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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2819 WALNUT HILL LANE, DALLAS, TEXAS 75229
- ---------------------------------------- ---------------
(Address of principal executive offices) (Zip code)
(214) 357-6181
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(Registrant's Telephone Number, Including Area Code)
Indicate by check 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 past 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
--- ---
As of February 14, 2002, there were 2,977,484 shares of the
Registrant's common stock outstanding.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at December 31, 2001
and June 30, 2001....................................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 2001 and 2000................... 5
Condensed Consolidated Statements of Cash Flows for
the six months ended December 31, 2001 and 2000......................... 6
Notes to the Condensed Consolidated Financial Statements................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .....18
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.........................................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................19
SIGNATURES..........................................................................20
</Table>
2
PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
From time to time, Peerless Mfg. Co. and subsidiaries (collectively, the
"Company") makes oral and written statements that may constitute
"forward-looking statements" (rather than historical facts) as defined in the
Private Securities Litigation Reform Act of 1996 (the "Act") or by the
Securities and Exchange Commission ("SEC") in its rules, regulations and
releases. The Company desires to take advantage of the "safe harbor" provisions
in the Act for forward-looking statements made from time to time, including, but
not limited to, the forward-looking statements made in this Report on From 10-Q
(the "Report"), as well as those made in other filings with the SEC.
Forward-looking statements contained in this Report are based on management's
current plans and expectations and are subject to a number of risk and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. In the preparation of this Report,
where such forward-looking statements appear, the Company has sought to
accompany such statements with meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those described in the forward-looking statements. Such factors include, but are
not limited to, the "Factors That May Affect Our Operating Results," as set
forth starting on page 15 of this Report.
The Company does not have, and expressly disclaims, any obligation to release
publicly any updates or changes in the Company's expectations or changes in
events, conditions, or circumstances on which any forward-looking statement is
based.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PEERLESS MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
December 31, June 30,
2001 2001
------------ ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 3,635 $ 2,577
Short term investments 303 300
Accounts receivable-principally trade-net 24,978 28,987
Inventories 2,296 2,084
Costs and earnings in excess of billings 6,144 6,328
Other 1,428 1,455
------------ ------------
Total current assets 38,784 41,731
Property, plant and equipment-net 4,082 3,365
Other assets 1,023 1,060
------------ ------------
$ 43,889 $ 46,156
============ ============
</Table>
See accompanying notes to condensed consolidated financial statements.
3
PEERLESS MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
December 31, June 30,
2001 2001
------------ ------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable-trade $ 8,432 $ 10,172
Billings in excess of costs and earnings 10,281 9,618
Current maturities of long-term debt -- 400
Commissions payable 1,252 1,443
Income taxes payable 601 1,754
Accrued liabilities and other 3,835 3,876
------------ ------------
Total current liabilities 24,401 27,263
Long-term debt, net of current maturities -- 1,200
Shareholders' equity
Common stock 2,978 2,954
Additional paid-in capital 1,433 1,327
Other (152) (101)
Retained earnings 15,229 13,513
------------ ------------
Total shareholders' equity 19,488 17,693
------------ ------------
$ 43,889 $ 46,156
============ ============
</Table>
See accompanying notes to condensed consolidated financial statements.
4
PEERLESS MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues $ 26,210 $ 16,383 $ 49,919 $ 27,442
Cost of goods sold 18,806 12,001 35,549 19,983
--------- --------- --------- ---------
Gross profit 7,404 4,382 14,370 7,459
Operating expenses 6,121 3,922 11,864 7,538
--------- --------- --------- ---------
Operating income (loss) 1,283 460 2,506 (79)
Other income (expense)
Interest expense, net (8) (231) (8) (415)
Foreign exchange gains (losses) (30) 7 38 (83)
Other, net 259 (27) 187 (58)
--------- --------- --------- ---------
221 (251) 217 (556)
--------- --------- --------- ---------
Earnings (loss) before federal income tax 1,504 209 2,723 (635)
Federal income tax (benefit) 556 77 1,007 (235)
--------- --------- --------- ---------
Net earnings (loss) $ 948 $ 132 $ 1,716 $ (400)
========= ========= ========= =========
Basic earnings (loss) per share $ 0.32 $ 0.04 $ 0.58 $ (0.14)
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.31 $ 0.04 $ 0.56 $ (0.14)
========= ========= ========= =========
</Table>
See accompanying notes to condensed consolidated financial statements
5
PEERLESS MFG. CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Six Months ended
December 31,
------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 1,716 $ (400)
Adjustments to reconcile net earnings (loss) to cash
provided by (used in) operating activities
Depreciation and amortization 296 179
Gain on sale of property (267) 21
Changes in operating assets and liabilities
Accounts receivable 3,972 (4,667)
Inventories (222) (589)
Cost and earnings in excess of billings 184 2,000
Other current assets (40) 70
Other assets 37 412
Accounts payable (1,747) 1,135
Billings in excess of costs and earnings 663 704
Commissions payable (190) 237
Income tax payable, accrued liabilities
and other (1,194) 749
--------- ---------
1,492 251
--------- ---------
Net cash provided by (used in) operating activities 3,208 (149)
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of property and equipment (1,105) (12)
Proceeds from sale of property 405 --
--------- ---------
Net cash used in investing activities (700) (12)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in borrowings (1,600) 1,189
Proceeds from issuance of common stock 140 63
Dividends paid -- (368)
--------- ---------
Net cash provided by (used in) financing activities (1,460) 884
Effect of exchange rate changes on cash 10 135
--------- ---------
Net increase in cash and cash equivalents 1,058 858
Cash and cash equivalents at beginning of period 2,577 561
--------- ---------
Cash and cash equivalents at end period $ 3,635 $ 1,419
========= =========
</Table>
See accompanying notes to condensed consolidated financial statements.
6
PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION.
The accompanying condensed consolidated financial statements of the
Company have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information.
The condensed consolidated financial statements of the Company as of
December 31, 2001 and for the three and six months ended December 31, 2001
and 2000 are unaudited and, in the opinion of management, contain all
adjustments necessary for the fair presentation of the financial position
and results of operations for the interim periods. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included the Company's Annual
Report on Form 10-K for the year ended June 30, 2001. The results of
operations for the three and six month periods ended December 31, 2001 are
not necessarily indicative of the results to be expected for the entire
year (see Part I. Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition - Factors That May Affect Our
Operating Results).
2. EARNINGS (LOSS) PER SHARE.
Basic earnings (loss) per share have been computed by dividing net
earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share reflect
the potential dilution that could occur if options or other contracts to
issue common shares were exercised or converted into common stock. The per
share amounts have been adjusted to reflect a two-for-one stock split
effected in the form of a stock dividend on October 18, 2001.
The following table presents the calculation of earnings (loss) per share
for the periods indicated.
<Table>
<Caption>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net earnings (loss) $ 948 $ 132 $ 1,716 $ (400)
-------- -------- -------- --------
Basic weighted average common
shares outstanding 2,977 2,943 2,973 2,943
Effect of dilutive options 112 35 116 0
-------- -------- -------- --------
Diluted weighted average common
shares outstanding 3,089 2,978 3,089 2,943
Net income (loss) per share - basic $ 0.32 $ 0.04 $ 0.58 $ (0.14)
Net income (loss) per share - diluted $ 0.31 $ 0.04 $ 0.56 $ (0.14)
</Table>
The weighted average common shares outstanding-diluted computation for the
three and six months ended December 31, 2001, respectively, excluded 0 and
56,500 outstanding stock options because their impact would be
anti-dilutive. Likewise, for the three and six months ended December 31,
2000, respectively, the computation excluded 0 and 140,000 outstanding
stock options because their impact would be anti-dilutive.
7
PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. COMPREHENSIVE INCOME (LOSS).
Comprehensive income (loss) is defined as all changes in equity during a
period, except those resulting from investments by owners and
distributions to owners. The components of comprehensive income (loss)
were as follows:
<Table>
<Caption>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net earnings (loss) $ 948 $ 132 $ 1,716 $ (400)
Foreign currency translation adjustment (6) 74 (61) 135
-------- -------- -------- --------
Comprehensive income (loss) $ 942 $ 206 $ 1,655 $ (265)
======== ======== ======== ========
</Table>
4. SUPPLEMENTAL CASH FLOW INFORMATION.
Net cash flow from operating activities reflects cash payments for
interest and income taxes as follows:
<Table>
<Caption>
Six Months Ended
December 31,
---------------------
2001 2000
-------- --------
Interest paid $ 118 $ 284
Income taxes paid $ 2,090 $ 94
</Table>
5. USE OF ESTIMATES.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates (see Part I. Item 2.
Management's Discussion and Analysis of Results of Operations and
Financial Condition - Factors That May Affect Our Operating Results).
8
PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. INVENTORIES.
Inventories are stated at the lower of cost (first-in, first-out) or market.
Principal components of inventories are as follows:
<Table>
<Caption>
December 31, June 30,
2001 2001
------------ ------------
Raw materials $ 1,535 $ 1,151
Work in process 545 583
Finished goods 216 350
------------ ------------
Total inventories $ 2,296 $ 2,084
============ ============
</Table>
7. SEGMENT INFORMATION.
The Company identifies reportable segments based on management
responsibility within the corporate structure. The Company has two
reportable industry segments: SCR Systems and gas/liquid filtration. The SCR
Systems segment produces selective catalytic reduction systems ("SCR") used
to separate nitrogen oxide (NOx) emissions from exhaust gases caused by
burning hydrocarbon fuels such as coal, gasoline, natural gas and oil. We
combine these systems with our components as totally integrated systems.
Many of the Company's components are packaged on skids complete with
instruments, controls and related valves and piping. The gas/liquid
filtration segment produces various types of separators and filters used for
removing liquids and solids from gases and air. The segment also provides
engineering design and services, pulsation dampeners, natural gas odorizers,
quick-opening closures and parts for its products. Included in our
gas/liquid filtration segment is the production of packaged boilers and
other steam generating equipment.
Segment profit and loss is based on revenue, less allocated costs of the
segment before allocation of general and administrative costs. There were no
sales or transfers between segments. The Company does not allocate assets,
expenditures for assets or depreciation expense on a segment basis for
internal management reporting and, therefore, such information is not
presented. Segment information and a reconciliation to operating profit for
the three and six months ended December 31, 2001 and 2000 are presented
below. Certain fiscal 2001 items have been reclassified to conform to the
fiscal 2002 presentation.
9
PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
SCR Gas/Liquid Unallocated
Systems Filtration Overhead Consolidated
------------ ------------ ------------ ------------
THREE MONTHS ENDED
DECEMBER 31, 2001
Revenues from customers $ 15,254 $ 10,956 $ -- $ 26,210
Segment profit (loss) 3,151 353 (2,221) 1,283
THREE MONTHS ENDED
DECEMBER 31, 2000
Revenues from customers $ 9,981 $ 6,402 $ -- $ 16,383
Segment profit (loss) 1,638 539 (1,717) 460
</Table>
<Table>
<Caption>
SCR Gas/Liquid Unallocated
Systems Filtration Overhead Consolidated
------------ ------------ ------------ ------------
SIX MONTHS ENDED
DECEMBER 31, 2001
Revenues from customers $ 29,767 $ 20,152 $ -- $ 49,919
Segment profit (loss) 6,366 481 (4,341) 2,506
SIX MONTHS ENDED
DECEMBER 31, 2000
Revenues from customers $ 16,383 $ 11,059 $ -- $ 27,442
Segment profit (loss) 2,149 515 (2,743) (79)
</Table>
10
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We operate our business through two principal business segments, the largest of
which is our SCR Systems. In this business segment we design, engineer,
manufacture and sell highly specialized environmental control systems which are
used for air pollution abatement. These systems convert nitrogen oxide (NOx)
emissions from exhaust gases caused by burning hydrocarbon fuels, such as coal,
gasoline, natural gas and oil into harmless nitrogen and water vapor. These
systems are totally integrated systems, complete with instruments, controls and
related values and piping, and packaged on skids.
Our other principal business is our gas/liquid filtration business. In this
business we design, engineer, manufacture and sell specialized products know as
"separators" or "filters" which are used for a variety purposes in cleaning
gases and liquids as they move through piping systems. These products are used
primarily to remove solid and liquid contaminants from natural gas and saltwater
aerosols from combustion intake air of shipboard gas turbine and diesel engines.
In addition, we design, engineer, manufacture and sell packaged boilers and
other steam generating equipment. This equipment is used to produce steam, which
is used for heating, drying, driving steam engines and a variety of other
applications.
RESULTS OF OPERATIONS
The Company's fiscal year ends on June 30th. References herein to fiscal 2001
and fiscal 2002 refer to our fiscal years ended June 30, 2001 and 2002,
respectively.
The following table displays the Company's statements of operations as a
percentage of net revenues:
<Table>
<Caption>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 71.8 73.3 71.2 72.8
------- ------- ------- -------
Gross margin 28.2 26.7 28.8 27.2
Operating expenses 23.3 23.9 23.8 27.5
------- ------- ------- -------
Operating income (loss) 4.9 2.8 5.0 (0.3)
Interest income (expense), net (0.1) (1.4) 0.0 (1.5)
Other, net 0.9 (0.1) 0.4 (0.5)
------- ------- ------- -------
Earnings (loss) before income taxes 5.7 1.3 5.4 (2.3)
Federal income tax (benefit) 2.1 0.5 2.0 (0.8)
------- ------- ------- -------
Net earnings (loss) 3.6% 0.8% 3.4% (1.5)%
======= ======= ======= =======
</Table>
11
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2000
Revenue for the second quarter of fiscal 2002 was $26.2 million, an increase of
$9.8 million, or 60% over the second quarter of fiscal 2001. For the quarter,
revenue related to our SCR Systems increased $5.3 million, or 52.8%, gas/liquid
filtration segment revenue increased $4.6 million, or 71.1%, which related
primarily to an increase in our boiler and other steam generating equipment
product sales.
Due to the new powered generating facilities currently under construction in the
United States to fill our country's demand for electricity, and the
refurbishment/modernization of existing facilities, we anticipate the demand for
our SCR Systems will continue to grow. Our backlog of unfilled orders was
approximately $69 million at December 31, 2001, as compared to approximately $24
million at December 31, 2000. The increase is primarily due to significant SCR
System orders booked during the last twelve months.
Our gross profit increased $3.0 million, or 69%, to $7.4 million for the three
months ended December 31, 2001, compared to $4.4 million for the same period a
year ago. Gross profit, as a percentage of sales, increased to 28.2% for the
three months ended December 31, 2001, compared to 26.7% for the same period last
year. During the quarter, as a result of the increased SCR volume, we were able
to increase our realized margins on our SCR Systems. This was partially offset
by the lower margins of our boiler products. We expect our margins on our boiler
products to continue to improve as we continue to recognize manufacturing
efficiencies associated with increased volume.
Operating expenses increased by $2.2 million, or 56%, from $3.9 million for the
three months ended December 31, 2000, to $6.1 million for the three months ended
December 31, 2001. The increase in operating expenses was due to additional
costs of engineering and project management required for the increased SCR
activities, as well as increased general and administrative expenses to support
the overall increase in revenues. Operating expenses decreased, as a percentage
of sales, from 23.9% for the three months ended December 31, 2000 to 23.3% for
the three months ended December 31, 2001.
Net interest expense decreased by $223,000 for the three months ended December
31, 2001, as we had no outstanding balances under credit facilities, compared to
$7.0 million of revolving debt and $1.8 million of installment debt outstanding
as of December 31, 2000.
Other income (expense) includes a one-time gain of approximately $250,000 due to
the sale of our unused facility in Carrollton, Texas. To improve operational
efficiencies we consolidated the operations previously performed by our
Carrollton facility into our Dallas operations.
As a result of the factors discussed above, we recorded net earnings for the
quarter ended December 31, 2001, of $948,000 compared to net earnings of
$132,000 for the same period a year ago.
12
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 2000
Revenue for the six months ended December 31, 2001 was $49.9 million, an
increase of $22.5 million, or 82% over the corresponding period last year. For
the period, revenue related to our SCR Systems increased $13.4 million, or
81.7%, gas/liquid filtration segment revenue increased $9.1 million, or 82.2%,
which related primarily to an increase in our boiler and other steam generating
equipment product sales.
Our gross profit increased $6.9 million, or 93%, to $14.4 million for the three
months ended December 31, 2001, compared to $7.5 million for the same period a
year ago. Gross profit, as a percentage of sales, increased to 28.8% for the six
months ended December 31, 2001, compared to 27.2% for the same period last year.
During the period, as a result of the increased SCR volume, we were able to
increase our realized margins on our SCR Systems. This was partially offset by
the lower margins of our boiler products. We expect our margins on our boiler
products to continue to improve as we continue to recognize manufacturing
efficiencies associated with increased volume.
Operating expenses increased by $4.4 million, or 57%, from $7.5 million for the
six months ended December 31, 2000, to $11.9 million for the six months ended
December 31, 2001. The increase in operating expenses was due to additional
costs of engineering and project management required for the increased SCR
activities, as well as increased general and administrative expenses to support
the overall increase in revenues. Operating expenses decreased, as a percentage
of sales, from 27.5% for the six months ended December 31, 2000 to 23.8% for the
six months ended December 31, 2001.
Net interest expense decreased by $407,000 for the six months ended December 31,
2001, which related primarily to us having less outstanding on our credit
facility during the period and a lower effective interest rate. Our installment
debt of $1.6 million was pre-paid in full during the first quarter of fiscal
2002, and our average debt outstanding under our revolving credit facility was
approximately $300,000 during the period, compared to average of $1.8 million
under our installment debt and $6.5 million outstanding under our revolving
credit facility for the six months ended December 31, 2000.
Other income (expense) includes a one-time gain of approximately $250,000 due to
the sale of our unused facility in Carrollton, Texas. To improve operational
efficiencies we consolidated the operations previously performed by our
Carrollton facility into our Dallas operations.
As a result of the factors discussed above, net earnings for the six months
ended December 31, 2001 was $1.7 million compared to a net loss of $400,000 for
the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were approximately $3.6 million and $2.6 million
as of December 31, 2001 and June 30, 2001, respectively. We have historically
been a net user of cash from operations and have financed our working capital
requirements and capital expenditures through the retention of earnings and the
use of our short-term credit lines. However, cash provided by operating
activities was approximately $3.2 million for the first six months ended
December 31, 2001, compared to cash used in operating activities of
approximately $149,000 for the same
13
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
period last year. The change was primarily the result of the increases in
billings in excess of cost and earnings and a reduction in accounts receivable
from June 30, 2001, which were offset by the reduction in accounts payable and
accrued liabilities.
Cash used in investing activities was $700,000 for the six months ended December
31, 2001, compared to $12,000 for the same period last year. The increase in
cash used for the period related primarily to a net increase in purchases of
property and equipment which related primarily to refurbishments of our ABCO
facility and infrastructure builds, offset by the proceeds from the sale of our
unused Carrollton, Texas facility during the quarter ended December 31, 2001.
We used approximately $1.5 million in cash related to our financing activities
during the period, compared to an increase of approximately $900,000 during the
period ended December 31, 2000. This related primarily to the payment in full of
our installment debt on our ABCO facility of $1.6 million, offset by the
proceeds from the issuance of common stock, pursuant to employee stock options,
of $140,000.
Because we are engaged in the business of manufacturing custom systems, our
progress billing practices are event oriented rather than date oriented, and
vary from contract to contract. We customarily bill our customers after the
occurrence of certain project milestones. Once we bill our customer, our
accounts receivable balance increases as does our balance of billings in excess
of costs and earnings on uncompleted contracts. Consequently, we focus on the
difference between our accounts receivable balance and our billings in excess of
cost balance to determine our "net working capital impact." As of December 31,
2001, our net working capital impact was approximately $14.7 million, and as of
December 31, 2000, that balance was $15.9 million.
We maintain a $10 million revolving line of credit facility that expires in
October 2003. The credit line carries a floating interest rate based on the
prime or eurodollar rate plus/minus an applicable margin (prime - less .25%,
eurodollar - plus 2.65%), and is secured by substantially all of our assets. The
margin factor is subject to a reduction schedule based on the Company's
obtainment of certain financial performance criteria. As of December 31, 2001,
we had no outstanding balances under the credit line, and $2.1 million
outstanding under letters of credit, leaving us with $7.9 million of
availability under the facility. The facility contains financial covenants,
restrictions on capital expenditures, acquisitions, asset dispositions,
additional debt, and other customary covenants.
We believe we maintain adequate liquidity to support existing operations and
planned growth, as well as to continue operations during reasonable periods of
unanticipated adversity. Management directs additional resources to strategic
new product development, market expansion and continuing improvement of existing
products to enhance our position as a market leader and to promote planned
internal growth and profitability.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued FAS 141 "Business
Combinations" ("FAS 141") and FAS 142 "Goodwill and Other Intangible Assets"
("FAS 142"). FAS 141 addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination
initiated after June 30, 2001. FAS 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination,
whether acquired individually or with a group of assets, and the accounting and
reporting for goodwill and other intangibles subsequent to their acquisition.
These standards
14
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
require all future business combinations to be accounted for using the purchase
method of accounting. Goodwill will no longer be amortized but instead will be
subject to impairment tests at least annually. The Company will adopt FAS 142 on
July 1, 2002. As a result of implementing these new standards, the Company will
discontinue the amortization of goodwill at that date.
In October 2001, the Financial Accounting Standards Board issued FAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144").
FAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes FAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("FAS 121") and related literature and establishes a single accounting
model, based on the framework established in FAS 121, for long-lived assets to
be disposed of by sale. The Company is required to adopt FAS 144 for fiscal
years beginning after December 15, 2001.
The Company does not believe that the adoption of these standards will have a
material effect on its financial condition or results of operations.
FACTORS THAT MAY AFFECT OUR OPERATING RESULTS
Investing in our common stock involves a high degree of risk. Any of the
following risks could have a material adverse effect on our financial condition,
liquidity, results of operations or prospects, financial or otherwise. Reference
to these factors in the context of a forward-looking statement or statements
shall be deemed to be a statement that any one or more of the following factors
may cause actual results to differ materially from those in such forward-looking
statement or statements. (See "Forward-looking Statements" above).
CHANGES IN THE POWER GENERATION INDUSTRY AND/OR ECONOMY COULD HAVE AN ADVERSE
IMPACT ON THE SALE OF OUR SCR SYSTEMS AND OUR OPERATING RESULTS.
The demand for our SCR Systems depends to an extent on the continued
construction of power generation plants and upgrade of existing power plants. In
the current year, approximately 60% of our consolidated revenues were from sales
of SCR Systems for new and refurbished power plants. The power generation
industry has experienced cyclical periods of slow growth or decline. Any change
in the power plant industry which results in a decline in the construction of
power plants or a decline in the upgrading of existing power plants could have a
materially adverse impact on our SCR revenues and our results of operations.
CHANGES IN CURRENT ENVIRONMENTAL LEGISLATION COULD HAVE AN ADVERSE IMPACT ON THE
SALE OF OUR SCR SYSTEMS AND OUR OPERATING RESULTS.
Laws and regulations governing the discharge of materials into the environment
or otherwise relating to the protection of the environment or human health have
played a part in the increased use of SCR Systems in the United States. These
laws include U.S. federal statutes such as the Resource Conservation and
Recovery Act of 1976, the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980 of CERCLA, the Clean Water Act and the Clean Air Act,
and the regulations implementing them, as well as similar laws and regulations
at the state
15
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
and local levels and in other countries. These laws and regulations may change
or other jurisdictions may not adopt similar laws and regulations. Our SCR
business is primarily regulatory driven. This business will be adversely
impacted to the extent that current regulations are repealed or amended to
significantly reduce the level of required NOx reduction or to the extent that
regulatory authorities minimize enforcement.
COMPETITION COULD RESULT IN LOWER SALES AND DECREASED MARGINS. We operate in
highly competitive markets worldwide. Competition could result in not only a
reduction in our sales but also a reduction in the prices that we can charge for
our products. To remain competitive we must be able to not only anticipate or
respond quickly to our customers' needs and enhance and upgrade our existing
products and services to meet those needs, but also continue to price our
products competitively. Our competitors may develop cheaper, more efficient
products or may be willing to charge lower prices for strategic marketing or to
increase market share. Some of our competitors have more capital and resources
than we do and may be better able to take advantage of acquisition opportunities
or adapt more quickly to changes in customer requirements.
WE FREQUENTLY ENTER INTO FIXED-PRICED CONTRACTS. IF OUR ACTUAL COSTS EXCEED OUR
ORIGINAL ESTIMATES OUR PROFITS WILL BE REDUCED.
The majority of our contracts are on a fixed-price basis. Although we benefit
from cost savings, we have limited ability to recover for any cost overruns.
Because of the large scale and long duration of our contracts, unanticipated
cost increases may occur as a result of several factors, including, but not
limited to, (1) increase in the cost, or shortage, of components, materials or
labor; (2) unanticipated technical problems; (3) required project modifications
not initiated by the customer; and (4) suppliers' or subcontractors' failure to
perform. These factors may also delay delivery of our products and we often are
subject to liquidated damages for late delivery. Unanticipated costs that we
cannot pass on to our customers or the payment of liquidated damages under fixed
contracts will negatively impact our profits.
OUR BACKLOG MAY NOT BE INDICATIVE OF OUR FUTURE REVENUES.
Customers may cancel or delay projects for reasons beyond our control. All of
our firm orders contain cancellation provisions, which permit us to recover only
our costs and a portion of our anticipated profit in the event a customer
cancels its order. If a customer elects to cancel, we may not realize the full
amount of revenues included in our backlog. If projects are delayed, the timing
of our revenues could be affected and projects may remain in our backlog for
extended periods of time. Revenue recognition occurs over long periods of time
and is subject to unanticipated delays. If we receive relatively large orders in
any given quarter, fluctuations in the levels of our quarterly backlog can
result because the backlog in that quarter may reach levels that may not be
sustained in subsequent quarters. Our backlog may not be indicative of our
future revenues.
16
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
OUR FINANCIAL PERFORMANCE MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER, MAKING
IT DIFFICULT FOR US TO ESTIMATE FUTURE REVENUE.
Our quarterly revenues and earnings have varied in the past and are likely to
vary in the future. Our SCR contracts generally stipulate customer specific
delivery terms and may have contract cycles of a year or more, which subjects
them to many factors beyond our control. In addition, these contracts are
significantly larger in size than our typical filtration contracts, which tend
to intensify their impact on our quarterly operating results. Furthermore, as a
significant portion of our operating costs are fixed, an unanticipated decrease
in our SCR revenues, a delay or canceling of orders in backlog, or a decrease in
the demand for our SCR products, may have a significant impact on our quarterly
operating results. Therefore, our quarterly operating results may be subject to
significant variations and our operating performance in one quarter may not be a
good indicator of our future performance.
OUR PRODUCTS ARE COVERED BY WARRANTIES AND UNANTICIPATED WARRANTY COSTS OR
PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We provide warranties on our products generally for terms of 3 years or less.
These warranties require us to repair or replace faulty products, meet certain
performance standards, etc. While we continually monitor our warranty claims and
provide a reserve for our estimate of potential warranty issues on an on-going
basis, an unanticipated claim could have a material adverse impact on the our
operations. In some cases, we may be able to attempt to subrogate such claim
back to our sub-contractor, if others performed the defective product or
service, but this may not always be possible. The need to repair or replace
products with design or manufacturing defects could temporarily delay the sale
of new products and could adversely affect our reputation.
In addition, we may be subject to product liability claims involving claims of
personal injury or property damage. While we maintain product liability
insurance coverage to protect us in the event of such a claim, such coverage may
not be adequate to cover the cost of our defense and the potential award in the
event of a very large claim. Additionally, a well-publicized actual or perceived
problem could adversely affect our reputation and reduce the demand for our
products.
LARGE CONTRACTS REPRESENT A SIGNIFICANT PORTION OF OUR ACCOUNTS RECEIVABLE,
WHICH INCREASES OUR EXPOSURE TO CREDIT RISK.
We continue to closely monitor the credit worthiness of our customers and have
not to date experienced any significant credit losses. Significant portions of
our sales are to customers who place large orders for custom products and whose
activities are related to the power industry. As such our exposure to credit
risk is affected to some degree by conditions within the power industry and
governmental and/or political conditions. We try to mitigate our exposure to
credit risk, to some extent, by requiring progress payments and letters of
credit. However, as some of our exposure is outside our control, unanticipated
events could have a materially adverse impact on our operating results.
17
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
THE TERMS AND CONDITIONS OF OUR CREDIT FACILITY MAY IMPOSE RESTRICTIONS ON OUR
OPERATIONS. THERE ARE NO ASSURANCES WE WILL BE ABLE TO RAISE ADDITIONAL CAPITAL,
IF NEEDED.
The terms and conditions of our current $10 million revolving credit facility
impose restrictions that affect, among other things, our ability to incur debt,
make capital expenditures, merge, sell assets, make distributions, or create or
incur liens. Availability of our credit facility is also subject to certain
financial covenants. Our ability to comply with the covenants can be affected by
events beyond our control and there can be no assurance that we will achieve
operating results that comply with the provisions of the credit agreement. A
breach of any of these covenants could result in a default under our credit
facility. In the event of a default, the bank could elect to declare the
outstanding principal amount of our credit facility, all interest thereon and
all other amounts payable under our credit facility to be immediately due and
payable.
Our ability to satisfy any debt obligations will depend upon our future
operating performance, which will be affected by prevailing economic, financial
and business conditions and other factors, some of which are beyond our control.
We anticipate that borrowings from our existing revolving credit facility, or
the refinancing of our revolving credit facility, and cash provided by operating
activities, will provide sufficient funds to finance capital expenditures,
working capital and otherwise meet our operating expenses and service our debt
requirements as they become due. However, in the event that we require
additional capital, there can be no assurance that we will be able to raise such
capital when needed or on satisfactory terms, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation-Liquidity and Capital Resources".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to foreign currency and interest rate risk. We currently have not
entered into any derivative transactions as a means of hedging our exposure to
interest rate risks. In addition, we have not, in the past, hedged our accounts
receivable or anticipated revenue against foreign currency fluctuations. While
we are not currently in a borrowing position and our accounts receivable and
future revenues subject to foreign currency fluctuations is relatively small
(less than $1 million in receivables at December 31, 2001), our earnings in the
future could be negatively impacted due to changes in interest rates or foreign
currency fluctuations. We will continue to monitor our exposure in these areas.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on November 20, 2001 at
the Company's headquarters in Dallas, Texas. A total of 2,416,126 shares
(approximately 81% of all shares entitled to vote) were represented by proxy or
ballot at the meeting. The matters voted upon at the meeting, and the votes cast
with respect to each, were as follows:
1. Election of Class I Director to serve a three year term expiring at
the Company's 2004 Annual Meeting of Shareholders: David D.
Battershell - 2,274,512 shares cast for election, and 141,614
withheld.
The terms of the following Directors continued after the meeting:
Sherrill Stone (Class III Director), Donald A. Sillers, Jr. (Class
III Director), Dr. Bernard S. Lee (Class II Director), and Joseph V.
Mariner (Class II Director). On January 23, 2002, Mr. R. Clayton
Mulford, a partner in the law firm of Hughes & Luce, LLP (outside
legal counsel to the Company), of Dallas, Texas, was elected by the
Board to fill the Class I Director vacancy created by the death of
Mr. Battershell on January 21, 2002.
2. Adoption of the Peerless Mfg. Co. 2001 Stock Option and Restricted
Stock Plan pursuant to which shares of the Company's common stock
are authorized for the issuance of stock options and restricted
stock grants to directors, officers and key employees of the
Company: 1,145,898 shares cast for the adoption, 198,750 shares cast
against the adoption, and 8,300 shares abstained. There were
1,062,978 broker non-votes.
3. Ratification of the selection of Grant Thornton, LLP as the
Company's independent outside accountants to audit the books and
records for the fiscal year ending June 30, 2002: 2,406,666 shares
cast for ratification, 6,670 shares cast against ratification, and
2,750 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A). Exhibits.
The following exhibits are filed as part of this Report:
Exhibit # Exhibit
--------- -------
10(m) Peerless Mfg. Co. 2001 Stock Option and Restricted
Stock Plan (filed as Appendix B to our proxy
statement on Schedule 14A dated October 24, 2001
and incorporated herein by reference).
(B). Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended
December 31, 2001. Items 1, 2, 3 and 5 are not applicable and have
been omitted.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
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 thereunto duly authorized.
PEERLESS MFG. CO.
Dated: February 14, 2001 /s/ SHERRILL STONE
--------------------------------------------
Sherrill Stone, Chairman, and Chief
Executive Officer
/s/ KATHERINE FRAZIER
--------------------------------------------
Katherine Frazier, Corporate Controller
(Principal Financial and Accounting Officer)
20