SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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 1-5356
PENN ENGINEERING & MANUFACTURING CORP.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-0951065
--------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 1000, DANBORO, PENNSYLVANIA 18916
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 766-8853
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------------------------------------------------------------------------
(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
----- -----
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 14,035,881 shares of common stock, $.01 par
value, outstanding on May 10, 2002.
Page 1 of 11 pages.
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
PENN ENGINEERING & MANUFACTURING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
------
(UNAUDITED)
CURRENT ASSETS MARCH 31, 2002 DECEMBER 31, 2001
Cash and cash equivalents $ 9,553 $ 8,421
Short-term investments 710 717
Accounts receivable-net 27,005 26,648
Inventories 63,134 61,646
Refundable income taxes 1,105 5,650
Other current assets 1,129 1,759
-------- --------
Total current assets 102,636 104,841
-------- --------
PROPERTY
Property, plant & equipment 167,999 170,101
Less accumulated depreciation 78,630 77,168
-------- --------
Property - net 89,369 92,933
-------- --------
GOODWILL, NET 25,783 25,860
-------- --------
OTHER ASSETS 6,488 5,192
-------- --------
TOTAL $224,276 $228,826
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 4,154 $ 4,146
Bank debt 12,042 12,664
Dividends payable 1,388 1,386
Accrued expenses:
Pension & profit sharing 763 1,114
Payroll & commissions 2,502 2,242
Other 2,608 2,744
-------- --------
Total current liabilities 23,457 24,296
-------- --------
ACCRUED PENSION COST 5,934 5,934
-------- --------
DEFERRED INCOME TAXES 6,168 6,170
-------- --------
LONG-TERM BANK DEBT 9,000 12,000
-------- --------
STOCKHOLDERS' EQUITY
Common stock 147 147
Class A common stock 35 35
Additional paid-in capital 39,859 39,424
Retained earnings 148,073 149,090
Accumulated other comprehensive loss (2,961) (2,834)
Treasury stock (5,436) (5,436)
-------- --------
Total stockholders' equity 179,717 180,426
-------- --------
TOTAL $224,276 $228,826
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
PENN ENGINEERING & MANUFACTURING CORP.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME
(Dollars in thousands except per share amounts)
THREE MONTHS ENDED
------------------
(UNAUDITED)
MARCH 31, 2002 MARCH 31, 2001
-------------- --------------
NET SALES $35,331 $68,127
COST OF PRODUCTS SOLD 24,023 44,263
------- -------
GROSS PROFIT 11,308 23,864
SELLING EXPENSES 4,768 6,584
GENERAL AND ADMINISTRATIVE EXPENSES 5,705 6,430
------- -------
OPERATING INCOME 835 10,850
------- -------
OTHER (EXPENSE) INCOME:
Interest income 16 114
Interest expense (193) (295)
Other, net (136) 523
------- -------
TOTAL OTHER (EXPENSE) INCOME (313) 342
------- -------
INCOME BEFORE INCOME TAXES 522 11,192
PROVISION FOR INCOME TAXES 151 3,637
------- -------
NET INCOME $ 371 $ 7,555
======= =======
PER SHARE DATA:
Basic earnings $0.02 $0.44
===== =====
Diluted earnings $0.02 $0.43
===== =====
Cash dividends declared $0.08 $0.08
===== =====
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
PENN ENGINEERING & MANUFACTURING CORP.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Dollars in thousands)
THREE MONTHS ENDED
-------------------------------
(UNAUDITED)
MARCH 31, 2002 MARCH 31, 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 371 $ 7,555
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,594 2,525
Amortization 3 269
(Decrease) in deferred income taxes-noncurrent (2) (2)
Foreign currency transaction losses (gains) 26 (623)
(Gain) loss on disposal of property (2) 7
Changes in assets and liabilities:
Increase in receivables (354) (3,448)
Increase in inventories (1,458) (6,156)
Decrease in refundable income taxes 4,545 0
Decrease (increase) in other current assets 624 (141)
Decrease in other assets 0 100
Increase in accounts payable 13 186
(Decrease) increase in accrued expenses (225) 4,696
------- --------
Net cash provided by operating activities 6,135 4,968
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (403) (2,721)
Acquisitions of businesses (net of cash acquired) 0 (17,436)
Proceeds from disposal of held-to-maturity investments 0 1,383
Proceeds from disposal of property 7 165
------- --------
Net cash used in investing activities (396) (18,609)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term (repayments) borrowings (3,622) 19,486
Net long-term borrowings 0 2,820
Dividends paid (1,386) 0
Issuance of common stock 435 401
------- --------
Net cash (used in) provided by financing activities (4,573) 22,707
------- --------
Effect of exchange rate changes on cash (34) 941
------- --------
Net increase in cash and cash equivalents 1,132 10,007
Cash and cash equivalents at beginning of period 8,421 3,550
------- --------
Cash and cash equivalents at end of period $ 9,553 $ 13,557
======= ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
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, 2001. 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, 2002 and 2001 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, 2002
are not necessarily indicative of the results of operations to be expected for
the year ending December 31, 2002.
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, 2002 DECEMBER 31, 2001
-------------- -----------------
Raw material $ 5,586 $ 5,697
Tooling 4,664 4,330
Work-in-process 10,435 10,417
Finished goods 42,449 41,202
------- -------
TOTAL $63,134 $61,646
======= =======
If the FIFO method of inventory valuation had been used by the Company for
all inventories, inventories would have been $10,802,000 and $10,618,000 higher
than reported at March 31, 2002 and December 31, 2001, respectively, and net
income would have been $131,000 and $177,000 higher than reported for the three
months ended March 31, 2002 and 2001, respectively. Long-term tooling inventory
totaling $3,000,000 at March 31, 2002 and December 31, 2001 is included in Other
Assets.
NOTE 3. BANK DEBT
-----------------
As of March 31, 2002, the Company has six unsecured line-of-credit
facilities available. All lines-of-credit bear interest at interest rate options
provided in the facilities and are reviewed annually by the banks for renewal.
The first two facilities are working capital facilities. The first one permits
maximum borrowings of $15,000,000, due on demand. At March 31, 2002, there was
no outstanding amount on this facility. The second working capital facility
permits borrowings of up to $10,000,000. At March 31, 2002, a total amount of
$1,000,000 was outstanding on this facility at a rate of 2.58%. The third
facility is a general facility that allows for borrowings of up to $40,000,000.
As of March 31, 2002, a total amount of $42,000 is outstanding on this facility
at a rate of 2.37%. The fourth facility allows for borrowings of up to
$12,000,000. A $12,000,000 term loan is currently outstanding on this facility
at a rate of 3.6%. This loan is payable in 12 equal monthly installments
commencing January 31, 2003 with the final payment due and payable on December
31, 2003 therefore, $9,000,000 of this loan is classified as long-term debt.
In addition to the above facilities, the Company has two acquisition lines
available. The first one permits borrowings of up to $15,000,000 to finance
acquisitions. At March 31, 2002, $8,000,000, bearing interest at 2.56%, was
outstanding on this facility. The second acquisition line has a zero balance as
of March 31, 2002, but permits borrowings of up to $30,000,000. At March 31,
2002, the acquisition lines of credit described above have been classified as
short-term debt.
These line of credit facilities require the Company to comply with certain
financial covenants. At March 31, 2002 the Company was in compliance with all
financial covenants.
5
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 4. COMPREHENSIVE INCOME
----------------------------
Total comprehensive income amounted to $244,000 and $6,557,000 for the
three months ended March 31, 2002 and 2001, respectively.
NOTE 5. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------------------------
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 141 ("SFAS No. 141"), "Business Combinations", Statement of
Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and other
Intangible Assets", and Statement of Financial Accounting Standards No. 144
("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting. SFAS No.
142 establishes new accounting and reporting standards for goodwill and
intangible assets. SFAS No. 142 requires that goodwill and intangible assets
deemed to have indefinite lives no longer be amortized but be subject to an
annual impairment test in accordance with SFAS No. 142. Other intangible assets
will continue to be amortized over their useful lives. Application of the
nonamortization provisions of SFAS No. 142 for the three months ended March 31,
2001 would have resulted in an increase in net income of approximately $181,000
or $.01 per diluted share. The Company will perform the first of the required
impairment tests of goodwill as of January 1, 2002 and has not yet determined
what the effect of this test will be on the earnings and financial position of
the Company. SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. 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.
6
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 7. SEGMENT INFORMATION
---------------------------
(Dollars in Thousands)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
FASTENERS DISTRIBUTION MOTORS FASTENERS DISTRIBUTION MOTORS
--------- ------------ ------ --------- ------------ ------
Revenues from external customers $19,475 $ 8,315 $ 7,541 $44,784 $12,421 $10,922
Intersegment revenues 4,927 9,225
Operating profit 795 371 323 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, 2002 MARCH 31, 2001
-------------- --------------
Total profit for reportable segments $ 1,489 $ 12,286
Unallocated corporate expenses (654) (1,436)
Other income (expense) (313) 342
------- --------
Income before income taxes $ 522 $ 11,192
======= ========
NOTE 8. 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, 2002 MARCH 31, 2001
-------------- --------------
(In Thousands, except per share data)
Basic:
Net income $ 371 $ 7,555
Average shares outstanding 17,339 17,207
------- -------
Basic EPS $ 0.02 $ 0.44
======= =======
Diluted:
Net income $ 371 $ 7,555
======= =======
Average shares outstanding 17,339 17,207
Net effect of dilutive stock options-based on treasury
stock method 329 490
------- -------
Totals 17,668 17,697
======= =======
Diluted EPS $ 0.02 $ 0.43
======= =======
NOTE 9. RECLASSIFICATIONS
-------------------------
Certain reclassifications have been made to prior year amounts and balances
to conform with the 2002 presentation.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS.
--------------
PENN ENGINEERING & MANUFACTURING CORP.
MARCH 31, 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
QUARTER ENDED MARCH 31, 2002 VS. QUARTER ENDED MARCH 31, 2001
--------------------------------------------------------------
Consolidated net sales for the quarter ended March 31, 2002 were $35.3
million, versus $68.1 million for the quarter ended March 31, 2001, a 48.2%
decrease. Net sales to customers outside the United States for the quarter ended
March 31, 2002 were $12.0 million, versus $18.1 million for the quarter ended
March 31, 2001, a 33.7% decrease. Net sales for the fastener segment for the
quarter ended March 31, 2002 were $19.5 million, versus $44.8 million for the
quarter ended March 31, 2001, a 56.5% decrease. Motor segment net sales were
$7.5 million for the quarter ended March 31, 2002, versus $10.9 million recorded
for the quarter ended March 31, 2001, a 31.2% decrease. Net sales for the
distribution segment for the quarter ended March 31, 2002 were $8.3 million,
versus $12.4 million for the quarter ended March 31, 2001, a 33.1% decrease.
Within the fastener and distribution operations, sales volume decreased
53.6% from the first quarter of 2001 to the first quarter of 2002. Approximately
60% of the sales of these segments is in the telecommunications,
datacommunications, and computer markets, all of which experienced a steep
decline during the latter half of 2001. Within the North American region, the
number of fastener units sold decreased 63.0% in the first quarter of 2002
compared to the first quarter of 2001 while in the European market the number of
units sold decreased 38.2% during the same period. In both these regions, the
recovery will be slow due to a high amount of inventory as well as the
persistent slowdown in the markets served by the Company. The Asia-Pacific
market, however, saw sales volume increase 9.7% from the first quarter of 2001
to the first quarter of 2002. Sales were weak in this region during 2001 and are
now returning to more normal levels. Within the motor division the number of
motors sold decreased 29.9% in the first quarter of 2002 compared to the first
quarter of 2001 while the average selling price per motor also decreased
approximately 1.5%. The majority of the motor segment sales are in the
semiconductor and data storage markets, which were significantly impacted by the
2001 recession. The decline in the average selling price was mainly due to an
increase in the percentage of lower priced brush motors sold in the first
quarter of 2002 compared to the first quarter of 2001.
Consolidated gross profit for the first quarter of 2002 was $11.3 million,
versus $23.9 million for the first quarter of 2001, a decrease of 52.7%. The
Company continues to implement cost reductions in line with the reduced sales
volume. The Company, however, has been forced to curtail production to a level
in which fixed costs constitute a much greater percentage of the unit cost than
in the prior year.
Consolidated selling, general, and administrative expenses ("SG&A") for the
first quarter of 2002 were $10.5 million, versus $13.0 million for the first
quarter of 2001, a 19.2% decrease. While SG&A expenses do not necessarily vary
directly with sales volume, the Company continues to monitor and reduce its
SG&A expenses in response to the changing business conditions.
Consolidated net income for the first quarter of 2002 was $371,000, versus
$7.6 million for the first quarter of 2001. The Company incurred other expenses
of $136,000 in 2002 versus other income of $523,000 in 2001 mainly due to
unfavorable currency fluctuations during the first quarter of 2002.
8
PENN ENGINEERING & MANUFACTURING CORP.
MARCH 31, 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash provided by operations totaled $6.1 million for the three months
ended March 31, 2002 versus $5.0 for the three months ended March 31, 2001.
Funds from operations were sufficient to pay for capital expenditures and also
to repay some of the Company's debt. 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, 2001.
9
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, 2001.
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
-------------------------
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
a) Exhibits
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 of the Company's Form 10-Q
Quarterly Report for the period ended March 31, 2001.)
3.2 By-laws, as amended (Incorporated by reference to
Exhibit 3.2 of the Company's Form 10-K Annual Report
for the year ended December 31, 2001.)
b) Reports on Form 8-K
None.
10
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, 2002 By: /s/ Kenneth A. Swanstrom
----------------------------------
Kenneth A. Swanstrom
Chairman/CEO
Dated: May 14, 2002 By: /s/ Mark W. Simon
----------------------------------
Mark W. Simon
Senior Vice President/CFO
11