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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
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, 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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2819 WALNUT HILL LANE, DALLAS, TEXAS 75229
(Address of principal executive offices) (Zip code)
(214) 357-6181
(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 [ ]
Indicate by check whether registrant is an accelerated filer (as defined
by Rule 12b-2 of the Securities and Exchange Act of 1934). Yes [ ] No [X]
As of February 13, 2003 there were 2,997,534 shares of the Registrant's
common stock outstanding.
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1
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
NUMBER
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 2002 and June 30, 2002...................... 3
Consolidated Statements of Operations for the three and six months ended
December 31, 2002 and 2001.............................................................. 4
Consolidated Statements of Cash Flows for the six months ended
December 31, 2002 and 2001.............................................................. 5
Notes to the Consolidated Financial Statements.......................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................... 23
ITEM 4. CONTROLS AND PROCEDURES........................................................ 23
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................... 24
SIGNATURES....................................................................................... 25
CERTIFICATIONS................................................................................... 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 31, June 30,
2002 2002
---- ----
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 4,945 $ 1,386
Short term investments 312 307
Accounts receivable - principally trade - net of
allowance for doubtful accounts of $749 at
December 31, 2002 and $354 at June 30, 2002 15,771 25,506
Inventories 3,292 3,671
Costs and earnings in excess of billings
on uncompleted contracts 7,454 9,218
Deferred income taxes 933 933
Other 1,159 725
------------ ------------
Total current assets 33,866 41,746
Property, plant and equipment - net 3,853 4,152
Other assets 566 608
------------ ------------
$ 38,285 $ 46,506
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable - trade 8,688 12,545
Billings in excess of costs and earnings
on uncompleted contracts 4,309 4,231
Commissions payable 1,020 1,556
Income taxes payable -- 766
Accrued liabilities and other 3,022 4,893
------------ ------------
Total current liabilities 17,039 23,991
Shareholders' equity
Common stock 2,998 2,991
Additional paid-in capital 1,752 1,720
Other (37) (98)
Retained earnings 16,533 17,902
------------ ------------
Total shareholders' equity 21,246 22,515
------------ ------------
Total liabilities and shareholders' equity $ 38,285 $ 46,506
============ ============
See accompanying notes to consolidated financial statements.
3
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 20,742 $ 27,044 $ 35,196 $ 51,553
Cost of goods sold 16,453 20,083 27,584 37,689
-------- -------- -------- --------
Gross profit 4,289 6,961 7,612 13,864
Operating expenses
Sales and marketing 1,497 1,928 3,164 4,041
Engineering and project management 1,219 1,999 3,007 3,834
General and administrative 1,689 1,751 3,166 3,483
Restructuring expense -- -- 483 --
-------- -------- -------- --------
4,405 5,678 9,820 11,358
-------- -------- -------- --------
Operating income (loss) (116) 1,283 (2,208) 2,506
Other income (expense)
Interest (expense) -- -- -- (114)
Foreign exchange gain (loss) (29) (30) (92) 38
Other 94 251 117 293
-------- -------- -------- --------
65 221 25 217
-------- -------- -------- --------
Earnings (loss) before income taxes (51) 1,504 (2,183) 2,723
Income tax expense (benefit) (25) 556 (814) 1,007
-------- -------- -------- --------
Net earnings (loss) $ (26) $ 948 $ (1,369) $ 1,716
======== ======== ======== ========
Basic earnings (loss) per share $ (0.01) $ 0.32 $ (0.46) $ 0.58
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.01) $ 0.31 $ (0.46) $ 0.56
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
December 31,
2002 2001
---- ----
Cash flows from operating activities:
Net earnings (loss) $ (1,369) $ 1,716
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 406 296
Gain on sale of property -- (267)
Bad debt expense 460 25
Other 71 --
Changes in operating assets and liabilities
Accounts receivable 9,264 3,947
Inventories 379 (222)
Costs and earnings in excess of billings 1,763 184
Other current assets (434) (40)
Other assets 42 37
Accounts payable (3,866) (1,747)
Billings in excess of costs and earnings 78 663
Commissions payable (536) (190)
Accrued expenses and other (2,638) (1,194)
-------- --------
4,989 1,492
-------- --------
Net cash provided by operating activities 3,620 3,208
Cash flow from investing activities:
Purchases of short term investments (4) --
Purchases of property and equipment (96) (1,105)
Proceeds from sale of property -- 405
-------- --------
Net cash used in investing activities (100) (700)
Cash flows from financing activities:
Net change in borrowings -- (1,600)
Proceeds from issuance of common stock 58 140
-------- --------
Net cash provided by (used in) financing activities 58 (1,460)
Effect of exchange rate changes on cash and cash equivalents (19) 10
-------- --------
Net increase in cash and cash equivalents 3,559 1,058
Cash and cash equivalents at beginning of period 1,386 2,577
-------- --------
Cash and cash equivalents at end of period $ 4,945 $ 3,635
======== ========
See accompanying notes to consolidated financial statements.
5
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
1. BASIS OF PRESENTATION.
The accompanying consolidated financial statements of Peerless Mfg.
Co. (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 December 31, 2002, and for the three and six months ended
December 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, 2002.
The results of operations for the three and six months ended December 31,
2002 are not necessarily indicative of the results to be expected for the
entire year (see Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Restructuring and
Organizational Realignment" and - "Factors That May Affect Our Operating
Results and Other Risk Factors" following). The Company's fiscal year ends
on June 30th. References herein to fiscal 2002 and fiscal 2003 refer to
our fiscal years ended June 30, 2002 and 2003, respectively. Certain
fiscal year 2002 items have been reclassified to conform with the fiscal
year 2003 presentation. All dollar and share amounts are in thousands,
except per share amounts.
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
following table presents the calculation of earnings (loss) per share for
the periods indicated.
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net earnings (loss) $ (26) $ 948 $ (1,369) $ 1,716
======== ======== ======== ========
Basic weighted average common
shares outstanding 2,994 2,977 2,993 2,973
Effect of dilutive options -- 112 -- 116
-------- -------- -------- --------
Diluted weighted average common
shares outstanding 2,994 3,089 2,993 3,089
======== ======== ======== ========
Net earnings (loss) per share - basic $ (0.01) $ 0.32 $ (0.46) $ 0.58
======== ======== ======== ========
Net earnings (loss) per share - diluted $ (0.01) $ 0.31 $ (0.46) $ 0.56
======== ======== ======== ========
The weighted average common shares outstanding-diluted computation
excluded 194,985 and 203,207 outstanding stock options for the three and
six months ended December 31, 2002 because their impact would be
anti-dilutive. Likewise, the weighted average common shares
outstanding-diluted computation excluded 0 and 56,500 outstanding stock
options for the three and six months ended December 31, 2001 because their
impact would be anti-dilutive.
6
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
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:
Three Months Ended Six Months Ended
December 31, December 31,
------------- ------------
2002 2001 2002 2001
---- ---- ---- ----
Net earnings (loss) $ (26) $ 948 $ (1,369) $ 1,716
Foreign currency translation adjustment 26 (6) 49 (61)
-------- -------- -------- --------
Comprehensive income (loss) $ -- $ 942 $ (1,320) $ 1,655
======== ======== ======== ========
4. SUPPLEMENTAL CASH FLOW INFORMATION.
Net cash flow from operating activities reflects cash payments for
interest and income taxes as follows:
Six Months Ended
December 31,
2002 2001
---- ----
Interest paid $ -- $ 114
Income taxes paid $ 428 $ 2,090
5. INVENTORIES.
Inventories are stated at the lower of cost (first-in, first-out) or
market. Principal components of inventories are as follows:
December 31, June 30,
2002 2002
---- ----
Raw materials $ 2,628 $ 2,201
Work in process 608 1,085
Finished goods 56 385
-------- --------
Total inventories $ 3,292 $ 3,671
======== ========
7
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
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, separation & filtration and
boilers. For a discussion on these various segments, see Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Overview" following.
Segment profit and loss is based on revenue less direct costs of the
segment before allocation of general, administrative, research and
development costs. All inter-company transfers between segments have been
eliminated. Segment information and reconciliation to operating income
(loss) for the three and six months ended December 31, 2002 and 2001 are
presented below. Note that the Company does not allocate general and
administrative expenses and restructuring expenses ("unallocated
overhead"), assets, expenditures for assets or depreciation expense on a
segment basis for internal management reporting, and therefore such
information is not presented.
SEPARATION UNALLOCATED
SCR & FILTRATION BOILERS OVERHEAD CONSOLIDATED
--- ------------ ------- -------- ------------
THREE MONTHS ENDED
DECEMBER 31, 2002
- ----------------------
Revenue from customers $ 12,506 $ 7,506 $ 730 $ -- $ 20,742
Segment profit (loss) 715 1,134 (276) (1,689) (116)
THREE MONTHS ENDED
DECEMBER 31, 2001
- ----------------------
Revenue from customers $ 16,014 $ 7,682 $ 3,348 $ -- $ 27,044
Segment profit (loss) 2,802 442 (210) (1,751) 1,283
SIX MONTHS ENDED
DECEMBER 31, 2002
- ----------------------
Revenue from customers $ 19,449 $ 13,839 $ 1,908 $ -- $ 35,196
Segment profit (loss) 208 1,821 (588) (3,649) (2,208)
SIX MONTHS ENDED
DECEMBER 31, 2001
- ----------------------
Revenue from customers $ 31,261 $ 13,923 $ 6,369 $ -- $ 51,553
Segment profit (loss) 5,703 540 (254) (3,483) 2,506
8
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
7. CONTINGENCIES
The Company's financial statements includes a $2.2 million
receivable due from a customer that recently filed a plan of
reorganization under Chapter 11 of the United States Bankruptcy Code. The
Company has been classified as an unsecured creditor under such filing.
The Company has obtained outside counsel to help with the collection of
this receivable and has filed a statutory lien on the refinery where its
equipment was installed. In addition, the Company has filed a lawsuit to
perfect its lien interest against the owner of the refinery. The Company
intends to vigorously pursue its collection and believes that this
receivable will be collected. In event that the Company's lien is held to
be invalid, or if the receivable or a significant portion thereof is
deemed to be not collectible, the Company will be required to write down
the receivable to its net realizable value. The Company believes that its
existing allowances for doubtful accounts includes the necessary
provision for losses associated with this receivable based upon
information available to-date.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
From time to time, 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, including statements regarding our expectations, hopes, beliefs,
intentions or strategies regarding the future. 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 by the Company 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 and Other Risk Factors," as set
forth starting on page 19 of this Report.
All forward-looking statements included in this Report are based on
information available to us on the date hereof, and the Company expressly
disclaims any obligation to release publicly any updates or changes in the
forward-looking statements, whether as a result of changes in events,
conditions, or circumstances on which any forward-looking statement is based.
9
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
OVERVIEW
Peerless is a global company providing environmental and separation and
filtration products for the abatement of air pollution, the removal of
contaminants from gases and liquids and the manufacturing and sale of packaged
boilers through its three principal business segments - SCR Systems, separation
& filtration and boilers.
SCR Systems. In this business segment, our largest, 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 valves and piping, and are packaged on skids.
Separation & Filtration. In this business segment, our traditional and
second principal segment, 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.
Boilers. 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. See "Restructuring and Organizational
Realignment" following for additional discussion on the suspension of this
business.
RESTRUCTURING AND ORGANIZATIONAL REALIGNMENT
During the latter part of fiscal 2002, the construction of new merchant
power plants in this country slowed considerably, as doubts emerged regarding
the actual demand for electricity began to surface, coupled with the continued
weakness in the United States economy. In addition, recent regulatory
uncertainties have caused NOx reduction initiatives relating to retro-fit
projects to be delayed. These factors resulted in a downturn of new SCR Systems
orders during the second half of fiscal 2002, as well as a decrease in new
packaged boiler orders, which impacted our backlog at June 30, 2002.
In response to the slow down of new merchant power plants, continued
weakness in the United States and global economies, and recent regulatory and
political uncertainties, the Company in July 2002 initiated its "restructuring
and organizational realignment initiative." The goal of this initiative was to
reduce costs, streamline operations, and identify and exit certain non-critical,
marginally performing operating activities, thereby positioning the Company with
a more competitive cost structure vital for its overall long-term success. The
plan included, among other things, the consolidation of manufacturing facilities
and processes, the scaling down of capacities at the remaining facilities to
meet anticipated market requirements and current economic conditions, suspension
of non-strategic business units, and the realignment of the organization to
10
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
focus on the Company's two primary business segments: SCR Systems and separation
& filtration.
The Company believes that the result of these initiatives and the
redirection of our resources to suspend the boiler business and focus on our two
remaining more profitable segments will position the Company to maximize its
current operational efficiencies and allow it the flexibility to meet our
customers' current and anticipated needs, without sacrificing our ability to
expand our business to meet future demand. While the initial phase of the
Company's restructuring and organizational realignment initiatives have
basically been completed, the Company continues to look for ways to improve its
operational efficiencies and performance during these difficult times.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience. Because of
the use of estimates inherent in the financial reporting process, actual results
could differ from those estimates.
Certain of our accounting policies require a higher degree of judgment
than others in their application. These include revenue recognition on long-term
contracts, accrual for estimated warranty costs and allowance for doubtful
accounts. Our policy and related procedures for revenue recognition on long-term
contracts, accrual of warranty costs and allowance for doubtful accounts are
summarized below.
Revenue Recognition. We provide products under long-term, generally
fixed-priced, contracts that may extend up to 18 months in duration. In
connection with these contracts, we follow the guidance contained in AICPA
Statement of Position ("SOP") 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. SOP 81-1 requires the
use of percentage-of-completion accounting for long-term contracts that contain
enforceable rights regarding services to be provided and received by the
contracting parties, consideration to be exchanged, and the manner and terms of
settlement, assuming reasonably dependable estimates of revenues and expenses
can be made. The percentage-of-completion methodology generally results in the
recognition of reasonably consistent profit margins over the life of a contract.
Amounts recognized in revenue are calculated using the percentage of
construction cost completed, generally on a cumulative cost to total cost basis.
Cumulative revenues recognized may be less or greater than cumulative costs and
profits billed at any point in time during a contract's term. The resulting
difference is recognized as "costs and earnings in excess of billings on
uncompleted contracts" or "billings in excess of costs and earnings on
uncompleted contracts."
When using the percentage-of-completion method, we must be able to
accurately estimate the total costs we expect to incur on a project in order to
record the proper amount of revenues for that period. The Company continually
updates its estimates of costs and status of each project with its
subcontractors and its manufacturing plants. If it is determined that a loss
will result from the performance of a contract, the entire amount of the loss is
charged against income when it is determined. The impact of revisions in
contract estimates are recognized on a cumulative catch up basis in the
11
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
period in which the revisions are made. In addition, significant portions of the
Company's costs are subcontracted under fixed-price arrangements, thereby
reducing the risk of significant cost overruns on any given project. However, a
number of internal and external factors, including labor rates, plant
utilization factors, future material prices, customer change specifications, and
other factors can affect our cost estimates. While we attempt to reduce the
inherent risk relating to revenue and cost estimates in percentage-of-completion
models through corporate policy, approval and monitoring processes, any
estimation process, including that used in preparing contract accounting models,
involves inherent risk.
Product Warranty. We offer warranties of various lengths to our customers
depending upon the specific product and terms of the customer product agreement.
We typically negotiate varying terms regarding warranty coverage and length of
warranty dependent upon the product involved and customary practices. Our
typical warranties require us to repair or replace defective product during the
warranty period at no cost to the customer. We attempt to obtain back-up
concurrent warranties for major component parts from our suppliers. As of the
balance sheet date, we record an estimate for warranty related costs for
products sold based on historical experience, expectation of future conditions
and the extent of back-up concurrent supplier warranties in place. While we
believe that our estimated warranty reserve is adequate and the judgment applied
is appropriate, the estimated liability for product warranties could differ from
future actual warranty costs due to a number of factors.
Allowance for Doubtful Accounts. The Company maintains an allowance for
doubtful accounts to reflect estimated losses resulting from the inability of
customers to make required payments. On an ongoing basis, we evaluate the
collectibility of accounts receivable based upon historical collection trends,
current economic factors, and the assessment of the collectibility of specific
accounts. We evaluate the collectibility of specific accounts using a
combination of factors, including the age of the outstanding balances,
evaluation of customers' current and past financial condition and credit scores,
recent payment history, current economic environment, and discussions with our
project managers and with the customers directly. See Item 2 - "Management's
Discussion and analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" of this Report.
12
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
RESULTS OF OPERATIONS
The following table displays the Company's statements of operations as a
percentage of net revenues:
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 79.3 74.3 78.4 73.1
----- ----- ----- -----
Gross profit 20.7 25.7 21.6 26.9
Operating expenses 21.2 21.0 26.5 22.0
Restructuring expense 0.0 0.0 1.4 0.0
----- ----- ----- -----
21.2 21.0 27.9 22.0
----- ----- ----- -----
Operating income (loss) (0.5) 4.7 (6.3) 4.9
Interest (expense) 0.0 0.0 0.0 (0.2)
Other income 0.3 0.8 0.1 0.6
----- ----- ----- -----
Earnings (loss) before income taxes (0.2) 5.5 (6.2) 5.3
Income tax expense (benefit) (0.1) 2.0 (2.3) 2.0
----- ----- ----- -----
Net earnings (loss) (0.1) % 3.5 % (3.9) % 3.3 %
===== ===== ===== =====
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2001
Revenue for the second quarter of fiscal 2003 was $20.7 million, a
decrease of $6.3 million, or 23.3%, over the second quarter revenues of $27.0
million for fiscal 2002. For the quarter, revenue related to our SCR Systems
decreased $3.5 million, or 21.9%, from $16.0 million for the second quarter of
fiscal year 2002 to $12.5 million for the same quarter of fiscal 2003. The
Company feels that the decline in the construction of new power plants, recent
environmental regulatory uncertainties, and the current economic climate have
all contributed to the decline in its SCR systems sales. Our separation &
filtration segment revenue remained relatively flat over both quarterly periods
($7.5 million for second quarter of fiscal 2003 and $7.7 million for the second
quarter of fiscal 2002), while our boiler revenues decreased $2.6 million, or
78.8%, from $3.3 million to $730,000 over the same periods. This resulted from a
drop in the general demand in the marketplace for all boiler products and the
Company's decision to suspend this operation.
The Company's backlog of unfilled orders was approximately $45 million at
December 31, 2002, compared to $69 million at December 31, 2001 and $38 million
at September 30, 2002. The Company feels that the decrease in its backlog
compared with the prior year is primarily due to the reduction in the
construction of new power plants, recent environmental regulatory uncertainties,
and the current economic climate. All of these factors have contributed to
planned projects being placed on hold, or new environmental projects being
canceled or delayed. These factors resulted in the reduction in SCR Systems
orders booked during the second half of fiscal 2002, as well as a decrease in
new packaged boiler orders, which is impacting our reported
13
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
revenues during this fiscal year. Regulations related to NOx emissions have in
the past resulted in increased sales of our SCR Systems, either through
new-source or retro-fit applications, and we anticipate that this trend will
continue in the future. However, current regulatory uncertainties have made the
ability to forecast these anticipated revenue streams extremely difficult. In
addition, while the construction of new power plants has seen a significant
decline over the past 12 months, there is expected to be a continued demand for
SCR Systems as new power plants are built to replace older less efficient
plants, and as regulatory compliance projects are commenced, which has
attributed to some degree to the improvement in the Company's backlog since
September 30, 2002.
The Company's gross profit decreased $2.7 million, or 38.6%, from $7.0
million to $4.3 million for the three months ended December 31, 2001 and 2002,
respectively. Gross profit, as a percentage of sales, decreased to 20.7% for the
three months ended December 31, 2002, compared to 25.7% for the same period last
year. The Company's reported margins during the period were impacted, and can in
the future be expected to be impacted by some degree, by increased competitive
market pressures on its SCR Systems and by the general lower volume of sales.
The Company did however, during the quarter, experience significant
unanticipated costs associated with the start-up and commissioning of several of
its SCR projects. Without these additional SCR costs ("additional project
costs"), the Company's reported margin, as a percentage of sales, for the period
would have been 25.5%. The Company believes it has instituted various
operational and project management control procedures and organizational changes
to lessen the likelihood of the reoccurrence of these additional project costs
in the future.
Operating expenses decreased by $1.3 million, or 22.8%, from $5.7 million
for the three months ended December 31, 2001, to $4.4 million for the three
months ended December 31, 2002. The decrease in operating expenses during the
period was due to the implementation of the Company's restructuring and
organizational realignment initiatives that were started last quarter. As a
result of these initiatives, the Company's operating expenses increased only
slightly, as a percentage of sales, from 21.0% for the three months ended
December 31, 2001 to 21.2% for the three months ended December 31, 2002.
Included in the Company's operating expenses this quarter is an additional
$400,000 provision for doubtful accounts which the Company felt was necessary
given the current economic environment and uncertainties surrounding certain
receivables. Without this charge the Company's operating expenses for the
quarter would have been approximately $4.0 million, or 19.3%, as a percentage of
sales. See also Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources" of this
Report.
Interest expense remained unchanged for the three months ended December
31, 2002 and December 31, 2001, as we had no outstanding debt during either of
these reported periods.
Other income decreased by approximately $156,000 from approximately
$221,000 for the three months ended December 31, 2001 to approximately $65,000
for the three months ended December 31, 2002. This related primarily to a gain
on the sale of the Company's Carrollton facility of approximately $267,000 which
was included in the operational results for the three months ended December 31,
2001.
As a result of the factors discussed above, we recorded a net loss for the
three months ended December 31, 2002, of approximately $26,000, or $.01 per
diluted share. Without the impact of the additional project costs and additional
provision to our allowance for doubtful
14
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
accounts both discussed above, the Company would have reported net earnings for
the period of approximately $850,000 or $.28 per diluted share, compared to net
earnings of approximately $948,000, or $.31 per diluted share, for the three
months ended December 31, 2001.
SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2001
Revenue for the six months ended December 31, 2002 was $35.2 million, a
decrease of $16.4 million, or 31.8%, over the corresponding period last year.
For the period, revenue related to our SCR Systems decreased $11.8 million, or
37.7%, as a result of the decline in the construction of new power plants,
recent environmental regulatory uncertainties, and the current economic climate.
Our separation & filtration segment revenue remained relatively flat decreasing
from $13.9 million to $13.8 million for the six months ended December 31, 2001
and 2002, respectively. Boiler and other steam generating equipment product
revenues decreased $4.5 million, or 70.3%, from $6.4 million for the six months
ended December 31, 2001, to $1.9 million for the six months ended December 31,
2002. This resulted from a drop in the general demand in the marketplace for all
boiler products, coupled with the Company's decision, during the first part of
this fiscal year, to suspend this business unit.
The Company's gross profit decreased $6.3 million, or 45.3%, to $7.6
million for the six months ended December 31, 2002, compared to $13.9 million
for the same period a year ago. Gross profit, as a percentage of sales,
decreased to 21.6% for the six months ended December 31, 2002, compared to 26.9%
for the same period last year. The Company's margin decline is due to a shift in
the Company's product mix as the Company's SCR Systems sales declined in the
period from 60.7% for the six months ended December 31, 2001 to 55.3% for the
current fiscal year (the Company traditionally recognizes a higher margin on its
SCR Systems, therefore any shift in product mix could have a significant impact
on its reported margins). In addition, lower sales volume and the additional
project costs mentioned previously in the Company's discussion of its gross
profit margin for the three months ended December 31, 2002 also contributed to
the decline. Without these additional project costs, however, the Company's
reported margin, as a percentage of sales, for the period, would have been
24.5%.
Operating expenses decreased by $1.6 million, or 14.0%, from $11.4 million
for the six months ended December 31, 2001, to $9.8 million for the six months
ended December 31, 2002. The decrease in operating expenses during the period
was due to the implementation of the Company's restructuring and organizational
realignment initiatives that were started during the first three months of this
fiscal year. In connection with the Company's restructuring and realignment
initiatives the Company has incurred, to date, approximately $483,000 in
severance and related benefits expenses. While these resulted in operating
expenses being reduced, the timing of these reductions did not result in these
expenses being proportionate with the reduction in the Company's reported
revenues. As a result, operating expenses increased, as a percentage of sales,
from 22.0% for the six months ended December 31, 2001 to 27.9% (25.4% without
restructuring charges and additional provision for doubtful accounts) for the
six months ended December 31, 2002.
Net interest expense decreased approximately $114,000 for the six months
ended December 31, 2002 compared to the same period last year, as we had no
outstanding balances under our credit facilities in the current year versus $1.6
million outstanding in the prior year.
15
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
Other income, excluding interest expense, decreased by approximately
$306,000 from income of $331,000 for the six months ended December 31, 2001 to
$25,000 for the six months ended December 31, 2002. This related primarily to
the impact of foreign currency exchange rates, approximately $130,000 negative
impact on current year's operations and the gain of approximately $267,000 which
was included in the results of operations last year.
As a result of the factors discussed above, the Company recorded a net
loss for the six months ended December 31, 2002, of approximately $1.4 million,
or $.46 per diluted share. Without the impact of the additional project costs
and provision for allowance for doubtful accounts discussed above, the Company
would have reported a net loss for the period of approximately $493,000, or $.16
per diluted share, compared to net earnings of approximately $1.7 million, or
$.56 per diluted share, for the six months ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were approximately $4.9 million and $1.4
million as of December 31, 2002 and June 30, 2002, respectively. Cash provided
by operating activities was approximately $3.6 million for the six months ended
December 31, 2002, compared to approximately $3.2 million for the same period
last year.
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 manage working capital. At December 31, 2002, the balance of these
working capital accounts was $10.2 million compared to $17.9 million at June 30,
2002, reflecting a reduction of our investment in these working capital items of
$7.7 million. This reduction in the working capital accounts was offset by a net
loss of approximately $1.4 million, and by cash used to increase our inventory
by approximately $379,000 and decrease our accrued liabilities by approximately
$2.6 million.
Cash used in investing activities was approximately $100,000 for the six
months ended December 31, 2002, compared to approximately $700,000 for the same
period last year. The decrease in cash used for the period related to a decrease
in capital expenditures during the period in connection with the Company's cost
containment initiatives.
We had approximately $58,000 of cash provided by financing activities
during the current period compared to using approximately $1.5 million in cash
related to our financing activities during the period ended December 31, 2001.
The prior year usage related to the payoff of the Company's installment debt on
its Abilene, Texas facility of approximately $1.6 million, offset by the
proceeds from the issuance of common stock, pursuant to employee stock options,
of approximately $140,000. The cash provided during the current period related
to the issuance of common stock pursuant to Company's employee stock options.
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
16
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
attainment of certain financial performance criteria. As of December 31, 2002,
we had no outstanding balances under the credit line, and $4.8 million
outstanding under letters of credit, leaving us with $5.2 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 that we
maintain adequate liquidity to support existing operations and planned growth,
as well as to continue operations during reasonable periods of unanticipated
adversity.
Included in the Company's financial statements is a $2.2 million
receivable due from a customer that recently filed a plan of reorganization
under Chapter 11 of the United States Bankruptcy Code (original amount of the
contract was approximately $6.1 million). The Company has been classified as an
unsecured creditor under such filing. The company has obtained outside counsel
to help with the collection of this receivable and has filed a statutory lien on
the refinery where its equipment was installed. In addition, the Company has
filed a lawsuit to perfect its lien interest against the owner of the refinery.
While the Company has reason to believe that its lien will be found to be valid,
no assurances can be given. The Company intends to vigorously pursue its
collection and believes that this receivable will be collected. In the event
that the Company's lien is held to be invalid, or if the receivable or a
significant portion thereof is deemed to be not collectible, the Company will be
required to write down the receivable to its net realizable value. To the extent
that the Company's existing allowance for doubtful accounts is not adequate to
cover this write down, the additional reserve required will be a charge against
the Company's current year operating results. Such an event could have a
material adverse impact on the Company's financial condition and reported
results of its operations, and in addition, could potentially trigger a
violation of the Company's loan covenants. While the Company would attempt, and
has reason to believe that it would be able, to obtain a waiver for such
violations, or find other lending alternatives, no assurances can be given that
it would be successful in such endeavors.
NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." Most significantly, this
Statement eliminates the requirement under Statement No. 4 to aggregate all
gains and losses from extinguishments of debt, and if material, be classified as
an extraordinary item. As a result, gains and losses from extinguishments of
debt should be classified as extraordinary items only if they meet the criteria
in APB Opinion No. 30. Applying the provisions of APB Opinion No. 30 will
distinguish transactions that are part of an entity's recurring operations from
those that are unusual or infrequent or that meet the criteria for
classification as an extraordinary item. There is no current impact to the
Company's financial statements upon the adoption of this statement.
In July 2002, The FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
FASB Statement No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company does not expect the
adoption of this pronouncement to have a material impact on its financial
condition or results of operations.
17
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
In November 2002, the FASB reached a consensus on EITF Issue 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" (the Issue).
The guidance in this Issue is effective for revenue arrangement entered into in
fiscal years beginning after June 15, 2003. The Issue addresses certain aspects
of the accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities and whether, as a result, there is
embedded more than one earnings process for revenue recognition purposes. The
Company does not expect the adoption of this pronouncement to have a material
impact on its financial condition or results of operations.
In November 2002, The FASB issues FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees of Indebtedness of
Others." This interpretation clarifies the requirements of SFAS No. 5,
"Accounting for Contingencies," relating to the guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. The Interpretation's
provision for initial recognition and measurement are required on a perspective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements are required for financial statements of interim or annual reports
that end after December 15, 2002. The Company does not expect the adoption of
this pronouncement to have a material impact on its financial condition or
results of operations.
In December 2002, the FASB issues SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123." This statement amends SFAS Statement No. 123, "Accounting
for Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation, and requires prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company accounts for stock-based compensation arrangements in accordance with
the provision of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" and the disclosure-only provisions of SFAS No.
123. The transition provisions are effective for fiscal years ending after
December 15, 2002, with the disclosure provisions effective for interim periods
beginning after December 15, 2002. The Company will implement the required
disclosure provisions of SFAS No. 148 in its Form 10-Q for the period ending
March 31, 2003. The Company does not expect the adoption of this pronouncement
to have a material impact on its financial condition or results of operations.
In January 2003, the FASB issued FASB Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities which
possess certain characteristics. The Interpretation requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of
the business enterprise. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. The Company
does not have any ownership interest in any variable interest entities as of
December 31, 2002.
18
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND OTHER RISK FACTORS
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 Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Statements".
CHANGES IN THE POWER GENERATION INDUSTRY AND/OR THE ECONOMY COULD HAVE AN
ADVERSE IMPACT ON OUR SALES OF 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 55% of our consolidated revenues were from sales
of SCR Systems for new and refurbished power plants versus approximately 61% for
the same period last year. 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. See Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Report.
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 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
requiring the reduction of NOx emissions are repealed, amended or implementation
dates delayed or to the extent that regulatory authorities minimize enforcement.
See Item 2 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of this Report.
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
19
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
changes in customer requirements. See Item 2 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of this Report.
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 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. See Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Report.
OUR BACKLOG MAY NOT BE INDICATIVE OF OUR FUTURE REVENUE.
Customers may cancel or delay projects for reasons beyond our control. Our
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.
OUR ABILITY TO CONDUCT BUSINESS OUTSIDE THE UNITED STATES MAY BE ADVERSELY
AFFECTED BY FACTORS OUTSIDE OUR CONTROL AND OUR REVENUES AND PROFITS FROM
INTERNATIONAL SALES COULD BE ADVERSELY IMPACTED.
In fiscal 2002, approximately 14.5% of our revenue was derived from sales
outside the United States. For fiscal 2003, revenue outside the United States
represented approximately 17.3% of our consolidated revenues. Our operations and
earnings throughout the world have been, and may in the future be, affected from
time to time in varying degrees by war, political developments and foreign laws
and regulations, such as regional economic uncertainty, political instability,
restrictions, customs and tariffs, changing regulatory environments and adverse
tax consequences. The likelihood of such occurrences and their overall effect
upon us vary greatly from country to country and are not predictable. These
factors may result in a decline in revenues or profitability and could adversely
affect our ability to expand our business outside the United States.
20
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 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 separation and 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 indicative 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 three years
or less. These warranties require us to repair or replace faulty products and
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 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. Also, 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 of our control,
unanticipated events could have a materially adverse impact on our operating
results. See Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources" of this
Report.
21
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
THE TERMS AND CONDITIONS OF OUR CREDIT FACILITY 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, amongst others, a prohibition against losses in any
three consecutive quarters or aggregate losses in any three consecutive quarters
exceeding $750,000 . 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 Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources" of this Report.
OUR BUSINESS IS SUBJECT TO RISKS OF TERRORIST ACTS AND ACTS OF WAR.
Terrorist acts and acts of war may disrupt our operations, as well as our
customers operations. Such acts have created, and continue to create, economic
and political uncertainties and have contributed to the global economic downturn
that we are currently facing. Any future terrorist activities, or any continued
military or security operations could further weaken the global economy and
create additional uncertainties forcing our customers to further reduce their
capital spending, or cancel or delay already planned construction projects,
which could have a material adverse impact on our business, operating results
and financial condition.
OUR COMMON STOCK IS THINLY TRADED, WHICH MAY RESULT IN LOW LIQUIDITY.
The daily trading volume of our common stock is relatively low and
therefore the liquidity and appreciation in our stock may not meet our
shareholders' expectations. The market price of our common stock could be
adversely impacted as a result of sales by our existing shareholders of a large
number of shares of our common stock in the market, or the perception that such
sales could occur.
22
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
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. Although we are not currently in a
borrowing position, and the assets and anticipated revenues which are subject to
foreign currency fluctuations are relatively immaterial ($3.7 million in assets
and $5.5 million in backlog at December 31, 2002), and in currencies
historically not subject to significant fluctuations, the Company will continue
to monitor its exposure in these areas.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports and
filings under the Securities and Exchange Act of 1934, as amended (the "Exchange
Act") is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. The disclosure controls and procedures
also are designed to ensure that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
disclosure based closely on the definition of "disclosure controls and
procedure" in Rule 13a-14(c) of the Exchange Act. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this Report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation and as of the date
of the filing of this Form 10-Q.
23
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
PART II. OTHER INFORMATION
ITEMS 1, 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of securities holders at
the Annual Meeting of Shareholders held on November 21, 2002. A total of
2,894,175 shares (approximately 96% of all shares entitled to vote) were
represented by proxy or ballot at the meeting.
1. The stockholders' elected the following Class II Directors to serve
for a three-year term expiring at the annual meeting of shareholders
in 2005, or until their successors are elected and qualified.
FOR AGAINST WITHHELD
--- ------- --------
Mr. Bernard S. Lee 2,881,138 - 13,037
Mr. Joseph v. Mariner Jr. 2,870,538 - 23,637
2. The stockholders' ratified the selection of Grant Thornton LLP to
serve as the Company's independent accountants for the fiscal year
ending June 30, 2003. The matter was approved by a vote of 2,886,447
FOR, 3,128 AGAINST, and 4,600 ABSTAINING.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed as part of this report.
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
24
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
on Form 8-A dated August 30, 2001, and incorporated
herein by reference).
99.1 Certification of Mr. Sherrill Stone, Chief Executive
Officer.*
99.2 Certification of Mr. Richard L. Travis, Chief Financial
Officer.*
- ----------
* This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the extent
required by the Sarbanes-Oxley Act of 2002, by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the period.
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.
Date: February 13, 2003 /s/ Sherrill Stone
--------------------------------------------
Sherrill Stone, Chairman and Chief
Executive Officer
/s/ Richard L. Travis
--------------------------------------------
Richard L. Travis, Chief Financial Officer
(Principal Financial and Accounting Officer)
25
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Sherrill Stone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peerless Mfg. Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Sherrill Stone
------------------
Sherrill Stone
Chairman and Chief Executive Officer
26
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Richard L. Travis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peerless Mfg. Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Richard L. Travis
---------------------
Richard L Travis
Chief Financial Officer
27
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2002
INDEX TO EXHIBITS
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).
99.1 Certification of Mr. Sherrill Stone, Chief Executive Officer.*
99.2 Certification of Mr. Richard L. Travis, Chief Financial Officer.*
- ----------
* This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the extent
required by the Sarbanes-Oxley Act of 2002, by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
28