<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
Commission file Number 1-5356
PENN ENGINERRING & 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
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical
date: 1,675,082 shares of Class A common stock, $.01 par value, and
6,971,524 shares of common stock, $.01 par value, outstanding on
May 12, 1999.
<PAGE> 2
<TABLE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
PENN ENGINEERING & MANUFACTURING CORP.
CONDENSED CONSOLIDATED BALANCE SSHEETS
<CAPTION>
(Dollars in thousands)
ASSETS
(Unaudited)
March 31, 1999 December 31, 1998
------------------ -----------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $13,706 $13,103
Short-term investments 13,724 10,584
Accounts receivable-trade 31,530 29,513
Allowance for doubtful accounts (575) (550)
Inventories 33,512 31,840
Prepaid expenses 2,777 2,474
------- -------
Total current assets 94,674 86,964
------- -------
PROPERTY
Property, plant & equipment 127,921 126,773
Less accumulated depreciation 54,717 52,769
------- -------
Property - net 73,204 74,004
------- -------
OTHER ASSETS 3,300 3,200
------- -------
TOTAL $171,178 $164,168
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $6,095 $5,460
Dividends payable 1,036 0
Accrued expenses:
Pension & profit sharing 1,970 1,155
Income taxes 2,875 1,026
Payroll & commissions 3,678 3,237
Other 2,022 2,429
------- -------
Total current liabilities 17,676 13,307
------- -------
ACCRUED PENSION COST 4,088 4,088
------- -------
DEFERRED INCOME TAXES 4,928 4,721
------- -------
STOCKHOLDERS' EQUITY
Class A common stock 18 18
Common stock 72 72
Additional paid-in capital 36,532 36,530
Retained earnings 112,404 109,384
Accumulated other comprehensive
income (1,554) (966)
Treasury stock (2,986) (2,986)
------- -------
Total stockholders' equity 144,486 142,052
------- -------
TOTAL $171,178 $164,168
======== ========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 3
<TABLE>
PENN ENGINEERING & MANUFACTURING CORP.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME AND RETAINED EARNINGS
<CAPTION>
(Dollars in thousands except per share amounts)
THREE MONTHS ENDED
-----------------------------------
(Unaudited)
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
NET SALES $46,000 $46,725
COST OF PRODUCTS SOLD 31,512 32,131
------ ------
GROSS PROFIT 14,488 14,594
------ ------
OTHER EXPENSES:
Selling expenses 4,934 4,804
General & administrative expenses 3,769 3,389
------ ------
8,703 8,193
------ ------
OPERATING PROFIT 5,785 6,401
OTHER INCOME - NET 310 280
------ ------
INCOME BEFORE INCOME TAXES 6,095 6,681
PROVISION FOR INCOME TAXES 2,039 2,415
------ ------
NET INCOME $4,056 $4,266
====== ======
PER SHARE DATA:
Basic earnings $0.47 $0.49
===== =====
Diluted earnings $0.47 $0.49
===== =====
Cash dividends declared $0.12 $0.11
===== =====
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 4
<TABLE>
PENN ENGINEERING & MANUFACTURING CORP.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
<CAPTION>
(Dollars in thousands)
THREE MONTHS ENDED
---------------------------------
March 31, 1999 March 31, 1998
(Unaudited) (Unaudited)
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $4,056 $4,266
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,075 1,924
(Gain) loss on disposal of property (175) 6
Changes in assets and liabilities:
Increase in receivables (2,204) (1,898)
Increase in inventories (1,887) (907)
(Increase) decrease in prepaid expenses (336) 342
Increase in other assets (100) (119)
Increase in accounts payable 646 611
Increase in accrued expenses 2,691 2,084
Increase in deferred income taxes -
noncurrent 207 320
----- -----
Net cash provided by operating
activities 4,973 6,629
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (1,397) (1,600)
Additions to held-to-maturity
investments (11,092) (5,988)
Proceeds from disposal of held-to-
maturity investments 7,943 4,358
Proceeds from disposal of property 215 46
----- -----
Net cash used in investing activities (4,331) (3,184)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2 0
----- -----
Net cash provided by financing activities 2 0
----- -----
Effect of exchange rate changes on cash (41) 251
----- -----
Net increase in cash and cash equivalents 603 3,696
Cash and cash equivalents at
beginning of period 13,103 6,826
------ ------
Cash and cash equivalents at end of
period $13,706 $10,522
======= =======
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 5
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
Note 1. Condensed Consolidated Financial Statements (Unaudited)
- ---------------------------------------------------------------
The accompanying interim financial statements should be read in conjunction
with the annual financial statements and notes thereto included in the
Company's Annual Report for the year ended December 31, 1998. The information
contained in this report is unaudited and subject to year-end audit and
adjustment. In the opinion of management, all adjustments (which include only
normal recurring adjustments) have been made which are necessary for a fair
presentation of the Company's consolidated financial position at March 31,
1999 and 1998 and the consolidated statements of income and cash flows for the
three-month periods then ended. The results of operations for the three months
ended March 31, 1999 are not necessarily indicative of the results of
operations to be expected for the year ending December 31, 1999.
Note 2. Inventories
- -------------------
Substantially all of the Company's domestic fastener inventories are priced
on the last-in, first-out (LIFO) method, at the lower of cost or market. The
remainder of the inventories are priced on the first-in, first-out (FIFO)
method, at the lower of cost or market.
Inventories are as follows: (Dollars in thousands)
(Unaudited)
March 31, 1999 December 31, 1998
-------------- -----------------
Raw material $4,754 $4,572
Tooling 3,504 3,435
Work-in-process 11,055 10,533
Finished goods 14,199 13,300
------ ------
TOTAL $33,512 $31,840
======= =======
If the FIFO method of inventory valuation had been used by the Company for
all inventories, inventories would have been $9,146,000 and $9,046,000 higher
than reported at March 31, 1999 and December 31, 1998, respectively, and
net income would have been $67,000 and $64,000 higher than reported for the
three months ended March 31, 1999 and 1998, respectively. Included in other
assets is long-term tooling inventory totaling $3,300,000 and $3,200,000 at
March 31, 1999 and December 31, 1998, respectively.
Note 3. Comprehensive Income
- ----------------------------
Total comprehensive income amounted to $3,468,000 and $5,060,000 for the
three months ended March 31, 1999 and 1998, respectively.
Note 4. Use of Estimates
- ------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE> 6
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1999
Note 5. Segment Information
- ---------------------------
(Dollars in thousands)
THREE MONTHS ENDED THREE MONTHS ENDED
March 31, 1999 March 31, 1998
-------------- --------------
Fasteners Motors Fasteners Motors
--------- ------ --------- ------
Revenue from external customers $38,054 $7,945 $37,827 $8,898
Operating profit 5,191 594 5,729 672
Segment assets 156,908 14,820 145,430 16,476
A reconciliation of combined operating profit for the fastener and motor
segments to consolidated income before income taxes is as follows:
THREE MONTHS ENDED
March 31, 1999 March 31, 1998
-------------- --------------
Total profit for reportable segments $5,785 $6,401
Other income 310 280
----- -----
Income before income taxes $6,095 $6,681
====== ======
Note 6. Earnings Per Share Data
- -------------------------------
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
THREE MONTHS ENDED
March 31, 1999 March 31, 1998
-------------- --------------
(In Thousands, except per share data)
Basic:
Net income $4,056 $4,266
Average shares outstanding 8,633 8,634
----- -----
Basic EPS $0.47 $0.49
===== =====
Diluted:
Net income $4,056 $4,266
====== ======
Average shares outstanding 8,633 8,634
Net effect of dilutive stock options-
based on treasury stock method 11 33
----- -----
Totals 8,644 8,667
===== =====
Diluted EPS $0.47 $0.49
===== =====
Note 7. Reclassifications
- -------------------------
Certain reclassifications have been made to prior year amounts and balances
to conform with the 1999 presentation.
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PENN ENGINEERING & MANUFACTURING CORP.
March 31, 1999
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Quarter Ended March 31, 1999 vs. Quarter Ended March 31, 1998
- -------------------------------------------------------------
Consolidated net sales for the quarter ended March 31, 1999 were $46.0
million, versus $46.7 million for the quarter ended March 31, 1998, a 1.5%
decrease. Net sales to customers outside the United States for the quarter
ended March 31, 1999 were $16.0 million, versus $13.1 million for the
quarter ended March 31, 1998, a 22.1% increase. Net sales for the fastener
operation for the quarter ended March 31, 1999 were $38.1 million, versus
$37.8 million for the quarter ended March 31, 1998, a 0.8% increase. Motor
net sales were $7.9 million for the quarter ended March 31, 1999, versus
$8.9 million recorded for the quarter ended March 31, 1998, an 11.2% decrease.
The number of fastener units sold to the Company's global OEM direct
customers and its independent distribution network increased approximately
2.4% in the first quarter of 1999 compared to the first quarter of 1998. The
number of fastener units sold within North America decreased approximately
9.1% in the first quarter of 1999 compared to the first quarter of 1998, and
represented approximately 62.6% of total fasteners sold in the first quarter
of 1999. This decrease in the North America market was offset by the increase
in the Asia-Pacific market as computer manufacturers shifted their production
off-shore. The number of fastener units sold into Europe increased
approximately 9.7% in the first quarter of 1999 compared to the first quarter
of 1998 and represented approximately 27.2% of total fasteners sold in the
first quarter of 1999. The increase in the European market is a direct result
of the continued strong European economy especially in the automotive market.
The number of fastener units sold into the Asia-Pacific region increased
approximately 156.1% in the first quarter of 1999 compared to the first
quarter of 1998. This increase is a direct result of the computer
manufacturers shifting of assembly to this area to take advantage of lower
assembly costs. The number of motors sold decreased 7.7% in the first quarter
of 1999 compared to the first quarter of 1998.
The average selling price for fasteners shipped in the first quarter of 1999
decreased approximately 1.8% from $63.26 per thousand fasteners sold in the
first quarter of 1998 to $62.13 per thousand fasteners sold in the first
quarter of 1999. Fastener product mix in the first quarter of 1999 was heavier
in the lower priced studs and steel nuts product lines, which offset an
average 2.3% price increase which took effect in October of 1998. The average
selling price of Pittman motors decreased approximately 3.3% from the first
quarter of 1998 to the first quarter of 1999 due to a shift towards lower
priced brush motors from the higher priced brushless motors.
Consolidated gross profit for the first quarter of 1999 was $14.5 million,
versus $14.6 million for the first quarter of 1998. Motor gross profit
decreased 7.3% in the first quarter of 1999 compared to the first quarter of
1998 while fastener gross profit remained about the same.
Consolidated selling, general, and administrative expenses ("SG&A") for the
first quarter of 1999 were $8.7 million, versus $8.2 million for the first
quarter of 1998, a 6.1% increase. This increase was mainly caused by
increased advertising expenses as well as increased technology related
expenses, including Year 2000 related expenses.
Consolidated net income for the first quarter of 1999 was $4.1 million,
versus $4.3 million for the first quarter of 1998. Other income was negatively
impacted in the first quarter of 1999 by realized currency losses in both the
Asia-Pacific region and the European region.
<PAGE> 8
PENN ENGINEERING & MANUFACTURING CORP.
March 31, 1999
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operations totaled $5.0 million for the three months
ended March 31, 1999. These funds are being temporarily invested in
anticipation of increased capital spending and working capital needs during
the remaining quarters of 1999 including the $3.5 million purchase of
additional manufacturing space in April 1999. Short-term investments increased
29.7% from $10.6 million at December 31, 1998 to $13.7 million at March 31,
1999. Accordingly, the Company anticipates that its existing capital resources
and cash flow generated from future operations will enable it to maintain its
current level of operations and its planned growth for the foreseeable future.
Year 2000 Issues
- ----------------
As is more fully described in the Company's annual report on Form 10-K for
the fiscal year ended December 31, 1998, the Company is modifying or replacing
significant portions of its software as well as certain hardware to enable
continued operations beyond December 31, 1999. As of March 31, 1999 the
Company estimates its progress toward completion of its Year 2000 compliance
plan as indicated in the following table:
<TABLE>
<CAPTION>
Fastener Operation
-----------------------------
Danboro Winston Suffolk Motor IT PEM PEM
Operation Operation Operation Operation Systems Facilities Singapore Doncaster
--------- --------- --------- --------- ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Review & Assessment 100% 100% 100% 100% 100% 100% 100% 100%
Document Unknown Status
Items 100% 100% 100% 100% 100% 100% 100% 100%
Remediation-Known Non-
Compliance Testing 88% 51% 86% 100% 86% 100% 81% 83%
Testing 71% 71% 71% 61% 50% 53% 71% 71%
Expected Completion Date6/30/99 6/30/99 6/30/99 6/30/99 6/30/99 6/30/99 6/30/99 6/30/99
Testing for Winston-Salem, Suffolk, Singapore, and Doncaster are conducted at
Danboro.
</TABLE>
We are also in the process of surveying our business partners concerning
their Y2K readiness. As of this date we have completed 75% of this process. It
is our goal to complete this phase by September 30, 1999. Y2K is not
applicable to our self-clinching fastener products, our PEMSERTER insertion
machines, or our Pittman division motors.
Total Y2K expenditures are expected to approximate $1.0 million, of which
approximately 65% has been spent to date. The balance is expected to be spent
during the remainder of 1999. These costs represent 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.
The Comapny's plans to complete Y2K modifications are based on management's
estimates, which are based on numerous assumptions about future events,
including the continued availability of certain resources and other factors.
Estimates on the status of completion and the expected completion dates are
based on the level of effort expended to date to total expected internal staff
effort. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similiar
uncertainties.
The information above contains forward-looking statements, including, with-
out limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, and adequate resources that are made
pursuant to the "safe harbor" provisions of the "Private Securities Litigation
Reform Act of 1995". Readers are cautioned that forward-looking statements
about Y2K should be read in conjunction with the Company's disclosure under
the heading "Forward Looking Statements".
<PAGE> 9
PENN ENGINEERING & MANUFACTURING CORP.
March 31, 1999
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Forward-Looking Statements
- --------------------------
Forward-looking statements are made throughout this Mnagement'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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- -----------------------------------------------------------------
There have been no material changes to Part 2, Item 7A of the Company's
Form 10-K Annual Report for the year ended December 31, 1998.
<PAGE> 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Reference is made to Part 1, Item 3 of the Company's Form 10-K Annual Report
for the year ended December 31, 1998.
Item 2. Changes in Securities
- -----------------------------
Not Applicable.
Item 3. Default upon Senior Securities
- --------------------------------------
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not Applicable.
Item 5. Other Information
- -------------------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
a). Exhibits
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 of the Company's Form 10-Q
Quarterly Report for the period ended June 30, 1996.)
3.2 By-laws, as amended (Incorporated by reference to Exhibit
3(ii) of the Company's Form 10-K Annual Report for the
fiscal year ended December 31, 1994.)
27 Financial Statemet Data Schedule.
b). Reports on Form 8-K
None.
<PAGE> 11
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PENN ENGINEERING & MANUFACTURING CORP.
Dated: May 13, 1999 By: /s/ Kenneth A. Swanstrom
-----------------------------
Kenneth A. Swanstrom
Chairman/CEO
Dated: May 13, 1999 By: /s/ Mark W. Simon
-----------------------------
Mark W. Simon
Vice-President - Finance
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 13,706
<SECURITIES> 13,724
<RECEIVABLES> 31,530
<ALLOWANCES> 575
<INVENTORY> 33,512
<CURRENT-ASSETS> 94,674
<PP&E> 127,921
<DEPRECIATION> 54,717
<TOTAL-ASSETS> 171,178
<CURRENT-LIABILITIES> 17,676
<BONDS> 0
<COMMON> 90
0
0
<OTHER-SE> 144,396
<TOTAL-LIABILITY-AND-EQUITY> 171,178
<SALES> 46,000
<TOTAL-REVENUES> 46,310
<CGS> 31,512
<TOTAL-COSTS> 40,215
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,095
<INCOME-TAX> 2,039
<INCOME-CONTINUING> 4,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,056
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
