<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
- ---
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
Commission file number 1-5356
PENN ENGINEERING & MANUFACTURING CORP.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-0951065
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 1000, Danboro, Pennsylvania 18916
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 766-8853
- ---------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- ---------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-------- -------
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the last practicable
date: 1,707,082 shares of Class A common stock, $.01 par value and
6,981,682 shares of common stock, $.01 par value, outstanding on
August 8, 1997.
<PAGE> 2
PART I. FINANCIAL INFORMATION
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, 1997 December 31, 1996
CURRENT ASSETS -------------- ------------------
Cash and cash equivalents $5,862,395 $4,208,339
Short-term investments 11,093,221 10,857,728
Accounts receivable-trade 27,660,915 29,579,972
Allowance for doubtful accounts (900,000) (1,000,000)
Refundable income taxes 678,173 245,682
Inventories (Note 2) 27,295,415 27,533,220
Prepaid expenses 2,265,527 2,124,335
Deferred income taxes 333,727 391,244
---------- ----------
Total current assets 74,289,373 73,940,520
---------- ----------
PROPERTY
Property, plant & equipment 113,185,650 101,260,757
Less accumulated depreciation 42,336,149 39,428,723
---------- ----------
Property - net 70,849,501 61,832,034
---------- ----------
OTHER ASSETS 2,825,000 2,765,000
---------- ----------
TOTAL $147,963,874 $138,537,554
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable-trade $4,684,580 $3,740,603
Dividends payable 868,875
Accrued expenses:
Pension & profit sharing 3,291,252 2,139,844
Income taxes 21,776
Payroll & commissions 4,014,541 2,809,711
Other 973,120 1,017,518
---------- ----------
Total current liabilities 13,854,144 9,707,676
---------- ----------
ACCRUED PENSION COST 4,792,857 4,792,857
---------- ----------
DEFERRED INCOME TAXES 3,478,678 2,899,870
---------- ----------
STOCKHOLDERS' EQUITY (See Note 3)
Class A common stock 17,720 17,720
Common stock 71,766 71,661
Additional paid-in capital 35,587,913 35,420,903
Retained earnings 90,620,125 85,822,011
Unrealized (loss) on
investments -net of tax (62,055) (61,671)
Cumulative foreign currency
translation adjustment 555,167 818,484
Treasury stock (952,441) (951,957)
----------- -----------
Total stockholders' equity 125,838,195 121,137,151
----------- -----------
TOTAL $147,963,874 $138,537,554
============ ============
See Notes to Condensed Consolidated Financial Statements
<PAGE> 3
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- ------------------------------
(Unaudited) (Unaudited)
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net Sales $41,973,879 $41,482,437 $80,989,652 $80,511,303
Other income 297,404 95,103 470,461 230,815
----------- ----------- ----------- -----------
42,271,283 41,577,540 81,460,113 80,742,118
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of products sold 29,007,288 28,103,676 56,243,879 55,516,303
Selling, general & administrative 7,529,776 7,164,971 14,831,411 14,278,001
----------- ----------- ----------- -----------
36,537,064 35,268,647 71,075,290 69,794,304
----------- ----------- ----------- -----------
INOME BEFORE INCOME TAXES 5,734,219 6,308,893 10,384,823 10,947,814
PROVISION FOR INCOME TAXES 2,174,000 2,377,500 3,850,000 4,108,500
----------- ----------- ----------- -----------
NET INCOME 3,560,219 3,931,393 6,534,823 6,839,314
RETAINED EARNINGS - BEGINNING 87,928,782 77,289,897 85,822,011 74,851,423
CASH DIVIDEND (868,876) (682,833) (1,736,709) (1,152,280)
----------- ----------- ----------- -----------
RETAINED EARNINGS - ENDING $90,620,125 $80,538,457 $90,620,125 $80,538,457
=========== =========== =========== ===========
NET INCOME PER SHARE (See Note 3) $0.41 $0.58 $0.75 $1.00
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING (See Note 3) 8,688,764 6,828,328 8,683,574 6,828,328
CASH DIVIDEND PER SHARE (see Note 3) $.10 $.10 $.20 $.169
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE> 4
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
SIX MONTHS ENDED
-----------------------------
(Unaudited)
June 30, 1997 June 30, 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,534,823 $6,839,314
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,016,237 2,466,085
Loss on disposal of property 55,200 38,779
Gain on disposal of investments (1,250) 0
Changes in assets and liabilities:
(Increase)decrease in receivables 1,819,057 (3,464,735)
(Increase) in refundable income taxes (432,491) 0
(Increase)decrease in inventories 237,805 (7,195,141)
(Increase) in prepaid expenses, etc. (141,192) (1,235,031)
(Increase)decrease in deferred
income taxes-current 57,517 (9,163)
(Increase) in other assets (60,000) (310,000)
Increase in accounts payable 943,977 2,041,276
Increase in accrued expenses 2,333,615 305,874
Increase in accrued pension cost 0 50,000
Increase in deferred income
taxes- noncurrent 578,808 361,121
---------- ----------
Net cash provided by (used in)
operating activities 14,942,106 (111,621)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (12,097,964) (11,970,264)
Additions to held-to-maturity investments (17,361,669) (4,344,532)
Proceeds from disposal of available-for-
sale investments 0 101,368
Proceeds from disposal of held-to-maturity
investments 17,126,797 5,628,519
Proceeds from disposal of property 47 10,625
---------- ----------
Net cash used in investing activities (12,332,789) (10,574,284)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 0 38,750,000
Net short-term repayments 0 (26,250,000)
Dividends paid (867,834) (469,447)
Issuance of common stock 167,115 0
Acquisition of treasury stock (484) 0
---------- ----------
Net cash provided by (used in)
financing activities (701,203) 12,030,553
---------- ----------
Effect of exchange rate and investment
reserve changes on cash (254,058) 164,378
----------- ---------
Net increase in cash and cash equivalents 1,654,056 1,509,026
Cash and cash equivalents at
beginning of year 4,208,339 1,459,370
----------- ---------
Cash and cash equivalents at end of year $5,862,395 $2,968,396
=========== ==========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the year for:
Income taxes $3,436,990 $3,819,600
Interest 1,380 199,150
See Notes to Condensed Consolidated Financial Statements
<PAGE> 5
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
Note 1. Condensed Consolidated Financial Statements (Unaudited)
- ---------------------------------------------------------------
The accompanying interim financial statements should be read in conjunction
with the annual financial statements and notes thereto included in
Registrant's Annual Report. The information contained in this report is
unaudited and subject to year-end audit and adjustment. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
have been made which are necessary for a fair presentation of Registrant's
consolidated financial position at June 30, 1997 and 1996 and the
consolidated statements of income and cash flows for the six-month periods
then ended. The results of operations for the six months ended June 30, 1997
are not necessarily indicative of the results of operations to be expected
for the year ending December 31, 1997.
Note 2. Inventories
- -------------------
Substantially all of the Registrant's domestic fastener inventories are
priced on the lower of last-in, first-out (LIFO) cost or market method. The
remainder of the inventories are priced on the first-in, first-out (FIFO)
method, at the lower of cost or market.
Inventories are as follows:
(Unaudited)
June 30, 1997 December 31, 1996
-------------- -----------------
Raw material $4,221,448 $4,469,666
Tooling 4,110,243 3,882,298
Work-in-process 8,040,848 7,648,141
Finished goods 10,922,876 11,533,115
---------- ---------
TOTAL $27,295,415 $27,533,220
========== ==========
If the FIFO method of inventory valuation had been used by Registrant for
all inventories, inventories would have been $8,340,112 and $8,117,442 higher
than reported at June 30, 1997 and December 31, 1996, respectively, and net
income would have been $140,000 and $173,000 higher than reported for the
six months ended June 30, 1997 and 1996, respectively. Included in other
assets is long-term tooling inventory totaling $2,825,000 and $2,765,000 at
June 30, 1997 and December 31, 1996, respectively.
In the fourth quarter of 1996, the Company changed its method of calculating
the index on its domestic fastener LIFO inventory from the unit cost method
to the components of cost method. Management believes that the change in its
LIFO method of application better reflects the effects of inflation and
results in a more representative LIFO cost index for product mix changes.
Accordingly, the statement of Condensed Consolidated Income and Retained
Earnings for the three months and six months ended June 30, 1996 has been
restated to reflect the results of this change.
Note 3. Reclassification
- ------------------------
On May 22, 1996, Registrant effected a reclassification of its existing
common stock whereby each share of existing $1.00 par value voting common
stock became one share of new $.01 par value Class A voting common stock (the
"Stock Reclassification"). On May 23, 1996, the Registrant effected a 4-for-1
stock split, in the form of a stock dividend, payable in shares of $.01 par
value non-voting common stock to stockholders of record on May 3, 1996
(the "Stock Dividend"). The change in par value of the Class A common stock
as a result of the Stock Reclassification resulted in the transfer of
$1,754,305 from Class A common stock to additional paid-in capital, and the
Stock Dividend resulted in the issuance of 5,316,075 new common shares and
in the transfer of $53,161 from retained earnings to common stock. In the
forgoing consolidated financial statements, all per share amounts and number
of shares have been restated to reflect the Stock Reclassification and the
Stock Dividend.
<PAGE> 6
Note 4. Newly Issued Accounting Pronouncement
- ---------------------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 requires
the presentation of basic EPS, calculated by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding during the period, and diluted EPS, calculated the same as basic
EPS except that the denominator is increased to include the number of
additional common shares that would have been issued if all dilutive
potential common shares had been issued. SFAS No. 128 is effective for
periods ending after December 15, 1997, and requires the restatement of EPS
for all periods presented. On a pro forma basis, the adoption of SFAS No. 128
would not have a material effect on the Company's calculation of primary or
fully diluted earnings per share in the accompanying financial statements.
<PAGE> 7
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
June 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Quarter Ended June 30, 1997 vs. Quarter Ended June 30, 1996
- -----------------------------------------------------------
Consolidated net sales for the quarter ended June 30, 1997 were $42.0
million, versus $41.5 million for the quarter ended June 30, 1996, a 1.2%
increase. Sales to customers outside the United States for the quarter
ended June 30, 1997 were $9.9 million, versus $9.7 million for the quarter
ended June 30, 1996, a 2.1% increase. Net sales for the fastener operation
for the quarter ended June 30, 1997 were $34.1 million, versus $33.7 million
for the quarter ended June 30, 1996, a 1.2% increase. Motor sales were $7.8
million for the quarter ended June 30, 1997, equal to the same amount
recorded for the quarter ended June 30, 1996.
The number of fastener units sold to independent customers decreased
approximately 4.5% in the second quarter of 1997 compared to the second
quarter of 1996. The number of fastener units sold within North America
decreased approximately 10.2% in the second quarter of 1997 compared to the
second quarter of 1996, and represented approximately 71.3% of total fasteners
sold in the second quarter of 1997. The number of fastener units sold into
Europe increased approximately 14.2% in the second quarter of 1997 compared
to the second quarter of 1996 and represented approximately 23.3% of total
fasteners sold in the second quarter of 1997. The decrease in North American
shipments continues to be caused by adjustments in distributor inventory
levels, which were unusually high during 1996. The increase in the European
market was due to an unusually low sales level in 1996 caused by a reduction
in European distributor levels. The number of fastener units sold into the
Asia-Pacific region increased approximately 11.4% in the second quarter of
1997 compared to the second quarter of 1996, mainly as a result of the
establishment of a master warehouse in Singapore in March of 1996. This
master warehouse has allowed the Company to better service the major multi-
national personal computer companies operating in the area. The number of
motors sold decreased 1.6% in the second quarter of 1997 compared to the
second quarter of 1996.
The average selling price for fasteners shipped in the second quarter of
1997 increased approximately 3.2% from $61.79 per thousand fasteners sold in
the second quarter of 1996 to $63.79 per thousand fasteners sold in the second
quarter of 1997. This increase is mainly due to a 3.98% price increase
effective in the second quarter of 1997. The average selling price of Pittman
motors increased approximately 2.5% from the second quarter of 1996 to the
second quarter of 1997 mainly due to a higher percentage of more expensive
brushless motors sold in the second quarter of 1997 compared to the second
quarter of 1996.
Consolidated gross profit for the second quarter of 1997 was $13.0 million,
versus $13.4 million for the second quarter of 1996, an 3.0% decrease.
Fastener gross profit margins decreased 3.0% in the second quarter of 1997
compared to the second quarter of 1996 while motor gross profit decreased
3.6% during the same period. The fastener gross profit was negatively
impacted by higher depreciation expense due to the large level of capital
expenditures during 1996.
Consolidated selling, general, and administrative expenses ("SG&A") for
the second quarter of 1997 were $7.5 million, versus $7.2 million for the
second quarter of 1996, a 4.2% increase. Contributing to this increase were
increased commission expense due to continued strong end customer demand.
Consolidated net income for the second quarter of 1997 was $3.6 million,
versus $3.9 million for the second quarter of 1996. Other income increased
significantly due to higher investment income.
<PAGE> 8
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
June 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Six Months Ended June 30, 1997 vs.Six Months Ended June 30, 1996
- ----------------------------------------------------------------
Consolidated net sales for the six months ended June 30, 1997 were $81.0
million, versus $80.5 million for the six months ended June 30, 1996, an
increase of less than 1%. Sales to customers outside the United States for
the six months ended June 30, 1997 were $20.7 million, versus $19.5 million
for the six months ended June 30, 1996, a 6.1% increase. Net sales for the
fastener operation for the six months ended June 30, 1997 were $66.2 million,
versus $65.2 million for the six months ended June 30, 1996, a 1.5% increase.
Motor sales decreased approximately 3.3% from $15.3 million recorded for the
first six months of 1996 to $14.8 million recorded for the six months ended
June 30, 1997.
The number of fastener units sold to independent customers decreased
approximately 7.8% in the first six months of 1997 compared to the first six
months of 1996. The number of fastener units sold within North America
decreased approximately 11.9% in the first six months of 1997 compared to the
first six months of 1996, and represented approximately 70.7% of total
fasteners shipped in the first six months of 1997. The number of fastener
units sold into Europe decreased approximately 1.0% in the first six months
of 1997 compared to the first six months of 1996, while the number of units
sold to the Asia-Pacific region increased 27.2% in the first six months of
1997 compared to the first six months of 1996. The decrease in North American
shipments is mainly due to adjustments in distributor inventory levels which
were unusually high during the latter part of 1996. The increase in the
Asia-Pacific region is mainly due to the establishment of a master warehouse
in Singapore in March of 1996. The number of motors sold decreased 7.3% from
the first six months of 1996 to the first six months of 1997.
The average selling price of fasteners shipped in the first six months of
1997 increased approximately 8.7% from $59.32 per thousand fasteners sold in
the first six months of 1996 to $64.51 per thousand fasteners sold in the
first six months of 1997. This increase is mainly due to a change in product
mix toward higher priced fasteners and a 3.98% price increase effective in the
second quarter of 1997. The average selling price of Pittman motors increased
from $40.87 per motor in the first six months of 1996 to $42.59 per motor in
the first six months of 1997 mainly as a result of increased brushless motor
sales which carry a higher price per motor.
Consolidated gross profit decreased slightly from $25.0 million in the
first six months of 1996 compared to $24.7 million in the first six months of
1997. Fastener gross profit margin increased 0.5% in the first six months of
1997 compared to the first six months of 1996 as a result of lower outside
supplemental screw machine costs. Motor gross profit margins decreased 8.5%
in the first six months of 1997 compared to the first six months of 1996 due
to increased fixed expenses and lower than expected sales volume.
Consolidated selling, general, and administrative expenses ("SG&A") for
the first six months of 1997 were $14.8 million, versus $14.3 million for the
first six months of 1996, a 3.5% increase. This increase was caused by
increased commission expense due to continued strong end customer demand and
increased legal, investor relations, and other professional fees resulting
from the Company's 1996 public offering and subsequent listing on the New
York Stock Exchange.
Consolidated net income for the first six months of 1997 was $6.5 million,
versus $6.8 million for the first six months of 1996. The increase in sales
due to higher prices and a more favorable mix was not enough to offset the
increases in cost of sales and SG&A. Other income increased mainly due to
higher investment income.
<PAGE> 9
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
June 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operations totaled $14.9 million for the six months
ended June 30, 1997. Liquidity needs for the six months ended June 30, 1997
were primarily for $12.1 million of capital expenditures including the
construction of a 120,000 square foot manufacturing facility in Winston-Salem,
North Carolina. Short-term investments increased 1.8% from $10.9 million at
December 31, 1996 to $11.1 million at June 30, 1997. Also, the Company had
approximately $27.5 million available at June 30, 1997 under its short-term
lines of credit. Accordingly, the Company anticipates that its existing
capital resources and cash flow generated from future operations will enable
it to maintain its current level of operations and its planned growth for the
foreseeable future.
<PAGE> 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Reference is made to Part 1, Item 3 of the Registrant's Form 10-K Annual
Report for the year ended December 31, 1996.
Item 2. Changes in Securities
- -----------------------------
Not Applicable
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Registrant held its 1997 Annual Meeting of Stockholders (the "Annual
Meeting") on April 30, 1997. The matters voted upon at the Annual Meeting and
the respective voting results were as follows:
1. The election of three Class C Directors of Registrant to hold office
until the Annual Meeting of Stockholders to be held in 2000 and until their
successors are duly elected.
Name of Nominee For Withheld
- --------------- --- --------
Willard S. Boothby, Jr. 1,638,117 1,277
Thomas M. Hyndman, Jr. 1,638,117 1,277
Daryl L. Swanstrom 1,638,482 912
2. The election of Deloitte & Touche LLP as auditors for Registrant for
its 1997 fiscal year.
For Against Abstain
--- ------- -------
1,637,514 615 -0-
Item 5. Other Information
- -------------------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits:
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 of Registrant's Form 10-Q
Quarterly Report for the period ended June 30, 1996.)
3.2 Bylaws, as amended. (Incorporated by reference to Exhibit
3(ii) of the Registrant's Form 10-K Annual Report for the
year ended December 31, 1994.)
27 Financial Statement Data Schedule. (Filed herewith.)
(b) Reports on Form 8-K
None
<PAGE> 11
SIGNATURE
Pursuant to the requirements 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.
Dated: August 14, 1997 By: /s/ Kenneth A. Swanstrom
----------------------------
Kenneth A. Swanstrom
Chairman/ CEO/ President
Dated: August 14, 1997 By: /s/ Mark W. Simon
----------------------------
Mark W. Simon
Vice-President - Finance
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,862,395
<SECURITIES> 11,093,221
<RECEIVABLES> 27,660,915
<ALLOWANCES> 900,000
<INVENTORY> 27,295,415
<CURRENT-ASSETS> 74,289,373
<PP&E> 113,185,650
<DEPRECIATION> 42,336,149
<TOTAL-ASSETS> 147,963,874
<CURRENT-LIABILITIES> 13,854,144
<BONDS> 0
<COMMON> 89,486
0
0
<OTHER-SE> 125,748,709
<TOTAL-LIABILITY-AND-EQUITY> 147,963,874
<SALES> 80,989,652
<TOTAL-REVENUES> 81,460,113
<CGS> 56,243,879
<TOTAL-COSTS> 71,073,910
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,380
<INCOME-PRETAX> 10,384,823
<INCOME-TAX> 3,850,000
<INCOME-CONTINUING> 6,534,823
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,534,823
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
