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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 MARCH 31, 2002
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 Identification No.)
Incorporation or Organization)
2819 WALNUT HILL LANE, DALLAS, TEXAS 75229
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(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 May 13, 2002, there were 2,983,484 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 MARCH 31, 2002
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 2002
and June 30, 2001....................................................................... 3
Consolidated Statements of Operations for the
three and nine months ended March 31, 2002 and 2001..................................... 5
Consolidated Statements of Cash Flows for
the nine months ended March 31, 2002 and 2001........................................... 6
Notes to the Consolidated Financial Statements.......................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................... 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................... 17
PART II:.OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 18
SIGNATURES....................................................................................... 19
</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 Form 10-Q
(this "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 risks 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 14 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
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
March 31, June 30,
2002 2001
--------- --------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 6,016 $ 2,577
Short term investments 305 300
Accounts receivable-principally trade-net 26,738 28,987
Inventories 3,262 2,084
Costs and earnings in excess of billings 10,224 6,328
Other 1,668 1,455
-------- --------
Total current assets 48,213 41,731
Property, plant and equipment-net 4,091 3,365
Other assets 925 1,060
-------- --------
$ 53,229 $ 46,156
======== ========
</Table>
See accompanying notes to consolidated financial statements.
3
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
March 31, June 30,
2002 2001
---------- ----------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable-trade $ 18,337 $ 10,172
Billings in excess of costs and earnings 6,728 9,618
Current maturities of long-term debt -- 400
Commissions payable 1,465 1,443
Income taxes payable 902 1,754
Accrued liabilities and other 5,086 3,876
---------- ----------
Total current liabilities 32,518 27,263
Long-term debt, net of current maturities -- 1,200
Shareholders' equity
Common stock 2,983 2,954
Additional paid-in capital 1,467 1,327
Other (155) (101)
Retained earnings 16,416 13,513
---------- ----------
Total shareholders' equity 20,711 17,693
---------- ----------
$ 53,229 $ 46,156
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
4
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues $ 28,864 $ 18,229 $ 78,783 $ 45,671
Cost of goods sold 20,379 12,823 55,928 32,806
---------- ---------- ---------- ----------
Gross profit 8,485 5,406 22,855 12,865
Operating expenses
Sales and marketing 2,120 1,689 6,152 4,358
Engineering and project
management 2,056 1,150 5,584 3,243
General and administrative 2,498 1,511 6,802 4,287
---------- ---------- ---------- ----------
6,674 4,350 18,538 11,888
---------- ---------- ---------- ----------
Operating income 1,811 1,056 4,317 977
Other income (expense)
Interest income (expense), net 32 (199) 24 (614)
Foreign exchange gain (loss) -- (97) 38 (180)
Other, net 42 (56) 229 (114)
---------- ---------- ---------- ----------
74 (352) 291 (908)
---------- ---------- ---------- ----------
Earnings before income taxes 1,885 704 4,608 69
Income tax expense 698 260 1,705 25
---------- ---------- ---------- ----------
Net earnings $ 1,187 $ 444 $ 2,903 $ 44
========== ========== ========== ==========
Basic earnings per share $ 0.40 $ 0.15 $ 0.98 $ 0.01
========== ========== ========== ==========
Diluted earnings per share $ 0.38 $ 0.15 $ 0.94 $ 0.01
========== ========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
5
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Nine Months Ended
March 31,
-------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 2,903 $ 44
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation and amortization 480 288
Gain on sale of property (267) --
Changes in operating assets and liabilities
Accounts receivable 2,228 (15,988)
Inventories (1,184) 522
Cost and earnings in excess of billings (3,896) 2,721
Other current assets (280) (1,887)
Other assets 133 324
Accounts payable 8,137 2,548
Billings in excess of costs and earnings (2,890) 9,293
Commissions payable 22 552
Income tax payable, accrued liabilities
and other 354 2,074
---------- ----------
2,837 447
---------- ----------
Net cash provided by operating activities 5,740 491
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of short-term investments -- (24)
Net purchases of property and equipment (1,298) (91)
Proceeds from sale of property 405 --
---------- ----------
Net cash used in investing activities (893) (115)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in borrowings (1,600) 1,089
Proceeds from issuance of common stock 189 104
Dividends paid -- (368)
---------- ----------
Net cash provided by (used in) financing activities (1,411) 825
Effect of exchange rate changes on cash 3 121
---------- ----------
Net increase in cash and cash equivalents 3,439 1,322
Cash and cash equivalents at beginning of period 2,577 561
---------- ----------
Cash and cash equivalents at end period $ 6,016 $ 1,883
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
6
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
1. BASIS OF PRESENTATION.
The accompanying consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information. The consolidated financial statements of the Company as of
March 31, 2002, and for the three and nine months ended March 31, 2002
and 2001 are unaudited and, in the opinion of management, contain all
adjustments necessary for the fair presentation of the financial
position and results of operations of the Company for the interim
periods. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended June 30,
2001. The results of operations for the three and nine month periods
ended March 31, 2002 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 Financial Condition and Results of
Operations - Factors That May Affect Our Operating Results). All dollar
and share amounts are in thousands, except per share amounts.
2. EARNINGS PER SHARE.
Basic earnings per share have been computed by dividing net earnings by
the weighted average number of common shares outstanding during the
period. Diluted earnings 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. 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 per share for
the periods indicated.
<Table>
<Caption>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $ 1,187 $ 444 $ 2,903 $ 44
-------- -------- -------- --------
Basic weighted average common
shares outstanding 2,983 2,948 2,976 2,944
Effect of dilutive options 103 35 112 24
-------- -------- -------- --------
Diluted weighted average common
shares outstanding 3,086 2,983 3,088 2,968
Net income per share - basic $ 0.40 $ 0.15 $ 0.98 $ 0.01
Net income per share - diluted $ 0.38 $ 0.15 $ 0.94 $ 0.01
</Table>
The weighted average common shares outstanding-diluted computation for
the three and nine months ended March 31, 2002, excluded 60,500 and
24,352 outstanding stock options, respectively, because their impact
would be anti-dilutive.
7
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
3. COMPREHENSIVE INCOME.
Comprehensive income 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 were as
follows:
<Table>
<Caption>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $ 1,187 $ 444 $ 2,903 $ 44
Foreign currency translation adjustment (13) (14) (74) 121
-------- -------- -------- --------
Comprehensive income $ 1,174 $ 430 $ 2,829 $ 165
======== ======== ======== ========
</Table>
4. SUPPLEMENTAL CASH FLOW INFORMATION.
Net cash flow from operating activities reflects cash payments for
interest and income taxes as follows:
<Table>
<Caption>
Nine Months Ended
March 31,
--------------------
2002 2001
-------- --------
Interest paid $ 148 $ 449
Income taxes paid $ 2,486 $ 94
</Table>
5. INVENTORIES.
Inventories are stated at the lower of cost (first-in, first-out) or
market. Principal components of inventories are as follows:
<Table>
<Caption>
March 31, June 30,
2002 2001
--------- --------
Raw materials $ 2,427 $ 1,151
Work in process 620 583
Finished goods 215 350
-------- --------
Total inventories $ 3,262 $ 2,084
======== ========
</Table>
6. SEGMENT INFORMATION.
The Company identifies reportable segments based on management
responsibility within the corporate structure. The Company has three
reportable industry segments: SCR Systems, gas/liquid filtration and
boilers. Previously, the Company had two reportable segments - SCR
Systems and gas/liquid filtration. Segment information for 2001 has
been restated on a comparable basis with 2002. 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. Many of
the Company's components are packaged on skids
8
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 produces pulsation dampeners, natural gas odorizers,
quick-opening closures and other parts for its products. The boiler
segment produces packaged boilers systems, heat recovery steam
generating systems, and other steam generating equipment.
Segment profit and loss is based on revenue, the respective gross
margin, 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 nine months ended March 31, 2002 and 2001 are presented
below.
<Table>
<Caption>
GAS/LIQUID UNALLOCATED
SCR FILTRATION BOILERS OVERHEAD CONSOLIDATED
---------- ---------- ---------- ----------- ------------
THREE MONTHS ENDED
MARCH 31, 2002
Revenue from customers $ 17,159 $ 7,164 $ 4,541 $ -- $ 28,864
Segment profit (loss) 3,693 980 (401) (2,461) 1,811
THREE MONTHS ENDED
MARCH 31, 2001
Revenue from customers $ 12,372 $ 5,329 $ 528 $ -- $ 18,229
Segment profit (loss) 2,201 869 (470) (1,544) 1,056
</Table>
<Table>
<Caption>
GAS/LIQUID UNALLOCATED
SCR FILTRATION BOILERS OVERHEAD CONSOLIDATED
---------- ---------- ---------- ----------- ------------
NINE MONTHS ENDED
MARCH 31, 2002
Revenue from customers $ 46,926 $ 21,197 $ 10,660 $ -- $ 78,783
Segment profit (loss) 10,059 1,739 (679) (6,802) 4,317
NINE MONTHS ENDED
MARCH 31, 2001
Revenue from customers $ 28,755 $ 15,840 $ 1,076 $ -- $ 45,671
Segment profit (loss) 4,350 2,218 (1,304) (4,287) 977
</Table>
9
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We operate our business through three principal business segments, the largest
of which is our SCR Systems segment. 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 are packaged on skids.
Our second principal business segment is our gas/liquid filtration business. In
this business we design, engineer, manufacture and sell specialized products
known as "separators" or "filters" which are used for a variety of 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 our third business segment, we design, engineer, manufacture and sell
packaged boilers and other steam generating equipment. This equipment is used to
produce steam, 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 year ended June 30, 2001, and to our nine
months ended March 31, 2002, respectively.
The following table displays the Company's statements of operations as a
percentage of net revenues:
<Table>
<Caption>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 70.6 70.3 71.0 71.8
-------- -------- -------- --------
Gross margin 29.4 29.7 29.0 28.2
Operating expenses
Sales and marketing 7.3 9.3 7.8 9.5
Engineering and
project management 7.1 6.3 7.1 7.1
General and administrative 8.7 8.3 8.6 9.4
-------- -------- -------- --------
23.1 23.9 23.5 26.0
-------- -------- -------- --------
Operating income 6.3 5.8 5.5 2.2
Interest income (expense), net 0.1 (1.1) 0.0 (1.4)
Other, net 0.1 (0.8) 0.4 (0.6)
-------- -------- -------- --------
Earnings before income taxes 6.5 3.9 5.9 0.2
Income tax expense 2.4 1.5 2.2 0.1
-------- -------- -------- --------
Net earnings 4.1% 2.4% 3.7% 0.1%
======== ======== ======== ========
</Table>
10
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Revenue for the third quarter of fiscal 2002 was $28.9 million, an increase of
$10.6 million, or 58.3%, over the third quarter of fiscal 2001. For the quarter,
revenue related to our SCR Systems increased $4.8 million, or 38.7%, gas/liquid
filtration segment revenue increased $1.8 million, or 34.4%, and our boiler and
other steam generating equipment product sales increased $4.0 million or 760.0%.
Our backlog of unfilled orders was approximately $63 million at March 31, 2002,
as compared to approximately $65 million at March 31, 2001.
Our gross profit increased $3.1 million, or 57.0%, to $8.5 million for the three
months ended March 31, 2002, compared to $5.4 million for the same period a year
ago. Gross profit, as a percentage of sales, decreased to 29.4% for the three
months ended March 31,2002, compared to 29.7% for the same period last year.
During the quarter, the Company's revenue derived from its boiler segment
increased from 2.9%, for the three months ended March 31, 2001, to 15.7% for the
quarter ended March 31, 2002. Traditionally, the Company has recognized a lower
margin on its boiler products, versus its other two business segments.
Therefore, a shift in the Company's product mix in a particular period could
have an impact on the Company's reported margins for that period. The Company
expects its margin on its boiler segment to improve through manufacturing
efficiencies and increased volume. However, even so, revenue mix shifts in any
quarter could continue to impact the Company's reported margin.
Operating expenses increased by $2.3 million, or 53.4%, from $4.4 million for
the three months ended March 31, 2001, to $6.7 million for the three months
ended March 31, 2002. The increase in operating expenses was due to additional
costs of engineering and project management required for the increased SCR
Systems 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 March 31, 2001 to
23.1% for the three months ended March 31, 2002.
Net interest expense decreased by $231,000 for the three months ended March 31,
2002, as we had no outstanding balances under credit facilities, compared to
$7.0 million of revolving debt and $1.7 million of installment debt outstanding
as of March 31, 2001.
As a result of the factors discussed above, we recorded net earnings for the
quarter ended March 31, 2002, of $1,187,000 compared to net earnings of $444,000
for the same period a year ago.
11
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO NINE MONTHS ENDED MARCH 31, 2001
Revenue for the nine months ended March 31, 2002 was $78.8 million, an increase
of $33.1 million, or 72.5% over the corresponding period last year. For the
period, revenue related to our SCR Systems segment increased $18.2 million, or
63.2%, gas/liquid filtration segment revenue increased $5.3 million, or 33.8%,
and our boiler and other steam generating equipment product sales increased $9.6
million, or 890.7%.
Our gross profit increased $10.0 million, or 77.6%, to $22.9 million for the
nine months ended March 31, 2002, compared to $12.9 million for the same period
a year ago. Gross profit, as a percentage of sales, increased to 29.0% for the
nine months ended March 31, 2002, compared to 28.2% for the same period last
year. During the period, due to product shifts, while we were able to increase
our realized margin on our SCR Systems, due to increased volume, this was
partially offset by the lower margin we recognized on our boiler products.
Operating expenses increased by $6.6 million, or 55.9%, from $11.9 million for
the nine months ended March 31, 2001, to $18.5 million for the nine months ended
March 31, 2002. The increase in operating expenses was due to additional costs
of engineering and project management required for the increased SCR Systems
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 26.0% for the nine months ended March 31, 2001 to 23.5% for the
nine months ended March 31, 2002, due to economies of scale, which we would
anticipate would continue as our revenue increases.
Net interest expense decreased by $638,000 for the nine months ended March 31,
2002, which related primarily to our having less outstanding under our credit
facility during the period and a lower effective interest rate. Our installment
debt of $1.6 million was prepaid in full during the first quarter of fiscal
2002, and our average debt outstanding under our revolving credit facility was
approximately $100,000 during the nine months ended March 31, 2002, compared to
an average of $1.8 million under our installment debt and $6.6 million
outstanding under our revolving credit facility for the nine months ended March
31, 2001.
Other income (expense) includes a one-time gain of approximately $250,000 due to
the sale of our facility in Carrollton, Texas. To improve operational
efficiencies we consolidated the operations previously performed at our
Carrollton facility with the operations performed by our Dallas, Texas facility.
As a result of the factors discussed above, net earnings for the nine months
ended March 31, 2002 were $2.9 million compared to net earnings of $44,000 for
the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were approximately $6.0 million and $2.6 million
as of March 31, 2002 and June 30, 2001, respectively. Cash provided by operating
activities was approximately $5.7 million for the first nine months ended March
31, 2002, compared to cash provided by operating activities of approximately
$491,000 for the same period last year.
12
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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. Billings to customers affect the
balance of billings in excess of costs and earnings or the balance of cost and
earnings in excess of billings, as well as the balance of accounts receivable.
Consequently, we focus on the net amount of these accounts along with accounts
payable, to determine our management of working capital. At March 31, 2002, the
balance of these working capital accounts was $11.9 million compared to $15.5
million at June 30, 2001, reflecting a reduction of our investment in these
working capital items of $3.6 million. In addition, we had net earnings of $2.9
million, and used cash to increase our inventories by $1.2 million during the
period.
Cash used in investing activities was $893,000 for the nine months ended March
31, 2002, compared to $115,000 for the same period last year. The increase in
cash used for the period related to a net increase in purchases of property and
equipment, which related primarily to refurbishments of our Abilene facility,
offset by the proceeds from the sale of our Carrollton, Texas facility during
fiscal 2002.
We used approximately $1.4 million in cash related to our financing activities
during the period, compared to cash provided by financing activities of
approximately $825,000 during the period ended March 31, 2001. The current usage
related to the payment in full of our installment debt on our Abilene, Texas
facility of $1.6 million, offset by the proceeds from the issuance of common
stock, pursuant to employee stock options, of $189,000.
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 or 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 March 31, 2002, we
had no outstanding balances under the credit line, and $2.4 million outstanding
under letters of credit, leaving us with $7.6 million of availability under the
facility. The facility contains financial covenants, restrictions on capital
expenditures, acquisitions, asset dispositions, and additional debt, as well as
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.
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 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
13
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 THE ECONOMY COULD HAVE AN
ADVERSE IMPACT ON THE SALE OF OUR SCR SYSTEMS AND ON 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 that 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 Systems segment revenues and our results of
operations.
CHANGES IN CURRENT ENVIRONMENTAL LEGISLATION COULD HAVE AN ADVERSE IMPACT ON THE
SALE OF OUR SCR SYSTEMS AND ON 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, or CERCLA, the Clean Water Act and the Clean Air Act,
and the regulations implementing them, as well as similar laws and regulations
at state and local levels and in other countries. These laws and regulations may
change or other jurisdictions
14
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
may not adopt similar laws and regulations. Our SCR Systems 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) increases in the cost, or shortages, 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 our contracts
often provide for 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. Our firm
orders normally 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.
15
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 cancellation 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. 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, among other customary warranty provisions. 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 our operations. In some cases, we may be able
to subrogate such a claim back to a subcontractor, if the subcontractor supplied
the defective product or performed the 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 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.
16
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
THE TERMS AND CONDITIONS OF OUR CREDIT FACILITY MAY IMPOSE RESTRICTIONS ON OUR
OPERATIONS. WE MAY NOT 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 may be affected by
events beyond our control and we cannot assure you that we will achieve
operating results that meet the requirements 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, would 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, entered into
derivative transactions to hedge our foreign balance sheet accounts or
anticipated revenues. As a result, these assets and revenues are currently
subject to foreign currency fluctuations. While we are not currently in a
borrowing position, and the assets and anticipated revenues (backlog) which are
subject to foreign currency fluctuations are relatively immaterial ($4.5 million
in assets and $5.5 million in backlog), and in currencies historically not
subject to significant fluctuations, the Company will continue to monitor its
exposure in these areas.
17
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed as part of this
report.
<Table>
<Caption>
Exhibit
Number Exhibit
------- -------
3 (a) Articles of Incorporation, as amended to date (filed as Exhibit 3 (a) to the
report of the Company on Form 10-Q for the fiscal quarter ended December 31,
1997, and incorporated herein by reference).
3 (b) Bylaws, as amended to date (filed as Exhibit 3 (b) to the report of the
Company on Form 10-K, for the fiscal year ended June 30, 1997, and
incorporated herein by reference).
4 (a) Rights Agreement as of May 22, 1997 between Peerless Mfg. Co. and Mellon
Investor Services, LLC (formerly ChaseMellon Shareholder Services, LLC) (filed
as Exhibit 1 to the Registration Statement of the Company on Form 8-A dated
May 22, 1997, and incorporated herein by reference).
4 (b) First Amendment to Rights Agreement as of August 23, 2001 between Peerless
Mfg. Co. and Mellon Investor Services, LLC (filed as Exhibit 2 to the
Registration Statement of the Company on Form 8-A dated August 30, 2001, and
incorporated herein by reference).
10 (m) Employment Agreement dated February 4, 2002, by and between Richard L. Travis
and Peerless Mfg. Co., filed herewith.
10 (n) Agreement dated February 4, 2002, by and between Richard L. Travis and
Peerless Mfg. Co., filed herewith.
</Table>
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter
ended March 31, 2002.
18
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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: May 14, 2002 /s/ Sherrill Stone
---------------------------------------------
Sherrill Stone, Chairman and Chief
Executive Officer
/s/ Richard Travis
---------------------------------------------
Richard L. Travis, Chief Financial Officer
(Principal Financial and Accounting Officer)
19
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
Index to Exhibits
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3 (a) Articles of Incorporation, as amended to date (filed as Exhibit 3 (a) to the report of the
Company on Form 10-Q for the fiscal quarter ended December 31, 1997, and incorporated herein
by reference).
3 (b) Bylaws, as amended to date (filed as Exhibit 3 (b) to the report of the Company on Form 10-K,
for the fiscal year ended June 30, 1997, and incorporated herein by reference).
4 (a) Rights Agreement as of May 22, 1997 between Peerless Mfg. Co. and Mellon Investor Services,
LLC (formerly ChaseMellon Shareholder Services, LLC) (filed as Exhibit 1 to the Registration
Statement of the Company on Form 8-A dated May 22, 1997, and incorporated herein by reference).
4 (b) First Amendment to Rights Agreement as of August 23, 2001 between Peerless Mfg. Co. and Mellon
Investor Services, LLC (filed as Exhibit 2 to the Registration Statement of the Company on
Form 8-A dated August 30, 2001, and incorporated herein by reference).
10 (m) Employment Agreement dated February 4, 2002, by and between Richard L. Travis and Peerless
Mfg. Co., filed herewith.
10 (n) Agreement dated February 4, 2002, by and between Richard L. Travis and Peerless Mfg. Co.,
filed herewith.
</Table>
20