UNITED STATES
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, 2004
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 14,285,190 shares of common stock, $.01 par
value, outstanding on May 5, 2004.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
PENN ENGINEERING & MANUFACTURING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
------
(UNAUDITED)
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 15,064 $ 8,361
Short-term investments 230 228
Accounts receivable-net 44,392 37,629
Inventories 46,914 48,512
Refundable income taxes 218 2,129
Other current assets 2,190 1,881
--------- ---------
Total current assets 109,008 98,740
--------- ---------
PROPERTY
Property, plant & equipment 190,482 190,876
Less accumulated depreciation 102,133 99,774
--------- ---------
Property - net 88,349 91,102
--------- ---------
GOODWILL, NET 41,305 41,844
--------- ---------
OTHER ASSETS 4,461 4,438
--------- ---------
TOTAL $ 243,123 $ 236,124
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable $ 7,146 $ 6,865
Bank debt 8,486 9,042
Dividends payable 1,055 1,052
Accrued expenses:
Pension & profit sharing 2,115 2,104
Payroll & commissions 5,425 3,040
Other 6,321 7,129
--------- ---------
Total current liabilities 30,548 29,232
--------- ---------
ACCRUED PENSION COST 1,192 1,192
--------- ---------
DEFERRED INCOME TAXES 11,387 10,927
--------- ---------
LONG-TERM BANK DEBT 2,804 3,173
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 150 150
Class A common stock 35 35
Additional paid-in capital 43,178 42,573
Retained earnings 153,718 148,906
Accumulated other comprehensive income 6,197 6,022
Treasury stock (6,086) (6,086)
--------- ---------
Total stockholders' equity 197,192 191,600
--------- ---------
TOTAL $ 243,123 $ 236,124
========= =========
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, 2004 MARCH 31, 2003
-------------- --------------
NET SALES $ 63,307 $ 44,814
COST OF PRODUCTS SOLD 40,785 32,240
-------- --------
GROSS PROFIT 22,522 12,574
SELLING EXPENSES 6,409 5,229
GENERAL AND ADMINISTRATIVE EXPENSES 7,371 6,267
-------- --------
OPERATING INCOME 8,742 1,078
-------- --------
OTHER (EXPENSE) INCOME:
Interest income 49 47
Interest expense (96) (307)
Other, net (128) (126)
-------- --------
TOTAL OTHER (EXPENSE) INCOME (175) (386)
-------- --------
INCOME BEFORE INCOME TAXES 8,567 692
PROVISION FOR INCOME TAXES 2,700 152
-------- --------
NET INCOME $ 5,867 $ 540
======== ========
PER SHARE DATA:
Basic earnings $ 0.33 $ 0.03
======== ========
Diluted earnings $ 0.33 $ 0.03
======== ========
Cash dividends declared $ 0.06 $ 0.06
======== ========
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, 2004 MARCH 31, 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,867 $ 540
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,649 2,749
Amortization 1 1
Deferred income taxes 1 0
Foreign currency transaction (gains) losses (4) 138
Loss (gain) on disposal of property 56 (1)
Changes in assets and liabilities:
Increase in receivables (6,754) (5,425)
Decrease in inventories 1,577 2,789
Decrease in refundable income taxes 1,911 332
(Increase) decrease in other current assets (317) 196
Increase in other assets (58) (477)
Increase in accounts payable 338 854
Increase in accrued expenses 2,443 2,208
-------- --------
Net cash provided by operating activities 7,710 3,904
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (473) (1,258)
Acquisitions of businesses (net of cash acquired) 0 (9,941)
Proceeds from disposal of property 9 6
-------- --------
Net cash used in investing activities (464) (11,193)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term debt repayments (770) (4,007)
Dividends paid (1,052) (2,085)
Issuance of common stock 606 404
-------- --------
Net cash used in financing activities (1,216) (5,688)
-------- --------
Effect of exchange rate changes on cash 673 214
-------- --------
Net increase (decrease) in cash and cash equivalents 6,703 (12,763)
Cash and cash equivalents at beginning of period 8,361 20,927
-------- --------
Cash and cash equivalents at end of period $ 15,064 $ 8,164
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
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, 2003. 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 that are necessary for a fair presentation of the
Company's consolidated financial position at March 31, 2004 and 2003 and its
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, 2004
are not necessarily indicative of the results of operations to be expected for
the year ending December 31, 2004.
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)
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
Raw material $ 2,700 $ 2,807
Tooling 5,943 5,540
Work-in-process 12,296 11,541
Finished goods 25,975 28,624
------- -------
TOTAL $46,914 $48,512
======= =======
If the FIFO method of inventory valuation had been used by the Company for
all inventories, inventories would have been $10,175,000 and $10,072,000 higher
than reported at March 31, 2004 and December 31, 2003, respectively, and net
income would have been $71,000 and $114,000 higher than reported for the three
months ended March 31, 2004 and 2003, respectively. Long-term tooling inventory
totaling $1,344,000 at March 31, 2004 and $1,285,000 at December 31, 2003 is
included in Other Assets.
NOTE 3. BANK DEBT
- -----------------
As of March 31, 2004, the Company has four 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 facility is a working capital facility that permits maximum borrowings
of $7,000,000, due on demand. At March 31, 2004, there was no outstanding amount
on this facility. The second facility is a general facility that allows for
borrowings of up to $12,000,000. As of March 31, 2004, there was no amount
outstanding on this facility. The third facility allows for borrowings of up to
$15,000,000. Two short-term loans are currently outstanding on this facility.
The first is a $5,305,000 term loan at a rate of 1.93% and the second is a
$1,833,000 loan at a rate of 2.7374%. The fourth facility provides for
borrowings up to $15,000,000. A short-term loan in the amount of $274,000 at a
rate of 5.07625% is outstanding under this facility at March 31, 2004.
In addition to the above facilities, the Company has a committed
line-of-credit that permits borrowings of up to $8,000,000 and a lease line
facility of $1,000,000. At March 31, 2004, there were no amounts outstanding on
either one of these facilities.
These line of credit facilities require the Company to comply with certain
financial covenants. At March 31, 2004, the Company was in compliance with all
financial covenants.
In addition to the above domestic line-of-credit facilities, the Company's
subsidiary, M.A.E. S.p.A. (MAE) has two short-term credit facilities under which
$513,000 was outstanding at March 31, 2004. MAE also has an outstanding mortgage
on its building, of which $561,000 is classified as short-term debt and
$2,804,000 is classified as long-term debt as of March 31, 2004.
5
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 4. COMPREHENSIVE INCOME
- ----------------------------
Total comprehensive income amounted to $6,042,000 and $1,192,000 for the
three months ended March 31, 2004 and 2003, respectively.
NOTE 5. ACCOUNTING FOR STOCK OPTIONS
- ------------------------------------
The Company follows Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock options. Under APB 25, if the exercise price of stock
options granted equals or exceeds the market price of the underlying common
stock on the date of grant, no compensation expense is recognized. Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123") requires pro forma
information regarding net income and earnings per share as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option-pricing model. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period. Had compensation costs for the Company's plans
been determined based on the fair value at the grant date for awards under these
plans consistent with the method of SFAS No. 123, the impact on the Company's
financial results would have been as follows:
THREE MONTHS ENDED
(Dollars in thousands except per share amounts) MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
Net income as reported $ 5,867 $ 540
Pro forma compensation cost, net of tax (353) (279)
--------- -------
Pro forma net income $ 5,514 $ 261
========= =======
Basic earnings per share:
As reported $ .33 $ .03
Pro forma .31 .02
Diluted earnings per share:
As reported $ .33 $ .03
Pro forma .31 .01
NOTE 6. USE OF ESTIMATES
- ------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that may 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, 2004
NOTE 7. COMPONENTS OF NET PERIODIC PENSION COST
- -----------------------------------------------
Net pension costs included the following components:
THREE MONTHS ENDED
(Dollars in thousands) MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
Service cost $ 720 $ 595
Interest cost 750 770
Expected return on plan assets (600) (500)
Net amortization and deferral 180 35
------- -----
Net periodic pension cost $ 1,050 $ 900
======= =====
NOTE 8. SEGMENT INFORMATION
- ---------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
(Dollars in thousands) FASTENERS DISTRIBUTION MOTORS FASTENERS DISTRIBUTION MOTORS
--------- ------------ ------- --------- ------------ ------
Revenues from external customers $33,608 $17,142 $12,557 $23,597 $11,266 $9,951
Intersegment revenues 8,622 -- 776 6,119 -- 57
Operating profit 8,681 1,728 723 1,329 572 531
A reconciliation of combined operating profit for the reportable segments to
consolidated income before income taxes is as follows:
THREE MONTHS ENDED
(Dollars in thousands) MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
Total profit for reportable segments $ 11,132 $ 2,432
Unallocated corporate expenses (2,390) (1,354)
Other expense (175) (386)
-------- -------
Income before income taxes $ 8,567 $ 692
======== =======
7
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 9. 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
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
(In thousands, except per share data)
Basic:
Net income $ 5,867 $ 540
Weighted average shares outstanding 17,557 17,383
------- -------
Basic EPS $ 0.33 $ 0.03
======= =======
Diluted:
Net income $ 5,867 $ 540
======= =======
Weighted average shares outstanding 17,557 17,383
Net effect of dilutive stock options-
based on treasury stock method 263 25
------- -------
Totals 17,820 17,408
======= =======
Diluted EPS $ 0.33 $ 0.03
======= =======
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
QUARTER ENDED MARCH 31, 2004 VS. QUARTER ENDED MARCH 31, 2003
- --------------------------------------------------------------
Consolidated net sales for the quarter ended March 31, 2004 were $63.3
million, versus $44.8 million for the quarter ended March 31, 2003, a 41.3%
increase. Net sales to customers outside the United States for the quarter ended
March 31, 2004 were $27.4 million, versus $17.2 million for the quarter ended
March 31, 2003, a 59.3% increase. Net sales for the Fastening Technologies
segment for the quarter ended March 31, 2004 were $33.6 million, versus $23.6
million for the quarter ended March 31, 2003, a 42.4% increase. Net sales for
the Motion Technologies segment were $12.6 million for the quarter ended March
31, 2004, versus $9.9 million recorded for the quarter ended March 31, 2003, a
27.3% increase. Net sales for the Distribution segment for the quarter ended
March 31, 2004 were $17.1 million, versus $11.3 million for the quarter ended
March 31, 2003, a 51.3% increase.
Within the Fastening Technologies segment, sales volume increased 31.7% in
both the domestic and international markets from the first quarter of 2003 to
the first quarter of 2004 while the average selling price increased
approximately 8.7% due to a change in product mix as well as a 3.5% price
increase that went into effect January 1, 2004. This segment continues to
benefit from the improved economy especially in the gaming, security, and
medical markets as well as the segment's traditional telecommunications and
datacommunications markets. Within the Motion Technologies segment, the number
of motors sold under the Pittman brand increased approximately 20.8% in the
first quarter of 2004 compared to the first quarter of 2003 while the average
selling price per motor increased approximately 5.4% primarily due to a price
increase effective January 1, 2004. Motor sales from MAE, acquired in February,
2003, were $2.8 million in the first quarter of 2004 compared to $1.7 million in
the first quarter of 2003. Within the Distribution segment, the largest sales
increase occurred in the Asia-Pacific region where sales increased 98.0% from
the first quarter of 2003 to the first quarter of 2004. Personal computer and
electronics companies continue to manufacture heavily in this region due to
lower assembly costs. Sales to Europe increased approximately 37.4% while sales
to North America increased approximately 32.0% from the first quarter of 2003 to
the first quarter of 2004.
Consolidated gross profit for the first quarter of 2004 was $22.5 million,
versus $12.6 million for the first quarter of 2003, an increase of 78.6%. Gross
profit as a percent of sales increased from 28.1% in the first quarter of 2003
to 35.6% in the first quarter of 2004. The Company benefited from increased
volume, especially in the manufacturing of fasteners where increased plant and
machinery utilization occurred without corresponding increases in fixed costs.
Consolidated selling, general, and administrative expenses for the first
quarter of 2004 were $13.8 million, versus $11.5 million for the first quarter
of 2003, a 20.0% increase. Commission expense increased 12.4% due to the
increased sales volume. Employee benefit expenses increased approximately 9.8%
due to higher medical costs and increased retirement contributions.
Consolidated net income for the first quarter of 2004 was $5,867,000,
versus $540,000 for the first quarter of 2003. Interest expense decreased from
$307,000 in the first quarter of 2003 to $96,000 in the first quarter of 2004
primarily from lower outstanding borrowings. The effective tax rate increased
from 22% in the first quarter of 2003 to 31.5% in the first quarter of 2004 due
to the fact that a greater proportion of income was produced in the United
States, with a higher corporate income tax rate compared to the locations where
income was generated in the first quarter of 2003.
9
PENN ENGINEERING & MANUFACTURING CORP.
MARCH 31, 2004
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents at March 31, 2004 were $15.1 million compared to
$8.4 million at December 31, 2003. Working capital totaled $78.5 million at
March 31, 2004 compared to $69.5 million at December 31, 2003.
Net cash of $7.7 million was provided by operating activities for the three
months ended March 31, 2004 compared to $3.9 million provided by operating
activities for the three months ended March 31, 2003. The Company continued to
generate cash from further reductions in overall inventory levels during the
first quarter of 2004. However, as sales volume increased, the level of accounts
receivable also increased, particularly in the Asia-Pacific region where payment
terms are generally longer than domestic payment terms.
The Company continues to exercise caution with its capital expenditures as
it attempts to utilize current capacity during the economic recovery. Cash has
therefore been used to repay debt and pay dividends.
The Company's principal contractual obligations are the repayment of its
short-term debt (see Note 3) and the payment of operating lease commitments
covering certain automobiles, office space, and office equipment that is listed
in Note 12 to the Company's Annual Report for the year ended December 31, 2003.
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.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company has identified a number of its accounting polices 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 that changes in those estimates and
assumptions could have on our 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 77% and 79% of total inventories at March 31, 2004 and December
31, 2003, respectively, are priced on the first-in, first-out (FIFO) method.
Reserves are recorded for obsolete, excess, and slow-moving inventories based on
management's estimates about future demand and market conditions. At March 31,
2004, our inventory balance of $46,914,000 was net of a reserve for obsolete,
excess, and slow-moving inventories of approximately $3,475,000. At December 31,
2003, our inventory balance of $48,512,000 was net of a reserve for obsolete,
excess, and slow-moving inventories of approximately $3,512,000. If the
estimated reserves for obsolete, excess, and slow-moving inventories are not
sufficient based on actual future demand, additions to the reserve may be
required.
ACCOUNTS RECEIVABLE
- -------------------
The Company maintains an allowance for doubtful accounts for trade
receivables for which collectibility is uncertain. At March 31, 2004 and
December 31, 2003, this allowance was approximately $987,000 and $886,000,
respectively. In estimating uncollectible accounts, the Company considers
factors such as current overall economic conditions, industry-specific economic
conditions, and historical and anticipated customer performance. While the
Company believes that its procedures effectively address exposure for doubtful
accounts, changes in the economy, industry, or specific customer conditions may
require adjustments to the allowance.
10
PENN ENGINEERING & MANUFACTURING CORP.
MARCH 31, 2004
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GOODWILL
- --------
SFAS No. 142 requires that goodwill no longer be amortized, and instead, be
tested for impairment on a periodic basis. At March 31, 2004, the Company had
$41,305,000 in goodwill. The process of evaluating the potential impairment of
goodwill is highly subjective and requires significant judgments at many points
during the analysis. In estimating the fair value of the reporting units with
recognized goodwill for the purposes of the Company's fiscal 2003 financial
statements, the Company made estimates and judgments about the future cash flows
of these reporting units. The Company's cash flow forecasts were based on
assumptions that are consistent with the plans and estimates the Company is
using to manage the underlying businesses. In addition, the Company made certain
judgments about allocating shared assets to the balance sheet for those
reporting units. Based on its estimates, the Company concluded that there is no
impairment of its goodwill as of December 31, 2003. However, changes in these
estimates could cause one or more of the reporting units to be valued
differently in the future. The Company will evaluate its goodwill again for
impairment as of October 1, 2004, or sooner if deemed necessary by management.
PENSIONS
- --------
Accounting for the Company's defined benefit pension plan requires that
amounts recognized in the 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
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, 2003, the Company
determined this rate to be 6.25% and no adjustment to this rate has been made in
the quarter ended March 31, 2004. Historically the Company has assumed that the
expected long-term rate of return on plan assets will be 8.00%, and this
expected rate of return has been used for many years. Because pension plan
assets have earned substantially less than 8.00% in the last two years, the
Company reduced the expected long-term rate of return to 7.00% in 2003 and no
adjustment to this rate has been made in the quarter ended March 31, 2004.
Should the downward trend in return on pension assets continue, future pension
expense would likely increase. The net effect of changes in 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. 132 and
will ultimately affect future pension expense.
11
PENN ENGINEERING & MANUFACTURING CORP.
MARCH 31, 2004
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 for trading or speculative purposes and only uses derivatives when
there is an underlying exposure. The evaluation of hedge effectiveness is
subject to assumptions based on the terms and the timing of the underlying
exposures. All derivative instruments are recognized in the Consolidated Balance
Sheet at fair value, which is generally based on quoted market prices.
FORWARD-LOOKING STATEMENTS
- --------------------------
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
under the Private Securities Litigation Reform Act of 1995, 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 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, 2003.
ITEM 4. CONTROLS AND PROCEDURES.
- --------------------------------
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on this evaluation, the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, concluded that the Company's disclosure controls and procedures are
effective for recording, processing, summarizing, and reporting the information
the Company is required to disclose in the reports it files under the Securities
Exchange Act of 1934, within the time periods specified in the SEC's rules and
forms. There have been no significant changes in the Company's internal controls
over financial reporting (as such term is defined in Rules 13a-15 and 15d-15)
during the quarter ended March 31, 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
12
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, 2003.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF
- -----------------------------------------------------------------------
EQUITY 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.)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 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
1. Form 8-K filed on January 30, 2004, reporting under Item 7 the Company's
issuance of a press release regarding the Company's results for its
fourth quarter and year ended December 31, 2003.
2. Form 8-K filed on March 23, 2004, reporting under Item 5 the Company's
issuance of a press release regarding earnings guidance for the quarter
ended March 31, 2004.
13
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 10, 2004 By: /s/ Kenneth A. Swanstrom
---------------------------------
Kenneth A. Swanstrom
Chairman/CEO
Dated: May 10, 2004 By: /s/ Mark W. Simon
---------------------------------
Mark W. Simon
Senior Vice President/CFO
14
PENN ENGINEERING & MANUFACTURING CORP.
EXHIBIT INDEX
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.)
3.3 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.)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.