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, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period
from _________________ to _________________
Commission file number 1-5356
PENN ENGINEERING & MANUFACTURING CORP.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-0951065
------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 1000, Danboro, Pennsylvania 18916
- --------------------------------------- --------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 766-8853
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ----------------------------- -----------------------------------------
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 25, 1999, 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 $168,614,703.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date: 1,675,082 shares of Class A
Common Stock and 6,958,428 shares of Common Stock outstanding on March 25, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of Registrant's 1998 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 1999 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.
-----------
INDEX TO FORM 10-K REPORT
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PAGE
----
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........................................ 5
Executive Officers of the Registrant..................... 5
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.................................................... 8
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................................... 8
III. PART III.......................................................... 9
Item 10. Directors and Executive Officers of
the Registrant.......................................... 9
Item 11. Executive Compensation................................... 9
Item 12. Security Ownership of Certain
Beneficial Owners and Management........................ 9
Item 13. Certain Relationships and Related
Transactions............................................ 9
IV. PART IV. ......................................................... 10
Item 14. Exhibits, Financial Statements and
Schedules and Reports on Form 8-K....................... 10
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business.
The Registrant, a Delaware corporation, was incorporated in 1942. The
primary businesses of the Registrant are:
(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.
(b) Financial Information About Industry Segments.
The answer to this Item is incorporated by reference to Note 13 of the
Notes to Consolidated Financial Statements "Financial Reporting for Segments of
the Registrant" on pages 22 and 23 of the Registrant's 1998 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 82% of the Registrant's sales in 1998, 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.
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
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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 for
the end user.
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) dc 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, 1996, 1997 and 1998:
Percentage of Total Sales
-------------------------
Year Ended Electric
December 31, Fasteners Motors
------------ --------- ------
1996 82% 18%
1997 81% 19%
1998 82% 18%
The Company's fastener products are sold through a worldwide network of
approximately 40 authorized distributors located in 34 countries and the
Company's own subsidiaries in Singapore and England. Many of the independent
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, typically sell
other complimentary industrial components. The Company's return allowances,
which are made through the exchange of inventory, have generally averaged less
than 1% of sales. The Company's engineers work in collaboration with individual
manufacturers early in the design process to 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 and European sales of Pittman motors are handled by independent
sales representatives.
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During the year ended December 31, 1998, 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 1998. 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 dc motor market in 1998.
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 dc 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 $21,830,000 for the year ended December 31, 1996,
$20,687,000 for the year ended December 31, 1997, and $21,060,000 for the year
ended December 31, 1998, or approximately 13.6%, 12.3%, and 11.7%, 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 and $22,885,000 for the year
ended December 31, 1998, or approximately 11.8% and 12.7%, respectively, of the
Registrant's consolidated net sales during such years.
As of December 31, 1998, the Registrant had an order backlog of $45,105,000
compared with $57,249,000 as of December 31, 1997. The Registrant estimates that
substantially all of its backlog as of December 31, 1998 will be shipped during
its fiscal year ending December 31, 1999.
The raw materials used by the Registrant are generally available in
adequate supply.
The Registrant holds a number of patents and trademarks, 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, 1996, 1997, and 1998 were
approximately $1,520,000, $2,944,000, and $3,410,0000, respectively.
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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, 1998, 1,423 persons were employed by the Registrant, 55
more than were employed as of December 31, 1997. None of the Company's personnel
are governed by collective bargaining agreements. 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 13 "Financial
Reporting for Segments of the Company" on pages 22 and 23 of the Registrant's
1998 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, 1998, the Registrant's principal plants and offices, all
of which (other than the Singapore office) were owned by the Registrant, were as
follows:
<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
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<PAGE>
Suffolk, Virginia 50,000 sq. ft. building Manufacture of components
on 17.2 acres for fasteners
Harleysville, 58,000 sq. ft. building Manufacture of dc motors
Pennsylvania on 6 acres
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 has entered into an agreement to purchase 10.7 acres in
Bedminster Township, Pennsylvania. The property has three buildings, totaling
51,000 square feet, which will be utilized for additional manufacturing
capacity.
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 12 of Notes to
Consolidated Financial Statements "Contingencies" on page 22 of the Registrant's
1998 Annual Report to Stockholders which is included as Exhibit (13) to this
Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Certain information about the executive officers of the Registrant is as
follows:
Name Age Position Held With the Registrant
---- --- ---------------------------------
Kenneth A. Swanstrom 59 Chairman of the Board and
Chief Executive Officer
Martin Bidart 62 President and Chief Operating Officer
Raymond L. Bievenour 55 Vice President - Sales/Marketing
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Kent R. Fretz 61 Vice President and General
Manager - Pittman division
Mark W. Simon 60 Vice President - Finance
and Corporate Secretary
Francis P. Wilson 59 Vice President - Operations
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 until he
joined the Registrant, Mr. Wilson was Director of Engineering for the
International Division of Emhart Fastening Technologies, a subsidiary of Black &
Decker.
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 25, 1999, there were 571 holders of record
of the Registrant's Common Stock and 441 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 14 of the Registrant's 1998 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 9 of the Registrant's 1998
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 1998 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.
The Registrant=s earnings and cash flow are subject to fluctuations due to
changes in foreign currency exchange rates. The Registrant manages its exposures
to changes in foreign currency exchange rates on certain firm sales commitments
and anticipated, but not yet committed sales, by entering into foreign currency
forward contracts and foreign currency option contracts, respectively. The
Registrant=s risk management objective is to reduce its exposure to the effect
of changes in exchange rates on sales revenue over quarterly time horizons. To a
certain extent, foreign currency rate movements also affect the Registrant=s
competitive position, as exchange rate changes may affect business practices
and/or pricing strategies of non-U.S. based competitors. The Registrant=s
foreign currency risk policies entail entering into foreign currency derivative
instruments only to manage risk, not for speculative investments.
Annually, financial officers approve the Registrant=s outlook for expected
currency exchange rate movements, as well as the policy on desired future
foreign currency cash flow positions (long, short, balanced) for those
currencies where there is significant activity. Financial officers receive a
daily report on open foreign currency hedges. Expected future cash flow
positions and strategies are continuously monitored. Foreign exchange management
practices,
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including the use of derivative financial instruments, are presented to the
Audit Committee of the Registrant=s Board of Directors at least annually.
Considering both the anticipated cash flows from firm sales commitments
plus anticipated sales for the next quarter and the foreign currency derivative
instruments in place at year end, a hypothetical 10% weakening of the U.S.
dollar relative to all other currencies would not materially adversely affect
expected 1999 earnings or cash flows. This analysis is dependent on actual
export sales during the next quarter occurring within 90% of the budgeted
forecasts. The effect of the hypothetical change in exchange rates ignores the
effect that this movement may have on other variables including competitive
risk. If it were possible to quantify this competitive impact, the results could
well be different than the sensitivity effect shown above. In addition, it is
unlikely that all currencies would uniformly strengthen or weaken relative to
the U.S. Dollar. In reality, some currencies may weaken while others strengthen.
Item 8. Financial Statements and Supplementary Data.
The answer to this Item is incorporated by reference to pages 14 through 24
of the Registrant's 1998 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 1999 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1998. 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 1999 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1998.
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 1999 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1998.
Item 13. Certain Relationships and Related Transactions.
Information concerning this item is incorporated by reference to the
Registrant's Proxy Statement for its 1999 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1998.
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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, 1998 and 1997. 14*
Statements of Consolidated Income 15*
for the years ended December 31, 1998, 1997 and 1996.
Statements of Changes in Consolidated Stockholders' Equity 16*
for the years ended December 31, 1998, 1997 and 1996.
Statements of Consolidated Cash Flows for the years 17*
ended December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements. 18-23*
Independent Auditors' Report. 24*
- ---------------
* Refers to the respective page of the Registrant's 1998 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.
None.
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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, 1999 By:/s/ Kenneth A. Swanstrom
--------------------------------------
Kenneth A. Swanstrom,
Chairman and Chief Executive Officer
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 of the Board, March 30, 1999
- --------------------------------- Chief Executive Officer,
Kenneth A. Swanstrom and Director (Principal
Executive Officer)
/s/ Martin Bidart President, Chief Operating March 30, 1999
- --------------------------------- Officer, and Director
Martin Bidart
/s/ Mark W. Simon V.P. Finance, Corporate March 30, 1999
- --------------------------------- Secretary, and Director
Mark W. Simon (Principal Financial
and Accounting Officer)
/s/ Willard S. Boothby, Jr. Director March 30, 1999
- ---------------------------------
Willard S. Boothby, Jr.
/s/ Lewis W. Hull Director March 30, 1999
- ---------------------------------
Lewis W. Hull
/s/ Thomas M. Hyndman, Jr. Director March 30, 1999
- ---------------------------------
Thomas M. Hyndman, Jr.
/s/ Maurice D. Oaks Director March 30, 1999
- ---------------------------------
Maurice D. Oaks
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<S> <C> <C>
/s/ Charles R. Smith Director March 30, 1999
- ---------------------------------
Charles R. Smith
/s/ Daryl L. Swanstrom Director March 30, 1999
- ---------------------------------
Daryl L. Swanstrom
</TABLE>
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PENN ENGINEERING & MANUFACTURING CORP.
EXHIBIT INDEX
Item Description
(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 L. Swanstrom.
(Incorporated by reference to Exhibit A to the Registrant'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) 1998 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
SELECTED FINANCIAL DATA (Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $179,687 $167,702 $160,323 $141,268 $121,470
Cost of products sold 124,468 115,374 111,027 96,190 83,128
Provision for income taxes 7,620 8,425 8,264 8,323 6,686
Net income 16,580 14,501 13,858 13,798 10,441
Capital expenditures 8,315 19,234 25,266 17,213 3,833
Depreciation 8,064 6,570 5,343 4,165 3,425
Total assets 164,168 150,992 138,538 96,074 82,127
Stockholders' equity 142,052 128,919 121,137 76,091 65,910
Working capital $ 73,657 $ 60,411 $ 64,233 $ 38,881 $ 41,612
Number of employees (at year end) 1,423 1,368 1,330 1,211 1,088
Number of stockholders of record (at year end)
PNN 572 618 648 N/A N/A
PNNA 446 480 520 540 580
Weighted average shares outstanding used
to compute basic EPS (in thousands) 8,633 8,664 7,748 6,828 6,828
Weighted average shares outstanding used
to compute diluted EPS (in thousands) 8,659 8,683 7,748 6,828 6,828
Per share information:
Net income--basic 1.92 1.67 1.79 2.02 1.53
Net income--diluted 1.91 1.67 1.79 2.02 1.53
Stockholders' equity 16.45 14.88 15.63 11.15 9.65
Dividends .45 .42 .37 .50 .38
</TABLE>
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
December 31, 1998
OVERVIEW
The Company's operations 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 81.8% of the Company's consolidated net sales in 1998 compared to
81.0% in 1997 and 81.5% in 1996, are marketed through a worldwide network of
independent authorized distributors and two Company-owned distributors. In 1998,
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 18.2% of the Company's consolidated net sales in 1998
compared to 19.0% in 1997 and 18.5% in 1996, and are marketed in North America
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,
medical 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 11.7% from 1.96 billion in 1997, to 2.19 billion in 1998
after having decreased 3% in 1997 from 2.03 billion in 1996. The increase in
1998 was a result of a strong European economy as well as increased fabrication
activity in the Asia-Pacific region as customers shifted production to that
region to take advantage of currency devaluations. The decrease in 1997 was
primarily caused by independent distributors selling from excess inventory
accumulated in prior years. As a result of this, distributor demand on the
Company was lessened in 1997.
In 1998, 1997, and 1996, sales to domestic customers accounted for 70.0%,
73.7%, and 74.6%, respectively, of the Company's consolidated net sales. During
the same periods, foreign sales accounted for 30.0%, 26.3%, and 25.4%
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 27 years
and 12 years, respectively.
YEAR 2000 ("Y2K")
The following information is considered a Year 2000 Readiness Disclosure in
accordance with Section 7(B) of the Year 2000 Information and Readiness
Disclosure Act.
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, possibly resulting in
processing failures or errors
We at Penn Engineering are well underway towards having all critical
systems and products Year 2000 ("Y2K") compliant before September 30, 1999. The
Company defines Y2K compliance as delivering a product that functions accurately
and without interruption before, on, and after 1/1/2000. Compliance also means
that the Company's internal systems will continue to accurately process date and
time data (including but not limited to, calculation, comparing, and sequencing)
from, into, and between the 20th and 21st centuries, the years 1999 and 2000,
and perform the leap year calculation.
The Company has completed an inventory of internal computer and
information systems, manufacturing and delivery equipment, and facilities
equipment. We have made a reasonable assessment of those areas we believe to be
inherently Y2K compliant, those areas that are not compliant, and those areas
that need further investigation. In connection with our Y2K program our
mainframe computer system has been updated so that we believe system functions
relating to critical operations such as accounting, order entry, inventory,
production, shipping and billing are Y2K compliant. The Company is currently
testing, and will continue to test throughout 1999, these systems to ensure that
they process date/time data accurately between the 20th and 21st centuries, the
years 1999 and 2000, and perform the leap year calculation.
We have identified other areas, including our overseas systems, where Y2K
compliance programs have been implemented, which we believe are Y2K compliant.
Our Y2K program seeks to address the Y2K activities of our suppliers,
service providers, distributors, and other business relationships. We are in the
process of surveying our business partners. As of this date we have completed
approximately 75% of this process. It is our intention to complete this process
by September 30, 1999.
During 1998 we began the process of testing all internal personal
computers, file servers, networking equipment, and all information technology
support equipment to determine their Y2K readiness. The process includes
replacing equipment that does not meet Y2K readiness standards. As of this date
we have completed approximately 90% of this process. It is our goal to complete
this phase by June 30, 1999. We are also surveying all manufacturing, testing,
and production support equipment to determine if Y2K is applicable. Where it is
determined that Y2K could be a potential problem, the Company is seeking
certification from manufacturers that their equipment will be able to process
date and time data from, into, and between the 20th and 21st centuries, the
years 1999 and 2000, and the leap year calculation. As of this date we have
completed approximately 80% of this phase. It is our goal to complete this phase
by June 30, 1999.
Y2K is not applicable to our self-clinching fastener products. We either
have or are manufacturing PEMSERTER insertion products, Series 100, 500, 1000,
and 2000 machines that utilize Programmable Logic Chips (PLC). We have confirmed
with the manufacturers that the PLCs used in the aforementioned PEMSERTER
insertion machines do not have date/time functionality and therefore Y2K is not
applicable. The Company's Pittman Division manufactures a line of motors that
utilize encoders, some of which may have date/time functionality, which in turn
10
<PAGE>
may have Y2K implications. The Company has confirmed with the manufacturers that
the encoders used with Pittman motors do not have date/time functionality, and
therefore Y2K is not applicable.
Many of the factors that influence the sources for Year 2000 compliance
programs are beyond the control of Penn Engineering. These factors include
availability of vendor compliant products, interface system partner compliance,
government activity, and suppliers in areas such as utilities, communications,
transportation, and other services. Because of the interconnectedness of the
Year 2000 situation, Penn Engineering cannot realistically offer any
certifications, representations, or guarantees of total Y2K compliance.
Nevertheless, Penn Engineering has devoted substantial resources and money to
the problem.
Total Y2K expenditures are expected to exceed $1.0 million, of which
approximately 65% was spent by the end of 1998. The balance is expected to be
spent in 1999. These costs are the Company's best estimates based on internal
and external efforts to identify Y2K issues critical to the production and
delivery of the Company's products. Actual results could differ from those
anticipated.
CAUTIONARY STATEMENT ON 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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
NET SALES
<S> <C> <C> <C> <C> <C> <C>
Fasteners $146,931 81.8% $135,841 81.0% $130,721 81.5%
Motors 32,756 18.2 31,861 19.0 29,602 18.5
----------------------------------------------------------------
Total $179,687 100.0% $167,702 100.0% $160,323 100.0%
================================================================
Domestic $125,777 70.0% $123,534 73.7% $119,640 74.6%
Foreign 53,910 30.0 44,168 26.3 40,683 25.4
================================================================
Total $179,687 100.0% $167,702 100.0% $160,323 100.0%
----------------------------------------------------------------
GROSS PROFIT BY SEGMENT
Fasteners $ 46,860 31.9% $ 43,805 32.2% $ 41,557 31.8%
Motors 8,359 25.5 8,523 26.8 7,739 26.1
TOTAL COMPANY
Gross Profit $ 55,219 30.7% $ 52,328 31.2% $ 49,296 30.7%
Selling, general and administrative expenses 32,800 18.2 30,640 18.3 28,177 17.6
Operating profit 22,419 12.5 21,688 12.9 21,119 13.2
Net income 16,580 9.2 14,501 8.6 13,858 8.6
</TABLE>
Year Ended December 31, 1998 vs. Year Ended
December 31, 1997
Consolidated net sales for 1998 were $179.7 million, versus $167.7 million in
1997, a 7.2% increase. This growth in sales was largely the result of the
continued growth in the personal computer and automotive markets, especially in
the European and Asia-Pacific regions. Sales to customers outside the United
States for 1998 increased 21.9% to $53.9 million, from $44.2 million in 1997.
Net sales for the fastener operation for 1998 were $146.9 million, versus $135.8
million in 1997, an 8.2% increase. Motor sales in 1998 increased 2.8% to $32.8
million from $31.9 million in 1997.
The Company's average selling price for fasteners shipped to global OEM
direct customers and its independent distribution network in 1998 was $63.96 per
thousand, compared to $65.15 per thousand in 1997, a decrease of 1.8%. This
decrease is mainly due to a change in product mix toward lower priced fasteners
as inventory levels at distributors are once again replenished.
The number of fasteners sold to the Company's global OEM direct customers
and its independent distribution network increased approximately 10.1% from 1997
to 1998. The number of fasteners sold within North America, 68.8% of total
fasteners sold in 1998, increased 4.9% from 1997 to 1998 as distributor
inventory levels stabilized in 1998 and there was a return to a more normal
ordering pattern. The number of fasteners sold to Europe, approximately 24.5% of
total fasteners sold in 1998, increased 21.7% from 1997 to 1998. This increase
is mainly due to continued strong point-of-sale demand for personal computers,
network servers, and automotive products. The number of fasteners sold to the
Asia-Pacific market, approximately 6.7% of total fasteners sold in 1998,
increased 31.7% from 1997 to 1998. Much of this growth was due to the shifting
of production to this area to take advantage of the currency devaluation which
occurred in the region during the latter half of 1997 and early 1998. This
allowed major computer manufacturers to lower the selling price of products
shipped back to the United States.
The average selling price of motors increased approximately 3.9% to $42.16
per motor in 1998 from $40.58 per motor in 1997. The number of motors sold
decreased approximately 1.0% to 776,952 in 1998 from 785,052 in 1997.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
December 31, 1998 (continued)
Consolidated gross profit was $55.2 million in 1998, versus $52.3 million
in 1997, a 5.5% increase. Fastener gross profit increased 7.0% to $46.9 million
in 1998 from $43.8 million in 1997 mainly as a result of increased sales volume.
Motor gross profit decreased 1.2% to $8.4 million in 1998 from $8.5 million in
1997.
Consolidated selling, general, and administrative expenses ("SG&A") for
1998 were $32.8 million, versus $30.6 million for 1997, a 7.2% increase.
Additional expenses were incurred in 1998 due to changes in the Company's
executive management structure, increased technology related expenditures
including Year 2000 related expenses, and other outside professional expenses
related to the Company's foreign operations.
Consolidated net income for 1998 was $16.6 million, versus $14.5 million
for 1997. Other income, which includes investment income and realized currency
translation gains, increased to $1.8 million in 1998 from $1.2 million in 1997.
Consolidated net income was favorably impacted by a reduction in the Company's
effective tax rate from 36.7% in 1997 to 31.5% in 1998. This decrease was due
primarily to the increased benefits of the Foreign Sales Corporation.
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 for 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 to global OEM
direct customers and its independent distribution network in 1997 was $65.15 per
thousand, compared to $62.68 per thousand in 1996, an increase of 3.9%. This
increase is mainly due to 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 number of fasteners sold within North America, 71.5% of total
fasteners sold in 1997, decreased 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
to 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 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 motors increased approximately 0.7% to $40.58
per motor in 1997 from $40.29 per motor in 1996. The number of 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 SG&A 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
translation gains, increased to $1.2 million in 1997 from $1.0 million in 1996.
Liquidity and Capital Resources
Liquidity needs for the year ended December 31, 1998
consisted primarily of $8.3 million of capital expenditures to expand the
Company's manufacturing equipment and payment of $3.9 million of dividends. The
Company's primary source of cash in 1998 and 1997 came from operations.
At December 31, 1998, the Company also had $22.5 million available under
its short-term lines of credit. Working capital increased to $73.7 million in
1998 from $60.4 million in 1997 primarily due to the increase in inventories
needed to support the Company's present and future growth. Working capital
decreased from $64.2 million in 1996 to $60.4 million in 1997 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.
The Company anticipates that its existing capital resources and cash flow
generated from future operations will enable it to maintain its current level of
operations and its planned growth for the foreseeable future.
Stockholders' equity per share at the end of 1998 was $16.45 compared to
$14.88 at year-end 1997 and $15.63 at year-end 1996.
12
<PAGE>
<TABLE>
<CAPTION>
Selected Quarterly Financial Data (Unaudited, dollars in thousands except per
share amounts)
- --------------------------------------------------------------------------------------------------
1998 Quarter Ended
---------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Total Year
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $46,725 $44,995 $43,357 $44,610 $ 179,687
Gross profit 14,594 13,938 13,291 13,396 55,219
Net income 4,266 3,882 3,881 4,551 16,580
Net income per share--basic .49 .45 .45 .53 1.92
Net income per share--diluted .49 .45 .45 .53 1.91
Dividends declared per share .11 .11 .11 .12 .45
---------------------------------------------------------------
Market prices per share:
Common Stock (PNN)
High 26 1/2 28 3/8 24 7/8 23 28 3/8
Low 22 1/16 22 3/4 18 5/8 17 1/4 17 1/4
Class A Common Stock (PNNA)
High 25 3/16 26 22 1/16 21 3/8 26
Low 22 5/8 19 9/16 18 16 1/4 16 1/4
---------------------------------------------------------------
</TABLE>
<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:
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
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
-----------------------------------------------------------
</TABLE>
The Common Stock and Class A Common Stock of Penn Engineering &
Manufacturing Corp. are 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, 1998 1997 1996
- -------------------------------------------------------------------
Net Sales
Fastener products 82% 81% 82%
Electric motors 18 19 18
Operating Profit
Fastener products 88 87 89
Electric motors 12 13 11
13
<PAGE>
Consolidated Balance Sheets (Dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 13,103 $ 6,826
Short-term investments 10,584 10,844
Accounts receivable (less allowance for doubtful accounts--1998 and 1997, $550) 28,963 27,444
Inventories 31,840 26,679
Other current assets 2,474 2,130
-----------------------
Total current assets 86,964 73,923
-----------------------
PROPERTY--At cost:
Land and improvements 4,729 4,744
Buildings and improvements 31,067 30,509
Machinery and equipment 90,977 84,037
-----------------------
Total 126,773 119,290
Less accumulated depreciation 52,769 45,393
-----------------------
Total property--net 74,004 73,897
-----------------------
OTHER ASSETS 3,200 3,172
-----------------------
TOTAL $ 164,168 $ 150,992
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,460 $ 5,826
Accrued expenses:
Pension and profit sharing 1,155 2,522
Payroll and commissions 3,237 2,961
Other 3,455 2,203
-----------------------
Total current liabilities 13,307 13,512
-----------------------
ACCRUED PENSION COST 4,088 4,330
-----------------------
DEFERRED INCOME TAXES 4,721 4,231
-----------------------
STOCKHOLDERS' EQUITY:
Common stock--authorized 20,000,000 shares of $.01 par value each;
Issued 7,218,191 shares in 1998 and 7,187,011 shares in 1997 72 72
Class A common stock--authorized 3,000,000 shares of $.01 par value each;
Issued 1,772,025 shares in 1998 and 1997 18 18
Additional paid-in capital 36,530 35,878
Retained earnings 109,384 96,688
Accumulated other comprehensive income (966) (1,419)
-----------------------
Total 145,038 131,237
-----------------------
Less cost of treasury stock--356,831 shares in 1998 and 324,831 shares in 1997 2,986 2,318
-----------------------
Total stockholders' equity 142,052 128,919
-----------------------
TOTAL $ 164,168 $ 150,992
=======================
</TABLE>
See the accompanying notes to consolidated financial statements.
14
<PAGE>
Statements of Consolidated Income (Dollars in thousands except share and per
share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 179,687 $ 167,702 $ 160,323
COST OF PRODUCTS SOLD 124,468 115,374 111,027
--------------------------------------
GROSS PROFIT 55,219 52,328 49,296
OTHER EXPENSES:
Selling expenses 18,414 18,016 16,347
General and administrative expenses 14,386 12,624 11,830
--------------------------------------
TOTAL 32,800 30,640 28,177
--------------------------------------
OPERATING PROFIT 22,419 21,688 21,119
OTHER INCOME--NET 1,781 1,238 1,003
--------------------------------------
INCOME BEFORE INCOME TAXES 24,200 22,926 22,122
PROVISION FOR INCOME TAXES 7,620 8,425 8,264
--------------------------------------
NET INCOME $ 16,580 $ 14,501 $ 13,858
======================================
NET INCOME PER SHARE--BASIC $ 1.92 $ 1.67 $ 1.79
WEIGHTED AVERAGE SHARES OUTSTANDING 8,632,739 8,663,530 7,748,273
--------------------------------------
NET INCOME PER SHARE--DILUTED $ 1.91 $ 1.67 $ 1.79
WEIGHTED AVERAGE SHARES OUTSTANDING 8,632,739 8,663,530 7,748,273
NET EFFECT OF DILUTIVE SECURITIES 26,359 19,729 --
--------------------------------------
TOTAL SHARES OUTSTANDING USED IN
COMPUTING DILUTED EARNINGS PER SHARE 8,659,098 8,683,259 7,748,273
======================================
</TABLE>
See the accompanying notes to consolidated financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
Statements of Changes in Consolidated Stockholders Equity (Dollars in thousands)
Accumulated
Class A Additional Other Total
Common Common Paid-in Treasury Retained Comprehensive Stockholders'
Stock Stock Capital Stock Earnings Income Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 0 $1,772 $ 932 $ (952) $ 74,905 $ (566) $ 76,091
---------------------------------------------------------------------------------
Net income for 1996 13,858 13,858
Increase in unrealized investment
loss reserve (2) (2)
Foreign currency translation
adjustment 1,324 1,324
--------
Comprehensive income 15,180
--------
Cash dividends declared--
$.37 per share (2,888) (2,888)
Stock dividend declared 53 (53) --
Reclassification of stock (1,754) 1,754 --
Stock offering--
1,850,000 shares issued 19 32,735 32,754
---------------------------------------------------------------------------------
Balance at December 31, 1996 72 18 35,421 (952) 85,822 756 121,137
---------------------------------------------------------------------------------
Net income for 1997 14,501 14,501
Increase in unrealized investment
loss reserve (2) (2)
Foreign currency translation
adjustment (2,173) (2,173)
--------
Comprehensive income 12,326
--------
Cash dividends declared--
$.42 per share (3,635) (3,635)
Stock issued under employee stock
purchase plan 457 457
Purchase of treasury stock (1,366) (1,366)
---------------------------------------------------------------------------------
Balance at December 31, 1997 72 18 35,878 (2,318) 96,688 (1,419) 128,919
---------------------------------------------------------------------------------
Net income for 1998 16,580 16,580
Decrease in unrealized investment
loss reserve 16 16
Foreign currency translation
adjustment 437 437
--------
Comprehensive income 17,033
-------
Cash dividends declared--
$.45 per share (3,884) (3,884)
Stock issued under employee
stock purchase plan and
stock option plan 652 652
Purchase of treasury stock (668) (668)
---------------------------------------------------------------------------------
Balance at December 31, 1998 $72 $ 18 $36,530 $(2,986) $109,384 $ (966) $142,052
---------------------------------------------------------------------------------
</TABLE>
See the accompanying notes to consolidated statements financial.
16
<PAGE>
<TABLE>
<CAPTION>
Statements of Consolidated Cash Flows (Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net income $ 16,580 $ 14,501 $ 13,858
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 8,064 6,570 5,343
(Gain) loss on disposal of property (51) 329 38
Loss (gain) on disposal of investments 4 (6) --
Changes in assets and liabilities:
(Increase) decrease in accounts receivables (1,309) 597 (7,735)
Increase in inventories (4,900) (7) (7,258)
(Increase) decrease in other current assets (331) 374 754
Increase in other assets (28) (407) (715)
(Decrease) increase in accounts payable (380) 2,095 (562)
Increase (decrease) in accrued expenses 159 2,006 (1,432)
(Decrease) increase in accrued pension costs (242) (463) 78
Increase in deferred income taxes--noncurrent 490 1,331 834
-------------------------------------
Net cash provided by operating activities 18,056 26,920 3,203
Cash Flows from Investing Activities: -------------------------------------
Property additions (8,315) (19,234) (25,266)
Additions to available-for-sale investments -- -- (14)
Additions to held-to-maturity investments (25,999) (28,355) (106,415)
Proceeds from disposal of available-for-sale investments 101 448 217
Proceeds from disposal of held-to-maturity investments 25,608 27,925 101,340
Proceeds from disposal of property 226 199 79
-------------------------------------
Net cash used in investing activities (8,379) (19,017) (30,059)
-------------------------------------
Cash Flows from Financing Activities:
Net short-term repayments -- -- (1,500)
Issuance of common stock 652 457 32,754
Dividends paid (3,884) (3,635) (2,888)
Acquisition of treasury stock (668) (1,366) --
-------------------------------------
Net cash (used in) provided by financing activities (3,900) (4,544) 28,366
-------------------------------------
Effect of exchange rate changes on cash 500 (741) 1,239
-------------------------------------
Net increase in cash and cash equivalents 6,277 2,618 2,749
Cash and cash equivalents at beginning of year 6,826 4,208 1,459
-------------------------------------
Cash and cash equivalents at end of year $ 13,103 $ 6,826 $ 4,208
-------------------------------------
Supplemental Cash Flow Data:
Cash paid during the year for:
Income taxes $ 6,952 $ 5,574 $ 7,429
=====================================
</TABLE>
See the accompanying notes to consolidated financial statements.
17
<PAGE>
Notes to Consolidated Financial Statements For the Years Ended December 31,
1998, 1997, and 1996
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 other comprehensive income. 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 59% and 67% of total inventories at
December 31, 1998 and 1997, 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. and PEM International Singapore Pte. Ltd. is recorded
as a separate component of other comprehensive income 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
may 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.
Revenue Recognition
The Company's revenues are recorded at the time the products are shipped.
Accounting for Stock Options
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for stock options. Under APB 25, if the exercise price of stock options granted
equals the market price of the underlying common stock on the date of grant, no
compensation expense is recognized. Note 6 to these consolidated financial
statements includes the disclosures and pro forma information required by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123").
18
<PAGE>
Net Income Per Share
Basic and diluted earnings per share are calculated in accordance with the FASB
Statement No. 128, "Earnings Per Share." Basic earnings per share is calculated
by dividing net income by the weighted average shares outstanding for the year
and diluted earnings per share is calculated by dividing net income by the
weighted average shares outstanding for the year plus the dilutive effect of
stock options.
Impact of Recently Issued Accounting Standards
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income is defined as net income plus other
comprehensive income which, for the Company, consists of changes in the
unrealized investment reserve and foreign currency translation adjustments.
Prior year financial statements have been reclassified to conform with the
requirements of SFAS 130. The adoption of SFAS 130 had no affect on the results
of operations or financial position.
SFAS 131 establishes standards for the way public companies report
information about operating segments in annual financial statements and requires
those companies to report selected information about operating segments in
interim financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS 131 had no effect on the results of operations or financial
position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective in the first quarter of 2000. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in fair value of the derivative will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company is
currently evaluating the impact of SFAS No. 133 on the earnings and financial
position of the Company.
Reclassifications
Certain reclassifications have been made to prior year amounts and balances to
conform with the 1998 presentation.
Note 2: Short-term Investments
Held-to-Maturity--The following is a summary of short-term Held-to-Maturity
securities:
- ----------------------------------------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury securities and securities
of U.S. Government agencies $ 2,979 $ 6,814
Corporate bonds 2,832 3,008
Commercial paper 3,980 150
------------------
TOTAL $ 9,791 $ 9,972
==================
Available-for-Sale--Unrealized losses were $48,000, net of taxes of $32,000 at
December 31, 1998, and were $64,000, net of taxes of $42,000, at December 31,
1997. The following is a summary of the estimated fair value of short-term
Available-for-Sale securities:
- ----------------------------------------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------
(Dollars in thousands)
Mutual Common Stock Funds $ 602 $ 580
U.S. Government Security Income Fund -- 101
State and Municipal Bond Funds 191 191
------------------
TOTAL $ 793 $ 872
==================
Note 3: Inventories
Inventories consist of the following:
- ----------------------------------------------------------------
December 31, 1998 1997
- ----------------------------------------------------------------
(Dollars in thousands)
Raw material $ 4,572 $ 4,348
Tooling 3,435 3,392
Work-in-process 10,533 8,073
Finished goods 13,300 10,866
------------------
TOTAL $31,840 $26,679
==================
If the FIFO method of inventory valuation had been used for all
inventories by the Company, inventories at December 31, 1998, 1997, and 1996
would have been $9,046,000, $8,704,000, and $8,117,000 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).
Included in Other Assets is long-term tooling inventory totaling
$3,200,000 and $3,172,000 at December 31, 1998 and 1997, respectively.
Note 4: Lines of Credit
At December 31, 1998, the Company had available unused short-term lines of
credit totaling approximately $22,500,000. No amounts were outstanding under
these lines at December 31, 1998 or December 31, 1997.
19
<PAGE>
Notes to Consolidated Financial Statements For the Years Ended December 31,
1998, 1997, and 1996 (continued)
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.
- ------------------------------------------------------------------
December 31, 1998 1997
- ------------------------------------------------------------------
Change in benefit obligation: (Dollars in thousands)
Benefit obligation at beginning of year $30,690 $24,937
Service cost 2,537 2,076
Interest cost 2,137 1,857
Actuarial loss 1,944 3,118
Benefits paid (1,717) (1,298)
---------------------
Benefit obligation at end of year $35,591 $30,690
=====================
Change in plan assets:
Fair value of plan assets at
beginning of year $25,399 $20,334
Actual return on assets 1,063 3,753
Employer contributions 2,788 2,610
Benefits paid (1,717) (1,298)
----------------------
Fair value of plan assets at end of year $27,533 $25,399
======================
Funded status $(8,058) $ (5,291)
Unrecognized actuarial loss 4,364 1,441
Unamortized prior service cost (204) (227)
Unrecognized transition asset (190) (253)
-----------------------
Accrued Pension Cost $(4,088) $ (4,330)
=======================
Net pension costs included the following components:
- --------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 2,537 $ 2,076 $ 2,081
Interest cost 2,137 1,857 1,756
Expected return on plan assets (2,042) (1,699) (1,493)
Net amortization and deferral (86) (86) (37)
-----------------------------------
Net periodic pension cost $ 2,546 $ 2,148 $ 2,307
===================================
The weighted-average assumptions used as of December 31 to determine the
plans' financial status and pension cost were:
- --------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------
Discount rate 7.0% 7.5%
Expected return on plan assets 8.0 8.0
Rate of compensation increase 6.0 6.0
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 $4,156,000 in 1998, $4,026,000 in 1997, and
$3,631,000 in 1996.
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
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, December 31, 1997 and December 31, 1998 is as
follows:
Weighted-
Average
Options Exercise price
- ------------------------------------------------------------------
Outstanding--December 31, 1995 --
Granted 126,220 $18.375
--------
Outstanding--December 31, 1996 126,220 $18.375
Granted 141,410 $25.625
Canceled 1,140 $18.375
--------
Outstanding--December 31, 1997 266,490 $22.22
Granted 157,680 $22.000
Exercised 10,835 $18.375
Canceled 5,980 $22.159
--------
Outstanding--December 31, 1998 407,355 $22.284
Exercisable at December 31, 1998 99,053
Weighted-average fair value of
options granted during 1998 $8.18
Weighted-average remaining
life of options outstanding at
December 31, 1998 9.06 years
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
20
<PAGE>
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 the 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 $103,111 in
employee withholdings at the beginning of the year and had employee withholdings
of $48,140 for the current subscription period at December 31, 1998. The Plan
has issued 41,294 shares to employees as of December 31, 1998. The Company
utilized the same valuation assumptions in this plan as it did in the stock
option plan.
Effective January 1, 1996, the Company adopted SFAS No. 123 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 APB No. 25. 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. Because SFAS No.
123 was not effective for the Company until 1996, its pro forma effects will not
be fully reflected until the year 2000 due to the four year vesting period of
options granted in 1996. The fair value of each option granted was estimated on
the date of grant using the Black-Scholes option-pricing model. The 1998, 1997,
and 1996 grants had the following common assumptions: dividend yield of 2.25%;
expected life of 6 years; and volatility of 30%. The 1998, 1997, and 1996 grants
assumed a risk free rate of 5.78%, 5.75%, and 5.93%, respectively. Had
compensation costs for the Company's plans been determined based on the fair
value at the grant date for awards under these plans consistent with the methods
of SFAS No. 123, the impact on the Company's financial results would have been
as follows: as of December 31, 1998, an $823,000 reduction of net income, or
$0.09 per share, and as of December 31, 1997, 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 and
foreign currency option contracts. Gains or losses on qualifying hedges of firm
commitments are recognized as 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 $180,000, $373,000, and $(224,000) were recorded
in 1998, 1997, and 1996, respectively. Such amounts are included in other income
in the Statements of Consolidated Income. The forward contracts outstanding at
December 31, 1998 mature during 1999 and 2000, and require the Company to
exchange foreign currency for U.S. dollars at maturity. The Company had foreign
exchange forward contracts of $17.9 million outstanding at December 31, 1998
with a fair market value of approximately $18.2 million. At December 31, 1997
there were $9.8 million foreign exchange forward contacts outstanding with a
fair market value which approximated cost. The foreign exchange option contracts
outstanding at December 31, 1998 can be exercised by the Company during 1999 and
2000 to exchange foreign currency for U.S. dollars at maturity. The Company had
foreign exchange option contracts of $3.4 million outstanding at December 31,
1998 with a fair market value which approximated cost. The fair value of the
foreign exchange forward and option 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, 1998 1997 1996
- ------------------------------------------------------------------
(Dollars in thousands)
Current:
Federal $6,688 $6,058 $6,239
State 685 565 644
--------------------------
Total current tax provision 7,373 6,623 6,883
--------------------------
Deferred:
Federal 232 1,617 1,236
State 15 185 145
-------------------------
Total deferred tax 247 1,802 1,381
-------------------------
Total income tax provision $7,620 $8,425 $8,264
=========================
The significant components of the Company's net deferred tax assets and
liabilities are as follows :
- ------------------------------------------------------------------
December 31, 1998 1997
- ------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets:
Accrued pension $2,376 $1,690
Allowance for doubtful accounts 215 207
Other 285 322
---------------
Total deferred tax asset 2,876 2,219
---------------
Deferred tax liabilities:
Property $6,895 5,897
Inventories 520 318
Other 182 235
---------------
Total deferred tax liability 7,597 6,450
---------------
Net deferred tax liability $4,721 $4,231
===============
21
<PAGE>
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, 1998 1997 1996
- ------------------------------------------------------------------
(Dollars in thousands)
Federal income tax provision
at statutory rate $ 8,470 $8,024 $7,743
State income taxes, after deducting
federal income tax benefit 455 488 513
Foreign sales corporation
tax benefits (1,132)
Other (173) (87) 8
---------------------------
Provision for income taxes $ 7,620 $8,425 $8,264
===========================
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 amount of $6,512,000 during 1996. 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 $252,000, $328,000, and $289,000 in 1998, 1997, and 1996,
respectively.
NOTE 10: ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of other comprehensive income are as follows:
Unrealized-
Losses on
Currency Available-
Translation for-sale
Adjustments Securities Total
- ----------------------------------------------------------------
(Dollars in thousands)
- ----------------------------------------------------------------
Balance at December 31, 1996 $ 818 $(62) $ 756
Currency translation
adjustments (2,173) (2,173)
Unrealized losses on available-
for-sale securities -- (3) (3)
Deferred taxes relating to
unrealized losses on
available-for-sale securities -- 1 1
--------------------------------
Balance at December 31, 1997 (1,355) (64) (1,419)
Currency translation
adjustments 437 437
Unrealized gains on available-
for-sale securities 26 26
Deferred taxes relating to
unrealized gains on
available-for-sale securities (10) (10)
-------------------------------
Balance at December 31, 1998 $ (918) $ (48) $ (966)
===============================
NOTE 11: 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, 1998, having initial or
remaining terms of more than one year are $558,000 for 1999, $378,000 for 2000,
$314,000 for 2001, $5,000 for 2002, and $1,000 for 2003. Rental and operating
<PAGE>
lease expenses charged against earnings were $697,000, $671,000, and $586,000 in
1998, 1997, and 1996, respectively.
NOTE 12: 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 13: FINANCIAL REPORTING FOR SEGMENTS OF THE COMPANY
Information about the operations of the Company in different business segments
are as follows:
Fasteners Motors Consolidated
- ----------------------------------------------------------------
Year Ended December 31, 1998
- ----------------------------------------------------------------
(Dollars in thousands)
Net sales $146,931 $32,756 $179,687
-------------------------------
Operating profit 19,696 2,723 22,419
Other income 1,781
--------
Income before
income taxes $ 24,200
--------
Identifiable assets $138,069 $14,370 $152,439
Corporate assets 11,729
--------
Total assets at
December 31, 1998 $164,168
--------
Depreciation $ 7,434 $ 631 $ 8,064
Capital expenditures $ 7,605 $ 710 $ 8,315
- ----------------------------------------------------------------
Year Ended December 31, 1997
- ----------------------------------------------------------------
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
- ----------------------------------------------------------------
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
- ----------------------------------------------------------------
22
<PAGE>
NOTE 13: FINANCIAL REPORTING FOR SEGMENTS OF THE COMPANY (CONTINUED)
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 $21,060,000, $20,687,000, and $21,830,000 for
the years ended December 31, 1998, 1997, and 1996, respectively (approximately
12%, 12%, and 14% of consolidated net sales in 1998, 1997, and 1996,
respectively). Sales of fasteners to another customer (an authorized distributor
of the Company) totaled approximately $22,885,000 and $19,827,000 for the years
ended December 31, 1998 and 1997, respectively (approximately 13% and 12% of
consolidated net sales in 1998 and 1997, respectively). 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>
PEM
United States Operations PEM International
------------------------------------------------ International Singapore Total
North Asia-Pacific Ltd. Pte. Ltd. Consolidated
America Europe &Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales 1998 $131,311 $2,206 $1,861 $135,378 $34,180 $10,129 $179,687
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
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1998 $ 25,227 $(1,306) $ 279 $ 24,200
1997 23,447 (117) (404) 22,926
1996 21,133 715 274 22,122
- ----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 1998 $132,854 $18,161 $13,153 $164,168
1997 126,153 16,068 8,771 150,992
1996 115,073 16,309 7,156 138,538
==================================================================================================================================
</TABLE>
23
<PAGE>
Report of Independent Auditors
To the Stockholders and Board of Directors
Penn Engineering & Manufacturing Corp.
We have audited the accompanying consolidated balance sheets of Penn
Engineering & Manufacturing Corp. as of December 31, 1998 and 1997 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years 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 audits. The financial
statements of the Company for the year ended December 31, 1996 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 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 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 audits provide a
reasonable basis for our opinion.
In our opinion, the 1998 and 1997 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernest & Young LLP
Philadelphia, Pennsylvania
January 27, 1999
24
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.
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 27, 1999,
included in the 1998 Annual Report to Stockholders of Penn Engineering &
Manufacturing Corp.
We also consent to the incorporation by reference of our report dated January
27, 1999 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, 1998, 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 30, 1999
EXHIBIT 23(ii)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Numbers
333-20101 and 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, 1998.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 26, 1999
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 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,103,489
<SECURITIES> 10,584,046
<RECEIVABLES> 29,512,841
<ALLOWANCES> 550,000
<INVENTORY> 31,840,353
<CURRENT-ASSETS> 86,964,243
<PP&E> 126,772,962
<DEPRECIATION> 52,769,296
<TOTAL-ASSETS> 164,167,909
<CURRENT-LIABILITIES> 13,307,472
<BONDS> 0
0
0
<COMMON> 89,902
<OTHER-SE> 141,961,186
<TOTAL-LIABILITY-AND-EQUITY> 164,167,909
<SALES> 179,687,024
<TOTAL-REVENUES> 181,468,166
<CGS> 124,468,363
<TOTAL-COSTS> 157,268,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,199,566
<INCOME-TAX> 7,620,000
<INCOME-CONTINUING> 16,579,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,579,566
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.91
</TABLE>
