SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[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 23-09591065
(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>
PENN ENGINEERING & MANUFACTURING CORP.
-----------
INDEX TO FORM 10-K REPORT
-----------
PAGE
----
I. PART I. .......................................... 1
Item 1. Business.................................. 1
Item 2. Properties................................ 5
Item 3. Legal Proceedings......................... 7
Item 4. Submission of Matters to a Vote of
Security Holders......................... 7
Executive Officers of the Registrant. . . 7
II. PART II. .......................................... 8
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.......... 8
Item 6. Selected Financial Data................... 8
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................ 8
Item 8. Financial Statements and Supplementary
Data..................................... 9
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure..................... 9
III. PART III. .......................................... 9
Item 10. Directors and Executive Officers of
the Registrant........................... 9
Item 11. Executive Compensation.................... 9
Item 12. Security Ownership of Certain
Beneficial Owners and Management......... 10
Item 13. Certain Relationships and Related
Transactions............................. 10
IV. PART IV. .......................................... 10
Item 14. Exhibits, Financial Statements and
Schedules and Reports on Form 8-K........ 10
<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, brushcommutated 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 17 and 18 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
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<PAGE>
competitive position of Registrant in the market for self-clinching, broaching
and insert fasteners. Registrant believes 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
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<PAGE>
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.
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
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<PAGE>
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 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 17 and 18 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 2. Properties.
As of December 31, 1995, Registrant's principal plants and
offices, all of which were owned by it, were as follows:
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<PAGE>
Location Size of Facility Use of Facility
-------- ---------------- ---------------
Danboro, Pennsylvania Two buildings Executive offices
totalling 183,442 and manufacture
sq. ft. on 106.9 of fasteners
acres
Winston-Salem, 58,280 sq. ft. Manufacture of
North Carolina building on 3.4 components for
acres fasteners
Harleysville, 58,000 sq. ft. Manufacture of
Pennsylvania building on miniature
6 acres electric motors
Suffolk, Virginia 50,000 sq. ft. Manufacture of
building on components for
17.2 acres fasteners
Doncaster, South 10,500 sq. ft. Office and ware-
Yorkshire, England building on house for the
5.25 acres distribution of
fasteners
Registrant considers all of its plants and equipment to be modern
and well maintained. Registrant is building a 43,000 square foot addition to its
Danboro facility for increased manufacturing capacity and office space. This
addition is expected to be completed by June 1996. Registrant also has purchased
a 16.3 acre commercial plot in Winston-Salem, N.C. Registrant is planning to
build a 120,000 square foot building at this location and will then sell its
current building and site in North Carolina. This new facility is scheduled for
completion by late 1996.
Registrant carries fire, casualty, business interruption and
public liability insurance for all of its facilities in amounts which are deemed
adequate.
-6-
<PAGE>
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 17
of Registrant's 1995 Annual Report to Stockholders which is included as Exhibit
(13) to this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant.
Certain information about the executive officers of
Registrant as of March 15, 1996 is as follows:
Name Age Position Held With Registrant
---- --- -----------------------------
Kenneth A. Swanstrom 56 Chairman of the Board, Chief
Executive Officer and President
Martin J. Bidart 59 Vice President - Manufacturing
Raymond L. Bievenour 52 Vice President - Sales/Marketing
Richard B. Ernest 61 Vice President - Quality Control
Joseph F. Lopes 62 Vice President - Engineering
Mark W. Simon 57 Vice President - Finance
and Corporate Secretary
Kent R. Fretz 58 Vice President and General
Manager - Pittman Division
All of the executive officers of Registrant have been
principally employed as officers or employees of Registrant for
more than the past five years, except Mr. Lopes. During the past
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<PAGE>
five years, Mr. Lopes served in various engineering management
positions with SPS Technologies, Inc.
The executive officers of Registrant are elected each year at
the organization meeting of the Board of Directors of Registrant which is held
following the Annual Meeting of Stockholders.
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 8
of Registrant's 1995 Annual Report to Stockholders which is included as Exhibit
(13) to this Form 10-K Report.
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
and 7 of Registrant's 1995 Annual Report to Stockholders, which is included as
Exhibit (13) to this Form 10-K Report.
-8-
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The answer to this Item is incorporated by reference to
pages 9 through 19 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.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning directors necessary to answer
this item is incorporated by reference to Registrant's Proxy Statement for its
1996 Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission separately pursuant to Rule 14a-6 under the Securities
Exchange Act of 1934.
Information with respect to executive officers of Registrant is
included in Part I of this Form 10-K report.
Item 11. Executive Compensation.
The answer to this Item is incorporated by reference to
Registrant's Proxy Statement for its 1996 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.
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<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The answer to this item is incorporated by reference to
Registrant's Proxy Statement for its 1996 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.
Item 13. Certain Relationships and Related Transactions.
The answer to this item is incorporated by reference to
Registrant's Proxy Statement for its 1996 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission separately pursuant to
Rule 14a-6 under the Securities Exchange Act of 1934.
PART IV
Item 14. Exhibits, Financial Statements and Schedules and
Reports on Form 8-K.
(a) Financial Statements, Financial Schedules and
Exhibits Filed.
1. Consolidated Financial Statements. Page
----
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, 1995 and 1994. 9*
Statements of Consolidated Income and 10*
Retained Earnings for the years ended
December 31, 1995, 1994 and 1993.
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<PAGE>
Page
----
Statements of Consolidated Cash Flows for 11*
the years ended December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements. 12-18*
Independent Auditors' Report 19*
2. Financial Schedules.
**Schedules (consolidated) for the years ended
December 31, 1995, 1994 and 1993 (as applicable):
II - Consolidated Valuation Accounts F-1
Independent Auditors' Report on Schedule
- -------------------
* 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 Financial Statements and Notes
which have been incorporated by reference herein.
3. Exhibits.
Reference is made to the Exhibit Index on page 13.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1995, Registrant did not
file any reports on Form 8-K.
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<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 report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PENN ENGINEERING &
MANUFACTURING CORP.
Date: March 29, 1996 By:/s/Kenneth A. Swanstrom
-----------------------
Kenneth A. Swanstrom,
Chairman/CEO/President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Kenneth A. Swanstrom Chairman/CEO/President March 29, 1996
- ------------------------- (Principal
Kenneth A. Swanstrom Executive Officer)
/s/ Mark W. Simon V.P. Finance,Corporate March 29, 1996
- ------------------------- Secretary and Director
Mark W. Simon (Principal Financial
and Accounting Officer)
/s/Willard S. Boothby, Jr. Director March 29, 1996
- -------------------------
Willard S. Boothby, Jr.
/s/ Frank S. Hermance Director March 29, 1996
- -------------------------
Frank S. Hermance
/s/ Lewis W. Hull Director March 29, 1996
- -------------------------
Lewis W. Hull
/s/ Thomas M. Hyndman, Jr. Director March 29, 1996
- -------------------------
Thomas M. Hyndman, Jr.
/s/ Maurice D. Oaks Director March 29, 1996
- -------------------------
Maurice D. Oaks
/s/ Daryl L. Swanstrom Director March 29, 1996
- -------------------------
Daryl L. Swanstrom
<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
(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
(27) Financial Data Schedule
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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>
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<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; 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
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
(Dollars in thousands except per share amounts)
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) 1,707 1,707 1,707 1,707 1,707
Per share information:
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
</TABLE>
4
<PAGE>
Management's Discussion & Analysis of Results of
Operations & Financial Condition Expenses
RESULTS OF OPERATIONS
Revenue
For the year ended December 31, 1995, consolidated net sales were $141.3
million, an increase of 16.3% over the $121.5 million recorded in 1994 and 40.3%
over the $100.7 million recorded in 1993. Sales to customers outside the United
States totaled approximately $35.4 million in 1995, or 25.1% of consolidated net
sales, compared to $27.5 million or 22.6% of net sales in 1994 and $20.6 million
or 20.4% of net sales in 1993. In 1995, the fastener operation's net sales of
$113.3 million were approximately 18.0% higher than 1994 and approximately 46.8%
higher than 1993. The number of fasteners sold increased approximately 17.0%
from 1994 to 1995. The remainder of the fastener revenue increase was due to
selective price increases implemented during the second quarter of 1995.
Compared to 1993, 1995 average selling prices were 3.3% higher due to an
effective 3% selling price increase implemented in the second quarter of 1994
while units sold increased 44.9%. The dc motor operation's net sales increased
approximately 10.0% from 1994 to 1995 and approximately 19.1% from the 1993
figures. 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 more expensive brushless motors and motors with additional features
and options. Comparing 1993 to 1995, the number of motors sold increased
approximately 2.4% while the average selling price increased 16.3%. During 1995,
brushless motor sales comprised 21.7% of total dc motor net sales as compared to
16.8% in 1994 and 14.3% in 1993.
Expenses
In 1995 the Company's total operating expenses, as a percent of sales, were
85.1% compared to 86.4% in 1994 and 89.0% in 1993. Cost of products sold,
selling expenses, and general & administrative expenses saw decreases as a
percent of sales from 1995 to 1994. The Company continues to realize economies
of scale from the increased sales and production volume. In addition, process
improvement techniques have led to cost reductions in both the fastener and dc
motor operations.
Income
Consolidated income before taxes in 1995 was $22.1 million or approximately
29.2% higher than the $17.1 million before taxes recorded in 1994 and
approximately 92.7% higher than the $11.5 million before taxes and the
cumulative effect of accounting change recorded in 1993. Consolidated gross
profit margins have increased from 29.5% in 1993 to 31.6% in 1994 to 31.9% in
1995 as a result of operating
[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
[GRAPHIC]
In the printed document there is a bar graph illustrating the following:
CASH DIVIDENDS
Annual Cash Dividend Paid
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Dividends $0.90 $1.00 $1.15 $1.525 $2.00
6
<PAGE>
Management's Discussion & Analysis of Results of
Operations & Financial Condition
efficiencies and continued emphasis on cost containment. The fastener
operation's income before taxes in 1995 increased 29.7% over 1994 fastener
income before taxes and 96.4% over 1993 fastener income before taxes and
accounting change. The dc motor operation's income before taxes increased 13.7%
from 1994 to 1995 and 34.6% from 1993 to 1994. The Company's 1995 consolidated
net income was $13.8 million or approximately 32.2% higher than the $10.4
million recorded in 1994 and approximately 87.7% higher than the $7.4 million
recorded in 1993. Net income in 1995 was favorably affected by lower state
income taxes as described below. Adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" resulted in an increase in net
income of $423,000 in 1993. Other income totaled $1.1 million in 1995 compared
to $.6 million in 1994 and $.4 million in 1993. Increased investment returns as
well as favorable currency exchange rates contributed to these increases.
Provision for Income Taxes: The Company's effective tax rate continued to
decrease from 39.6% in 1993 to 39.0% in 1994 to 37.6% in 1995. The reduction
from 1994 to 1995 was caused primarily by a Pennsylvania state income tax rate
reduction that was retroactive to the beginning of 1995. A reconciliation of
statutory and effective tax rates, as well as other tax information, appears in
Note 6 to the Consolidated Financial Statements.
Financial Condition
The Company generated cash from operations of $14.7 million in 1995. This
compares favorably with the $12.3 million generated in 1994 and the $9.0 million
produced in 1993. Cash flow from operations continues to be the primary source
of financing the Company's internal growth. The Company's total dividends paid
increased 31.1% from 1994 to 1995 after having increased 32.6% from 1993 to
1994. Every year the Company invests in capital expenditures 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 include construction of a 43,000
square foot addition to our Danboro facility which is expected to be completed
in the Spring of 1996. The Company has available short-term lines of credit
totaling $37.5 million to augment internal financing for the 1996 capital budget
which includes expansion of our Winston-Salem, NC operation. Stockholders'
equity per share at the end of 1995 was $44.58 compared to $38.61 at year-end
1994, an increase of 15.5%.
[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 &
EARNINGS PER SHARE ANALYSIS
Before Accounting
Change
-----------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Net Sales
(Millions of Dollars) $70.8 $88.3 $100.7 $121.5 $141.3
Earnings Per Share $2.29 $3.71 $4.06 $6.12 $8.08
7
<PAGE>
Selected Quarterly Financial Data
<TABLE>
<CAPTION>
(Unaudited) (In thousands except per share amounts and prices)
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 .......... 1.77 2.03 1.98 2.30 8.08
Dividends declared per share .. .275 .275 .275 1.175+ 2.00
-------- -------- ------- -------- -------
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.
<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 .......... .96 1.47 1.66 2.03 6.12
Dividends declared per share .. .25 .25 .25 .775+ 1.525
------- -------- -------- ------- --------
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. The regular dividend was increased from $.25 to $.275 in the
fourth quarter of 1994.
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 the consolidated financial statements.
8
<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:
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>
See the accompanying notes to the consolidated financial statements.
9
<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
(Per share - 1995, $2.00; 1994, $1.525;
1993, $1.15) .................................... (3,414) (2,603) (1,963)
----------- ----------- -----------
RETAINED EARNINGS AT
END OF YEAR ........................................ $ 74,905 $ 64,521 $ 56,683
=========== =========== ===========
INCOME PER SHARE -
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
=========== =========== ===========
</TABLE>
See the accompanying notes to the consolidated financial statements.
10
<PAGE>
Statements of Consolidated Cash Flows
For the years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
<S> <C> <C> <C>
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.
11
<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 generally under the straight-line method over the
estimated useful lives of the respective assets. 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" (Note 6).
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. As such, gains and losses
on forward exchange contracts are deferred and recognized as adjustments to the
bases of those transactions being hedged. 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.
12
<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.
(Dollars in thousands)
1995 1994
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
------ ------
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
======= =======
13
<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>
14
<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. Under SFAS No. 109 the deferred tax provision is determined
under 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.
The income tax (benefit) provision consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994 1993
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
15
<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
======= ======= =======
16
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
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.
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:
<TABLE>
<CAPTION>
(Dollars in thousands)
Year Ended December 31, 1995 Fasteners Motors Consolidated
<S> <C> <C> <C>
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
</TABLE>
17
<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)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1994 Fasteners Motors Consolidated
<S> <C> <C> <C>
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
</TABLE>
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1993 Fasteners Motors Consolidated
<S> <C> <C> <C>
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
</TABLE>
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 $14,322,000 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).
18
<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
19
<PAGE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
PEM International, Ltd., incorporated under the laws of the State of
Delaware, is 100% owned by Registrant.
PEM Management, Inc., incorporated under the laws of the State of
Delaware, is 100% owned by Registrant.
PEM Investments, Inc., incorporated under the laws of the State of
Delaware, is 100% owned by Registrant.
PEM World Sales, Ltd., incorporated under the laws of Bermuda, is 100%
owned by Registrant.
PEM International (Singapore) Pte Ltd., incorporated under the laws of
the State of Delaware, is 100% owned by Registrant.
<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>
