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 through Registrant's PEM[registered] Fastening Systems division ("PEM Fastening Systems") of PEM[registered] self-clinching and broaching fasteners, inserts for plastics, and automatic insertion equipment for such fasteners sold under the name PEMSERTER[registered];
(ii) The development, manufacture, and sale through the Registrant's Pittman division ("Pittman") of permanent magnet brush-commutated dc motors under the Pittman[registered] trademark, and electronically commutated brushless dc servomotors under the Elcom[registered] trademark; and
(iii) The distribution of fasteners and other components utilized by original equipment manufacturers ("OEMs") and the provision of comprehensive logistical and inventory management services through Arconix Group, Inc. ("Arconix Group"), which the Registrant commenced reporting as a separate business segment for the fiscal year ended December 31, 2001.
On February 5, 2001, the Registrant acquired all of the issued and outstanding capital stock of Precision Steel Holdings, Ltd. and its subsidiary, Precision Steel Components Ltd., whose name was changed in February 2002 to PEM Fastening Systems/Europe Ltd. PEM Fastening Systems/Europe Ltd., which is located in Galway, Ireland, is a manufacturer of screw machine products, serving customers throughout Europe. The purchase price of approximately $17.4 million consisted of cash, the assumption of certain liabilities and acquisition-related expenses. The cash portion of the purchase price was financed with borrowings under the Registrant's existing line of credit facilities.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The answer to this Item is incorporated by reference to Note 12 of the Notes to Consolidated Financial Statements "Financial Reporting for Business Segments of the Registrant" on pages 22, 23, and 24 of the Registrant's 2001 Annual Report to Stockholders (the "Annual Report"), which is included as Exhibit (13) to this Form 10-K Annual Report.
(C) NARRATIVE DESCRIPTION OF BUSINESS.
PEM Fastening Systems is the world's leading manufacturer of self-clinching fasteners, which are used by the computer, data communications, telecommunications, general electronics, automotive, and avionics industries. PEM[registered] self-clinching fasteners 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.
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 fasteners are primarily used by sheet metal fabricators, which utilize the Registrant's fasteners to produce sub-assemblies for OEMs. Both OEMs and their subcontractors seek fastening solutions that provide lower total installed cost and are highly reliable, thereby lowering production and service costs. The Registrant's application engineers, its distributors and its independent distributors continually work in close collaboration with OEMs and their subcontractors early in the design process to determine appropriate fastener applications and to engineer fastening solutions. This collaboration often results in OEMs specifying the Registrant's fasteners in their products. Self-clinching fasteners generally compete against loose hardware, such as nuts and bolts. Even though the Registrant's fasteners typically sell at a premium to loose hardware, its fasteners generally result in lower overall manufacturing costs for the end user.
PEM Fastening Systems also manufactures and sells manual and automated presses for fastener installation under the PEMSERTER[registered] trademark. The rapid and accurate installation provided by PEMSERTER[registered] presses, together with the Registrant's broad range of fastener products, provides the Registrant's customers with a complete fastening system.
Pittman produces high-quality, high-performance, permanent magnet dc motors and electronically commutated brushless dc servomotors used in light-weight precision electronics, medical, and manufacturing 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.
Arconix Group is a global distribution organization that offers a single source of supply for fastening and electronic hardware products and other components utilized by OEMs and their subcontractors and also provides a broad range of logistical and on-site inventory management services.
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, 1999, 2000, and 2001:
Percentage of Total Sales ------------------------- Year Ended December 31, Fasteners Motors Distribution ------------ --------- ------ ------------
1999 82% 18% * 2000 84 16 * 2001 63 18 19%
- --------------------
* Prior to 2001, the sales of the distribution segment were included with those of the fastener segment.
The Registrant's fastener products are sold through a worldwide network of approximately 40 authorized independent distributors located in 36 countries, including the
Registrant's own subsidiaries in California, Singapore, England, and Mexico. Many of the independent distributors and engineering representative organizations have been affiliated with the Registrant for more than 20 years. The Registrant's independent distributors, which maintain their own inventories of the Registrant's products, typically sell other complementary industrial components. The Registrant's return allowances, which are made through the exchange of inventory, have generally averaged less than 1% of sales. The Registrant supplies its customers and distributors through warehouses in Oxnard, California, Doncaster, England, Singapore and Guadalajara, Mexico in addition to maintaining an inventory at its Danboro, Pennsylvania facility.
Domestic and European sales of Pittman motors are made through independent sales representatives.
During the year ended December 31, 2001, 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 PEM Fastening Systems in the market for self-clinching, broaching, and insert fasteners. The Registrant believes that PEM Fastening Systems has maintained its market share during 2001. 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 that Pittman has maintained its competitive position in the dc motor market in 2001 and that Arconix Group has maintained its competitive position in the distribution and inventory management services arena in 2001.
Among PEM Fastening Systems' principal customers for fasteners and PEMSERTER[registered] presses are manufacturers of business machines, personal computers, computer peripherals, electronic and communications equipment, electrical equipment, industrial controls instrumentation, vending machines, automotive subcontractors, and other fabricated metal products. Pittman's principal customers for the dc motors and servomotors are manufacturers of mass data storage units, automated production equipment, instruments, computer peripherals, business machines, and medical equipment. Arconix Group's customers are generally the same as those of PEM Fastening Systems. 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 $25,354,000 for the year ended December 31, 1999, $32,557,000 for the year ended December 31, 2000, and $22,105,000 for the year ended December 31, 2001, or approximately 13%, 12%, and 12%, respectively, of the Registrant's consolidated net sales during such years.
As of December 31, 2001, the Registrant had an order backlog of $24,028,000 compared with $98,998,000 as of December 31, 2000. The Registrant estimates that substantially all of its backlog as of December 31, 2001 will be shipped during its fiscal year ending December 31, 2002.
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, 1999, 2000, and 2001 were approximately $4,727,000, $5,635,000, and $5,111,000, respectively.
The Registrant believes that compliance with federal, state, and local laws and regulations that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will not have a material adverse effect upon the earnings or competitive position of the Registrant.
As of December 31, 2001, 1,344 persons were employed by the Registrant, 313 fewer than were employed as of December 31, 2000. The Registrant believes that its labor rates are comparable to those of its competitors and that the Registrant's relations with its employees are good. The Registrant does not consider its business to be seasonal in any material respect, nor is any material portion of the Registrant's business subject to the renegotiation of profits or termination of contracts at the election of the Government.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.
The answer to this Item is incorporated by reference to Note 12 "Financial Reporting for Business Segments of the Company" on pages 22, 23 and 24 of the Annual Report. All foreign sales, except for those of Arconix/UK Ltd., Arconix/Singapore Pte Ltd., and PEM Fastening Systems/Europe Ltd. (formerly known as Precision Steel Components Ltd.), are sold F.O.B., the Registrant's United States factory, payable in U.S. dollars. Sales in the United Kingdom and Western Europe are made through the Registrant's wholly owned subsidiaries, Arconix/UK Ltd. and PEM Fastening Systems/Europe Ltd., and are denominated in pounds sterling, Irish pounds, U.S. dollars, and Euros. Sales in the Pacific Rim are made through the Registrant's wholly owned subsidiary, Arconix/Singapore Pte Ltd., and are denominated in Singapore dollars and U.S. dollars. In 2002, the Registrant will commence selling in Mexico through its Arconix/Mexico affiliate, which sales will be denominated in U.S. dollars and Mexican pesos. 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.
RISK FACTORS
MANY OF THE COMPANY'S CUSTOMERS ARE IN CYCLICAL INDUSTRIES, AND THEIR PURCHASES FROM THE COMPANY TEND TO DECLINE DURING PERIODS OF ECONOMIC SLOWDOWN.
A majority of the Company's revenues are derived from customers and OEMs that are in industries and businesses that are cyclical in nature and subject to change in general economic conditions, such as business machines, personal computers, computer peripherals, electronic and communications equipment, and other electronic equipment. Demand for the Company's products is affected by the business success of the Company's OEM and indirect customers who purchase
products from those OEM customers. General economic or industry-specific downturns could have a material adverse effect on the Company and its business, results of operations, and financial condition.
THE COMPANY'S FOREIGN OPERATIONS ARE SUBJECT TO NUMEROUS RISKS, INCLUDING CURRENCY FLUCTUATIONS AND OTHER RISKS THAT MAY IMPACT THE COMPANY'S RESULTS OF OPERATIONS.
Foreign sales accounted for approximately 26% of the Company's 2001 consolidated sales. Because not all of the Company's sales and expenses are incurred in U.S. dollars, the Company's operations have been and may continue to be affected by fluctuations in currency exchange rates. Furthermore, currency fluctuations may cause reported sales to fluctuate from period to period regardless of the fluctuation in the volume of such sales in foreign currencies. The Company purchases forward foreign currency exchange contracts to attempt to insulate the Company from the impact of foreign currency exchange rate fluctuations. See Item 7A "Quantitative and Qualitative Disclosure About Market Risk" in this Form 10-K Annual Report.
Foreign sales are subject to numerous other risks, including political and economic instability in foreign markets, restrictive trade policies of foreign governments, economic conditions in local markets, the imposition of product tariffs, and the burdens of complying with a wide variety of international and U.S. export laws.
ITEM 2.
ITEM 2. PROPERTIES.
The Registrant's principal plants and offices, all of which (other than the Singapore and Mexico offices) were owned by the Registrant, were as follows:
The Registrant has also leased 9,758 sq. ft. of office and warehouse space in Guadalajara, Mexico and 7,000 sq. ft. of office and warehouse space in Singapore. The Registrant carries fire, casualty, business interruption, and public liability insurance for all of its facilities in amounts which are deemed adequate.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The answer to this Item is incorporated by reference to Note 11 of Notes to Consolidated Financial Statements "Commitments & Contingencies" on page 22 of the Annual Report.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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 62 Chairman of the Board and Chief Executive Officer
Martin Bidart 65 President and Chief Operating Officer
Mark W. Simon 63 Senior Vice President, Chief Financial Officer, and Corporate Secretary
Raymond L. Bievenour 58 Vice President - Corporate Business Development
Royce C. Sturdevant 41 Vice President - Corporate Quality
Francis P. Wilson 62 President - PEM Fastening Systems
Kent R. Fretz 64 President - Pittman
NAME AGE POSITION HELD WITH THE REGISTRANT - ---- --- ---------------------------------
Richard F. Davies 52 Treasurer and Assistant Secretary
William E. Sarnese 48 Corporate Controller and Assistant Secretary
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 Messrs. Sturdevant and Wilson. Mr. Sturdevant was hired on August 2, 1999 and has an extensive background in quality control with several major multinational companies. Mr. Wilson 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.
PART II
ITEM 5.
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 1, 2002, there were 510 holders of record of the Registrant's common stock and 355 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 13 of the Annual Report.
ITEM 6.
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 Annual Report.
ITEM 7.
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 12 of the Annual Report.
ITEM 7A.
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 and interest 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. 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, and not for speculative investments.
Annually, Registrant's financial officers approve the outlook for expected currency exchange rate movements, as well as the policy on desired future foreign currency cash flow positions (i.e., long, short, balanced) for those currencies where there is significant activity. These officers receive reports on open foreign currency hedges on a regular basis. Expected future cash flow positions and strategies are continuously monitored. Foreign exchange practices, including the use of derivative financial instruments, are reviewed with 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 2002 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 from the sensitivity effect mentioned 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.
The Registrant does not believe that its earnings will be exposed to changes in short-term interest rates because the Registrant has entered into interest rate swap agreements in 2002 for substantially all of its short and long-term debt at an average rate of approximately 3.7%. A small portion of current debt as well as any additional debt incurred in 2002, for working capital or acquisitions, may affect the Registrant's earnings due to potential interest rate risk. The fair values of the Registrant's bank loans are not significantly affected by changes in market interest rates. The change in fair value of the Registrant's long-term debt resulting from a hypothetical 10% change in interest rates is not material.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The answer to this Item is incorporated by reference to pages 13 through 24 of the Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The response to this Item with respect to the Registrant's directors is incorporated by reference to pages 5 through 6 of the proxy statement relating to the Registrant's 2002 annual meeting of stockholders to be held April 25, 2002 (the "Proxy Statement"). Information with respect to executive officers of the Registrant is included in Part I of this Form 10-K Annual Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The response to this Item is incorporated by reference to pages 7 through 12 of the Proxy Statement, other than the "Report of the Compensation Committee of the Board of Directors" and the "Performance Graph," which are not incorporated by reference into this Form 10-K Annual Report.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to this Item is incorporated by reference to pages 2 through 4 of the Proxy Statement.
The following table sets forth information regarding equity compensation plans of the Registrant. Only shares of the Registrant's common stock (non-voting) may be issued under the Registrant's equity compensation plans. The Registrant does not have any equity compensation plans that have not been approved by the stockholders of the Registrant.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14.
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:
- ------------------- * Refers to the respective pages of the Annual 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 13 of this Form 10-K.
(B) REPORTS ON FORM 8-K.
Form 8-K Current Report filed with the Securities and Exchange Commission on January 8, 2002 disclosing information under Item 5.
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 15, 2002 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.
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 March 31, 2001.)
(3)(ii) By-laws of the Registrant, as amended.
(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-K 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 Securities and Exchange 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 Securities and Exchange Commission on September 30, 1996.)
(10)(iv) 1998 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to the Registrant's Form S-8 Registration Statement No. 333- 92907 filed with the Securities and Exchange Commission on December 16, 1999.)
(10)(v) 1999 Employee Stock Option Plan. (Incorporated by reference to the Registrant's Form S-8 Registration Statement No. 333-92903 filed with the Securities and Exchange Commission on December 16, 1999.)
(13) 2001 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 Auditor's Consent.