Back to GetFilings.com
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 June 30, 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 14,041,405 shares of common stock, $.01 par
value, outstanding on August 9, 2002.
Page 1 of 18 pages.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
PENN ENGINEERING & MANUFACTURING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
------
(UNAUDITED)
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 14,480 $ 8,421
Short-term investments 184 717
Accounts receivable - net 27,422 26,648
Inventories 62,144 61,646
Refundable income taxes 818 5,650
Other current assets 1,015 1,759
-------- --------
Total current assets 106,063 104,841
-------- --------
PROPERTY
Property, plant & equipment 172,365 170,101
Less accumulated depreciation 82,320 77,168
-------- --------
Property - net 90,045 92,933
-------- --------
GOODWILL, NET 26,619 25,860
-------- --------
OTHER ASSETS 4,685 5,192
-------- --------
TOTAL $227,412 $228,826
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 4,909 $ 4,146
Bank debt 15,000 12,664
Dividends payable 1,397 1,386
Accrued expenses:
Pension & profit sharing 1,946 1,114
Payroll & commissions 2,471 2,242
Other 3,066 2,744
-------- --------
Total current liabilities 28,789 24,296
-------- --------
ACCRUED PENSION COST 5,009 5,934
-------- --------
DEFERRED INCOME TAXES 6,224 6,170
-------- --------
LONG-TERM BANK DEBT 6,000 12,000
-------- --------
STOCKHOLDERS' EQUITY
Common stock 148 147
Class A common stock 35 35
Additional paid-in capital 40,306 39,424
Retained earnings 147,670 149,090
Accumulated other comprehensive loss (1,333) (2,834)
Treasury stock (5,436) (5,436)
-------- --------
Total stockholders' equity 181,390 180,426
-------- --------
TOTAL $227,412 $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 SIX MONTHS ENDED
------------------ ----------------
(UNAUDITED) (UNAUDITED)
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------- ------------- ------------- -------------
NET SALES $38,004 $52,079 $73,335 $120,206
COST OF PRODUCTS SOLD 26,630 35,529 50,653 79,792
------- ------- ------- --------
GROSS PROFIT 11,374 16,550 22,682 40,414
SELLING EXPENSES 4,783 4,771 9,551 11,355
GENERAL AND ADMINISTRATIVE EXPENSES 6,095 6,307 11,800 12,737
------- ------- ------- --------
OPERATING PROFIT 496 5,472 1,331 16,322
------- ------- ------- --------
OTHER INCOME (EXPENSE):
Interest income 29 85 44 198
Interest expense (216) (225) (409) (520)
Other, net 1,084 117 949 640
------- ------- ------- --------
TOTAL OTHER INCOME 897 (23) 584 318
------- ------- ------- --------
INCOME BEFORE INCOME TAXES 1,393 5,449 1,915 16,640
PROVISION FOR INCOME TAXES 405 1,771 556 5,408
------- ------- ------- --------
NET INCOME $ 988 $ 3,678 $ 1,359 $ 11,232
======= ======= ======= ========
PER SHARE DATA:
Basic earnings $ 0.06 $ 0.21 $ 0.08 $ 0.65
======= ======= ======= ========
Diluted earnings $ 0.06 $ 0.21 $ 0.08 $ 0.63
======= ======= ======= ========
Cash dividends declared $ 0.08 $ 0.08 $ 0.16 $ 0.16
======= ======= ======= ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
PENN ENGINEERING & MANUFACTURING CORP.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Dollars in thousands)
SIX MONTHS ENDED
----------------
(UNAUDITED)
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,359 $ 11,232
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 5,203 4,999
Amortization 7 636
Deferred income taxes 53 (3)
Foreign currency transaction gains (305) (635)
Gain on disposal of property (1) (28)
Loss on disposal of investments 137 0
Changes in assets and liabilities:
Increase in receivables (309) (1,058)
Increase in inventories (43) (10,596)
Decrease in refundable income taxes 4,809 0
Decrease in other current assets 751 1,046
Decrease in other assets 500 100
Increase (decrease) in accounts payable 724 (1,918)
Increase (decrease) in accrued expenses 383 (126)
Decrease in accrued pension cost (925) 0
------- --------
Net cash provided by operating activities 12,343 3,649
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (1,027) (7,440)
Acquisitions of businesses (net of cash acquired) 0 (16,707)
Proceeds from disposal of held-to-maturity investments 0 2,225
Proceeds from disposal of available-for-sale investments 531 0
Proceeds from disposal of property 7 205
------- --------
Net cash used in investing activities (489) (21,717)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term (repayments) borrowings (3,664) 22,499
Dividends paid (2,768) (1,378)
Issuance of common stock 882 1,146
------- --------
Net cash (used in) provided by financing activities (5,550) 22,267
------- --------
Effect of exchange rate changes on cash (245) 170
------- --------
Net increase in cash and cash equivalents 6,059 4,369
Cash and cash equivalents at beginning of period 8,421 3,550
------- --------
Cash and cash equivalents at end of period $14,480 $ 7,919
======= ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 2002 and 2001 and the
consolidated statements of income and cash flows for the six-month periods then
ended. The results of operations for the three and six months ended June 30,
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 lower of last-in, first-out (LIFO) cost or market method. 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)
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Raw material $ 5,316 $ 5,697
Tooling 4,768 4,330
Work-in-process 10,374 10,417
Finished goods 41,686 41,202
------- -------
TOTAL $62,144 $61,646
======= =======
If the FIFO method of inventory valuation had been used for all inventories
by the Company, inventories would have been $10,986,000 and $10,618,000 higher
than reported at June 30, 2002 and December 31, 2001, respectively, and net
income would have been $262,000 and $387,000 higher than reported for the six
months ended June 30, 2002 and 2001, respectively. Long-term tooling inventory
totaling $2,500,000 and $3,000,000 at June 30, 2002 and December 31, 2001,
respectively, is included in Other Assets.
5
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 3. BANK DEBT
- ------------------
As of June 30, 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 June 30, 2002, there was no
outstanding amount on this facility. The second working capital facility permits
borrowings of up to $10,000,000. At June 30, 2002, $1,000,000, bearing interest
at 2.58%, was outstanding on this facility. The third facility is a general
facility that allows for borrowings up to $40,000,000. As of June 30, 2002,
there was no outstanding amount on this facility. 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 an interest 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, $6,000,000 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 June 30, 2002, $8,000,000, bearing interest at 2.56%, was
outstanding on this facility. The second acquisition line has a zero balance as
of June 30, 2002, but permits borrowings of up to $30,000,000. At June 30, 2002
borrowings on the first acquisition line 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 June 30, 2002 the Company is not in compliance with the
required financial covenants. However all banks involved have waived compliance
for the measurement period ended June 30, 2002.
NOTE 4. COMPREHENSIVE INCOME
- ----------------------------
Total comprehensive income amounted to $2,616,000 and $2,731,000 for the
three months ended June 30, 2002 and 2001, respectively and $2,860,000 and
$9,288,000 for the six months ended June 30, 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 and six months
ended June 30, 2001 would have resulted in an increase in net income of
approximately $244,000 ($.01 per diluted share) and $426,000 ($.02 per diluted
share) respectively. The Company has performed the first of the required
impairment tests of goodwill as of January 1, 2002 and this test did not result
in any impairment. 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
JUNE 30, 2002
NOTE 7. SEGMENT INFORMATION
- ---------------------------
(Dollars in Thousands)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
FASTENERS DISTRIBUTION MOTORS FASTENERS DISTRIBUTION MOTORS
--------- ------------ ------ --------- ------------ ------
Revenues from external customers $21,309 $ 8,975 $ 7,720 $35,570 $ 8,459 $8,050
Intersegment revenues 5,447 7,696
Operating profit (loss) 580 326 422 7,272 (181) 6
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
FASTENERS DISTRIBUTION MOTORS FASTENERS DISTRIBUTION MOTORS
--------- ------------ ------ --------- ------------ ------
Revenues from external customers $40,784 $17,290 $15,261 $80,354 $20,880 $18,972
Intersegment revenues 10,374 16,921
Operating profit 1,375 697 745 18,128 646 608
A reconciliation of combined operating profit for the reportable segments to
consolidated income before income taxes is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------- -------
2002 2001 2002 2001
------- ------- ------- -------
Total profit for reportable segments $ 1,328 $ 7,097 $ 2,817 $19,382
Unallocated corporate expenses (832) (1,625) (1,486) (3,060)
Other income (expense) 897 (23) 584 318
------- ------- ------- -------
Income before income taxes $ 1,393 $ 5,449 $ 1,915 $16,640
======= ======= ======= =======
7
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 8. EARNINGS PER SHARE DATA
- -------------------------------
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------- -------
2002 2001 2002 2001
------- ------- ------- -------
(In Thousands, except per share data)
Basic:
Net income $ 988 $ 3,678 $ 1,359 $11,232
Weighted average shares outstanding 17,385 17,265 17,362 17,236
------- ------- ------- -------
Basic EPS $ 0.06 $ 0.21 $ 0.08 $ 0.65
======= ======= ======= =======
Diluted:
Net income $ 988 $ 3,678 $ 1,359 $11,232
======= ======= ======= =======
Weighted average shares outstanding 17,385 17,265 17,362 17,236
Net effect of dilutive stock options-
based on treasury stock method 363 436 349 472
------- ------- ------- -------
Totals 17,748 17,701 17,711 17,708
======= ======= ======= =======
Diluted EPS $ 0.06 $ 0.21 $ 0.08 $ 0.63
======= ======= ======= =======
NOTE 9. RECLASSIFICATIONS
- -------------------------
Certain reclassifications have been made to prior year amounts and balances
to conform with the 2002 presentation.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
- -------------------------------------------------------------------------------
PENN ENGINEERING & MANUFACTURING CORP.
JUNE 30, 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2002 VS. QUARTER ENDED JUNE 30, 2001
- -----------------------------------------------------------
Consolidated net sales for the quarter ended June 30, 2002 were $38.0
million, versus $52.1 million for the quarter ended June 30, 2001, a decrease of
27.1%. Net sales to customers outside the United States for the quarter ended
June 30, 2002 were $12.4 million, versus $15.6 million for the quarter ended
June 30, 2001, a 20.5% decrease. Net sales for the fastener segment for the
quarter ended June 30, 2002 were $21.3 million, versus $35.6 million for the
quarter ended June 30, 2001, a 40.2% decrease. Motor segment net sales were $7.7
million for the quarter ended June 30, 2002, versus $8.1 million for the quarter
ended June 30, 2001, a 4.9% decrease. Net sales for the distribution segment for
the quarter ended June 30, 2002 were $9.0 million versus $8.5 million for the
quarter ended June 30, 2001, a 5.9% increase. This increase was mainly driven by
a large increase in sales in the Asia-Pacific market.
Within the fastener and distribution segments, sales volume decreased 29.6%
in the second quarter of 2002 compared to the second quarter of 2001. The major
markets served by the Company experienced a steep decline during the latter half
of 2001 and are only showing small signs of recovering during 2002. The expected
recovery in the fastener segment has been further hindered due to high inventory
levels at the Company's distributors. The number of fastener units sold within
North America decreased approximately 32.9% in the second quarter of 2002
compared to the second quarter of 2001 while the number of fastener units sold
into Europe decreased approximately 39.3% in the second quarter of 2002 compared
to the second quarter of 2001. The Asia-Pacific market however saw sales volume
increase approximately 78.0% from the second quarter of 2001 to the second
quarter of 2002. Sales were weak in this area during 2001 and are now returning
to more normal levels as more assembly work is being shifted to this region.
Within the motor division the number of motors sold decreased 12.1% in the
second quarter of 2002 compared to the second quarter of 2001 while the average
selling price per motor increased approximately 9.1%.
Consolidated gross profit for the second quarter of 2002 was $11.4 million,
versus $16.6 million for the second quarter of 2001, a decrease of 31.3%. The
fastener segment saw gross profit decrease 55.4% in the second quarter of 2002
compared to the second quarter of 2001, while motor segment gross profit
increased 18.3% and distribution segment gross profit increased 7.0% during the
same period. The fastener segment has been adversely affected by the high
inventory levels, which has forced it 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
second quarter of 2002 were $10.9 million versus $11.1 million for the second
quarter of 2001. Consolidated net income for the second quarter of 2002 was
$988,000, versus $3.7 million for the second quarter of 2001. Other income
increased from the second quarter of 2001 to the second quarter of 2002 due to
favorable currency exchange transactions.
9
PENN ENGINEERING & MANUFACTURING CORP.
JUNE 30, 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 VS. SIX MONTHS ENDED JUNE 30, 2001
- -----------------------------------------------------------------
Consolidated net sales for the six months ended June 30, 2002 were $73.3
million, versus $120.2 million for the six months ended June 30, 2001, a 39.0%
decrease. Net sales to customers outside the United States for the six months
ended June 30, 2002 were $24.4 million, versus $34.3 million for the six months
ended June 30, 2001, a decrease of 28.9%. Net sales for the fastener segment for
the six months ended June 30, 2002 were $40.8 million, versus $80.4 million for
the six months ended June 30, 2001, a 49.3% decrease. Motor segment net sales
were $15.3 million for the six months ended June 30, 2002, versus $19.0 million
for the six months ended June 30, 2001, a 19.5% decrease. Net sales for the
distribution segment for the six months ended June 30, 2002 were $17.3 million,
versus $20.9 million for the six months ended June 30, 2001, a 17.2% decrease.
Within the fastener and distribution operations, sales volume decreased
43.6% from the first six months of 2001 compared to the first six months of
2002. Within the North American region, the number of fastener units sold
decreased approximately 51.0% in the first six months of 2002 compared to the
first six months of 2001, while the number of fastener units sold into Europe
decreased approximately 38.6% during the same period. The major markets served
by the Company experienced a steep decline during the latter half of 2001 and
are only showing small signs of recovering during 2002. In addition, inventory
levels at the Company's major distributors remain high. The Asia-Pacific region
saw sales volume increase approximately 38.3% in the first six months of 2002
compared to the first six months of 2001 as electronics production has been
shifted to that region. The number of motors sold decreased 22.0% in the first
six months of 2002 compared to the first six months of 2001. The majority of the
motor segment sales are in the semiconductor and data storage markets, which
were significantly impacted by the 2001 recession.
Consolidated gross profit for the first six months of 2002 was $22.7
million, versus $40.4 million for the first six months of 2001, a 43.8%
decrease. All three operating segments experienced gross profit declines from
the first six months of 2001 to the first six months of 2002 due mainly to the
large sales volume decline and the resulting costs associated with workforce
reductions and decreased production requirements.
Consolidated SG&A expenses for the first six months of 2002 were $21.4
million, versus $24.1 million for the first six months of 2001. 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 six months of 2002 was $1.4 million,
versus $11.2 million for the first six months of 2001. Other income for the
first six months of 2002 was higher than the first six months of 2001 due to
favorable foreign currency transactions and reduced interest expense during the
period.
10
PENN ENGINEERING & MANUFACTURING CORP.
JUNE 30, 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The following statement regarding liquidity and capital resources is made
pursuant to Securities and Exchange Commission Release Nos. 33-8056, 34-45321,
and financial reporting release FR-61.
Cash and cash equivalents at June 30, 2002 were $14.5 million compared to
$9.6 million at March 31, 2002 and $8.4 million at December 31, 2001. Working
capital totaled $77.3 million at June 30, 2002 compared to $79.2 million at
March 31, 2002 and $80.5 million at December 31, 2001.
Net cash of $12.3 million was provided by operating activities for the six
months ended June 30, 2002 compared to $3.6 million provided by operating
activities for the six months ended June 30, 2001. During the six months ended
June 30, 2002, non-cash items totaled $5.1 million and the Company received $4.8
million from tax refunds due to overpayments of estimated tax in 2001. Inventory
levels increased slightly, however it is the Company's intent to reduce
inventory levels by December 31, 2002 to further provide cash from operations.
Net cash used in investing activities totaled $0.5 million for the six
months ended June 30, 2002 compared to $21.7 million for the six months ended
June 30, 2001. The Company significantly curtailed capital expenditures during
2002 because of the downturn in business activity.
Net cash used in financing activities totaled $5.6 million for the six
months ended June 30, 2002 compared to net cash provided by financing activities
of $22.3 million for the six months ended June 30, 2001. Because of the
decreased capital expenditures and lack of business acquisition activity in
2002, the Company repaid $3.7 million of short-term debt. Despite the economic
downturn and its impact on the Company's earnings, the Company's strong cash and
working capital position have allowed for the continued payment of cash
dividends of $2.8 million for the six months ended June 30, 2002. As a result,
the Company's dividend per share exceeded earnings per share for the three and
six month periods ended June 30, 2002. The Company's earnings per share have
historically exceeded dividends declared and paid and the Company expects this
to be the case in the future as the business climate recovers.
The Company's main contractual obligations are the repayment of its
short-term and long-term debt (see Note 3) and the payment of operating lease
commitments covering certain automobiles, office space, and office equipment
which are listed in Note 11 to the Company's Annual Report for the year ended
December 31, 2001. As stated in Note 3, the Company was not in compliance with
two required financial covenants of its three lending banks at June 30, 2002.
The first covenant requires that the ratio of funds flow (net income plus
depreciation and amortization plus interest expense less dividends paid) for a
rolling four quarters to current maturities of long-term debt plus interest
expense exceed 1.50. The Company did not meet this covenant at June 30, 2002 due
to a net loss in the fourth quarter of 2001 as well as lower than expected net
income in the first six months of 2002. The second covenant requires that the
ratio of the Company's total funded debt at the end of the period to earnings
before interest, taxes, depreciation, and amortization for a rolling four
quarters not exceed a maximum of 1.75. The Company exceeded this ratio at June
30, 2002 due to the same reason as described above. As of June 30, 2002, the
Company has received letters from all three banks waiving covenant compliance
for the measurement period ended June 30, 2002. Because a rolling four quarters
are used for both covenants, the Company expects to once again be in compliance
by December 31, 2002. Also, because of the Company's strong cash position, a
portion of the debt can be paid down to insure compliance in the future.
The Company anticipates that its existing capital resources and cash flow
generated from future operations as well as existing short-term lines of credit
will enable it to maintain its current level of operations and its planned
growth for the foreseeable future.
11
PENN ENGINEERING & MANUFACTURING CORP.
JUNE 30, 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company has identified a number of its accounting policies that it has
determined to be critical. These critical accounting policies primarily relate
to financial statement assertions that are based on the estimates and
assumptions of management and the effect of changing those estimates and
assumptions could have a material effect on the Company's financial statements.
The following is a summary of those critical accounting policies.
INVENTORIES
- -----------
The Company's domestic fastener inventories are priced on the last-in,
first-out (LIFO) method of accounting. Other inventories, representing
approximately 63% and 65% of total inventories at June 30, 2002 and December 31,
2001, respectively, are priced on the first-in, first-out (FIFO) method.
Reserves are recorded for obsolete, excess and slow-moving inventory based on
management's estimates about future demand and market conditions. If the
estimated reserves for obsolete, excess and slow-moving inventory are not
sufficient based on actual future demand, additions to the reserves may be
required.
ACCOUNTS RECEIVABLE
- -------------------
The Company maintains an allowance for doubtful accounts for trade
receivables for which collectibility is uncertain. In estimating uncollectible
amounts, management considers factors such as current overall economic
conditions, industry-specific economic conditions, historical customer
performance, and anticipated customer performance. While management believes the
Company's processes effectively address its exposure for doubtful accounts,
changes in the economy, industry, or specific customer conditions may require
adjustment to the allowance for doubtful accounts recorded by the Company.
PENSIONS
- --------
The Company accounts for its defined benefit pension plan in accordance
with SFAS No. 87, "Employers' Accounting for Pensions", which requires that
amounts recognized in financial statements be determined on an actuarial basis.
The most significant elements in determining the Company's pension expense are
pension liability discount rates and the expected return on plan assets. The
pension discount rate reflects the current interest rate at which the pension
liabilities could be settled at the end of the year. At the end of each year,
the Company determines the discount rate to be used to discount plan
liabilities. In estimating this rate, the Company looks to rates of return on
high-quality, fixed-income investments. At December 31, 2001, the Company
determined this rate to be 7.25%. The Company has assumed that the expected
long-term rate of return on plan assets will be 8.00%. This expected rate of
return has been used by the Company for many years. Although in the last two
years pension plan assets have earned substantially less than 8.00%, over the
long-term, the Company believes that its return assumption of 8.00% is
reasonable, based on its expectations about future returns. Should the downward
trend in return on pension assets continue, future pension expense would likely
increase. The net effect of changes in the discount rate, as well as the effect
of differences between the expected return and the actual return on plan assets
have been deferred in accordance with SFAS No. 87 and will ultimately affect
future pension expense.
12
PENN ENGINEERING & MANUFACTURING CORP.
JUNE 30, 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES - CONTINUED
- ----------------------------------------
DERIVATIVE INSTRUMENTS AND HEDGING
- ----------------------------------
The Company manages risks associated with foreign exchange rates and
interest rates with derivative instruments. The Company does not use derivative
instruments unless there is an underlying exposure and, therefore, does not use
derivative instruments for trading or speculative purposes. The evaluation of
hedge effectiveness is subject to assumptions based on the terms and timing of
the underlying exposures. All derivative instruments are recognized in the
Consolidated Balance Sheet at fair value. The fair value of derivative
instruments is generally based on quoted market prices.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements and information contained in this Quarterly Report on
Form 10-Q are "forward-looking statements" (within the meaning of Section 27A of
the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934), and
accordingly, are subject to risks and uncertainties. For such statements, the
Company claims the protections of the safe-harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements may be identified by their use of words like "plans,"
"expects," "will," "anticipates," "intends," "projects," "estimates" or other
words of similar meaning. 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 demand in markets served by the
Company, particularly the computer and telecommunications markets, 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.
13
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
- -----------------------------------------------------------
The Company held its 2002 Annual Meeting of Stockholders (the "Annual
Meeting") on April 25, 2002. The matters voted upon at the Annual Meeting and
the respective voting results were as follows:
1. The election of three Class B Directors of the Company to hold office
until the Annual Meeting of Stockholders to be held in 2005 and until their
successors are duly elected.
Name of Nominee For Withheld
- --------------- --- --------
Kenneth A. Swanstrom 3,195,961 12,174
Mark W. Simon 3,195,967 12,168
John J. Sickler 3,195,861 12,274
The Directors whose term of office continued after the meeting were:
Class A Directors:
- ------------------
Martin Bidart
Maurice D. Oaks
Charles R. Smith
Class C Directors:
- ------------------
Willard S. Boothby, Jr.
Thomas M. Hyndman, Jr.
Daryl L. Swanstrom
2. The election of Ernst & Young LLP as auditors for the Company for its
2002 fiscal year.
For Against Abstain
--- ------- -------
3,205,895 1,508 732
ITEM 5. OTHER INFORMATION
- -------------------------
Not Applicable
14
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.)
99.1 Certification pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None.
15
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: August 14, 2002 By: /s/Kenneth A. Swanstrom
-----------------------------------
Kenneth A. Swanstrom
Chairman/CEO
Dated: August 14, 2002 By: /s/ Mark W. Simon
-----------------------------------
Mark W. Simon
Senior Vice-President/CFO
16