SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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)
Registrant's telephone number, including area code: (215) 766-8853
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $1.00 par value American Stock Exchange
-----------------------
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 11, 1996, the aggregate market value based on the closing sales
price on that date of the voting stock held by non-affiliates of the Registrant
was approximately $75,700,000.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date: 1,707,082 shares of Common Stock
outstanding on March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of Registrant's 1995 Annual Report to Stockholders incorporated by
reference in Items 1, 3, 5, 6, 7, 8 and 14.
2. Portions of the Proxy Statement for Registrant's 1996 Annual Meeting of
Stockholders incorporated by reference in Items 10, 11, 12 and 13.
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business.
The Company, a Delaware corporation, was incorporated in 1942. During the
past five years, the primary businesses of Registrant have been:
(i) The development, manufacture and sale of PEM(R) self-clinching and
broaching fasteners and automatic insertion equipment for such fasteners sold
under the name PEMSERTER(R), and
(ii) The development, manufacture and sale through Registrant's Pittman
Division of permanent magnet field, brush-commutated direct current electric
motors under the Pittman(R) and Pitmo(R) trademarks, and electronically
commutated brushless direct current servomotors and controls under the Elcom(R)
trademark.
Self-clinching fasteners, which become a permanent part of the material to
which they are attached, provide permanent threads in sheet metal materials too
thin for threading. Broaching fasteners provide permanent threads in non-ductile
materials such as plastics and printed circuit boards.
Unless otherwise indicated or unless the context otherwise requires, the
term Registrant includes Registrant's wholly owned subsidiaries.
There were no significant developments in Registrant's business during the
fiscal year ended December 31, 1995.
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<PAGE>
(b) Financial Information About Industry Segments.
The answer to this Item is incorporated by reference to Note 10 of the
Notes to Consolidated Financial Statements "Financial Reporting for Segments of
the Company" on pages 21 and 22 of Registrant's 1995 Annual Report to
Stockholders which is included as Exhibit (13) to this Form 10-K Report.
(c) Narrative Description of Business.
The manufacture and sale of (i) self-clinching and broaching fasteners and
plastic inserts and (ii) direct current electric motors are Registrant's only
lines of business. The following table sets forth information with respect to
the percentage of total sales attributable to each of Registrant's principal
products which accounted for 10% or more of consolidated revenues in each of the
fiscal years ended December 31, 1993, 1994 and 1995:
Percentage of Total Sales
-------------------------
Year Ended Electric
December 31 Fasteners Motors
- ----------- --------- --------
1993 77% 23%
1994 79% 21%
1995 80% 20%
The products of Registrant described in Item 1(a) are marketed primarily
through independent manufacturers' representatives and, in the case of fasteners
and inserts, also by authorized distributors.
During the year ended December 31, 1995, conditions in the domestic market
for fasteners continued to be highly competitive. It is not possible to
determine with accuracy the relative competitive position of Registrant in the
market for self-clinching, broaching and insert fasteners. Registrant believes
-2-
<PAGE>
that it has maintained its market share during 1995. On the basis of reports
from its sales representatives and customers, Registrant believes that it is the
principal manufacturer and seller of self-clinching, broaching and insert
fasteners in the United States and that it offers a broader range of these
products than any of its competitors. Approximately ten other companies are
known to be competing with Registrant in the manufacture and sale of such
fasteners. Some of Registrant's competitors also manufacture products other than
self-clinching, broaching and insert fasteners.
Registrant also believes the Pittman Division maintained its competitive
position in the electric motor market in 1995.
Among Registrant's principal customers for fasteners and PEMSERTERS(R) are
manufacturers of business machines, electronic and communications equipment,
electrical equipment, industrial controls instrumentation, vending machines,
automotive subcontractors and other fabricated metal products. The principal
customers for the direct current electric motors and servomotors are
manufacturers of automated production equipment, instruments, computer
peripherals, business machines and medical equipment. In the opinion of
Registrant, no material part of its business is dependent upon a single customer
or a few customers, the loss of any one or more of which would have a material
adverse effect on the business of Registrant. However, sales of fasteners to one
of Registrant's authorized distributors totalled approximately $14,322,000 for
the year ended December 31, 1993, $16,554,000 for the year ended December 31,
1994 and $20,854,000 for the year ended December 31, 1995, or approximately
14.2%, 13.6% and 14.8%, respectively, of Registrant's consolidated net sales in
such years.
-3-
<PAGE>
As of December 31, 1995, Registrant had an order backlog of $70,364,000,
compared with $41,902,000 as of December 31, 1994. Registrant estimates that
substantially all of its backlog as of December 31, 1995 will be shipped during
its fiscal year ending December 31, 1996.
The raw materials used by Registrant are generally available in adequate
supply.
Registrant holds a number of patents, and has patent applications pending,
in the United States and various foreign countries. Management believes,
however, that Registrant's business is not materially dependent on any patent or
group of patents. The principal trademarks of Registrant are registered in the
United States and various foreign countries.
Research and development is carried on by the operating personnel of
Registrant on a continuing basis. The amounts expended for research and
development for the fiscal years ended December 31, 1993, 1994 and 1995 were
approximately $1,161,000, 1,136,000 and $1,460,000, respectively.
Registrant believes that compliance with federal, state and local laws and
regulations that have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, will not have a material adverse effect upon the earnings or
competitive position of Registrant.
As of December 31, 1995, 1,211 persons were employed by Registrant, 123
more than were employed as of December 31, 1994.
Registrant does not consider its business to be seasonal in any material
respect, nor is any material portion of Registrant's
-4-
<PAGE>
business subject to the renegotiation of profits or termination of
contracts at the election of the Government.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales.
The answer to this Item is incorporated by reference to Note 10 "Financial
Reporting for Segments of the Company" on pages 21 and 22 of Registrant's 1995
Annual Report to Stockholders, which is included as Exhibit (13) to this Form
10-K. Also, all foreign sales except for those of PEM International, Ltd. are
sold F.O.B., Registrant's factory, payable in U.S. dollars. Sales in the United
Kingdom and Western Europe are made through Registrant's wholly owned
subsidiary, PEM International, Ltd. and are denominated in pounds sterling. All
foreign sales are subject to special risks of exchange controls and restrictions
on the repatriation of funds and also may be affected by the imposition or
increase of taxes and/or tariffs and international instability.
Item 3. Legal Proceedings.
The answer to this Item is incorporated by reference to Note 9 of Notes to
Consolidated Financial Statements "Contingencies" on page 20 of Registrant's
1995 Annual Report to Stockholders which is included as Exhibit (13) to this
Form 10-K.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters.
The answer to this Item is incorporated by reference to page 12 of
Registrant's 1995 Annual Report to Stockholders which is included as Exhibit
(13) to this Form 10-K Report.
-5-
<PAGE>
Item 6. Selected Financial Data.
The Five-Year Financial Data and other financial information for Registrant
is incorporated by reference to page 4 of Registrant's 1995 Annual Report to
Stockholders, which is included as Exhibit (13) to this Form 10-K Report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The answer to this Item is incorporated by reference to pages 6 through 11
of Registrant's 1995 Annual Report to Stockholders, which is included as Exhibit
(13) to this Form 10-K Report.
Item 8. Financial Statements and Supplementary Data.
The answer to this Item is incorporated by reference to pages 13 through 23
of Registrant's 1995 Annual Report to Stockholders, which is included as Exhibit
(13) to this Form 10-K Report, and the schedules included herewith.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Schedules and
Reports on Form 8-K.
(a) Financial Statements, Financial Schedules and
Exhibits Filed.
<TABLE>
<CAPTION>
1. Consolidated Financial Statements. Page
-----
<S> <C>
The following Consolidated Financial Statements of Registrant and its
subsidiaries are filed as part of this Form 10-K Report:
Consolidated Balance Sheets at December 31, 13*
1995 and 1994.
Statements of Consolidated Income and 14*
Retained Earnings for the years ended
December 31, 1995, 1994 and 1993.
Page
-----
Statements of Consolidated Cash Flows for 15*
the years ended December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements. 16-22*
Independent Auditors' Report 23*
2. Financial Schedules.
**Schedules (consolidated) for the years ended December
31, 1995, 1994 and 1993 (as applicable):
II - Consolidated Valuation Accounts 11
Independent Auditors' Report on Schedule
</TABLE>
- -------------------
* Refers to the respective page of Registrant's 1995 Annual Report to
Stockholders, which is filed as Exhibit (13) to this Form 10-K Report.
With the exception of the portions of such Annual Report specifically
incorporated by reference in this Item, and in Items 1, 3, 5, 6, 7 and 8
hereof, such Annual Report shall not be deemed filed as a part of this Form
10-K Report or otherwise deemed subject to the liabilities of Section 18 of
the Securities Exchange Act of 1934.
** All other schedules are omitted because the required information, as
applicable, is included in the Consolidated
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<PAGE>
Financial Statements and Notes which have been incorporated by reference
herein.
3. Exhibits.
Reference is made to the Exhibit Index on page 10 of this Form 10-K/A.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1995, Registrant did not
file any reports on Form 8-K.
-8-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K/A report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PENN ENGINEERING &
MANUFACTURING CORP.
Date: May 1, 1996 By: /s/ Mark W. Simon
----------------------------------
Mark W. Simon,
Vice President, Finance
-9-
<PAGE>
PENN ENGINEERING & MANUFACTURING CORP.
EXHIBIT INDEX
Page
Item Description Number
- ------ ---------------------------------- --------
(3)(i) Certificate of Incorporation
of Registrant, as amended
(incorporated by reference to
Exhibit (3)(A) of Registrant's
Form 10-K Annual Report for the
fiscal year ended December 31,
1987).
(3)(ii) By-laws of Registrant, as amended
(incorporated by reference to
Exhibit 3(ii) of Registrant's
Form 10-K Annual Report for the
fiscal year ended December 31, 1994).
(10)(i) Right of First Refusal dated as of
September 5, 1986 between Registrant
and Lawrence W. Swanstrom and
Daryl E. Swanstrom. (Incorporated
by reference to Exhibit A to the
Company's Form 8-K Current Report
dated September 5, 1986, the date
of the earliest event reported.)
(13) 1995 Annual Report to Stockholders Filed herewith
(Only those pages expressly
incorporated by reference in Items
1, 3, 5, 6, 7, 8, and 14 of this
Form 10-K report)
(21) Subsidiaries of Registrant
(incorporated by reference to
the Company's initial filing of
this Form 10-K report for the year
ended December 31, 1995
filed on April 1, 1996)
(27) Financial Data Schedule Filed herewith
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<PAGE>
PENN ENGINEERING & MANUFACTURING CORP. AND SUBSIDIARIES
-------------------------------------------------------
SUPPLEMENTAL DATA
-----------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
SCHEDULE II
PENN ENGINEERING & MANUFACTURING CORP. AND SUBSIDIARIES
CONSOLIDATED VALUATION ACCOUNTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance, Charged Balance,
Beginning (Credited) to End
DESCRIPTION of Year Expenses Deductions of Year
<S> <C> <C> <C> <C>
Year Ended December 31, 1995:
Allowance for doubtful accounts $800,000 $ 156,294 $ 56,294 $900,000
-------- --------- -------- --------
Year Ended December 31, 1994:
Reserve for impairment of
short-term investments $100,000 $(100,000)
-------- ----------
Allowance for doubtful accounts $524,400 $ 343,630 $ 68,030 $800,000
-------- --------- -------- --------
Year Ended December 31, 1993:
Warranty reserve $ 57,500 $ 57,500
-------- --------
Reserve for impairment of
short-term investments $200,000 $(100,000) $100,000
-------- ---------- --------
Allowance for doubtful accounts $450,000 $ 144,327 $ 69,927 $524,400
-------- --------- -------- --------
</TABLE>
-11-
<PAGE>
INDEPENDENT AUDITORS' REPORT
Penn Engineering & Manufacturing Corp.:
We have audited the consolidated financial statements of Penn Engineering &
Manufacturing Corp. and subsidiaries as of December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995, and have issued
our report thereon dated February 6, 1996 (April 17, 1996 as to Note 11); such
consolidated financial statements and report are included in your 1995 Annual
Report to Stockholders and are incorporated herein by reference. Our audits also
included the consolidated financial schedule of Penn Engineering & Manufacturing
Corp. and subsidiaries, listed in Item 14(a)2. This consolidated financial
schedule is the responsibility of the Corporation's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 6, 1996
(April 17, 1996 as to Note 11)
EXHIBIT 13
(ANNUAL REPORT TO STOCKHOLDERS)
Financial Highlights
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $141,268 $121,470 $100,665 $88,328 $70,845
Cost of products sold 96,190 83,128 70,979 61,127 51,045
Income taxes 8,323 6,686 4,548 4,219 2,394
Income before cumulative effect of
1993 and 1992 accounting changes 13,798 10,441 6,929 6,327 3,912
Net income 13,798 10,441 7,352 8,127 3,912
Capital expenditures 17,213 3,833 8,354 3,395 2,435
Depreciation 4,165 3,425 3,180 2,855 2,819
Total assets 96,074 82,127 73,542 67,132 57,486
Stockholders' equity 76,091 65,910 57,819 52,498 46,939
Working capital $ 38,881 $ 41,612 $ 34,953 $ 35,112 $ 29,665
Number of stockholders of record
(at year end) 540 580 607 650 670
Number of employees (at year end) 1,211 1,088 1,008 978 806
Average number of common shares
outstanding used to compute
per share information (in thousands)
- Historical 1,707 1,707 1,707 1,707 1,707
- Restated* 6,828 6,828 6,828 6,828 6,828
Per share information: - Historical
Income before cumulative effect of
1993 and 1992 accounting changes $8.08 $6.12 $4.06 $3.71 $2.29
Net income 8.08 6.12 4.31 4.76 2.29
Dividends 2.00 1.525 1.15 1.00 .90
Stockholders' equity $44.58 $38.61 $33.87 $30.75 $27.50
Per share information: - Restated*
Income before cumulative effect of
1993 and 1992 accounting changes $2.02 $1.53 $1.01 $.93 $.57
Net income 2.02 1.53 1.08 1.19 .57
Dividends .50 .38125 .2875 .25 .225
Stockholders' equity $11.15 $9.65 $8.47 $7.69 $6.88
</TABLE>
* Share and per share amounts have been restated to give effect to a 4-for-1
split of the Company's common stock, effected through a stock dividend, to
shareholders of record on May 3, 1996.
4
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
Overview
The Company's operations consist of two business segments: PEM(R) brand
self-clinching fasteners, including fastener insertion machines and Pittman(R)
electric dc motors. Self-clinching fasteners, which accounted for approximately
80% of the Company's consolidated sales in 1995 compared to 75% in 1991, are
marketed through a worldwide network of distributors. In 1995, sales to the
computer/electronics and automotive industries accounted for approximately 90%
and 5% of fastener sales, respectively, with the balance distributed among other
industries such as recreational equipment, commercial appliances, and gaming
machines.
Electric motors accounted for approximately 20% of the Company's
consolidated sales in 1995 compared to 25% in 1991, and are marketed in the
United States and Europe through regional sales representatives. The Company
primarily designs and manufactures its motors on a custom basis. End users of
the Company's motors include manufacturers of computer and electronics
equipment, hospital emergency/surgery equipment, and industrial equipment. The
Company's motor segment has benefited from a gradual shift to longer lasting
"brushless" motors which enjoy higher margins than brush-commutated motors. The
Company's brushless motors have an average price of approximately $210 per unit,
reflecting more expensive materials and higher labor content, and are used in
equipment requiring a high degree of reliability, while brush-commutated motors
have an average price of $40 per unit and are typically used in less
critical/demanding volume related equipment. The percentage of total motor sales
represented by brushless motors was 21.7% in 1995 compared to 8.1% in 1991.
The Company's consolidated net sales increased from $ 70.8 million in
1991 to $141.3 million in 1995. The number of fastener units increased 105.9%
from 896 million in 1991 to 1.8 billion in 1995. Motor unit sales increased
21.9% from 557,000 in 1991 to 680,000 in 1995. This growth in sales is largely
the result of the growth of the personal computer and electronics markets.
[GRAPHIC]
In the printed document there is a bar graph illustrating the following:
STOCK PERFORMANCE
(Annual High/Low)
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
High $28.875 $39.25 $47.875 $52.5 $100.50
Low $18.50 $29.00 $36.875 $40.625 $ 42.50
In 1995, the Company's domestic and foreign customers accounted for
74.9% and 25.1%, respectively, of the Company's sales compared to 77.2% and
22.8% in 1991. The Company's export sales have benefited from the Company's
ability to serve large multi-national computer and electronic manufacturers who
have moved much of their product fabrication to offshore labor markets. The
Company has maintained significant distribution channels and inventories in
Europe and the Pacific Rim for more than 25 years and 10 years, respectively.
Between 1991 and 1995, the Company's distributors increased their inventories of
the Company's fasteners nearly 500% in the European market and over 800% in the
Pacific Rim market. In addition, the Company maintains an inventory of more than
100 million fasteners at its Pennsylvania facility. As a result of increasing
the availability of its products, the Company has supported growth in its sales
and positioned itself to meet the needs of its customers in the North American,
European, and Pacific Rim markets.
The Company has strengthened its program of providing product in those
areas that would best serve the electronics and computer manufacturers. As part
of increasing the worldwide availability of its
6
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
products, the Company recently established a subsidiary in Singapore through the
acquisition of the assets of the Company's distributor in Singapore. To better
meet the Pacific Rim demand for its fasteners, the Company intends to create a
master warehouse in Singapore that will serve the same function as the existing
Company warehouse in England. The ownership of warehouse facilities in England
and Singapore allows the Company to ship product in bulk via ocean freight
rather than the more costly air shipments directly to the end user. The Company
also plans to establish application engineering capabilities in England and
Singapore. While the Company's international pricing is consistent with its
domestic pricing, the Company's profits from export sales may be affected to
some extent by freight costs, currency fluctuations, duties and local
administrative costs. The Company has not experienced any material impact from
these factors to date.
Historically, the Company has been able to sustain its margins and
achieve steady improvements in fastener profitability largely as a result of (i)
increased customer demand for its products, (ii) focus on cost containment and
improved productivity, and (iii) the general ability to provide the right
product at the right time and at the right location to support customer
applications. The Company's gross margin increased from 28.0% in 1991 to 31.9%
in 1995 because of the ability to increase the production and shipment of
fasteners without a proportional increase in fixed costs and overhead. As an
example, fixed manufacturing costs of fasteners (i.e., depreciation and
supervisory expenses) as a percentage of sales declined from 11.6% in 1991 to
7.6% in 1995. In addition, process improvement techniques, including focused
work centers and product cells where fasteners are essentially complete when
they leave the work center, have led to cost reductions within the manufacturing
departments. The Company is not always able to pass raw material price increases
along to its customers, but through cost reduction programs and by keeping
control of the indirect and fixed costs of operations, the Company increased the
operating profit margins of its fastener operations from 7.6% in 1991 to 16.2%
in 1995. Price increases on the Company's fastener products since 1991 have
averaged 2.0% to 2.5% annually.
[GRAPHIC]
In the printed document there is a bar graph illustrating the following:
STOCKHOLDERS' EQUITY
Millions of Dollars
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Stockholders' Equity $46.9 $52.5 $57.8 $65.9 $76.1
[GRAPHIC]
In the printed document there is a bar graph illustrating the following:
CORPORATE NET SALES
Before Accounting
Change
-----------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Net Sales
(Millions of Dollars) $70.8 $88.3 $100.7 $121.5 $141.3
The motor operation's gross margin increased 41.8% from $5.5 million in
1991 to $ 7.8 million
7
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
in 1995. Continued emphasis on demand-flow technology has allowed Pittman
to move away from batch size manufacturing and reduce work-in-process inventory
by approximately 61%. The resulting improved process flow has led to increased
gross margins. Several of Pittman's key productivity and cycle time reduction
projects have increased some component assembly productivity by as much as 50%
and thereby contributed to improved gross margins.
Currently the Company's fastener operation is working at near full
capacity to meet strong demand for the Company's products. Overtime and higher
than planned outside supplemental screw machine support have impacted negatively
the costs of the Company's fastener operation recently; however, the Company has
incurred approximately $20 million in capital expenditures in the last two years
to increase machine capacity. The Company's objective is to reduce current
overtime levels and delivery lead times of the Company's product and enhance the
Company's ability to respond to new growth opportunities. The Company typically
experiences a period of six to nine months between the purchase of equipment and
its full inclusion into the manufacturing process because of equipment
manufacturers' lead times.
In the past the Company has experienced a surge in order volume during
the first two months of the calendar year as distributors build inventory to
meet customer demand. In addition, the first quarter of the year is negatively
impacted by relatively higher payroll costs which precede the effectiveness of
price increases. The Company's profits in the fourth quarter have typically been
negatively affected by holiday related labor inefficiencies. Contracts with
major customers are generally negotiated on an annual basis and as a result
there is no guarantee that the Company's product pricing will support historical
profit margins. As a result, the Company targets 5% annual gains in productivity
and closely monitors its return on equity. The Company also targets, at a
minimum, a 15% return on equity. In 1994 and 1995 the Company achieved a return
on equity of 16.9% and 19.4%, respectively.
Results of Operations
The following tables sets forth for the periods indicated certain
information derived from the Company's consolidated statements of income
expressed in dollars and as a percentage of total net sales and segment sales.
There can be no assurance that the trends in operating results will continue in
the future:
8
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Year Ended December 31, 1995 1994 1993
---- ---- ----
Amount % Amount % Amount %
------- --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
NET SALES
Fasteners $113,323 80.2 $ 96,067 79.1 $ 77,192 76.7
Motors 27,945 19.8 25,403 20.9 23,473 23.3
-------- ----- -------- ----- -------- -----
TOTAL $141,268 100.0 $121,470 100.0 $100,665 100.0
======== ===== ======== ===== ======== =====
Domestic $105,831 74.9 $ 93,979 77.4 $ 80,106 79.6
Foreign 35,437 25.1 27,491 22.6 20,559 20.4
-------- ---- -------- ----- -------- -----
TOTAL $141,268 100.0 $121,470 100.0 $100,665 100.0
======== ===== ======== ===== ======== =====
GROSS MARGIN BY SEGMENT
Fasteners $ 37,258 32.9% $ 31,427 32.7% $ 23,350 30.3%
Motors 7,820 28.0 6,914 27.2 6,336 27.0%
TOTAL COMPANY
Gross margin $ 45,078 31.9% $ 38,342 31.6% $ 29,686 29.5%
Selling, general & administrative expenses 24,056 17.0 21,842 18.0 18,596 18.5
Operating profit 21,022 14.9 16,500 13.6 11,090 11.0
Net income 13,798 9.8 10,441 8.6 7,352 7.3
</TABLE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Consolidated net sales for 1995 were $141.3 million, versus $121.5
million in 1994, a 16.3% increase. Sales to customers outside the United States
for 1995 were $35.4 million, versus $27.5 million in 1994, a 28.9% increase.
Net sales of the fastener operation for 1995 were $113.3 million, versus
$96.1 million in 1994, a 17.9% increase. The number of fasteners sold increased
approximately 17.7% from 1994 to 1995. Shipment of fasteners within North
America (including Canada) increased approximately 12.2% from 1994 to 1995, and
represented approximately 72.1% of total fasteners shipped in 1995. Shipments of
fasteners to Europe and the Asia-Pacific region increased 37.2% and 26.4%,
respectively, from 1994 to 1995 and represented approximately 21.9% and 6.0%,
respectively, of total fasteners shipped in 1995. The continued strong demand
for personal computers as well as other electronic equipment, which accounted
for approximately 90.0% of fastener sales in 1994 and 1995, has been the main
cause of the increased shipment volume. Average selling prices for fasteners
shipped in 1995 increased less than 1% from 1994 to 1995 as a result of
selective price increases effective in the second quarter of 1995.
Motor sales increased 10.0% from the $25.4 million recorded in 1994 to
$27.9 million for the year ended December 31, 1995. The number of motors sold
increased approximately 1.0% from 1994 to 1995, while the average selling price
increased 8.9% due to a shift in product mix towards higher-priced brushless
motors and motors with additional features and options. During 1995, brushless
motor sales, which carry a higher margin, comprised 21.7% of total motor sales
compared to 16.8% in 1994.
9
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
Consolidated gross margin for 1995 was $45.1 million, versus $38.3
million for 1994, a 17.8% increase. Fastener gross margin increased 18.6% from
1994 to 1995 as a result of the increased number of units sold without a
proportionate increase in cost. As a result of the continuing increase in demand
for the Company's fasteners, manufacturing operations were nearly at full
capacity, allowing the Company to realize economies of scale with regard to its
fixed expenses. In addition, increases in raw material costs were offset by cost
reductions within the manufacturing departments.
Selling, general, and administrative expenses ("SG&A") for 1995 were
$24.1 million, versus $21.8 million in 1994, a 10.1% increase. However, as a
percentage of sales, SG&A declined from 18.0% in 1994 to 17.0% in 1995. Selling
expenses, as a percentage of sales, declined because sales on which the Company
does not pay commissions increased in 1995 compared to 1994. The Company's sales
to the Common Market and to the Pacific Rim are through subsidiaries and
distributors and consequently carry no commission-related expenses. These sales
increased approximately 29% in 1995 compared to 1994. In addition, growth in the
Company's general and administrative staff was less than the increase in the
Company's sales.
Consolidated net income for 1995 was $13.8 million, versus $10.4 million
in 1994, a 32.2% increase. Increased investment income and favorable
exchange rates in 1995 contributed $.5 million to other income in 1995. The
Company's effective tax rate decreased from 39.0% in 1994 to 37.6% in 1995. This
reduction was caused primarily by a Pennsylvania state income tax rate reduction
that was retroactive to the beginning of 1995. These factors, combined with the
operating efficiencies associated with increased capacity utilization, and the
increased sales volume, all contributed to the increase in net income in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Consolidated net sales for 1994 were $121.5 million, versus $100.7
million in 1993, a 20.7% increase. Sales to customers outside the United States
were $27.5 million for 1994, versus $20.6 million for 1993, a 33.7% increase.
Net sales of the fastener operation for 1994 were $96.1 million, versus
$77.2 million in 1993, a 24.5% increase. The number of fasteners sold increased
approximately 22.3% from 1993 to 1994. Shipments of fasteners within North
America (including Canada) increased approximately 17.7% while shipments of
fasteners to Europe and the Asia-Pacific region increased 37.5% and 43.5%,
respectively, from 1993 to 1994. This volume increase resulted from the
continuing demand for telecommunications and data communications equipment and
personal computers. The remainder of the fastener revenue increase was due to an
effective selling price increase of approximately 3% implemented during the
second quarter of 1994.
Net sales of the motor operation for 1994 were $25.4 million, versus
$23.5 million in 1993, an 8.2% increase. The number of motors sold increased
approximately 1.4% from 1993 to 1994, while the average selling price increased
6.8% from 1993 to 1994 due to a shift in product mix towards more higher-priced
brushless motors and motors with additional features and options. Domestic motor
sales increased 12.1% from 1993 to 1994, while foreign sales decreased 17.5% due
to a product phase-out by an overseas customer. During 1994, brushless motor
sales, which carry a higher margin, comprised 16.8% of total motor net sales
compared to 14.3% in 1993.
Consolidated gross margin for 1994 was $38.3 million, versus $29.7
million for 1993, a 29.3% increase. Fastener gross margin increased 34.6% from
1993 to 1994 as a result of the increased number of units sold without a
proportionate increase in costs. As a result of the continuing increase in
10
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
demand for the Company's fasteners, manufacturing operations were nearly at full
capacity, allowing the Company to realize economies of scale with regard to its
fixed expenses. In addition, increases in raw material costs were offset by cost
reductions within the manufacturing departments.
SG&A for 1994 were $21.8 million, versus $18.6 million in 1993, a 17.5%
increase. However, as a percentage of sales, SG&A declined from 18.5% in 1993 to
18.0% in 1994 as sales volume increases more than offset the labor and benefit
increases comprising SG&A. Cost of products sold, as a percentage of sales, also
decreased from 70.5% in 1993 to 68.4% in 1994 due to economies of scale
resulting from increased production volume, better factory utilization, and
continued emphasis on cost containment.
Consolidated net income for 1994 was $10.4 million, versus $7.4 million
in 1993, a 42.0% increase. Adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", resulted in an increase in net
income of $.4 million in 1993. Other income totaled $.6 million in 1994, an
increase of 62.2% over 1993. This increase was primarily caused by favorable
currency exchange rates as well as increased investment income.
Liquidity and Capital Resources
The Company's liquidity needs are primarily for capital expenditures and
working capital. Cash flow from operations continues to be the primary source of
financing for the Company's growth. The Company generated cash from operations
of $14.7 million in 1995 compared to $12.3 million in 1994 and $9.0 million in
1993. Working capital decreased in 1995 to $38.9 million from $41.6 million in
1994 primarily due to the increase in notes and accounts payable needed to
finance capital expenditures and raw material inventory. Working capital
increased to $41.6 million in 1994 from $35.0 million in 1993 primarily due to
increased receivables resulting from increased sales volume.
The Company annually invests in capital assets primarily to increase
production capacity and efficiency. In 1995, the Company spent a record $17.2
million for capital expenditures in response to the continuing demand for the
Company's products. These expenditures included construction of a 43,000 square
foot addition to the Company's Danboro facility, which is expected to be
completed in the spring of 1996. Capital expenditures in 1994 and 1993 were $3.8
million and $8.4 million, respectively. In addition to the working capital
described above, the Company has available unused short-term lines of credit
totaling approximately $36.0 million as of December 31, 1995. The Company
expects to utilize a portion of these credit lines in 1996 to supplement cash
flow from operations to finance capital expenditures of approximately $25
million, including a new 120,000 square foot facility to replace the Company's
58,000 square foot facility in Winston-Salem, North Carolina. The Company's
five-year plan includes $100 million in capital expenditures to increase
capacity by 25% during this period. The Company expects to use internally
generated earnings and external financing to fund these expenditures.
On a historical basis, stockholders' equity per share at the end of 1995
was $44.58 compared to $38.61 at year-end 1994 and $33.87 at year-end 1993.
Stockholders' equity per share amounts as adjusted for a 4-for-1 stock split,
effected by a stock dividend, that was authorized by the Board of Directors on
April 17, 1996 for stockholders of record on May 3, 1996, were $11.15 at the end
of 1995 compared to $9.65 at the end of 1994 and $8.47 at the end of 1993. The
Company's total dividends paid increased 31.1% from $2.6 million in 1994 to $3.4
million in 1995 after having increased 32.6% from $2.0 million in 1993 to $2.6
million in 1994. On April 17, 1996, the Company declared a quarterly cash
dividend of $.10 per share, on total shares outstanding after the stock
dividend, payable on July 9, 1996, to stockholders of record on June 14, 1996.
11
<PAGE>
Selected Quarterly Financial Data
(Unaudited) (In thousands except per share amounts and prices)
<TABLE>
<CAPTION>
1995 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31 Total Year
--------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $35,299 $36,898 $34,080 $34,991 $141,268
Gross profit.......................................... 10,669 11,753 10,403 12,253 45,078
Net income............................................ 3,023 3,457 3,384 3,934 13,798
Net income per share-historical/restated*............. 1.77/.44 2.03/.51 1.98/.50 2.30/.57 8.08/2.02
Dividends declared per share-historical/restated*..... .275/.07 .275/.07 .275/.07 1.175/.29+ 2.00/.50
--------- --------- -------- ---------- ----------
Market prices per share:
High............................................... 59 75 1/2 100 1/2 97 100 1/2
Low................................................ 42 1/2 54 73 1/2 77 42 1/2
</TABLE>
+ Includes a regular dividend of $.275 per share and an extra dividend of
$.90 per share ($0.07 per share and $.22 per share on a restated basis).
<TABLE>
<CAPTION>
1994 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31 Total Year
--------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $28,408 $31,021 $30,836 $31,205 $121,470
Gross profit.......................................... 8,013 9,555 10,060 10,714 38,342
Net income............................................ 1,637 2,509 2,828 3,467 10,441
Net income per share-historical/restated*............. .96/.24 1.47/.37 1.60/.41 2.03/.51 6.12/1.53
Dividends declared per share-historical/restated*..... .25/.063 .25/.063 .25/.063 .775/.194+ 1.525/.381
--------- --------- -------- ---------- ----------
Market prices per share:
High............................................... 52 1/2 52 1/8 47 43 52 1/2
Low................................................ 47 47 1/8 42 1/2 40 5/8 40 5/8
</TABLE>
+ Includes a regular dividend of $.275 per share and an extra dividend of
$.50 per share ($.07 per share and $.125 per share on a restated basis). The
regular dividend was increased from $.25 to $.275 in the fourth quarter of 1994
(increased from $.063 to $.07 on a restated basis).
* Per share data has been restated to give effect to a 4-for-1 stock split,
effected by a stock dividend, to shareholders of record May 3, 1996
The common stock of Penn Engineering & Manufacturing Corp. is traded on the
American Stock Exchange. Symbol: PNN. As of January 31, 1996 the number
of stockholders of record was approximately 540.
Lines of Business
The manufacture and sale of fastener products and dc motors are the Company's
only lines of business. Certain information on percent of sales and percent
of operating profits attributable to these lines of business for the last
three years is as follows:
Year Ended December 31, 1995 1994 1993
---- ---- ----
Sales
Fastener products................................ 80% 79% 77%
Electric motors.................................. 20 21 23
Operating Profit
Fastener products................................ 87 86 84
Electric motors.................................. 13 14 16
See Note 10 to consolidated financial statements.
12
<PAGE>
Consolidated Balance Sheets
At December 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,459 $ 6,106
Short-term investments 5,988 5,303
Accounts receivable (less allowance for doubtful accounts-
1995, $900; 1994, $800) 20,845 20,059
Inventories 20,275 17,637
Deferred income taxes 959 897
Other current assets 2,557 1,107
------- -------
Total current assets 52,083 51,109
------- -------
PROPERTY-At cost:
Land and improvements 3,699 2,247
Buildings and improvements 15,843 14,089
Machinery and equipment 57,295 43,416
------- -------
Total 76,837 59,752
Less accumulated depreciation 34,896 30,832
------- -------
Total property-net 41,941 28,920
------- -------
OTHER ASSETS 2,050 2,098
------- -------
TOTAL $96,074 $82,127
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,303 $ 2,750
Notes payable 1,500
Accrued expenses:
Pension and profit sharing 3,984 2,736
Income taxes 468 813
Payroll and commissions 2,426 2,654
Other 521 544
------- ------
Total current liabilities 13,202 9,497
------- ------
ACCRUED PENSION COST 4,715 5,370
------- ------
DEFERRED INCOME TAXES 2,066 1,350
------- ------
STOCKHOLDERS' EQUITY (See Note 11):
Common stock - authorized 3,000,000 shares of $1.00 par value each;
issued 1,772,025 shares 1,772 1,772
Additional paid-in capital 932 932
Retained earnings 74,905 64,521
Unrealized (loss) on investments (net of tax) (60) (140)
Cumulative foreign currency translation adjustment (506) (223)
------- ------
Total 77,043 66,862
------- ------
Less cost of treasury stock-64,943 shares 952 952
------- ------
Total stockholders' equity 76,091 65,910
------- ------
TOTAL $96,074 $82,127
======= =======
</TABLE>
13
See the accompanying notes to the consolidated financial statements.
<PAGE>
Statements of Consolidated Income & Retained Earnings
For the years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
(Dollars in thousands except share and per share amounts) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 141,268 $ 121,470 $ 100,665
OTHER INCOME - Net 1,099 627 387
---------- ---------- ----------
Total 142,367 122,097 101,052
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of products sold 96,190 83,128 70,979
Selling expenses 14,867 13,634 10,885
General and administrative expenses 9,189 8,208 7,711
---------- ---------- ----------
Total 120,246 104,970 89,575
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF 1993 ACCOUNTING CHANGE 22,121 17,127 11,477
PROVISION FOR INCOME TAXES 8,323 6,686 4,548
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF 1993
ACCOUNTING CHANGE 13,798 10,441 6,929
CUMULATIVE EFFECT OF 1993
ACCOUNTING CHANGE 423
---------- ---------- ----------
NET INCOME 13,798 10,441 7,352
RETAINED EARNINGS AT
BEGINNING OF YEAR 64,521 56,683 51,294
DIVIDENDS ON COMMON STOCK
(Historical per share - 1995, $2.00; 1994, $1.525; 1993, $1.15)
(Restated per share - 1995, $.50; 1994, $.38125; 1993, $.2875) (3,414) (2,603) (1,963)
---------- ---------- ----------
RETAINED EARNINGS AT
END OF YEAR $ 74,905 $ 64,521 $ 56,683
========== ========== ==========
INCOME PER SHARE - Historical
Weighted average number
of shares of common stock
outstanding during the year 1,707,082 1,707,082 1,707,082
Income before cumulative effect of 1993
accounting change $ 8.08 $ 6.12 $ 4.06
Cumulative effect of 1993 accounting change .25
---------- ---------- ----------
Net income $ 8.08 $ 6.12 $ 4.31
========== ========== ==========
INCOME PER SHARE - Restated (See Note 11)
Weighted average number
of shares of common stock
outstanding during the year 6,828,328 6,828,328 6,828,328
Income before cumulative effect of 1993
accounting change $ 2.02 $ 1.53 $ 1.01
Cumulative effect of 1993 accounting change .07
---------- ---------- ----------
Net income $ 2.02 $ 1.53 $ 1.08
========== ========== ==========
See the accompanying notes to the consolidated financial statements
</TABLE>
14
<PAGE>
Statements of Consolidated Cash Flows
For the years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- ---------- --------
<S> <C> <C> <C>
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income $ 13,798 $ 10,441 $ 7,352
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 4,165 3,425 3,180
Loss (gain) on disposal of property 17 (2) 5
Loss (gain) on disposal of investments (41) 34 (6)
Reserve for impairment on short-term investments (100)
Changes in assets and liabilities:
(Increase) in receivables (786) (4,718) (792)
(Increase) decrease in inventories (2,638) 3,496 (1,150)
(Increase) decrease in other current assets (1,450) (523) 646
(Increase) decrease in deferred income taxes-current (62) 1 (31)
(Increase) in other assets (560) (1,490)
Increase (decrease) in accounts payable 1,553 385 (1,119)
Increase in accrued expenses 652 852 701
Increase (decrease) in accrued pension costs (655) 201 896
Increase (decrease) in deferred income taxes-noncurrent 716 208 (541)
-------- ---------- --------
Net cash provided by operating activities 14,709 12,310 9,041
-------- ---------- --------
Cash Flows from Investing Activities:
Property additions (17,213) (3,833) (8,354)
Additions to available-for-sale and
held-to-maturity investments (28,343) (13,266)
Additions to investments (1,400)
Proceeds from disposal of available-for-sale and
held-to-maturity investments 28,440 12,079
Proceeds from disposal of investments 714
Proceeds from disposal of property 3 13 6
-------- ---------- --------
Net cash used in investing activities (17,113) (5,007) (9,034)
-------- ---------- --------
Cash Flows from Financing Activities:
Net short-term borrowings (repayments) 1,500 (1,152) 1,152
Dividends paid (3,414) (2,603) (1,963)
-------- ---------- --------
Net cash used in financing activities (1,914) (3,755) (811)
-------- ---------- --------
Effect of exchange rate changes on cash (329) 358 (58)
-------- ---------- --------
Net increase (decrease) in cash and cash equivalents (4,647) 3,906 (862)
Cash and cash equivalents at beginning of year 6,106 2,200 3,062
-------- ---------- --------
Cash and cash equivalents at end of year $ 1,459 $ 6,106 $ 2,200
======== ========== ========
Supplemental Cash Flow Data:
Cash paid during the year for:
Income taxes $ 8,062 $ 6,008 $ 5,230
Interest 10 66 181
</TABLE>
See the accompanying notes to the consolidated financial statements
15
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 1: Significant Accounting Policies
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
Penn Engineering & Manufacturing Corp. and its wholly owned subsidiaries, PEM
International Ltd., PEM Investment, Inc., and PEM Management, Inc. All
significant intercompany transactions and balances are eliminated in
consolidation.
b. INVESTMENTS
The Company adopted as of January 1, 1994, the accounting and disclosure
requirements of the Statement of Financial Accounting Standards No. 115 (SFAS
No. 115), "Accounting for Certain Investments in Debt and Equity Securities"
(Note 2). For years prior to 1994, the Company accounted for investments under
the provisions of SFAS No. 12. Investments are classified as short-term if the
maturities at December 31 are less than one year.
c. INVENTORIES
The Company's domestic fastener inventories, are priced on the last-in,
first-out (LIFO) method, at the lower of cost or market. Other inventories,
representing approximately 70% and 72% of total inventories at December 31, 1995
and 1994, respectively, are priced on the first-in, first-out (FIFO) method, at
the lower of cost or market.
d. PROPERTY
Depreciation is calculated under the straight-line method over the estimated
useful lives of the respective assets, generally 3-5 years for tooling and
computer equipment, 10 years for furniture, fixtures and machinery, and 25-40
years for buildings. Maintenance and repairs are charged to income and major
renewals and betterments are capitalized. At the time properties are retired or
sold, the cost and related accumulated depreciation are eliminated and any gain
or loss is included in income.
e. INCOME TAXES
The Company adopted as of January 1, 1993, the accounting and disclosure
requirements of the Statement of Financial Accounting Standards No. 109 (SFAS
No. 109), "Accounting for Income Taxes". Under SFAS No. 109 the deferred tax
provision is determined using the liability method. Under this method, deferred
tax assets and liabilities are recognized based on differences between financial
statement and tax bases of assets and liabilities using presently enacted tax
rates.
f. STATEMENT OF CONSOLIDATED CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on deposit, cash in excess of daily requirements which is invested in
overnight repurchase agreements and other interest bearing accounts withdrawable
on a daily basis.
g. RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
h. FOREIGN CURRENCY TRANSACTIONS
The effect of translating the financial statements of PEM International Ltd. is
recorded as a separate component of Stockholders' Equity in the consolidated
financial statements. All assets and liabilities are translated at
the year-end exchange rate while all income and expense accounts are translated
at the weighted average rate for the year.
Gains and losses resulting from transactions of the Company and its
subsidiary which are made in currency different than their own are included in
other income as they occur. Total foreign currency transaction gains (losses) of
$174,000, $109,000, and ($104,000) were recorded in 1995, 1994, and 1993,
respectively.
Forward foreign currency exchange contracts are purchased to insulate
revenue streams from the impact of foreign currency exchange rate fluctuations.
The effect of this practice is to minimize variability in the Company's
operating results arising from foreign exchange rate movements. Gains and losses
on forward exchange contracts are recognized currently in income. These
contracts have maturities that do not exceed one year and require the Company to
exchange foreign currency for U.S. dollars at maturity. The Company had foreign
exchange contracts of $9.4 million outstanding at both December 31, 1995 and
1994, which approximated their fair market value. The fair value of these
foreign exchange contracts is the amount the Company would receive or pay to
terminate the contracts using quoted market rates.
16
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 1: Significant Accounting Policies (continued)
i. 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.
j. RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts and balances to
conform with the 1995 presentation.
Note 2: Investments
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS No. 115). As discussed in Note 1 (b), the
Company elected to adopt SFAS No. 115 effective January 1, 1994. The cumulative
and current year effect of the accounting change is not considered to be
significant. SFAS No. 115 requires the Company to account for debt and equity
securities as follows:
Trading - The Company holds no investments that were designated as trading
securities.
Held-to-Maturity - Securities that management has the positive intent and
ability to hold until maturity. These investments are carried at their remaining
unpaid principal balance net of any unamortized premiums or discounts. The
following is a summary of the net unpaid principal value of held to maturity
securities at December 31, 1995 and 1994.
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
---- ----
<S> <C> <C>
U.S. Treasury securities and securities of U.S. Government agencies:
Short-Term Investments................................. $4,466 $2,712
Long-Term Investments ................................. 0 608
------- ------
TOTAL ......................................... $4,466 $3,320
======= =======
</TABLE>
Available-for-Sale - Securities that will be held for indefinite periods of
time. These investments are carried at market value which is determined using
published quotes as of the close of business on December 31, 1995. Unrealized
gains and losses are excluded from earnings and are reported net of tax as a
separate component of equity until realized. Unrealized losses were $60,000, net
of taxes of $39,000, at December 31, 1995 and were $140,000, net of taxes of
$93,000, at December 31, 1994. The following is a summary of the estimated fair
value of the short-term available-for-sale securities at December 31, 1995 and
1994:
(Dollars in thousands) 1995 1994
------- --------
Mutual Common Stock Funds ............... $ 571 $1,075
U.S. Government Security Income Fund..... 759 939
State and Municipal Bond Funds........... 192 577
------- --------
TOTAL.................... $1,522 $2,591
======= =======
Note 3: Inventories
At December 31, 1995 and 1994 inventories comprised:
(Dollars in thousands) 1995 1994
------- -------
Raw material ......... $ 4,570 $ 3,585
Tooling .............. 3,610 2,741
Work-in-process ...... 6,512 5,099
Finished goods ....... 5,583 6,212
------- -------
TOTAL ........ $20,275 $17,637
======= =======
17
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 3: Inventories (continued)
If the FIFO method of inventory valuation had been used for all inventories by
the Company, inventories at December 31, 1995, 1994, and 1993 would have been
$8,028,000, $7,642,000, and $7,516,000 higher and net income would have been
$240,000, $77,000, and $487,000 higher than reported for 1995, 1994, and 1993,
respectively.
A reduction in inventory quantities for the year ended December 31, 1994
resulted in the liquidation of LIFO inventory quantities carried at lower
manufacturing costs prevailing in prior years as compared with current year
manufacturing costs. The effect of such a reduction was to increase 1994 net
income by approximately $832,000.
Included in other assets is long-term tooling inventory totaling $2,050,000
and $1,490,000 at December 31, 1995 and 1994, respectively.
Note 4: Lines of Credit
At December 31, 1995, the Company had available unused short term lines of
credit totaling approximately $36,000,000. Borrowings under these lines totaled
$1,500,000 at December 31, 1995, at an effective interest rate of 6.71%. No
amounts were outstanding under these lines at December 31, 1994.
Note 5: Pension and Profit Sharing Plans
The Company has a defined benefit pension plan covering substantially all
employees in the United States. The benefits are based on years of service and
the employee's earned compensation during any period of the highest 60
consecutive months occurring during the last ten years of employment. The
Company's policy is to fund at least the minimum pension payment required for
federal income tax qualification purposes. Plan provisions and funding meet the
requirements of the Employee Retirement Income Security Act of 1974.
The Company records pension costs in accordance with Statement of Financial
Accounting Standards No. 87. The total pension expense for 1995, 1994 and 1993
was $ 1,767,000, $1,860,000, and $1,851,000, respectively. The following table
sets forth the plans' funded status and amounts recognized in the Company's
consolidated financial statements for the years ended December 31, 1995 and
1994:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested employees ............................................... $ 13,301 $ 9,897
Non-vested employees ........................................... 365 170
-------- --------
Total .......................................................... $ 13,666 $ 10,067
======== ========
Projected plan benefit obligation for services rendered to date $ 24,807 $ 17,313
Plan assets at fair value (primarily listed stocks, bonds and
cash equivalents) ...................................... (17,230) (12,452)
-------- --------
Excess of projected benefit obligation over plan assets ........ 7,577 4,861
Unrecognized net (gain) loss from past experience different from
that assumed and effects of changes in assumptions ..... (2,494) 762
Unrecognized net asset at January 1, 1987 being
recognized over 15 years ............................... 380 443
-------- --------
Total accrued pension cost ..................................... $ 5,463 $ 6,066
======== ========
Current pension cost payable ........................... $ 748 $ 696
Accrued pension cost - noncurrent ...................... $ 4,715 $ 5,370
</TABLE>
18
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 5: Pension and Profit Sharing Plans (continued)
Net pension cost for 1995, 1994, and 1993 included the following components:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the period...... $1,426 $1,586 $1,486
Interest cost on projected benefit obligation....... 1,435 1,339 1,263
Actual return on plan assets ....................... (3,261) 355 (877)
Net amortization and deferral ...................... 2,132 (1,450) (54)
------ ------- ------
Net periodic pension cost .......................... $1,732 $1,830 $1,818
====== ====== ======
</TABLE>
The assumed discount rate, rate of increase in long-term compensation levels,
and expected long-term rate of return on assets were 7% (8% in 1994 and 7% in
1993), 6%, and 8%, respectively. The decrease in the discount rate from 8% in
1994 to 7% in 1995 caused an increase in the projected benefit obligation of
approximately $4,630,000. The increase in the discount rate from 7% in 1993 to
8% in 1994 caused a decrease in the projected benefit obligation of
approximately $3,884,000.
The Company has profit sharing plans covering all eligible employees in the
United States. Contributions and costs are determined as the lesser of 25% of
income before income taxes and profit sharing cost or 10% of each covered
employee's salary, and totaled $3,225,000 in 1995, $3,043,000 in 1994, and
$2,514,000 in 1993.
Note 6: Income Taxes
As discussed in Note 1 (e), effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). The adoption of SFAS No. 109 resulted in an increase in
net income of $423,000, or $.25 per share, reflecting the cumulative effect of
the change for periods prior to January 1, 1993. The effect of the change on
1993 income before cumulative effect of accounting change is not considered to
be significant.
The income tax (benefit) provision consists of the following:
(Dollars in thousands)
1995 1994 1993
---- ---- ----
Current:
Federal ................................. $ 6,837 $ 5,234 $ 3,826
State ................................... 863 1,303 870
------- ------- -------
Total current tax provision ..... 7,700 6,537 4,696
------- ------- -------
Deferred:
Federal ................................. 553 133 (131)
State ................................... 70 16 (17)
------- ------- -------
Total deferred tax (benefit) .... 623 149 (148)
------- ------- -------
Total income tax provision ...................... $ 8,323 $ 6,686 $ 4,548
======= ======= =======
19
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 6: Income Taxes (continued)
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows:(in thousands):
1995 1994
---- ----
Deferred tax assets:
Pension ...................................... $1,854 $2,152
Allowance for doubtful accounts .............. 346 312
Inventory .................................... 343 312
Other ........................................ 290 278
------ ------
Total deferred tax asset ............. 2,833 3,054
------ ------
Deferred tax liabilities:
Property ..................................... 3,847 3,437
Other ........................................ 93 70
------ ------
Total deferred tax liability ......... 3,940 3,507
------ ------
Net deferred tax liability ........................... $1,107 $ 453
====== ======
A reconciliation between the provision for income taxes, computed by
applying the statutory federal income tax rate to income before taxes, and the
actual provision for income taxes on such income is as follows:
(Dollars in thousands) 1995 1994 1993
---- ---- ----
Federal income tax provision at statutory rate $ 7,742 $ 5,958 $ 3,902
State income taxes, after deducting federal
income tax benefit ................... 606 860 574
Interest and dividend income excluded from
taxable income ....................... (23) (24) (34)
Other ........................................ (2) 108 106
------- ------- -------
Actual provision for income taxes ............ $ 8,323 $ 6,686 $ 4,548
======= ======= =======
Note 7: Certain Transactions
The Company sold fasteners at standard authorized distributor prices to a
corporation, an officer and director of which is also a director of the Company,
in the amounts of $7,932,000, $7,061,000, and $3,964,000 and made purchases from
this party in the amounts of $320,000, $356,000, and $323,000 in 1995, 1994, and
1993, respectively. At December 31, 1995 and 1994, the Company had trade
receivable balances due from this party in the amounts of $778,000 and $821,000,
respectively.
Note 8: Commitments
The Company has operating leases covering certain automobiles and office
equipment. Rental and operating lease expenses charged against earnings were
$429,000, $374,000 and $416,000 in 1995, 1994, and 1993, respectively.
Note 9: Contingencies
The Company is exposed to asserted and unasserted potential claims
encountered in the normal course of business. Based on the advice of legal
counsel, management believes that the final resolution of these matters will not
materially affect the Company's consolidated financial position or results of
operations.
20
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 10: Financial Reporting For Segments of the Company
Information about the operations of the Company in different industry segments
for 1995, 1994, and 1993 follows:
(Dollars in thousands)
Year Ended December 31, 1995 Fasteners Motors Consolidated
--------- -------- ------------
Net sales ............................... $113,323 $ 27,945 $141,268
-------- -------- --------
Operating profit ........................ $ 18,353 $ 2,669 $ 21,022
Other income ............................ 1,099
--------
Income before income taxes .............. $ 22,121
========
Identifiable assets ..................... $ 74,328 $ 13,654 $ 87,982
Corporate assets ........................ 8,092
--------
Total assets at December 31, 1995 ....... $ 96,074
========
Depreciation ............................ $ 3,686 $ 479 $ 4,165
Capital expenditures .................... $ 16,464 $ 749 $ 17,213
(Dollars in thousands)
Year Ended December 31, 1994 Fasteners Motors Consolidated
--------- -------- ------------
Net sales ............................... $ 96,067 $ 25,403 $121,470
-------- -------- --------
Operating profit ........................ $ 14,152 $ 2,348 $ 16,500
Other income ............................ 627
--------
Income before income taxes .............. $ 17,127
========
Identifiable assets ..................... $ 61,490 $ 12,684 $ 74,174
Corporate assets ........................ 7,953
--------
Total assets at December 31, 1994 ....... $ 82,127
========
Depreciation ............................ $ 2,932 $ 493 $ 3,425
Capital expenditures .................... $ 3,307 $ 526 $ 3,833
(Dollars in thousands)
Year Ended December 31, 1993 Fasteners Motors Consolidated
--------- -------- ------------
Net sales ............................... $ 77,192 $ 23,473 $100,665
-------- -------- --------
Operating profit ........................ $ 9,346 $ 1,744 $ 11,090
Other income ............................ 387
--------
Income before income taxes and cumulative
effect of accounting change ............. $ 11,477
========
Identifiable assets ..................... $ 54,215 $ 12,393 $ 66,608
Corporate assets ........................ 6,934
--------
Total assets at December 31, 1993 ....... $ 73,542
========
Depreciation ............................ $ 2,686 $ 494 $ 3,180
Capital expenditures .................... $ 7,815 $ 539 $ 8,354
21
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 10: Financial Reporting For Segments of the Company (continued)
The Company operates in two industries, fastener products and electric motors.
Operating profit is net sales less costs and expenses. Identifiable assets by
industry are those assets that are used in the Company's operations in each
industry. Sales of fasteners to one customer (an authorized distributor of the
Company) totaled approximately $20,854,000, $16,554,000, and $14,322,00 for the
years ended December 31, 1995, 1994, and 1993, respectively (approximately 15%
of consolidated net sales in 1995 and 14% of consolidated net sales in 1994 and
1993).
Sales of PEM International Ltd., totaled approximately $22,852,000, $17,374,000,
and $12,007,000 for the years ended December 31, 1995, 1994, and 1993,
respectively (approximately 16%, 14%, and 12% of consolidated net sales in 1995,
1994, and 1993, respectively). Sales from the parent Company to PEM
International Ltd. result in profit margins which are representative of those
obtained from sales to unaffiliated distributors. PEM International Ltd.'s
income (loss) before taxes totaled $605,000, ($17,000), and $354,000 for the
years ended December 31, 1995, 1994, and 1993, respectively. PEM International
Ltd.'s assets represented approximately 12%, and 13% of consolidated total
assets as of December 31, 1995, and 1994, respectively. Export sales, other than
to PEM International Ltd., totaled approximately $12,585,000, $10,118,000, and
$8,552,000 for the years ended December 31, 1995, 1994, and 1993, respectively,
(approximately 9% of consolidated net sales in 1995 and 8% of consolidated net
sales in 1994 and 1993).
Note 11: Subsequent Event
On April 17, 1996, the Board of Directors authorized a reclassification of the
Company's existing common stock whereby each share of existing $1.00 par value
voting common stock was exchanged for one share of new $.01 par value Class A
voting common stock (the "Stock Reclassification"). Immediately after the Stock
Reclassification, the Board authorized a 4-for-1 stock split, effected in the
form of a stock dividend, payable in shares of $.01 par value non-voting common
stock to shareholders of record on May 3, 1996 (the "Stock Dividend"). On the
contemplated issuance date, May 23, 1996, stockholders' equity as of December
31, 1995 and 1994, restated to give effect to the Stock Reclassification and
Stock Dividend, is as follows:
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY - RESTATED: 1995 1994
---- ----
<S> <C> <C>
Common stock class A - authorized 3,000,000 shares of $.01 par value each;
issued 1,772,025 shares .......................................... $ 18 $ 18
Common stock - authorized 20,000,000 shares of $.01 value each;
issued 5,316,075 shares .......................................... 53 53
Additional paid-in capital ............................................... 2,686 2,686
Retained earnings ........................................................ 74,852 64,468
Unrealized (loss) on investments (net of tax) ............................ (60) (140)
Cumulative foreign currency translation adjustment ....................... (506) (223)
------ ------
Total ............................................................ 77,043 66,862
------ ------
Less cost of treasury stock-259,772 shares ............................... 952 952
------ ------
Total stockholders' equity ....................................... 76,091 65,910
------ ------
TOTAL ............................................................ $96,074 $82,127
====== ======
</TABLE>
Accordingly, all references in the financial statements to average numbers of
shares outstanding and per share amounts have been stated at their historical
amounts as well as restated to reflect the Stock Reclassification and the Stock
Dividend.
22
<PAGE>
To the Stockholders and Board of Directors
of Penn Engineering & Manufacturing Corp.
We have audited the accompanying consolidated balance sheets of Penn Engineering
& Manufacturing Corp. and subsidiaries (the "Company") as of December 31, 1995
and 1994 and the related statements of consolidated income and retained earnings
and of consolidated cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1995
and 1994, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective January 1, 1993 to
conform with Statement of Financial Accounting Standards No. 109.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 6, 1996
(April 17, 1996 as to Note 11)
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,459
<SECURITIES> 5,988
<RECEIVABLES> 21,745
<ALLOWANCES> 900
<INVENTORY> 20,275
<CURRENT-ASSETS> 52,083
<PP&E> 76,837
<DEPRECIATION> 34,896
<TOTAL-ASSETS> 96,074
<CURRENT-LIABILITIES> 13,202
<BONDS> 0
0
0
<COMMON> 1,772
<OTHER-SE> 74,319
<TOTAL-LIABILITY-AND-EQUITY> 95,074
<SALES> 141,268
<TOTAL-REVENUES> 142,367
<CGS> 96,190
<TOTAL-COSTS> 120,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 22,121
<INCOME-TAX> 8,323
<INCOME-CONTINUING> 13,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,798
<EPS-PRIMARY> 8.08
<EPS-DILUTED> 8.08
</TABLE>
