FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5356
PENN ENGINEERING & MANUFACTURING CORP.
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(Exact name of registrant as specified in its charter)
Delaware 23-0951065
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 1000, Danboro, Pennsylvania 18916
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(Address of principal executive offices) (Zip Code)
(215) 766-8853
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 3,350,164 shares of Class A
common stock, $.01 par value, and 13,910,326 shares of common stock, $.01 par
value, outstanding on May 10, 2001.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
PENN ENGINEERING & MANUFACTURING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
THREE MONTHS ENDED
(unaudited)
March 31, December 31,
2001 2000
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CURRENT ASSETS
Cash and cash equivalents $ 13,557 $ 3,550
Short-term investments 1,675 3,064
Accounts receivable - net 46,786 43,039
Inventories 53,096 46,847
Other current assets 5,381 5,139
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Total current assets 120,495 101,639
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PROPERTY
Property, plant & equipment 164,243 153,811
Less accumulated depreciation 71,360 69,524
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Property - net 92,883 84,287
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GOODWILL 27,091 20,570
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OTHER ASSETS 3,400 3,500
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TOTAL $243,869 $209,996
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 11,256 $ 10,612
Bank debt 21,478 2,783
Dividends payable 1,378
Accrued expenses:
Pension & profit sharing 2,215 3,106
Payroll & commissions 5,297 4,712
Other 7,111 1,890
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Total current liabilities 48,735 23,103
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ACCRUED PENSION COST 5,965 5,965
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DEFERRED INCOME TAXES 4,638 4,640
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LONG-TERM BANK DEBT 2,662 0
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STOCKHOLDERS' EQUITY
Common stock 146 146
Class A common stock 35 35
Additional paid-in capital 38,048 37,646
Retained earnings 151,516 145,339
Accumulated other comprehensive loss (2,440) (1,442)
Treasury stock (5,436) (5,436)
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Total stockholders' equity 181,869 176,288
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TOTAL $243,869 $209,996
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See Notes to Condensed Consolidated Financial Statements
PENN ENGINEERING & MANUFACTURING CORP.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME
(Dollars in thousands except per share amounts)
THREE MONTHS ENDED
(unaudited)
March 31, March 31,
2001 2000
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Net Sales $ 68,127 $ 65,137
Cost of Products Sold 44,263 44,060
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Gross Profit 23,864 21,077
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Selling Expenses 6,584 6,540
General and Administrative Expenses 6,430 5,726
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Operating Profit 10,850 8,811
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Other Income (Expense):
Interest income 114 134
Interest expense (295) (422)
Other, net 523 97
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Total Other Income (Expense) 342 (191)
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Income Before Income Taxes 11,192 8,620
Provision for Income Taxes 3,637 2,975
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Net Income $ 7,555 $ 5,645
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PER SHARE DATA:
Basic earnings $0.44 $0.33
Diluted earnings $0.43 $0.33
Cash dividends declared $0.08 $0.06
See Notes to Condensed Consolidated Financial Statements
PENN ENGINEERING & MANUFACTURING CORP.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Dollars in thousands)
THREE MONTHS ENDED
(unaudited)
March 31, March 31,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,555 $ 5,645
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,525 2,240
Amortization 269 270
(Decrease) increase in deferred income taxes - noncurrent (2) 321
Foreign currency transaction gains (623) 0
Loss on disposal of property 7 20
Changes in assets and liabilities:
Increase in receivables (3,448) (6,227)
(Increase) decrease in inventories (6,156) 3,433
Increase in other current assets (141) (2,237)
Decrease in other assets 100 150
Increase in accounts payable 186 569
Increase in accrued expenses 4,696 3,679
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Net cash provided by operating activities 4,968 7,863
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (2,721) (2,065)
Acquisitions of businesses (net of cash acquired) (17,436) 0
Proceeds from disposal of held-to-maturity investments 1,383 2,609
Proceeds from disposal of property 165 46
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Net cash (used in) provided by investing activities (18,609) 590
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 19,486 2,732
Net long-term borrowings (repayments) 2,820 (7,500)
Issuance of common stock 401 0
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Net cash provided by (used in) financing activities 22,707 (4,768)
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Effect of exchange rate changes on cash 941 72
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Net increase in cash and cash equivalents 10,007 3,757
Cash and cash equivalents at beginning of period 3,550 4,231
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Cash and cash equivalents at end of period $13,557 $ 7,988
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See Notes to Condensed Consolidated Financial Statements
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
Note 1. Condensed Consolidated Financial Statements (Unaudited)
The accompanying interim financial statements should be read in conjunction with
the annual financial statements and notes thereto included in the Company's
Annual Report for the year ended December 31, 2000. The information contained in
this report is unaudited and subject to year-end audit and adjustment. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) have been made which are necessary for a fair presentation of the
Company's consolidated financial position at March 31, 2001 and 2000 and the
consolidated statements of income and cash flows for the three-month periods
then ended. The results of operations for the three months ended March 31, 2001
are not necessarily indicative of the results of operations to be expected for
the year ending December 31, 2001.
Note 2. Inventories
Substantially all of the Company's domestic fastener inventories are priced on
the last-in, first-out (LIFO) method, at the lower of cost or market. The
remainder of the inventories are priced on the first-in, first-out (FIFO)
method, at the lower of cost or market.
Inventories are as follows: (Dollars in thousands)
(unaudited)
March 31, December 31,
2001 2000
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Raw material $ 7,162 $ 6,157
Tooling 4,160 4,145
Work-in-process 13,641 12,828
Finished goods 28,133 23,717
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TOTAL $53,096 $46,847
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If the FIFO method of inventory valuation had been used by the Company for all
inventories, inventories would have been $10,584,000 and $10,322,000 higher than
reported at March 31, 2001 and December 31, 2000, respectively, and net income
would have been $177,000 and $156,000 higher than reported for the three months
ended March 31, 2001 and 2000, respectively. Other assets consist of long-term
tooling inventory totaling $3,400,000 and $3,500,000 at March 31, 2001 and
December 31, 2000, respectively.
Note 3. Bank Debt
As of March 31, 2001, the Company has three unsecured line-of-credit facilities
available. All lines-of-credit bear interest at interest rate options provided
in the facilities. The first line-of-credit facility permits maximum borrowings
of $15,000,000, due on demand. At March 31, 2001, $8,106,000, bearing interest
at 5.05%, was outstanding on this facility. The availability of funds under this
facility is periodically reviewed by the bank. The second line-of-credit
facility permits borrowings of up to $10,000,000 and expires on September 30,
2001 unless extended by the bank. At March 31, 2001 there was no amount
outstanding on this facility. In addition to the above short-term lines of
credit, the Company has an unsecured line of credit with a bank that permits
borrowings of up to $30,000,000 to finance acquisitions. At March 31, 2001,
$8,047,000, bearing interest at 5.20%, was outstanding on this facility and has
been classified as short-term debt. The acquisition line of credit requires the
Company to comply with certain financial covenants. At March 31, 2001 the
Company was in compliance with all financial covenants. The Company also has a
commercial loan outstanding as of March 31, 2001 for a total amount of
$7,988,000 which was used to fund the purchase of Precision Steel. As of March
31, 2001, the loan consists of a short-term amount of $5,325,000 and a long-term
amount of $2,662,000. The interest rate on the loan is 5.45%.
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
Note 4. Comprehensive Income
Total comprehensive income amounted to $6,557,000 and $5,464,000 for the three
months ended March 31, 2001 and 2000, respectively.
Note 5. Accounting for Derivative Instruments and Hedging Activities
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities". The adoption of this standard did not have a material impact on the
quarterly consolidated financial position or results of operations for the
Company.
Note 6. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 7. Acquisition
On February 5, 2001, the Company acquired all of the issued and outstanding
capital stock of Precision Steel Holdings Limited and its subsidiary, Precision
Steel Components Limited (Precision Steel). The acquisition was accounted for
using the purchase method. The purchase price of approximately $17,436,000
consisted of cash, the assumption of certain liabilities, and acquisition
related expenses. The results of the operations of Precision Steel have been
included in the accompanying consolidated statement of income since the
acquisition date. The purchase price has been preliminarily allocated to;
accounts receivable - $812,000, inventory - $370,000, property - $9,039,000,
other current assets - $110,000, and goodwill - $7,105,000. Goodwill will be
amortized using the straight - line method over a period of 20 years.
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
Note 8. Segment Information
Effective January 1, 2001, the Company reorganized its operations and
implemented a new internal reporting system. As a result of this reorganization,
the Company has subdivided what was previously called the fasteners segment into
two reportable segments - fasteners (which includes the results of PEM Fastening
Systems and Atlas Engineering) and distribution (which includes the results of
the Arconix Group). There is no change in the motor segment (which includes the
results of Pittman). Due to the nature of this change, it is impracticable to
restate prior years segment data in a manner consistent with current year data.
Segment data reported in a manner consistent with prior years is as follows:
(Dollars in Thousands)
THREE MONTHS ENDED THREE MONTHS ENDED
March 31, 2001 March 31, 2000
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Fasteners Motors Fasteners Motors
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Revenues from external customers $57,205 $10,922 $54,931 $10,206
Operating profit 11,683 603 7,838 973
Segment data reported under the new method of internal reporting is as follows:
(Dollars in Thousands)
THREE MONTHS ENDED
March 31, 2001
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Fasteners Distribution Motors
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Revenues from external customers $44,784 $12,421 $10,922
Intersegment revenues 9,212
Operating profit 10,856 827 603
A reconciliation of combined operating profit for the reportable segments to
consolidated income before income taxes is as follows:
THREE MONTHS ENDED
March 31, March 31,
2001 2000
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Total profit for reportable segments $12,286 $8,811
Unallocated corporate expenses (1,436)
Other income (expense) 342 (191)
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Income before income taxes $11,192 $8,620
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PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
Note 9. Earnings Per Share Data
The following table sets forth the computation of basic and diluted earnings per
share for the periods indicated. All share and per share amounts have been
adjusted to account for the two-for-one stock split in the form of a 100% stock
dividend that was issued on May 1, 2001.
THREE MONTHS ENDED
March 31, March 31,
2001 2000
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(In Thousands, except per share data)
Basic:
Net income $ 7,555 $ 5,645
Average shares outstanding 17,207 17,123
Basic EPS $ 0.44 $ 0.33
Diluted:
Net income $ 7,555 $ 5,645
Average shares outstanding 17,207 17,123
Net effect of dilutive stock options - based on treasury
stock method 490 68
Totals 17,697 17,191
Diluted EPS $ 0.43 $ 0.33
Note 10. Reclassifications
Certain reclassifications have been made to prior year amounts and balances to
conform with the 2001 presentation.
PENN ENGINEERING & MANUFACTURING CORP.
March 31, 2001
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Quarter Ended March 31, 2001 vs. Quarter Ended March 31, 2000
Consolidated net sales for the quarter ended March 31, 2001 were $68.1
million, versus $65.1 million for the quarter ended March 31, 2000, a 4.6%
increase. Net sales to customers outside the United States for the quarter ended
March 31, 2001 were $18.1 million, versus $16.8 million for the quarter ended
March 31, 2000, a 7.7% increase. Net sales for the fastener and distribution
operations for the quarter ended March 31, 2001 were $57.2 million, versus $54.9
million for the quarter ended March 31, 2000, a 4.2% increase. Motor net sales
were $10.9 million for the quarter ended March 31, 2001, versus $10.2 million
recorded for the quarter ended March 31, 2000, a 6.9% increase.
Within the fastener and distribution operations sales volume increased 7.2% from
the first quarter of 2000 to the first quarter of 2001. Price increases
averaging 3.2% were put into effect in the fourth quarter of 2000, however the
effect of these increases was mitigated in the first quarter of 2001 due
especially to currency fluctuations in Europe as a result of the strong dollar
and a shift in mix in North America to lower priced fasteners. Within the North
American region, the number of fastener units sold increased 4.6% in the first
quarter of 2001 compared to the first quarter of 2000 while in the European
market the number of units sold increased 18.3% during the same period. The
Asia-Pacific market saw sales volume decrease 2.8% from the first quarter of
2000 to the first quarter of 2001. In general, the fastener and distribution
operations began to feel the effects of the current economic slowdown late in
the first quarter of 2001 with the exception of the European markets where sales
continue to be strong. Within the motor division the number of motors sold
increased 2.5% in the first quarter of 2001 compared to the first quarter of
2000. The majority of the increase occurred within the higher priced brushless
product line which resulted in an increase in the average unit selling price of
approximately 4.4%.
Consolidated gross profit for the first quarter of 2001 was $23.9 million,
versus $21.1 million for the first quarter of 2000, an increase of 13.3%. Motor
gross profit increased 4.1% from the first quarter of 2000 to the first quarter
of 2001 while the remainder of the consolidated gross profit increase occurred
in the fastener division. The fastener division continues to benefit from stable
raw material prices and increased capacity utilization as well as productivity
improvements.
Consolidated selling, general, and administrative expenses ("SG&A") for the
first quarter of 2001 were $13.0 million (19.1% of net sales), versus $12.3
million (18.8% of net sales) for the first quarter of 2000. Specifically, the
Company saw increases in the areas of information technology, insurance costs,
and legal and professional fees.
Consolidated net income for the first quarter of 2001 was $7.6 million, versus
$5.6 million for the first quarter of 2000. The Company incurred $295,000 of
interest expense in the first quarter of 2001 compared to $422,000 in the first
quarter of 2000 related to loans outstanding to finance acquisitions.
PENN ENGINEERING & MANUFACTURING CORP.
March 31, 2001
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
Liquidity and Capital Resources
Net cash provided by operations totaled $5.0 million for the three months ended
March 31, 2001. Funds from operations were sufficient to pay for capital
expenditures other than the acquisition of Precision Steel which was funded
through borrowings. Accordingly, the Company anticipates that its existing
capital resources and cash flow generated from future operations will enable it
to maintain its current level of operations and its planned growth for the
foreseeable future.
Forward-Looking Statements
Forward-looking statements are made throughout this Management's Discussion and
Analysis. The Company's results may differ materially from those in the
forward-looking statements. Forward-looking statements are based on management's
current views and assumptions, and involve risks and uncertainties that
significantly affect expected results. For example, operating results may be
affected by external factors such as: changes in laws and regulations, changes
in accounting standards, fluctuations in the cost and availability of the supply
chain resources, and foreign economic conditions, including currency rate
fluctuations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
There have been no material changes to Part 2, Item 7A of the Company's Form
10-K Annual Report for the year ended December 31, 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Part 1, Item 3 of the Company's Form 10-K Annual Report for
the year ended December 31, 2000.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
The Board of Directors of the Company declared a 2 for 1 stock split of its
Common Stock and Class A Common Stock in the form of a 100 percent stock
dividend for both classes payable on May 1, 2001 to stockholders of record as of
the close of business on April 11, 2001.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Description
3.1 Restated Certificate of Incorporation, as amended.
3.2 By-laws, as amended (Incorporated by reference to Exhibit 3(ii)
of the Company's Form 10-K Annual Report for the fiscal year
ended December 31, 1994.)
(b) Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Penn Engineering & Manufacturing Corp.
Dated: May 14, 2001 By: /s/ Kenneth A. Swanstrom
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Kenneth A. Swanstrom
Chairman/CEO
Dated: May 14, 2001 By: /s/ Mark W. Simon
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Mark W. Simon
Senior Vice President/CFO
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