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Executives

Kevin McGrath - Partner

Peter J. Burlage - Chief Executive Officer, President and Director

Ronald L. McCrummen - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Shawn M. Severson - JMP Securities LLC, Research Division

Tim Mulrooney

David Peter Cohen - Minerva Advisors LLC

PMFG (PMFG) Q2 2013 Earnings Call February 7, 2013 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the PMFG, Inc. Second Quarter Fiscal Year 2013 Financial Results Conference Call. My name is Felicia, and I'll be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Kevin McGrath. Please proceed.

Kevin McGrath

Thank you and good morning. We appreciate your interest in joining us on PMFG's conference call and webcast to discuss financial results for the 3- and 6-month periods ended December 29, 2012.

On the call with me today are Peter Burlage, President and CEO; and Ronald McCrummen, Chief Financial Officer. Peter and Ron will be reviewing the quarter and year-to-date results and also provide an update on the company's strategy and outlook.

Following our prepared remarks, we will open the call to questions. This call is being webcast along with our earnings presentation on our website, at peerlessmfg.com if you click on the Events Calendar tab in the Investor Relations section to access the website and the accompanying presentation.

The webcast will be posted at peerlessmfg.com for a replay approximately 2 hours following the end of this call. The replay will stay on the site for on-demand review over the next several months.

Before we get started, I need to review our Safe Harbor statement with you. Any statements in this call regarding our business that are not historical facts are 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, and our future results could differ materially from the forward-looking statements made today.

Statements that include the words anticipate, expect, believe, intend and similar statements of a future or forward-looking nature identify forward-looking statements.

Our actual results may be affected by many important factors, including risks and uncertainties identified in our press release and in our SEC filings. You should not place undue reliance on these statements.

Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause the company's actual results to differ materially from those indicated in these statements.

Important information regarding factors that may affect the company's future performance are included in the public reports that the company files with the Securities and Exchange Commission, including information in Item 1.A, Risk Factors, or Part 1 to our annual report on Form 10-K for the fiscal year ended June 30, 2012, and for our 10-Q for the period ended December 29, 2012, that we intend to file later today.

The company undertakes no obligation to publicly update or revise any forward-looking statements, except to the extent required by law. The inclusion of any statement on this conference call does not constitute any -- an admission by the company or any other person that the events or circumstances described in such statement are material.

And now, I'd like to turn the call over to the Peter to begin the discussion.

Peter J. Burlage

Thank you, Kevin. Good morning, everyone. I'll begin with Slide 4 where you can see the financial and strategic highlights for the quarter.

Revenue in the quarter decreased from the prior year by almost 17% as we experienced lower revenue in both our reporting segments. The decrease results from the customer-driven delays on projects previously awarded as well as lengthening sales cycles that are delaying anticipated bookings. Increased revenue in the Asia Pacific and the Middle East regions were more than offset by the decrease of revenue in North America.

Our gross margin percentage increased over 200 basis points from the gross margin reported in Q1 of this year to be 36.7%. The higher gross margin is attributed to the product and geographic mix, lower-than-previously-anticipated cost on projects completed and in the process as well as improvements in our manufacturing efficiency. As Ron will discuss further later in this call, we do not anticipate our gross margin percentage for the year to remain at the level realized in the first and second quarters of this year.

The second quarter of our fiscal year has historically represented one of our strongest quarters for net bookings. While our net bookings improved sequentially over the first quarter, it remained behind our expectations. Quote activity remained solid. However, we are experiencing delays in the sales cycle as well as the amount of time from project award to approval to fabricate.

We completed the quarter with backlog of nearly $88 million, down slightly from the end of September. As noted in our press releases this morning, approximately 14% of our backlog at the end of the quarter remains subject to a customer-driven hold.

While the customer has communicated their expectations that the project will continue, the timing and the impact on our scope, if any, remains unclear.

Based on recent conversations with the customer, they are rethinking the facility design and the throughput that they utilized to procure the capital equipment last year. They are currently evaluating the merit of the construction of a larger facility with greater daily throughput.

The final scope of the project will require the redesign in the products and solutions. This could result in an overall still to change, but at what extent and time frame is unknown. The customer expects to finalize their design over the next several months.

From a strategic perspective, we continue to make progress on our key long-term strategic initiatives to position us for growth and to meet customer commitments.

The construction of new manufacturing facilities in the United States and China are on track, and we expect both facilities to open mid-summer of this year. These facilities are intended to support anticipated future growth in product demand, both domestically and internationally.

The U.S. facility will allow us to meet both the physical size requirements of the next generation of nuclear reactors, as well as enable us to meet the stringent quality standards required in the nuclear industry. Additionally, we believe we will recognize economic benefits from the consolidation of our manufacturing facilities in the United States.

The facility under construction in China will replace the smaller facility that we lease from our joint venture partner. We entered the China market to serve the anticipated nuclear demands within China. The discovery of shale gas reserves, the development of coal bed methane and the benefit of cleaner-burning energy sources will drive the demand for natural gas infrastructure within China.

For the next generation of nuclear reactors in China, we will need a larger facility to efficiently manufacture our Process Products [ph].

At the present time, we anticipated that the manufacturing facility will primarily support product demand in Asia and China in particular.

Revenue related from the nuclear marine applications represented a higher relative percentage of our revenue in the quarter and contributed to an increase in our gross margin percentage.

We received new bookings in the second quarter for both new and replacement units in China and United States, respectively. We anticipate that the strong bookings in these product lines to continue over the balance of the fiscal year.

Finally, we are building our footprint of capabilities for long-term growth and profitability as we cannot ignore our short-term performance.

We are currently adjusting our resources in the United States and Europe to temper the near-term delays in our market demand.

Moving on to our reporting segments, starting with our Process Products segment on Slide 5. Revenue in the second quarter decreased approximately 13% year-over-year, particularly in the separation of filtration product applications utilized in natural gas infrastructure. This decreased demand was primarily felt in North America, where we continue to see delays in energy-related capital expenditures.

We continue to experience strong inquiry demand for products and systems used in natural gas infrastructure and oil production, both in developed and emerging markets. At the present time, the growth we are seeing in Asia Pacific and the Middle East is being offset entirely by decreased demand in North America, Europe and a slower-developing markets in Latin America.

Net bookings in the quarter totaled $24.6 million. While higher sequentially than the first quarter of the fiscal year, the net bookings in the quarter were roughly half of that realized in the second quarter of the prior year. We will remind you approximately $23 million of the $50.5 million of processed systems bookings in the second quarter of last year related to 2 international capital projects.

We are clearly experiencing delays in the sales cycle as well as customers slowing down the pace between contract award and notification release to fabricate. We attribute the slowdown to uncertainties related to the broader global economic outlook rather than a permanent shift in our industry.

Moving on to Environmental Systems segment, beginning on Slide 6. The sluggish economy in the United States as well as the uncertainties related to the delayed timing of compliance deadlines for environmental regulations continue to create near-term indecisions in the segment.

Revenue in the quarter decreased $2.1 million or 41% from the prior year as we worked through projects in backlog. Net bookings in the second quarter were flat sequentially in the first quarter of this year and significantly down from the prior year.

Earlier this week, we announced an environmental awards that aggregated approximately $7.5 million in value. These are great projects, and we welcome the opportunity to assist our customers in their successful execution. With that said, we had anticipated these projects would be awarded much earlier in the fiscal year, and they confirmed the delays that we continue to experience in the marketplace.

Of particular interest in the bookings announced earlier this week are the aftermarket projects in Texas and California. These aftermarket projects allow us an opportunity to demonstrate our ability to serve a larger potential market for assisting customers as they change their plant utilization rates of existing power plants. We have traditionally focused our efforts on new-build constructions only.

Our quote activity for this reporting segment indicates that there are larger and more frequent opportunities in the marketplace, but the timing is very uncertain.

I'll turn it over to Ron for a more detailed review of the financial results for the quarter, as well as an update -- outlook on the balance of this fiscal year.

Ronald L. McCrummen

Thank you, Peter, and good morning, everyone. The following comments are a summary of our financial highlights for the second quarter of fiscal year 2013.

Beginning with Slide 8. Consolidated revenue in the second quarter of fiscal 2013 of $31.5 million decreased $6.2 million from the same period in fiscal 2012 as we noted decreased demand and flow-through in both our Process Products and Environmental System segments.

Our gross profit as a percentage of revenue increased in the quarter from 33.1% in the prior year to 36.7% in the second quarter of this fiscal year. The gross margin percentage represents further improvement from the 34.5% realized in the first quarter of this fiscal year. While welcome in the quarter, I do not expect this trend in improving gross margin percentage to continue.

Looking at the active projects currently in backlog and those in our pipeline, I would expect the gross margin for the balance of the year to move towards, but not likely within, our historical margin ranges of 30% to 32%. I will touch on our updated outlook in a moment.

On a non-GAAP basis, our operating expenses decreased $800,000 as we overlapped the $2.1 million onetime charge from the accelerated vesting of restricted stocks in the second quarter of fiscal 2012. On a non-GAAP basis, our operating expenses increased $1.2 million in the quarter, primarily related to higher commissions and the costs associated with our investment in sales resources within China.

After netting the impact of interest expense, foreign currency gains and losses and the minority interest in our China operation, the diluted earnings per share was $0.02 per share in the quarter compared to $0.08 per share in the same period last year when measured on a non-GAAP basis.

In the Process Products segment, as shown on Slide 9, revenue decreased $4.2 million, or nearly 13%, to $28.5 million compared to $32.7 million in the prior year. The increase (sic) [decrease] in the quarter related to pressure products, including nuclear products, in the Asia Pacific region was more than offset by lower demand within North America and delays in the fabrication of Latin American projects in backlog.

Operating income in this segment decreased $1.5 million, or 24%, to $4.7 million compared to $6.2 million in the prior year. The decrease in operating income is attributed to the decrease in revenue, partially offset by an improvement in gross margin percentage. The lower revenue decreases the leverage of our manufacturing, sales and engineering resources dedicated to this reporting segment.

I do want to spend a moment on the higher gross margin percentage during the quarter as it is attributed primarily to this reporting segment. Earlier, I attributed the higher gross margin percentage to changes in product and geographical mix, lower-than-previously-expected costs and completed and in-process projects and improvement in our manufacturing efficiencies.

As to product mix, our nuclear and marine products account for approximately 10% of the revenue in the quarter, which is bringing up the gross margin percentage.

As to geographical mix, our recent wins in the Asia Pacific region results in a higher relative operating income than other geographical regions as we benefit from a lower level of outsourcing and the projects tend to include more units on a single design. Intuitively, the efficiency in labor when building units in a batch process and the material savings from buying in larger quantities will drive higher margins.

Finally, we were very focused on driving costs out of the business, through focused initiatives on procurement, manufacturing procedures, work-through through our facilities and reducing indirect cost.

The backlog of Process Products segment remained strong at $73.2 million. However, we have less certainty around when a portion of that backlog will turn.

In the Environmental Systems segment, as shown on Slide 10, revenue decreased $2.1 million, or 41%, to $3 million compared to $5.1 million in the prior year. The lower revenue is consistent with the decline in recent bookings. Demand for SCR systems has been dampened by continued delays and the deadlines associated with environmental regulations.

Net bookings of $3.1 million in the second quarter of fiscal 2013 was generally consistent with the first quarter of this fiscal year. Peter noted in the press release earlier this week of approximately $7.5 million in bookings in this quarter-to-date.

Operating income from this segment decreased in line with the decline in revenue. Steve [ph] is doing a very effective job in managing down their fixed costs as we work through this period of dampened demand. The Environmental Systems backlog was $14.7 million at December 29, 2012.

Turning now to the balance sheet and cash flows on Slides 11 and 12. The equity offering completed in February 2012 and the refinancing of our senior credit facility in September 2012 significantly strengthened our balance sheet. We believe the liquidity and flexibility will be absolutely critical in pursuing organic and strategic opportunities.

Cash and cash equivalents were $69.2 million as of December 29, 2012, compared to $60.2 million at June 30, 2012, of which $8.5 million was restricted as collateral for standby letters of credit.

Net cash provided by operating activities for the 6 months ended December 29, 2012, improved to $10.4 million compared to $7.3 million in fiscal 2012. Net cash used in investing activities decreased to $3.8 million in fiscal 2013 as compared to $5.7 million in fiscal 2012.

Finally, you will note that we began to draw down on the construction financing related to the facility under construction in Texas.

I'll provide a few comments with regards to our updated guidance for the balance of fiscal 2013 provided on Slide 13, and then I will turn the call back over to Peter for additional comments before we open the call up for questions.

As we concluded fiscal year 2012 with a backlog of $100 million and strong quote activity across multiple markets, we provided anticipated revenue growth in fiscal 2013 of a range of 13% to 18%.

With the continued customer-related delays of our large project in Latin America as well as delays in sales cycle, it now appears that a significant portion of that anticipated growth will not be realized until fiscal year 2014. While we do not think we have lost these revenue opportunities, we believe they will slip out of the current fiscal year. Assuming that limited additional revenue is recognized from the Latin American project in fiscal year 2013, we now expect consolidated revenue to be roughly flat in comparison to fiscal 2012. By roughly flat, I'm implying a range of plus or minus 5% on consolidated revenue.

Our year-to-date gross margin of 35.6% in fiscal 2013 is above the range of 30% to 32% that we discussed back in September of last year.

Looking at projects in backlog and quotes in-process, we now expect the gross margin to fall outside of the high end of that range for the full year 2013, more likely in a range of 32% to 34% for the full year 2013.

Our view with regard to operating expenses. Operating expense growth remains unchanged.

With that, I'll turn back to Peter before we open the call up for questions.

Peter J. Burlage

Thanks, Ron. I've been with Peerless for over 20 years, and I've been a large part of the company's movement into the international markets. It is clear that those markets are going to present new challenges for the company and expose us to the greater variations in bookings, revenue and operating results that we are seeing play out over fiscal year 2013.

With that said, I believe we have built a strong global footprint, offering products and solutions that will be in significant demand, both domestically and globally, as we -- the world seeks safer, efficient, clean energy solutions.

Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Nathan Jones from Stifel, Nicolaus.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Can we just start on the gross margin expectation of 32% to 34% for the year? You did 35.5-ish percent in the first half of the year, which would imply something like 29% to 33% in the back half of the year. It seems a little light to me based on -- your mix of nuclear and marine, I would think, it should be staying relatively the same as it is, and probably, the mix of international business the same as it is. Why is the expectation in the second half so much lower than the first half?

Peter J. Burlage

I think, the revenue has -- you got to weigh it with the revenue. We had a little bit stronger revenue expectations in there. But I think the nuclear projects, a little bit of it is timing. We get a rush of offered revenue coming off of those nuclear projects when we complete the engineer, then we get thrust [ph] into the cycle before we get to the next round, so we see the mix of products in the next quarter to be a little bit different. But I -- so our more traditional pressure products stuff is going to take a larger percentage of the revenue in the coming quarters, and that's going to bring our margins back down into that -- in the 30%, 32% range that we typically see.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay. You said you expect gross margins in the 30% to 32% range over time. Despite having still depressed revenue and not getting the benefit of operating leverage and probably looking at a better mix over the next few years than you've seen over the last couple with the nuclear and marine businesses picking up, are we looking at a business that should be operating at a structurally higher gross margin level over the next few years? And why and why not?

Peter J. Burlage

I mean, structurally higher. I think with the -- if we can maintain the nuclear component and the marine component in there, I think we'd be running probably more around that 32%. If you look back over the history of our gross margins over the last numerous years, I mean, we've traditionally run probably a little bit closer to the 32% than we do the 30%. So there is a -- I'm just going to get to the number here real quick, but -- you got it?

Ronald L. McCrummen

Yes.

Peter J. Burlage

Okay. So yes. So we've been running -- I mean, in fiscal year '10, we ran quite a bit higher above the -- in the range of where we are right now. Even prior to the acquisition of Nitram, which has had an impact on our revenues, we're running more traditionally in that 32% range. But since then, 30% to 32% has been the majority of the years we've had. One year in 2010, we’re above 35%, but the majority of the time, we're going to run in that 32%. And prior to the Nitram acquisition, we were running in that 32% range. When the environmental business picks up in there and gets back up there, you can see that number -- I would be more confident that number being above 32% when the Environmental revenue gets back in line with where -- as a percentage of our overall revenue. I mean, we're traditionally more of a 25% of our business being environmental. And as you saw, currently, our environmental is significantly less than that.

Ronald L. McCrummen

I think the other thing, Nathan, I'll throw in there is there are -- in a project environment such as what we're in, while we will cautiously take them my [ph], there are projects out there that are going to have that lower margin, which are going to be in your low 20%. It doesn't mean they're bad projects or high risk, but I think we will selectively take on such projects, which will bring down that overall margin. They'll increase our contribution, bring more to the bottom -- or bring additional money to the bottom line, but there are those opportunities out there, and I don't think we will shy away from those that we think are good projects with good customers.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And Peter, you said in your prepared remarks that you're adjusting resources in the U.S. and Europe to adjust for near-term delays. Are we talking restructuring, taking out hedge, reducing costs? What were you talking about there?

Peter J. Burlage

Yes. Predominantly, I mean, we're adjusting some of our staffing resources to where there is the excess capacity to get in line with the projects and the kind of work that's going on.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Can you put any numbers around that in terms of potential cost savings and when they might be recognized?

Peter J. Burlage

No, the recognition of the costs that we've -- we've done some here early March, so we'll see some benefit from that, obviously, in the third quarter or towards the end of the third -- fourth quarter really by the time you put that out there. As far as the magnitude, I mean, it's -- I don't really want to disclose the content -- the detail of that, and you'll see it in the next quarter run numbers in our -- as we move forward.

Operator

Your next question comes from the line of Shawn Severson from JMP Securities.

Shawn M. Severson - JMP Securities LLC, Research Division

Well, could you -- I mean, you talked a little bit about some delays in energy projects in the U.S. And is that just simply not much dry gas development because of prices? Or were there specific pipelines or other projects that were deferred not necessarily related to short-term prices in nat gas? I'm just trying to understand some of the dynamics there.

Peter J. Burlage

I think probably not as much the -- while it is delays, I mean, it is -- there is a reluctance in the speed at which our customers are releasing orders and buying, whether they're OEMs that are selling to those projects or whether they're end users. Predominantly, those are the 2 types of customers I'm referring to in that comment. But both of them are actively quoting but slow at buying. I mean, we are -- our quote inquiry level has stayed pretty consistent and strong, but the speed at which those orders are being let -- I mean, we're seeing the days that the proposals are active are dragging out extensively long. And so it just seems to be a lack of urgency and speed at which they want to move forward. And then we also see the same scenario happening with regard to the projects once we receive the orders. There seems to be no urgency on our customers' part to complete the engineering review process and allow us to proceed with manufacturing, and that's holding up backlog and not allowing it to turn. So we're seeing those in both. There isn't a -- any -- I can't point to a specific job that's there, but it seems to be a consistent situation. And I've talked to other peer companies in the market, too, to see in their experience and their very similar phenomenon with regard to the -- just the extensive cycle time in the bid process. That typically leads to some competitive pricing, too.

Shawn M. Severson - JMP Securities LLC, Research Division

Oh, yes, that was my next question. I mean, as these things slow -- I mean, if you look at the fundamental development, it's more a question of when, not, if, still, correct? I mean, you look at what's happening in gas development in the U.S. But when you get into this environment, is there opportunities? Or do you get short-term pricing pressure just because people are -- have more time to sit and think about it and compete for it and, obviously, no scarcity of resources?

Peter J. Burlage

Well, absolutely. I mean, it's a typical sales cycle out there that allow people to continue to -- and even competitors like ourselves, we're looking for that opportunity to come up with more. We try to do something to get the order solidified. And there is -- I will say there is one exception to that, and that is still the oil sands in Canada. I mean, our projects and stuff up there, it is -- their delays are due to the speed at which they're trying to get those projects installed and operating. Now those projects have continued to be -- they're resource constrained in order to get the oil sands projects moving forward, completed, and that's slowing down the speed at which those customers, those end use customers are buying equipment from us. So still strong pipeline. They still planning on building everything that they've got scheduled to build there in Western Canada. But the orders that we thought we're going to get here in this -- right at this end of the year, beginning of this -- the quarter we're in right now are looking to be towards the summertime. They're actually moving some of the projects from this current construction year into the next construction year due to the lack of resources. They had to install the equipment. And they're dealing with a little bit, I guess, muddier -- the construction season up there and operation season.

Shawn M. Severson - JMP Securities LLC, Research Division

Yes. And then just moving to China quickly. What's your best guess as far as how this kind of rolls out, I mean, the road map there of maybe stimulus plans in China, obviously, structured development on the nat gas side? I mean, clearly, nuclear. I'm just trying to get an understanding of the timing of this, when it might actually impact your business and your bookings there.

Peter J. Burlage

Well, I think as the -- we had a pretty decent improvement in the year-over-year performance out of Asia this year. I mean, they've done a pretty good job, and we're already seeing the contribution is increasing at a pretty good pace this year over last year coming out of China. The major West-to-East pipeline project that's going on in China, Phase III, we're in the midst of receiving some of those orders. I mean, that's a good jump for the bookings that took place in the second quarter as well as coming up in the -- well, there's some more to be let here in the -- in our third quarter. So those pipeline projects are buying right now. I mean, they're building up backlog. The nuclear side, the active job we did when and ordered at the end of second quarter for China, the next order is scheduled here in the spring to be released. And so that's putting work back into our shop there in China for filling that up. And the timing of that, we're going to go through this transition this summer to move from the current manufacturing facility to the new manufacturing facility. So we are trying to create a hole in our production cycle there to make that happen. And how we're doing that is pulling work forward in China as fast as we can to get it built in advance of delivery so that during the transition time we have a lower demand of -- urgency of getting equipment through to the shop. We're going to keep both of them running. Now our -- there'll be a period there we’ll have overlap with both facilities running, finishing up jobs in the old facility while starting new jobs in the new facility. But that is going to create some challenges for us in this -- basically the beginning of the first quarter of next fiscal year.

Shawn M. Severson - JMP Securities LLC, Research Division

All right. And then just lastly, as China does become -- resurging here as an impact factor, what's the margin change, if any, versus kind of again that 30% to 32%? And as the international business in general grows but, obviously, specifically, China, and there's going to be "nuclear" there, which should be a favorable mix, but is there any reason to think that, that changes in that margin target is different than what you've seen in the past?

Peter J. Burlage

Well, the -- I think China -- certainly, we have the nuclear business, which has a much stronger margin than the pressure products business there. And then we -- the sales staff that we have in China are very petrochemical centric, and so there are some good projects within that. But I think your China margin, if the nuclear gets back -- and then now what's happening here, that's one of the challenges to answer this question, is -- we're seeing a pretty good growth rates in our -- significantly better growth rate in our pressure products type -- or Process Products-type equipment than we are in the nuclear. So the Process Products is making up a bigger and bigger percentage of our revenue out of China all the time. So I don't think you're going to be looking at the -- a very significant higher margin coming out of China than the mix of projects coming out of the United States. They're going to be a little bit stronger in the near term. We'll see how the competitive pressures continue to evolve in China. But currently, the margins are staying probably in that above 32% margin range, and we expect it to stay there over the coming year.

Operator

Your next question comes from the line of Tim Mulrooney from William Blair.

Tim Mulrooney

First question. The 14% of projects that remain on customer hold within your backlog, is that all related to this Latin American project? Or is that multiple projects?

Peter J. Burlage

No, that all relates to Latin America.

Tim Mulrooney

Okay. And that Latin American project now seems pulled out of your guidance for 2013. Does that mean it's kind of being pushed out into fiscal 2014 at this point?

Peter J. Burlage

We're -- this is -- it becomes a -- it's a weekly conversation with the customer on exactly what the timing will look like. It's a -- we're seeing positive developments as far as that project moving forward. I think right now, it's -- we're -- we'll be pleasantly surprised if we can move it forward in the next -- within the next 2 quarters. I think more likely, the more meaningful part of that revenue is going to be recognized 2014. The delays that we've had to date on just the simple design of what they think they'll eventually build is going to require a certain amount of redesign period, which will delay how much we can recognize in revenue in the next 2 quarters.

Tim Mulrooney

Yes.

Peter J. Burlage

And this unit is going to have to go through an engineering -- reengineering process here. So it's -- so any revenue opportunity we're looking at for this fiscal year is going to be predominantly related to the engineering work that goes on. Just the simple fact of the changes that they are proposed to put in place is going to push the revenue for equipment likely into next fiscal year. Maybe some, but they're going to have to get moving really fast in order to get that into this fiscal year.

Ronald L. McCrummen

It's frustrating. But at the same time, I might -- we're the exact right people for this job because we can bring the technical expertise to help them adjust to figure out where they're going and how to get it done. So we're working very closely with them to see if we can help them be successful.

Tim Mulrooney

And then I guess your Environmental segment where we saw that $7.5 million order for the SCR systems, and that looked great. But looking at your bookings, still pretty low compared to historical bookings. As we look into the back half of fiscal 2013, are you expecting a similar level of environmental revenue? Or would you -- would we see, I guess, a material pickup? Or what are your expectations for this segment in the back half of the year?

Ronald L. McCrummen

The -- I'll throw out comments and I'll let Peter jump in on -- from his perspective. I think the -- earlier, back in September, we thought revenue would be flat for the Environmental segment if we looked at for the full fiscal year. If I look at it on a year-to-date basis, we're down about $4 million year-over-year in that particular segment. With the projects -- couple of projects that we announced earlier this week have very quick turnarounds. And so we will be able to recognize a good portion of that revenue over the next 2 quarters. I do think we'll see a -- we'll move closer to flat is my current expectations with regard to full year revenue on our Environmental Systems segment. I -- if -- the bookings will continue to be lumpy, as you're seeing right now. I think we've said a couple of quarters ago that for a period of time, I think you look at this segment and say it's going to range -- bookings are probably going to be -- are going to average out for the next several quarters maybe $5 million to $7 million. But where are they going to fall? I think that's about where you're seeing the range fall if you look at how what we're doing this quarter combined with the previous 2. I think we're kind of getting into that range. But it's very lumpy. The projects are large, and they come in a...

Peter J. Burlage

Spaced out.

Ronald L. McCrummen

They come in there spaced out. So it's very difficult to predict timing.

Tim Mulrooney

Okay, that's great. And then I know this is asked every quarter, but I got to ask it again. Do you have any update on the CEFCO opportunity at this point?

Peter J. Burlage

I think there's some progress being made there by CEFCO. We're in dialogue with a potential host site for a small pilot facility. So there has been progress made over this last quarter at CEFCO. So from that aspect, we're excited. But it's too early to absolutely conclude that it's a done deal from that pilot capability. But they have made some progress during this last quarter.

Operator

[Operator Instructions] Your next question comes from the line of David Cohen from Minerva Advisors.

David Peter Cohen - Minerva Advisors LLC

Couple of things. First, just going back to this issue of OpEx growth. The script -- well, you have said that you're adjusting resources to temper the financial effect of order delays, and yet there's no change in the OpEx growth outlook, I think I heard Ron say. I'm trying to -- and you're forecasting second half gross margins below the first half. So I'm just trying to understand, if you're adjusting resources to temper the financial effect, where does that show up in the guidance?

Ronald L. McCrummen

I'll -- so as it relates to OpEx, so part of what we will -- huh?

Peter J. Burlage

I was just going to say, just the guidance that we give is revenues and gross margins. We don't have any guidance on OpEx.

Ronald L. McCrummen

The -- so David, as we think about that -- those expenditures or that mix over the balance of the year, I am taking into consideration where we're sitting at on a year-to-date basis as well. So our expectation is that we will bring down sequentially over the balance of the year, but we've got to -- year-over-year, we are sitting up already above the -- I think it's about $1 million on our operating expenses year-over-year on a non-GAAP basis.

David Peter Cohen - Minerva Advisors LLC

Okay. So what I'm hearing is, if we're to see any change on the OpEx line, it's really going to be 4Q versus 3Q?

Ronald L. McCrummen

Yes, absolutely true. I think it's going to -- we're looking to take it out as quickly as possible, but it's -- I think the benefit is going to be more in Q4.

David Peter Cohen - Minerva Advisors LLC

Okay, all right. And the other question is, I'm embarrassed to say I don't know this, but if we were to wake up next month, let's say, and see that the Keystone pipeline was pretty much approved, the -- what -- does that have any impact on us over the next 12 to 18 months?

Peter J. Burlage

Not much. The Keystone -- I mean, the -- it has -- because it's predominantly liquids, there isn't much of an impact for us.

David Peter Cohen - Minerva Advisors LLC

And you don't think there -- is there a second order impact as it's built out? Does it create other opportunities for us?

Peter J. Burlage

I mean, it probably gives a -- opens some opportunity to move other products in the same area. But it would be probably third -- 2 degree -- at least 2 degrees of separation away from that. I guess it -- it probably drives -- okay -- well, let me add just -- it probably drives opportunity in the Gulf Coast with regard to refinery facilities being modified and expanding their capacity. But I think that would be where our opportunity would come, is in the -- in any kind of expansion, retrofit-type projects inside of the refinery we get an opportunity to work on.

David Peter Cohen - Minerva Advisors LLC

But that's obviously more than a 12- to 18-month revenue event?

Peter J. Burlage

Well, yes, they'll be -- they'll start the expansion of those facilities, obviously, before the pipeline is built. But they don't have to have that until the pipeline's there. So they got a little time to get their -- I mean, they're going to be working on their projects, sourcing them and building them before -- until they've got it, until the pipeline's flowing before they have to have their facilities expanded.

Operator

That concludes the Q&A portion of the conference. We have no more questions in the queue. I would now like to turn the conference over to Mr. Peter Burlage for any closing remarks.

Peter J. Burlage

I just want to thank all of you for participating today in the conference call. We appreciate your time and your interest in PMFG. We look forward to speaking with you on the third quarter call. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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