SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
____ SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
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 0-5214
PEERLESS MFG. CO.
(Exact name of registrant as specified in its charter)
Texas 75-0724417
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
2819 Walnut Hill Lane Dallas, Texas 75229
P. O. Box 540667 Dallas, Texas 75354
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (214) 357-6181
None
Former name, former address and former fiscal year, if changed since
last report.
Indicate by a 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 shorter periods 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 practicable date.
Class Outstanding at February 12, 1999
Common stock, $1.00 par value 1,452,492 Shares
PEERLESS MFG. CO.
INDEX
Page
Number
Part I: Financial Information
Item 1: Consolidated Financial Statements
Condensed Consolidated Balance Sheets for the
periods ended December 31, 1998 and June 30, 1998. 3
Condensed Consolidated Statements of Earnings for the
three and six months ended December 31, 1998 and 1997. 4
Condensed Consolidated Statements of Cash Flows for
the six months ended December 31, 1998 and 1997. 5
Notes to the Condensed Consolidated Financial Statements. 6 - 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8 - 11
Part II: Other Information
Legal Proceedings 12
Exhibits and Reports 12 - 13
Signatures 14
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
PEERLESS MFG. CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1998 1998
(UNAUDITED (AUDITED)
---------- ----------
Assets:
Current assets:
Cash and cash equivalents $1,662,762 $428,482
Short term investments 268,065 268,065
Accounts receivable-principally trade-net
of allowance for doubtful accounts of
$769,861 at December 31, 1998 and $806,200
at June 30, 1998 10,035,518 14,241,036
Inventories:
Raw materials 991,38 973,906
Work in process 1,088,167 1,114,524
Finished goods 261,956 331,415
Costs and earnings in excess of billings
on uncompleted contracts 1,913,862 1,838,641
Deferred income taxes 425,460 433,596
Other 193,801 165,631
---------- ----------
Total current assets 16,840,975 19,795,296
Property, plant and equipment-at Cost, less
accumulated depreciation 1,488,702 1,506,465
Property held for investment-at Cost, less
accumulated depreciation 802,274 830,840
Other assets 669,202 623,620
---------- ----------
$19,801,153 $22,756,221
========== ==========
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $0 $200,000
Accounts payable-trade 3,097,456 5,566,068
Billings in excess of costs and
earnings on uncompleted contracts 338,397 49,977
Commissions payable 995,774 1,205,391
Accrued liabilities:
Compensation 453,554 1,499,443
Warranty 547,683 434,588
Other 555,690 366,408
---------- ----------
Total current liabilities 5,988,554 9,321,875
Deferred income taxes 38,862 38,543
Stockholders' equity:
Common stock-authorized 10,000,000 shares
of $1 par value; issued and outstanding,
1,457,492 shares 1,457,492 1,457,492
Additional paid-in capital 2,583,701 2,583,701
Unamortized value of restricted stock grants (39,427) (51,385)
Cumulative foreign currency translation
adjustment (61,063) (79,849)
Retained earnings 9,833,034 9,485,844
---------- ----------
13,773,737 13,395,803
---------- ----------
$19,801,153 $22,756,221
========== ==========
The accompanying notes are an integral part of these statements.
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PEERLESS MFG. CO.
CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues $10,931,835 $11,041,772 $20,301,525 $18,247,561
Cost of goods sold 7,295,692 7,278,267 13,722,263 11,893,871
---------- ---------- ---------- ----------
Gross profit 3,636,143 3,763,505 6,579,262 6,353,690
Operating expenses 2,729,934 2,808,416 5,321,089 5,319,887
---------- ---------- ---------- ----------
Operating income 906,209 955,089 1,258,173 1,033,803
Other income(expense)
Interest income 16,679 6,871 23,673 15,404
Interest expense (954) (11,790) (18,898) (14,586)
Foreign exchange gains
(losses) (65,851) (21,902) (93,355) (50,984)
Other, net (10,620) (59,927) (12,805) (48,953)
---------- ---------- ---------- ----------
(60,746) (86,748) (101,385) (99,119)
---------- ---------- ---------- ----------
Earnings from operations
before Federal income tax 845,463 868,341 1,156,788 934,684
Federal income tax
Current 331,608 283,387 436,312 349,481
Deferred 2,037 (51,126) 8,905 (51,126)
---------- ---------- ---------- ----------
333,645 232,261 445,217 298,355
---------- ---------- ---------- ----------
Net earnings 511,818 636,080 711,571 636,329
========== ========== ========== ==========
Basic and diluted earnings
per share $0.35 $0.44 $0.49 $0.44
========== ========== ========== ==========
Basic weighted average
shares 1,457,492 1,451,992 1,457,492 1,451,992
Dilutive options 1,695 1,328 2,379 1,986
---------- ---------- ---------- ----------
Adjusted weighted average
shares 1,459,187 1,453,320 1,459,871 1,453,978
========== ========== ========== ==========
Cash dividend per common
share $0.125 $0.125 $0.250 $0.250
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
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PEERLESS MFG. CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended
December 31,
1998 1997
--------- ----------
Cash flows from operating activities:
Net earnings $ 711,564 $ 636,329
Adjustments to reconcile earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 172,953 177,166
Other 698 7,686
Changes in operating assets and liabilities
Accounts receivable 4,205,518 958,698
Inventories 78,338 (868,915)
Cost and earnings in excess of billings
on uncompleted contracts (75,221) 1,469,558
Other current assets (20,034) 59,257
Other assets (45,582) (116,371)
Accounts payable (2,468,612) (1,898,972)
Billings in excess of costs and earnings
on uncompleted contracts 288,420 (315,447)
Commissions payable (209,617) 81,765
Accrued liabilities (743,193) 21,717
--------- ----------
1,183,668 (423,858)
--------- ----------
Net cash provided by (used in) operating
activities 1,895,232 212,471
Cash flows from investing activities:
Net sales (purchases) of short-term investments 0 (1,587)
Net sales (purchases) of property and equipment (115,364) (195,972)
--------- ----------
Net cash provided by (used in) investing
activities (115,364) (197,559)
Cash flows from financing activities:
Net change in short-term borrowings (200,000) 1,550,000
Dividends paid (364,374) (362,999)
--------- ----------
Net cash used in financing activities (564,374) 1,187,001
Effect of exchange rate on cash and cash equivalents 18,786 15,598
--------- ----------
Net increase (decrease) in cash and cash
equivalents 1,234,280 1,217,511
Cash and cash equivalents at beginning of period 428,482 772,553
--------- ----------
Cash and cash equivalents at end period $1,662,762 $1,990,064
========= =========
The accompanying notes are an integral part of these statements.
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PEERLESS MFG. CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements of
Peerless Mfg. Co. and its subsidiaries (the "Company") have
been prepared by the Company without audit. In the opinion
of the Company's management, the financial statements
reflect all adjustments necessary to present fairly the
results of operations for the three and six months ended
December 31, 1998 and 1997, the Company's financial position
at December 31, 1998 and June 30, 1998, and cash flows for
the six months ended December 31, 1998 and 1997. These
adjustments are of a normal, recurring nature which are, in
the opinion of management, necessary for a fair presentation
of the financial position and results of operations for the
interim periods.
Certain notes and other information have been condensed or
omitted from the interim financial statements presented in
this Quarterly Report on Form 10-Q. Therefore, these
financial statements should be read in conjunction with the
Company's Annual Report Form 10-K for the Fiscal year ended
June 30, 1998 and the consolidated financial statements and
notes thereto included in the Company's June 30, 1998,
audited financial statements.
2. The results for interim periods are not necessarily
indicative of the results to be expected for the full year.
Peerless Mfg. Co. designs and manufactures custom contracted
pressure vessels and other products to customer
specifications, sales of which are obtained by competitive
bids and may result in material sales and profitability
increases or decreases when comparing interim periods
between years. The Company generally recognizes sales of
custom-contracted products at the completion of the
manufacturing process, which is normally less than one year.
The percentage-of-completion method is used for significant
long-term contracts.
3. The backlog of uncompleted orders and letters of intent at
December 31, 1998 was approximately $25,000,000 as compared
to a December 31, 1997 backlog of $26,800,000. Of the
$25,000,000 backlog at December 31, 1998, approximately 75%
is scheduled to be completed in the current fiscal year.
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4. The Company has formal agreements with NationsBank N.A. and
Chase Bank of Texas N.A. for $3,500,000 each for an
aggregate of $7,000,000 continuing lines of credit,
renewable annually. Under the terms of these agreements,
loans bear interest at the prevailing prime rate and the
Company is required to pay 1/4 of 1% per annum on the unused
portion of the facility. In addition, Chase Bank of Texas
provided the Company a LIBOR rate option. As of December
31, 1998, the Company had nothing outstanding and $1,550,000
outstanding at December 31, 1997 against these lines of
credit.
5. The Company consolidates the accounts of its wholly-owned
foreign subsidiaries, Peerless Europe Limited and Peerless
Europe B.V. All significant intercompany accounts and
transactions have been eliminated in the consolidation.
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Item 2. Management's discussion and analysis of financial
- - ------- -------------------------------------------------
condition and results of operations.
------------------------------------
PEERLESS MFG. CO.
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such
statements are subject to inherent risks and uncertainties, some
of which cannot be predicted or quantified. Actual results could
differ materially from those projected in the forward-looking
statements as a result of changes in market conditions, increased
competition, global and domestic economic conditions, or other
factors. The following discussion and analysis should be read in
conjunction with the attached consolidated financial statements
and notes thereto, and with the Company's audited financial
statements and notes thereto for the fiscal year ended June 30,
1998.
Capital Resources and Liquidity
-------------------------------
As a general policy, the Company maintains corporate liquidity at
a level adequate to support existing operations and planned
internal growth, and to allow continued operations through
periods of unanticipated adversity.
Cash and equivalents increased $1,234,280 from June 30, 1998.
Company operations provided $1,895,232 primarily from collecting
accounts receivable of $4,205,518 and increasing billings in
excess of costs by $288,420. These positive cash flows were
partially offset by reducing accounts payable $2,468,612,
commissions payable $209,617 and accrued liabilities $743,193.
Uses of cash for the six months ended December 31, 1998 included
capital expenditures of $115,364, dividend payments of $364,374
and repayment of short term borrowing of $200,000.
The Company has historically and continues to finance plant
expansion, equipment purchases, acquisitions and working capital
requirements primarily through the retention of earnings, which
is reflected by the absence of long-term debt in the Company's
statement of financial position. In addition to retained
earnings, the Company has from time to time used two short-term
bank credit lines totaling $7,000,000 to supplement working
capital. The Company currently has no material commitments for
capital expenditures other than its established program of
maintaining existing plant and equipment.
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REVENUE: Revenue decreased to $10,931,835 for the three months
ended December 31, 1998 from $11,041,772 for the three months
ended December 31, 1997. For the six month period, revenues
increased 11% to $20,301,525 for the six months ended December
31, 1998 from $18,247,561 for the six months ended December 31,
1997. Sales volumes continued to be firm for SCR products,
filtration and separation products, nuclear steam dryers,
commercial mist extractors, and other marine products, partially
offset by reduced sales to Asian customers for the three and six
months ended December 31, 1998 compared to the three and six
months ended December 31, 1997.
GROSS PROFIT: Gross profit at $3,636,143 for the three months
ended December 31, 1998 was down 3.5% on slightly lower volume
compared to the $3,763,505 earned for the three months ended
December 31, 1997. For the six month period, gross profit
increased 3.6% to $6,579,262 for the six months ended December
31, 1998 from $6,353,690 for the six months ended December 31,
1997. The $225,572 increase in gross profit is attributable to
the increased sales revenue.
OPERATING EXPENSES: Operating expenses decreased by 3% to
$2,729,934 for the three months ended December 31, 1998 from
$2,808,416 for the three months ended December 31, 1997. For the
six months, operating expenses remained stable at $5,321,089 for
the six months ended December 31, 1998 from $5,319,887 for the
six months ended December 31, 1997.
OTHER INCOME/(EXPENSE): The Company recognized net other expense
of $60,000 and $101,000 for the three and six months ending
December 31, 1998 for interest, foreign exchange losses and other
expenses. These expenses compare favorably to the $87,000 and
$99,000 net other expense reported for the three and six month
periods ending December 1, 1997.
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YEAR 2000 COMPLIANCE:
The inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process data
fields containing a two-digit year is commonly referred to as the
Year 2000 Compliance issue. As the Year 2000 approaches, such
systems may be unable to accurately process certain date-based
information.
As the case with most other companies using computers in their
operations, the Company is in the process of addressing the Year
2000 Compliance issue. The Company began converting its
information systems in 1996 through the purchase of a new
information system that is already Year 2000 compliant. The
Company has incurred approximately $450,000 to date in
implementing this new system and expects to incur an additional
$50,000 for future modifications, testing and services.
Implementation is planned for the third quarter of Fiscal 1999
with testing to be done simultaneously. The vendor has assured
management that the new system will be Year 2000 compliant.
These cost and timing estimates are based on management's best
estimates, which were derived utilizing numerous assumptions
regarding future events, including the continued availability of
certain resources and the accuracy of third-party
representations. However, there can be no guarantee that the
estimates will be achieved and actual results could differ from
those plans.
The Company purchases computer hardware and software products
from third parties for incorporation into the Company's products
and such third-party products may be affected by the Year 2000
problem. There can be no guarantee, however, that these products
or the systems of other companies on which the Company's systems
and operations rely will be timely converted or that the failure
of these systems would not have an adverse effect on the
Company's systems. The Company has advised its customers
inquiring about this issue to contact the Company's vendors for
Year 2000 information. The Company has consulted with such
vendors in an effort to assure that the vendors have minimized
the risk of Year 2000 problems in the systems currently used by
the Company.
10 of 14
INTERNATIONAL MARKETS:
The demand for our products in Southeast Asia has declined as a
result of the current financial crisis there. However, some
projects remain active in the region and we continue to
aggressively pursue these opportunities as well as opportunities
in Australia, where economic conditions continue to be positive.
It is expected that the Brazilian financial crisis will have an
adverse impact on the Company's results of operations.
The Company cannot assess whether such impact will be
material. Of significant concern is the competition with our
products in Latin America from the Company's traditional
competitors as well as local fabricators. We are attempting to
counter these competitive threats with new technology as well as
global sourcing of materials and labor.
Our SCR environmental product line is experiencing growth
opportunities in the healthy U.S. domestic market. The primary
source of new SCR opportunities is the result of new gas turbine
power electric generating facilities to fill the demand for
electric power in the U.S. These projects use clean burning
natural gas, creating opportunities for our gas cleaning
equipment.
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PEERLESS MFG. CO.
PART II
OTHER INFORMATION
Item 1 -- Legal proceedings
- - ---------------------------
Reference is made to Form 10-K Annual Report, as amended,
Item 3, Page 6, "Legal Proceedings" for the Fiscal year
ended June 30, 1998. For the three months ended
December 31, 1998 there were no new material proceedings
filed against the Company.
Item 6 -- Exhibits and Reports -- Form 8-K
- - ------------------------------------------
(a) EXHIBITS:
References to the Company's SEC File Number 0-05214.
3(a) The Company's Articles of Incorporation, as amended to
date (filed as Exhibit 3(a) to the Company's Quarterly
Report on Form 10-Q, dated December 31, 1997, and
incorporated herein by reference).
3(b) The Company's Bylaws, as amended to date (filed as
Exhibit 3(b) to the Company's Annual Report on Form 10-
K, dated June 30, 1997, and incorporated herein by
reference).
10(a) Incentive Compensation Plan effective January 1, 1981,
as amended January 23, 1991 (filed as Exhibit 10(b) to
the Company's Annual Report on Form 10-K, dated June
30, 1991, and incorporated herein by reference).
10(b) 1985 Restricted Stock Plan for Peerless Mfg. Co.,
effective December 13, 1985 (filed as Exhibit 10(b) to
the Company's Annual Report on Form 10-K, dated June
30, 1993, and incorporated herein by reference).
10(c) 1991 Restricted Stock Plan for Non-Employee Directors
of Peerless Mfg. Co., adopted subject to shareholder
approval May 24, 1991, and approved by shareholders
November 20, 1991 (filed as Exhibit 10(e) to the
Company's Annual Report on Form 10-K dated June 30,
1991, and incorporated herein by reference).
12 of 14
10(d) Employment Agreement, dated as of April 29, 1994, by
and between the Company and Sherrill Stone (filed as
Exhibit 10(d) to the Company's Annual Report on Form
10-K for the Fiscal year ended June 30, 1994, and
incorporated herein by reference).
10(e) Agreement, dated as of April 29, 1994 by and between
Company and Sherrill Stone (filed as Exhibit 10(e) to
the Company's Annual Report on Form 10-K dated June 30,
1994 and incorporated herein by reference).
10(f) Seventh Amended and Restated Loan Agreement, dated as
of December 12, 1998, between NationsBank of Texas,
N.A. and the Company.*
10(g) Amended and Restated Loan Agreement, dated as of
December 12, 1998, by and between Chase Bank of Texas
N.A, and the Company.*
10(h) Peerless Mfg. Co. 1995 Stock Option and Restricted
Stock Plan, adopted by the Board of Directors December
31, 1995 and approved by the Shareholders of the
Company November 21, 1996 (filed as Exhibit 10(h) to
the Company's Annual Report on Form 10-K dated June 30,
1997 and incorporated herein by reference).
10(i) Rights Agreement between Peerless Mfg. Co. and
ChaseMellon Shareholder Services, L.L.C., adopted by
the Board of Directors May 21, 1997 (filed as Exhibit 1
to the Company's Registration Statement on Form 8-A
(File No. 0-05214) and incorporated herein by
reference).
21 Subsidiaries of the Company (filed as Exhibit 21 to the
Company's Annual Report on Form 10-K dated June 30,
1997, and incorporated herein by reference).
27 Financial Data Schedule.*
*Filed herewith
(b) Reports on form 8-K. None.
13 of 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereto duly authorized.
PEERLESS MFG. CO.
Dated: February 12, 1999
/s/ Sherrill Stone /s/ Paul W. Willey
- - ---------------------------- ----------------------------
By: Sherrill Stone By: Paul W. Willey
Chairman, President and Chief Financial Officer
Chief Executive Officer
/s/ Kent J. Van Houten
----------------------------
By: Kent J. Van Houten
Controller
Chief Accounting Officer
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