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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
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 14,120,117 shares of common stock, $.01 par
value, outstanding on November 7, 2003.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
PENN ENGINEERING & MANUFACTURING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
(unaudited)
CURRENT ASSETS September 30, 2003 December 31, 2002
------------------ -----------------
Cash and cash equivalents $7,496 $20,927
Short-term investments 231 233
Accounts receivable-net 37,563 25,373
Inventories 51,105 56,458
Refundable income taxes 1,337 1,939
Other current assets 1,811 1,641
----- -----
Total current assets 99,543 106,571
------ -------
PROPERTY
Property, plant & equipment 188,125 174,871
Less accumulated depreciation 97,087 88,202
------ ------
Property - net 91,038 86,669
------ ------
GOODWILL, Net 38,406 27,047
------ ------
OTHER ASSETS 5,169 4,692
----- -----
TOTAL ASSETS $234,156 $224,979
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $4,830 $3,817
Bank debt 8,694 20,000
Dividends payable 1,047 1,042
Accrued expenses:
Profit sharing 1,427 -
Payroll & commissions 4,846 3,087
Other 6,575 2,603
----- -----
Total current liabilities 27,419 30,549
------ ------
ACCRUED PENSION COST 6,478 3,778
----- -----
DEFERRED INCOME TAXES 9,849 7,435
----- -----
LONG-TERM BANK DEBT 3,159 -
-----
STOCKHOLDERS' EQUITY
Common Stock 149 148
Class A Common Stock 35 35
Additional paid-in capital 41,555 40,682
Retained earnings 148,412 148,211
Accumulated other comprehensive income 3,186 227
Treasury stock (6,086) (6,086)
----- -----
Total stockholders' equity 187,251 183,217
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $234,156 $224,979
======== ========
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 NINE MONTHS ENDED
(unaudited) (unaudited)
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
-------------------------------------- -------------------------------------
Net Sales $46,321 $38,112 $138,574 $111,446
Cost of Products Sold 32,728 25,995 99,408 76,648
------ ------ ------ ------
Gross Profit 13,593 12,117 39,166 34,798
Selling Expenses 5,054 4,838 15,765 14,389
General and Administrative Expenses 6,562 5,837 18,911 17,636
----- ----- ------ ------
Operating Income 1,977 1,442 4,490 2,773
----- ----- ----- -----
Other Income (Expense):
Interest income 13 42 114 86
Interest expense (176) (205) (701) (614)
Other, net 201 128 488 1,077
--- --- --- -----
Total Other Income (Expense) 38 (35) (99) 549
-- ---- ---- ---
Income Before Income Taxes 2,015 1,407 4,391 3,322
Provision for Income Taxes 538 407 1,054 963
--- --- ----- ---
Net Income $1,477 $1,000 $3,337 $2,359
===== ===== ===== =====
PER SHARE DATA:
Basic earnings $0.08 $0.06 $0.19 $0.14
===== ===== ===== =====
Diluted earnings $0.08 $0.06 $0.19 $0.13
===== ===== ===== =====
Cash dividends declared $0.06 $0.06 $0.18 $0.22
===== ===== ===== =====
See Notes to Condensed Consolidated Financial Statements
PENN ENGINEERING & MANUFACTURING CORP.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Dollars in thousands)
NINE MONTHS ENDED
(unaudited)
September 30, 2003 September 30, 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,337 $2,359
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,484 7,779
Deferred income taxes 0 56
Foreign currency transaction gains (22) (642)
Loss on disposal of property 81 0
Loss on disposal of investments 0 137
Changes in assets and liabilities:
Increase in receivables (7,792) (111)
Decrease in inventories 8,903 2,186
Decrease in refundable income taxes 567 5,311
Decrease in other current assets 150 300
(Increase) decrease in other assets (477) 500
(Decrease) increase in accounts payable (1,981) 76
Increase in accrued expenses 4,519 36
Increase (decrease) in accrued pension cost 2,700 (1,942)
----- -------
Net cash provided by operating activities 18,469 16,045
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (2,567) (1,960)
Acquisitions of businesses (net of cash acquired) (10,442) 0
Proceeds from disposal of available-for-sale investments 0 531
Proceeds from disposal of property 17 7
-- -
Net cash used in investing activities (12,992) (1,422)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net bank debt repayments (17,341) (4,664)
Dividends paid (3,132) (4,165)
Issuance of Common Stock 874 903
--- ---
Net cash used in financing activities (19,599) (7,926)
-------- -------
Effect of exchange rate changes on cash 691 (282)
--- -----
Net (decrease) increase in cash and cash equivalents (13,431) 6,415
Cash and cash equivalents at beginning of period 20,927 8,421
------ -----
Cash and cash equivalents at end of period $7,496 $14,836
====== =======
See Notes to Condensed Consolidated Financial Statements
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Note 1. Condensed Consolidated Financial Statements (Unaudited)
The accompanying condensed consolidated financial statements and notes
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,
2002. The information contained in this report is unaudited and in the opinion
of management, reflects all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the Company's consolidated
financial position at September 30, 2003 and 2002 and the consolidated
statements of income and cash flows for the nine-month periods then ended. The
results of operations for the three and nine months ended September 30, 2003 are
not necessarily indicative of the results of operations to be expected for the
year ending December 31, 2003.
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)
September 30, 2003 December 31, 2002
------------------ -----------------
Raw material $6,486 $4,566
Tooling 4,761 4,926
Work-in-process 8,173 7,935
Finished goods 31,685 39,031
------ ------
TOTAL $51,105 $56,458
======= =======
If the FIFO method of inventory valuation had been used by the Company for
all inventories, inventories would have been $10,239,000 and $10,100,000 higher
than reported at September 30, 2003 and December 31, 2002, respectively, and net
income would have been $106,000 and $392,000 higher than reported for the nine
months ended September 30, 2003 and 2002, respectively. Long-term tooling
inventory totaling $2,000,000 at September 30, 2003 and $2,500,000 at December
31, 2002 is included in Other Assets.
Note 3. Bank Debt
As of September 30, 2003, the Company had 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 September 30, 2003, there was no outstanding
amount on this facility. The second facility is a general facility that allows
for borrowings of up to $15,000,000. At September 30, 2003, $1,590,000, bearing
interest at 2.88%, was outstanding on this facility and was classified as
short-term debt. The third facility allows for borrowings of up to $12,000,000.
A $3,000,000 term loan is currently outstanding on this facility at a rate of
3.6% (3.1% after giving effect to interest rate swaps) and is due and payable on
December 31, 2003. This loan is currently classified as short-term debt.
The fourth facility permits borrowings of up to $8,000,000. At September
30, 2003, $2,000,000, bearing interest at 2.11% (3.35% after giving effect to
interest rate swaps) was outstanding on this facility and was classified as
short-term debt.
These line of credit facilities require the Company to comply with certain
financial covenants. At September 30, 2003, the Company was in compliance with
all financial covenants.
In addition to the above domestic line-of-credit facilities, the Company's
new subsidiary, M.A.E. S.p.A. (MAE) (see Note 7) has several short-term credit
facilities in place and there was $1,576,000 outstanding on such facilities at
September 30, 2003. MAE also has an outstanding mortgage, where $528,000 is
classified as short-term debt and $3,159,000 is classified as long-term debt as
of September 30, 2003.
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Note 4. Comprehensive Income
Total comprehensive income amounted to $2,191,000 and $1,274,000 for the
three months ended September 30, 2003 and 2002, respectively, and $6,296,000 and
$4,134,000 for the nine months ended September 30, 2003 and 2002, respectively.
Comprehensive income consists of net income, foreign currency translation
adjustments, and the fair value of derivative instruments that qualify as cash
flow hedges.
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 NINE MONTHS ENDED
September 30 September 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in thousands except per share amounts)
Net income as reported $1,477 $1,000 $3,337 $2,359
Pro forma compensation cost, net of tax (302) (291) (797) (872)
----- ----- ----- -----
Pro forma net income $1,175 $709 $2,540 $1,487
====== ==== ====== ======
Basic earnings per share:
As reported $0.08 $0.06 $0.19 $0.14
Pro forma 0.07 0.04 0.15 0.09
Diluted earnings per share:
As reported $0.08 $0.06 $0.19 $0.13
Pro forma 0.07 0.04 0.14 0.08
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.
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Note 7. Acquisition
On February 5, 2003, the Company acquired all of the issued and outstanding
capital stock of Maelux SA and its sole operating company, M.A.E. S.p.A. (MAE)
of Offanengo, Italy for cash of $10,442,000, including acquisition related
expenses. MAE is a manufacturer of stepper, brush, and brushless DC motors
serving customers throughout Europe, and its operations are included with the
Company's motor segment. The results of the operations of MAE have been included
in the accompanying consolidated statement of income since the acquisition date.
The purchase price has been preliminarily allocated to MAE's assets and
liabilities as follows; accounts receivable - $4,100,000, inventory -
$3,214,000, property - $8,628,000, other current assets - $296,000, goodwill -
$10,008,000, deferred income taxes - $2,475,000, current liabilities including
short-term bank debt - $10,359,000, and long-term bank debt - $2,970,000.
Additional consideration may be required based on the earnings of MAE
through year 2006. Any contingent payments will be recorded as additional
purchase price.
Note 8. Segment Information
In 2003, the Company changed the manner in which it accounted for sales
to certain customers in the Asia-Pacific region. Prior to 2003, these sales were
recorded in the fastener segment, whereas in 2003 these sales are recorded in
the distribution segment. Therefore, 2002 three and nine month results have been
reclassified so as to be comparable with the 2003 presentation.
(Dollars in Thousands)
THREE MONTHS ENDED THREE MONTHS ENDED
September 30, 2003 September 30, 2002
------------------ ------------------
Fasteners Distribution Motors Fasteners Distribution Motors
Revenues from external customers $ 21,954 $ 13,889 $ 10,478 $ 19,907 $ 10,217 $ 7,988
Intersegment revenues 7,243 24 7,055
Operating profit 2,320 953 570 2,175 236 568
NINE MONTHS ENDED NINE MONTHS ENDED
September 30, 2003 September 30, 2002
------------------ ------------------
Fasteners Distribution Motors Fasteners Distribution Motors
Revenues from external customers $ 70,420 $ 36,445 $ 31,709 $ 57,738 $ 30,459 $23,249
Intersegment revenues 19,895 130 19,901
Operating profit 6,743 1,741 1,907 3,365 1,118 1,312
A reconciliation of combined operating profit for the reportable segments to
consolidated income before income taxes is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
------------ ------------
2003 2002 2003 2002
----- ---- ----- ----
Total profit for reportable segments $3,843 $2,979 $10,391 $5,795
Unallocated corporate expenses (1,866) (1,537) (5,901) (3,022)
Other income (expense) 38 (35) (99) 549
-- --------- ---- ---
Income before income taxes $2,015 $1,407 $4,391 $3,322
===== ===== ===== =====
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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 NINE MONTHS ENDED
September 30 September 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands, except per share data)
Basic:
Net income $1,477 $1,000 $3,337 $2,359
Weighted average shares outstanding 17,451 17,392 17,424 17,372
------ ------ ------ ------
Basic EPS $ 0.08 $ 0.06 $ 0.19 $ 0.14
==== ==== ====== ========
Diluted:
Net income $1,477 $ 1,000 $ 3,337 $ 2,359
======== ===== ======= =====
Weighted average shares outstanding 17,451 17,392 17,424 17,372
Net effect of dilutive stock options-
based on treasury stock method 253 122 137 269
--- --- --- ---
Totals 17,704 17,514 17,561 17,641
====== ====== ====== ======
Diluted EPS $ 0.08 $ 0.06 $ 0.19 $ 0.13
====== ===== ==== ======
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
PENN ENGINEERING & MANUFACTURING CORP.
September 30, 2003
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Quarter Ended September 30, 2003 vs. Quarter Ended September 30, 2002
Consolidated net sales for the quarter ended September 30, 2003 were $46.3
million, versus $38.1 million for the quarter ended September 30, 2002, a 21.5%
increase. Net sales to customers outside the United States for the quarter ended
September 30, 2003 were $19.4 million, versus $12.2 million for the quarter
ended September 30, 2002, a 59.0% increase. Net sales for the fastener segment
for the quarter ended September 30, 2003 were $22.0 million, versus $19.9
million for the quarter ended September 30, 2002, a 10.6% increase. Motor
segment net sales were $10.5 million for the quarter ended September 30, 2003,
versus $8.0 million for the quarter ended September 30, 2002, a 31.2% increase.
The motor segment sales for the quarter ended September 30, 2003 included $2.3
million of sales at MAE which was purchased in February, 2003 (see Note 7). Net
sales for the distribution segment for the quarter ended September 30, 2003 were
$13.9 million, versus $10.2 million for the quarter ended September 30, 2002, a
36.3% increase.
Within the fastener segment, sales volume increased 8.0% from the third
quarter of 2002 to the third quarter of 2003 and the average selling price also
increased approximately 8.3% during the same period. While selling prices were
not increased from quarter to quarter, the Company benefited from the weakening
US dollar and a more favorable product mix. Within the motor segment, the number
of motors sold (excluding sales by MAE) increased less than 1% in the third
quarter of 2003 compared to the third quarter of 2002, while the average selling
price per motor increased approximately 1.6%. Within the distribution segment,
sales into Europe increased approximately 12.0%, sales into North America
increased approximately 8.8%, while sales into Asia increased approximately
110.0% from the third quarter of 2002 to the third quarter of 2003. This segment
continues to experience international growth as personal computer and
electronics companies shift production to other global areas to take advantage
of lower assembly costs. In addition, the Company's Singapore location benefited
from a large order in the third quarter of 2003 from a major computer
manufacturer.
Consolidated gross profit for the third quarter of 2003 was $13.6 million,
versus $12.1 million for the third quarter of 2002, an increase of 12.4%.
However, gross profit as a percent of sales decreased from 31.8% in the third
quarter of 2002 to 29.3% in the third quarter of 2003. The Company's gross
profit was negatively impacted by increased wages, medical expenses, and pension
expense, as well as increased freight costs necessary to support the sales
growth in Asia.
Consolidated selling, general, and administrative expenses ("SG&A") for the
third quarter of 2003 were $11.6 million, versus $10.7 million for the third
quarter of 2002, an 8.4% increase. Excluding the additional SG&A related to the
acquisition of MAE, the increase from 2002 to 2003 was approximately 5.7%.
Commission expense increased 1.4% due to increased sales, while increases in
wages, employee benefit expenses, and software maintenance charges contributed
to the remainder of the increase.
Consolidated net income for the third quarter of 2003 was $1.5 million,
versus $1.0 million for the third quarter of 2002, an increase of 50.0%. The
Company benefited from favorable foreign currency exchange rates in the third
quarter of 2003 as well as lower interest expense due to the repayment of debt
and lower interest rates during 2003.
PENN ENGINEERING & MANUFACTURING CORP.
September 30, 2003
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Nine Months Ended September 30, 2003 vs. Nine Months Ended September 30, 2002
Consolidated net sales for the nine months ended September 30, 2003 were
$138.6 million, versus $111.4 million for the nine months ended September 30,
2002, a 24.4% increase. Sales from the Company's newest acquisition (MAE)
amounted to $7.1 million for the period since its acquisition on February 5,
2003. Net sales to customers outside the United States for the nine months ended
September 30, 2003 were $55.3 million, versus $36.6 million for the nine months
ended September 30, 2002, an increase of 51.1%. Net sales for the fastener
segment for the nine months ended September 30, 2003 were $70.4 million, versus
$57.7 million for the nine months ended September 30, 2002, a 22.0% increase.
Motor segment net sales (including MAE) were $31.7 for the nine months ended
September 30, 2003, versus $23.2 million for the nine months ended September 30,
2002, a 36.6% increase. Net sales for the distribution segment for the nine
months ended September 30, 2003 were $36.4 million, versus $30.5 million for the
nine months ended September 30, 2002, a 19.3% increase.
Within the fastener segment, sales volume increased 21.4% from the first
nine months of 2002 to the first nine months of 2003 while the average selling
price increased approximately 4.2%. As the business climate slowly improved in
all markets served by the Company, distributors were gradually replenishing
inventory levels. The Company's average selling price increased mainly as a
result of the weaker dollar in Europe. Within the motor segment, the number of
motors sold (excluding MAE) increased approximately 6.8% in the first nine
months of 2003 compared to the first nine months of 2002 while the average
selling price remained the same. Within the distribution segment, the Company
experienced international growth during the first nine months of 2003 compared
to the same period in 2002 as the Asian market increased 58.4% and the European
market increased 10.5%. The Company benefited from increased ordering activity
in both the computer market in Asia and the automotive market in Europe. The
recovery in the domestic distribution market remained sluggish during the first
nine months of 2003, posting only a 4.7% increase over the comparable period in
2002.
Consolidated gross profit for the first nine months of 2003 was $39.2
million, versus $34.8 million for the first nine months of 2002, a 12.6%
increase. The percentage increase in gross profit from the first nine months of
2002 to the first nine months of 2003 was less than the sales percentage
increase in all three segments due primarily to increased wages and benefit
expenses as well as increased freight and duty costs related to the increased
level of sales activity overseas.
Consolidated selling, general, and administrative expenses for the first
nine months of 2003 were $34.7 million, versus $32.0 million for the first nine
months of 2002, an increase of 8.4%. However, as a percent of sales, SG&A
expenses were 25.0% for the first nine months of 2003 compared to 28.7% for the
comparable period in 2002. Commission expense increased 5.8% from the first nine
months of 2002 to the first nine months of 2003 due to increased sales. In
addition, the Company experienced increases in wages, employee benefits,
software maintenance charges, and liability insurance.
Consolidated net income for the first nine months of 2003 was $3.3 million,
versus $2.4 million for the first nine months of 2002. The Company has benefited
from a lower effective tax rate in 2003 due to increased foreign sales while
favorable foreign currency transactions affected both periods.
PENN ENGINEERING & MANUFACTURING CORP.
September 30, 2003
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Liquidity and Capital Resources
Cash and cash equivalents at September 30, 2003 were $7.5 million compared
to $20.9 million at December 31, 2002. Working capital totaled $72.1 million at
September 30, 2003 compared to $76.0 million at December 31, 2002.
Net cash of $18.5 million was provided by operating activities for the nine
months ended September 30, 2003 compared to $16.0 million provided by operating
activities for the nine months ended September 30, 2002. The Company continued
to generate cash from further reductions in overall inventory levels during the
first nine months of 2003. However, as sales volume increased, the level of
accounts receivable also increased, thus decreasing the amount of cash provided
from operations. Most of the increased accounts receivable occurred in the
Asia-Pacific region where payment terms are generally longer than domestic
payment terms.
Net cash used in investing activities totaled $13.0 million for the nine
months ended September 30, 2003 due mainly to the acquisition of MAE in February
of 2003. The Company spent $2.6 million for capital additions in the first nine
months of 2003, the bulk of which was for a new heat treat furnace at the
Company's manufacturing facility in Ireland.
Net cash used in financing activities totaled $19.6 million for the nine
months ended September 30, 2003 compared to $7.9 million for the nine months
ended September 30, 2002. Because of the decreased capital expenditures, the
Company repaid short-term debt during both years. 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
$3.1 million for the nine months ended September 30, 2003.
The Company's main 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 which are
listed in Note 12 to the Company's Annual Report for the year ended December 31,
2002. 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 of changing those estimates and
assumptions could have a material effect 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 78% and 69% of total inventories at September 30, 2003 and
December 31, 2002, respectively, are priced on the first-in, first-out (FIFO)
method. The original cost of inventory is written-down to its estimated net
realizable value based on projected sales of the inventory and the age of the
inventory in stock. If actual future demand or market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required. Provisions for the write-down of inventory are recorded in cost
of products sold.
PENN ENGINEERING & MANUFACTURING CORP.
September 30, 2003
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Accounts Receivable
The Company maintains an allowance for doubtful accounts for trade
receivables for which collectibility is uncertain. At September 30, 2003 and
December 31, 2002, this allowance was approximately $794,000 and $830,000,
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.
Goodwill
SFAS No. 142 requires that goodwill no longer be amortized, and instead, be
tested for impairment on a periodic basis. At September 30, 2003, the Company
had $38,406,000 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 2002 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 has concluded that there is
no impairment of its goodwill as of September 30, 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, 2003.
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 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, 2002, the Company
determined this rate to be 7.00% and no adjustment to this rate has been made
for the nine months ended September 30, 2003. 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. Although in the
last two years pension plan assets have earned substantially less than 8.00%,
over the long-term, the Company believes that the return assumption of 8.00% is
reasonable, based on 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 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.
PENN ENGINEERING & MANUFACTURING CORP.
September 30, 2003
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 may 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. These and other risk factors have been further discussed in our
Report on Form 10-K for the year ended December 31, 2002.
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, 2002.
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 September 30, 2003 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
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, 2002.
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
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
or 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
Form 8-K filed on August 6, 2003, reporting under Item 7 the Company's
issuance of a press release regarding the Company's results for its
second quarter ended June 30, 2003.
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: November 14, 2003 By: /s/ Kenneth A. Swanstrom
--------------------
Kenneth A. Swanstrom
Chairman/CEO
Dated: November 14, 2003 By: /s/ Mark W. Simon
--------------------------
Mark W. Simon
Senior Vice President/CFO
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 Other Exhibit - Certification pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Other Exhibit - Certification pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.