net Working Capital Threshold Amount” means $800,000.

“Open Source Software” means any software that is licensed or distributed under any version of the GNU General Public License, Mozilla Public License, Common Public License or other license endorsed by the Free Software Foundation or that includes terms providing that (a) a licensee of the software is authorized to make modifications to the source code and (b) the licensee is authorized to distribute such modified form or compilation thereof only if subsequent licensees are also authorized to modify such modified form.

“Order” means any judgment, injunction, award, order, ruling, charge, writ or decree (including a consent decree) that is issued by a Government Entity.

6

“Ordinary Course” or “Ordinary Course of Business” means the ordinary course of the business of Seller, consistent with Seller’s past custom and practice (including with respect to quantity and frequency).

“Permit” means any permit, license, approval, Order, concession, clearance, registration, certificate, franchise, qualification, Consent or authorization issued by a Government Entity.

“Permitted Encumbrances” means, collectively, (a) mechanics’, materialmen’s, warehousemen’s, carriers’, workers’, or repairmen’s liens or other similar common law or statutory Encumbrances arising or incurred in the Ordinary Course and not securing any amount that is past due, (b) liens for Taxes, assessments and other governmental charges not yet due and payable or due but not delinquent or being contested in good faith by appropriate proceedings and, in either case, for which adequate reserves for the periods included in the Financial Statements are reflected or otherwise disclosed in the respective Financial Statements, (c) the rights of any licensors with respect to any licensed property, and (d) with respect to real property, (i) easements, quasi-easements, licenses, covenants, rights-of-way, rights of re-entry or other similar restrictions, including any other agreements, conditions or restrictions affecting real property which do not materially detract from the value of or materially interfere with the current use of such real property and (ii) zoning requirements or restrictions.

“Person” means an individual, a corporation, a partnership, an association, a limited liability company, a Government Entity, a trust or other entity or organization.

“Pre-Closing Product” means any product or service of the Business sold by or on behalf of Seller prior to Closing or in the process of being designed, manufactured, installed or performed by or on behalf of Seller pursuant to a customer Contract or purchase order entered into or issued prior to Closing.

“Real Property” means the Leased Real Property together with all real property previously owned, leased, licensed, subleased, occupied or operated by Seller.

“Release” means any release, spill, emission, leaking, pumping, pouring, injection, deposit, dumping, emptying, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, or into or out of any property.

“Remedial Action” means all actions including any capital expenditures undertaken to (a) clean up, remove, treat or in any other way address any Hazardous Material, (b) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Material, (c) perform pre-remedial studies and investigations or post-remedial monitoring and care, or (d) correct a condition of noncompliance with any Environmental Law.

“Retained IP WIP Liabilities” means the portion of any Losses arising from any actual or alleged infringement or violation of the Intellectual Property of any Person occurring after the Closing with respect to a Pre-Closing Product in an amount equal to (a) the aggregate of such Losses multiplied by (b) the percentage of completion corresponding to such Pre-Closing Product as set forth on the Percentage Complete Schedule.

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“SEC” means the United States Securities and Exchange Commission.

“Seller Material Adverse Effect” means any event, circumstance, change or effect that, individually or when taken with all such other events, circumstances, changes and effects, has or could reasonably be expected to have a material adverse effect on the business, prospects, assets, liabilities, results of operations or financial condition of Seller or the Business, or a material adverse effect on the ability of Seller to perform its obligations under this Agreement or the ability of Seller to consummate the Transaction, but excluding any adverse change, circumstance or effect to the extent resulting from (a) public or industry knowledge of the transactions contemplated by this Agreement (including, without limitation, any action or inaction by Seller’s customers or vendors) or (b) general economic conditions or other conditions generally affecting the industry in which Seller competes.

“Severance Agreement” means the severance agreement, by and between Buyer and Lawrence Berry in the form attached hereto as Exhibit A.

“Subsidiary” means any Person with respect to which any other Person directly or indirectly owns in excess of 50% of the outstanding capital stock or equity.

“Tax Returns” means all reports, returns, declarations, schedules, attachments or statements required to be filed with respect to Taxes including any amendments or supplements thereof.

“Taxes” means (a) all federal, state or local and all foreign taxes, including income, franchise, gross receipts, windfall profits, value added, severance, property, production, sales, use, duty, license, excise, franchise, employment, withholding or similar taxes, escheat or unclaimed property obligation, duty or similar charge together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties, (b) any obligation of the types described in clause (a) as a result of being a member of a consolidated, combined, unitary or similar group of companies, and (c) any obligation of the types described in clauses (a) and (b) with respect to another person as a result of Liability as a transferee, by indemnity or otherwise imposed by Law.

“Transaction” means, collectively, the purchase and sale of the Purchased Assets and the other transactions contemplated by this Agreement and the Ancillary Agreements.

“Warranty Work” means any work required to ensure that the design, installation, performance or operation of any Pre-Closing Product conforms to the requirements of any applicable warranty or reliability or performance guaranty provided by Seller to any initial purchaser of such Pre-Closing Product under a written product warranty, purchase order or other Contract.

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Section 1.2 Other Definitional Provisions. Unless the express context otherwise requires:

(a) any reference to any Contract, instrument or Law is a reference to it as amended and supplemented from time to time (and, in the case of a Law, to any successor provision and as in effect as of the time of measurement, but not including changes in Law subsequent to the date of this Agreement);

(b) any reference in this Agreement to a “day” or a number of “days” (without the explicit qualification of “Business”) is a reference to a calendar day or number of calendar days;

(c) the terms defined in the singular have a comparable meaning when used in the plural, and vice versa;

(d) references herein to any gender include each other gender;

(e) the terms “dollars” and “$” means the lawful currency of the United States;

(f) references herein to any Article, Section, Subsection, Exhibit or Schedule refer to, respectively, Articles, Sections, Subsections, Exhibits or Schedules of this Agreement;

(g) the words “hereof”, “herein”, and “hereunder” and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision of this Agreement; and

(h) wherever any of the words “include”, “includes”, or “including” is used in this Agreement, it is deemed to be followed by the words “without limitation” and is not to be construed to limit any general statement that it follows to the specific or similar items or matters immediately following it.

Section 1.3 Joint Negotiation. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises under any provision of this Agreement, this Agreement will be construed as if drafted jointly by the Parties, and no presumption or burden of proof will arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement or by virtue of any prior drafts of this Agreement.

ARTICLE II

PURCHASE AND SALE

Section 2.1 Purchased Assets. Except for the Excluded Assets identified in Section 2.2, at the Closing, Buyer will purchase, acquire and accept from Seller and Seller will sell, transfer, convey, assign and deliver to Buyer, free and clear of any and all Encumbrances (other than Permitted Encumbrances) and subject to the Assumed Liabilities, all of Seller’s rights, title and interest in the assets, properties and rights

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owned or held by Seller that are used, held for use or useful in connection with, or relating to, the Business, of every nature and description, both tangible and intangible, real or personal, wherever such assets are situated, whether or not reflected on the books and records of Seller, other than the Excluded Assets (collectively, the “Purchased Assets”), including:

(a) all trade and other accounts and notes receivable of Seller in respect of the Business;

(b) all inventory used, held for use or useful in connection with the Business, including all raw materials and supplies, parts, goods-in-process and finished goods (whether in transit, located at Seller’s facilities or located elsewhere), including the inventory described on Schedule 2.1(b) (the “Purchased Inventory”);

(c) all deposits (including customer deposits and security for rent, electricity, telephone or otherwise) and prepaid charges and expenses of Seller in respect of the Business;

(d) all tangible personal property used, held for use or useful in connection with, or relating to, the Business, including all machinery, equipment, tools, tooling, furnishings, desks, chairs, copiers, computers, monitors, network equipment, telephones, other office equipment and vehicles, including those described on Schedule 2.1(d);

(e) all rights of Seller (i) under the Real Property Leases and (ii) in and to all improvements, fixtures and other appurtenances located on or attached to the Leased Real Property;

(f) all rights of Seller to any claims, demands, judgments, suits, actions or causes of action related to the Business, whether known or unknown, and whether arising before or after the Closing Date;

(g) all rights of Seller under those Contracts identified on Schedule 2.1(g) (together with the Real Property Leases, the “Assumed Contracts”), including all claims or causes of action in favor of Seller with respect to the Assumed Contracts;

(h) all Intellectual Property owned by, licensed to, or otherwise in the possession or control of Seller in each case, which are used, held for use or useful in connection with, or relating to, the Purchased Assets or the Business (the “Purchased Intellectual Property”), including the Intellectual Property listed on Schedule 2.1(h);

(i) to the extent assignable or transferable, all Permits, authorizations, certificates and credits granted or issued by Governmental Entities used, held for use or useful in connection with, or relating to, the Purchased Assets or the Business;

(j) all goodwill and other intangible assets of Seller with respect to the Business;

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(k) all telephone and facsimile numbers, telephone number listings, and post office boxes relating to the Business;

(l) all representations, warranties and guarantees made by suppliers, manufacturers and contractors in connection with products sold or services provided to Seller in connection with, or relating to, the Business;

(m) all property and casualty insurance proceeds, and all rights to property and casualty insurance proceeds, in each case to the extent received or receivable in respect of the Business;

(n) all business records, files, production data, technical documentation, (including design specifications, functional requirements, operating instructions, operating procedures and method masters), equipment maintenance data, accounting records, inventory records, sales data, customer lists, customer files, promotional data, advertising materials (including sales brochures, flyers, pamphlets and web pages), cost and pricing information, business plans, supplier lists, lists of independent contractors, regulatory filings and all other records and data relating to any Purchased Asset or used or useful in connection with the Business, regardless of the data storage medium; and

(o) other than the Excluded Assets, all other assets used, held for use or useful in connection with, or relating to, the Business.

Section 2.2 Excluded Assets. Notwithstanding anything to the contrary in this Agreement, Seller will retain and not sell, transfer, convey, assign or deliver to Buyer and Buyer will not purchase, acquire or accept from Seller pursuant to this Agreement the following (the “Excluded Assets”):

(a) all minute books, organizational documents, shareholder and member ledgers and such other books and records of Seller as pertain to ownership, organization or existence of Seller;

(b) any business records and files that Seller is required by Law to retain; provided that Buyer will have the right to make copies of any portions of such retained records and files that relate to the Purchased Assets or the Business;

(c) all rights, claims or causes of action of Seller arising under this Agreement or the Ancillary Agreements, or relating to the Excluded Assets or the Retained Liabilities;

(d) all documents primarily relating to proposals to acquire the Business by Persons other than Buyer;

(e) Tax refunds, Tax credits, pre-paid Taxes or estimated Taxes, or any similar Tax benefits of Seller;

(f) all Contracts of Seller which are not Assumed Contracts;

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(g) all cash and cash equivalents of Seller;

(h) all confidential personnel records pertaining to any Employee; provided that Buyer will have the right to make copies of any portions of such records pertaining to those Employees who are employed by Buyer or any Affiliate of Buyer after the Closing;

(i) any assets held in relation to any employee benefit or welfare plan or any Contract or policy relating to any such plan;

(j) all refunds of pre-paid insurance premiums;

(k) all abandoned or unclaimed property reportable under any state or local unclaimed property, escheat or similar Law where the dormancy period elapsed prior to the Closing Date;

(l) any equity interest in any Subsidiary or any other Person, including Holmes Tool & Engineering, Inc. (“Holmes Tool”); and

(m) the assets set forth on Schedule 2.2(m).

Section 2.3 Assumed and Retained Liabilities.

(a) On the terms and subject to the conditions set forth in this Agreement, at the Closing, Buyer will assume, and agree to pay, perform and discharge when due, only (i) obligations under the Assumed Contracts (including any Non-assigned Assets) that arise out of or relate to the period of performance from and after the Closing Date; (ii) any Liabilities arising following the Closing in connection with, or relating to, the operation of the Business by Buyer or the use or ownership of any Purchased Assets; (iii) the Assumed IP WIP Liabilities; (iv) the Assumed Environmental Liabilities; and (v) the current liabilities of Seller included in the calculation of the Closing Working Capital (collectively, the “Assumed Liabilities”). Except as otherwise provided in Section 6.14, in no event will the Assumed Liabilities include any Liability attributable to Seller’s action, failure to act, or other claim arising from Seller’s action or inaction occurring prior to the Closing.

(b) Notwithstanding anything to the contrary in this Agreement, Buyer will not assume, or be deemed to have assumed or guaranteed, or otherwise be responsible for, any Liability of Seller or any predecessor-in-interest, of any kind or nature whatsoever other than the Assumed Liabilities. Without limiting the generality or effect of the foregoing, from and after the Closing Date, Seller will continue to be liable for and will pay, perform, or otherwise discharge, as and when the same may become due and payable, all Liabilities and obligations of Seller other than the Assumed Liabilities, including those set forth below (such Liabilities and obligations retained by Seller being referred to herein as the “Retained Liabilities”):

(i) any Liabilities that would be shown on or reflected in the notes to a balance sheet of Seller prepared in accordance with GAAP at the time of Closing, other than as specifically included in the Assumed Liabilities;

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(ii) other than the Assumed Environmental Liabilities, any Environmental Liabilities of Seller or its current or former equityholders or arising out of the operation of Seller’s business (including the Business on or prior to the Closing Date);

(iii) any Liabilities arising in connection with, or relating to, Contracts that are not Assumed Contracts;

(iv) any Liabilities arising in connection with, or relating to, any Debt of Seller;

(v) any Liabilities to pay so-called “transaction bonuses” to Edward Bird, Lawrence Berry, James Valentine, and Ravi Krishnan in accordance with the terms and provisions of Transaction Bonus Letters dated as of December 6, 2013 from Seller in favor of each of such individuals and any other Liabilities of Seller for any other bonuses, severance payments, change of control payments or similar obligations arising prior to the Closing or payable as a result of the consummation of the Transaction;

(vi) any Liabilities arising in connection with, or relating to, (A) Taxes of Seller, or any of its predecessors-in-interest, (B) Taxes that relate to the Purchased Assets, the Assumed Liabilities or the Business arising prior to or at the Closing Date, or (C) payments of Taxes of any other Person for which Seller may be liable, whether as a transferee under any Tax allocation, sharing or similar agreement (whether oral or written) of Seller or any of its predecessors-in-interest or otherwise;

(vii) any Liabilities arising in connection with, or relating to, (A) any employee benefit plan of Seller, including any withdrawal Liability under Part I of Subtitle E of Title IV of ERISA for a “complete withdrawal” (within the meaning of Section 4203 of ERISA) or a “partial withdrawal” (within the meaning of Section 4205 of ERISA), or the amendment, termination or freeze of any employee benefit plan, (B) any Employee or former employee of Seller or any spouse, child or other dependent or beneficiary of any Employee or former employee of Seller, including Liabilities for wages, salaries, benefits or claims, or (C) the termination of employment by or with Seller of any Employee;

(viii) any Liabilities arising in connection with, or relating to, any pending or threatened Legal Proceeding involving Seller (including the operation of the Business prior to the Closing);

(ix) any Liabilities now due or hereafter arising in connection with the assignment or other transfer, documentation or recording of any of the Purchased Intellectual Property through its complete chain of title into the name of Seller before the assignment thereof to Buyer at Closing, including any Tax Liabilities associated with any such actions;

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(x) any Liabilities arising in connection with, or relating to, the operation of the Business, the use or ownership of any Purchased Assets, or events, actions or failures to act occurring, prior to the Closing, including a breach, event of default or indemnity obligation under an Assumed Contract, other than as specifically included in the Assumed Liabilities, including (i) Liabilities arising after Closing with respect to any actual or alleged infringement or violation of the Intellectual Property of any Person occurring prior to the Closing and (ii) the Retained IP WIP Liabilities;

(xi) subject to Section 6.14, any Liabilities arising as a result of any design, installation, performance or operation of any Pre-Closing Product;

(xii) any Liabilities of Seller under, or in connection with the execution, delivery or performance of, this Agreement; and

(xiii) any Liabilities arising in connection with, or relating to the sale, transfer or other disposition of any business segment or other assets (other than the Assumed Liabilities) of Seller (whether previously held, currently held or may be held in the future).

Section 2.4 Purchase Price.

(a) The aggregate consideration for the Purchased Assets will be (i) an amount in cash equal to $8,900,000 (the “Purchase Price”), subject to adjustment as provided in Section 2.5, plus (ii) the Contingent Consideration, if any, and (iii) the assumption of the Assumed Liabilities.

(b) On the Closing Date, Buyer will pay an amount equal to the Purchase Price, minus (i) the Escrow Amount, (ii) Buyer’s cost of each Substitute Bond, and (iii) the outstanding amount of Debt owing to the Persons set forth on Schedule 2.9(i), to Seller, which amount will be paid by wire transfer of immediately available funds into an account designated by Seller in writing not fewer than three Business Days prior to the Closing Date.

(c) On the Closing Date, Buyer will deposit the Escrow Amount by wire transfer of immediately available funds into an interest bearing escrow account to be designated and held by the Escrow Agent pursuant to the Escrow Agreement. The Escrow Amount will be held in escrow and maintained and disbursed in accordance with Section 9.12 of this Agreement and the Escrow Agreement. The Escrow Amount will be used to secure and satisfy indemnification obligations and reimbursement obligations of Seller and Shareholder under this Agreement following the Closing Date.

(d) On the Closing Date, Buyer will pay on behalf of Seller all Debt to those Persons set forth on Schedule 2.9(i) by wire transfer of immediately available funds in the amounts and to the accounts specified on Schedule 2.9(i).

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(e) (i) As soon as practicable, but no later than 90 days after the Closing, Buyer will prepare and deliver, or cause to be prepared and delivered, to Seller a Form 8594 and any required exhibits thereto (the “Allocation Schedule”) allocating the Purchase Price among the Purchased Assets in conformance with Section 1060 of the Code. To the extent consistent with the Code and applicable regulations, the Buyer will prepare the Allocation Schedule in a manner consistent with the preliminary allocations set forth on Exhibit D, with such changes as may be necessary to reflect changes in amounts as of the Closing Date, it being understood that the preliminary allocations were prepared as of an earlier date.

(ii) Within 30 days after Buyer’s delivery of the Allocation Schedule to Seller, Seller may deliver to Buyer a written notice (an “Allocation Schedule Objection”) of any disagreement with the Allocation Schedule, specifying any proposed changes thereto consistent with Section 1060 of the Code. If an Allocation Schedule Objection is not timely delivered, the Allocation Schedule delivered by Buyer will be deemed final.

(iii) If an Allocation Schedule Objection is timely delivered, Buyer and Seller will, during the 30 days following such delivery, use their commercially reasonable efforts to agree on the disputed items or amounts to determine the Allocation Schedule. If the Parties resolve all disputes, the Allocation Schedule, as amended to the extent necessary to reflect the resolution of the dispute, will be conclusive and binding on the Parties. If no such agreement is reached during such 30 day period, then Buyer and Seller, jointly, will engage an independent valuation firm mutually acceptable to Buyer and Seller for the purpose of determining the Allocation Schedule (it being understood that in making such determination, the valuation firm will be functioning as an expert and not as an arbitrator). The valuation firm will deliver to Buyer and Seller, as promptly as practicable (but in any case no later than 45 days from the date of engagement of the valuation firm), a report setting forth such determination and the Allocation Schedule. The decision of the valuation firm will be final and binding on Buyer and Seller. The fees, costs and expenses of the valuation firm’s review and report will be borne by Buyer.

(iv) Buyer and Seller will, and will cause their respective representatives to, cooperate and assist in the preparation of the Allocation Schedule and in the conduct of the review referred to in this Section 2.4(e), including making available to the extent necessary its applicable property, books, records, work papers and personnel.

(v) None of Buyer, Seller or any of their Affiliates will take a position on a Tax Return or otherwise that is inconsistent with the Allocation Schedule as finally determined pursuant to this Section 2.4(e).

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Section 2.5 Purchase Price Adjustment.

(a) As soon as practicable after the Closing, but no later than 60 days after, Buyer will prepare and deliver, or cause to be prepared and delivered, to Seller a closing statement and a certificate based on such closing statement setting forth Buyer’s calculation of the Closing Working Capital (the “Closing Statement”). The Closing Statement will present the Net Working Capital as of 12:01 a.m., Central time, on the Closing Date (the “Closing Working Capital”). An example of the calculation of Net Working Capital as of January 31, 2014 is set forth on Schedule 2.5(a).

(b) Within 30 days after Buyer’s delivery of the Closing Statement to Seller, Seller may deliver to Buyer a written notice (a “Closing Statement Objection”) of any disagreement with the Closing Statement, specifying any proposed adjustment thereto (an “Adjustment Request”). Any such Adjustment Request will specify those items or amounts as to which Seller disagrees, and Seller will be deemed to have agreed with all other items and amounts contained in the Closing Statement and the calculation of the Closing Working Capital delivered pursuant to Section 2.5(a). If the Closing Statement Objection is not timely delivered, the Closing Statement will be deemed final.

(c) If Seller timely delivers to Buyer a Closing Statement Objection pursuant to Section 2.5(b), Buyer and Seller will, during the 30 days following such delivery, use their commercially reasonable efforts to agree on the disputed items or amounts to determine the amount of the Closing Working Capital. If the Parties resolve all disputes, the computation of the Closing Working Capital, as amended to the extent necessary to reflect the resolution of the dispute, will be conclusive and binding on the Parties. If no such agreement is reached during such 30 day period, then Buyer and Seller, jointly, will engage Ernst & Young LLP (the “Independent Accountant”), to review this Agreement and the disputed items or amounts for the purpose of calculating the Closing Working Capital (it being understood that in making such calculation, the Independent Accountant will be functioning as an expert and not as an arbitrator). In making such calculation, the Independent Accountant will act in good faith and consider only those items or amounts in the Closing Statement and the calculation of the Closing Working Capital as to which Seller has disagreed. The Independent Accountant will deliver to Buyer and Seller, as promptly as practicable (but in any case no later than 30 days from the date of engagement of the Independent Accountant), a report setting forth such calculation. In no event will the amount of the Closing Working Capital be less than the amount thereof shown in Buyer’s calculation delivered pursuant to Section 2.5(a) nor more than the amount thereof shown in Seller’s calculation delivered pursuant to Section 2.5(b). During the period in which the Independent Accountant is making its determination, the Independent Accountant may communicate with Buyer and Seller from time to time; provided, however, that neither Seller nor Buyer will have any communication with the Independent Accountant without first offering the other Party a reasonable opportunity to participate in that communication at a time acceptable to Buyer, Seller, and the Independent Accountant. The decision of the Independent Accountant will be final and binding on Buyer and Seller. The fees, costs and expenses of the Independent Accountant’s review and report will be divided equally between Buyer and Seller.

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(d) Buyer and Seller will, and will cause their respective representatives to, cooperate and assist in the preparation of the Closing Statement and the calculation of the Closing Working Capital and in the conduct of the review referred to in this Section 2.5, including making available to the extent necessary its applicable books, records, work papers and personnel.

(e) If Seller timely delivers to Buyer a Closing Statement Objection pursuant to Section 2.5(b) and the Closing Working Capital would be less than the Net Working Capital Threshold Amount if all disputed items or amounts in the Closing Statement Objection were to be resolved in favor of Seller, Seller will pay Buyer the amount of such deficiency within three Business Days after Seller delivers the Closing Statement Objection to Buyer by wire transfer of immediately available funds to the account designated in writing by Buyer.

(f) After the Closing Working Capital is deemed final pursuant to Section 2.5(c), if the Closing Working Capital is less than the Net Working Capital Threshold Amount, Seller will pay Buyer the amount of such deficiency (less any amount paid by Seller to Buyer pursuant to Section 2.5(e)). Any payment pursuant to this Section 2.5(f) will be due no later than three Business Days after the Closing Working Capital is deemed final pursuant to Section 2.5(c), and will be payable by wire transfer of immediately available funds to the account designated in writing by Buyer.

Section 2.6 Contingent Consideration.

(a) Seller will be entitled to receive additional cash consideration if, (i) on or prior to the Closing Date, Seller or (ii) within 270 days from the Closing Date, Buyer, enters into any binding purchase order resulting from any or all of the potential customer projects described on Schedule 2.6(a) (each a “Purchase Order”) which (A) is on terms that are consistent with the Ordinary Course of Business and (B) has a projected Gross Margin as of the date of such Purchase Order or, for any Purchase Order accepted by Seller prior to Closing, as of the Closing Date, in excess of 25%. In such case, subject to Section 2.6(b), Seller will be entitled to an amount equal to 5% of the aggregate consideration received by Buyer after the Closing in connection with each such Purchase Order (collectively, the “Contingent Consideration”).

(b) Any Contingent Consideration with respect to a Purchase Order or a deliverable thereunder will be considered fully earned and payable to Seller within 30 days after Buyer’s actual receipt of each and every corresponding cash payment related to such Purchase Order, without giving effect to any credits, refunds, incentives, or offsets provided to the applicable customer under such Purchase Order.

(c) Seller acknowledges that (i) the provisions of this Section 2.6 are an integral part of the consideration to be received by Seller in respect of the Purchased Assets, (ii) there may be no Contingent Consideration payable pursuant to the provisions of this Section 2.6, (iii) the rights of Seller under this Section 2.6 will not be represented by certificates or other instruments and will not represent an ownership interest in Buyer or any of its Affiliates or Subsidiaries, (iv) the rights of Seller under this Section 2.6 are not transferable, except as provided in Section 10.3, and (v) the rights of Seller to payment of Contingent Consideration will not bear any interest.

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(d) Seller acknowledges that Buyer’s operation of the Business may affect the ability to realize any Contingent Consideration, and Buyer will not be obligated to enter into or accept a Purchase Order pursuant this Section 2.6 if, in the reasonable, good faith judgment of Buyer, the Purchase Order (i) will not result in a Gross Margin equal to or greater than 25% or (ii) is not, or would not be, on terms and conditions that are consistent with the Ordinary Course of Business of Seller. Buyer agrees to use its commercially reasonable efforts to perform its obligations under each accepted Purchase Order.

Section 2.7 Closing. The Closing will take place at the offices of Jones Day, 2727 North Harwood Street, Dallas, Texas, at 10:00 a.m., Central time, as promptly as practicable following the date of this Agreement and in any event no later than the third Business Day following the satisfaction or waiver of the conditions set forth in Article VII (other than those conditions that by their terms cannot be satisfied until the Closing, but subject to the satisfaction or waiver of such conditions), or at such other place or such other time as Seller and Buyer may mutually agree. The Closing may be conducted remotely by overnight mail, e-mail and/or wire transfer. The “Closing Date” will be the date upon which the Closing occurs.

Section 2.8 Deliveries by Buyer. At the Closing, Buyer will:

(a) pay the Purchase Price to Seller in accordance with Section 2.4(b);

(b) deposit the Escrow Amount with the Escrow Agent in accordance with Section 2.4(c);

(c) pay on behalf of Seller the Debt in accordance with Section 2.4(d); and

(d) deliver, or cause to be delivered, to Seller and the Shareholder:

(i) counterpart signature to one or more assignment and assumption agreements, in form and substance reasonably acceptable to Buyer and Seller (the “Assignment Agreements”);

(ii) counterpart signature to the Severance Agreement;

(iii) the Escrow Agreement, executed by Buyer and the Escrow Agent;

(iv) the closing certificate contemplated by Section 7.3(c);

(v) a certificate, in a form satisfactory to Seller, of an officer of Buyer dated as of the Closing Date and certifying correct and complete copies of the resolutions of the board of directors of Buyer, approving and authorizing the execution, delivery and performance of this Agreement, the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby;

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(vi) evidence satisfactory to Seller and Shareholder that Buyer has caused to be furnished to the customers of the Business listed on Schedule 2.8(d)(vi) performance bonds (in form and substance satisfactory to each such customer) in substitution for the performance bonds listed thereon and previously furnished on behalf of Seller to such customers (each, a “Substitute Bond”); and

(vii) such other documents and instruments necessary to consummate the Transaction upon the terms and conditions set forth in this Agreement, all of which, together with the documents and instruments referred to above, will be in form and substance reasonably satisfactory to Seller and the Shareholder.

Section 2.9 Deliveries by Seller and the Shareholder. At the Closing, Seller and the Shareholder will deliver, or cause to be delivered, to Buyer:

(a) one or more bills of sale executed by Seller conveying to Buyer title to the Purchased Assets, in form and substance reasonably acceptable to Buyer and Seller;

(b) Seller’s counterpart signature to the Assignment Agreements;

(c) Lawrence Berry’s counterpart signature to the Severance Agreement;

(d) Seller’s counterpart signature to the Escrow Agreement;

(e) the closing certificate contemplated to Section 7.2(c);

(f) landlord estoppel certificates with respect to, and from the landlord of, the Leased Real Property, in form and substance reasonably acceptable to Buyer;

(g) the Intellectual Property Assignment Agreement(s), executed by Seller;

(h) evidence of the name change of Seller, including any “d/b/a” names or other business aliases or trade names of Seller, to a name that is not confusingly similar to Seller’s name prior to the Closing Date;

(i) pay-off letters, in form and substance reasonably acceptable to Buyer, with respect to the discharge in full of the Debt of Seller to each person listed on Schedule 2.9(i) and any other Person which has an Encumbrance (other than a Permitted Encumbrance) on the Purchased Assets, including any set forth on Schedule 4.11;

(j) evidence, satisfactory to Buyer, of payment and termination of all security interests, Tax Encumbrances or other Encumbrances of any nature with respect to the Purchased Assets (except the Permitted Encumbrances), not already provided for under Section 2.9(i);

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(k) a certificate, in a form satisfactory to Buyer, of a duly authorized officer of Seller dated as of the Closing Date, certifying correct and complete copies of the resolutions of the board of directors and the sole shareholder of Seller, approving and authorizing the execution, delivery and performance of this Agreement, the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby;

(l) a certificate addressed to Buyer from a duly authorized officer of Seller confirming that, upon payment by Buyer of the Purchase Price, all Debt outstanding prior to or as of the Closing, including any additional amounts necessary to fully discharge such Debt, shall have been paid in full;

(m) copies of the executed Consents listed on Schedule 2.9(m);

(n) an affidavit that Seller is not a “foreign person” within the meaning of Section 1445 of the Code; and

(o) such other documents and instruments necessary to consummate the Transaction upon the terms and conditions set forth in this Agreement, all of which, together with the documents and instruments referred to above, will be in form and substance reasonably satisfactory to Buyer.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER

Seller and the Shareholder have provided certain disclosure schedules accompanying this Agreement (the “Disclosure Schedules”, with each reference to a “Schedule” in Article III or Article IV deemed to be a reference to the corresponding section of the Disclosure Schedules), which Disclosure Schedules will be arranged for convenience in individual Schedules corresponding to certain numbered Sections contained in this Agreement. The disclosures on any Schedule will qualify any representation or warranty to the extent that the relevance or applicability of such disclosures to such representation or warranty is reasonably apparent on its face, notwithstanding that a particular representation or warranty may not specifically make a reference or cross-reference to the Schedule. Except as set forth in the Disclosure Schedules, the Shareholder hereby represents and warrants to Buyer as follows:

Section 3.1 Authorization and Enforceability. The execution, delivery and performance of the Shareholder of this Agreement and the Ancillary Agreements to which he is a party, and the consummation of the transactions contemplated hereby and thereby are within the Shareholder’s power and authority. The Agreement has been, and at the Closing the Ancillary Agreement will be, duly executed and delivered by the Shareholder, to the extent he is a party thereto. This Agreement is, and upon execution and delivery at the Closing each of the Ancillary Agreements, to the extent he is a party thereto, will be, a legal, valid and binding agreement of the Shareholder, enforceable against the Shareholder in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general applicability relating to or affecting creditors’ rights and to general equity principles (the “Bankruptcy and Equity Exception”).

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Section 3.2 Consents and Approvals. Except for the Consents set forth on Schedule 3.2, no Consent is required to be obtained by the Shareholder from, or to be given by the Shareholder to, or made by the Shareholder with, any Government Entity or other Person in connection with the execution, delivery and performance by the Shareholder of this Agreement or any of the Ancillary Agreements to which the Shareholder is a party.

Section 3.3 Non-Contravention. The execution, delivery and performance by the Shareholder of this Agreement and the Ancillary Agreements to which the Shareholder is a party, and the consummation of the Transaction, does not and will not (a) conflict with, or result in the breach of, or constitute a default under, any Contract to which the Shareholder is a party or bound, or result in the creation of any Encumbrance upon any of the Purchased Assets or (b) violate any Law to which the Shareholder is subject.

Section 3.4 Finders’ Fees. Except for Persons listed on Schedule 3.4, whose fees will be paid by the Shareholder on or prior to the Closing, there is no investment banker, broker or other finder that has been retained by or is authorized to act on behalf of the Shareholder or his Affiliates who might be entitled to any fee or commission from the Shareholder or his Affiliates in connection with the Transaction.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF SELLER

Except as set forth in the Disclosure Schedules, Seller and the Shareholder hereby, jointly and severally, represent and warrant to Buyer as follows:

Section 4.1 Organization, Due Authorization and Enforceability.

(a) Seller is duly organized, validly existing and in good standing under the Laws of the State of Connecticut, has all requisite corporate power and authority to own, lease and operate its properties and assets (including the Purchased Assets), and to carry on the Business as currently conducted by such entity and is duly qualified to do business, and is in good standing as a foreign entity in each jurisdiction where the ownership or operation of such assets or the conduct of the Business by such entity requires such qualification, except for failures to be so qualified or in good standing, as the case may be, that individually or in the aggregate, would not reasonably be likely to result in a Seller Material Adverse Effect. The organizational documents of Seller are in full force and effect. The states in which Seller is qualified to do business as a foreign entity are identified on Schedule 4.1(a).

(b) Seller has full corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party and to perform its obligations hereunder and thereunder.

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(c) The execution, delivery and performance by Seller of this Agreement and the Ancillary Agreements to which it is a party has been duly and validly authorized and no additional corporate authorization or consent is required in connection with the execution, delivery and performance by Seller of this Agreement and the Ancillary Agreements to which it is a party. Seller has, in accordance with the relevant provisions of its organizational documents and applicable Laws, obtained the unanimous written consents of its shareholders and board of directors, approving this Agreement, the Ancillary Agreements and the Transaction and such consents have not been amended, rescinded, revoked or otherwise terminated as of the Closing.

(d) This Agreement has been, and at the Closing each of the Ancillary Agreements to which it is a party will be, duly and validly executed by Seller. This Agreement and the Ancillary Agreements to which Seller is a party will constitute, when so executed and delivered, a valid and legally binding obligation of Seller, enforceable against Seller in accordance with its terms, subject to the Bankruptcy and Equity Exception.

Section 4.2 Consents and Approvals. Except for the Consents set forth on Schedule 4.2, no Consent is required to be obtained by Seller from, or to be given by Seller to, or made by Seller with, any Government Entity or other Person in connection with the execution, delivery and performance by Seller of this Agreement or any of the Ancillary Agreements or the consummation by Seller of the transactions contemplated hereby and thereby, except where the failure to obtain any Consent would not result in a Seller Material Effect.

Section 4.3 Non-Contravention. Except as set forth on Schedule 4.3, the execution, delivery and performance by Seller of this Agreement or any of the Ancillary Agreements, and the consummation of the transactions contemplated hereby and thereby, does not and will not (a) violate any provision of the organizational documents of Seller, (b) conflict with, or result in the breach of, or constitute a default under, any Contract to which Seller is a party or bound, or result in the creation of any Encumbrance (other than a Permitted Encumbrance) upon any of the assets or properties of Seller (including the Purchased Assets), or (c) violate any Law to which Seller is subject, except, with respect to (b) and (c), where the conflict or violation would not result in a Seller Material Adverse Effect.

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Section 4.4 Financial Statements.

(a) Seller has made available to Buyer correct and complete copies of (i) the unaudited balance sheets of Seller as of November 30, 2011 and 2012 and the related unaudited statements of income and cash flow for the years then ended and (ii) the internally prepared balance sheet of Seller as of November 30, 2013 ( the “Balance Sheet”) and the related unaudited statements of income and cash flow of Seller for the 12-month period then ended (such financial statements, including the related notes and schedules thereto, are referred to herein as the “Financial Statements”).

(b) The Financial Statements have been prepared in accordance with GAAP, as historically applied by Seller, consistently applied, and fairly and accurately present the financial condition and results of operations and cash flows of Seller as of the dates thereof or the periods then ended.

(c) There are no significant deficiencies or material weaknesses in the design or operation of Seller’s internal controls that adversely affect the ability of Seller to record, process, summarize and report financial information in accordance with GAAP as historically applied by Seller. Seller has not and, to the Knowledge of Seller, no auditor, accountant, consultant or representative of any such Person has received or otherwise obtained knowledge of any substantive complaint, allegation, assertion or claim, whether written or oral, that Seller has engaged in questionable accounting or auditing practices. There has been no, and there does not currently exist, any fraud, nor the existence of or allegation of financial improprieties that involves management of Seller.

(d) All notes and accounts receivable reflected on the Financial Statements are valid receivables and were incurred in the Ordinary Course of Business for bona fide products delivered or services rendered and, to the Knowledge of Seller, to the extent not previously collected, are current and collectible net of any reserves shown on the Financial Statements. No such accounts or notes receivable (i) are subject to any pending or, to the Knowledge of Seller, threatened set-off, discount or counterclaim, other than for which a reserve has been established on the Financial Statements or (ii) have been assigned or pledged to any Person. Seller has delivered to Buyer a true, correct and complete aging of Seller’s accounts and notes receivable as of November 30, 2013.

(e) All inventories (including materials, work-in-progress and finished products held for sale) of Seller (whether or not in the possession of Seller) are of a quality and quantity usable and saleable in the Ordinary Course of Business and fit for the purposes for which they were procured or manufactured, subject to appropriate and adequate allowances reflected on the Financial Statements for obsolete, excess, slow-moving and other irregular items. Such allowances have been calculated in accordance with GAAP and in a manner consistent with past practice. No items of inventory (including materials, work-in-progress and finished products held for sale) are held on consignment, or otherwise, by third parties.

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(f) Schedule 4.4(f) sets forth the back-log of Seller as of January 31, 2014 setting forth the applicable (i) customer, (ii) order date, and (iii) order amount. The back-log for Seller represents bona fide orders under Contracts that were made in the Ordinary Course of Business, including with respect to the expected Gross Margins.

Section 4.5 Absence of Liabilities. Except as set forth on Schedule 4.5, Seller has no Liabilities, or facts or circumstances, that could reasonably be expected to give rise to Liabilities of Seller, except (a) Liabilities reflected on the Balance Sheet and (b) Liabilities arising in the Ordinary Course of Business after November 30, 2013 (none of which relates to breach of Contract, breach of warranty, tort, infringement, violation of Law or Environmental Liability or which would, individually or in the aggregate, result in a Seller Material Adverse Effect).

Section 4.6 Absence of Changes. Except as set forth on Schedule 4.6, since December 1, 2012, (a) Seller has conducted the Business in the Ordinary Course and (b) there has not been any event, occurrence, development, circumstance, condition or state of facts that has had or which would reasonably be expected to result in, individually or in the aggregate, a Seller Material Adverse Effect.

Section 4.7 Litigation and Claims. Except as set forth on Schedule 4.7, there is no Legal Proceeding pending or, to the Knowledge of Seller, threatened against or relating to Seller in connection with the assets or properties of Seller (including the Purchased Assets), the Business or the Transaction, and to the Knowledge of Seller, there is no valid basis for any such Legal Proceeding. Neither Seller nor any of its assets and properties (including the Purchased Assets) are subject to any Order, writ, judgment, award, injunction or decree of any court or governmental or regulatory authority of competent jurisdiction or any arbitrator or arbitrators.

Section 4.8 Taxes.

(a) Seller is, and has been since December 1, 1998, a validly electing “S Corporation” within the meaning of Sections 1361 and 1362 of the Code and no Government Entity has raised, formally or informally, any question regarding the status of the Company as an S Corporation. Seller has no qualified subchapter S subsidiaries within the meaning of Section 1361(b)(3)(B) of the Code. Seller has not acquired since the date of its formation an asset from a C corporation in the circumstances described in Section 1374(d)(8) of the Code. Seller is not and will not be liable for any Tax under Sections 1374 or 1375 of the Code or any similar provisions of state, local or foreign Law in connection with the Transaction contemplated by this Agreement. Further, the Purchased Assets are not otherwise subject to, for federal income tax purposes, treatment as a partnership among Seller and any other Person for which a partnership income Tax Return is required.

(b) Seller has properly completed and timely filed in correct form all federal, state, county, local and foreign income, excise, property, sales, use and other Tax Returns required to be filed by Seller (including any Tax Returns with respect to the Purchased Assets) prior to the Closing Date for all Tax years in which the statute of

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limitations remains open for a Government Entity to assess Taxes, all of which when filed were true, correct and complete in all material respects, and Seller has paid all Taxes and assessments (including any Taxes with respect to the Purchased Assets) which have become due and owing, except to the extent contested in good faith by proper proceedings, and except where the failure to file or pay Taxes would not result in a Seller Material Adverse Effect or for which adequate reserves have been established on the Financial Statements.

(c) Schedule 4.8(c) lists: (i) each type of Tax paid by Seller in any of years 2011 and 2012 where the liability of Seller in any such year exceeded $25,000, (ii) each type of Tax Return filed by or on behalf of Seller in any of years 2011 and 2012, and (iii) each jurisdiction where Seller, in any of years 2011 and 2012, paid Tax in excess of $25,000. Seller has filed all Tax Returns in all jurisdictions where it had a duty to do so with respect to Seller and the Purchased Assets. Except as set forth on Schedule 4.8(c), no claim has been made by a Governmental Entity in a jurisdiction in which Seller does not currently file a Tax Return such that Seller is or may be subject to taxation by that jurisdiction.

(d) Seller has delivered to Buyer true and complete copies of all federal and State of Connecticut income Tax Returns filed by Seller in the prior two years.

(e) Except as set forth on Schedule 4.8(e), there are no agreements, waivers or other arrangements with any Government Entity providing for an extension of time for filing any Tax Returns or the assessment of any Tax (or deficiency thereof) in effect or, to the Knowledge of Seller, contemplated, and there are no actions, suits, proceedings, investigations, claims or offers in compromise pending by or against Seller in respect of any Tax or assessment.

(f) Seller has not been audited by the United States Internal Revenue Service or the taxing authority of the State of Connecticut during the five year period preceding the end of Seller’s last fiscal year.

(g) Seller has not executed or granted any waiver of any statute of limitation with respect to the assessment or collection of any Tax.

(h) Except as set forth on Schedule 4.8(h), Seller has properly withheld from the salaries, wages or other compensation paid or payable to its officers, Employees, independent contractors and other Persons, and has paid to the appropriate federal, state and local authorities, all amounts required to be withheld therefrom under applicable Law.

(i) There are no Encumbrances upon any of the properties or assets of Seller for Taxes due and payable or interest or penalty thereon. There are no pending or, to the Knowledge of Seller, threatened Tax appeals or claims for a Tax refund. To the Knowledge of Seller, there are no pending Tax audits or Tax examinations.

(j) Seller has not requested, consented to or entered into any offers-in-compromise or other agreements with the United States Internal Revenue Service for the payment of any Tax, interest or penalties in connection with the Business after the date on which such amounts were originally due.

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(k) Seller is not a “foreign person” within the meaning of Section 1445 of the Code.

(l) The Transaction is not, with respect to Seller, a “reportable transaction” within the meaning of Section 6707A of the Code.

Section 4.9 Employees and Employee Benefits.

(a) Each “employee benefit plan,” as defined in Section 3(3) of ERISA, whether or not subject to ERISA, and any other material employee plan or agreement, including each severance pay, salary continuation, bonus, incentive, equity, phantom equity, deferred compensation, change of control, retention, employment agreement, consulting agreement, maintained, contributed to or required to be contributed to by Seller (collectively, the “Benefit Plans”) is listed on Schedule 4.9(a). With respect to each Benefit Plan, Seller has provided or made available to Buyer (i) correct and complete copies of the Benefit Plans (or, in the case of any such Benefit Plans that are unwritten, descriptions thereof), (ii) all determination letters or opinion letters from the Internal Revenue Service relating to any qualified employee pension benefit plan, (iii) all current summary plan descriptions and the most recent summaries of material modifications and summary annual reports for each Benefit Plan to which the ERISA disclosure requirements apply, (iv) Form 5500 (and all schedules) for the last three plan years for each Benefit Plan to which the ERISA reporting requirements apply, and (v) all trust agreements, insurance contracts or similar funding vehicles. The Benefit Plans maintained, contributed to or required to be contributed to by Seller have been maintained, operated and administered in all material respects in accordance with their respective terms and applicable Law. Seller does not have any Liability under any benefit or compensation plan that covers any Employee, former employee, sales representative or consultant other than the Benefit Plans or as required under applicable Laws.

(b) Buyer will have no Liability with respect to any plan, arrangement or practice of the type described in Section 4.9(a) or other employee benefit plan as a result of the Transaction contemplated by this Agreement (other than any COBRA Liabilities to which Buyer may be subject to by Law).

(c) Set forth on Schedule 4.9(c) is, for each Employee, independent contractor, consultant and agent of Seller, including each Employee on leave of absence or layoff status, each of the following: (i) name, (ii) job title, (iii) date of hiring or engagement, (iv) current compensation paid or payable, and (v) sick and vacation leave that is accrued but unused. Prior to the Closing, Seller will provide Buyer with reasonable access to each Employee, independent contractor, consultant and agent of Seller for the purpose of preparing for and conducting employee interviews with each such person.

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(d) Except as set forth on Schedule 4.9(d), all Employees of Seller are at-will employees.

(e) Seller is, and after the consummation of the Transaction contemplated by this Agreement will be, in compliance in all material respects with all Laws relating to employment, equal employment opportunity, non-discrimination, affirmative action, civil rights, terms and conditions of employment, wages, hours, benefits, family and medical leave rights, payment of wages, employee privacy rights, immigration, work eligibility, labor relations, occupational safety and health, the WARN Act and any similar state or local “mass layoff” or “plant closing” Laws, employee and independent contractor classifications, workers’ compensation and the collection and payment of withholding and/or social security Taxes and any similar Taxes. All Employees are legally eligible to work in the jurisdictions where they are currently employed. There has been no “mass layoff” or “plant closing” (as defined by the WARN Act) with respect to Seller in the past five years. Seller is not liable for the payment of any compensation, damages, Taxes, fines, penalties or other amounts, however designated, for failure to comply with the foregoing. Seller is not subject to any consent decree or settlement agreement with any Governmental Entity relating to compliance with Laws pertaining to labor or employment issues.

(f) Except as set forth on Schedule 4.9(f), none of the Benefit Plans are a “nonqualified deferred compensation plan” within the meaning of Section 409A of the Code and the applicable guidance thereunder.

Section 4.10 Compliance with Laws and Permits.

(a) Except as set forth on Schedule 4.10(a), the Business and the Purchased Assets have been and are in compliance with all applicable Laws and other requirements of all Government Entities, except where any non-compliance has not resulted in or would not result in a Seller Material Adverse Effect. Seller has not received any written or other notice of or been charged with the violation of any Laws. To the Knowledge of Seller, Seller is not under investigation with respect to the violation of any Laws and there are no facts or circumstances which could form the basis for any such investigation. Seller does not need to make any unusual expenditure in order to achieve or maintain compliance with any Laws. Seller is not subject to any Order, and Seller is not in breach or violation of any Order.

(b) Schedule 4.10(b) sets forth a correct and complete list of all material Permits held by Seller or used by it in the conduct of the Business. Seller is in compliance with the terms of such Permits in all material respects and there is no pending or, to the Knowledge of Seller, threatened termination, expiration, suspension, withdrawal or revocation of any such Permits. Except for the Permits set forth on Schedule 4.10(b), there are no Permits necessary or required for the conduct of the Business, except where the lack of any Permit would not result in a Seller Material Adverse Effect. Each Permit is valid and in full force and effect, and none of the Permits will lapse, terminate, expire or otherwise be impaired as a result of the performance of this Agreement or the consummation of the Transaction.

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Section 4.11 Title to Properties; Sufficiency of Assets. Seller owns good and valid title to, or a valid leasehold interest in, or a valid license to use, all of the Purchased Assets free and clear of all Encumbrances, except for Permitted Encumbrances and as set forth on Schedule 4.11. There are no existing agreements, options, commitments or rights which would entitle any Person or entity to acquire any of the Purchased Assets or any interest therein, except for purchase and sale orders set forth on Schedule 4.11 for the sale of inventory (none of which will materially adversely affect the Business or the value of the Purchased Assets). The tangible Purchased Assets have been properly maintained and are in good operating condition and repair (subject to normal wear and tear and such minor defects as do not interfere with the intended use thereof in the conduct of normal operations of the Business). The Business is conducted only through Seller. Except as set forth on Schedule 4.11, the Purchased Assets constitute all property (real and personal), tangible and intangible, necessary or appropriate for the operation of the Business as presently conducted by Seller. The delivery to Buyer at the Closing of the Purchased Assets will vest in Buyer good, marketable and exclusive title to such Purchased Assets, free and clear of all Encumbrances other than the Permitted Encumbrances.

Section 4.12 Environmental Matters.

(a) Except as set forth on Schedule 4.12(a), Seller is, and since January 1, 2009 has been, in compliance in all material respects with all applicable Environmental Laws, and Seller has not had any material Liability under any Environmental Law and, except as set forth on Schedule 4.12(a), no expenditures or operational adjustments are reasonably expected to be required in order to comply with any Environmental Laws during the next three years assuming no change in the conduct of the Business.

(b) Since January 1, 2009, Seller has possessed all Permits, licenses, registrations, identification numbers, authorizations and approvals required under applicable Environmental Laws for the operation of the Business and Seller has been and is in compliance in all material respects with same.

(c) Since January 1, 2009, Seller has not received any written claim, notice of violation or citation concerning any violation or alleged violation of any applicable Environmental Law or that relates in any way to any Hazardous Materials stored, disposed of, or generated by Seller that is presently outstanding and unresolved.

(d) There are no Orders outstanding, nor any Legal Proceedings pending or, to the Knowledge of Seller, threatened concerning compliance by Seller with any Environmental Law.

(e) Seller is not currently party to, or subject to the terms of, any Order under any applicable Environmental Law and Seller has not entered into any currently effective agreement with a Government Entity or other Person agreeing to any Liability or assuming any obligation under Environmental Law.

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(f) Except as set forth on Schedule 4.12(a), there has been no Release of any Hazardous Materials by Seller or, to the Knowledge of Seller, any other Person, on the Leased Real Property or, to the Knowledge of Seller, any of the Real Property in a manner that would reasonably be expected to result in a material Liability under any applicable Environmental Law or in violation of applicable Environmental Laws.

(g) The Leased Real Property and, to the Knowledge of Seller, any of the Real Property: (i) has not been used at any time by Seller or, to the Knowledge of Seller, by any other Person as a landfill or a waste disposal site, or (ii) is not listed or, to the Knowledge of Seller, proposed for listing on the National Priorities List, CERCLA, CERCLIS, or any similar list maintained under any Environmental Law.

(h) Except as set forth on Schedule 4.12(a), Seller has not disposed of or treated, or arranged for the disposal or treatment of, any Hazardous Material at any off-site location in a manner that would reasonably be expected to result in a material Liability under any applicable Environmental Law or in violation of applicable Environmental Laws.

(i) Except as set forth on Schedule 4.12(a), Seller does not own or operate any underground storage tanks and, to the Knowledge of Seller, no underground tanks are located in, at, on or under the Leased Real Property.

Section 4.13 Intellectual Property.

(a) Schedule 4.13(a) lists each item of Intellectual Property that is currently owned or purported to be owned by Seller and that is or was registered, issued, filed or pending, including for each jurisdiction in which such Intellectual Property is pending or has been registered or issued, the jurisdiction, the application and, if applicable, registration/issue numbers and corresponding date(s), the title or mark, as applicable, and the actual owner(s) and publicly recorded owner(s). Schedule 2.1(h) lists all of the foregoing that is Purchased Intellectual Property, and includes, to the extent known as of the date hereof, all fees that are due or other actions that need to be taken to prevent abandonment thereof within the one year following the date hereof. All renewal and maintenance fees, Taxes, annuities or other fees required to maintain rights in any Purchased Intellectual Property listed or required to be listed on Schedule 2.1(h) have been paid in full in a timely manner to the proper Governmental Entity and no such fees are due within the three month period after the Closing Date. All of the Purchased Intellectual Property required to be listed thereon has been duly registered with, filed in or issued by, as the case may be, the United States Patent and Trademark Office, the United States Copyright Office or other applicable filing office(s), domestic or foreign, and all such registrations, filings, issuances and other actions remain in full force and effect and are recorded with the applicable Governmental Entity solely in the name of Seller. Except as set forth on Schedule 4.13(a), none of the Purchased Intellectual Property is the subject of any Legal Proceeding challenging the validity, enforceability, patentability, registerability, scope or ownership of any of the Purchased Intellectual Property, other than non-final office actions by a Government Entity encountered in the ordinary course of prosecution of applications for Patent or Copyright, Internet Domain Name or Trademark registration.

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(b) Except as set forth on Schedule 4.13(a), Seller solely owns, licenses or otherwise has the right to use, free and clear of any Encumbrances (other than Permitted Encumbrances), all of the Intellectual Property used in the operation of the Business as currently conducted. Except as set forth on Schedule 4.13(a), Seller has the sole and exclusive right, title and interest to the Purchased Intellectual Property for the life thereof for any purpose, free from any requirement of any past, present or future royalty payments, license fees, charges or other payments, or conditions or restrictions whatsoever. Except as set forth on Schedule 4.13(a), immediately upon the Closing, Buyer will own all of the Purchased Intellectual Property free from Encumbrances arising from any act or failure to act by Seller and otherwise on the same terms and conditions as in effect prior to the Closing.

(c) Except as set forth on Schedule 4.13(a), to the Knowledge of Seller, there exists no fact, circumstance or Patent that would indicate to a reasonable Person that the operation of the Business as currently conducted by Seller or as conducted by Seller in the six years immediately preceding the Closing Date, including the manufacture, use, sale, offer for sale or import of any Pre-Closing Product in such period, infringes, directly or indirectly (e.g., constitutes contributory or active inducement of infringement of) any Intellectual Property of any other Person. The operation of the Business as currently conducted by Seller is not engaging in unfair competition or deceptive trade practices, and is not in violation of any Person’s rights of publicity, privacy or attribution, and has not engaged in any of the foregoing acts. Except as set forth on Schedule 4.13(a), Seller has not received written notice that accused it of infringing, misappropriating or otherwise violating or being in conflict with any Intellectual Property of any Person, engaging in unfair competition or deceptive trade practices, or violating any Person’s rights of publicity, privacy or attribution.

(d) Except as set forth on Schedule 4.13(a), to the Knowledge of Seller, no Person (i) is infringing, misappropriating or otherwise violating or in conflict with any of the Purchased Intellectual Property and is not engaging in unfair competition or deceptive trade practices with respect to the operation of the Business and (ii) Seller has not alleged any of the foregoing against any Person. The Material Contracts listed on Schedule 4.14(a) include (i) all Contracts pursuant to which Seller has acquired any right, title or interest to (whether by merger, stock purchase, assignment or otherwise) or has been licensed, sublicensed, granted a covenant not to sue or immunity from suit, or granted a similar right under any Intellectual Property of any other Person (including any Affiliate) used in or applicable to the Business, as presently conducted or contemplated to be conducted, except any non-exclusive license to commercially available, off-the-shelf software for fees payable thereunder of less than $5,000 annually, and (ii) all agreements pursuant to which any Person (including any Affiliate) has acquired any right, title or interest to (whether by merger, stock purchase, assignment or otherwise) or has been licensed, sublicensed, granted a covenant not to sue or immunity from suit, or granted a similar right under any Purchased Intellectual Property.

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(e) Schedule 4.13(e) sets forth a list of all Consents and any transfer fees, charges or similar expenses that are required, or expected to be required as a result of the transactions contemplated hereby with respect to the Purchased Intellectual Property or other Material Contracts involving Intellectual Property.

(f) Seller has entered into confidentiality and nondisclosure agreements with all of its directors, officers, Employees, consultants, contractors and agents and any other Person with access to the Confidential Information or Purchased Intellectual Property, including the Trade Secrets therein, or such directors, officers, and Employees are subject to obligations of confidentiality as set forth in Seller’s employee manual that are binding on such Persons to protect the confidentiality and value thereof, and, to the Knowledge of Seller, there has not been any breach by any of the foregoing of any such agreement or employee manual. Seller uses reasonable measures commensurate with industry standards to maintain the secrecy of all Trade Secrets of Seller and the Business and in each such case using not less than a reasonable degree of care under the circumstances. To the Knowledge of Seller, the Trade Secrets of Seller and the Business are not part of the public domain and have not been used or divulged to the detriment of Seller or in any manner in violation of any Material Contract.

(g) All former and current Employees, consultants or contractors of Seller have executed and delivered valid, written instruments that assign (or are subject to provisions of Seller’s employee manual that require and are binding obligations upon such Employees to do so) to Seller all rights to any Intellectual Property conceived, reduced to practice, created or otherwise developed by them in the course of their performing services for Seller. All Employees of Seller who participated in the conception, reduction to practice, creation or development of Intellectual Property were employees of Seller at the time of rendering such services and such services were within the scope of their employment or such employees have otherwise validly assigned such Intellectual Property to Seller. No director, officer, stockholder, Employee, consultant, contractor, agent or other representative of Seller owns or claims any rights in (nor has any of them made application for) any Intellectual Property owned or used by Seller.

(h) To the Knowledge of Seller, none of the products sold, licensed or otherwise distributed as part of the Business include or have ever included any Open Source Software. To the Knowledge of Seller, none of such products were created using any Open Source Software and none of such products created by Seller include any Open Source Software.

(i) The License Agreement listed on Schedule 4.13(i) was not extended after its initial two-year term, and expired by its own terms on January 15, 2013.

(j) Seller has made available to Buyer correct and complete copies of all correspondence related to any of the Material Contracts that include a license, covenant not to sue, immunity from suit, or assignment of any Intellectual Property, including any correspondence related to termination, allegations of breach, clarification on or definition or modification of scope of license or assignment.

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(k) Except as set forth on Schedule 4.13(k), the operation of the Business as currently conducted by Seller does not require the use, other exploitation or disclosure of any of the Information, Know-How or Patent Rights, as those terms are defined in that License Implementation Agreement listed on Schedule 4.13(k). Except as set forth on Schedule 4.13(k), the operation of the Business as currently conducted by Seller does not use, otherwise exploit or disclose any of the foregoing Information, Know-How or Patent Rights. Except as set forth on Schedule 4.13(k), Seller has not used, otherwise exploited or disclosed any of the foregoing since August 2, 2010.

(l) To the extent that such materials are in the possession or control of Seller or its attorneys or agents, Seller has made available to Buyer correct and complete copies of: (i) the results of all patentability, validity, enforceability, infringement, non-infringement, freedom-to-operate, clearance or other searches conducted by or on behalf of Seller relating to Intellectual Property, domestic and foreign, whether owned by Seller or any other Person, and (ii) all analysis, summaries, reviews, opinions, or other commentaries regarding such results, other than any such materials that are attorney-client privileged.

Section 4.14 Contracts.

(a) Schedule 4.14(a) is a complete and accurate list of all Contracts to which Seller is a party of any kind and nature with respect to the Business, the Leased Real Property or the Purchased Assets:

(i) under which Seller is obliged to make or entitled to receive payments on an annual basis in excess of $5,000 in the aggregate;

(ii) whose term is in excess of one year; or

(iii) which is an Assumed Contract.

(b) All of the Contracts identified or required to be indentified on Schedule 4.14(a) (each, a “Material Contract”) are valid and binding Contracts of Seller and are in full force and effect and are enforceable against each party thereto in accordance with the terms thereof, subject to the Bankruptcy and Equity Exception. There does not exist under any Material Contract any violation, breach or event of default, on the part of Seller or, to the Knowledge of Seller, any other party thereto. Except as set forth on Schedule 4.14(a), to the Knowledge of Seller, there is no event, occurrence, condition, or act (including the consummation of the Transaction) that, with the giving of notice or the passage of time (or both), could become a default or event of default on the part of Seller under any Material Contract or cause or permit the loss of any material benefit thereunder.

(c) Seller has made available to Buyer correct and complete copies of each Assumed Contract, together with all amendments and supplements thereto and all waivers and modifications of any terms thereof, and correct and reasonable summaries of the terms and conditions of each oral Assumed Contract.

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Section 4.15 Transactions with Affiliates. Except as set forth on Schedule 4.15, neither the Shareholder or any Affiliate or family member of the Shareholder, nor any officer, director or manager of Seller or any of its respective Affiliates possess, directly or indirectly, any ownership or pecuniary interest in, or is a trustee, director, manager, officer, Affiliate, family member or employee of, any Person that is a seller to, or supplier, lessor, lessee, licensor, or competitor of Seller, including any counterparty to any Contract required to be listed on Schedule 4.14(a). Except as set forth on Schedule 4.15, since November 30, 2012, Seller has not transferred any of its respective assets or properties (including the Purchased Assets) to, or bought any assets or properties (including the Purchased Assets) from, the Shareholder or any Affiliate of the Shareholder, except for compensation, dividends, usual and customary benefits, perquisites, and reimbursements of business expenses in the Ordinary Course. Beneficial ownership of 2% or less of any class of securities of a Person whose securities are registered under the Exchange Act will not be deemed to be an ownership interest for purposes of this Section 4.15.

Section 4.16 Customers and Suppliers. Schedule 4.16 sets forth a correct and complete list of the top 20 customers and suppliers of the Business for each of the fiscal years ended November 30, 2012 and November 30, 2013. Except as set forth on Schedule 4.16, and except for customer or supplier contracts that have been fulfilled or expired by their own terms, since November 30, 2012 there has been no termination or cancellation of, and no materially adverse modification or change in, Seller’s business relationships with any material customer or supplier or group of customers or suppliers, nor has Seller received any notice of such. To the Knowledge of Seller, the benefits of any relationship with any of the customers or suppliers of the Business will continue after the Closing Date in substantially the same manner as prior to the Closing Date. No rebates (volume or otherwise), discounts or benefits are currently due, accruing due or payable to any customer of the Business.

Section 4.17 Product Warranty and Liability.

(a) Product Warranties. Except as set forth on Schedule 4.17(a), each product (including work-in-progress items) designed, manufactured, sold, leased, rented, installed or otherwise delivered by Seller in respect of the Business is being, and has been, designed and manufactured in conformity with all applicable contractual commitments and all express and implied warranties in all material respects, and Seller does not have any Liability or obligation (and, to the Knowledge of Seller, there is no basis for any present or future Legal Proceedings against Seller) for non-performance, replacement or repair of any such products or other damages or other costs in connection therewith or services rendered by Seller in connection with the Business, to the extent not reserved on the Financial Statements that would result in a Seller Material Adverse Effect.

(b) Absence of Product Liability. Except as set forth on Schedule 4.17(a), Seller does not have any Liabilities or obligations, and, to the Knowledge of Seller, there is no basis for any present or future Legal Proceedings against Seller, for non-performance, replacement or repair of any products designed, manufactured, sold,

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leased, rented, installed or otherwise delivered by Seller in connection with the Business or other damages or other costs in connection therewith or services rendered by Seller in connection with the Business that would reasonably be expected, individually or in the aggregate, to result in a Seller Material Adverse Effect. Seller does not have any Liabilities or obligations, and, to the Knowledge of Seller, there is no basis for any present or future Legal Proceedings against Seller that could give rise to any Liabilities or obligations, arising out of any injury to any Person or property as a result of the ownership, possession or use of a product designed, manufactured, sold, leased, rented, installed or otherwise delivered in connection with the Business, or services rendered in connection with the Business, by Seller that would reasonably be expected, individually or in the aggregate, to result in a Seller Material Adverse Effect.

Section 4.18 Anti-Corruption and Trade Sanctions.

(a) None of Seller, any of its Subsidiaries, the Shareholder, nor to the Knowledge of Seller, any other Person acting on any of their behalf, has, at any time, directly or indirectly (i) made or authorized any offer, gift, bribe, rebate, payoff, kickback, or other payment or promise of, any money or anything else of value, or provided any benefit, to (A) any governmental official or other governmental employee or agent (domestic or foreign) to induce the recipient or the recipient’s employer to do business with, grant favorable treatment to or compromise or forego any claim against Seller or (B) any Person that was unlawful under any applicable Laws or (ii) made any payment to or conferred any benefit on any Person to promote or retain sales or to help, procure or maintain good relations with suppliers that such Person knew or reasonably should have known to be a violation of Law or of the employee code of conduct of the employer of such Person. Seller and its Subsidiaries are and at all times have been in compliance with the United States Foreign Corruption Practices Act of 1977, as amended, and all other applicable Laws of similar effect, including all Laws enacted to implement the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions.

(b) None of Seller, any of its Subsidiaries, the Shareholder, nor to the Knowledge of Seller, any other Person acting on any of their behalf, has, at any time, (i) directly or indirectly, acted in contravention of any United States or international Laws, including anti-money laundering and anti-terrorism Laws, (ii) been included on the List of Specially Designated Nationals and Blocked Persons maintained by the United States Treasury Department’s Office of Foreign Assets Control (“OFAC”), (iii) resided or had places of business in a country or territory named on an OFAC list or which is designated as a Non-Cooperative Jurisdiction by the Financial Action Task Force on Money Laundering, or whose funds are transferred from or through such a jurisdiction, (iv) resided in or been organized under the Laws of, or whose funds are transferred from or through, a jurisdiction or transferred from or through a financial institution (A) designated by the Secretary of the Treasury or Financial Crimes Enforcement Network as warranting special measures due to money laundering concerns or (B) covered by or subject to sanctions under the International Emergency Economic Powers Act, the Trading With the Enemy Act or other applicable Laws imposing economic sanctions against or prohibiting transacting business with, for or on behalf of any country or region

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pursuant to United States federal or state Law, (v) has been or is a senior foreign political figure, member of a senior foreign political figure’s immediate family or close associates of a senior foreign political figure, or (vi) foreign shell bank. To the Knowledge of Seller, none of Seller, any of its Affiliates or their respective directors, officers, employees, agents, or representatives have been investigated (or are being investigated or are subject to a pending or threatened investigation) or are involved in an investigation (as a witness or possible suspect) with respect to any of the matters set out in the preceding sentence by any Government Entity or any customer, or been barred from bidding for any Contract or business, and there are no facts or circumstances which are likely to give rise to such an investigation.

Section 4.19 Real Property.

(a) Seller does not own and has never owned any real property.

(b) Schedule 4.19(b) sets forth a correct and complete (i) list of all real property leased, licensed, subleased, occupied or operated by Seller (“Leased Real Property”) and (ii) list of all leases, licenses, subleases, and/or similar occupancy agreements and all amendments thereto, and any other side letters, agreements, estoppel certificates, subordination, non-disturbance and attornment agreements related thereto to which Seller is a party (collectively, the “Real Property Leases”) pursuant to which Seller leases such Leased Real Property. Seller possesses a valid leasehold interest thereto, free and clear of all Encumbrances (other than Permitted Encumbrances), and the right to quiet enjoyment of such Leased Real Property. Correct and complete copies of all Real Property Leases have been made available to Buyer. Seller has not exercised any option to purchase any parcel of Leased Real Property. There are no leases, subleases, licenses, concessions or other agreements, written or oral, by which Seller has granted to any party or parties the right of use or occupancy of any portion of any parcel of the Leased Real Property. There are no parties (other than Seller) in possession of any parcel of the Leased Real Property, and Seller enjoys peaceful and undisturbed possession of the Leased Real Property, subject to the terms and conditions of the Real Property Leases.

(c) Except as set forth on Schedule 4.19(c), the occupancy, use and operation of the Leased Real Property by Seller complies with all Laws in all material respects.

(d) There are no pending, or to the Knowledge of Seller, threatened appropriation, condemnation, eminent domain or like proceedings relating to the Leased Real Property.

(e) None of the Leased Real Property has suffered any damage by fire or other casualty which has not heretofore been repaired and restored in all material respects.

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(f) No work has been done by Seller or at the direction of Seller at the Leased Real Property that has not been paid for, and no materials have been supplied to the Leased Real Property at the direction of Seller, that have not been paid for, and there are no materialmen’s liens or mechanic’s lien affecting the Leased Real Property arising from the same.

(g) The Leased Real Property constitutes all of the real property leased, occupied or operated by Seller with respect to the Business. All improvements or facilities located on each parcel of the Leased Real Property are supplied with utilities and other services necessary for the operation of such facilities in the Ordinary Course. Seller has rights of egress and ingress with respect to the Leased Real Property to and from public roads. Except as set forth on Schedule 4.19(g), all improvements, fixtures, mechanical and other systems located at the Leased Real Property are in good operating condition and no condition exists requiring repairs (other than routine maintenance) or alterations thereof. To the Knowledge of Seller, there are no latent or patent structural or other defects therein or thereon. Seller has not received any written notice from any insurance company that has issued a policy with respect to any such Leased Real Property requiring performance of any structural or other repairs or alterations to such Leased Real Property that have not been completed.

(h) None of the Permitted Encumbrances or any other Encumbrance will interfere with or prevent the conduct of the Business as currently conducted by Seller at the Leased Real Property. Seller is not in violation of a condition, covenant or restriction contained in any Permitted Encumbrance or any other Encumbrance affecting the Leased Real Property.

Section 4.20 Insurance. Schedule 4.20 sets forth a correct and complete list of all insurance policies and fidelity bonds covering the properties, assets, Employees, officers, directors, managers, and operations, as applicable, of the Business (including policies providing property, casualty, liability, and workers’ compensation coverage) to which Seller is a party to or a beneficiary. There is no material claim by Seller pending under any of such policies or bonds as to which coverage has been questioned, denied, or disputed by the issuers or underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and Seller is not liable for any retrospective premiums under any such policies or bonds. Seller has complied in all material respects with the terms and conditions of all such policies and bonds. Such policies of insurance and bonds (or other policies and bonds providing substantially similar coverage) are in full force and effect. Such policies of insurance and bonds are of the type and in amounts adequate, to the Knowledge of Seller, to insure fully against the risks to which Seller and its properties and assets are normally exposed in the operation of the Business or as otherwise required pursuant to the terms of any Contract of Seller. To the Knowledge of Seller, there is no threatened termination of, or premium increase with respect to, any of such policies or bonds, nor has any event occurred which could result in a retroactive or prospective upward adjustment in premiums under any such policies or bonds. Since the last renewal date of any insurance policy, there has not been any material adverse change in the relationship of Seller, on the one hand, and its insurers, on the other hand, or on the premiums payable pursuant to such policies. Other than deductibles or self insured retentions maintained under the insurance policies described on Schedule 4.20, Seller does not have any self-insured or co-insurance programs.

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Section 4.21 Finders’ Fees. Except for Persons listed on Schedule 4.21, whose fees will be paid by Seller on or prior to the Closing, there is no investment banker, broker or other finder that has been retained by or is authorized to act on behalf of Seller or its Affiliates who might be entitled to any fee or commission from Seller or its Affiliates in connection with the Transaction.

Section 4.22 Limitations of Representations and Warranties. Except for the representations and warranties set forth in this Agreement (including the Disclosure Schedules), neither Seller nor the Shareholder is making any other representations or warranties, written or oral, statutory, express or implied, concerning the Business, Purchased Assets, or Liabilities of Seller. Buyer acknowledges that, except as expressly provided in this Agreement, neither Seller nor the Shareholder has made any representation or warranty, express or implied, concerning the Business, Purchased Assets, or Liabilities of Seller.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to the Shareholder and Seller as follows:

Section 5.1 Organization, Due Authorization and Enforceability.

(a) Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the State of Texas, has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as currently conducted and is duly qualified to do business and is in good standing as a foreign entity in each jurisdiction where the ownership or operation of Buyer’s assets or the conduct of Buyer’s business requires such qualification except for failures to be so qualified or in good standing, as the case may be, that individually or in the aggregate, would not reasonably be expected to prevent, hinder or delay Buyer from consummating the Transaction.

(b) Buyer has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which it is a party and to perform its obligations hereunder and thereunder.

(c) The execution, delivery and performance by Buyer of this Agreement and each of the Ancillary Agreements to which it is a party or by which Buyer is bound has been duly and validly authorized and no other authorization or consent is required in connection with the execution, delivery and performance by Buyer of this Agreement and each of the Ancillary Agreements.

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(d) This Agreement has been, and at the Closing each of the Ancillary Agreements will be, duly and validly executed by Buyer and constitute a valid and legally binding obligation of Buyer, to the extent it is a party thereto, enforceable against Buyer in accordance with its terms, subject to the Bankruptcy and Equity Exception.

Section 5.2 Consents and Approvals. Except for the Consents set forth on Schedule 5.2, no Consent is required to be obtained by Buyer from, or to be given by Buyer to, or made by Buyer with, any Government Entity or other Person in connection with the execution, delivery and performance by Buyer of this Agreement or any of the Ancillary Agreements, except where the failure to obtain any Consent would not reasonably be expected to prevent, hinder or delay Buyer from consummating the Transaction.

Section 5.3 Non-Contravention. The execution, delivery and performance by Buyer of this Agreement and the Ancillary Agreement to which it is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not violate (a) any provision of the organizational documents of Buyer or (b) any Law to which Buyer is subject, other than conflicts, breaches, defaults, or violations that, individually or in the aggregate, would not reasonably be expected to prevent, hinder or delay Buyer from consummating the Transaction.

Section 5.4 Litigation. There is no Legal Proceeding pending or, to the knowledge of Buyer, threatened against or relating to Buyer that would reasonably be expected to prevent, hinder or delay Buyer from consummating the Transaction.

Section 5.5 Finders’ Fees. Except for Persons listed on Schedule 5.5, whose fees will be paid by Buyer on or prior to the Closing, there is no investment banker, broker or other finder that has been retained by or is authorized to act on behalf of Buyer or its Affiliates who might be entitled to any fee or commission from Buyer or its Affiliates in connection with the Transaction.

Section 5.6 Availability of Funds. Buyer has or will have at the Closing (a) sufficient cash available to enable it to pay the full Purchase Price payable at the Closing hereunder and (b) adequate capital to perform its obligations under this Agreement and the Ancillary Agreements.

ARTICLE VI

COVENANTS

Section 6.1 Conduct of Business.

(a) Affirmative Operating Covenants. From and after the date of this Agreement and until the Closing Date or the earlier termination of this Agreement pursuant to Section 8.1, Seller will (except for actions expressly contemplated by this Agreement):

(i) operate only in the Ordinary Course of Business (including funding budgeted capital expenditures);

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(ii) use commercially reasonable efforts to preserve intact the current business organization and personnel;

(iii) use commercially reasonable efforts to preserve present relationships and goodwill with customers, suppliers, landlords, creditors, Employees and other Persons having business dealings with Seller;

(iv) maintain books and records in accordance with past practice and GAAP;

(v) maintain all Permits necessary to conduct the Business; and

(vi) use commercially reasonable efforts to perform in all material respects its obligations under Contracts to which it is a party or by which it or any of its assets or properties are bound.

(b) Negative Operating Covenants. Without limiting Section 6.1(a), from and after the date of this Agreement and until the Closing Date or the earlier termination of this Agreement pursuant to Section 8.1, Seller will not, without the prior written consent of Buyer (which consent will not be unreasonably conditioned, withheld or delayed with respect to Sections 6.1(b)(iii), (iv), (v) or (vi)):

(i) fail to maintain in full force and effect the current policies of insurance, subject only to variations required by the Ordinary Course of Business;

(ii) change or modify in any material respect the existing credit, collection and payment policies, procedures and practices with respect to accounts receivable and accounts payable, respectively, including acceleration of collection of receivables, or failure to pay or delay payment of payables;

(iii) enter into, adopt, amend or terminate any bonus, severance, retention, profit sharing or other Benefit Plan;

(iv) enter into, adopt, amend or terminate any employment contract with respect to, or make or grant any compensation or salary increase to, any current or former employees, officers, directors, members or managers;

(v) incur any obligation or enter into any Contract which requires a payment in excess of $50,000 or has a term that requires performance over a period in excess of 12 months, other than (A) in the Ordinary Course of Business and (B) accepting and executing Contracts with customers and procuring materials and services in connection with such Contracts with customers;

(vi) amend, modify, cancel or terminate any Material Contract or enter into any Contract that would constitute a Material Contract other than in the Ordinary Course of Business, or waive, release or assign any rights or claims thereunder;

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(vii) sell, assign, license, sublicense, lease, abandon (by act or failure to act), transfer or otherwise dispose of any Purchased Asset, except for sales of finished goods or inventory and collection of accounts receivable in the Ordinary Course of Business;

(viii) merge or consolidate with any other Person;

(ix) incur any Encumbrances (other than Permitted Encumbrances) on the Purchased Assets;

(x) take any action that would reasonably be expected to (A) adversely affect the ability of any of the Parties to consummate the transactions contemplated by this Agreement and the Ancillary Agreements, (B) make any of the representations and warranties of Seller or the Shareholder in this Agreement untrue or incorrect in any material respect, or result in any of the conditions to the Closing not being satisfied, or (C) have a Seller Material Adverse Effect; or

(xi) authorize or enter into any Contract to do any of the foregoing.

Section 6.2 Taxes.

(a) Transfer Taxes. All federal, state, local or foreign or other excise, sales, use, value added, transfer (including real property transfer or gains), stamp, documentary, filing, recordation and other similar Taxes and fees that may be imposed or assessed as a result of the Transaction, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties (“Transfer Taxes”), will be borne equally by Buyer, on the one hand, and Seller, on the other hand. Any Tax Returns that must be filed in connection with Transfer Taxes will be prepared by the Party primarily or customarily responsible under applicable Law for filing such Tax Returns, and such Party will provide such Tax Returns to the other Party at least ten Business Days prior to the date such Tax Returns are due to be filed. Seller and Buyer will cooperate in the timely completion and filing of all such Tax Returns.

(b) Proration. Seller will bear all property and ad valorem Tax Liability with respect to the Purchased Assets if the payment date of such Taxes arises prior to the Closing Date. All other real property Taxes, personal property Taxes, or ad valorem obligations and similar recurring Taxes and fees on the Purchased Assets for taxable periods beginning before, and ending after, the Closing Date, will be prorated between Seller and Buyer as of the Closing Date. Seller will be responsible for all such Taxes and fees on the Purchased Assets due and payable during any period up to and including the Closing Date. Buyer will be responsible for all such Taxes and fees on the Purchased Assets due and payable during any period after the Closing Date. With respect to the Taxes described in this Section 6.2(b), Seller will timely file all Tax Returns due before the Closing Date with respect to such Taxes and Buyer will prepare and timely file all Tax Returns due after the Closing Date with respect to such Taxes. If one Party remits to the appropriate Government Entity payment for Taxes, which are subject to proration under this Section 6.2(b) and such payment includes the other Party’s share of such Taxes, such other Party will promptly reimburse the remitting Party for its share of such Taxes.

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(c) Cooperation on Tax Matters. Buyer and Seller will furnish or cause to be furnished to each other, as promptly as practicable, such information and assistance relating to the Purchased Assets and the Assumed Liabilities as is reasonably necessary for the preparation and filing of any Tax Return, claim for refund or other filings relating to Tax matters, for the preparation for any Tax audit, for the preparation for any Tax protest, and for the prosecution or defense of any Legal Proceeding relating to Tax matters.

Section 6.3 Employee Matters. Buyer or an Affiliate of Buyer will offer employment to substantially all of the Employees, and Seller will use its commercially reasonable efforts to assist Buyer in employing such Employees as employees of Buyer effective as of the Closing. Buyer will offer compensation and benefits to such Employees on a basis comparable to those currently provided to such Employees by Seller. Buyer agrees that the years of service to Seller by each Employee employed by Buyer will count towards the years of service to Buyer for purposes of determining eligibility and vesting under Buyer’s vacation policy, retirement plan, and health plan. Seller will terminate all employment arrangements Seller has with the Employees effective as of the Closing in a manner that does not result in the payment of severance for any Employee hired by Buyer. Seller will be responsible for any severance or similar obligations arising from such terminations.

Section 6.4 Efforts; Consents.

(a) Commercially Reasonable Efforts; Further Assurances. The Parties will use their commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, and assist and cooperate with the other Parties in doing, all things necessary or desirable under applicable Law to consummate, in the most expeditious manner practicable, the Transaction. Without limiting the generality of the foregoing, from time to time, as and when requested by any Party and at such requesting Party’s expense (except as otherwise provided in this Agreement), any other Party will promptly execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, any assurances or documents or instruments of transfer, or take, or cause to be taken, all such further or other action, as reasonably requested by any other Party to consummate the Transaction or further document and record the assignment of the Purchased Assets made hereby.

(b) Efforts to Obtain Consents. Prior to the Closing Date, Seller will use its commercially reasonable efforts to give all notices required to be given by Seller and to obtain all Consents of any Person (including any Government Entity) necessary to consummate the Transaction. Buyer will cooperate with Seller in obtaining such Consents; provided, however, that any costs or expenses in connection therewith will be borne solely by Seller, and neither Buyer nor its Affiliates will be required to make any payments or offer or grant any accommodation (financial or otherwise). All such Consents and notices will be in writing and in form and substance reasonably

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satisfactory to Buyer and Seller. Seller will provide to Buyer copies of each such Consent after it has been obtained. Prior to the Closing Date, Buyer will use its commercially reasonable efforts to give all notices required to be given by Buyer and to obtain all Consents set forth on Schedule 5.2.

(c) Third Party Consents. Notwithstanding anything to the contrary in this Agreement, this Agreement will not constitute an agreement to assign or transfer any Assumed Contract or any claim or right or any benefit arising thereunder or resulting therefrom if any assignment or transfer or attempt to make such an assignment or transfer is not permitted without the Consent of, or notice to, a third party or would constitute a breach or violation thereof or affect adversely the rights of Buyer or Seller thereunder (any assets so described, the “Non-assigned Assets”). After the Closing, Seller and Buyer will use their commercially reasonable efforts (including the dedication of resources thereto, but without any obligation to make any payments or offer or grant any accommodation (financial or otherwise)) to obtain the Consent of, or provide the required notice to, such third parties to or of the assignment to Buyer of any Assumed Contract or any claim or right or any benefit arising thereunder or otherwise transfer the rights and benefits of any Non-assigned Asset to Buyer. If such Consent is not obtained, or such notice is not made, or if an attempted assignment thereof would be ineffective or would adversely affect the rights of Seller thereunder so that Buyer would not in fact receive all such rights, for the period from the Closing until such Consent is obtained or notice is made, Buyer and Seller will enter into a mutually acceptable arrangement under which (i) Buyer agrees to assume all of the obligations and Liabilities under, and Seller agrees to provide to Buyer the benefits of, each and every Non-assigned Asset, including by sub-contracting, sub-licensing, or sub-leasing to Buyer, and (ii) Seller agrees to enforce for the benefit of Buyer any and all rights of Seller against a third party thereto, in each case as to provide the benefits and obligations and Liabilities thereunder to the same extent had the Non-assigned Asset been assigned, transferred and conveyed to Buyer at the Closing as an Assumed Contract as contemplated by this Agreement. In connection with any such arrangement, other than for any Buyer’s Warranty Work Cost, Buyer will reimburse Seller for any reasonable and documented out-of-pocket costs and expenses actually incurred by Seller in connection with such arrangement, the administration thereof, or that otherwise would have been incurred by Buyer had such Non-assigned Asset been assigned, transferred or conveyed to Buyer as an Assumed Contract as contemplated by this Agreement (such costs and expenses, the “Alternative Arrangement Costs”). Seller will promptly pay to Buyer when received all monies received, after offsetting applicable Alternative Arrangement Costs owed but not yet paid by Buyer, by Seller or its Affiliates under such Non-assigned Asset or any claim or right or any benefit arising thereunder.

Section 6.5 Notification. From the date hereof until the Closing Date, as promptly as practicable following the discovery thereof, Seller and the Shareholder will disclose to Buyer in writing any development, fact or circumstance arising after the date hereof causing a breach of any of the representations and warranties contained in Article III and Article IV and of any breach of the covenants in this Agreement made by Seller or the Shareholder. No information or disclosure provided to Buyer pursuant to

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this Section 6.5 will be deemed to cure any breach of any representation or warranty or covenant or agreement contained in this Agreement or have any effect for purposes of the indemnification obligations of Seller or the Shareholder, the conditions to the Closing set forth in Article VII or Buyer’s ability to terminate the Agreement pursuant to Article VIII.

Section 6.6 Confidentiality.

(a) Effective as of the Closing Date, the Confidentiality Agreement will terminate.

(b) After the Closing Date, Seller and the Shareholder will, and will instruct their agents, representatives and Affiliates to, keep in strict confidence, and will not, directly or indirectly, at any time, disclose, furnish, disseminate, publish, or make available, except to Buyer and its representatives and Affiliates and to the extent required to perform the Shareholder’s obligations under this Agreement, any Trade Secrets regarding Seller, the Business, the Purchased Assets or the Transaction contemplated herein.

(c) Seller and the Shareholder specifically acknowledge (i) that all the Trade Secrets, whether reduced to writing, maintained on any form of electronic media, or maintained in the mind or memory of Seller or the Shareholder, derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from its disclosure or use, (ii) that reasonable best efforts have been made by the Shareholder and Seller prior to the Closing to maintain the secrecy of such information, (iii) upon Closing, such information is the sole property of Buyer and its Affiliates, (iv) any retention and use of such information by Seller or the Shareholder after Closing not otherwise permitted by this Section 6.6 constitutes a misappropriation of the trade secrets of Buyer and its Affiliates, and (v) after Closing, at the request of at the expense of Buyer, Seller and Shareholder will enforce confidentiality obligations in respect of the Business or the Purchased Assets that are owed to Seller by third parties.

(d) In the event that Seller or the Shareholder will be legally compelled or required by any Government Entity to disclose any Trade Secrets regarding the Business or the Purchased Assets, Seller or the Shareholder, as the case may be, will promptly provide written notice to Buyer to enable Buyer, at its sole cost, to seek a protective Order, in camera process or other appropriate remedy to avoid public or any other disclosure of such Trade Secrets. In the event that such protective Order or other remedy is not obtained, Seller or the Shareholder, as the case may be, will furnish only so much of such Trade Secrets regarding the Business or the Purchased Assets as it is legally compelled to disclose (upon advice of legal counsel) and will exercise its reasonable best efforts to obtain reliable assurance that confidential treatment will be accorded such Trade Secrets. Such Trade Secrets will otherwise remain subject to the provisions of this Section 6.6. Seller and the Shareholder will cooperate with and assist Buyer in seeking any protective Order or other relief requested pursuant to this Section 6.6.

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Section 6.7 Access to Books and Records; Preservation of Records.

(a) From the date of this Agreement until the Closing or the earlier termination of this Agreement pursuant to Section 8.1, and subject to the Confidentiality Agreement, Seller will, and will cause its representatives to, afford Buyer and its representatives full and free access during normal business hours to Seller’s assets (including the Purchased Assets but excluding Trade Secrets to the extent such access would result in the loss of trade secret protections under Law), properties, facilities, offices, Contracts, books and records, Permits and other documents and data.

(b) Buyer and Seller will preserve and keep the records held by them relating to the Business for a period of seven years from the Closing Date and will make such records and personnel available to the other as may be reasonably required by such Party in connection with Buyer’s operation of the Business, Tax matters, any insurance claims by or Legal Proceedings against or governmental investigations of Buyer or Seller or any of their Affiliates as required by Law and in order to enable Buyer or Seller to comply with its respective obligations under this Agreement and each Ancillary Agreement. Notwithstanding the foregoing, during such seven year period, either Buyer or Seller (or any of their Affiliates) may dispose of any such books and records which are offered to, but not accepted by, the other Party. If at any time after such seven year period either such Party (or its Affiliate) intends to dispose of any such books and records, such Party will not do so without first offering such books and records to such other Party.

Section 6.8 Exclusive Dealing.

(a) Seller will not, and will not permit any of its representatives to, directly or indirectly, (i) discuss, encourage, negotiate, undertake, initiate, authorize, recommend, propose or enter into, whether as the proposed surviving, merged, acquiring or acquired corporation or otherwise, any transaction involving a merger, consolidation, business combination, purchase or disposition of any material amount of the assets of Seller (other than Seller’s interest in Holmes Tool) or the Business or any capital stock or other equity ownership interests or equity securities of Seller other than the transactions contemplated by this Agreement (an “Acquisition Transaction”), (ii) facilitate, encourage, solicit or initiate discussions, negotiations or submissions of proposals or offers in respect of an Acquisition Transaction, (iii) furnish or cause to be furnished, to any Person, any information concerning the business, operations, assets or properties of Seller in connection with an Acquisition Transaction, or (iv) otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing.

(b) Seller will notify Buyer orally and in writing promptly (but in no event later than 24 hours) after receipt by Seller or its representatives of any proposal or offer from any Person other than Buyer to effect an Acquisition Transaction or any request for non-public information relating to Seller or for access to the properties or books and records of Seller by any Person other than Buyer. Such notice will indicate the identity of the Person making the proposal or offer, or requesting non-public information or access to

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the properties or books and records of Seller, the material terms of any such proposal or offer, or modification or amendment to such proposal or offer and copies of any written proposals or offers or amendments or supplements thereto. Seller will keep Buyer informed, on a current basis, of any material changes in the status and any material changes or modifications in the material terms of any such proposal, offer or request.

(c) Upon the effectiveness of this Agreement, Seller will, and Seller will cause its representatives to, (i) immediately cease and cause to be terminated any existing discussions or negotiations with any Persons (other than Buyer) conducted heretofore with respect to any Acquisition Transaction, (ii) following public disclosure of this Agreement by Buyer, promptly notify such Persons to return or destroy (and confirm destruction of) all non-public information regarding Seller that was previously furnished to such Persons to the extent not previously so notified, and (iii) immediately take steps so that no such Persons continue to have access to any data room or other depository containing such information. Seller and the Shareholder will not release any Person from the confidentiality and standstill provisions of any Contract to which Seller is a party.

Section 6.9 Non-Competition.

(a) Until the fifth anniversary of the Closing Date, Seller and the Shareholder will not, and will not permit any of its respective Affiliates to, directly or indirectly, including through another Person:

(i) engage in, or own, manage, control, operate or have any direct or indirect interest or any investment (including a loan, gift, or other financial accommodation) in, or render services in any capacity to, any Person (other than Buyer or any of its Affiliates) that is engaged in, the business of engineering, designing, installing or manufacturing low emission combustion systems or emission control technologies for stationary utility or industrial boilers or other emission sources or any other business which Seller conducts as of the Closing, in the United States, Canada, Mexico, South America or any other state, province, country or region thereof in which Seller conducts business, or intends or plans to conduct business as set forth on Schedule 6.9(a)(i), as of the Closing Date (the “Restricted Business”); or

(ii) do business with, solicit or attempt to obtain business from, or provide products or services to, including for or on behalf of another Person (other than Buyer or any of its Affiliates), any Person that is a customer of the Business as of the Closing to the extent such activities relate to the Restricted Business.

(b) Seller and the Shareholder will cause Holmes Tool to comply with the terms and provisions of that certain Non-Competition Agreement, dated September 6, 2012, among Seller, Holmes Tool, Shareholder, and Tenneco Automotive Operating Company Inc.

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(c) Notwithstanding the foregoing and anything in this Agreement to the contrary, Seller and the Shareholder may, without violating Section 6.9(a)(i):

(i) own a passive capital stock investment not in excess of 2% of the outstanding capital stock of a corporation which engages in the Restricted Business, if such capital stock is a security actively traded on an established national securities exchange,

(ii) continue to participate in the business operations of Holmes Tool, so long as Holmes Tool is not a direct competitor of the Business and does not engage in any aspect of the Restricted Business on behalf of itself or on behalf of any other Person; provided, however, that Holmes Tool will have the right to engage in the Restricted Business to the limited extent of producing and selling products to:

(A) Buyer or any of its Affiliates,

(B) any Person, other than Seller, to the extent such products are produced and sold to correspond to the specifications, schematic design or blueprint of such products that are owned by or licensed to such Person (which may not include any Purchased Intellectual Property), or

(C) any Person to the extent such products consist only of Holmes Tool’s so-called “Clean Jet Nozzle.”

Nothing herein will be deemed to grant any rights in or to the Purchased Intellectual Property to any Person, including Seller, Shareholder, Holmes Tool or any of their respective Affiliates, and

(iii) make gifts to any children or step-children of Shareholder.

(d) Seller and the Shareholder, on behalf of themselves and their Affiliates, acknowledge that a remedy at Law for any breach or attempted breach of this Section 6.9 will be inadequate and further agree that any breach of this Section 6.9 will result in irreparable harm to Buyer and its Affiliates, and Buyer will, in addition to any other remedy that may be available to it, be entitled to specific performance and injunctive and other equitable relief in case of any such breach or attempted breach of this Section 6.9.

(e) Each of Seller and the Shareholder acknowledge that this covenant not to compete is being provided as an inducement to Buyer to enter into this Agreement and that this Section 6.9 contains reasonable limitations as to time, geographical area and scope of activity to be restrained that do not impose a greater restraint than is necessary to protect the goodwill or other business interest of Buyer, its Affiliates and the acquired Business. Whenever possible, each provision of this Section 6.9 will be interpreted in such a manner as to be effective and valid under applicable Law but if any provision of this Section 6.9 will be prohibited by or invalid under applicable Law, such

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provision will be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Section 6.9. If any provision of this Section 6.9 will, for any reason, be judged by any court of competent jurisdiction to be invalid or unenforceable, such judgment will not affect, impair or invalidate the remainder of this Section 6.9 but will be confined in its operation to the provision of this Section 6.9 directly involved in the controversy in which such judgment shall have been rendered. In the event that the provisions of this Section 6.9 should ever be deemed to exceed the scope of activity, time or geographic limitations permitted by applicable Laws, then such provision will be reformed to the maximum scope of activity, time or geographic limitations permitted by applicable Law.

Section 6.10 Non-Solicitation. Each of Seller and the Shareholder agrees that it will not, and will not permit any of its Affiliates to, until the fifth anniversary of the Closing Date, without the prior written consent of Buyer, directly or indirectly, including through another Person, solicit, including for or on behalf of another Person, any individual who is an employee of Buyer or any of its Affiliates who is involved in the acquired Business, as of the Closing Date or at any time thereafter, to leave his or her employment with Buyer or its Affiliates, hire any such individual or in any way interfere with the employment relationship between Buyer or its Affiliates and any of such individual. Notwithstanding the foregoing and anything in this Agreement to the contrary, each of Seller, the Shareholder and their respective Affiliates will not be precluded from soliciting or hiring (a) any individual whose employment with Buyer or its Affiliates has been terminated by Buyer or its Affiliates for at least six months, (b) Edward Bird and Michele Bird, during the six month period after Closing for up to 30 hours per month each and outside of their employment with Buyer or any of its Affiliates, for the purpose of assisting Seller wind up its affairs, including assisting with the potential sale of Seller’s interest in or to the assets of Holmes Tool or providing services to Holmes Tool consistent with such services provided by them to Holmes Tool in the six month period prior to the date of this Agreement, (c) Edward Bird and Michele Bird after whose employment with Buyer or its Affiliates has terminated, or (d) Jeff Broderick, after whose employment with Buyer or its Affiliates has terminated, for employment at Split Rock Farm or Holmes Tool.

Section 6.11 Use of Name. Immediately following the Closing, none of the Shareholder or Seller, or any of their respective Affiliates will have an interest in the names “Combustion Components Associates, Inc.” or “CCA,” nor will they use such names, any derivations thereof, any names that include any of the foregoing, or any names confusingly similar thereto.

Section 6.12 Risk of Loss. Risk of loss for each of the Purchased Assets will be borne by Seller until the Closing, after which such time Buyer will bear the risk of loss for each such Purchased Asset.

Section 6.13 Payments Received. Following the Closing, Seller and Buyer will each hold and promptly transfer and deliver to the other, from time to time as and when received by them, any cash, checks with appropriate endorsements (using their best efforts not to convert such checks into cash), or other property that they may receive on

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or after the Closing which properly belongs to the other Party, including any insurance proceeds, and will account to the other for all such receipts. From and after the Closing, Buyer will have the right and authority to endorse without recourse the name of Seller on any check or any other evidence of indebtedness received by Buyer on account of the Business and the Purchased Assets transferred to Buyer hereunder.

Section 6.14 Warranty Work.

(a) If a claim for Warranty Work is made by a customer of the Business after the Closing Date and Buyer determines in its reasonable discretion, upon consultation with Shareholder, that such Warranty Work is required, Buyer will use commercially reasonable efforts to perform such Warranty Work on behalf of Seller (which may include Shareholder performing such work as an employee of Buyer) to the extent funds are available in the Escrow Fund, other than the amount of any unresolved indemnification claims asserted by Buyer in good faith pursuant to Article IX, for reimbursement of Seller’s portion of Buyer’s Warranty Work Cost of such Warranty Work. Upon completion of the Warranty Work, Buyer will be reimbursed from the Escrow Fund for Seller’s portion of Buyer’s Warranty Work Cost in accordance with Section 6.14(b).

(b) Within 30 days after the Closing Date, Seller will deliver to Buyer a schedule (the “Percentage Complete Schedule”) listing (x) the percentage of completion as of the Closing Date for each outstanding purchase order for any Pre-Closing Products (each an “In-process Purchase Order”) and (y) any completed purchase orders for any Pre-Closing Products that have continuing obligations to perform Warranty Work (each a “Complete Purchase Order”). Seller’s portion of Buyer’s Warranty Work Cost will be (i) for a Pre-Closing Product under an In-process Purchase Order, an amount equal to: (A) Buyer’s Warranty Work Costs multiplied by (B) the percentage of completion of the applicable In-process Purchase Order corresponding to such Pre-Closing Product and (ii) for a Pre-Closing Product under a Complete Purchase Order, an amount equal to the full amount of Buyer’s Warranty Work Costs for such Pre-Closing Product.

Section 6.15 Insurance. On or prior to the Closing Date, Seller shall purchase 24 month “tail” insurance coverage relating to its current policies of employment practices liability insurance and errors and omissions insurance.

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ARTICLE VII

CONDITIONS TO CLOSING

Section 7.1 Conditions to All Parties’ Obligations. The obligations of the Parties to consummate the Transaction are subject to the satisfaction or waiver of the following conditions as of the Closing Date:

(a) No Pending Action, Injunction or Legal Impediment. Except for any pending Legal Proceeding directly or indirectly initiated by the Party asserting its right to not consummate the Transaction pursuant to this Section 7.1(a), no Legal Proceeding before any court or other Government Entity of competent jurisdiction shall be pending wherein an unfavorable Order would prevent the performance of this Agreement or the consummation of the Transaction, declare the Transaction unlawful or cause the Transaction to be rescinded. There shall not be outstanding any Order, whether temporary, preliminary or permanent, of any court or other Government Entity of competent jurisdiction enjoining or otherwise preventing the consummation of the Transaction contemplated by this Agreement. No Government Entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any Law that is in effect and prevents the performance of this Agreement or the consummation of the Transaction, declares the Transaction unlawful or would cause the Transaction to be rescinded.

Section 7.2 Conditions to Buyer’s Obligations. The obligation of Buyer to consummate the Transaction is subject to the satisfaction of the following conditions as of the Closing Date, any of which may be waived by Buyer:

(a) Accuracy of Representations and Warranties. The representations and warranties of Seller and the Shareholder set forth in Article III and Article IV will be true and correct in all respects (disregarding for such purposes any qualification therein by “material,” “materiality,” “material respects,” “material adverse effect” or other words of similar import or effect), in each case at and as of the date of this Agreement and the Closing Date as though then made and as though the Closing Date was substituted for the date of this Agreement throughout such representations and warranties (other than those representations and warranties that address matters as of particular dates, which will be true and correct as of such dates), except where the failure of any such representations and warranties to be true and correct has not had, and would not have, individually or in the aggregate, a Seller Material Adverse Effect.

(b) Compliance With Covenants. Seller and the Shareholder shall have performed and complied with all of the covenants required to be performed or complied with by them under this Agreement at or prior to the Closing in all material respects.

(c) Delivery of Closing Certificate. Seller shall have delivered to Buyer a certificate, dated as of the Closing Date and duly signed by the Shareholder and a senior officer of Seller, given by him or her on behalf of Seller and not in his or her individual capacity, certifying that the conditions set forth in Sections 7.2(a), (b), and (f) have been satisfied.

(d) Termination of Affiliate Agreements. All Contracts with Affiliates set forth on Schedule 4.15 shall have been terminated and evidence of such termination, in form and substance satisfactory to Buyer, shall have been delivered to Buyer at or prior to the Closing.

(e) Delivery of Closing and Other Documents. Buyer shall have timely received each of the deliverables set forth in Section 2.9.

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(f) Receipt of Tax Clearance or Tax Escrow Letter. Buyer shall have received from the Connecticut Department of Revenue Services a certificate stating that no taxes, interest or penalties are due from Seller or a statement showing the amount that must be paid as a condition to issuing the certificate.

(g) No Material Adverse Changes. Since the date of this Agreement, there shall not have occurred any events, changes, occurrences, facts, variations, developments or circumstances that have resulted in or would reasonably be expected to result in, whether in the near term or over an extended period, individually or in the aggregate, a Seller Material Adverse Effect.

Section 7.3 Conditions to Seller’s Obligations. The obligations of Seller to consummate the Transaction are subject to the satisfaction of the following conditions as of the Closing Date, any of which may be waived by Seller:

(a) Accuracy of Representations and Warranties. The representations and warranties of Buyer set forth in Article V will be true and correct in all respects (disregarding for such any qualification therein by “material,” “materiality,” “material respects,” “material adverse effect” or other words of similar import or effect), in each case at and as of the date of this Agreement and the Closing Date as though then made and as though the Closing Date was substituted for the date of this Agreement throughout such representations and warranties (other than those representations and warranties that address matters as of particular dates, which will be true and correct as of such dates), except where the failure of any such representations and warranties to be true and correct has not had, and would not have, individually or in the aggregate, a material adverse effect on the ability of Buyer to consummate the Transactions, or otherwise perform its obligations hereunder.

(b) Compliance with Covenants. Buyer shall have performed and complied with all of the covenants required to be performed or complied with by it under this Agreement at or prior to the Closing in all material respects.

(c) Delivery of Closing Certificate. Buyer shall have delivered to Seller a certificate, dated as of the Closing Date and signed by a senior officer of Buyer, given by him or her on behalf of Buyer and not in his or her individual capacity, certifying that the conditions set forth in Sections 7.3(a) and (b) have been satisfied.

(d) Delivery of Closing Documents. Buyer shall have delivered the deliverables set forth in Section 2.8 and the Parties shall have received the Consents set forth in Section 2.9(m).

Section 7.4 Frustration of Closing Conditions. No Party may rely on the failure of any condition set forth in this Article VII, if such failure was caused by such Party’s intentional breach of any provision of this Agreement.

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ARTICLE VIII

TERMINATION

Section 8.1 Termination.

(a) Mutual Consent. This Agreement may be terminated at any time prior to the Closing by the mutual written consent of Buyer and Seller.

(b) Failure to Close by the Outside Date. Subject to Section 8.1(c), Buyer or Seller may terminate this Agreement, at any time prior to the Closing, if the Closing shall not have occurred on or before June 1, 2014 (the “Termination Date”); provided neither Buyer nor Seller may terminate this Agreement pursuant to this Section 8.1(b) if Buyer, in the case of termination by Buyer, or Seller or the Shareholder, in the case of termination by Seller, has breached its obligations under this Agreement in a manner that shall have proximately contributed to the failure of the Closing to occur by such date.

(c) Breach of Seller’s Covenants, Representation or Warranties. Buyer may terminate this Agreement, at any time prior to the Closing, if there has been a violation or breach by Seller or the Shareholder of any covenant, representation or warranty contained in this Agreement which has prevented the satisfaction of any condition to the obligations of Buyer at the Closing and such violation or breach has not been waived by Buyer or cured, if capable of being cured, by Seller or the Shareholder within 30 days after receipt of written notice thereof from Buyer to Seller; provided that the right to terminate this Agreement pursuant to this Section 8.1(c) will not be available to Buyer if Buyer shall have materially violated or breached any of its covenants, representations or warranties contained in this Agreement.

(d) Breach of Buyer’s Covenants, Representation or Warranties. Seller may terminate this Agreement, at any time prior to the Closing, if there has been a violation or breach by Buyer of any covenant, representation or warranty contained in this Agreement which has prevented the satisfaction of any condition to the obligations of Seller at the Closing and such violation or breach has not been waived by Seller or cured, if capable of being cured, by Buyer within 30 days after receipt of written notice thereof from Seller; provided that the right to terminate this Agreement pursuant to this Section 8.1(d) will not be available to Seller if Seller or the Shareholder shall have materially violated or breached any of its covenants, representations or warranties contained in this Agreement.

Section 8.2 Notice of Termination. Buyer or Seller may exercise its right to terminate this Agreement by giving written notice to the other Party, specifying the basis for such termination under Section 8.1.

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Section 8.3 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 8.1, the provisions of this Agreement will immediately become void and of no further force or effect (other than this Section 8.3 and Article X which will survive the termination of this Agreement in accordance with their terms), and there will be no Liability on the part of any of the Parties or any of their respective Affiliates to one another, except for fraud or breach of this Agreement, in each case occurring prior to the termination of this Agreement (including the failure of a Party to consummate the Transaction contemplated by this Agreement following the satisfaction of all the conditions to such Party’s obligations under Article VII).

ARTICLE IX

SURVIVAL; INDEMNIFICATION; CERTAIN REMEDIES

Section 9.1 Survival.

(a) All of the representations, warranties, covenants and agreements of the Parties set forth in this Agreement will survive the Closing and will terminate on the second anniversary of the Closing Date; except, that (i) the representations and warranties set forth in Sections 3.1, 3.2, 3.3, 3.4, 4.1 4.2, 4.3, 4.21, 5.1, 5.2, 5.3 and 5.6 will survive the Closing and will terminate on the fifth anniversary of the Closing Date; and (ii) the representations and warranties set forth in Sections 4.8, 4.10, and 4.12 will survive the Closing until 30 days following the expiration of the statute of limitation applicable to matters covered thereby (after giving effect to any waiver or extension thereof granted by the applicable Party). Notwithstanding the preceding sentence, any representation or warranty in respect of which indemnity may be sought under this Agreement will survive the time at which it would otherwise terminate pursuant to the immediately preceding sentence if written notice specifying in reasonable detail the inaccuracy or breach thereof giving rise to such right of indemnification has been given in good faith to the Party against whom such indemnification may be sought prior to such time.

(b) Notwithstanding the foregoing any covenant or agreement of any Party that is to be performed after the Closing will survive the Closing indefinitely or for the shorter period explicitly specified therein.

(c) The indemnification obligations set forth in this Article IX will survive indefinitely. This Section 9.1(c) is not intended to extend the survival period of the representations and warranties set forth in Section 9.1(a).

Section 9.2 Indemnification by Buyer. Subject to the conditions and limitations set forth in this Article IX, from and after the Closing, Buyer will indemnify, defend and hold harmless Seller, the Shareholder, their Affiliates, and their respective directors, officers, managers, shareholders, members, partners, employees, representatives and agents, and their respective heirs, successors and assigns of the foregoing, each in their capacity as such (the “Seller Indemnified Parties”) from, against and in respect of any Losses arising out of or resulting from:

(a) any failure to be true and correct as of the date of this Agreement, and as of the Closing (as if made anew at and as of the Closing), of any representation or warranty made by Buyer contained in this Agreement (or the certificate delivered pursuant to Section 7.3(c));

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(b) any nonfulfillment or breach of any covenant or agreement made by Buyer contained in this Agreement;

(c) any Purchased Assets; and

(d) any failure to fully and timely discharge or perform any of the Assumed Liabilities.

Section 9.3 Indemnification by Seller and the Shareholder. Subject to the conditions and limitations set forth in this Article IX, from and after the Closing, Seller and the Shareholder, jointly and severally, will indemnify, defend and hold harmless Buyer and its Affiliates and their respective directors, officers, managers, shareholders, members, partners, employees, representatives and agents, and the respective successors and assigns of the foregoing (the “Buyer Indemnified Parties”) from, against and in respect of any Losses arising out of or resulting from:

(a) any failure to be true and correct as of the date of this Agreement, and as of the Closing (as if made anew at and as of the Closing), of any representation or warranty made by Seller or the Shareholder contained in this Agreement (or the certificate delivered pursuant to Section 7.2(c));

(b) any nonfulfillment or breach of any covenant or agreement made by Seller or the Shareholder contained in this Agreement;

(c) any failure to fully and timely discharge or perform any of the Retained Liabilities; and

(d) any Excluded Assets.

Section 9.4 Third Party Claim Indemnification Procedures.

(a) In the event that any Legal Proceeding is instituted or that any claim or demand is asserted by any third party for which Buyer (in respect of claims made pursuant Section 9.2) or Seller and the Shareholder (in respect of claims made pursuant to Section 9.3) (an “Indemnifying Party”) may have liability to a Person pursuant to this Article IX (an “Indemnified Party”) (such Legal Proceeding, claim or demand, a “Third Party Claim”), such Indemnified Party will promptly, but in no event more than 30 days following such Indemnified Party’s receipt of a Third Party Claim, promptly notify the Indemnifying Party in writing of such Third Party Claim (a “Claim Notice”); provided, however, that the failure to timely give a Claim Notice will affect the rights of an Indemnified Party hereunder only if and to the extent such failure has an actual prejudicial effect on the Indemnifying Party with respect to such Third Party Claim. The Indemnifying Party will have 20 days (or such lesser number of days set forth in the Claim Notice as may be required by court proceeding in the event of a Legal Proceeding) after receipt of the Claim Notice (the “Notice Period”) to notify the Indemnified Party that it desires to defend the Indemnified Party against such Third Party Claim, which may include a reservation of rights on behalf of the Indemnifying Party.

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(b) In the event that the Indemnifying Party notifies the Indemnified Party within the Notice Period that it desires to defend the Indemnified Party against a Third Party Claim, the Indemnifying Party will have the right to defend the Indemnified Party by appropriate proceedings and will have the sole power to direct and control such defense. Once the Indemnifying Party has duly assumed the defense of a Third Party Claim, the Indemnified Party will have the right, but not the obligation, to participate in any such defense and to employ separate counsel of its choosing. The Indemnified Party’s participation in any such defense will be at its own expense unless (i) representation of the Indemnified Party’s interests by the Indemnifying Party’s counsel would involve an actual conflict of interest or (ii) the Indemnified Party assumes the defense of a Third Party Claim after the Indemnifying Party has failed to diligently pursue a Third Party Claim it has assumed, as provided in the first sentence of Section 9.4(c), in which either case the Indemnifying Party will pay the expenses of the Indemnified Party’s counsel to the extent of its indemnification obligations hereunder. The Indemnifying Party will not, without the prior written consent of the Indemnified Party (which consent will not be unreasonably conditioned, delayed, or withheld), settle, compromise or offer to settle or compromise any Third Party Claim on a basis that would result in (A) the imposition of a consent Order, injunction or decree that would restrict the future activity or conduct of the Indemnified Party or any of its Affiliates, (B) a finding or admission of a violation of Law or violation of the rights of any Person by the Indemnified Party or any of its Affiliates, (C) a finding or admission that would have an adverse effect on other claims made or threatened against the Indemnified Party or any of its Affiliates, or (D) any monetary liability of the Indemnified Party that will not be promptly paid or reimbursed by the Indemnifying Party. The Indemnified Party will cooperate in the defense of any Third Party Claim, including by providing access to such personnel, support and relevant business records and other documents, as may be reasonably requested by the Indemnifying Party in connection with such defense.

(c) If the Indemnifying Party (i) elects not to defend the Indemnified Party against a Third Party Claim, whether by not giving the Indemnified Party timely notice of its desire to so defend or otherwise or (ii) after assuming the defense of a Third Party Claim, fails to use its reasonable best efforts to defend diligently such Third Party Claim within ten Business Days after receiving written notice from the Indemnified Party to the effect that the Indemnifying Party has so failed, the Indemnified Party will have the right but not the obligation to assume its own defense, in which case the Indemnified Party will have sole power to direct and control such defense (it being understood that the Indemnified Party’s right to indemnification for a Third Party Claim will not be adversely affected by assuming the defense of such Third Party Claim). In such case, the Indemnified Party will not settle, compromise or offer to settle or compromise the Third Party Claim without the prior written consent of the Indemnifying Party, which consent will not be unreasonably conditioned, delayed, or withheld.

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(d) The Indemnified Party and the Indemnifying Party will use their reasonable best efforts to avoid production of Confidential Information (consistent with applicable Law) and to cause all communications among employees, counsel and others representing any party to a Third Party Claim to be made so as to preserve any applicable attorney-client or work-product privileges.

Section 9.5 Notice of Direct Claims. Any claim for indemnification of Losses under this Article IX that is not a Third Party Claim (a “Direct Claim”) by an Indemnified Party will be asserted by giving prompt written notice thereof to Seller (in the case of indemnification sought by a Buyer Indemnified Party) or Buyer (in the case of indemnification sought by a Seller Indemnified Party); provided, however, that any delay in providing, or the failure to provide such notification, will not affect the right of the Indemnified Party to indemnification hereunder except in the event that such delay or failure extends past the applicable survival expiration date set forth in Section 9.1 or to the extent that the Indemnifying Party is actually prejudiced by the delay or failure. Such notice will describe the Direct Claim in reasonable detail, including (to the extent practicable) copies of any written evidence thereof and will indicate the estimated amount of Losses, if reasonably determinable, that has been sustained by the Indemnified Party. The Indemnifying Party will have 20 Business Days after the Direct Claim is asserted to respond in writing to such Direct Claim. If such response by the Indemnifying Party is not received within such 20 Business Day period, the Indemnifying Party will be deemed to have accepted such claim, in which event the Direct Claim will be deemed due and payable to the Indemnified Party. If a response of the Indemnifying Party disputing the Direct Claim is received by the Indemnified Party within such 20 Business Day period the Indemnified Party will be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Article IX.

Section 9.6 Certain Limitations on Indemnification.

(a) Seller and the Shareholder will have no liability for indemnification pursuant to Section 9.3(a) with respect to Losses for which indemnification is provided thereunder unless and until the aggregate amount of such Losses exceeds $150,000 (the “Basket”), in which case Seller and the Shareholder will be liable for all such Losses, including all Losses initially applied against the Basket; provided that in no event will the aggregate indemnification to be paid by Seller and the Shareholder pursuant to Section 9.3(a) exceed $2,500,000. Subject to Section 9.10, Seller and the Shareholder will not have any obligation to pay to Buyer an aggregate amount in excess of $5,000,000 in respect of Losses indemnifiable pursuant to Section 9.3(c) resulting from (i) any alleged or actual infringement or violation of the Intellectual Property of any Person prior to Closing or (ii) any written product warranty with respect to any Pre-Closing Product.

(b) The limitations set forth in Section 9.6(a) will not apply to any claim arising out of or resulting from fraud or intentional misrepresentation or to claims of indemnification by Buyer Indemnified Parties in connection with any inaccuracy in or breach of the representations and warranties contained in Sections 3.1, 3.2, 3.3, 3.4, 4.1, 4.2, 4.3, 4.8, and 4.21. For the avoidance of doubt, other than as specified in the last sentence of Section 9.6(a), the limitations set forth in Section 9.6(a) will not apply to any claim pursuant to Section 9.3(b), 9.3(c) or 9.3(d).

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(c) Each Party will take all commercially reasonable steps to mitigate its Losses upon and after becoming aware of any event or condition which would reasonably be expected to give rise to any Losses that are indemnifiable hereunder, including using its reasonable best efforts to recover any insurance proceeds in connection therewith. The failure to so mitigate or recover such insurance proceeds will not affect any Indemnified Party’s ability to make, and will not give rise to a right of set-off or otherwise constitute a defense against, a claim for indemnification pursuant to this Agreement; provided further that the foregoing will not relieve an Indemnified Party of its obligations under the immediately preceding sentence. Payments by the Indemnifying Party in respect of any Losses will be calculated net of any insurance proceeds and any indemnity, contribution or other similar payment actually received by the Indemnified Party from any insurer or other third party in respect of such Loss, less any related costs and expenses, including the aggregate cost of pursuing any related insurance claims, any Taxes paid or payable as a result of receipt of such proceeds or payment, and any related increases in insurance premiums or other chargebacks. Promptly after the realization of any insurance proceeds, indemnity, contribution or other similar payment, the Indemnified Party will reimburse the Indemnifying Party for such reduction in Losses for which the Indemnified Party was indemnified prior to the realization of reduction of such Losses.

(d) In determining (i) whether any representation or warranty made by Seller, the Shareholder or Buyer in this Agreement (or any certification delivered pursuant to this Agreement) was true and correct as of any particular date and (ii) the amount of any Losses in respect of the failure of any such representation or warranty to be true and correct as of any particular date, any qualification or limitation as to materiality contained in such representation or warranty will be disregarded.

(e) Seller and the Shareholder will have no liability for indemnification pursuant to Section 9.3(a) for the failure of the representations and warranties set forth in the first sentence of each of Sections 4.13(c) and 4.13(d) to be true and correct with respect to any Losses arising out of the conduct of the Business or the use of the Purchased Assets by the Buyer and its Affiliates after the Closing.

Section 9.7 Damages. An Indemnified Party will be permitted to recover damages that are probable and reasonably foreseeable, subject to the limitations set forth in Section 9.6. The burden of proof of any such damages will be on the party that asserts the claim for such damages. In no event will any Party be liable to any Party or other Person for any special, indirect, lost opportunity, exemplary or punitive damages of any kind, regardless of whether such Party will be advised, will have other reason to know, or in fact will know of the possibility of the foregoing; unless such damages are owed to a third party as part of a judgment in connection with a claim of such third party against an Indemnified Party.

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Section 9.8 Payments.

(a) Subject to Section 9.12(a), Seller and the Shareholder (if the Indemnified Party is a Buyer Indemnified Party) or Buyer (if the Indemnified Party is a Seller Indemnified Party) will pay or cause to be paid to the Indemnified Party, by wire transfer of immediately available funds, the amount of any Loss for which it is liable hereunder no later than three Business Days following any final determination of such Loss and the Indemnifying Party’s liability therefor. A “Final Determination” will exist when (i) the parties to the dispute have reached an agreement in writing, (ii) the Indemnifying Party does not respond within the 20 Business Day period stipulated in Section 9.5, (iii) a court of competent jurisdiction shall have entered a final and non-appealable Order, or (iv) an arbitration or like panel shall have rendered a final non-appealable determination with respect to disputes the parties have agreed to submit thereto.

Section 9.9 Effect of Waiver of Condition. No Indemnified Party’s right to indemnity pursuant to this Article IX will be adversely affected by any waiver of a condition to Closing unless the terms of such waiver expressly waive such Indemnified Party’s right to indemnity with respect to the matter that is the subject of the waiver.

Section 9.10 Remedies. Following the Closing, this Article IX will be the exclusive remedy for any Losses arising out of any breach of the representations, warranties, covenants or agreements of the Parties other than in respect of fraud or intentional misrepresentation. Notwithstanding the foregoing, the Parties are entitled to injunctive relief or other specific enforcement of the provisions of this Agreement pursuant to Section 10.11. Notwithstanding anything in this Agreement to the contrary and for the avoidance of doubt, regardless of the limitations set forth in Section 9.6(a), (a) a Buyer Indemnified Party or a Seller Indemnified Party may assert as a defense to a Third Party Claim that, in the case of a claim against a Buyer Indemnified Party, Buyer did not assume or acquire the Retained Liabilities or Excluded Assets from Seller or that, in the case of a claim against a Seller Indemnified Party, Seller did not retain the Purchased Assets or the Assumed Liabilities, and (b) in either such case in the foregoing clause (a), the Indemnified Party may bring the Seller or Buyer, as the case may be, into any Legal Proceeding in respect of such Third Party Claim as a third party defendant and recover Losses as a result of such Third Party Claim or Legal Proceeding. The procedures set forth in this Article IX will not apply in respect of a Third Party Claim described in clause (a) of the foregoing sentence if the Buyer Indemnified Party or Seller Indemnified Party, as the case may be, is dismissed or removed as a party from the Third Party Claim; provided that such procedures will be restored and will apply if the Buyer Indemnified Party or Seller Indemnified Party, respectively, becomes a party to the Third Party Claim.

Section 9.11 Tax Treatment of Indemnity Payments. Seller, the Shareholder and Buyer agree to treat any indemnity payment made pursuant to this Article IX as an adjustment to the Purchase Price for all Tax purposes, except to the extent otherwise required by applicable Law.

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Section 9.12 Release of Escrow Fund.

(a) Seller’s portion of Buyer’s costs of Warranty Work, as determined in accordance with Section 6.14, will be paid from the Escrow Fund. In addition, promptly upon a Final Determination of any claim for indemnification made by a Buyer Indemnified Party pursuant to Section 9.3, such payment will be paid (i) first, from the Escrow Fund and (ii) second, subject to the limitations set forth in Section 9.6, in the case of any payment with respect to which the then-remaining Escrow Fund is insufficient to satisfy such payment obligation, by Seller or Shareholder.

(b) Within five Business Days following the first anniversary of the Closing Date (the “Initial Escrow Release Date”), Buyer and Seller will execute and deliver to the Escrow Agent a certificate jointly instructing the Escrow Agent to distribute in accordance with the Escrow Agreement to the account or accounts designated by Seller an aggregate amount equal to (i) $1,000,000 minus (ii) the total amounts previously paid out of the Escrow Fund minus (iii) the amount of any unresolved indemnification claims asserted by Buyer in good faith pursuant to this Article IX, as such amount is reasonably estimated in good faith by Buyer.

(c) Within five Business Days following the second anniversary of the Closing Date (the “Escrow Release Date”), Buyer and Seller will execute and deliver to the Escrow Agent a certificate jointly instructing the Escrow Agent to distribute in accordance with the Escrow Agreement to the account or accounts designated by Seller an aggregate amount equal to (i) the amount then remaining in the Escrow Fund minus (ii) the amount of any unresolved indemnification claims asserted by Buyer in good faith pursuant to this Article IX, as such amount is reasonably estimated in good faith by Buyer. Any amounts that thereafter remain in the Escrow Fund will continue to be held in the Escrow Fund in accordance with the terms of the Escrow Agreement until the resolution and payment of the indemnification claims asserted by Buyer pursuant to this Article IX.

ARTICLE X

MISCELLANEOUS

Section 10.1 Notices. All notices, demands and other communications hereunder will be deemed to have been duly given, (a) when received if given in person or by courier or a courier service or (b) on the date of transmission if sent by facsimile, email or other electronic transmission (receipt confirmed), at the applicable address or facsimile number set forth below:

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To Seller and the Shareholder prior to Closing:

Combustion Components Associates, Inc.

884 Main Street

Monroe, CT 06468

Facsimile: (203) 261-7697

E-mail: Broderick@cca-inc.net

Attention: President

To Seller and the Shareholder after Closing:

ROC, Inc.

94 Silver Spring Road

Wilton, CT 06897

Facsimile: N/A E-mail: rgbroderick@snet.net

Attention: R. Gifford Broderick

With a copy to, whether prior to or after Closing (which will not constitute notice to Seller or the Shareholder):

Reid & Riege P.C.

One Financial Plaza, 21^st Floor

Hartford, CT 06103

Facsimile: (860) 240-1002

E-mail: kferrigno@reidandriege.com

Attention: Kevin G. Ferrigno

To Buyer:

Peerless Mfg. Co.

14651 North Dallas Parkway, Suite 500

Dallas, TX 75254

Facsimile: (214) 351-4172

E-mail: pburlage@peerlessmfg.com

Attn: Peter Burlage, Chairman and Chief Executive Officer

With a copy to (which will not constitute notice to Buyer):

Jones Day

2727 N. Harwood Street

Dallas, Texas 75201

Facsimile: (214) 969-5100

E-mail: jeobannon@jonesday.com

Attn: James E. O’Bannon

Any Party may change the address or the persons to whom notices or copies hereunder will be directed by providing written notice to the other Parties of such change in accordance with this Section 10.1.

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Section 10.2 Amendment; Waiver. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Parties, or in the case of a waiver, by the Party against whom the waiver is to be effective. No failure or delay by any Party in exercising any right, power or privilege hereunder will operate as a waiver thereof nor will any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided will be cumulative and not exclusive of any rights or remedies provided by Law.

Section 10.3 No Assignment or Benefit to Third Parties. This Agreement will be binding upon and inure to the benefit of the Parties and their respective successors, legal representatives and permitted assigns. No Party may assign any of its rights or delegate any of its obligations under this Agreement, by operation of Law or otherwise, without the prior written consent of the other Parties, and any such purported assignment in violation of this Agreement will be null and void; provided, however, that Buyer may, without such consent, assign any of its rights pursuant to this Agreement (in whole or in part) to any Affiliate of Buyer or, following the Closing, any subsequent purchaser of all or substantially all of the assets and properties of Buyer (whether via merger or otherwise). Nothing in this Agreement, express or implied, is intended to confer upon any Person other than the Shareholder, Seller, Buyer, the Indemnified Parties and their respective successors, legal representatives and permitted assigns, any rights or remedies under or by reason of this Agreement.

Section 10.4 Entire Agreement. This Agreement and the Ancillary Agreements (including all Schedules and Exhibits hereto and thereto) contains the entire agreement and understanding among the Parties with respect to the subject matter hereof and thereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters.

Section 10.5 Public Disclosure. No public announcement or other publicity regarding the existence of this Agreement or its contents or the Transaction contemplated hereby will be made by Buyer, the Shareholder, Seller or any of their respective Affiliates, officers, directors, managers, employees, representatives or agents, unless specifically approved in advance by Buyer and Seller, in any case, as to the form, content, timing and manner of distribution or publication; provided, that nothing in this Agreement will prevent Buyer or its Affiliates from making any filing or disclosures required by Law (including applicable securities Laws) or the rules of any stock exchange or from publicly issuing a press release, in each case, with respect to this Agreement or its contents or the Transaction contemplated hereby (the contents of which will be determined by Buyer and its Affiliates in their sole discretion if Buyer has used all reasonable efforts to consult with Seller and obtain Seller’s consent, which will not be unreasonably conditioned, withheld or delayed, but has been unable to do so in a timely manner).

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Section 10.6 Expenses.

(a) Except as otherwise expressly provided in this Agreement, whether or not the Transaction is consummated, all costs and expenses incurred in connection with this Agreement and the Transaction will be borne by the Party incurring such costs and expenses.

(b) In the event of any litigation brought to enforce or interpret this Agreement, or arising out of its negotiation, performance, or subject matter, the Party who prevails will be entitled to recover its attorneys’ fees and costs, including those incurred at trial, in any bankruptcy or other proceeding, on appeal, and in enforcing any judgment, as determined by the court.

Section 10.7 Governing Law; Submission to Jurisdiction; Selection of Forum; Waiver of Trial by Jury.

(a) This Agreement and any other document or instrument delivered pursuant hereto, and all claims or causes of action (whether in contract or tort) that may be based upon, arise out of or relate to this Agreement or the negotiation, execution, termination, performance or nonperformance of this Agreement, will be deemed to be made in and in all respects will be interpreted, construed and governed by and in accordance with the law of the State of New York, without regard to the conflicts of law principles thereof. Each Party hereby irrevocably submits to the exclusive jurisdiction of any federal or state court located in the Borough of Manhattan in New York City, and of any court in which appeals from judgments of such courts may be heard (the “Designated Courts”) in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the Transaction (including the pursuit of injunctive (whether temporary, preliminary or permanent) monetary or other, relief), and hereby waives, and agrees not to assert, as a defense in any Legal Proceeding for the interpretation or enforcement of this Agreement or of any such document, that the Party is not subject to personal jurisdiction in that court or that such Legal Proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any such document may not be enforced in or by such courts, and each Party irrevocably agrees that all claims with respect to such Legal Proceeding will be heard and determined in one of the Designated Courts. Each Party hereby consents to and grants any such court jurisdiction over the person of such parties and, to the extent permitted by Law, over the subject matter of such dispute. Each Party agrees that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 10.1 or in such other manner as may be permitted by Law will be valid and sufficient service thereof.

(b) EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO

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REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.7(b).

Section 10.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, and all of which will constitute one and the same Agreement.

Section 10.9 Headings. The heading references herein and the table of contents hereof are for convenience purposes only, and will not be deemed to limit or affect any of the provisions hereof.

Section 10.10 Severability. The provisions of this Agreement will be deemed severable and the invalidity or unenforceability of any provision will not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision will be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other Persons or circumstances will not be affected by such invalidity or unenforceability, nor will such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction.

Section 10.11 Specific Performance. Each of the Parties acknowledges and agrees that a violation of any of the terms of this Agreement will cause the other Parties irreparable injury for which adequate remedy at Law is not available. Accordingly, it is agreed that each of the Parties will be entitled to specific performance, injunction, restraining Order or other equitable relief, without the posting of any bond, to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction, in addition to any other remedy to which they may be entitled at law or equity.

Section 10.12 Investigation. Buyer acknowledges that it and its representatives have undertaken an independent investigation and verification of the business, assets, operations, financial condition and prospects of Seller and the Business. In connection with such investigation, Buyer and its representatives have received from or on behalf of Seller certain estimates, forecasts, plans and financial projections (“Forward-Looking Statements”), and Buyer acknowledges that (a) there are uncertainties inherent in making Forward-Looking Statements and (b) it is familiar with such uncertainties and it is taking full responsibility for making its own evaluation of the adequacy and accuracy of all Forward-Looking Statements so furnished to it and its representatives (including the reasonableness of the assumptions underlying Forward-Looking Statements where such assumptions are explicitly disclosed). Neither Seller nor any other Person will have or be subject to any Liability to Buyer, or any other Person resulting from the distribution to Buyer, or its use of, Forward-Looking Statements, except in cases of fraud or willful misconduct.

[signature page follows]

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IN WITNESS WHEREOF, the parties have executed or caused this Agreement to be executed as of the date first written above.

SELLER:
COMBUSTION COMPONENTS ASSOCIATES, INC.
By:	/s/ Edward H. Bird
	Name: Edward H. Bird
	Title: Vice President and Secretary
SHAREHOLDER:
/s/ R. Gifford Broderick
R. Gifford Broderick
BUYER:
PEERLESS MFG. CO.
By:	/s/ Peter Burlage
	Name: Peter Burlage
	Title: Chief Executive Officer

[Signature Page to Asset Purchase Agreement]

EX-10.3

Exhibit 10.3

SECOND AMENDMENT TO CREDIT AGREEMENT

THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this “Amendment”), dated May 7, 2014, but to be effective as of March 29, 2014 (the “Effective Date”), among PMFG, INC., a Delaware corporation (“PMFG”), and PEERLESS MFG. CO., a Texas corporation (“Peerless”, and PMFG and Peerless, individually and collectively shall be referred to herein as, the “Borrower”); each of the Lenders party hereto; and CITIBANK, N.A., a national banking association (in its individual capacity, “Citibank”), as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the “Administrative Agent”).

BACKGROUND

A. The Borrower, the Lenders and the Administrative Agent are parties to that certain Credit Agreement, dated as of September 7, 2012 (said Credit Agreement, as amended, the “Credit Agreement”; the terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement).

B. The Borrower, the Lenders and the Administrative Agent desire to amend the Credit Agreement, subject to the terms and conditions contained herein.

NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, the parties hereto covenant and agree as follows:

1. AMENDMENTS.

(a) The definition of “Borrowing Base” set forth in Section 1.02 of the Credit Agreement is hereby amended in its entirety to read as follows:

“Borrowing Base” means, as of any date:

(a) during a DSCR Compliance Period, an amount equal to (i) the sum of (A) eighty percent (80%) of the aggregate amount of Eligible Accounts on such date plus (B) fifty percent (50%) of the aggregate amount of Eligible Inventory on such date plus (C) one hundred percent (100%) of the cash held in the LC Cash Account as of such date of determination, minus (ii) the Foreign Currency Letter of Credit Contingency Amount; and

(b) during a DSCR Non-Compliance Period, an amount equal to (i) one hundred percent (100%) of the Amended Borrowing Base Cash Collateral held by the Administrative Agent pursuant to Section 2.13 at such time, less (ii) the Cash Buy Down Amount at such time.

(b) The definition of “Borrowing Base Certificate” set forth in Section 1.02 of the Credit Agreement is hereby amended by adding the following sentence at the end thereof: “For the avoidance of doubt, for so long as the Amended Borrowing Base is in effect, the calculations set forth on the Borrowing Base Certificate most recently delivered shall be used for informational purposes only.”

(c) The definition of “LC Cash Account” set forth in Section 1.02 of the Credit Agreement is hereby amended by adding the following sentence at the end thereof: “For the avoidance of doubt, the LC Cash Account shall include any one or more such deposit accounts and shall include the LC Collection Account and the Amended Borrowing Base Cash Collateral Account (as defined in Section 2.13).”

(d) Section 1.02 of the Credit Agreement is hereby amended by adding the following definitions thereto in appropriate alphabetical order:

“Amended Borrowing Base” shall mean the Borrowing Base as determined in accordance with clause (b) of the definition of “Borrowing Base”.

“Amended Borrowing Base Cash Collateral” has the meaning set forth in Section 2.13.

“Cash Buy Down Amount” means, as of any date of determination, an amount equal to (a) $3,000,000, minus (b) the sum of the payments made on the Term Loans pursuant to Sections 3.01 and 3.04 of the Credit Agreement from and after the Second Amendment Effective Date through such date of determination.

“DSCR Compliance Period” means any period (a) commencing upon the delivery of the Borrower’s financial statements pursuant to Sections 8.01(a) and 8.01(b), as applicable, which show that the Debt Service Coverage Ratio as of the last day of the most recently ended fiscal quarter was equal to or greater than 1.50:1.00, and (b) ending upon the commencement of a DSCR Non-Compliance Period; provided, however, that if the Borrower fails to timely deliver the financial statements required by Sections 8.01(a) and 8.01(b), as applicable, the Borrower shall be deemed to be in a DSCR Non-Compliance Period until the required financial statements are delivered which show that the Borrower is in a DSCR Compliance Period.

“DSCR Non-Compliance Period” means any period (a) commencing upon the delivery of the Borrower’s financial statements pursuant to Sections 8.01(a) and 8.01(b), as applicable, which show that the Debt Service Coverage Ratio as of the last day of the most recently ended fiscal quarter was less than 1.50:1.00, and (b) ending upon the commencement of a DSCR Compliance Period; provided, however, that if the Borrower fails to timely deliver the financial statements required by Sections 8.01(a) and 8.01(b), as applicable, the Borrower shall be deemed to be in a DSCR Non-Compliance Period until the required financial statements are delivered which show that the Borrower is in a DSCR Compliance Period.

“Second Amendment Effective Date” means March 29, 2014.

(e) A new Section 2.13 shall be added to the Credit Agreement which shall read in its entirety as follows:

Section 2.13 Cash Collateral – Amended Borrowing Base. At any time, Borrower may pledge and deposit with or deliver to the Administrative Agent cash collateral for purposes of determining the Amended Borrowing Base (the “Amended Borrowing Base Cash Collateral”), provided that, notwithstanding anything to the contrary in the Credit Agreement, Borrower shall not, as of any date of determination, be required to maintain Amended Borrowing Base Cash Collateral in the Amended Borrowing Base Cash Collateral Account in excess of an aggregate amount (the “Minimum Amended Borrowing Base Cash Collateral Amount”) equal to the greater of (a) $10,000,000, or (b) an aggregate amount equal to (i) 100% of the Risk Adjusted Revolving Credit Exposure as of any such date, plus (ii) the Cash Buy Down Amount as of such date. The Amended Borrowing Base Cash Collateral shall be deposited in a money market account of the Borrower established with the Administrative Agent (the “Amended Borrowing Base Cash Collateral Account”), subject to the provisions set forth in the following clauses (a) and (b) below.

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(a) Grant of Security Interest. The Borrower hereby grants to the Administrative Agent, for the benefit of the Secured Parties, an exclusive first priority and continuing perfected security interest in and Lien on the Amended Borrowing Base Cash Collateral Account and all cash, checks, drafts, certificates and instruments, if any, from time to time deposited or held in the Amended Borrowing Base Cash Collateral Account, all deposits or wire transfers made thereto, any and all investments purchased with funds deposited in such account, all interest, dividends, cash, instruments, financial assets and other Property from time to time received, receivable or otherwise payable in respect of, or in exchange for, any or all of the foregoing, and all proceeds, products, accessions, rents, profits, income and benefits therefrom, and any substitutions and replacements therefor. The Amended Borrowing Base Cash Collateral, to the fullest extent permitted by applicable Law, shall not be subject to any defense or be affected by a right of set-off, counterclaim or recoupment which the Borrower or any of its Subsidiaries may now or hereafter have against the Administrative Agent, the Lenders or any other Person for any reason whatsoever. Such deposit shall be held as collateral securing the payment and performance of the Obligations. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over the Amended Borrowing Base Cash Collateral Account. Interest or profits, if any, on such Amended Borrowing Base Cash Collateral shall accumulate in the Amended Borrowing Base Cash Collateral Account.

(b) Release.

(i) Upon the Borrower’s request at any time while the Amended Borrowing Base is in effect, the Administrative Agent shall return to the Borrower all amounts being held in the Amended Borrowing Base Cash Collateral Account in excess of the Minimum Amended Borrowing Base Cash Collateral Amount, provided that no Default has occurred and is continuing and no Borrowing Base Deficiency then exists or would result therefrom.

(ii) Upon the Borrower’s request, provided that the Amended Borrowing Base is not then in effect, the Administrative Agent shall return to the Borrower all amounts being held in the Amended Borrowing Base Cash Collateral Account, provided that no Default has occurred and is continuing and no Borrowing Base Deficiency then exists or would result therefrom.

(f) Section 9.01(b) of the Credit Agreement is hereby amended by adding the following proviso to the end of the sentence set forth therein: “; provided, however, that for so long as the Amended Borrowing Base is in effect, the Borrower shall not be required to comply with this Section 9.01(b).”

2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, the Borrower represents and warrants that, as of the date hereof and after giving effect to the amendments set forth in the foregoing Section 1 of this Amendment:

(a) the representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct on and as of the date hereof as made on and as of such date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date;

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(b) no event has occurred and is continuing which constitutes a Default or an Event of Default;

(c) (i) the Borrower has full power and authority to execute and deliver this Amendment, (ii) this Amendment has been duly executed and delivered by Borrower, and (iii) this Amendment and the Credit Agreement, as amended hereby, constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except as enforceability may be limited by applicable Debtor Relief Laws and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and except as rights to indemnity may be limited by federal or state securities laws; and

(d) no authorization, approval, consent, or other action by, notice to, or filing with, any Governmental Authority or other Person (not previously obtained), is required for (i) the execution, delivery or performance by the Borrower of this Amendment, or (ii) the acknowledgment by each Guarantor of this Amendment.

3. CONDITIONS TO EFFECTIVENESS. All provisions of this Amendment shall be effective as of the Effective Date upon satisfaction or completion of the following:

(a) Administrative Agent shall have received counterparts of this Amendment executed by the Required Lenders;

(b) Administrative Agent shall have received counterparts of this Amendment executed by the Borrower and acknowledged by each Guarantor;

(c) Administrative Agent shall have received cash collateral of at least $10,000,000 to be maintained in accordance with Section 2.13 of the Credit Agreement (as amended hereby);

(d) Administrative Agent shall have received for the account of each Lender party hereto payment of an amendment fee in an amount equal to 10 basis points of the sum of such Lender’s (i) Revolving Credit Exposures, (ii) outstanding Term Loans and (iii) unused Commitments, in each case as of the date of this Amendment;

(e) Administrative Agent shall have received reimbursement or payment of all reasonable out-of-pocket expenses required to be reimbursed or paid by the Borrower under the Credit Agreement, including without limitation, the reasonable fees and expenses of Winstead PC, counsel to the Administrative Agent; and

(f) The Administrative Agent shall have received, in form and substance satisfactory to the Administrative Agent and its counsel, such other documents, certificates and instruments as the Administrative Agent shall require.

4. GUARANTORS’ ACKNOWLEDGMENT. By signing below, each Guarantor (i) acknowledges, consents and agrees to the execution, delivery and performance by the Borrower of this Amendment, (ii) acknowledges and agrees that the obligations of such Guarantor in respect of the Guaranty Agreement are not released, diminished, waived, modified, impaired or affected in any manner by this Amendment, or any of the provisions contemplated herein, (iii) ratifies and confirms the obligations of such Guarantor under the Guaranty Agreement and (iv) acknowledges and agrees that such Guarantor has no claim or offsets against, or defenses or counterclaims to, the guaranty under the Guaranty Agreement.

4

5. REFERENCE TO THE CREDIT AGREEMENT.

(a) Upon and during the effectiveness of this Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, or words of like import shall mean and be a reference to the Credit Agreement, as affected by this Amendment.

(b) Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights or remedies of Administrative Agent or Lenders under the Credit Agreement or any of the other Loan Documents, and shall not alter, modify, amend, or in any way affect the terms, conditions, obligations, covenants, or agreements contained in the Credit Agreement and the other Loan Documents, all of which are hereby ratified and affirmed in all respects. The Credit Agreement, as amended by the amendments referred to above, shall remain in full force and effect.

6. COSTS AND EXPENSES. The Borrower agrees to pay or reimburse the Administrative Agent on demand for all reasonable costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder (including the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent with respect thereto).

7. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. For purposes of this Amendment, a counterpart hereof (or signature page thereto) signed and transmitted by any Person party hereto to the Administrative Agent (or its counsel) by facsimile machine, telecopier or electronic mail is to be treated as an original. The signature of such Person thereon, for purposes hereof, is to be considered as an original signature, and the counterpart (or signature page thereto) so transmitted is to be considered to have the same binding effect as an original signature on an original document.

8. GOVERNING LAW; BINDING EFFECT. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas applicable to agreements made and to be performed entirely within such state (provided that each party shall retain all rights arising under federal law), and shall be binding upon the parties hereto and their respective successors and assigns.

9. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AS TO THE SUBJECT MATTER THEREIN AND HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

REMAINDER OF PAGE LEFT INTENTIONALLY BLANK

5

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

BORROWER: PMFG, INC., a Delaware corporation
By:	/s/ Ronald L. McCrummen
	Ronald L. McCrummen Chief Financial Officer, Assistant Secretary and Treasurer

PEERLESS MFG. CO., a Texas corporation
By:	/s/ Ronald L. McCrummen
	Ronald L. McCrummen Treasurer

Signature Page to Second Amendment

CITIBANK, N.A., as Administrative Agent and a Lender
By:	/s/ John Torres
Name:	John Torres
Title:	Senior Vice President

Signature Page to Second Amendment

HSBC BANK USA, N.A., as Lender
By:	/s/ Robert Clouse
Name:	Robert Clouse
Title:	Senior Vice President

Signature Page to Second Amendment

ACKNOWLEDGED AND AGREED:
NITRAM ENERGY, INC.,
a New York corporation
By:	/s/ Ronald L. McCrummen
Ronald L. McCrummen
Vice President, Treasurer and Secretary

PMC ACQUISITION, INC.,
a Texas corporation
By:	/s/ Ronald L. McCrummen
Ronald L. McCrummen
Vice President, Treasurer and Secretary

BURGESS-MANNING, INC.,
a Texas corporation
By:	/s/ Ronald L. McCrummen
Ronald L. McCrummen
Vice President, Treasurer and Secretary

BURMAN MANAGEMENT, INC.,
a Texas corporation
By:	/s/ Ronald L. McCrummen
Ronald L. McCrummen
Vice President, Treasurer and Secretary

BOS-HATTEN, INC.,
a New York corporation
By:	/s/ Ronald L. McCrummen
Ronald L. McCrummen
Vice President, Treasurer and Secretary

Signature Page to Second Amendment

EX-31.1

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 quarterly report on Form 10-Q 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: May 8, 2014	/s/ Peter J. Burlage
	Peter J. Burlage
	President and Chief Executive Officer

EX-31.2

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 quarterly report on Form 10-Q 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: May 8, 2014	/s/ Ronald L McCrummen
	Ronald L. McCrummen
	Executive Vice President and Chief Financial Officer

EX-32

EXHIBIT 32

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 Quarterly Report on Form 10-Q of the Company for the period ended March 29, 2014, 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: May 8, 2014	/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.

XML

Principal Components of Inventories (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 29, 2014	Jun. 29, 2013
Inventory Disclosure [Abstract]
Raw materials	$ 6,676	$ 3,729
Work in progress	4,009	2,516
Finished goods	406	493
Acquired - CCA	88
Inventory, Gross, Total	11,179	6,738
Reserve for obsolete and slow-moving inventory	(185)	(250)
Inventories, net	$ 10,994	$ 6,488

XML

Summary of Various Interest Rate Agreements (Detail) (Interest Rate Swap [Member], USD $) In Thousands, unless otherwise specified	9 Months Ended
	Mar. 29, 2014
1.95 % Fixed Interest Rate Due In September 30, 2022 [Member]
Derivative [Line Items]
Fixed Interest Rate	1.95%
Expiration Date	Sep. 30, 2022
Notional Amounts	$ 9,000
1.50 % Fixed Interest Rate Due In September 30, 2019 [Member]
Derivative [Line Items]
Fixed Interest Rate	1.50%
Expiration Date	Sep. 30, 2019
Notional Amounts	$ 1,000

XML

Accrued Liabilities and Other - Additional Information (Detail) In Millions, unless otherwise specified	9 Months Ended
	Mar. 29, 2014 USD ($)	Mar. 29, 2014 JPY (¥)
Payables And Accruals [Abstract]
Short-term borrowings	$ 1.6	¥ 10.0
Interest rate on borrowings	6.60%	6.60%
Maturity date of borrowing	2014-07	2014-07

XML

Derivatives Recorded at Fair Value in Consolidated Balance Sheets (Detail) (Interest Rate Swap [Member], USD $) In Thousands, unless otherwise specified	Mar. 29, 2014	Jun. 29, 2013
Interest Rate Swap [Member]
Derivative [Line Items]
Derivative Assets	$ 61	$ 160
Derivative Liabilities

XML

Accrued Product Warranty Activity (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Mar. 29, 2014	Mar. 30, 2013
Guarantees [Abstract]
Balance at beginning of period	$ 2,241	$ 2,615
Provision for warranty expenses	726	1,666
Acquired - CCA	200
Warranty charges	(705)	(1,466)
Balance at end of period	$ 2,462	$ 2,815

XML

Cash Balances Including Restricted Cash (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 29, 2014
Restricted Cash and Cash Equivalents Items [Line Items]
Cash balances, including restricted cash	$ 47,492
Domestic [Member]
Restricted Cash and Cash Equivalents Items [Line Items]
Cash balances, including restricted cash	23,090
International [Member]
Restricted Cash and Cash Equivalents Items [Line Items]
Cash balances, including restricted cash	$ 24,402

XML

Segment Information - Additional Information (Detail)	9 Months Ended
	Mar. 29, 2014 Segment
Segment Reporting [Abstract]
Number of reportable segments	2

XML

GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)

9 Months Ended

Mar. 29, 2014

Goodwill And Intangible Assets Disclosure [Abstract]

Summary of Activity and Balances Related to Goodwill

The following table shows the activity and balances related to goodwill from June 30, 2013 through March 29, 2014 (in thousands):

Balance as of June 29, 2013	$	30,429
Goodwill acquired:
Preliminary allocation of purchase price related to CCA		5,490
Balance as of March 29, 2014	$	35,919

Acquisition-Related Intangible Assets

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

	Weighted Average Estimated Useful Life (Years)	Gross Value March 29, 2014		Accumulated Amortization			Net Book Value March 29, 2014		Gross Value June 29, 2013		Accumulated Amortization			Net Book Value June 29, 2013
Design guidelines	Indefinite	$	8,290	$	—		$	8,290	$	6,940	$	—		$	6,940
Customer relationships	8		8,840		(3,925	)	$	4,915		7,940		(3,429	)		4,511
Trade names	Indefinite		5,179		—		$	5,179		4,729		—			4,729
Backlog	0.5		60		—		$	60		—		—			—
		$	22,369	$	(3,925	)	$	18,444	$	19,609	$	(3,429	)	$	16,180

Estimated Aggregate Finite-Lived Intangible Asset Amortization Expense

Estimated aggregate finite-lived intangible asset amortization expense for the next five years is as follows (in thousands):

Fiscal Year
2014	$	713
2015		705
2016		600
2017		599
2018		594

XML

Debt - Additional Information (Detail)	3 Months Ended		9 Months Ended				1 Months Ended		9 Months Ended													9 Months Ended		3 Months Ended
	Mar. 29, 2014 USD ($)	Jun. 29, 2013 USD ($)	Mar. 29, 2014 Minimum [Member]	Mar. 29, 2014 Maximum [Member]	Mar. 29, 2014 Libor Plus [Member]	Mar. 29, 2014 Federal Reserve System Plus [Member]	Jul. 31, 2013 China Subsidiary [Member] USD ($)	Jul. 31, 2013 China Subsidiary [Member] JPY (¥)	Mar. 29, 2014 China Subsidiary [Member] USD ($)	Mar. 29, 2014 China Subsidiary [Member] JPY (¥)	Jun. 29, 2013 China Subsidiary [Member] USD ($)	Mar. 29, 2014 German Subsidiary Debenture [Member] USD ($)	Mar. 29, 2014 German Subsidiary Debenture [Member] EUR (€)	Jun. 29, 2013 German Subsidiary Debenture [Member] USD ($)	Jun. 29, 2013 German Subsidiary Debenture [Member] EUR (€)	Mar. 29, 2014 U.K. Subsidiary Debenture [Member] USD ($)	Mar. 29, 2014 U.K. Subsidiary Debenture [Member] GBP (£)	Jun. 29, 2013 U.K. Subsidiary Debenture [Member] USD ($)	Jun. 29, 2013 U.K. Subsidiary Debenture [Member] GBP (£)	Mar. 29, 2014 Singapore Subsidiary Debenture [Member] USD ($)	Jun. 29, 2013 Singapore Subsidiary Debenture [Member] USD ($)	Mar. 29, 2014 Senior Secured Credit Agreement [Member] USD ($)	Sep. 28, 2012 Senior Secured Credit Agreement [Member] USD ($)	Mar. 29, 2014 Letter of Credit [Member]	Mar. 29, 2014 Warranty Related Letter Of Credit [Member] USD ($)	Mar. 29, 2014 Term loan A [Member] USD ($)	Jun. 29, 2013 Term loan A [Member] USD ($)	Sep. 28, 2012 Term loan A [Member] USD ($)	Mar. 29, 2014 Term loan B [Member] USD ($)	Jun. 29, 2013 Term loan B [Member] USD ($)	Sep. 28, 2012 Term loan B [Member] USD ($)
Debt Instrument [Line Items]
New credit facility borrowing capacity																							$ 30,000,000					$ 2,000,000			$ 10,000,000
Maturity period of revolving credit facility																						Sep. 30, 2015
Percentage of eligible accounts receivable																						80.00%
Percentage of eligible inventory																						50.00%
Percentage of cash in special collateral account																						100.00%		100.00%	30.00%
Outstanding borrowings under revolving credit facility												4,400,000	3,200,000	3,500,000	2,700,000	7,800,000	4,700,000	6,800,000	4,400,000			0
Outstanding letters of credit																						6,400,000
Maximum borrowing availability																						30,000,000
Minimum interest rate protection																						50.00%
Basis point based on CFD ratio			0.00%	0.75%
Effective reserve rate					2.00%	0.50%
Line of credit facility, interest rate description																						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.
Consolidated total leverage ratio				1.75%
Debt service coverage ratio			1.00%	1.50%
Capital expenditure limit for new manufacturing facility in China	12,500,000
Other capital expenditure	3,000,000
Expenditure limit under credit agreement	3,000,000
Cash in special collateral account	10,000,000
Outstanding under the credit agreement																									3,000,000
Loan commitment amount							7,200,000	45,000,000
Borrowing amount outstanding	17,370,000	8,719,000							6,900,000	43,000,000																981,000	604,000		9,466,000	8,115,000
Interest rate									7.20%	7.20%
Issuance of letters of credit and bank guarantees									800,000		600,000	6,600,000	4,800,000	6,200,000	4,800,000	10,000,000	6,000,000	9,100,000	6,000,000	700,000	600,000
Restricted cash balances	4,919,000	5,029,000										1,100,000	800,000	900,000	700,000	3,000,000	1,800,000	3,200,000	2,100,000
Secured restricted cash balances									$ 800,000		$ 600,000

XML

Summary of Activity and Balances Related to Goodwill (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Mar. 29, 2014
Goodwill And Intangible Assets Disclosure [Abstract]
Goodwill beginning balance	$ 30,429
Preliminary allocation of purchase price related to CCA	5,490
Goodwill ending balance	$ 35,919

XML

Summary of Consideration Paid for the Acquisition (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 29, 2014	Jun. 29, 2013
Intangible Assets And Goodwill [Line Items]
Goodwill	$ 35,919	$ 30,429
Combustion Components Associates, Inc [Member]
Intangible Assets And Goodwill [Line Items]
Current assets	2,444
Property, plant and equipment	325
Identifiable intangible assets	2,760
Goodwill	5,490
Total assets acquired	11,019
Current liabilities	(2,128)
Net assets acquired	$ 8,891

XML

Grants of Stock-Based Compensation to Employees and Directors (Detail) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended
	Mar. 29, 2014	Mar. 30, 2013
Stock to directors [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares granted	40,430	36,000
Fair value of grant	$ 300	$ 291
Restricted stock awards [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares granted	101,410	110,377
Fair value of grant	752	894
Restricted stock units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares granted	77,460
Fair value of grant	$ 575

XML

Components of Accrued Liabilities and Other (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 29, 2014	Jun. 29, 2013
Payables And Accruals [Abstract]
Accrued start-up and commissioning expense	$ 230	$ 230
Accrued compensation	2,574	2,393
Accrued professional expenses	3,144	1,819
Subsidiary short-term debt	1,610
Other	399	944
Accrued liabilities and other	$ 7,957	$ 5,386

XML

ACQUISITIONS

9 Months Ended

Mar. 29, 2014

Business Combinations [Abstract]

ACQUISITIONS

2. ACQUISITIONS

On March 28, 2014, the Company acquired substantially all of the assets of Combustion Components Associates, Inc. (“CCA”), a leading provider of in-furnace and post-combustion control technologies. CCA technology is used to improve efficiency and reduce emissions at utility power plants, pulp and paper mills, chemical plants, oil refineries and other industrial facilities. The purchase price was approximately $8.9 million in cash plus performance-based contingent payments. Additional cash consideration will be paid if the Company recognizes revenue from certain customer projects specified in the purchase agreement. The contingent payment is 5% of the aggregate revenue recognized by the Company in connection with the specified projects. The preliminary allocation of consideration paid for the acquisition includes $0.6 million of contingent liabilities reported in current liabilities.

The Company funded the purchase of CCA with cash on hand. The assets acquired and liabilities assumed, including a preliminary allocation of purchase price, have been included in the Consolidated Balance Sheet as of March 29, 2014. The financial results of the acquisition will be included in the Environmental Systems segment in future periods.

The following table summarizes the consideration paid for the CCA acquisition and presents the preliminary allocation of these amounts to the net tangible and identifiable intangible assets based on their estimated fair values as of the respective acquisition dates. This allocation requires the significant use of estimates and is based on the information that was available to management at the time these condensed consolidated financial statements were prepared.

Current assets	$	2,444
Property, plant and equipment		325
Identifiable intangible assets		2,760
Goodwill		5,490
Total assets acquired	$	11,019
Current liabilities	$	(2,128	)
Net assets acquired	$	8,891

The Company determined the purchase price allocation for the acquisition based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed. The fair value of the assets acquired and liabilities assumed in the acquisition remain subject to adjustment.

Acquired intangible assets of $2.8 million consisted of customer projects currently in backlog, customer relationships, and trade names and design guidelines. The amortization period for these intangible assets ranges from 6 months to 10 years. As the acquisition was completed on March 28, 2014, no amortization expense related to these intangible assets was recognized during the three months ended March 29, 2014.

The acquisition of CCA extends the Company’s ability to deliver a broader portfolio of combustion and air pollution products and services to commercial, industrial and utility power-generation customers both domestically and internationally. The goodwill associated with the acquisition will be deductible for tax purposes.

The following unaudited pro forma information has been provided for illustrative purposes only and is not necessarily indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor are they necessarily indicative of future results.

	Three months ended					Nine months ended
	March 29, 2014			March 30, 2013		March 29, 2014			March 30, 2013
Revenue	$	34,973		$	38,270	$	100,557		$	108,099
Net income (loss)		(2,968	)		789		(7,162	)		1,588
Net income (loss) attributable to PMFG, Inc		(2,985	)		637		(7,279	)		1,004
Basic earnings per common share	$	(0.14	)	$	0.03	$	(0.35	)	$	0.05
Diluted earnings per common share	$	(0.14	)	$	0.03	$	(0.35	)	$	0.05

The pro forma combined results for the three and nine months ended March 29, 2014 and March 30, 2013 have been prepared by adjusting the Company’s historical results to include the acquisition as if it occurred on July 1, 2012. These pro forma combined historical results were then adjusted for an increase in amortization expense due to the incremental intangible assets recorded related to the acquisition. The pro forma results of operations also include adjustments to reflect the impact of $0.7 million of acquisition related costs as of July 1, 2012. The pro forma results do not include any adjustments to eliminate the impact of cost savings or other synergies that may result from the acquisition. As noted above, the pro forma results of operations do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future.

The Company recognized approximately $576,000 of acquisition-related costs that were expensed during the three months ended March 29, 2014. These acquisition costs are included in general and administrative expenses in the condensed Consolidated Statements of Operations for the three months ended March 29, 2014.

XML

Acquisition-Related Intangible Assets (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Mar. 29, 2014	Jun. 29, 2013
Finite And Indefinite Lived Intangible Assets [Line Items]
Total Gross Value	$ 22,369	$ 19,609
Accumulated Amortization	(3,925)	(3,429)
Total Net Book Value	18,444	16,180
Customer relationships [Member]
Finite And Indefinite Lived Intangible Assets [Line Items]
Weighted Average Estimated Useful Life	8 years
Finite Gross Value	8,840	7,940
Accumulated Amortization	(3,925)	(3,429)
Finite Net Book Value	4,915	4,511
Backlog [Member]
Finite And Indefinite Lived Intangible Assets [Line Items]
Weighted Average Estimated Useful Life	6 months
Finite Gross Value	60
Finite Net Book Value	60
Design guidelines [Member]
Finite And Indefinite Lived Intangible Assets [Line Items]
Indefinite Gross Value	8,290	6,940
Indefinite Net Book Value	8,290	6,940
Trade names [Member]
Finite And Indefinite Lived Intangible Assets [Line Items]
Indefinite Gross Value	5,179	4,729
Indefinite Net Book Value	$ 5,179	$ 4,729

XML

STOCK-BASED COMPENSATION (Tables)

9 Months Ended

Mar. 29, 2014

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Grants of Stock-Based Compensation to Employees and Directors

The following information represents the Company’s grants of stock-based compensation to employees and directors during the nine months ended March 29, 2014 and March 30, 2013 (in thousands, except share amounts):

	Nine months ended
	March 29,				March 30,
	2014				2013
Grant Type	Number of Shares Granted		Fair Value of Grant		Number of Shares Granted		Fair Value of Grant
Stock to directors		40,430	$	300		36,000	$	291
Restricted stock awards		101,410		752		110,377		894
Restricted stock units		77,460		575		—		—

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DEBT (Tables)

9 Months Ended

Mar. 29, 2014

Debt Disclosure [Abstract]

Outstanding Long-Term Debt Obligations

Outstanding long-term debt obligations are as follows (in thousands):

			March 29,			June 29,
	Maturities		2014			2013
Term loan A		2019	$	981		$	604
Term loan B		2022		9,466			8,115
Subsidiary loan		2017		6,923			—
Total long-term debt				17,370			8,719
Less current maturites				(2,210	)		—
Total long-term debt, net of current portion			$	15,160		$	8,719

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Summary of Derivative Assets and Liabilities Measured at Fair Value (Detail) (Interest Rate Swap [Member], USD $) In Thousands, unless otherwise specified	Mar. 29, 2014
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Asset-Interest rate swap contracts	$ 61
Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Asset-Interest rate swap contracts
Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Asset-Interest rate swap contracts	61
Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Asset-Interest rate swap contracts

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Goodwill and Other Intangible Assets - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Mar. 29, 2014	Mar. 30, 2013	Mar. 29, 2014	Mar. 30, 2013
Goodwill And Intangible Assets Disclosure [Abstract]
Amortization expense	$ 0	$ 0.3	$ 0.5	$ 0.8

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DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Mar. 29, 2014

Fair Value Disclosures [Abstract]

Summary of Various Interest Rate Agreements

The following table summarizes the interest rate agreements in effect as of March 29, 2014 (in thousands):

Fixed Interest Rate	Expiration Date		Notional Amounts
1.95%		September 30, 2022	$	9,000
1.50%		September 30, 2019		1,000

Derivatives Recorded at Fair Value in Consolidated Balance Sheets

The derivatives recorded at fair value in the Company’s Consolidated Balance Sheets were (in thousands):

	Derivative Assets				Derivative Liabilities
	March 29,		June 29,		March 30,		June 29,
	2014		2013		2014		2013
Interest rate swap contracts	$	61	$	160	$	—	$	—

Summary of Derivative Assets and Liabilities Measured at Fair Value

A summary of derivative assets and liabilities measured at fair value on a recurring basis is as follows (in thousands):

	Fair Value as of March 29, 2014		Level 1		Level 2		Level 3
Asset - Interest rate swap contracts	$	61	$	—	$	61	$	—

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SEGMENT INFORMATION (Tables)

9 Months Ended

Mar. 29, 2014

Segment Reporting [Abstract]

Segment Information and Reconciliation to Operating Income (Loss)

Segment information and reconciliation to operating income (loss) for the three and nine months ended March 29, 2014 and March 30, 2013 are presented below (in thousands).

	Three months ended						Nine months ended
	March 29,			March 30,			March 29,			March 30,
	2014			2013			2014			2013
Revenue:
Process Products	$	24,170		$	27,397		$	72,937		$	84,592
Environmental Systems		8,103			7,573			18,021			14,807
	$	32,273		$	34,970		$	90,958		$	99,399
Operating income (loss):
Process Products	$	24		$	3,593		$	4,063		$	13,679
Environmental Systems		1,803			1,541			4,064			2,671
Corporate and other unallocated expenses		(5,444	)		(4,112	)		(14,979	)		(14,008	)
	$	(3,617	)	$	1,022		$	(6,852	)	$	2,342

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SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Mar. 29, 2014

Accounting Policies [Abstract]

SIGNIFICANT ACCOUNTING POLICIES

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of PMFG, Inc. and subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. References to “Company,” “we,” “us” and “our” refer to PMFG, Inc. and its subsidiaries. The consolidated financial statements of the Company as of March 29, 2014 and for the three and nine months ended March 29, 2014 and March 30, 2013 are unaudited and, in the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations of the Company for the interim periods have been included and are of a normal recurring nature. The results of operations for such interim periods are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended June 29, 2013.

Each of the Company’s interim reporting periods ends on the Saturday closest to the last day of the corresponding quarterly calendar period. References to “fiscal 2014” and “fiscal 2013” refer to fiscal years ended June 28, 2014 and June 29, 2013, respectively. The third quarters of fiscal 2014 and fiscal 2013 ended on March 29, 2014 and March 30, 2013, respectively.

Basis of Consolidation

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

Cash and Cash Equivalents

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

	March 29, 2014
Domestic	$	23,090
International		24,402
	$	47,492

The Company maintains cash balances in bank accounts that normally exceed Federal Deposit Insurance Corporation insured limits. As of March 29, 2014, cash held in banks in the United States exceeded federally insured limits by $21.2 million. The Company has not experienced any losses related to this cash concentration.

The Company had restricted cash balances of $4.9 million and $5.0 million as of March 29, 2014 and June 29, 2013, respectively. Foreign restricted cash balances were $4.9 million and $4.7 million as of March 29, 2014 and June 29, 2013, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the ordinary course of business.

Accounts Receivable

The Company’s accounts receivable are due from companies in various industries. Credit is extended based on an evaluation of the customer’s financial condition. Generally, collateral is not required. 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 for doubtful accounts based on a specific identification, taking into consideration a number of factors, including the length of time the accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and the condition of the industry and the economy as a whole. The Company writes off accounts receivable when they are deemed to be uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts in the period the payment is received.

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

	Nine months ended
	March 29,			March 30,
	2014			2013
Balance at beginning of period	$	300		$	650
Bad debt expense		64			1,008
Acquired - CCA		26			—
Accounts written off		(80	)		(1,358	)
Balance at end of period	$	310		$	300

Inventories

The Company values its inventories using the lower of weighted average cost or market. The Company regularly reviews the value of inventories on hand, using specific aging categories, and records a provision for obsolete and slow-moving inventory based on historical and estimated future usage. In assessing the ultimate realization of its inventory, the Company is required to make judgments as to future demand requirements. As actual future demand or market conditions may vary from those projected by the Company, adjustments to inventory valuations may be required.

Property, Plant and Equipment

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

Buildings and improvements	5 - 40 years
Equipment	3 - 10 years
Furniture and fixtures	3 - 15 years

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

Long-Lived Assets

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

Goodwill and Other Intangible Assets

Goodwill represents the difference between the purchase price and the fair value of the net assets acquired upon acquisition. Goodwill is not amortized, however, it is measured at the reporting unit level to test for impairment annually, in the fourth quarter, or more frequently if conditions indicate an earlier review is necessary. A discounted future cash flow analysis is primarily used to determine whether impairment exists. If the fair value of a reporting unit is less than the carrying amount, then the Company writes down goodwill to its estimated fair value.

Intangible assets subject to amortization include licensing agreements, customer relationships and acquired sales order backlog. These intangible assets are amortized over their estimated useful lives based on a pattern in which the economic benefit of the respective intangible asset is realized. Intangible assets considered to have indefinite lives include trade names and design guidelines.

Fair Value of Financial Instruments

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

Revenue Recognition

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

The Company provides certain products under long-term, generally fixed-priced, contracts that may extend over multiple financial periods, where revenue and cost of sales are recognized in accordance with accounting rules relating to construction-type and production-type contracts. Amounts recognized in revenue are calculated using the percentage of cost completed (i.e., cumulative cost incurred to date in comparison to the estimated total cost at completion). This method requires the Company to make estimates regarding the total costs of the project at completion, which impacts the amount of gross margin the Company recognizes in each reporting period. Changes in estimated total costs are reflected in the computation of percentage-of-completion when such changes are identified and can be reasonably estimated. Change orders affecting the contract amount are considered only after receipt of a legally binding agreement. Incremental costs related to change orders are included in the estimate of total costs upon the earlier of receipt of the change order or the Company’s committed purchase obligation. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract.

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

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

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

Pre-contract, Start-up and Commissioning Costs

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

Warranty Costs

The Company provides warranties for specific products during a defined period of time, generally less than 18 months after shipment of the product. Warranties cover the failure of a product to perform after it has been placed in service. The Company reserves for estimated future warranty costs in the period in which the revenue is recognized based on historical experience, expectation of future conditions, and the extent of concurrent supplier warranties in place. Warranty costs are included in “cost of goods sold” in the Consolidated Statements of Operations.

Income Taxes

The Company utilizes the asset and liability approach in its reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income tax related interest and penalties are included in income tax expense. The Company recognizes in its financial statements the impact of a tax position taken or expected to be taken in a tax return, if that position is “more likely than not” of being sustained upon examination by the relevant taxing authority, based on the technical merits of the position.

The Company is required to estimate income taxes in each jurisdiction in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Judgment is required in assessing the future tax consequences of events that have been recognized in the 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.

For the nine months ended March 29, 2014, income tax expense was 3.0% of the loss before income taxes. The rate varies from the statutory rate because of the blend of taxable income in some state and foreign taxing jurisdictions and permanent differences and taxable losses in the United States for which no tax benefit has been recognized. At March 29, 2014, the Company had $5.1 million of operating loss carry forwards primarily in the United States available for carryover to future periods, subject to certain limitations and expiring beginning in fiscal 2032. A valuation allowance of $1.3 million has been established to reduce the computed benefits to the estimated future realization of the tax related benefit.

Earnings (Loss) Per Common Share

The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable to PMFG, Inc. stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share include the dilutive effect of stock options, restricted stock units and warrants granted using the treasury stock method. For the three and nine months ended March 29, 2014, 72,339 restricted stock units with performance and service based restrictions were omitted from the calculation of dilutive securities because they were anti-dilutive. Options to acquire 37,200 shares of common stock were omitted from the calculation of dilutive securities for the three and nine months ended March 29, 2014 because they were anti-dilutive. Warrants to acquire 839,063 shares of common stock were omitted from the calculation of dilutive securities for the three and nine months ended March 29, 2014 and the three and nine months ended March 30, 2013 because they were anti-dilutive. The warrants entitle the holders to purchase common stock for $10.56 per share, through a cashless exercise. The warrants expire on September 4, 2014.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

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Significant Accounting Policies - Additional Information (Detail) (USD $)	9 Months Ended		3 Months Ended	9 Months Ended	3 Months Ended	9 Months Ended	3 Months Ended		9 Months Ended
	Mar. 29, 2014	Jun. 29, 2013	Mar. 29, 2014 Restricted stock units [Member]	Mar. 29, 2014 Restricted stock units [Member]	Mar. 29, 2014 Stock Options [Member]	Mar. 29, 2014 Stock Options [Member]	Mar. 29, 2014 Warrants [Member]	Mar. 30, 2013 Warrants [Member]	Mar. 29, 2014 Warrants [Member]	Mar. 30, 2013 Warrants [Member]	Mar. 29, 2014 Maximum [Member]	Mar. 29, 2014 Peerless Propulsys [Member]
Significant Accounting Policies [Line Items]
Equity method investment, ownership percentage												60.00%
Equity investment entitles to earnings												80.00%
Maturity of liquid investments purchased	Three months or less
Cash held in banks in the United States exceeding federally insured limits	$ 21,200,000
Restricted cash balances	4,919,000	5,029,000
Foreign restricted cash balances	4,900,000	4,700,000
Accounts receivables due date											30 days
Period of product warranty	Less than 18 months
Percentage of income tax expense on loss before income tax	3.00%
Operating loss carry forwards	5,100,000
Operating loss carry forwards, Expiration date	Jul. 01, 2032
Operating loss carry forwards, Valuation allowance	1,300,000
Unremitted foreign earnings considered indefinitely reinvested		$ 10,500,000
Anti-dilutive securities omitted from computation of earnings per common share calculation			72,339	72,339	37,200	37,200	839,063	839,063	839,063	839,063
Common stock per share value	$ 0.01	$ 0.01					$ 10.56		$ 10.56
Warrants expiration date	Sep. 04, 2014

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Components of Uncompleted Contracts (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 29, 2014	Jun. 29, 2013
Contractors [Abstract]
Costs incurred on uncompleted contracts and estimated earnings	$ 100,599	$ 70,389
Less billings to date	(93,499)	(60,122)
Total uncompleted contracts	$ 7,100	$ 10,267

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Stock-Based Compensation - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		1 Months Ended			9 Months Ended
	Mar. 29, 2014	Mar. 30, 2013	Mar. 29, 2014	Mar. 30, 2013	Jul. 31, 2013 Restricted stock units [Member]	Jul. 31, 2013 Restricted stock units [Member] Minimum [Member]	Jul. 31, 2013 Restricted stock units [Member] Maximum [Member]	Mar. 29, 2014 Restricted stock awards [Member] Fiscal year 2014 [Member]	Mar. 29, 2014 Restricted stock awards [Member] Fiscal year 2013 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation vesting period								3 years	4 years
Change in range on the number of units granted						0.00%	200.00%
Share-based compensation performance period					1 year
Stock-based compensation	$ 200	$ 100	$ 755	$ 460

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 29, 2014	Jun. 29, 2013
Current assets:
Cash and cash equivalents	$ 42,573	$ 53,020
Restricted cash	4,919	5,029
Accounts receivable - trade, net of allowance for doubtful accounts of $310 at March 29, 2014 and $300 at June 29, 2013	29,473	22,509
Inventories, net	10,994	6,488
Costs and earnings in excess of billings on uncompleted contracts	19,119	16,544
Income taxes receivable	1,450	1,152
Deferred income taxes	304	304
Other current assets	4,949	3,427
Total current assets	113,781	108,473
Property, plant and equipment, net	31,348	24,031
Intangible assets, net	18,444	16,180
Goodwill	35,919	30,429
Other assets	838	998
Total assets	200,330	180,111
Current liabilities:
Accounts payable	21,736	14,899
Current maturities of long-term debt	2,210
Billings in excess of costs and earnings on uncompleted contracts	12,019	6,277
Commissions payable	1,575	1,763
Income taxes payable	1,089	339
Accrued product warranties	2,462	2,241
Customer deposits	2,946	2,566
Accrued liabilities and other	7,957	5,386
Total current liabilities	51,994	33,471
Long-term debt	15,160	8,719
Deferred income taxes	4,136	4,135
Other long-term liabilities	1,835	1,900
Commitments and contingencies
Preferred stock - authorized, 5,000,000 shares of $0.01 par value; no shares outstanding at March 29, 2014 or June 29, 2013
Stockholders' equity:
Common stock - authorized, 50,000,000 shares of $0.01 par value; issued and outstanding, 21,094,530 and 20,966,426 shares at March 29, 2014 and June 29, 2013, respectively	211	210
Additional paid-in capital	97,388	96,634
Accumulated other comprehensive loss	(761)	(2,004)
Retained earnings	24,738	33,114
Total PMFG, Inc. stockholders' equity	121,576	127,954
Noncontrolling interest	5,629	3,932
Total equity	127,205	131,886
Total liabilities and equity	$ 200,330	$ 180,111

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Estimated Aggregate Finite-Lived Intangible Asset Amortization Expense (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 29, 2014
Goodwill And Intangible Assets Disclosure [Abstract]
2014	$ 713
2015	705
2016	600
2017	599
2018	$ 594

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Consolidated Statement of Equity (Unaudited) (USD $) In Thousands	Total	Common Stock	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total Stockholders' Equity	Non Controlling Interest
Beginning Balance at Jun. 29, 2013	$ 131,886	$ 210	$ 96,634	$ 33,114	$ (2,004)	$ 127,954	$ 3,932
Beginning Balance, shares at Jun. 29, 2013		20,966
Net (loss)	(8,259)			(8,376)		(8,376)	117
Foreign currency translation adjustment	1,216				1,243	1,243	(27)
Stock grants, net of forfeitures (in shares)		128
Stock grants, net of forfeitures	755	1	754			755
Equity contribution from noncontrolling interest in subsidiary	1,607						1,607
Ending Balance at Mar. 29, 2014	$ 127,205	$ 211	$ 97,388	$ 24,738	$ (761)	$ 121,576	$ 5,629
Ending Balance, shares at Mar. 29, 2014		21,094

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Depreciation of Property, Plant and Equipment (Detail)	9 Months Ended
	Mar. 29, 2014
Buildings and improvements [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, estimated useful lives	40 years
Buildings and improvements [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, estimated useful lives	5 years
Equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, estimated useful lives	10 years
Equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, estimated useful lives	3 years
Furniture and fixtures [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, estimated useful lives	15 years
Furniture and fixtures [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, estimated useful lives	3 years

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ACQUISITIONS (Tables)

9 Months Ended

Mar. 29, 2014

Business Combinations [Abstract]

Summary of Consideration Paid for Acquisition

The following table summarizes the consideration paid for the acquisition and presents the preliminary allocation of these amounts to the net tangible and identifiable intangible assets based on their estimated fair values as of the respective acquisition dates. This allocation requires the significant use of estimates and is based on the information that was available to management at the time these condensed consolidated financial statements were prepared.

Current assets	$	2,444
Property, plant and equipment		325
Identifiable intangible assets		2,760
Goodwill		5,490
Total assets acquired	$	11,019
Current liabilities	$	(2,128	)
Net assets acquired	$	8,891

Summary of Unaudited Proforma Information

The following unaudited pro forma information has been provided for illustrative purposes only and is not necessarily indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor are they necessarily indicative of future results.

	Three months ended					Nine months ended
	March 29, 2014			March 30, 2013		March 29, 2014			March 30, 2013
Revenue	$	34,973		$	38,270	$	100,557		$	108,099
Net income (loss)		(2,968	)		789		(7,162	)		1,588
Net income (loss) attributable to PMFG, Inc		(2,985	)		637		(7,279	)		1,004
Basic earnings per common share	$	(0.14	)	$	0.03	$	(0.35	)	$	0.05
Diluted earnings per common share	$	(0.14	)	$	0.03	$	(0.35	)	$	0.05

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Acquisitions - Additional Information (Detail) (USD $)	0 Months Ended	3 Months Ended		9 Months Ended				3 Months Ended
	Mar. 28, 2014	Mar. 29, 2014	Mar. 30, 2013	Mar. 29, 2014	Mar. 30, 2013	Mar. 29, 2014 Minimum [Member]	Mar. 29, 2014 Maximum [Member]	Mar. 29, 2014 Combustion Components Associates, Inc [Member]	Jul. 01, 2012 Pro Forma [Member]
Acquisitions [Line Items]
Purchase Price	$ 8,900,000
Additional cash consideration percentage on value of binding purchase orders	5.00%
Acquired intangible assets		2,800,000		2,800,000
Amortization Period Of Intangible Assets						6 months	10 years
Amortization expense related to intangible assets		0	300,000	500,000	800,000			0
Pro forma acquisition related cost									700,000
Acquisition related cost		$ 576,000

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COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (Tables)

9 Months Ended

Mar. 29, 2014

Contractors [Abstract]

Components of Uncompleted Contracts

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

	March 29,			June 29,
	2014			2013
Costs incurred on uncompleted contracts and estimated earnings	$	100,599		$	70,389
Less billings to date		(93,499	)		(60,122	)
	$	7,100		$	10,267

Components of Uncompleted Contracts Reflected in Consolidated Balance Sheets

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

	March 29,			June 29,
	2014			2013
Costs and earnings in excess of billings on uncompleted contracts	$	19,119		$	16,544
Billings in excess of costs and earnings on uncompleted contracts		(12,019	)		(6,277	)
	$	7,100		$	10,267

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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Mar. 29, 2014	Mar. 30, 2013
Cash flows from operating activities:
Net income (loss)	$ (8,259)	$ 1,286
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of business acquisition:
Depreciation and amortization	1,851	1,926
Amortization of deferred finance charges	184	132
Stock-based compensation	755	460
Bad debt expense	64	1,008
Inventory valuation reserve	(65)	19
Provision for warranty expense	726	1,666
Loss on extinguishment of debt		291
Gain on disposal of property	(325)	(74)
Foreign currency exchange gain (loss)	666	(3)
Change in fair value of interest rate swap	99
Changes in operating assets and liabilities, net of business acquisition:
Accounts receivable	(5,024)	9,894
Inventories	(4,353)	(693)
Costs and earnings in excess of billings on uncompleted contracts	(2,193)	(3,243)
Other current assets	(1,617)	(44)
Accounts payable	6,438	459
Billings in excess of costs and earnings on uncompleted contracts	4,958	(2,330)
Commissions payable	(188)	341
Income taxes	452	1,775
Product warranties	(705)	(1,466)
Accrued liabilities and other	1,012	(1,644)
Net cash provided by (used in) operating activities:	(5,524)	9,760
Cash flows from investing activities:
Increase in restricted cash	(6)	(422)
Purchases of property and equipment	(9,172)	(9,912)
Net proceeds from sale of property	521	135
Business acquisition, net of cash received	(8,891)	(1,363)
Payments of deferred consideration	(37)
Net cash used in investing activities	(17,585)	(11,562)
Cash flows from financing activities:
Payment of long-term debt	(533)
Payment of debt issuance costs		(963)
Proceeds from short-term debt	1,634
Proceeds from long-term debt	9,311	5,129
Equity contribution from noncontrolling interest	1,607	2,000
Net cash provided by financing activities	12,019	6,166
Effect of exchange rate changes on cash and cash equivalents	643	85
Net (decrease) increase in cash and cash equivalents	(10,447)	4,449
Cash and cash equivalents at beginning of period	53,020	52,286
Cash and cash equivalents at end of period	42,573	56,735
Supplemental information on cash flow:
Income tax refunds received	399	2,475
Interest paid	$ 908	$ 442

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 29, 2014	Jun. 29, 2013
Statement Of Financial Position [Abstract]
Allowance for doubtful accounts	$ 310	$ 300
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares outstanding	0	0
Common stock, shares authorized	50,000,000	50,000,000
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares issued	21,094,530	20,966,426
Common stock, shares outstanding	21,094,530	20,966,426

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STOCK-BASED COMPENSATION

9 Months Ended

Mar. 29, 2014

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

STOCK-BASED COMPENSATION

10. STOCK-BASED COMPENSATION

The following information represents the Company’s grants of stock-based compensation to employees and directors during the nine months ended March 29, 2014 and March 30, 2013 (in thousands, except share amounts):

	Nine months ended
	March 29,				March 30,
	2014				2013
Grant Type	Number of Shares Granted		Fair Value of Grant		Number of Shares Granted		Fair Value of Grant
Stock to directors		40,430	$	300		36,000	$	291
Restricted stock awards		101,410		752		110,377		894
Restricted stock units		77,460		575		—		—

The stock granted to the members of the Board of Directors vested upon grant, therefore the fair value amount was recognized as expense at the time of grant. The compensation expense for the restricted stock awards granted to officers and other employees in fiscal year 2014 is recognized over a three-year vesting period whereas the awards granted to such persons in fiscal year 2013 are recognized over a four-year vesting period. The compensation expense is based on the fair value of the awards on the grant date, net of forfeitures.

In July 2013, the Company also awarded restricted stock units (“RSUs”), which are subject to both service and performance conditions, to some of the officers of the Company. The fair value of the RSUs is based on the probability of the performance condition being achieved on the date of grant. The actual number of shares that are eligible to vest is determined based on the Company’s performance during the performance period, which is a year from the date of grant, against established metrics and could range from 0% to 200% of the number of units originally granted. The RSUs that are issuable based on the one year performance period cliff vest on the third anniversary of the grant date subject to the continued employment of the grantee. The Company recognizes compensation expense for the RSUs based upon management’s determination of the potential likelihood of achievement of the performance conditions at each reporting date in fiscal 2014, net of estimated forfeitures.

The Company recognized $0.8 million and $0.5 million of stock-based compensation expense in the nine months ended March 29, 2014 and March 30, 2013, respectively. For the three months ended March 29, 2014 and March 30, 2013, the Company recognized $0.2 million and $0.1 million, respectively, of stock-based compensation expense.

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Document and Entity Information	9 Months Ended
	Mar. 29, 2014	May 01, 2014
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 29, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3
Trading Symbol	PMFG
Entity Registrant Name	PMFG, INC.
Entity Central Index Key	0001422862
Current Fiscal Year End Date	--06-29
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		21,094,530

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DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

9 Months Ended

Mar. 29, 2014

Fair Value Disclosures [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

11. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

The Company has entered into interest rate swap agreements that effectively convert the interest rates on the long-term debt issued under the Senior Credit facility from floating to fixed rates. The following table summarizes the interest rate agreements in effect as of March 29, 2014 (in thousands):

Fixed Interest Rate	Expiration Date		Notional Amounts
1.95%		September 30, 2022	$	9,000
1.50%		September 30, 2019		1,000

The swap agreements are recorded as an asset or liability in the Consolidated Balance Sheets at fair value, with the change in fair value recorded as interest expense within the Consolidated Statements of Operations.

The Company is exposed to market risk under these arrangements due to the possibility of interest rates on the term loans under the Credit Agreement declining below the rates in 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 becomes unable to fulfill its obligations to the Company, the financial benefits of the arrangements may not be realized.

The derivatives recorded at fair value in the Company’s Consolidated Balance Sheets were (in thousands):

	Derivative Assets				Derivative Liabilities
	March 29,		June 29,		March 30,		June 29,
	2014		2013		2014		2013
Interest rate swap contracts	$	61	$	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 March 29, 2014		Level 1		Level 2		Level 3
Asset - Interest rate swap contracts	$	61	$	—	$	61	$	—

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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Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Mar. 29, 2014	Mar. 30, 2013	Mar. 29, 2014	Mar. 30, 2013
Income Statement [Abstract]
Revenue	$ 32,273	$ 34,970	$ 90,958	$ 99,399
Cost of goods sold	24,231	24,223	65,080	65,731
Gross profit	8,042	10,747	25,878	33,668
Operating expenses:
Sales and marketing	3,489	3,278	10,127	10,282
Engineering and project management	2,726	2,335	7,624	7,036
General and administrative	5,444	4,112	14,979	14,008
Operating expenses, Total	11,659	9,725	32,730	31,326
Operating income (loss)	(3,617)	1,022	(6,852)	2,342
Other income (expense):
Interest income	31	12	63	29
Interest expense	(436)	(148)	(1,142)	(463)
Loss on extinguishment of debt				(291)
Foreign exchange gain (loss)	(194)	(32)	(666)	3
Other income (loss)	13	(1)	84	33
Nonoperating income (expense), Total	(586)	(169)	(1,661)	(689)
Income (loss) before income taxes	(4,203)	853	(8,513)	1,653
Income tax expense (benefit)	439	(156)	254	(367)
Net income (loss)	(3,764)	697	(8,259)	1,286
Net income attributable to noncontrolling interest	17	152	117	584
Net income (loss) attributable to PMFG, Inc.	$ (3,781)	$ 545	$ (8,376)	$ 702
Weighted-average common shares outstanding:
Basic	21,097	20,920	21,092	20,919
Diluted	21,097	20,936	21,092	20,935
Basic income (loss) per common share	$ (0.18)	$ 0.03	$ (0.40)	$ 0.03
Diluted income (loss) per common share	$ (0.18)	$ 0.03	$ (0.40)	$ 0.03

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GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Mar. 29, 2014

Goodwill And Intangible Assets Disclosure [Abstract]

GOODWILL AND OTHER INTANGIBLE ASSETS

5. GOODWILL AND OTHER INTANGIBLE ASSETS

The reporting units used in assessing goodwill are the same as the Company’s reportable segments, Process Products and Environmental Systems. The goodwill acquired with the purchase of CCA is allocated and assessed at the Environmental Systems segment, and the remaining goodwill is assessed at the Process Products segment.

Goodwill

The following table shows the activity and balances related to goodwill from June 30, 2013 through March 29, 2014 (in thousands):

Balance as of June 29, 2013	$	30,429
Goodwill acquired:
Preliminary allocation of purchase price related to CCA		5,490
Balance as of March 29, 2014	$	35,919

Acquisition-Related Intangibles

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

	Weighted Average Estimated Useful Life (Years)	Gross Value March 29, 2014		Accumulated Amortization			Net Book Value March 29, 2014		Gross Value June 29, 2013		Accumulated Amortization			Net Book Value June 29, 2013
Design guidelines	Indefinite	$	8,290	$	—		$	8,290	$	6,940	$	—		$	6,940
Customer relationships	8		8,840		(3,925	)	$	4,915		7,940		(3,429	)		4,511
Trade names	Indefinite		5,179		—		$	5,179		4,729		—			4,729
Backlog	0.5		60		—		$	60		—		—			—
		$	22,369	$	(3,925	)	$	18,444	$	19,609	$	(3,429	)	$	16,180

Amortization expense on finite-lived intangible assets was $0.2 million and $0.3 million for the three months ended March 29, 2014 and March 30, 2013, respectively. Amortization expense on finite-lived intangible assets for the nine months ended March 29, 2014 and March 30, 2013 was $0.5 million and $0.8 million, respectively. Estimated aggregate finite-lived intangible asset amortization expense for the next five years is as follows (in thousands):

Fiscal Year
2014	$	713
2015		705
2016		600
2017		599
2018		594

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. In determining whether the events or changes in circumstances in the third quarter of the fiscal year provided an indication that certain long-lived assets may not be recoverable and therefore warrant the acceleration of the annual evaluation to be completed in the fourth quarter of the fiscal year, the Company took into consideration both short- and long-term indicators. Such consideration included the year-to-date trend in customer bookings, relative quote activity, short- and long-term industry and market segment indicators and longer-term financial forecasts in addition to the consideration of the year to date operating losses against year to date. Management concluded that acceleration of the impairment evaluation was not required and will be completed in the fourth quarter.

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COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

9 Months Ended

Mar. 29, 2014

Contractors [Abstract]

COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

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

	March 29,			June 29,
	2014			2013
Costs incurred on uncompleted contracts and estimated earnings	$	100,599		$	70,389
Less billings to date		(93,499	)		(60,122	)
	$	7,100		$	10,267

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

	March 29,			June 29,
	2014			2013
Costs and earnings in excess of billings on uncompleted contracts	$	19,119		$	16,544
Billings in excess of costs and earnings on uncompleted contracts		(12,019	)		(6,277	)
	$	7,100		$	10,267

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INVENTORIES (Tables)

9 Months Ended

Mar. 29, 2014

Inventory Disclosure [Abstract]

Principal Components of Inventories

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

	March 29,			June 29,
	2014			2013
Raw materials	$	6,676			3,729
Work in progress		4,009			2,516
Finished goods		406			493
Acquired - CCA		88			—
		11,179			6,738
Reserve for obsolete and slow-moving inventory		(185	)		(250	)
	$	10,994		$	6,488

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SEGMENT INFORMATION

9 Months Ended

Mar. 29, 2014

Segment Reporting [Abstract]

SEGMENT INFORMATION

12. SEGMENT INFORMATION

The Company has two reportable segments: Process Products and Environmental Systems. The Process Products segment produces various types of separation and filtration equipment 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 Environmental Systems segment designs, engineers and installs highly efficient systems for combustion modification, fuel conversions and post-combustion nitrogen oxide (NOx) control for both new and existing sources. These environmental control systems are used for air pollution abatement and converting burners to accommodate alternative sources of fuel. System applications include Selective Catalytic Reduction (“SCR”) systems and Selective Non-Catalytic Reduction (“SNCR”) systems. The financial results of the CCA acquisition will be included in the Environmental Systems segment in future periods (see Note 2).

The Company allocates all costs associated with the manufacture, sale and design of its products to the appropriate segment. Segment profit and loss is based on revenue less direct expenses of the segment before general and administrative expenses. The Company does not allocate general and administrative expenses, assets, or expenditures for assets on a segment basis for internal management reporting, therefore, this information is not presented. Segment information and reconciliation to operating income (loss) for the three and nine months ended March 29, 2014 and March 30, 2013 are presented below (in thousands).

	Three months ended						Nine months ended
	March 29,			March 30,			March 29,			March 30,
	2014			2013			2014			2013
Revenue:
Process Products	$	24,170		$	27,397		$	72,937		$	84,592
Environmental Systems		8,103			7,573			18,021			14,807
	$	32,273		$	34,970		$	90,958		$	99,399
Operating income (loss):
Process Products	$	24		$	3,593		$	4,063		$	13,679
Environmental Systems		1,803			1,541			4,064			2,671
Corporate and other unallocated expenses		(5,444	)		(4,112	)		(14,979	)		(14,008	)
	$	(3,617	)	$	1,022		$	(6,852	)	$	2,342

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DEBT

9 Months Ended

Mar. 29, 2014

Debt Disclosure [Abstract]

DEBT

8. DEBT

Outstanding long-term debt obligations are as follows (in thousands):

			March 29,			June 29,
	Maturities		2014			2013
Term loan A		2019	$	981		$	604
Term loan B		2022		9,466			8,115
Subsidiary loan		2017		6,923			—
Total long-term debt				17,370			8,719
Less current maturites				(2,210	)		—
Total long-term debt, net of current portion			$	15,160		$	8,719

In September 2012, the Company entered into a Credit Agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent and other financial institutions party thereto. The Credit Agreement provides for, among other things, revolving credit commitments of $30.0 million to be used for working capital and general corporate purposes, term loan commitments of $2.0 million used for the purchase of equipment for a manufacturing facility in Denton, Texas (“Term Loan A”) and term loan commitments of $10.0 million used to fund the construction of the Denton facility (“Term Loan B”). All borrowings and other obligations of the Company are guaranteed by substantially all of its domestic subsidiaries and are secured by substantially all of the assets of the Company.

The revolving credit facility under the Credit Agreement will terminate on September 30, 2015, and all revolving credit loans mature on that date. Under the revolving credit facility, the Company has a maximum borrowing availability equal to the lesser of (a) $30.0 million or (b) the sum of 80% of eligible accounts receivable plus 50% of eligible inventory plus 100% of the cash amount held in a special collateral account less a foreign currency letter of credit reserve. At March 29, 2014, there were no outstanding borrowings and approximately $6.4 million of outstanding letters of credit under the Credit Agreement.

Beginning June 30, 2014, the Company is required to make quarterly principal payments on the term loans. 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 March 29, 2014, 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, as defined in the Credit Agreement, 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 12 month basis.

Under the Credit Agreement, as amended, capital expenditures are limited to (a) those made in connection with the new manufacturing facility in Denton, Texas; (b) those made in connection with the new manufacturing facility in China, not to exceed $12.5 million; and (c) $3.0 million of other capital expenditures in any fiscal year plus any amounts below $3.0 million of expenditures from the immediately preceding fiscal year. The Credit Agreement also contains other covenants, including restrictions on additional debt, dividends, capital expenditures, acquisitions and dispositions.

At March 29, 2014, the Company was not in compliance with the minimum DSC covenant in the Credit Agreement primarily as a result of the operating loss reported in the nine-month period ended March 29, 2014. Subsequent to March 29, 2014, the Company obtained an amendment to the Credit Agreement that brought the Company into compliance as of March 29, 2014. Pursuant to the amendment, if the DSC is less than 1.50 to 1.00 as of the end of any fiscal quarter, the Company must deposit and maintain cash in a blocked collateral account (to which only the administrative agent under the Credit Agreement has access) in an aggregate amount equal to the greater of (a) $10.0 million or (b) the sum of (i) the aggregate principal amount of all revolving credit and swing line loans outstanding under the Credit Agreement, plus (ii) 100% of the undrawn face amount of all performance-related letters of credit outstanding under the Credit Agreement, plus (iii) 30% (subject to upward adjustment) of the undrawn face amount of all warranty-related letters of credit outstanding under the Credit Agreement, plus (iv) $3.0 million, less (v) all term loan principal payments made on or after March 29, 2014. The Company may withdraw the cash in the collateral account when it achieves a DSC of at least 1.50 to 1.00 as of the end of a subsequent fiscal quarter, so long as no default or borrowing base deficiency then exists.

In July 2013, the Company’s subsidiary in China entered into a loan agreement with Bank of China Limited. The loan agreement provides for a loan commitment of ¥45.0 million ($7.2 million) to fund the construction of a manufacturing facility in Zhenjiang, China. The loan is guaranteed by PCMC’s property, plant and equipment. The loan matures on September 30, 2018. At March 29, 2014, there was an outstanding borrowing of ¥43.0 million ($6.9 million). Beginning June 20, 2014, the Company is required to make semi-annual principal payments on the loan which will be paid using cash on hand in China. Interest rates use floating rates as established by The People’s Bank of China. The rate at March 29, 2014 was 7.2%. The loan agreement also contains covenants, including restrictions on additional debt, dividends, acquisitions and dispositions. At March 29, 2014, the Company’s subsidiary was in compliance with all of its debt covenants. The Company’s subsidiary in China had bank guarantees of $0.8 million and $0.6 million at March 29, 2014 and June 29, 2013, respectively, secured by $0.8 million and $0.6 million of restricted cash balances.

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 ($10.0 million) at March 29, 2014 and £6.0 million ($9.1 million) at June 29, 2013. This facility was secured by substantially all of the assets of the Company’s U.K. subsidiary, a protective letter of credit issued by the Company to HSBC Bank and a cash deposit of £1.8 million ($3.0 million) at March 29, 2014 and £2.1 million ($3.2 million) at June 29, 2013, which is recorded as restricted cash on the Consolidated Balance Sheets. At March 29, 2014, there was £4.7 million ($7.8 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. At June 29, 2013, there was £4.4 million ($6.8 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.

The Company’s German subsidiary has a debenture agreement used to facilitate issuances of letters of credit and bank guarantees of €4.8 million ($6.6 million) at March 29, 2014 and €4.8 million ($6.2 million) at June 29, 2013. This facility is secured by substantially all of the assets of the Company’s German subsidiary and by a cash deposit of €0.8 million ($1.1 million) at March 29, 2014 and €0.7 million ($0.9 million) at June 29, 2013, which is recorded as restricted cash on the Consolidated Balance Sheets. At March 29, 2014, there was €3.2 million ($4.4 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement. At June 29, 2013, there was €2.7 million ($3.5 million) of outstanding stand-by letters of credit and bank guarantees under this debenture agreement.

The Company’s subsidiary in Singapore had bank guarantees of $0.7 million and $0.6 million at March 29, 2014 and June 29, 2013, respectively. These guarantees are secured with a protective letter of credit issued by the Company to Citibank.

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ACCRUED PRODUCT WARRANTIES

9 Months Ended

Mar. 29, 2014

Guarantees [Abstract]

ACCRUED PRODUCT WARRANTIES

6. ACCRUED PRODUCT WARRANTIES

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

	Nine months ended
	March 29,			March 30,
	2014			2013
Balance at beginning of period	$	2,241		$	2,615
Provision for warranty expenses		726			1,666
Acquired - CCA		200			—
Warranty charges		(705	)		(1,466	)
Balance at end of period	$	2,462		$	2,815

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ACCRUED LIABILITIES AND OTHER

9 Months Ended

Mar. 29, 2014

Payables And Accruals [Abstract]

ACCRUED LIABILITIES AND OTHER

7. ACCRUED LIABILITIES AND OTHER

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

	March 29,		June 29,
	2014		2013
Accrued start-up and commissioning expense	$	230	$	230
Accrued compensation		2,574		2,393
Accrued professional expenses		3,144		1,819
Subsidiary short-term debt		1,610		—
Other		399		944
	$	7,957	$	5,386

In July 2013, the Company obtained short-term financing from Bank of China Limited. The financing provides for borrowings up to ¥10 million ($1.6 million) at an interest rate of 6.6%. Interest is payable quarterly. All amounts outstanding are due July 2014 and are expected to be repaid with cash on hand.

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Mar. 29, 2014

Commitments And Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

9. COMMITMENTS AND CONTINGENCIES

Litigation

Under the contract for the Nitram acquisition, the Company has certain rights to indemnification from the selling stockholders for claims relating to breach of representations and certain other claims, including litigation costs and damages. Prior to the final escrow payment in October 2009, the Company made claims relating to environmental matters and indemnification for breach of representations and warranties in the Nitram purchase agreement, totaling approximately $2.0 million. Of this amount, $1.4 million was not released from escrow. This amount represents the Company’s claims, less the deductible of $0.6 million. The sellers have objected to the claims made by the Company and the parties are currently negotiating the 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.

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Allowance for Doubtful Accounts (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Mar. 29, 2014	Mar. 30, 2013
Allowance For Doubtful Accounts Receivable Rollforward
Balance at beginning of period	$ 300	$ 650
Bad debt expense	64	1,008
Acquired - CCA	26
Accounts written off	(80)	(1,358)
Balance at end of period	$ 310	$ 300

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Commitments and Contingencies - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Mar. 29, 2014
Commitments And Contingencies Disclosure [Abstract]
Claims against escrow	$ 2.0
Claims withheld from escrow releases	1.4
Estimated claims deductible	$ 0.6

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SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Mar. 29, 2014

Accounting Policies [Abstract]

Cash Balances Including Restricted Cash

Cash balances, including restricted cash, held within and outside the United States are as follows (in thousands):

	March 29, 2014
Domestic	$	23,090
International		24,402
	$	47,492

Allowance for Doubtful Accounts

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

	Nine months ended
	March 29,			March 30,
	2014			2013
Balance at beginning of period	$	300		$	650
Bad debt expense		64			1,008
Acquired - CCA		26			—
Accounts written off		(80	)		(1,358	)
Balance at end of period	$	310		$	300

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:

Buildings and improvements	5 - 40 years
Equipment	3 - 10 years
Furniture and fixtures	3 - 15 years

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ACCRUED PRODUCT WARRANTIES (Tables)

9 Months Ended

Mar. 29, 2014

Guarantees [Abstract]

Accrued Product Warranty Activity

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

	Nine months ended
	March 29,			March 30,
	2014			2013
Balance at beginning of period	$	2,241		$	2,615
Provision for warranty expenses		726			1,666
Acquired - CCA		200			—
Warranty charges		(705	)		(1,466	)
Balance at end of period	$	2,462		$	2,815

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Outstanding Long-Term Debt Obligations (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 29, 2014	Jun. 29, 2013
Debt Instrument [Line Items]
Total long-term debt	$ 17,370	$ 8,719
Less current maturities	2,210
Total long-term debt, net of current portion	15,160	8,719
Term loan A [Member]
Debt Instrument [Line Items]
Long-term debt, maturity year	2019
Total long-term debt	981	604
Term loan B [Member]
Debt Instrument [Line Items]
Long-term debt, maturity year	2022
Total long-term debt	9,466	8,115
Subsidiary loan [Member]
Debt Instrument [Line Items]
Long-term debt, maturity year	2017
Total long-term debt	$ 6,923

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Components of Uncompleted Contracts Reflected in Consolidated Balance Sheets (Detail) (USD $) In Thousands, unless otherwise specified	Mar. 29, 2014	Jun. 29, 2013
Contractors [Abstract]
Costs and earnings in excess of billings on uncompleted contracts	$ 19,119	$ 16,544
Billings in excess of costs and earnings on uncompleted contracts	(12,019)	(6,277)
Total uncompleted contracts	$ 7,100	$ 10,267

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Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Mar. 29, 2014	Mar. 30, 2013	Mar. 29, 2014	Mar. 30, 2013
Statement Of Income And Comprehensive Income [Abstract]
Net income (loss)	$ (3,764)	$ 697	$ (8,259)	$ 1,286
Other comprehensive income (loss):
Foreign currency translation adjustment	(99)	(749)	1,216	(97)
Other comprehensive income (loss)	(99)	(749)	1,216	(97)
Comprehensive income (loss)	(3,863)	(52)	(7,043)	1,189
Net income attributable to noncontrolling interest	17	152	117	584
Other comprehensive loss:
Foreign currency translation adjustment	(67)	(2)	(27)
Comprehensive income (loss) attributable to noncontrolling interest	(50)	150	90	584
Comprehensive income (loss) attributable to PMFG, Inc.	$ (3,813)	$ (202)	$ (7,133)	$ 605

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INVENTORIES

9 Months Ended

Mar. 29, 2014

Inventory Disclosure [Abstract]

INVENTORIES

3. INVENTORIES

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

	March 29,			June 29,
	2014			2013
Raw materials	$	6,676			3,729
Work in progress		4,009			2,516
Finished goods		406			493
Acquired - CCA		88			—
		11,179			6,738
Reserve for obsolete and slow-moving inventory		(185	)		(250	)
	$	10,994		$	6,488

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Segment Information and Reconciliation to Operating Income (Loss) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Mar. 29, 2014	Mar. 30, 2013	Mar. 29, 2014	Mar. 30, 2013
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Revenue	$ 32,273	$ 34,970	$ 90,958	$ 99,399
Operating income (loss)	(3,617)	1,022	(6,852)	2,342
Operating Segments [Member] | Process Products [Member]
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Revenue	24,170	27,397	72,937	84,592
Operating income (loss)	24	3,593	4,063	13,679
Operating Segments [Member] | Environmental Systems [Member]
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Revenue	8,103	7,573	18,021	14,807
Operating income (loss)	1,803	1,541	4,064	2,671
Corporate and other unallocated expenses [Member]
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Operating income (loss)	$ (5,444)	$ (4,112)	$ (14,979)	$ (14,008)

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ACCRUED LIABILITIES AND OTHER (Tables)

9 Months Ended

Mar. 29, 2014

Payables And Accruals [Abstract]

Components of Accrued Liabilities and Other

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

	March 29,		June 29,
	2014		2013
Accrued start-up and commissioning expense	$	230	$	230
Accrued compensation		2,574		2,393
Accrued professional expenses		3,144		1,819
Subsidiary short-term debt		1,610		—
Other		399		944
	$	7,957	$	5,386

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Summary of Unaudited Proforma Information (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Mar. 29, 2014	Mar. 30, 2013	Mar. 29, 2014	Mar. 30, 2013
Business Combinations [Abstract]
Revenue	$ 34,973	$ 38,270	$ 100,557	$ 108,099
Net income (loss)	(2,968)	789	(7,162)	1,588
Net income (loss) attributable to PMFG, Inc	$ (2,985)	$ 637	$ (7,279)	$ 1,004
Basic earnings per common share	$ (0.14)	$ 0.03	$ (0.35)	$ 0.05
Diluted earnings per common share	$ (0.14)	$ 0.03	$ (0.35)	$ 0.05

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SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Mar. 29, 2014

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements of PMFG, Inc. and subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. References to “Company,” “we,” “us” and “our” refer to PMFG, Inc. and its subsidiaries. The consolidated financial statements of the Company as of March 29, 2014 and for the three and nine months ended March 29, 2014 and March 30, 2013 are unaudited and, in the opinion of management, all adjustments necessary for the fair presentation of the financial position and results of operations of the Company for the interim periods have been included and are of a normal recurring nature. The results of operations for such interim periods are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended June 29, 2013.

Each of the Company’s interim reporting periods ends on the Saturday closest to the last day of the corresponding quarterly calendar period. References to “fiscal 2014” and “fiscal 2013” refer to fiscal years ended June 28, 2014 and June 29, 2013, respectively. The third quarters of fiscal 2014 and fiscal 2013 ended on March 29, 2014 and March 30, 2013, respectively

Basis of Consolidation

Basis of Consolidation

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

Cash and Cash Equivalents

Cash and Cash Equivalents

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

	March 29, 2014
Domestic	$	23,090
International		24,402
	$	47,492

The Company maintains cash balances in bank accounts that normally exceed Federal Deposit Insurance Corporation insured limits. As of March 29, 2014, cash held in banks in the United States exceeded federally insured limits by $21.2 million. The Company has not experienced any losses related to this cash concentration.

The Company had restricted cash balances of $4.9 million and $5.0 million as of March 29, 2014 and June 29, 2013, respectively. Foreign restricted cash balances were $4.9 million and $4.7 million as of March 29, 2014 and June 29, 2013, respectively. Cash balances were restricted to collateralize letters of credit and financial institution guarantees issued in the ordinary course of business.

Accounts Receivable

Accounts Receivable

The Company’s accounts receivable are due from companies in various industries. Credit is extended based on an evaluation of the customer’s financial condition. Generally, collateral is not required. 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 for doubtful accounts based on a specific identification, taking into consideration a number of factors, including the length of time the accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and the condition of the industry and the economy as a whole. The Company writes off accounts receivable when they are deemed to be uncollectible. Payments subsequently received on such receivables are credited to the allowance for doubtful accounts in the period the payment is received.

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

	Nine months ended
	March 29,			March 30,
	2014			2013
Balance at beginning of period	$	300		$	650
Bad debt expense		64			1,008
Acquired - CCA		26			—
Accounts written off		(80	)		(1,358	)
Balance at end of period	$	310		$	300

Inventories

Inventories

The Company values its inventories using the lower of weighted average cost or market. The Company regularly reviews the value of inventories on hand, using specific aging categories, and records a provision for obsolete and slow-moving inventory based on historical and estimated future usage. In assessing the ultimate realization of its inventory, the Company is required to make judgments as to future demand requirements. As actual future demand or market conditions may vary from those projected by the Company, adjustments to inventory valuations may be required.

Property, Plant and Equipment

Property, Plant and Equipment

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

Buildings and improvements	5 - 40 years
Equipment	3 - 10 years
Furniture and fixtures	3 - 15 years

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

Long-Lived Assets

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.

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

Goodwill represents the difference between the purchase price and the fair value of the net assets acquired upon acquisition. Goodwill is not amortized, however, it is measured at the reporting unit level to test for impairment annually, in the fourth quarter, or more frequently if conditions indicate an earlier review is necessary. A discounted future cash flow analysis is primarily used to determine whether impairment exists. If the fair value of a reporting unit is less than the carrying amount, then the Company writes down goodwill to its estimated fair value.

Intangible assets subject to amortization include licensing agreements, customer relationships and acquired sales order backlog. These intangible assets are amortized over their estimated useful lives based on a pattern in which the economic benefit of the respective intangible asset is realized. Intangible assets considered to have indefinite lives include trade names and design guidelines.

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 carrying amount of the Company’s debt approximates fair value as the debt bears interest at floating market rates.

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. Amounts recognized in revenue are calculated using the percentage of cost completed (i.e., cumulative cost incurred to date in comparison to the estimated total cost at completion). This method requires the Company to make estimates regarding the total costs of the project at completion, which impacts the amount of gross margin the Company recognizes in each reporting period. Changes in estimated total costs are reflected in the computation of percentage-of-completion when such changes are identified and can be reasonably estimated. Change orders affecting the contract amount are considered only after receipt of a legally binding agreement. Incremental costs related to change orders are included in the estimate of total costs upon the earlier of receipt of the change order or the Company’s committed purchase obligation. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract.

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

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

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

Pre-contract, Start-up and Commissioning Costs

Pre-contract, Start-up and Commissioning Costs

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

Warranty Costs

Warranty Costs

The Company provides warranties for specific products during a defined period of time, generally less than 18 months after shipment of the product. Warranties cover the failure of a product to perform after it has been placed in service. The Company reserves for estimated future warranty costs in the period in which the revenue is recognized based on historical experience, expectation of future conditions, and the extent of concurrent supplier warranties in place. Warranty costs are included in “cost of goods sold” in the Consolidated Statements of Operations.

Income Taxes

Income Taxes

The Company utilizes the asset and liability approach in its reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income tax related interest and penalties are included in income tax expense. The Company recognizes in its financial statements the impact of a tax position taken or expected to be taken in a tax return, if that position is “more likely than not” of being sustained upon examination by the relevant taxing authority, based on the technical merits of the position.

The Company is required to estimate income taxes in each jurisdiction in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In the event that actual results differ from these estimates, the Company’s provision for income taxes could be materially impacted.

For the nine months ended March 29, 2014, income tax expense was 3.0% of the loss before income taxes. The rate varies from the statutory rate because of the blend of taxable income in some state and foreign taxing jurisdictions and permanent differences and taxable losses in the United States for which no tax benefit has been recognized. At March 29, 2014, the Company had $5.1 million of operating loss carry forwards primarily in the United States available for carryover to future periods, subject to certain limitations and expiring beginning in fiscal 2032. A valuation allowance of $1.3 million has been established to reduce the computed benefits to the estimated future realization of the tax related benefit.

Earnings (Loss) Per Common Share

Earnings (Loss) Per Common Share

The Company calculates earnings (loss) per common share by dividing the earnings (loss) applicable to PMFG, Inc. stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share include the dilutive effect of stock options, restricted stock units and warrants granted using the treasury stock method. For the three and nine months ended March 29, 2014, 72,339 restricted stock units with performance and service based restrictions were omitted from the calculation of dilutive securities because they were anti-dilutive. Options to acquire 37,200 shares of common stock were omitted from the calculation of dilutive securities for the three and nine months ended March 29, 2014 because they were anti-dilutive. Warrants to acquire 839,063 shares of common stock were omitted from the calculation of dilutive securities for the three and nine months ended March 29, 2014 and the three and nine months ended March 30, 2013 because they were anti-dilutive. The warrants entitle the holders to purchase common stock for $10.56 per share, through a cashless exercise. The warrants expire on September 4, 2014.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.