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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002 Commission file number 0-31164
PREFORMED LINE PRODUCTS COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-0676895
- --------------------------------- ---------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
660 Beta Drive
Mayfield Village, Ohio 44143
- --------------------------------------- ------------------------------------
(Address of Principal Executive Office) (Zip Code)
(440) 461-5200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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
----- -----
The number of common shares, $2 par value, outstanding as of July 31, 2002:
5,766,460.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREFORMED LINE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS
PREFORMED LINE PRODUCTS COMPANY:
Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001........................................3
Statements of Consolidated Income for the Three and Six Months
Ended June 30, 2002 and 2001 (unaudited).....................4
Statements of Consolidated Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (unaudited).....................5
Notes to Consolidated Financial Statements.................................6
PREFORMED LINE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
June 30, December 31,
Thousands of dollars except share data 2002 2001
--------- ---------
(Unaudited)
ASSETS
Cash and cash equivalents $ 9,305 $ 8,409
Accounts receivable, less allowance of $980 ($813 in 2001) 33,544 29,251
Inventories 39,044 38,637
Deferred income taxes 3,393 3,206
Prepaids and other 6,129 3,727
--------- ---------
TOTAL CURRENT ASSETS 91,415 83,230
Property and equipment - net 50,853 54,206
Investments in foreign joint ventures 8,895 9,976
Deferred income taxes 1,520 1,435
Goodwill, patents and other intangibles 7,398 7,410
Other 4,101 4,933
--------- ---------
TOTAL ASSETS $ 164,182 $ 161,190
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to banks $ 2,588 $ 1,201
Trade accounts payable 13,282 9,560
Accrued compensation and amounts withheld from employees 3,993 3,585
Accrued expenses and other liabilities 3,586 3,890
Accrued profit-sharing and pension contributions 3,389 4,130
Dividends payable 1,153 1,151
Income taxes 1,603 923
Current portion of long-term debt 2,399 13,198
--------- ---------
TOTAL CURRENT LIABILITIES 31,993 37,638
Long-term debt, less current portion 10,314 2,341
Deferred income taxes 705 431
SHAREHOLDERS' EQUITY
Common shares - $2 par value, 15,000,000 shares authorized,
5,766,460 and 5,757,030 issued and outstanding, net of
389,188 and 398,618 treasury shares at par 11,533 11,514
Retained earnings 129,612 128,721
Accumulated foreign currency translation adjustment (19,975) (19,455)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 121,170 120,780
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 164,182 $ 161,190
========= =========
See notes to consolidated financial statements.
3
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Thousands of dollars, except per share data Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
----------- ---------- ---------- ---------
(Unaudited) (Unaudited)
Net sales $ 44,854 $ 52,863 $ 88,862 $ 102,936
Cost of products sold 30,900 35,691 60,366 70,745
--------- --------- --------- ---------
GROSS PROFIT 13,954 17,172 28,496 32,191
Costs and expenses
Selling 6,033 6,394 11,315 11,974
General and administrative 5,213 5,393 10,276 10,966
Research and engineering 1,518 1,422 3,134 3,119
Other operating expenses 78 641 164 1,015
--------- --------- --------- ---------
12,842 13,850 24,889 27,074
Royalty income - net (447) (580) (960) (1,200)
--------- --------- --------- ---------
OPERATING INCOME 1,559 3,902 4,567 6,317
Other income (expense)
Equity in net income of foreign joint ventures 128 100 203 100
Interest income 62 411 120 545
Interest expense (187) (403) (375) (821)
Other expense (50) (50) (100) (100)
--------- --------- --------- ---------
(47) 58 (152) (276)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 1,512 3,960 4,415 6,041
Income taxes 475 1,090 1,377 2,050
--------- --------- --------- ---------
NET INCOME $ 1,037 $ 2,870 $ 3,038 $ 3,991
========= ========= ========= =========
Net income per share - basic and diluted $ 0.18 $ 0.50 $ 0.53 $ 0.69
========= ========= ========= =========
Cash dividends declared per share $ 0.20 $ 0.20 $ 0.40 $ 0.35
========= ========= ========= =========
Average number of shares outstanding - basic 5,763 5,754 5,760 5,753
========= ========= ========= =========
Average number of shares outstanding - diluted 5,787 5,778 5,785 5,765
========= ========= ========= =========
See notes to consolidated financial statements.
4
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Thousands of dollars SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
--------- ----------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 3,038 $ 3,991
Adjustments to reconcile net income to net cash provided by operations
Depreciation and amortization 4,396 5,215
Deferred income taxes (253) -
Equity in earnings of joint ventures - net of dividends received 373 (85)
Loss (gain) on sales of property and equipment (2) -
Changes in operating assets and liabilities
Receivables (4,293) (5,117)
Inventories (407) (748)
Trade payables and accruals 3,087 2,445
Income taxes (358) (783)
Other - net (277) (2,598)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,304 2,320
INVESTING ACTIVITIES
Capital expenditures (2,214) (4,068)
Business acquisitions (38) (791)
Proceeds from the sale of property and equipment 1,249 10
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,003) (4,849)
FINANCING ACTIVITIES
Increase in notes payable to banks 1,375 1,322
Proceeds from the issuance of debt 9,849 9,548
Payments of debt (12,652) (6,193)
Dividends paid (2,304) (1,727)
Issuance (purchase) of common shares 177 (156)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,555) 2,794
Effects of exchange rate changes on cash and cash equivalents 150 (1,004)
-------- --------
Increase (decrease) in cash and cash equivalents 896 (739)
Cash and cash equivalents at beginning of year 8,409 9,470
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,305 $ 8,731
======== ========
See notes to consolidated financial statements.
5
PREFORMED LINE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, these consolidated financial
statements do not include all of the information and notes required by
accounting principles generally accepted in the United States of America for
complete financial statements. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and the accompanying notes. Actual
results could differ from these estimates. However, in the opinion of
management, these consolidated financial statements contain all estimates and
adjustments required to fairly present the financial position, results of
operations, and changes in cash flows for the interim periods. Operating results
for the three-month and six-month periods ended June 30, 2002 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2002. For further information, refer to the consolidated financial
statements and footnotes included in the Company's 10-K filed with the
Securities and Exchange Commission.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements, but does not include all of the information and notes
required by accounting principles generally accepted in the United States of
America for complete financial statements.
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.
NOTE B - SUPPLEMENTAL INFORMATION
Inventories
June 30, December 31,
Dollars in thousands 2002 2001
-------- --------
Finished goods $ 17,372 $ 17,885
Work-in-process 1,376 1,022
Raw material 20,296 19,730
-------- --------
$ 39,044 $ 38,637
======== ========
Comprehensive income
The components of comprehensive income are as follows:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
Dollars in thousands 2002 2001 2002 2001
----------- ------------ ---------- -----------
Net income $ 1,037 $ 2,870 $ 3,038 $ 3,991
Other comprehensive income:
Foreign currency adjustment (628) (865) (520) (3,097)
------- ------- ------- -------
Comprehensive income $ 409 $ 2,005 $ 2,518 $ 894
======= ======= ======= =======
6
NOTE C - COMPUTATION OF EARNINGS PER SHARE
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
Dollars and shares in thousands, except per share data 2002 2001 2002 2001
----------- ------------ --------- ------------
Numerator
Net income $1,037 $2,870 $3,038 $3,991
====== ====== ====== ======
Denominator
Determination of shares
Weighted average common shares outstanding 5,763 5,754 5,760 5,753
Dilutive effect - employee stock options 24 24 25 12
------ ------ ------ ------
Diluted weighted average common shares outstanding 5,787 5,778 5,785 5,765
====== ====== ====== ======
Earnings per common share
Basic $ 0.18 $ 0.50 $ 0.53 $ 0.69
Diluted $ 0.18 $ 0.50 $ 0.53 $ 0.69
NOTE D - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized but will be subject to annual impairment tests. Other
intangibles will continue to be amortized over their useful lives and will be
assessed for impairment under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
The Company has adopted SFAS No. 142 as of January 1, 2002. Consequently, the
Company has discontinued the amortization of goodwill during 2002. In accordance
with the Statement, the Company has completed the impairment test for goodwill,
and has determined that no adjustment to the carrying value of goodwill is
required. Under this Statement goodwill will continue to be tested annually for
impairment or if events or changes in circumstances indicate that the goodwill
of a reporting unit might be impaired. The aggregate amortization expense for
other intangibles with definite lives for the three and six months ended June
30, 2002 was $130,000 and $153,000, and amortization expense is estimated to be
$368,000 annually for the next five years. The following table sets forth the
carrying value and accumulated amortization of goodwill and intangibles by
segment at June 30, 2002. The second table includes a reconciliation of reported
net income to adjusted net income after goodwill amortization for the three and
six months ending June 30, 2002 and 2001.
Dollars in thousands As of June 30, 2002
----------------------------------
Domestic Foreign Net
-------- ------- -------
Amortized intangible assets
Gross carrying amount - patents and other intangibles $ 4,730 $ 275 $ 5,005
Accumulated amortization - patents and other intangibles (738) (51) (789)
------- ------- -------
Total $ 3,992 $ 224 $ 4,216
======= ======= =======
Unamortized intangible assets
Gross carrying amount - goodwill $ 9,047 $ 918 $ 9,965
Accumulated amortization - goodwill (6,778) (5) (6,783)
------- ------- -------
Total $ 2,269 $ 913 $ 3,182
======= ======= =======
7
Reconciliation of reported net income to adjusted net income.
For the three months ended June 30, For the six months ended June 30,
----------------------------------- ---------------------------------
Thousands of dollars, except per share data 2002 2001 2002 2001
--------------- ---------------- -------------- ---------------
Reported net income $ 1,037 $ 2,870 $ 3,038 $ 3,991
Add back: Goodwill amortization after income tax - 144 - 286
--------- --------- --------- ---------
Adjusted net income $ 1,037 $ 3,014 $ 3,038 $ 4,277
========= ========= ========= =========
Basic earnings per share:
Reported net income $ 0.18 $ 0.50 $ 0.53 $ 0.69
Goodwill amortization after income tax - 0.02 - 0.05
--------- --------- --------- ---------
Adjusted net income $ 0.18 $ 0.52 $ 0.53 $ 0.74
========= ========= ========= =========
Diluted earnings per share:
Reported net income $ 0.18 $ 0.50 $ 0.53 $ 0.69
Goodwill amortization after income tax - 0.02 - 0.05
--------- --------- --------- ---------
Adjusted net income $ 0.18 $ 0.52 $ 0.53 $ 0.74
========= ========= ========= =========
In May 2002, the FASB issued SFAS No. 145, Rescission of FAS Nos. 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections as of April 2002. The provisions
of this Statement related to the rescission of SFAS No. 4 are effective for
fiscal years beginning after May 15, 2002, while provisions related to the
amendment of SFAS No. 13 are effective for transactions occurring after May 15,
2002, and all remaining provisions of this Statement shall be effective for
financial statements issued on or after May 15, 2002. This Statement eliminates
SFAS No. 4, as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria of APB Opinion
No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. This Statement also eliminates SFAS No. 44,
which was established to provide accounting requirements for effects of
transition for provisions of the Motor Carrier Act of 1980. The deregulation of
intrastate operating rights and transition to the provisions of those laws being
complete has necessitated the rescission of SFAS No. 44. This Statement also
eliminates the need to have SFAS No. 64, which was an amendment to SFAS No. 4
and has been rescinded with this Statement. Lastly, this Statement amends SFAS
No. 13, requiring lease modifications that have economic effects similar to
sale-leaseback transactions to be accounted for in the same manner as
sale-leaseback transactions. The adoption of all the provisions of this
Statement did not have a material impact on the Company.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, effective for exit or disposal activities initiated
after December 31, 2002. This Statement nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue No. 94-3, a liability for exit costs was recognized at the
date of the entity's commitment to an exit plan. However, an entity's commitment
to a plan, by itself, does not create a present obligation to others that meets
the definition of a liability. Therefore this Statement eliminates the
definition and requirements of exit costs in Issue No. 94-3. This Statement also
establishes that fair value is the objective for initial measurement of the
liability. The Company is currently in the process of evaluating this Statement
and does not expect the adoption of this Statement to have a material impact on
its financial statements and results of operations.
8
NOTE E - BUSINESS SEGMENTS
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
Dollars in thousands 2002 2001 2002 2001
-------- -------- -------- -------
Net sales
Domestic $ 25,922 $ 29,754 $ 52,248 $ 59,524
Foreign 18,932 23,109 36,614 43,412
------- ------- ------- -------
Total net sales $ 44,854 $ 52,863 $ 88,862 $ 102,936
======= ======= ======= =======
Intersegment sales
Domestic $ 334 $ 269 $ 384 $ 377
Foreign 595 1,188 1,210 2,569
------- ------- ------- -------
Total intersegment sales $ 929 $ 1,457 $ 1,594 $ 2,946
======= ======= ======= =======
Operating income
Domestic $ 1,205 $ 1,860 $ 3,283 $ 2,831
Foreign 354 2,042 1,284 3,486
------- ------- ------- -------
1,559 3,902 4,567 6,317
Equity in net income of joint ventures 128 100 203 100
Interest income
Domestic - 243 - 246
Foreign 62 168 120 299
------- ------- ------- -------
62 411 120 545
Interest expense
Domestic 74 272 153 593
Foreign 113 131 222 228
------- ------- ------- -------
187 403 375 821
Other (expense) (50) (50) (100) (100)
------- ------- ------- -------
Income before income taxes $ 1,512 $ 3,960 $ 4,415 $ 6,041
======= ======= ======= =======
June 30, December 31,
2002 2001
--------- ---------
Identifiable assets
Domestic $ 84,734 $ 85,934
Foreign 70,553 65,280
--------- ---------
155,287 151,214
Corporate 8,895 9,976
--------- ---------
Total assets $164,182 $161,190
========= =========
NOTE F - INCOME TAXES
In accordance with the applicable tax laws in a foreign jurisdiction, the
Company is entitled to a preferential tax rate of 0% for the first two profit
making years after utilization of any tax loss carryforwards, which may be
carried forward for five years; and a 50% tax reduction for the succeeding three
years. The aggregate tax and per-share effect was $200,000, or $.04 per share,
for the three-month period and $300,000, or $.05 per share, for the six-month
period ending June 30, 2002, while aggregate tax and per-share effect was
immaterial for the three-month period and $59,000, or $.01 per share, for the
six-month period ending June 30, 2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations for the
three-month and six-month periods ended June 30, 2002 and 2001:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
Dollars in thousands, except per share data
NET SALES AND INCOME
Net sales $ 44,854 $ 52,863 $ 88,862 $ 102,936
Operating income 1,559 3,902 4,567 6,317
Income before income taxes 1,512 3,960 4,415 6,041
Net income 1,037 2,870 3,038 3,991
PER SHARE AMOUNTS
Net income - basic $ 0.18 $ 0.50 $ 0.53 $ 0.69
Net income - diluted $ 0.18 $ 0.50 $ 0.53 $ 0.69
Dividends declared $ 0.20 $ 0.20 $ 0.40 $ 0.35
The following discussion of the financial results is based on 2002 and 2001
reported results for the three and six-month periods ended June 30.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2001
For the three months ended June 30, 2002, consolidated net sales were $44.8
million, a decrease of $8.0 million or 15%, from the prior year's comparable
period. Domestic sales decreased $3.8 million, or 13% and foreign sales
decreased $4.2 million, or 18%. The decrease in domestic sales is primarily
attributable to lower sales volume in the telecommunications industry. The
foreign sales decrease is also due primarily to lower sales volume. A decrease
in foreign data communication sales accounted for approximately 57% of the
decrease in foreign sales. The Company has been unable to negotiate the renewal
of a supply agreement with a foreign data communication customer for the year
beginning January 2003. Sales to this customer were approximately $14.0 million
for 2001 and are estimated to be $10.0 million for 2002. The Company continues
to see softness in its domestic and foreign communications and fiber optic
hardware markets and does not expect a rebound to the previous years' sales
levels for the remainder of 2002.
Gross profit of $14.0 million for the three months ended June 30, 2002 decreased
$3.2 million or 19% compared to the same period in the prior year as a result of
lower sales. The Company expects its gross profit for 2002 to be lower than the
previous year's levels as a result of lower sales.
Cost and expenses of $12.8 million were $1.0 million lower or 7% less than last
year. The reduction is due to lower commission expenses of $.2 million (included
in selling expenses) as a result of lower sales, a $.2 million decrease in
general and administrative expenses and, a $.6 million reduction in other
operating expenses. The reduction in other operating expenses is primarily the
result of $.2 million in lower amortization of goodwill (see NOTE D - NEW
ACCOUNTING PRONOUNCEMENTS), a $.1 million gain on the exchange of foreign
currencies, $.1 million of costs included in 2001 to relocate the Company's
Mexican manufacturing operations, and a $.1 million decrease in other operating
expense.
Operating income of $1.6 million for the three months ended June 30, 2002
decreased $2.3 million, or 60%, compared to $3.9 million in the previous year.
This decrease is the result of the $3.2 million decrease in gross profit, and a
$.1
10
million decrease in royalty income, partially offset by the $1.0 million
decrease in costs and expenses. Domestic operating income of $1.2 million for
the three months ended June 30, 2002 decreased $.6 million, compared to the same
period in the previous year. The decrease is primarily a result of lower gross
profit of $1.6 million due to lower sales volumes partially offset by reduced
selling, general, and administrative costs and expenses of $.7 million related
to the business realignment of the data communication product line effected in
the third quarter 2001 and the $.2 million reduction in amortization of
goodwill. Foreign operating income of $.4 million for the quarter ended June 30,
2002 decreased $1.7 million, compared to the same period in 2001 primarily as a
result of lower gross profit of $1.6 million on lower sales volumes.
Other expense of $.1 million for the three-month period ended June 30, 2002
increased $.1 million compared to 2001. The increase in other expense is a
result of a $.3 million decrease in interest income primarily as a result of
interest received in 2001 on a one-time state tax refund, offset by a $.2
million reduction in interest expense, as outstanding debt was reduced by $11.3
from June 30, 2001.
Income before income taxes for the quarter ended June 30, 2002 of $1.5 million
was $2.4 million less than 2001. The reduction is due to the $2.3 million
decrease in operating income and the $.1 million increase in other expense.
The effective tax rate increased to 31.4% in 2002 from 27.5% in 2001 primarily
as a result of a one-time state tax refund received in 2001, which reduced the
2001 effective tax rate. Income taxes for the quarter ended June 30, 2002 of $.5
million were $.6 million lower than the prior year's $1.1 million as a result of
lower income before income taxes partially offset by a one-time state tax refund
received in 2001.
Net income was $1.0 million for the three months ended June 30, 2002, which
represents a decrease of $1.8 million, or 64% from the prior year, primarily a
result of lower operating income. Earnings per share for the quarter ended June
30, 2002 were $.18 compared to $.50 for 2001. The prior year results included
$144,000 or $.02 per share of goodwill amortization. Goodwill is not being
amortized in 2002 as a result of adopting a new accounting pronouncement (see
NOTE D - NEW ACCOUNTING PRONOUNCEMENTS).
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
For the six months ended June 30, 2002, consolidated net sales were $88.9
million, a decrease of $14.1 million or 14% from the same period in the prior
year. Domestic sales decreased $7.3 million, or 12%, and foreign sales decreased
$6.8 million, or 16%. The decrease in domestic sales is primarily attributable
to lower sales volume of data communication, telecommunication and fiber optic
hardware products. Foreign sales in native currency were unfavorably impacted by
$.9 million when converted to U.S. dollars as a result of the stronger U.S.
dollar compared to most foreign currencies. Excluding this unfavorable currency
impact, foreign sales declined primarily due to lower sales volume.
Gross profit of $28.5 million for the six months ended June 30, 2002 was a
decrease of $3.7 million, or 11% compared to the prior year. The stronger U.S.
dollar resulted in $.3 million lower gross profit on foreign sales when foreign
statements in native currency were translated to U.S. dollars. Excluding the
impact of foreign currency translation, gross profit decreased $3.4 million as a
result of lower sales.
Costs and expenses of $24.9 million were $2.2 million, or 8% lower than last
year. The stronger dollar favorably impacted costs and expenses by $.3 million
when foreign statements in native currency were translated to U.S. dollars. The
remaining improvement in costs and expenses of $1.9 million was primarily due to
lower domestic selling and administrative expense of $1.6 million as a result of
the realignment of the data communication product line undertaken during the
third quarter 2001, partially offset by a $.5 million increase in foreign
marketing and selling expenses to promote data communication products in the
international markets. Lower foreign commissions of $.3 million due to lower
sales and lower amortization of goodwill of $.4 million (see NOTE D - NEW
ACCOUNTING PRONOUNCEMENTS) also contributed to the improvement in costs and
expenses.
Operating income of $4.6 million for the six months ended June 30, 2002
decreased by $1.7 million, or 28%, compared to the previous year. This decrease
was a result of the $3.7 million decrease in gross profit and a $.2 million
decrease in royalty income partially offset by the $2.2 million decrease in
costs and expenses. Domestic
11
operating income for the six months ended June 30, 2002 of $3.3 million
increased $.5 million compared to the same period in the previous year. The
improvement in domestic operating income was a result of the reduction of
selling, general and administrative expenses and lower amortization of goodwill
more than offsetting the reduction in gross profit of $1.4 million and lower
royalty income of $.2 million due to lower sales. Foreign operating income of
$1.3 million for the six months ended June 30, 2002 decreased by $2.2 million,
compared to the same period in the previous year. This decrease was primarily a
result of lower gross profit of $2.3 million due to lower sales and an increase
in marketing and selling expense partially offset by lower sales commission and
royalty expense.
Other income (expense) of $(.2) million for the six months ended June 30, 2002
decreased $.1 million compared to 2001. The decrease is a result of a $.4
million decrease in interest income million primarily due to interest received
in 2001 on a one-time state tax refund, offset by a $.2 million reduction in
interest expense, as a result of lower debt, and an increase in net income from
joint ventures of $.1 million.
Income before income taxes for the six months ended June 30, 2002 was $1.6
million lower than 2001 as a result of the $1.7 million decrease in operating
income and the $.1 million reduction of other expense.
Income taxes for the six months ended June 30, 2002 of $1.4 million were $.7
million lower than the prior year of $2.0 million. The effective tax rate for
2002 was 31.2% compared to 33.9% in 2001. The Company has a tax "holiday" in a
foreign jurisdiction which grants an effective tax rate of 0% for the first two
profit making years after utilizing any tax loss carryforwards, and a 50% tax
reduction for the succeeding three years. The aggregate tax and per share effect
of this holiday was $300,000, or $.05, per share for the six months ending June
30, 2002 and $59,000, or $.01, per share in the comparable 2001 period.
As a result of the above, net income for the first six months of 2002 was $3.0
million which represents a decrease of $1.0 million, or 24%, from the same
period in the prior year. Earnings per share for the six months ended June 30,
2002 were $.53 compared to $.69 for 2001. The prior year includes goodwill
amortization of $287,000 or $.05 per share. Goodwill is no longer amortized
beginning in 2002 (see NOTE D - NEW ACCOUNTING PRONOUNCEMENTS).
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5.3 million for the first six
months of 2002, an increase of $3.0 million when compared to 2001. This increase
was primarily the result of a $3.6 million decrease in working capital and a $.6
million increase in dividends from joint ventures, partially offset by lower net
income of $1.0 million.
Net cash used in investing activities of $1.0 million represents a reduction of
$3.8 million when compared to 2001. This reduction is primarily the result of
lower capital expenditures in 2002 of $1.9 million and $1.2 million in proceeds
from the sale of certain long-lived assets from the Company's Birmingham,
Alabama location. The Company is continually analyzing potential acquisition
candidates and business alternatives but has no commitments that would
materially impact the operations of the business.
Cash used in financing activities was $3.5 million compared to $2.8 million
provided by financing activities in the previous year. This change of $6.3
million was primarily the result of reducing outstanding debt in the first six
months of 2002 by $6.5 million.
Although the Company believes its existing credit facilities, internally
generated funds and ability to obtain additional financing will be sufficient to
meet the Company's growth and operating needs for the next 12 months, there are
inherent risks related to each of these sources. The Company has evaluated its
long-term borrowing requirements and substantially completed amending its main
credit facility. The lending institution has approved renewal of the credit
facility and the new amendment is currently being drafted. Consequently, the
credit facility is being considered as long term as of June 30, 2002. The
Company's financial position remains strong and its current ratio at June 30,
2002 was 2.9:1, compared to 2.2:1 at December 31, 2001. At June 30, 2002, the
Company's unused balance under its main credit facility was $32.0 million, which
would be $12.0 million upon the adoption of the new amendment, and its debt to
equity ratio was 10%. The ability to internally generate funds from continuing
operations is contingent upon the Company's sales to its served markets
remaining at current levels or improving.
12
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized but will be subject to annual impairment tests. Other
intangibles will continue to be amortized over their useful lives and will be
assessed for impairment under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
The Company has adopted SFAS No. 142 as of January 1, 2002. Consequently, the
Company has discontinued the amortization of goodwill during 2002. In accordance
with the Statement, the Company has completed the impairment test for goodwill
and has determined that no adjustment to the carrying value of goodwill is
required. Under this Statement goodwill will continue to be tested annually for
impairment or if events or changes in circumstances indicate that the goodwill
of a reporting unit might be impaired. See NOTE D - NEW ACCOUNTING
PRONOUNCEMENTS for further discussion.
In May 2002, the FASB issued SFAS No. 145, Rescission of FAS Nos. 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections as of April 2002. The provisions
of this Statement related to the rescission of SFAS No. 4 are effective for
fiscal years beginning after May 15, 2002, while provisions related to the
amendment of SFAS No. 13 are effective for transactions occurring after May 15,
2002, and all remaining provisions of this Statement shall be effective for
financial statements issued on or after May 15, 2002. This Statement eliminates
SFAS No. 4, as a result, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria of APB Opinion
No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. This Statement also eliminates SFAS No. 44,
which was established to provide accounting requirements for effects of
transition for provisions of the Motor Carrier Act of 1980. The deregulation of
intrastate operating rights and transition to the provisions of those laws being
complete has necessitated the rescission of SFAS No. 44. This Statement also
eliminates the need to have SFAS No. 64, which was an amendment to SFAS No. 4
and has been rescinded with this Statement. Lastly, this Statement amends SFAS
No. 13, requiring lease modifications that have economic effects similar to
sale-leaseback transactions to be accounted for in the same manner as
sale-leaseback transactions. The adoption of all the provisions of this
Statement did not have a material impact on the Company.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, effective for exit or disposal activities initiated
after December 31, 2002. This Statement nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue No. 94-3, a liability for exit costs was recognized at the
date of the entity's commitment to an exit plan. However, an entity's commitment
to a plan, by itself, does not create a present obligation to others that meets
the definition of a liability. Therefore this Statement eliminates the
definition and requirements of exit costs in Issue No. 94-3. This Statement also
establishes that fair value is the objective for initial measurement of the
liability. The Company is currently in the process of evaluating this Statement
and does not expect the adoption of this Statement to have a material impact on
its financial statements and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company operates manufacturing facilities and offices around the world and
uses fixed and floating rate debt to finance the Company's global operations. As
a result, the Company is subject to business risks inherent in non-U.S.
activities, including political and economic uncertainty, import and export
limitations and market risk related to changes in interest rates and foreign
currency exchange rates. The Company believes the political and economic risks
related to the Company's foreign operations are mitigated due to the stability
of the countries in which the Company's largest foreign operations are located.
Currently, the Company does not use derivative financial instruments such as
interest rate swaps or foreign currency forward exchange contracts to manage the
Company's market risks nor does the Company hold derivatives for trading
purposes.
The Company is exposed to market risk, including changes in interest rates. The
Company is subject to interest rate
13
risk on its variable rate revolving credit facilities, which consisted of
borrowings of $15.3 million at June 30, 2002. A 100 basis point increase in the
interest rate would have resulted in an increase in interest expense of
approximately $153,000 for the six months ended June 30, 2002.
The Company's primary currency rate exposures are related to foreign denominated
debt, intercompany debt and cash and short-term investments. A hypothetical 10%
change of the U.S. dollar relative to the currencies of the Company's foreign
operations would have a favorable/unfavorable impact on fair values of $2.4
million and income before taxes of $.1 million.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management, the amount of any
ultimate liability with respect to these actions will not materially affect our
financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Preformed Line Products Company held its annual meeting of shareholders on April
29, 2002 at its principal executive offices in Mayfield Village, Ohio. At the
meeting, the shareholders voted to elect certain persons to the Board of
Directors for terms expiring at the 2004 annual meeting of shareholders. The
individuals listed below were elected to the Company's Board of Directors, each
to hold office until the 2004 annual meeting or until his successor is elected
and qualified, or until his earlier resignation. The table below indicates the
votes for, votes withheld, as well as the abstentions and shares not voted for
each nominee.
Name Votes For Votes Withheld Abstention Shares not Voted
- -------------------------- ------------ ------------------ -------------- --------------------
John D. Drinko 5,318,505 30,496 - 588,029
Wilber C. Nordstrom 5,139,605 29,396 - 588,029
Jon R. Ruhlman 5,087,845 81,156 - 588,029
Randall M. Ruhlman 5,143,101 25,900 - 588,029
The following are the names of each other director whose term of office as a
director continued after the 2002 annual meeting of shareholders (in this case,
for terms expiring at the 2003 annual meeting of shareholders):
Robert G. Ruhlman
Frank B. Carr
Barbara P. Ruhlman
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None.
15
FORWARD-LOOKING STATEMENTS
Cautionary Statement for "Safe Harbor" Purposes Under The Private Securities
Litigation Reform Act of 1995
This Form 10-Q contains forward-looking statements regarding the Company's and
management's beliefs and expectations. As a general matter, forward-looking
statements are those focused upon future plans, objectives or performance (as
opposed to historical items) and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature. Such forward-looking statements are subject to uncertainties and factors
relating to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the Company's control. Such
uncertainties and factors could cause the Company's actual results to differ
materially from those matters expressed in or implied by such forward-looking
statements.
The following factors, among others, could affect the Company's future
performance and cause the Company's actual results to differ materially from
those expressed or implied by forward-looking statements made in this report:
- The overall demand for cable anchoring and control hardware for
electrical transmission and distribution lines on a worldwide
basis, which has a slow growth rate in mature markets such as the
United States, Canada, Japan and Western Europe;
- The effect on the Company's business resulting from economic
uncertainty within Asia-Pacific and Latin American regions;
- Technology developments that affect longer-term trends for
communication lines such as wireless communication;
- The Company's success at continuing to develop proprietary
technology to meet or exceed new industry performance standards
and individual customer expectations;
- The rate of progress in continuing to reduce costs and in
modifying the Company's cost structure to maintain and enhance the
Company's competitiveness;
- The Company's success in strengthening and retaining relationships
with the Company's customers, growing sales at targeted accounts
and expanding geographically;
- The extent to which the Company is successful in expanding the
Company's product lines into new areas for inside plant;
- The Company's ability to identify, complete and integrate
acquisitions for profitable growth;
- The potential impact of consolidation and deregulation among the
Company's suppliers, competitors and customers;
- The relative degree of competitive and customer price pressure on
the Company's products;
- The cost, availability and quality of raw materials required for
the manufacture of products;
- The effects of fluctuation in currency exchange rates upon the
Company's reported results from international operations, together
with non-currency risks of investing in and conducting significant
operations in foreign countries, including those relating to
political, social, economic and regulatory factors;
- Changes in significant government regulations affecting
environmental compliance;
16
- The Company's ability to continue to compete with larger companies
which have acquired a substantial number of the Company's former
competitors;
- The Company's ability to compete in the domestic data
communications market and its success at penetrating the
international data communication market;
- The Company's ability to recover sales in the telecommunications
markets; and
- The factors set forth under the caption "Risk Factors" in the
Company Form 10 Registration Statement filed with the Securities
and Exchange Commission (see Amendment No. 3 to Form 10 filed on
August 24, 2001). The Form 10 can be found on the Securities and
Exchange Commission's website at www.sec.gov.
17
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.
August 14, 2002 /s/ Robert G. Ruhlman
----------------------
Robert G. Ruhlman
President and Chief Executive Officer
(Principal Executive Officer)
August 14, 2002 /s / Eric R. Graef
-------------------
Eric R. Graef
Vice President - Finance and Treasurer
(Principal Accounting Officer)
18
EXHIBIT INDEX
[NONE]
19