<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 September 30, 2000
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
6,914,577 shares of common stock, $.01 par value, outstanding on
November 13, 2000.
<PAGE> 2
<TABLE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
PENN ENGINEERING & MANUFACTURING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Dollars in thousands)
ASSETS
(Unaudited)
September 30, 2000 December 31, 1999
------------------ -----------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,272 $ 4,231
Short-term investments 3,684 9,538
Accounts receivable-net 46,110 37,622
Inventories 40,459 43,292
Prepaid expenses 6,506 2,051
Deferred income taxes 534 0
------ ------
Total current assets 102,565 96,734
------- -------
PROPERTY
Property, plant & equipment 151,230 140,592
Less accumulated depreciation 67,441 60,742
------- -------
Property - net 83,789 79,850
------- -------
GOODWILL - net 20,871 21,460
------- -------
OTHER ASSETS 3,350 3,500
------- -------
TOTAL $210,575 $201,544
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $11,953 $9,622
Line of credit 1,767 5,850
Dividends payable 1,201 0
Accrued expenses:
Pension & profit sharing 3,911 984
Payroll & commissions 8,152 3,613
Other 3,899 2,175
------ ------
Total current liabilities 30,883 22,244
------ ------
ACCRUED PENSION COST 5,527 6,518
------ ------
DEFERRED INCOME TAXES 5,093 4,902
------ ------
LONG-TERM DEBT 0 15,000
------ ------
STOCKHOLDERS' EQUITY
Common stock 73 72
Class A common stock 18 18
Additional paid-in capital 37,456 37,056
Retained earnings 138,432 122,335
Accumulated other comprehensive
income (1,471) (1,165)
Treasury stock (5,436) (5,436)
------- -------
Total stockholders' equity 169,072 152,880
------- -------
TOTAL $210,575 $201,544
======= =======
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 3
<TABLE>
PENN ENGINEERING & MANUFACTURING CORP.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME
(Unaudited)
<CAPTION>
(Dollars in thousands except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Sales $66,551 $48,378 $196,339 $141,415
Cost of Products Sold 42,432 32,822 128,630 96,402
------ ------ ------- -------
Gross Profit 24,119 15,556 67,709 45,013
Selling expenses 7,460 5,005 21,032 14,789
General & administrative expenses 5,929 3,826 17,765 11,501
------ ------ ------- -------
Operating Profit 10,730 6,725 28,912 18,726
------ ------ ------- -------
Other Income (Expense):
Interest income 100 335 379 1,061
Interest expense ( 56) 0 (686) 0
Other, net (292) (335) 81 (538)
------ ------ ------- -------
Total Other Income (Expense) (248) 0 (226) 523
------ ------ ------- -------
Incoem Before Income Taxes 10,482 6,725 28,686 19,249
Provision For Income Taxes 3,004 2,256 9,332 6,458
------ ------ ------- -------
Net Income $7,478 $4,469 $19,354 $12,791
===== ===== ====== ======
PER SHARE DATA:
Basic earnings $0.87 $0.52 $2.26 $1.48
==== ==== ==== =====
Diluted earnings $0.85 $0.51 $2.23 $1.48
==== ==== ==== =====
Cash dividends declared $0.14 $0.12 $0.38 $0.36
==== ==== ==== =====
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 4
<TABLE>
PENN ENGINEERING & MANUFACTURING CORP.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Unaudited)
<CAPTION>
(Dollars in thousands)
NINE MONTHS ENDED
-------------------------------------
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $19,354 $12,791
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 7,004 6,315
Amortization 795 0
Loss (gain) on disposal of property 34 (96)
Loss on disposal of investments 0 55
Changes in assets and liabilities:
Increase in receivables (7,946) (4,813)
Decrease (increase) in inventories 2,958 (3,246)
Increase in prepaid expenses (4,446) (337)
Decrease (increase) in other assets 150 (200)
Increase in accounts payable 2,061 568
Increase in accrued expenses 9,172 4,757
(Decrease) increase in accrued pension cost (992) 2,175
Increase (decrease) in deferred income taxes 192 (178)
------ ------
Net cash provided by operating
activities 28,336 17,791
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (10,167) (9,578)
Acquisition of businesses (net of cash) ( 3,019) (37,415)
Adjustment to prior year acquisition
purchase price 1,228 0
Additions to held-to-maturity
investments 0 (14,292)
Proceeds from disposal of held-to-
maturity investments 6,118 14,008
Proceeds from disposal of property 144 341
------ ------
Net cash used in investing activities ( 5,696) (46,939)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term (repayments) borrowings ( 4,083) 2,000
Net long-term (repayments) borrowings (15,653) 20,000
Dividends paid (2,056) (2,074)
Issuance of common stock 400 245
------ ------
Net cash (used in) provided by
financing activities (21,392) 20,171
------ ------
Effect of exchange rate changes on cash (207) 21
------ ------
Net increase (decrease) in cash and
cash equivalents 1,041 (8,953)
Cash and cash equivalents at
beginning of year 4,231 13,103
------ ------
Cash and cash equivalents at end of
period $ 5,272 $ 4,150
====== ======
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE> 5
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
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, 1999. 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 September 30,
2000 and 1999 and the consolidated statements of income and cash flows for the
nine-month periods then ended. The results of operations for the three and
nine months ended September 30, 2000 are not necessarily indicative of the
results of operations to be expected for the year ending December 31, 2000.
Note 2. Inventories
-------------------
Substantially all of the Company's domestic fastener inventories are priced
on the lower of last-in, first-out (LIFO) cost or market method. The remainder
of the inventories are priced on the first-in, first-out (FIFO) method, at the
lower of cost or market.
Inventories are as follows: (Dollars in thousands)
(Unaudited)
September 30, 2000 December 31, 1999
------------------ -----------------
Raw material $6,232 $5,472
Tooling 3,688 3,529
Work-in-process 12,695 12,463
Finished goods 17,844 21,828
------ ------
TOTAL $40,459 $43,292
====== ======
If the FIFO method of inventory valuation had been used by the Company for
all inventories, inventories would have been $10,503,000 and $9,562,000 higher
than reported at September 30, 2000 and December 31, 1999, respectively, and
net income would have been $635,000 and $199,000 higher than reported for the
nine months ended Septembre 30, 2000 and 1999, respectively. Included in other
assets is long-term tooling inventory totaling $3,350,000 and $3,500,000 at
September 30, 2000 and December 31, 1999, respectively.
Note 3. Lines of Credit
-----------------------
As of September 30, 2000, the Company has three unsecured line-of-credit
facilities available. The first line-of-credit facility permits maximum
borrowings of $15,000,000, due on demand. At September 30, 2000, $1,767,000,
bearing interest at 7.12%, was outstanding on this facility. The availability
of funds under this facility is periodically reviewed by the bank. The second
line-of-credit facility permits borrowings up to $10,000,000 and expires on
November 30, 2000 unless extended by the bank. There were no amounts out-
standing under the $10,000,000 line-of-credit facility at September 30, 2000.
In addition to the above short-term lines of credit, the Company has an un-
secured line of credit with a bank that permits borrowings of up to
$30,000,000 to finance acquisitions. At September 30, 2000, there were no
amounts outstanding under this facility.
<PAGE>6
PENN ENGINEERING & MANUFACTURING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
Note 4. Comprehensive Income
----------------------------
Total comprehensive income amounted to $7,429,000 and $4,618,000 for the
three months ended September 30, 2000 and 1999, respectively and $19,049,000
and $12,529,000 for the nine months ended September 30, 2000 and 1999,
respectively.
Note 5. 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.
Note 6. Segment Information
---------------------------
(Dollars in thousands)
THREE MONTHS ENDED THREE MONTHS ENDED
September 30, 2000 September 30, 1999
------------------ ------------------
Fasteners Motors Fasteners Motors
--------- ------ --------- ------
Revenues from external customers $55,782 $10,769 $38,995 $9,383
Operating profit 9,231 1,499 5,946 779
NINE MONTHS ENDED NINE MONTHS ENDED
September 30, 2000 September 30, 1999
------------------ ------------------
Fasteners Motors Fasteners Motors
--------- ------ --------- ------
Revenues from external customers $164,539 $31,800 $115,535 $25,880
Operating profit 25,110 3,802 16,553 2,173
Segment assets 193,102 17,473 191,792 16,080
Note 7. 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 NINE MONTHS ENDED
September 30 September 30
------------- ------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per share data)
Basic:
Net income $7,478 $4,469 $19,354 $12,791
Average shares outstanding 8,578 8,647 8,571 8,643
----- ----- ----- -----
Basic EPS $0.87 $0.52 $2.26 $1.48
===== ===== ===== =====
Diluted:
Net income $7,478 $4,469 $19,354 $12,791
===== ===== ====== ======
Average shares outstanding 8,578 8,647 8,571 8,643
Net effect of dilutive stock
options - based on treasury
stock method 176 33 111 16
----- ----- ----- -----
Totals 8,754 8,680 8,682 8,659
===== ===== ===== =====
Diluted EPS $0.85 $0.51 $2.23 $1.48
===== ===== ===== =====
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PENN ENGINEERING & MANUFACTURING CORP.
September 30, 2000
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Quarter Ended September 30, 2000 vs. Quarter Ended September 30, 1999
---------------------------------------------------------------------
Consolidated net sales for the quarter ended September 30, 2000 were $66.6
million, versus $48.4 million for the quarter ended September 30, 1999, a
37.6% increase. Net sales to customers outside the United States for the
quarter ended September 30, 2000 were $16.5 million, versus $15.0 million for
the quarter ended September 30, 1999, a 10.0% increase. Net sales for the
fastener operation for the quarter ended September 30, 2000 were $55.8
million, versus $39.0 million for the quarter ended September 30, 1999, a
43.1% increase. Approximately 37.3% of this increase in the fastener operation
sales was due to the acquisition of R.C. Dudek & Co., Inc. (now called
Arconix/USA) on September 30, 1999 and the acquisition of Atlas Engineering,
Inc. on April 10, 2000. The remainder of the increase is directly related to
the strong equipment requirements demand for the telecom, datacomm, and
communications markets. Motor net sales were $10.8 million for the quarter
ended September 30, 2000, versus $9.4 million recorded for the quarter ended
September 30, 1999, a 14.9% increase.
The number of fastener units sold to the Company's global OEM direct
customers and its independent distribution network increased approximately
29.0% in the third quarter of 2000 compared to the third quarter of 1999.
The number of fastener units sold within North America increased approximately
37.1% in the third quarter of 2000 compared to the third quarter of 1999, and
represented approximately 72.5% of total fasteners sold in the third quarter
of 2000. This increase is attributable to continued strong demand from the
communications sector. The number of fastener units sold into Europe increased
approximately 10.9% in the third quarter of 2000 compared to the third quarter
of 1999 and represented approximately 21.1% of total fasteners sold in the
third quarter of 2000. Demand continues to be strong in Europe across all
product lines in spite of the strength of the U.S. dollar to the Euro. The
number of fastener units sold into the Asia-Pacific region increased
approximately 14.1% in the third quarter of 2000 compared to the third quarter
of 1999, as a result of strong demand from both Hong Kong and China PC
manufacturers. The average selling price for fasteners sold increased
approxiamtely 7.1% from the third quarter of 1999 to the third quarter of 2000
due mainly to a shift in product mix towards higher priced panel fasteners and
standoffs and the Company's increased presence in the distribution market.The
number of motors sold increased 5.3% in the third quarter of 2000 compared to
the third quarter of 1999 while the average selling price also increased 9.0%.
Consolidated gross profit for the third quarter of 2000 was $24.1 million,
versus $15.6 million for the third quarter of 1999, a 54.5% increase. Fastener
gross profit increased 58.4% in the third quarter of 2000 compared to the
third quarter of 1999 while motor gross profit increased 38.1%. Both segments
benefited from increased volume, production efficiencies, and cost control
efforts.
Consolidated selling, general, and administrative expenses ("SG&A") for the
third quarter of 2000 were $13.4 million, versus $8.8 million for the third
quarter of 1999. Approximately 20.2% of this increase was due to the
acquisitions of R.C. Dudek & Co., Inc. and Atlas ENgineering, Inc. and the
related goodwill amortization. Commission expense increased 40.5% from the
third quarter of 1999 to the third quarter of 2000 due to the large increase
in sales in the North America region.
Consolidated net income for the third quarter of 2000 was $7.5 million,
versus $4.5 million for the third quarter of 1999. The Company benefited from
a reduced effective tax rate for the third quarter of 2000 compared to the
third quarter of 1999 due to available tax credits and favorable tax planning.
<PAGE> 8
PENN ENGINEERING & MANUFACTURING CORP.
September 30, 2000
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Nine Months Ended September 30, 2000 vs. Nine Months Ended September 30, 1999
-----------------------------------------------------------------------------
Consolidated net sales for the nine months ended September 30, 2000 were
$196.3 million, versus $141.4 million for the nine months ended September 30,
1999, a 38.8% increase. Net sales to customers outside the United States for
the nine months ended September 30, 2000 were $49.4 million, versus $45.8
million for the nine months ended September 30, 1999, a 7.9% increase. Net
sales for the fastener operation for the nine months ended September 30, 2000
were $164.5 million, versus $115.5 million for the nine months ended September
30, 1999, a 42.4% increase. Strong sales growth in the communications market
as well as the acquisitions of R.C. Dudek & Co., Inc. and Atlas Engineering,
Inc. contributed to this increase. Motor sales were $31.8 million for the nine
months ended September 30, 2000, versus $25.9 million for the nine months
ended September 30, 1999, a 22.8% increase. Increased demand from the data
storage and semiconductor equipment manufacturers contributed to this
increase.
The number of fastener units sold to the Company's global OEM direct
customers and its independent distribution network increased approximately
28.5% in the first nine months of 2000 compared to the first nine months of
1999. The number of fastener units sold within North America increased
approximately 41.8% in the first nine months of 2000 compared to the first
nine months of 1999, and represented approximately 73.0% of total fasteners
shipped in the first nine months of 2000. This increase was a result of very
strong demand for all types of wireless communication devices. The number of
fastener units sold into Europe increased approximately 8.8% in the first nine
months of 2000 compared to the first nine months of 1999 and represented
approximately 21.2% of total fasteners sold in the first nine months of 2000.
The European economy remains strong despite currency pressures. The number of
fastener units sold into the Asia-Pacific region decreased approximately 15.0%
in the first nine months of 2000 compared to the first nine months of 1999
which was an unusually high period due to Y2K concerns. The average selling
price of fasteners shipped in the first nine months of 2000 increased
approximately 7.8% from the first nine months of 1999. This was mainly due to
the Company's increased presence in the distribution segment of the market.
The number of motors sold increased 16.3% in the first nine months of 2000
compared to the first nine months of 1999 and the average selling price
increased 5.7% during the same period.
Consolidated gross profit for the first nine months of 2000 was $67.7
million, versus $45.0 million for the first nine months of 1999, a 50.4%
increase. Fastener gross profit increased 52.0% in the first nine months of
2000 compared to the first nine months of 1999 while motor gross profit
increased 42.1% during the same period. Gross profit increases were the direct
result of increased sales, cost containment, and productivity improvements.
Consolidated SG&A expenses for the first nine months of 2000 were $38.8
million (19.8% of net sales), versus $26.3 million (18.6% of net sales) for
the first nine months of 1999. The acquisitions of R.C. Dudek & Co., Inc. and
Atlas Engineering, Inc. contributed to 21.3% of this increase. Increased
commission expense contributed 28.4% of this increase due to increased sales
volume in the North America region. The remainder of the increase was due to
increased technology related expenses as well as increased legal and
professional fees.
Consolidated net income for the first nine months of 2000 was $19.4 million,
versus $12.8 million for the first nine months of 1999. The Company incurred
$686,000 of interest expense in the first nine months of 2000 related to loans
outstanding to finance acquisitions.
<PAGE> 9
PENN ENGINEERING & MANUFACTURING CORP.
September 30, 2000
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Liquidity and Capital Resources
-------------------------------
Net cash provided by operations totaled $28.3 million for the nine months
ended September 30, 2000 as compared to $17.8 million in the comparable
period of 1999. Funds from operations were sufficient to pay normal dividends,
capital expenditures, and to repay all of the Company's long-term debt.
Capital expenditures totalled $10.2 million during the first nine months of
2000 and included approximately $2.4 million for the purchase of a new
building for Atlas Engineering, Inc. The Company anticipates that its existing
capital resources and cash flow generated from future operations as well as
existing short-term lines of credit will enable it to maintain its current
level of operations and its planned growth for the foreseeable future.
Forward-Looking Statements
--------------------------
Forward-looking statements are made throughout this Management's Discussion
and Analysis. The Company's results may differ 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, 1999.
<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, 1999.
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
3.2 of the Company's Form 10-Q Quarterly Report for the
period ended June 30, 2000.)
27 Financial Statement 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: November 14, 2000 By: /s/ Kenneth A. Swanstrom
-----------------------------
Kenneth A. Swanstrom
Chairman/CEO
Dated: November 14, 2000 By: /s/ Mark W. Simon
-----------------------------
Mark W. Simon
Vice-President - Finance
