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 For the fiscal year ended December 31, 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
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PENN ENGINEERING & MANUFACTURING CORP.
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(Exact name of registrant as specified in its charter)
Delaware 23-0951065
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 1000, Danboro, Pennsylvania 18916
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 766-8853
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ----------------------------------- -----------------------------------------
Class A Common Stock, $.01 par value New York Stock Exchange
Common Stock, $.01 par value New York 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 16, 1998, the aggregate market value based on the closing sales
price on that date of the voting and non-voting common equity held by
non-affiliates of the Registrant was approximately $153,629,840.
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 Class A
Common Stock and 6,927,123 shares of Common Stock outstanding on December 31,
1997.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of Registrant's 1997 Annual Report to Stockholders filed as
Exhibit (13) are incorporated by reference in Items 1, 3, 5, 6, 7, 8 and
14.
2. Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders to be filed with the Commission are incorporated by reference
in Items 10, 11, 12 and 13.
<PAGE>
PENN ENGINEERING & MANUFACTURING CORP.
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INDEX TO FORM 10-K REPORT
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PAGE
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I. PART I. ............................................................... 1
Item 1. Business................................................... 1
Item 2. Properties................................................. 4
Item 3. Legal Proceedings.......................................... 5
Item 4. Submission of Matters to a Vote of Security Holders........ 6
Executive Officers of the Registrant....................... 6
II. PART II. .............................................................. 7
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.......................... 7
Item 6. Selected Financial Data.................................... 7
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................ 7
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.. 7
Item 8. Financial Statements and Supplementary Data................ 7
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 7
III. PART III. ............................................................. 8
Item 10. Directors and Executive Officers of the Registrant......... 8
Item 11. Executive Compensation..................................... 8
Item 12. Security Ownership of Certain
Beneficial Owners and Management......................... 8
Item 13. Certain Relationships and Related Transactions............. 8
IV. PART IV. .............................................................. 9
Item 14. Exhibits, Financial Statements and
Schedules and Reports on Form 8-K........................ 9
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business.
The Registrant, a Delaware corporation, was incorporated in 1942. The
primary businesses of the Registrant have been:
(i) The development, manufacture, and sale of PEM(R) self-clinching and
broaching fasteners, inserts for plastic, and automatic insertion equipment for
such fasteners sold under the name PEMSERTER(R); and
(ii) The development, manufacture, and sale through the Registrant's
Pittman division of permanent magnet field, brush-commutated dc electric motors
under the Pittman(R) and Pitmo(R) trademarks, and electronically commutated
brushless dc servomotors under the Elcom(R) trademark.
In early 1997, the Registrant completed its Danboro, Pennsylvania expansion
and renovation program, adding approximately 43,000 square feet of additional
manufacturing and office space. The Registrant's new 120,000 square foot
fastener facility in Winston-Salem, North Carolina, was completed in July 1997.
This new facility has replaced the 58,000 square foot North Carolina plant,
which the Registrant intends to sell. Therefore, the Registrant's total fastener
manufacturing floor space is approximately 375,000 square feet.
(b) Financial Information About Industry Segments.
The answer to this Item is incorporated by reference to Note 12 of the
Notes to Consolidated Financial Statements "Financial Reporting for Segments of
the Registrant" on pages 24 and 25 of the Registrant's 1997 Annual Report to
Stockholders which is included as Exhibit (13) to this Form 10-K Report.
(c) Narrative Description of Business.
The Registrant is the world's leading manufacturer of self-clinching
fasteners used by the computer, data communications, telecommunications, general
electronics, automotive, and avionics industries. PEM self-clinching fasteners,
which accounted for approximately 81% of the Registrant's sales in 1997, were
first developed by the Registrant's founder in 1942. Self-clinching fasteners
become an integral part of the material in which they are installed and provide
a reliable means of attaching components to sheet metal or plastic. Typical
applications for the Registrant's fastener products include personal computers,
computer cabinetry, power supplies, instrumentation, telecommunications
equipment, and certain automobile parts, such as air bags and windshield wipers.
The Registrant's Pittman division manufacturers high performance permanent
magnet dc motors used in electronics, medical, and manufacturing applications.
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<PAGE>
The Registrant's fasteners are primarily used by sheet metal fabricators
which utilize the Registrant's fasteners to produce sub-assemblies for original
equipment manufacturers ("OEMs"). Both OEMs and their subcontractors seek
fastening solutions which provide lower total installed cost and are highly
reliable, thereby lowering production and service costs. The Registrant's
application engineers and independent distributors continually work in close
collaboration with OEMs and their subcontractors to determine appropriate
fastener applications, which often results in OEMs specifying the Registrant's
fasteners. Self-cinching fasteners generally compete against loose hardware,
such as nuts and bolts. The Registrant's fasteners typically sell at a premium
to loose hardware. However, the Registrant's fasteners generally result in lower
overall manufacturing costs.
The Company also manufactures and sells manual and automated presses for
fastener installation under the PEMSERTER trademark. The rapid and accurate
installation provided by PEMSERTER presses, together with the Company's broad
range of fastener products, provides the Company's customers with a complete
fastening system.
The Registrant's Pittman division produces high-quality, high-performance,
permanent magnet dc motors used in light-weight precision applications such as
archival storage, printing, copying, robotics, and medical diagnostic equipment
and centrifuges. Pittman's broad range of products are typically adapted to the
specific requirements of individual customers.
The manufacture and sale of (i) self-clinching and broaching fasteners and
inserts for plastic and (ii) direct current electric motors are the Registrant's
only lines of business. The following table sets forth information with respect
to the percentage of total sales attributable to each of the Registrant's
principal products which accounted for 10% or more of consolidated revenues in
each of the fiscal years ended December 31, 1995, 1996 and 1997:
Percentage of Total Sales
-------------------------
Year Ended Electric
December 31 Fasteners Motors
----------- --------- --------
1995 80% 20%
1996 82% 18%
1997 81% 19%
The Company's fastener products are sold through a worldwide network of
approximately 40 authorized distributors located in 30 countries and the
Company's subsidiaries in Singapore and England. Many of the distributors and
engineering representative organizations have been affiliated with the Company
for more than 20 years. The Company's independent distributors, which maintain
their own inventories of the Company's products, may sell other industrial
components, but are not allowed to carry fasteners which compete with the
Company's products. The Company's return allowances, which are made through the
exchange of inventory, have generally averaged less than 1% of sales. Customers
receive technical support from the Company's worldwide network of independent
engineering representatives. The Company's engineers work in collaboration with
individual manufacturers early in the design process to
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<PAGE>
engineer fastening solutions that often result in the specification of PEM
fasteners in new products. The Company supplies its customers and distributors
through warehouses in Doncaster, England and Singapore, in addition to
maintaining an inventory at its Danboro, Pennsylvania facility.
Domestic sales of Pittman motors are handled by technical sales
representatives who have the expertise to combine Pittman's motor products with
available motion system components and deliver a complete motion control system
to the customer. European sales are conducted through an exclusive agreement
with a Swiss manufacturer of precision motors that utilize a different
technology from, and are complementary to, Pittman's motors.
During the year ended December 31, 1997, 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 the Registrant in
the market for self-clinching, broaching and insert fasteners. The Registrant
believes that it has maintained its market share during 1997. Approximately ten
other companies are known to be competing with the Registrant in the manufacture
and sale of such fasteners, some of which also manufacture products other than
self-clinching, broaching and insert fasteners.
The Registrant also believes its Pittman division maintained its
competitive position in the electric motor market in 1997.
Among the Registrant's principal customers for fasteners and PEMSERTERS(R)
are manufacturers of business machines, personal computers and computer
peripherals, 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 the 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 the Registrant. However, sales of fasteners to one of the
Registrant's authorized distributors totaled approximately $20,854,000 for the
year ended December 31, 1995, $21,830,000 for the year ended December 31, 1996,
and $20,687,000 for the year ended December 31, 1997, or approximately 14.8%,
and 13.6%, and 12.3%, respectively, of the Registrant's consolidated net sales
in such years. Sales of fasteners to another of the Registrant's authorized
distributors totaled approximately $19,827,000 for the year ended December 31,
1997, or approximately 11.8% of the Registrant's consolidated net sales during
the year.
As of December 31, 1997, the Registrant had an order backlog of $57,249,000
compared with $44,359,000 as of December 31, 1996. The Registrant estimates that
substantially all of its backlog as of December 31, 1997 will be shipped during
its fiscal year ending December 31, 1998.
The raw materials used by the Registrant are generally available in
adequate supply.
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<PAGE>
The Registrant holds a number of patents, and has patent applications
pending, in the United States and various foreign countries. Management
believes, however, that the Registrant's business is not materially dependent on
any patent or group of patents. The principal trademarks of the Registrant are
registered in the United States and various foreign countries.
Research and development is carried on by the operating personnel of the
Registrant on a continuing basis. The amounts expended for research and
development for the fiscal years ended December 31, 1995, 1996 and 1997 were
approximately $1,460,000, $1,520,000, and $2,944,000, respectively.
The 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 the Registrant.
As of December 31, 1997, 1,368 persons were employed by the Registrant, 38
more than were employed as of December 31, 1996. None of the Company's personnel
are governed by collective bargaining agreements, and the Company has never
experienced a strike. The Company believes that its labor rates are comparable
to those of its competitors and that the Company's relations with its employees
are good. The Registrant does not consider its business to be seasonal in any
material respect, nor is any material portion of the 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 12 "Financial
Reporting for Segments of the Company" on pages 24 and 25 of the Registrant's
1997 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.
and PEM International (Singapore) Pte Ltd. are sold F.O.B., the Registrant's
factory, payable in U.S. dollars. Sales in the United Kingdom and Western Europe
are made through the Registrant's wholly owned subsidiary, PEM International,
Ltd., and are denominated in pounds sterling. Sales in the Pacific Rim are made
through the Registrant's wholly owned subsidiary, PEM International (Singapore)
Pte Ltd., and are denominated in Singapore dollars. 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, 1997, the Registrant's principal plants and offices, all
of which (other than the Singapore office) were owned by the Registrant, were as
follows:
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<PAGE>
<TABLE>
<CAPTION>
Location Size of Facility Use of Facility
-------- ---------------- ---------------
<S> <C> <C>
Danboro, Pennsylvania 230,000 sq. ft building on Executive offices and
106.9 acres manufacture of fasteners
Winston-Salem, 120,000 sq. ft. building Manufacture of components
North Carolina on 16.3 acres for fasteners
Winston-Salem, 58,280 sq. ft. building Vacant. Available for Sale.
North Carolina on 6 acres
Harleysville, 58,000 sq. ft. building Manufacture of dc motors
Pennsylvania on 6 acres
Suffolk, Virginia 50,000 sq. ft. building Manufacture of components
on 17.2 acres for fasteners
Doncaster, South 10,500 sq. ft. building Office and warehouse for
Yorkshire, England on 5.25 acres the distribution of fasteners
Singapore 3,700 sq. ft. Office and warehouse for
the distribution of fasteners
</TABLE>
The Registrant considers all of its plants and equipment to be modern and
well maintained.
The Registrant carries fire, casualty, business interruption, and public
liability insurance for all of its facilities in amounts which are deemed
adequate.
Item 3. Legal Proceedings.
The answer to this Item is incorporated by reference to Note 11 of Notes to
Consolidated Financial Statements "Contingencies" on page 24 of the Registrant's
1997 Annual Report to Stockholders which is included as Exhibit (13) to this
Form 10-K.
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<PAGE>
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 the Registrant is as
follows:
Name Age Position Held With the Registrant
---- --- ---------------------------------
Kenneth A. Swanstrom 58 Chairman of the Board, Chief
Executive Officer and President
Martin Bidart 61 Vice President - Manufacturing
Raymond L. Bievenour 54 Vice President - Sales/Marketing
Joseph F. Lopes 64 Vice President - Quality
(Retired on December 31, 1997)
Mark W. Simon 59 Vice President - Finance
and Corporate Secretary
Francis P. Wilson 58 Vice President - Engineering
Kent R. Fretz 60 Vice President and General
Manager - Pittman division
All of the executive officers of the Registrant have been principally
employed as officers or employees of the Registrant for more than the past five
years, except for Mr. Wilson, who was hired on June 23, 1997. From 1993 to prior
to joining the Company in 1997, Mr. Wilson was Director of Engineering for the
International Division of Emhart Fastening Technologies, a subsidiary of Black &
Decker. From 1991 to 1993, Mr. Wilson served as Director of Advanced
Technologies of M/ACom Omni Spectra.
Mr. Lopes retired on December 31, 1997, and his position is currently
vacant. The Registrant has retained an executive search firm to assist with the
replacement for Mr. Lopes.
The executive officers of the Registrant are elected each year at the
organization meeting of the Board of Directors of the Registrant, which is held
following the Annual Meeting of Stockholders.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Registrant's Common Stock (non-voting), par value $0.01, is
traded on the New York Stock Exchange under the symbol "PNN." The Registrant's
Class A Common Stock (voting), par value $0.01, is traded on the New York Stock
Exchange under the symbol "PNNA." As of March 16, 1998, there were 616 holders
of record of the Registrant's Common Stock and 480 holders of record of the
Registrant's Class A Common Stock. Additional information with respect to this
Item 5 is incorporated by reference to page 15 of the Registrant's 1997 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 the
Registrant is incorporated by reference to page 10 of the Registrant's 1997
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 10 through 14
of the Registrant's 1997 Annual Report to Stockholders, which is included as
Exhibit (13) to this Form 10-K Report.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The answer to this Item is incorporated by reference to pages 16 through 26
of the Registrant's 1997 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.
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning directors is incorporated by reference to the
Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1997. Information with respect to executive officers
of the Registrant is included in Part I of this Form 10-K report.
Item 11. Executive Compensation.
Information concerning this item is incorporated by reference to the
Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information concerning this item is incorporated by reference to the
Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1997.
Item 13. Certain Relationships and Related Transactions.
Information concerning this item is incorporated by reference to the
Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1997.
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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.
1. Consolidated Financial Statements.
The following Consolidated Financial Statements of the Registrant and its
subsidiaries are filed as part of this Form 10-K Report:
Page
----
Consolidated Balance Sheets at December 31, 1997 and 1996. .......... 16*
Statements of Consolidated Income for the years ended December 31,
1997, 1996 and 1995. ................................................ 17*
Statements of Changes in Consolidated Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995. ............... 18*
Statements of Consolidated Cash Flows for the years ended
December 31, 1997, 1996 and 1995. ................................... 19*
Notes to Consolidated Financial Statements. .........................20-25*
Independent Auditors' Report. ....................................... 26*
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* Refers to the respective page of the Registrant's 1997 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.
2. Financial Schedules.
None.
3. Exhibits.
Reference is made to the Exhibit Index on page 11 of this Form 10-K.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1997, the Registrant filed a Current
Report on Form 8-K on October 3, 1997, reporting under Item 4 the change from
Deloitte & Touche LLP as its independent auditors to Ernst & Young LLP as its
certifying accountant.
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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 30, 1998 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kenneth A. Swanstrom Chairman/CEO/President March 30, 1998
- ----------------------------- (Principal Executive Officer)
Kenneth A. Swanstrom
/s/ Mark W. Simon V.P. Finance, Corporate March 30, 1998
- ----------------------------- Secretary and Director
Mark W. Simon (Principal Financial
and Accounting Officer)
/s/ Willard S. Boothby, Jr. Director March 30, 1998
- -----------------------------
Willard S. Boothby, Jr.
/s/ Lewis W. Hull Director March 30, 1998
- -----------------------------
Lewis W. Hull
Director March , 1998
- -----------------------------
Thomas M. Hyndman, Jr.
/s/ Maurice D. Oaks Director March 30, 1998
- -----------------------------
Maurice D. Oaks
/s/ Charles R. Smith Director March 30, 1998
- -----------------------------
Charles R. Smith
/s/ Daryl L. Swanstrom Director March 30, 1998
- -----------------------------
Daryl L. Swanstrom
</TABLE>
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PENN ENGINEERING & MANUFACTURING CORP.
EXHIBIT INDEX
Item Description
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(3)(i) Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1 of the Registrant's Form
10-Q Quarterly Report for the period ended June 30, 1996.)
(3)(ii) By-laws of the Registrant, as amended. (Incorporated by reference
to Exhibit 3(ii) of the 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 the
Registrant and Lawrence W. Swanstrom and Daryl E. Swanstrom.
(Incorporated by reference to Exhibit A to the Company's Form 8-
Current Report dated September 5, 1986, the date of the earliest
event reported.)
(10)(ii) 1996 Equity Incentive Plan. (Incorporated by reference to the
Registrant's Form S-8 Registration Statement No. 333-20101 filed
with the Commission on January 21, 1997.)
(10)(iii) 1996 Employee Stock Purchase Plan. (Incorporated by reference to
the Registrant's Form S-8 Registration Statement No. 333-13073
filed with the Commission on September 30, 1996.)
(13) 1997 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 the Registrant.
(23) Independent Auditors' Consents.
(27) Financial Data Schedule (Electronic Filing Only).
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EXHIBIT 13
(ANNUAL REPORT TO STOCKHOLDERS)
<TABLE>
<CAPTION>
Selected Financial Data
- ------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
============================================================================================================
Year Ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $167,702 $160,323 $141,268 $121,470 $100,665
Cost of products sold 115,374 111,027 96,190 83,128 70,979
Provision for income taxes 8,425 8,264 8,323 6,686 4,548
Net income 14,501 13,858 13,798 10,441 7,352
Capital expenditures 19,234 25,266 17,213 3,833 8,354
Depreciation 6,570 5,343 4,165 3,425 3,180
Total assets 150,992 138,538 96,074 82,127 73,542
Stockholders' equity 128,919 121,137 76,091 65,910 57,819
Working capital $ 60,411 $ 64,233 $ 38,881 $ 41,612 $ 34,953
Number of employees (at year end) 1,368 1,330 1,211 1,088 1,008
Number of stockholders of record (at year end)
PNN 618 648 N/A N/A N/A
PNNA 480 520 540 580 607
Average number of common shares outstanding used
to compute per share information (in thousands) 8,664 7,748 6,828 6,828 6,828
Per share information:
Net income 1.67 1.79 2.02 1.53 1.08
Stockholders' equity 14.88 15.63 11.15 9.65 8.47
Dividends .42 .37 .50 .38 .29
--------------------------------------------------
</TABLE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
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DECEMBER 31, 1997
OVERVIEW
The Company consists of two business segments: the manufacture and sale of
PEM(R) brand self-clinching fasteners, including PEMSERTER(R) fastener insertion
machines, and Pittman(R) dc motors. Self-clinching fasteners, which accounted
for 81.0% of the Company's consolidated net sales in 1997 compared to 81.5% in
1996 and 80.2% in 1995, are marketed through a worldwide network of independent
authorized distributors and two Company owned distributors. In 1997, sales to
the computer/electronics and automotive industries accounted for approximately
81% and 7% of fastener sales, respectively, with the balance distributed among
other industries.
Motors accounted for 19.0% of the Company's consolidated net sales in 1997
compared to 18.5% in 1996 and 19.8% in 1995, and are marketed in the United
States and Europe through independent 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 consists of brush-commutated motors and longer lasting
brushless motors. Brushless motors are generally higher priced units with higher
profit margins, versus the brush motors, which are lower priced and carry a
lower margin, but generate higher sales volume.
The number of fastener units shipped from the Company's manufacturing
facilities to all customers, including independent and Company owned
distributors, increased 10% to 2.03 billion in 1996 from 1.84 billion in 1995,
and then decreased 3% to 1.96 billion in 1997. The decrease in 1997 was
primarily caused by independent distributors selling excess inventory
accumulated in prior years. As a result, distributor demand on the Company was
lessened in 1997.
In 1997, 1996, and 1995, sales to domestic customers accounted for 73.7%,
74.6%, and 74.9%, respectively, of the Company's consolidated net sales. During
the same periods, foreign sales accounted for 26.3%, 25.4%, and 25.1%,
respectively, of the Company's consolidated net sales. The Company's export
sales have benefited from the Company's ability to serve large multi-national
computer and electronic manufacturers who have moved some of their product
fabrication offshore. The Company has maintained significant distribution
channels and inventories in Europe and the Pacific Rim for more than 26 years
and 11 years, respectively.
11
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
Approximately 700 million pieces are available throughout the Company's
worldwide distribution network. In addition, the Company maintains an inventory
of approximately 100 million fastener units at its Danboro 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's profits from
export sales may be affected to some extent by freight costs, currency
fluctuations, duties and local administrative costs.
YEAR 2000
Many companies are currently in the process of determining what corrective
measures, if any, need to be taken in order to ensure that their computer
systems will not be disrupted by the Year 2000 problem. The problem is one where
many computer systems in use today have codes programmed to read dates as two
digits. The issue becomes a problem if the computer system recognizes the
designation "00" as 1900 when it should be 2000, resulting in processing
failures or errors. The Company is well underway towards having all critical
systems Year 2000 compliant by the close of 1998.
The total Year 2000 project cost is estimated at approximately $300,000,
which includes approximately $275,000 for the purchase of new software that will
be capitalized and $25,000 that will be expensed as incurred. To date, the
Company has incurred $175,000 for the upgrade of mainframe computer software,
that has been capitalized in 1997. The remaining costs are expected to be for
software upgrades for support systems and expenses to research and plan for the
total modification and conversion of all Company computer systems.
The project is estimated to be completed not later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The costs of
the project and the date on which the Company believes it will complete the Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated.
FORWARD-LOOKING STATEMENTS
Forward-looking statements are made throughout this Management's Discussion
and Analysis. The Company's results may differ materially from those in the
forward-looking statements. Forward-looking statements are based on management's
current views and assumptions, and involve risks and uncertainties that
significantly affect expected results. For example, operating results may be
affected by external factors such as: changes in laws and regulations, changes
in accounting standards, fluctuations in the cost and availability of the supply
chain resources, and foreign economic conditions, including currency rate
fluctuations.
Results of Operations
The following tables set 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.
================================================================================
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(Dollars in Thousands)
NET SALES
Fasteners $135,841 81.0% $130,721 81.5% $113,323 80.2%
Motors 31,861 19.0 29,602 18.5 27,945 19.8
----------------------------------------------------------
Total $167,702 100.0% $160,323 100.0% $141,268 100.0%
==========================================================
Domestic $123,534 73.7% $119,640 74.6% $105,831 74.9%
Foreign 44,168 26.3 40,683 25.4 35,437 25.1
----------------------------------------------------------
Total $167,702 100.0% $160,323 100.0% $141,268 100.0%
==========================================================
GROSS PROFIT
BY SEGMENT
Fasteners $ 43,805 32.2% $ 41,557 31.8% $ 37,258 32.9%
Motors 8,523 26.8 7,739 26.1 7,820 28.0
TOTAL COMPANY
Gross Profit $ 52,328 31.2% $ 49,296 30.7% $ 45,078 31.9%
Selling, general &
administrative
expenses 30,640 18.3 28,177 17.6 24,056 17.0
Operating profit 21,688 12.9 21,119 13.2 21,022 14.9
Net income 14,501 8.6 13,858 8.6 13,798 9.8
Year Ended December 31, 1997 vs. Year Ended December 31, 1996
Consolidated net sales for 1997 were $167.7 million, versus $160.3 million
in 1996, a 4.6% increase. This growth in sales was largely the result of the
growth of the personal computer, network servers, and automotive markets. Sales
to customers outside the United States in 1997 increased 8.6% to $44.2 million,
from $40.7 million in 1996. Net sales for the fastener operation for 1997 were
$135.8 million, versus $130.7 million in 1996, a 3.9% increase. Motor sales in
1997 increased 7.8% to $31.9 million from $29.6 million in 1996.
The Company's average selling price for fasteners shipped in 1997 increased
approximately 4.3% to $63.19 per thousand fasteners sold from $60.59 per
thousand fasteners sold in 1996 mainly due to a change in product mix and an
approximate 4.0% price increase that was effective as of April 1, 1997.
The number of fasteners sold to the Company's global OEM direct customers
and its independent distribution network decreased approximately 0.7% from 1996
to 1997. The
12
<PAGE>
number of fasteners sold within North America, approximately 71.5% of total
fasteners sold in 1997, decreased approximately 4.6% from 1996 to 1997. This
decrease is mainly due to adjustments in distributor inventory levels which were
unusually high during the latter part of 1996 and early 1997. The number of
fasteners sold into Europe, approximately 22.9% of total fasteners sold in 1997,
increased 14.1% from 1996 to 1997. The increase in this market was due to strong
point-of-sale demand throughout all four quarters of 1997 as opposed to 1996
when point-of-sale demand trended downward in the latter part of the year. The
number of fasteners sold into the Asia-Pacific market, approximately 5.6% of
total fasteners sold in 1997, decreased approximately 1.5% from 1996 to 1997.
Sales in this region were affected by the currency fluctuations and other
economic problems experienced in the area during the last half of 1997.
The average selling price of Pittman motors increased approximately 0.7% to
$40.58 per motor in 1997 from $40.29 per motor in 1996. The number of Pittman
motors sold increased approximately 6.9% to 785,052 in 1997 from 734,741 in
1996.
Consolidated gross profit was $52.3 million in 1997, versus $49.3 million
in 1996, a 6.1% increase. Fastener gross profit increased 5.3% to $43.8 million
in 1997 from $41.6 million in 1996 mainly as a result of a change in product mix
and a continuing emphasis on manufacturing cost control. As a percent of sales,
fastener gross profit increased to 32.2% in 1997 from 31.8% in 1996. This
increase was achieved even though the fastener operation incurred one-time
expenses, approximately $500,000, associated with the moving of equipment into a
new manufacturing facility in Winston-Salem.
Motor gross profit increased 10.4% to $8.5 million in 1997 from $7.7
million in 1996 due to increased sales volume. Motor gross profit margins
increased to 26.8% in 1997 from 26.1% in 1996 also due to increased sales
volume.
Consolidated selling, general, and administrative expenses ("SG&A") for
1997 were $30.6 million, versus $28.2 million for 1996, an 8.5% increase. SG&A,
as a percent of sales, increased from 17.6% in 1996 to 18.3% in 1997. The
increase was caused by additional commission expense due to continued strong end
customer demand, additional staff, and Singapore distribution center expenses
for an entire year.
Consolidated net income for 1997 was $14.5 million, versus $13.9 million
for 1996. Other income, which includes investment income and realized currency
transaction gains, increased to $1.2 million in 1997 from $1.0 million in 1996.
Year Ended December 31, 1996 vs. Year Ended December 31, 1995
Consolidated net sales for 1996 were $160.3 million, versus $141.3 million
in 1995, a 13.5% increase. Sales to customers outside the United States for 1996
were $40.7 million, versus $35.4 million in 1995, a 15.0% increase. Net sales
for the fastener operation for 1996 were $130.7 million, versus $113.3 million
in 1995, a 15.4% increase. Motor sales increased to $29.6 million in 1996 from
the $27.9 million recorded in 1995.
The Company's average selling price for fasteners shipped in 1996 increased
approximately 4.6% to $60.59 per thousand fasteners sold from $57.95 per
thousand fasteners sold in 1995 mainly due to a change in product mix and a 2.8%
price increase that was effective as of April 1, 1996. The average selling price
of Pittman motors declined 2.1% from $41.15 per motor in 1995 to $40.29 per
motor in 1996 as a result of a change in product mix toward lower margin brush
type 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 21.4% in
1996 compared to 22.5% in 1995.
The number of fasteners sold to the Company's global OEM direct customers
and its independent distribution network increased approximately 10.2% from 1995
to 1996. The number of fasteners sold within North America increased
approximately 12.3% from 1995 to 1996, and represented approximately 74.4% of
total fasteners sold in 1996. The number of fasteners sold into the Europe and
the Asia-Pacific markets increased 3.4% and 9.3%, respectively, from 1995 to
1996 and represented approximately 19.9% and 5.7%, respectively, of total
fasteners sold in 1996. The continued strong demand for personal computers as
well as other electronic equipment was the main cause of the increased sales
volume. However, the rate at which sales volume grew slowed from prior years
because of excess distributor inventory in some product lines.
Consolidated gross profit was $49.3 million in 1996, versus $45.1 million
in 1995, a 9.3% increase. Fastener gross profit increased 11.5% to $41.6 million
from $37.3 million in 1995 mainly as a result of a greater number of fasteners
manufactured and sold in 1996 compared to 1995. However, fastener gross margins
decreased from 32.9% in 1995 to 31.8% in 1996 because cost increases incurred
for raw material, outside screw machine services, and tooling were not fully
offset
13
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
by price increases, production efficiencies, and cost containment. The fastener
division also incurred additional one-time expenses associated with the moving
of equipment into the additional manufacturing facilities built in Danboro.
Motor gross profit decreased 1.0% from $7.8 million in 1995 to $7.7 million
in 1996 due to higher fixed costs in the manufacturing engineering departments
and a shift, dictated by customer demand, toward the manufacture and shipment of
less profitable brush type motors. Motor gross profit margins declined from
28.0% in 1995 to 26.1% in 1996.
Consolidated selling, general, and administrative expenses ("SG&A") for
1996 were $28.2 million, versus $24.1 million for 1995, a 17.1% increase. SG&A,
as a percent of sales, increased from 17.0% in 1995 to 17.6% in 1996. Additional
SG&A staff, wage increases for current staff, the establishment of a Singapore
distribution center, and increased legal, investor relations and other
professional fees related to the Company's 1996 public offering contributed to
the increased SG&A.
Consolidated net income for 1996 was $13.9 million, versus $13.8 million
for 1995. Other income, which includes investment income and realized currency
transaction gains, decreased 8.7% as a result of decreased investment income
during the first six months of 1996, related to capital equipment expenditures
and less favorable foreign currency exchange rates in 1996 compared to 1995.
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 this 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. The
effect of this change was to increase net income in 1996 by $910,000.
Liquidity and Capital Resources
Liquidity needs for the year ended December 31, 1997 consisted primarily of
$19.2 million of capital expenditures which included the completion of a 120,000
square foot new building at the Company's Winston-Salem location and to expand
the Company's manufacturing equipment. The Company's primary source of cash in
1997 came from operations while in 1996 the primary source of cash came from the
public offering of 1,850,000 shares of non-voting common stock.
At December 31, 1997, the Company also had $27.5 million available under
its short-term lines of credit. Working capital decreased to $60.4 million in
1997 from $64.2 million in 1996 primarily due to the increase in accounts
payable needed to finance capital expenditures and a decrease in accounts
receivable as a result of a 7.7% decrease in receivable days outstanding from
December 31, 1996 to December 31, 1997. Working capital increased to $64.2
million in 1996 from $38.9 million in 1995 as a result of the public offering
proceeds, increased sales, and the purchase of the Singapore distributor.
The Company anticipates that its existing capital resources and cash flow
generated from future operations will enable it to adequately maintain a current
level of operations and planned growth for the foreseeable future.
Stockholders' equity per share at the end of 1997 was $14.88 compared to
$15.63 at year-end 1996 and $11.15 at year-end 1995. The 1995 amount has been
restated to adjust for a 4-for-1 stock split, effected in the form of a stock
dividend, distributed to stockholders in May 1996.
The Company, along with a large number of other entities, has been
designated a potentially responsible party (PRP) subject to joint and several
liability for the cost of three superfund sites by the US Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act. Based on the Company's assessment of the costs associated
with its environmental responsibilities, compliance with federal, state, and
local laws regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, have not had, and in
the opinion of Company's management, will not have a material effect on the
Company's financial condition.
14
<PAGE>
Selected Quarterly Financial Data
- --------------------------------------------------------------------------------
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
==================================================================================================
1997 Quarter Ended
-------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Total Year
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $39,016 $41,974 $42,531 $44,181 $167,702
Gross profit 11,779 12,967 13,117 14,465 52,328
Net income 2,975 3,560 3,828 4,138 14,501
Net income per share--basic and diluted .34 .41 .44 .48 1.67
Dividends declared per share .10 .10 .11 .11 .42
-------------------------------------------------
Market prices per share:
Class A Common Stock (PNNA)
High 21 1/2 23 3/8 26 1/4 27 1/4 27 1/4
Low 19 1/8 18 3/4 18 7/8 24 18 3/4
Common Stock (PNN)
High 21 1/8 19 7/8 27 7/8 27 3/4 27 7/8
Low 18 7/8 17 3/4 19 1/2 23 3/8 17 3/4
==================================================================================================
1996 Quarter Ended
-------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Total Year
- --------------------------------------------------------------------------------------------------
Net sales $39,029 $41,482 $38,714 $41,098 $160,323
Gross profit 11,616 13,379 12,259 12,042 49,296
Net income 2,908 3,931 3,675 3,344 13,858
Net income per share--basic and diluted .42 .58 .43 .36 1.79
Dividends declared per share .07 .10 .10 .10 .37
-------------------------------------------------
Market prices per share:
Class A Common Stock (PNNA)
High 24 27 1/8 19 1/8 20 5/8 27 1/8
Low 21 1/4 18 1/8 15 16 7/8 15
Common Stock (PNN)
High N/A 26 7/8 23 7/8 20 3/4 26 7/8
Low N/A 18 3/8 16 7/8 17 1/4 16 7/8
-------------------------------------------------
</TABLE>
The common stock of Penn Engineering & Manufacturing Corp. is traded on the New
York Stock Exchange. Symbols: PNN & PNNA.
Lines of Business
The manufacture and sale of fastener products and electric motors are the
Company's only lines of business. Certain information on percent of net sales
and percent of operating profits attributable to these lines of business for the
last three years is as follows:
================================================================================
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Net Sales
Fastener products 81% 82% 80%
Electric motors 19 18 20
Operating Profit
Fastener products 87 89 87
Electric motors 13 11 13
-----------------------
15
<PAGE>
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
================================================================================
December 31, 1997 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,826 $ 4,208
Short-term investments 10,844 10,858
Accounts receivable
(less allowance for doubtful accounts--
1997, $550; 1996, $1,000) 27,444 28,580
Inventories 26,679 27,533
Other current assets 2,130 2,762
-------------------
Total current assets 73,923 73,941
-------------------
PROPERTY--At cost:
Land and improvements 4,744 4,358
Buildings and improvements 30,509 22,417
Machinery and equipment 84,037 74,486
-------------------
Total 119,290 101,261
Less accumulated depreciation 45,393 39,429
-------------------
Total property--net 73,897 61,832
-------------------
OTHER ASSETS 3,172 2,765
-------------------
TOTAL $150,992 $138,538
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,826 $ 3,741
Accrued expenses:
Pension and profit sharing 2,522 2,140
Payroll and commissions 2,961 2,810
Other 2,203 1,017
-------------------
Total current liabilities 13,512 9,708
-------------------
ACCRUED PENSION COST 4,330 4,793
-------------------
DEFERRED INCOME TAXES 4,231 2,900
-------------------
STOCKHOLDERS' EQUITY:
Class A common stock--authorized 3,000,000 shares
of $.01 par value each;
Issued 1,772,025 shares in 1997 and 1996 18 18
Common stock--authorized 20,000,000 shares
of $.01 par value each;
Issued 7,187,011 shares in 1997 and 7,166,075
shares in 1996 72 72
Additional paid-in capital 35,878 35,421
Retained earnings 96,688 85,822
Unrealized loss on investments (net of tax) (64) (62)
Cumulative foreign currency translation adjustment (1,355) 818
-------------------
Total 131,237 122,089
-------------------
Less cost of treasury stock--324,831 shares in 1997
and 259,772 shares in 1996 2,318 952
-------------------
Total stockholders' equity 128,919 121,137
-------------------
TOTAL $150,992 $138,538
===================
See the accompanying notes to consolidated financial statements.
16
<PAGE>
Statements of Consolidated Income
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $167,702 $160,323 $141,268
COST OF PRODUCTS SOLD 115,374 111,027 96,190
-----------------------------------
GROSS PROFIT 52,328 49,296 45,078
OTHER EXPENSES:
Selling expenses 18,016 16,347 14,867
General and administrative expenses 12,624 11,830 9,189
-----------------------------------
TOTAL 30,640 28,177 24,056
-----------------------------------
OPERATING PROFIT 21,688 21,119 21,022
OTHER INCOME--NET 1,238 1,003 1,099
-----------------------------------
INCOME BEFORE INCOME TAXES 22,926 22,122 22,121
PROVISION FOR INCOME TAXES 8,425 8,264 8,323
-----------------------------------
NET INCOME $ 14,501 $ 13,858 $ 13,798
===================================
NET INCOME PER SHARE--BASIC AND DILUTED $ 1.67 $ 1.79 $ 2.02
WEIGHTED AVERAGE NUMBER OF SHARES OF CLASS A COMMON STOCK
AND COMMON STOCK OUTSTANDING DURING THE YEAR 8,663,530 7,748,273 6,828,328
-----------------------------------
</TABLE>
See the accompanying notes to consolidated financial statements.
17
<PAGE>
Statements of Changes In Consolidated Stockholders' Equity
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
==================================================================================================================================
Cumulative
Foreign
Class A Additional Unrealized Currency Total
Common Common Paid-in Retained Loss on Translation Treasury Stockholders'
Stock Stock Capital Earnings Investments Adjustment Stock Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $1,772 $ 932 $64,521 $(140) $ (223) $ (952) $ 65,910
Net income 13,798 13,798
Cash dividends--$.50 per share (3,414) (3,414)
Decrease in unrealized investment
loss reserve 80 80
Foreign currency translation adjustment (283) (283)
--------------------------------------------------------------------------------------
Balance at December 31, 1995 1,772 932 74,905 (60) (506) (952) 76,091
Net income 13,858 13,858
Cash dividends--$.36875 per share (2,888) (2,888)
Reclassification of stock (1,754) 1,754 0
Stock dividend declared 53 (53) 0
Stock offering--1,850,000 shares issued 19 32,735 32,754
Increase in unrealized investment
loss reserve (2) (2)
Foreign currency translation adjustment 1,324 1,324
--------------------------------------------------------------------------------------
Balance at December 31, 1996 18 72 35,421 85,822 (62) 818 (952) 121,137
Net income 14,501 14,501
Cash dividends--$.42 per share (3,635) (3,635)
Stock issued under employee stock
purchase plan 457 457
Purchase of treasury stock (1,366) (1,366)
Increase in unrealized investment
loss reserve (2) (2)
Foreign currency translation adjustment (2,173) (2,173)
--------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 18 $72 $35,878 $96,688 $ (64) $(1,355) $(2,318) $128,919
======================================================================================
</TABLE>
See the accompanying notes to consolidated financial statements.
18
<PAGE>
Statements of Consolidated Cash Flows
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
========================================================================================================================
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,501 $ 13,858 $13,798
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 6,570 5,343 4,165
Loss on disposal of property 329 38 17
(Gain) on disposal of investments (6) -- (41)
Changes in assets and liabilities:
(Increase) decrease in accounts receivables 597 (7,735) (786)
(Increase) in inventories (7) (7,258) (2,638)
(Increase) decrease in other current assets 374 754 (1,512)
(Increase) in other assets (407) (715) (560)
Increase (decrease) in accounts payable 2,095 (562) 1,553
Increase (decrease) in accrued expenses 2,006 (1,432) 652
Increase (decrease) in accrued pension costs (463) 78 (655)
Increase in deferred income taxes--noncurrent 1,331 834 716
-----------------------------
Net cash provided by operating activities 26,920 3,203 14,709
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (19,234) (25,266) (17,213)
Additions to available-for-sale investments -- (14) --
Additions to held-to-maturity investments (28,355) (106,415) (28,343)
Proceeds from disposal of available-for-sale investments 448 217 1,202
Proceeds from disposal of held-to-maturity investments 27,925 101,340 27,238
Proceeds from disposal of property 199 79 3
-----------------------------
Net cash used in investing activities (19,017) (30,059) (17,113)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term (repayments) borrowings -- (1,500) 1,500
Issuance of common stock 457 32,754 --
Dividends paid (3,635) (2,888) (3,414)
Acquisition of treasury stock (1,366) -- --
-----------------------------
Net cash (used in) provided by financing activities (4,544) 28,366 (1,914)
-----------------------------
Effect of exchange rate changes on cash (741) 1,239 (329)
-----------------------------
Net increase (decrease) in cash and cash equivalents 2,618 2,749 (4,647)
Cash and cash equivalents at beginning of year 4,208 1,459 6,106
-----------------------------
Cash and cash equivalents at end of year $ 6,826 $ 4,208 $ 1,459
=============================
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the year for:
Income taxes $ 5,574 $ 7,429 $ 8,062
-----------------------------
</TABLE>
See the accompanying notes to consolidated financial statements.
19
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
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 International (Singapore) Pte. Ltd., PEM World Sales
Ltd., PEM Investments, Inc., and PEM Management, Inc. All significant
intercompany transactions and balances are eliminated in consolidation.
Short-Term Investments
Management determines the appropriate classifications of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Bonds and commercial paper investments are classified as Held-to-Maturity as the
Company has the positive intent and ability to hold the securities to maturity.
Bonds are stated at amortized cost. Securities not classified as
Held-to-Maturity have been classified as Available-for-Sale. Available-for-Sale
securities are stated at fair value, with unrealized gains and losses reported
as a separate component of stockholders' equity. The fair value of all
securities is determined based upon the current value quoted on public
exchanges. Investments are classified as short-term if the maturities at
December 31 are less than one year.
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 67% and 69% of total inventories at December 31, 1997
and 1996, respectively, are priced on the first-in, first-out (FIFO) method, at
the lower of cost or market.
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.
Cash and Cash Equivalents
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.
Research and Development Costs
The Company expenses all research and development costs as incurred.
Foreign Currency Translation
The effect of translating the financial statements of PEM International
Ltd. & PEM International (Singapore) Pte. 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.
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.
Fair Values of Financial Instruments
Fair values of cash equivalents, short-term investments, trade receivables,
and payables approximate their carrying value. The estimated fair values of
other financial instruments have been determined using available market
information and valuation methodologies. These estimates require considerable
judgment in interpreting market data, and changes in assumptions or estimation
methods may significantly affect the fair value estimates.
Capital Stock
The Company's capital stock consists of $.01 par value Class A Common Stock
and $.01 par value Common Stock. Holders of Class A Common Stock have one vote
per share, while holders of Common Stock have no votes. All other rights of the
Class A Common Stock and Common Stock, including rights with respect to stock
splits, the consideration payable in a merger or consolidation, and distribution
upon liquidation, are the same.
20
<PAGE>
Revenue Recognition
The Company's revenues are recorded at the time the products are shipped.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires expanded disclosure of stock-based compensation
arrangements with employees. This statement encourages, but does not require,
compensation cost to be measured based on the fair value of the equity
instrument awarded. It allows the Company to continue to measure compensation
cost for these plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company has elected to continue to recognize
compensation cost based on the intrinsic value of the equity instrument awarded.
Net Income Per Share
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" which replaces the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Adoption of this statement had no effect on the Company's
earnings per share calculation.
Pending Accounting Changes
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" and Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Further, in February 1998, the FASB issued Statement No.
132, "Pension and Other Postretirement Disclosures." The Company will adopt
these statements in 1998.
Reclassifications
Certain reclassifications have been made to prior year amounts and balances
to conform with the 1997 presentation.
NOTE 2: SHORT-TERM INVESTMENTS
Held-to-Maturity--The following is a summary of short-term Held-to-Maturity
securities:
================================================================================
December 31, (Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
U.S. Treasury securities and securities of
U.S. Government agencies $6,814 $8,303
Corporate bonds 3,008 --
Commercial paper 150 1,238
--------------------
TOTAL $9,972 $9,541
====================
Available-for-Sale--Unrealized losses were $64,000, net of taxes of
$42,000, at December 31, 1997 and were $62,000, net of taxes of $40,000, at
December 31, 1996. The following is a summary of the estimated fair value of
short-term Available-for-Sale securities:
================================================================================
December 31, (Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Mutual Common Stock Funds $580 $ 580
U.S. Government Security Income Fund 101 549
State and Municipal Bond Funds 191 188
------------------
TOTAL $872 $1,317
==================
NOTE 3: INVENTORIES
Inventory consists of the following:
================================================================================
December 31, (Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Raw material $ 4,348 $ 4,470
Tooling 3,392 3,882
Work-in-process 8,073 7,648
Finished goods 10,866 11,533
---------------------
TOTAL $26,679 $27,533
=====================
If the FIFO method of inventory valuation had been used for all inventories
by the Company, inventories at December 31, 1997, 1996, and 1995 would have been
$8,704,000, $8,117,000, and $8,028,000 higher.
In 1996, the Company changed the method of calculating its domestic
fastener LIFO inventory from the unit cost method to the components of cost
method. Management believes that this change in its LIFO method better reflects
the effect of inflation and results in a more representative LIFO cost index for
product mix changes. The effect of this change was to increase 1996 net income
by $910,000 ($.12 per share). The cumulative effect of this accounting change
and the pro forma effect on 1995 net income have not been disclosed because such
effects are not reasonably determinable. Included in Other Assets is long-term
tooling inventory totaling $3,172,000 and $2,765,000 at December 31, 1997 and
1996, respectively.
NOTE 4: LINES OF CREDIT
At December 31, 1997, the Company had available unused short-term lines of
credit totaling $27,500,000. No amounts were outstanding under these lines at
December 31, 1997 or December 31, 1996.
21
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
NOTE 5: PENSION AND PROFIT SHARING PLANS
The Company has a defined benefit pension plan covering all eligible
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 total pension expense for 1997, 1996, and 1995 was $2,193,000,
$2,348,000, and $1,767,000, respectively. The following table sets forth the
plan's funded status and amounts recognized in the Company's consolidated
financial statements:
================================================================================
December 31, (Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested employees $16,420 $13,563
Non-vested employees 496 379
----------------------
TOTAL $16,916 $13,942
----------------------
Projected plan benefit obligation for services
rendered to date $30,690 $24,937
Plan assets at fair value (primarily listed
stocks, bonds and cash equivalents) (25,399) (20,324)
----------------------
Excess of projected benefit obligation over
plan assets 5,291 4,613
Unrecognized net (gain) from past experience
different from that assumed and effects of
changes in assumptions (1,214) (136)
Unrecognized net asset at January 1, 1987
being recognized over 15 years 253 316
----------------------
Total accrued pension cost $ 4,330 $ 4,793
----------------------
Net pension costs included the following components:
================================================================================
Year ended December 31, (Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost--benefits earned
during the period $2,076 $2,081 $1,426
Interest cost on projected
benefit obligation 1,857 1,756 1,435
Actual return on plan assets (3,753) (1,581) (3,261)
Net amortization and deferral 1,968 51 2,132
------------------------------
Net periodic pension cost $2,148 $2,307 $1,732
=============================
The assumed discount rate, rate of increase in long-term compensation
levels, and expected long-term rate of return on assets were 7% (7.5% in 1996
and 7% in 1995), 6%, and 8%, respectively. The decrease in the discount rate
from 7.5% in 1996 to 7% in 1997 caused an increase in the projected benefit
obligation of approximately $3,115,000. The increase in the discount rate from
7% in 1995 to 7.5% in 1996 caused a decrease in the projected benefit obligation
of approximately $2,693,000.
The Company has a profit sharing plan 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 $4,026,000 in 1997, $3,631,000 in 1996, and
$3,225,000 in 1995.
NOTE 6: STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company currently has one fixed option plan, the 1996 Equity Incentive
Plan (the "Plan"). The Plan provides for the granting of options to eligible
employees of all participating subsidiaries of the Company. The Plan permits the
granting of both options that qualify as incentive stock options under Section
422(b) of the Internal Revenue Code of 1986 (the "Code") and options that do not
qualify as incentive stock options under the Code (Non-Qualified Stock Options).
The Company is authorized under the Plan to grant options for shares not to
exceed in the aggregate 500,000 shares of the Company's non-voting Common Stock.
The Plan provides for the granting of both types of options with an exercise
price equal to the greater of par value or the closing market price of the
Company's non-voting Common Stock on the date of the grant, and a maximum term
of ten years. All options granted under this Plan shall vest in four equal
cumulative installments commencing on the first, second, third, and fourth
anniversaries of the grant date of the option.
A summary of the Company's option activity, and related information for the
years ended December 31, 1996 and December 31, 1997 is as follows:
================================================================================
Weighted-
Average
Options Exercise price
- --------------------------------------------------------------------------------
Outstanding--December 31, 1995 N/A
Granted 126,220 18.375
Exercised --
Canceled --
Outstanding--December 31, 1996 126,220 18.375
Granted 141,410 25.625
Exercised --
Canceled 1,140 18.375
Outstanding--December 31, 1997 266,490 22.222
Exercisable at December 31, 1997 31,270 18.375
Weighted-average fair value of
options granted during 1997 $8.11
Weighted-average remaining
life of options outstanding at
December 31, 1997 9.48 years
22
<PAGE>
The Company also has one stock purchase plan, the 1996 Employee Stock
Purchase Plan (the "Purchase Plan") which provides for the purchase of the
Company's non-voting Common Stock by eligible employees of all participating
subsidiaries of the Company. The Purchase Plan commenced on October 1,1996 and
has a term of ten years with 20 semi-annual subscription periods. During its
term the Purchase Plan permits employees to purchase the Company's non-voting
Common Stock on a regular basis, through payroll deductions not exceeding 10% of
base wages, at a 10% discount from the lowest of the market price on the last
trading day before the first day of enrollment period with respect to the
subscription period or on the last trading day of such subscription period. The
maximum number of shares to be issued under the Purchase Plan is 150,000 shares
of the Company's non-voting Common Stock. Shares under the Purchase Plan are
subscribed during each subscription period and purchased on the last business
day of such subscription period. The Company had a balance of $68,400 in
employee withholdings at the beginning of the year and had employee withholdings
of $103,111 for the current subscription period at December 31, 1997. The Plan
has issued to employees 20,936 shares as of December 31,1997. The Company
utilized the same valuation assumptions in this plan as it had in the stock
option plan.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," which requires expanded disclosures of stock-based compensation
arrangements with employees. SFAS 123 encourages, but does not require,
compensation cost to be measured based on the fair value of the equity
instrument awarded. It allows the Company to continue to measure compensation
cost for these plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees." The Company has elected to continue
to recognize compensation cost based on the intrinsic value of the equity
instrument awarded as promulgated in APB No. 25. The fair value of each option
granted was estimated on the date of grant using the Black-Scholes
option-pricing model. The 1996 and the 1997 grant had the following common
assumptions: dividend yield of 2.25%; expected life of 6 years; and volatility
of 30%. The 1996 grant assumed a risk free interest rate of 5.93% while the 1997
grant assumed a risk free interest rate of 5.75%. Had 1997 compensation costs
for the Company's plans been determined based on the fair value at the grant
date for awards under these plans consistent with the method of SFAS No. 123,
the impact on the Company's financial results as of December 31, 1997 would have
been a $392,000 reduction of net income, or $0.04 per share. No stock options
were vested as of December 31, 1996.
NOTE 7: FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company hedges the potential effect of currency fluctuations on foreign
operating activities by entering into foreign currency forward contracts. Gains
or losses on qualifying hedges of firm commitments are recognized in income when
the hedged transaction occurs. Forward contracts that do not qualify for hedge
accounting are marked to market, and the resulting gains or losses are reflected
in income. Total foreign currency transaction gains (losses) of $373,000,
$(224,000), and $174,000 were recorded in 1997, 1996, and 1995, respectively.
The forward contracts outstanding at December 31, 1997 mature in 1998 and
require the Company to exchange foreign currency for U.S. dollars at maturity.
The Company had foreign exchange contracts of $9.8 million outstanding at
December 31, 1997 with a fair market value which approximated cost. At December
31, 1996 there were $13.9 million foreign exchange contacts outstanding with a
fair market value of approximately $12.7 million. 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.
NOTE 8: INCOME TAXES
The income tax provision consists of the following:
================================================================================
Year ended December 31, (Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $6,058 $6,239 $6,837
State 565 644 863
------------------------
Total current tax provision 6,623 6,883 7,700
------------------------
Deferred:
Federal 1,617 1,236 553
State 185 145 70
------------------------
Total deferred tax 1,802 1,381 623
------------------------
Total income tax provision $8,425 $8,264 $8,323
========================
The significant components of the Company's net deferred tax assets and
liabilities are as follows:
================================================================================
December 31, (Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Accrued pension $1,690 $1,871
Allowance for doubtful accounts 207 382
Other 322 341
----------------
Total deferred tax asset 2,219 2,594
----------------
Deferred tax liabilities:
Property 5,897 4,771
Inventories 318 214
Other 235 118
----------------
Total deferred tax liability 6,450 5,103
----------------
Net deferred tax liability $4,231 $2,509
================
23
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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:
================================================================================
December 31, (Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Federal income tax provision at
statutory rate $8,024 $7,743 $7,742
State income taxes, after deducting
federal income tax benefit 488 513 606
Other (87) 8 (25)
-----------------------------
Provision for income taxes $8,425 $8,264 $8,323
=============================
NOTE 9: 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 $6,512,000 during 1996 and $7,932,000 during 1995. In
November, 1996 this corporation was sold to an unrelated party. The Company also
made purchases from another corporation, an officer and director of which is
also a director of the Company, in the amounts of $328,000, $289,000, and
$320,000 in 1997, 1996, and 1995, respectively.
NOTE 10: COMMITMENTS
The Company has operating leases covering certain automobiles, office
space, and office equipment. The future minimum annual payments on these
non-cancelable operating leases which were in effect at December 31, 1997,
having initial or remaining terms of more than one year are $531,000 for 1998,
$494,000 for 1999 and $161,000 for 2000.
Rental and operating lease expenses charged against earnings were $671,000,
$586,000, and $429,000 in 1997, 1996, and 1995, respectively.
NOTE 11: 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 12: FINANCIAL REPORTING FOR SEGMENTS OF THE COMPANY
Information about the operations of the Company in different business
segments are as follows (dollars in thousands):
================================================================================
Year Ended December 31, 1997 Fasteners Motors Consolidated
- --------------------------------------------------------------------------------
Net sales $135,841 $31,861 $167,702
---------------------------------
Operating profit 18,884 2,804 $ 21,688
Other income 1,238
--------
Income before income taxes $ 22,926
========
Identifiable assets $123,426 $15,576 $139,002
Corporate assets 11,990
--------
Total assets at December 31, 1997 $150,992
========
Depreciation $ 5,973 $ 597 $ 6,570
Capital expenditures $ 18,820 $ 414 $ 19,234
================================================================================
Year Ended December 31, 1996 Fasteners Motors Consolidated
- --------------------------------------------------------------------------------
Net sales $130,721 $29,602 $160,323
---------------------------------
Operating profit $ 18,754 $ 2,365 $ 21,119
Other income 1,003
--------
Income before income taxes $ 22,122
========
Identifiable assets $110,999 $14,899 $125,898
Corporate assets 12,640
--------
Total assets at December 31, 1996 $138,538
========
Depreciation $ 4,815 $ 528 $ 5,343
Capital expenditures $ 24,083 $ 1,183 $ 25,266
================================================================================
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
- --------------------------------------------------------------------------------
24
<PAGE>
The Company operates in two business segments, fastener products and
electric motors. Operating profit is net sales less costs and expenses.
Identifiable assets by segment are those assets that are used in the Company's
operations in each segment. Sales of fasteners to one customer (an authorized
distributor of the Company) totaled approximately $20,687,000, $21,830,000, and
$20,854,00 for the years ended December 31, 1997, 1996, and 1995, respectively
(approximately 12%, 14%, and 15% of consolidated net sales in 1997, 1996, and
1995, respectively). Sales of fasteners to another customer (an authorized
distributor of the Company) totaled approximately $19,827,000 or approximately
12% of consolidated net sales in 1997. The Company has operations in the United
States, the United Kingdom, and Singapore. Information about the operations of
the Company in different geographic segments are as follows:
<TABLE>
<CAPTION>
United States Operations PEM
--------------------------------------- PEM International
North Asia-Pacific International Singapore Total
America Europe & Other Total Ltd. Pte. Ltd. Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales 1997 $127,490 $2,362 $1,413 $131,265 $29,309 $7,128 $167,702
1996 124,569 2,027 2,738 129,334 25,081 5,908 160,323
1995 109,453 1,453 7,510 118,416 22,852 141,268
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1997 $139,523 $ (117) $ (404) $139,002
1996 124,909 715 274 125,898
1995 87,377 605 87,982
- -----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 1997 $126,153 $16,068 $8,771 $150,992
1996 115,073 16,309 7,156 138,538
1995 84,533 11,541 96,074
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13: STOCK RECLASSIFICATION AND STOCK DIVIDEND
On May 22, 1996, the Company effected a reclassification of its 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 Company 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 foregoing consolidated financial
statements, all per share amounts and number of shares have been restated to
reflect the Stock Reclassification and the Stock Dividend.
25
<PAGE>
Report of Independent Auditors
- --------------------------------------------------------------------------------
To the Stockholders and Board of Directors
Penn Engineering & Manufacturing Corp.
We have audited the accompanying consolidated balance sheet of Penn
Engineering & Manufacturing Corp. as of December 31, 1997 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of the Company for the years ended December 31, 1996 and 1995, were
audited by other auditors whose report dated January 29, 1997, expressed an
unqualified opinion on these statements and included an explanatory paragraph
that disclosed the change in the Company's method of accounting for last-in,
first-out inventories discussed in Note 3 to these financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company at December 31, 1997 and the consolidated results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
- --------------------------
Philadelphia, Pennsylvania
January 28, 1998
26
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PEM International, Ltd., incorporated under the laws of the State of
Delaware, is 100% owned by the Registrant.
PEM International (Singapore) Pte Ltd., incorporated under the laws of the
State of Delaware, is 100% owned by the Registrant.
PEM Management, Inc., incorporated under the laws of the State of Delaware,
is 100% owned by the Registrant.
PEM Investments, Inc., incorporated under the laws of the State of
Delaware, is 100% owned by the Registrant.
PEM World Sales, Ltd., incorporated under the laws of Bermuda, is 100%
owned by the Registrant.
<PAGE>
EXHIBIT 23(i)
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Penn Engineering & Manufacturing Corp. of our report dated January 28, 1998,
included in the 1997 Annual Report to Stockholders of Penn Engineering &
Manufacturing Corp.
We also consent to the incorporation by reference of our report dated January
28, 1998 with respect to the consolidated financial statements of Penn
Engineering & Manufacturing Corp. incorporated by reference in this Annual
report (Form 10-K) for the year ended December 31, 1997, in the following
registration statements:
Penn Engineering & Manufacturing Corp. 1996 Equity Incentive Plan
Form S-8 Registration Statement (Registration No. 333-20101); and
Penn Engineering & Manufacturing Corp. 1996 Employee Stock
Purchase Plan Form S-8 Registration Statement (Registration No. 333-13073).
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 31, 1998
<PAGE>
EXHIBIT 23(ii)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Numbers
333-20101 and No. 333-13073, both on Form S-8, of Penn Engineering &
Manufacturing Corp. of our report dated January 29, 1997, appearing in this
Annual Report on Form 10-K of Penn Engineering & Manufacturing Corp. for the
year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 26, 1998
EXHIBIT 23(iii)
To the Stockholders and Board of Directors of
Penn Engineering & Manufacturing Corp.
Danboro, Pennsylvania:
We have audited the accompanying consolidated balance sheet of Penn Engineering
& Manufacturing Corp. and subsidiaries (the "Company's") as of December 31, 1996
and the related statements of consolidated income, changes in consolidated
stockholders' equity and consolidated cash flows for each of the two years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on the 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 1996 and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the consolidated financial statements, during 1996
the Company changed its method of accounting for last-in, first-out inventories.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
January 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,826,152
<SECURITIES> 10,844,382
<RECEIVABLES> 27,994,379
<ALLOWANCES> 550,000
<INVENTORY> 26,678,203
<CURRENT-ASSETS> 73,923,473
<PP&E> 119,289,752
<DEPRECIATION> 45,392,774
<TOTAL-ASSETS> 150,992,451
<CURRENT-LIABILITIES> 13,512,152
<BONDS> 0
0
0
<COMMON> 89,590
<OTHER-SE> 128,828,906
<TOTAL-LIABILITY-AND-EQUITY> 150,992,451
<SALES> 167,701,593
<TOTAL-REVENUES> 168,939,272
<CGS> 115,373,492
<TOTAL-COSTS> 146,011,454
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,054
<INCOME-PRETAX> 22,925,764
<INCOME-TAX> 8,425,000
<INCOME-CONTINUING> 14,500,764
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,500,764
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.67
</TABLE>
