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UNITED STATES
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 March 31, 2004 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 of (I.R.S. Employer Identification No.)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of common shares outstanding as of May 11, 2004: 5,714,433.
TABLE OF CONTENTS
PAGE
----
PART I.
Item 1. Financial Statements....................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 14
Item 4. Controls and Procedures.................................................... 15
PART II.
Item 1. Legal Proceedings.......................................................... 15
Item 2. Changes in Securities and Use of Proceeds.................................. 15
Item 3. Defaults Upon Senior Securities............................................ 15
Item 4. Submission of Matters to a Vote of Security Holders........................ 15
Item 5. Other Information.......................................................... 15
Item 6. Exhibit and Reports on Form 8-K............................................ 15
SIGNATURES................................................................................... 19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREFORMED LINE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
Thousands of dollars, except share data 2004 2003
---------- ----------
ASSETS
Cash and cash equivalents $ 24,603 $ 28,209
Accounts receivable, less allowance of $2,551 ($2,463 in 2003) 28,428 24,225
Inventories - net 31,529 31,113
Deferred income taxes 3,308 3,740
Prepaids and other 1,722 1,692
---------- ----------
TOTAL CURRENT ASSETS 89,590 88,979
Property and equipment - net 46,964 47,888
Investments in foreign joint venture 2,884 2,826
Deferred income taxes 401 434
Goodwill - net 1,922 1,929
Patents and other intangibles - net 3,529 3,624
Other 3,214 3,290
---------- ----------
TOTAL ASSETS $ 148,504 $ 148,970
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to banks $ 982 $ 1,019
Current portion of long-term debt 1,872 1,884
Trade accounts payable 10,454 7,648
Accrued compensation and amounts withheld from employees 4,444 3,749
Accrued expenses and other liabilities 3,912 4,356
Accrued profit-sharing and pension contributions 4,201 3,850
Dividends payable 1,143 1,163
Income taxes 650 1,650
---------- ----------
TOTAL CURRENT LIABILITIES 27,658 25,319
Long-term debt, less current portion 2,504 2,515
Deferred income taxes - long-term 111 97
Minimum pension liability -- 309
SHAREHOLDERS' EQUITY
Common shares - $2 par value, 15,000,000 shares authorized,
5,714,433 and 5,814,269 outstanding, net of
477,404 and 377,404 treasury shares at par 11,429 11,629
Paid in capital 472 472
Retained earnings 120,861 123,022
Accumulated other comprehensive loss (14,531) (14,393)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 118,231 120,730
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 148,504 $ 148,970
========== ==========
See notes to consolidated financial statements.
3
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
Thousands of dollars, except per share data Three month periods
ended March 31,
---------------------------
2004 2003
---------- ----------
Net sales $ 39,530 $ 35,209
Cost of products sold 27,460 23,542
---------- ----------
GROSS PROFIT 12,070 11,667
Costs and expenses
Selling 4,487 3,915
General and administrative 4,517 5,071
Research and engineering 1,477 1,373
Other operating expenses (income) - net (128) 116
---------- ----------
10,353 10,475
Royalty income - net 426 348
---------- ----------
OPERATING INCOME 2,143 1,540
Other income (expense)
Equity in net income of foreign joint ventures 58 199
Interest income 127 75
Interest expense (86) (108)
Other expense (36) (40)
---------- ----------
63 126
---------- ----------
INCOME BEFORE INCOME TAXES 2,206 1,666
Income taxes 842 582
---------- ----------
NET INCOME $ 1,364 $ 1,084
========== ==========
Net income per share - basic $ 0.24 $ 0.19
========== ==========
Net income per share - diluted $ 0.23 $ 0.19
========== ==========
Cash dividends declared per share $ 0.20 $ 0.20
========== ==========
Average number of shares outstanding - basic 5,781 5,772
========== ==========
Average number of shares outstanding - diluted 5,841 5,777
========== ==========
See notes to consolidated financial statements.
4
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
THREE MONTH PERIODS
ENDED MARCH 31,
---------------------------
Thousands of dollars 2004 2003
---------- ----------
OPERATING ACTIVITIES
Net income $ 1,364 $ 1,084
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 2,774 2,244
Deferred income taxes 479 570
Cash surrender value of life insurance -- 141
Cumulative translation adjustment (57) (64)
Earnings of joint ventures (58) (199)
Changes in operating assets and liabilities:
Accounts receivable (4,787) (601)
Inventories 23 392
Trade accounts payable and accrued liabilities 3,172 1,508
Income taxes (951) 146
Other - net 99 (198)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,058 5,023
INVESTING ACTIVITIES
Capital expenditures (909) (1,372)
Business acquisitions -- (34)
Proceeds from the sale of property and equipment 35 --
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (874) (1,406)
FINANCING ACTIVITIES
Increase (decrease) in notes payable to banks (36) (250)
Proceeds from the issuance of debt 2 3,616
Payments of long-term debt -- (4,224)
Dividends paid (1,163) (1,155)
Purchase of common shares (2,582) --
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (3,779) (2,013)
Effects of exchange rate changes on cash and cash equivalents (1,011) 92
---------- ----------
Increase (decrease) in cash and cash equivalents (3,606) 1,696
Cash and cash equivalents at beginning of year 28,209 11,629
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,603 $ 13,325
========== ==========
See notes to consolidated financial statements.
5
PREFORMED LINE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Tables in thousands, except per share data
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 cash flows for the interim periods. Operating results for the
three-month period ended March 31, 2004 is not necessarily indicative of the
results to be expected for the year ending December 31, 2004. For further
information, refer to the consolidated financial statements and notes to
consolidated financial statements included in the Company's Form 10-K for 2003
filed with the Securities and Exchange Commission.
The consolidated balance sheet at December 31, 2003 has been derived from the
audited consolidated 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 prior year's financial statements have been reclassified
to conform to the presentation of 2004.
NOTE B - SUPPLEMENTAL INFORMATION
INVENTORIES
March 31, December 31,
2004 2003
---------- ----------
Finished products $ 12,268 $ 12,330
Work-in-process 1,836 1,414
Raw materials 17,425 17,369
---------- ----------
$ 31,529 $ 31,113
========== ==========
COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three month periods
ended March 31,
---------------------------
2004 2003
---------- ----------
Net income $ 1,364 $ 1,084
Other comprehensive income (loss):
Foreign currency translation adjustment (138) 1,114
---------- ----------
Total comprehensive income $ 1,226 $ 2,198
========== ==========
6
GUARANTEES
Product warranty balance at December 31, 2003 $ 202
Deductions (11)
----------
Product warranty balance at March 31, 2004 $ 191
==========
The Company has certain indemnification clauses in its credit facility
agreements, which are considered to be guarantees under the provisions of FIN
45, Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others. The Company has not recorded any
amounts related to such guarantees, as the fair values are immaterial. The
maximum exposure under these guarantees cannot be determined by the Company
because it is contingent upon certain future changes in governmental regulations
and tax laws that could occur but cannot be predicted or anticipated.
NOTE C - STOCK OPTIONS
As permitted under SFAS No. 123, Accounting for Stock-Based Compensation, the
Company applies the intrinsic value based method prescribed in APB Opinion No.
25, Accounting for Stock Issued to Employees, to account for stock options
granted to employees to purchase common shares. Under this method, compensation
expense is measured as the excess, if any, of the market price at the date of
grant over the exercise price of the options. No compensation expense has been
recorded because the exercise price is equal to market value at the date of
grant.
SFAS 123 requires pro forma disclosure of the effect on net income and earnings
per share when applying the fair value method of valuing stock-based
compensation. For purposes of this pro forma disclosure, the estimated fair
value of the options is recognized ratably over the vesting period.
Three month periods
ended March 31,
--------------------------
2004 2003
---------- ----------
Net income, as reported $ 1,364 $ 1,084
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards 15 68
---------- ----------
Pro forma net income $ 1,349 $ 1,016
========== ==========
Earnings per share:
Basic - as reported $ 0.24 $ 0.19
========== ==========
Basic - pro forma $ 0.23 $ 0.18
========== ==========
Diluted - as reported $ 0.23 $ 0.19
========== ==========
Diluted - pro forma $ 0.23 $ 0.18
========== ==========
7
NOTE D - PENSION PLANS
Net periodic benefit cost for the Company's domestic plan included the following
components:
Three month periods
ended March 31,
---------------------------
2004 2003
---------- ----------
Service cost $ 136 $ 136
Interest cost 170 159
Expected return on plan assets (153) (115)
Recognized net actuarial loss 20 28
---------- ----------
Net periodic benefit cost $ 173 $ 208
========== ==========
The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $1 million to its pension plan
in 2004. The first quarterly contribution was made on April 14, 2004 in the
amount of $.3 million. Although the Company presently anticipates contributing
$1 million to fund its pension plan in 2004, this amount may decrease because of
the Pension Funding Equity Act of 2004, signed into law in April 2004.
NOTE E - COMPUTATION OF EARNINGS PER SHARE
Three month periods
ended March 31,
--------------------------
2004 2003
---------- ----------
Numerator
Net income $ 1,364 $ 1,084
========== ==========
Denominator
Determination of shares
Weighted average common shares outstanding 5,781 5,772
Dilutive effect - employee stock options 60 5
---------- ----------
Diluted weighted average common shares outstanding 5,841 5,777
========== ==========
Earnings per common share
Basic $ 0.24 $ 0.19
========== ==========
Diluted $ 0.23 $ 0.19
========== ==========
NOTE F - GOODWILL AND OTHER INTANGIBLES
The Company performed its annual impairment test for goodwill pursuant to SFAS
No. 142, Goodwill and Intangible Assets, as of January 2004 and had determined
that no adjustment to the carrying value of goodwill was required. The Company's
only intangible asset with an indefinite life is goodwill. The aggregate
amortization expense for other intangibles with finite lives for each of the
three-month periods ended March 31, 2004 and 2003 was $.1 million. Amortization
expense is estimated to be $.4 million annually for 2004 and 2005 and $.3
million for 2006, 2007 and 2008. The following table sets forth the carrying
value and accumulated amortization of intangibles by segment at March 31, 2004:
As of March 31, 2004
--------------------------------------------
Domestic Foreign Total
---------- ---------- ----------
Amortized intangible assets, including effect of foreign currency translation
Gross carrying amount - patents and other intangibles $ 4,947 $ 75 $ 5,022
Accumulated amortization - patents and other intangibles (1,464) (29) (1,493)
---------- ---------- ----------
Total $ 3,483 $ 46 $ 3,529
========== ========== ==========
8
The changes in the carrying amount of goodwill for the three-month period ended
March 31, 2004, by segment, is as follows:
December 31, Currency March 31,
2003 Translation 2004
------------ ------------ ------------
Domestic $ 648 $ -- $ 648
Foreign 1,281 (7) 1,274
------------ ------------ ------------
Total $ 1,929 $ (7) $ 1,922
============ ============ ============
NOTE G - NEW ACCOUNTING PRONOUNCEMENTS
During January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities an interpretation of ARB No. 51, Consolidated
Financial Statements (FIN 46). FIN 46 clarifies the accounting for certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB released a revised
version of FIN 46 (FIN 46R). The revision slightly modified the variable
interest model contained in FIN 46. However, FIN 46R adopted certain scope
exceptions and clarified definitions and calculations underlying the model. FIN
46R required the application of either FIN 46 or FIN 46R for Special Purpose
Entities ("SPE") in the annual reporting period ending after December 15, 2003.
The application of FIN 46R for non-SPEs was deferred until the quarter ending
March 31, 2004. The Company has adopted the applicable disclosure provisions of
FIN 46 and FIN 46R in the financial statements.
The Company has invested in qualified affordable housing projects as a limited
partner. The Company receives affordable housing federal and state tax credits
for these limited partnership investments. The Company's maximum potential
exposure to these partnerships is $.4 million, consisting of the limited
partnership investments plus unfunded commitments. The Company has determined
its investment should not be consolidated in accordance with FIN 46R.
The Company has an equity investment in a Japanese joint venture. The Company
has determined that the investment should not be consolidated in accordance with
FIN 46R. The maximum exposure of the Company's investment is $2.9 million as of
March 31, 2004, which is equal to its recorded investment.
9
NOTE H - BUSINESS SEGMENTS
Three month periods
ended March 31,
---------------------------
2004 2003
---------- ----------
Net sales
Domestic $ 23,389 $ 21,293
Foreign 16,141 13,916
---------- ----------
Total net sales $ 39,530 $ 35,209
========== ==========
Intersegment sales
Domestic $ 152 $ 21
Foreign 378 32
---------- ----------
Total intersegment sales $ 530 $ 53
========== ==========
Operating income
Domestic $ 1,181 $ (3,797)
Foreign 962 5,337
---------- ----------
2,143 1,540
Equity in net income of joint ventures 58 199
Interest income
Domestic 26 --
Foreign 101 75
---------- ----------
127 75
Interest expense
Domestic (10) (30)
Foreign (76) (78)
---------- ----------
(86) (108)
Other expense (36) (40)
---------- ----------
Income before income taxes $ 2,206 $ 1,666
========== ==========
March 31, December 31,
2004 2003
---------- ----------
Identifiable assets
Domestic $ 75,742 $ 77,007
Foreign 69,878 69,137
---------- ----------
145,620 146,144
Corporate 2,884 2,826
---------- ----------
Total assets $ 148,504 $ 148,970
========== ==========
The domestic business segment operating loss for the quarter ended March 31,
2003 includes an expense for forgiveness of intercompany receivables related to
the abandoned European data communications operations in the amount of $4.5
million from the foreign business segment, while the foreign business segment
includes a similar amount as income related to this transaction.
NOTE I - INCOME TAXES
In accordance with the applicable tax laws in China, the Company is entitled to
a preferential tax rate of a 50% reduction for the three years beginning in
2003. There was no favorable aggregate tax as there was a pretax loss for
10
the three-month period ended March 2004. The favorable aggregate tax was
$33,000, or $.01 per share, for the three-month period ended March 31, 2003.
NOTE J - BUSINESS ABANDONMENT CHARGES
During the third quarter of 2002, the Company recorded a charge to write-off
certain assets and to record severance payments related to closing its data
communications operations in Europe. This entailed winding down a manufacturing
operation, closing five sales offices, terminating leases and reducing personnel
by approximately 130. This action was taken as a result of the continuing
decline in the global telecommunication and data communication markets and after
failing to reach agreement on an acceptable selling price on product supplied to
a significant foreign customer. The Company incurred a pre-tax charge of $4.7
million for these activities in the third quarter of 2002. Approximately $3.3
million of the charge was related to asset write-downs, of which $2.1 million of
inventory write-offs were recorded in Cost of products sold and $1.2 million of
write-offs related to receivables was included in Costs and expenses on the
Statements of Consolidated Operations. The remaining $1.4 million of the charge,
included in Cost of products sold and Costs and expenses, primarily relates to
cash outlays for employee severance cost, cost of exiting leased facilities and
termination of other contractual obligations. The cash outlays of the later
category are substantially complete as of March 31, 2004. An analysis of the
amount accrued in the Consolidated Balance Sheet at March 31, 2004 is as
follows:
December 31, March 31,
2003 Activity 2004
Accrual Cash and Accrual
Balance Payments Adjustments Balance
------- -------- ----------- -------
Write-off of inventories, net of currency translation effect,
included in Cost of products sold $ 910 $ -- $ (893) $ 17
Write-off of receivables, net of currency translation effect,
included in Costs and expenses 741 -- 23 764
Severance and other related expenses
included in Cost of products sold and cost and expenses 98 (22) (3) 73
---------- ----------
$ 1,749 $ 854
========== ==========
NOTE K - SUBSEQUENT EVENT
On April 2, 2004, the Company acquired the assets of Union Electric
Manufacturing Co. LTD, (UEM) located in Bangkok, Thailand for $.5 million. The
company manufactures and supplies power fittings to the power industry. The
results of operations of this acquisition will be included in the Company's
results of operations from the acquisition date beginning in the second quarter
ending June 30, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
The Company's net sales increased 12% and gross profit increased 3% in the first
quarter of 2004 compared to the same period in 2003. Net sales increased
primarily from volume increases in the domestic market coupled with the
favorable impact of the conversion of local currencies to U.S. dollars as a
result of the continued weakening of the U.S. dollar compared to most foreign
currencies. The increase in gross profit combined with relatively flat costs and
expenses resulted in an increase in net income of 26%, or five cents a basic
share, when compared to the same period in 2003.
On April 2, 2004, the Company acquired the assets of Union Electric
Manufacturing Co. LTD, (UEM) located in
11
Bangkok, Thailand for $.5 million. UEM manufactures and supplies power fittings
to the power industry. The Company does not anticipate this acquisition to have
an immediate significant impact on its financial statements.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
For the three months ended March 31, 2004 consolidated net sales were $39.5
million, an increase of $4.3 million, or 12%, from the same period in 2003.
Domestic net sales increased $2.1 million, or 10%, and foreign sales increased
$2.2 million, or 16%. The increase in domestic net sales was due to volume
increases in the telecommunications and energy markets. The Company believes the
domestic telecommunications and energy markets have stabilized and believes that
the recent upward trend in increased domestic sales activity will continue for
the remainder of 2004 but not necessarily as high as a double digit percentage
increase. Foreign net sales were favorably impacted by $2.5 million when
converted to U.S. dollars as a result of the weaker U.S. dollar compared to most
foreign currencies when compared to the first quarter 2003 conversion rates.
Excluding the effect of currency conversion, foreign sales remained relatively
unchanged when compared to the same period in 2003 as stronger sales in the
America and European markets were offset by lower sales in the Asia Pacific
market. Although the Company expects most of its foreign markets to strengthen
in the near term, severe price competition within China is expected to
substantially offset these sales gains.
Gross profit of $12.1 million for the three months ended March 31, 2004 was an
increase of $.4 million, or 3%, compared to the prior year. The increase in
gross profit is primarily a result of higher net sales partially offset by
higher domestic manufacturing overhead costs included in cost of sales. Domestic
gross profit decreased $.4 million compared to the first quarter 2003 primarily
as a result of higher domestic manufacturing overhead costs included in costs of
sales compared to the same period in 2003 partially offset by increased net
sales. Foreign gross profit increased $.8 million primarily due to the favorable
impact of converting foreign currencies to U.S. dollars.
During the quarter ended March 31, 2003 the domestic operations forgave foreign
intercompany debt of $4.5 million related to the abandoned European data
communications operations. This amount was included as expense for the domestic
operations and as income for the foreign operations. Consolidated costs and
expenses of $10.4 million for the three months ended March 31, 2004 decreased
$.1 million, or 1%, compared to the previous year, excluding intercompany debt
forgiveness, as summarized in the following table:
Three month periods ended March 31,
-------------------------------------------------------------
thousands of dollars %
Increase Increase
2004 2003 (decrease) (decrease)
---------- ---------- ---------- ----------
Cost and expenses
Domestic:
Selling $ 2,975 $ 2,676 $ 299 11%
General and administrative 2,641 3,300 (659) (20)
Research and engineering 1,030 1,025 5 0
Other operating (income) expense-net (79) 223 (302) (135)
---------- ---------- ---------- ----------
6,567 7,224 (657) (9)
---------- ---------- ---------- ----------
Foreign:
Selling 1,512 1,239 273 22
General and administrative 1,876 1,771 105 6
Research and engineering 447 348 99 28
Other operating income-net (49) (107) 58 (54)
---------- ---------- ---------- ----------
3,786 3,251 535 16
---------- ---------- ---------- ----------
Total $ 10,353 $ 10,475 $ (122) (1)%
========== ========== ========== ==========
Domestic costs and expenses of $6.6 million for the three-month period ended
March 31, 2004 decreased $.7 million, or 9%, compared to the same period in
2003. Selling expenses of $3 million increased $.3 million as a result of a $.2
12
million increase in commission expense on increased net sales and a $.1 million
increase in advertising and sales promotion expense. General and administrative
expenses decreased $.7 million primarily due to a $.2 million reduction in bad
debt expense, a $.2 million reduction in professional fees and a $.3 million
reduction in employee severance and wage related expenses. Research and
engineering expenses remained relatively unchanged from 2003. Other operating
income increased $.3 million due to a $.2 million decrease in the costs related
to officers' life insurance and a $.1 million decrease in amortization.
Foreign cost and expenses of $3.8 million for the three months ended March 31,
2004 increased $.5 million, or 16%, compared to the same period in 2003. The
weaker dollar unfavorably impacted costs and expenses by $.5 million when
foreign costs in local currency were translated to U.S. dollars. Foreign selling
expense net of currency translation increased $.1 million due to an increase in
employment. General and administrative expense net of currency translation
decreased $.2 million due to the reduction in administrative expenses incurred
in 2003 related to the abandonment of the European data communication
operations. Research and engineering expenses remained relatively unchanged from
the same period in 2003. Other operating income net of currency translation
decreased $.1 million primarily due to the increase in foreign currency
transaction expense.
Royalty income for the quarter ended March 31, 2004 of $.4 million increased $.1
million, or 18%, compared to 2003 as a result of higher sales by licensees.
Operating income of $2.1 million for the quarter ended March 31, 2004 increased
$.6 million, or 39%, compared to $1.5 million in the previous year. This
increase was a result of the $.4 million increase in gross profit, the $.1
million decrease in costs and expenses and the $.1 million increase in royalty
income. Domestic operating income increased $5 million, compared to the same
period in 2003, primarily as a result of the forgiveness of intercompany debt of
$4.5 million in 2003, the $.7 million decrease in costs and expenses, the
increase of $.1 million in royalty income partially offset by the $.4 million
decrease in gross profit. Foreign operating income of $1 million decreased $4.4
million, compared to the same period in 2003, primarily due to the $4.5 million
forgiveness of intercompany debt in 2003, the increase in cost and expenses of
$.5 million partially offset by the increase in gross profit of $.8 million.
Other income of $.1 million for the three months ended March 31, 2004 remained
relatively unchanged from the same period in 2003 as the increase in interest
income offset the decrease in equity earnings from foreign joint ventures.
Income taxes for the three months ended March 31, 2004 of $.8 million increased
$.3 million, or 45%, compared to the same period in 2003. The effective tax rate
in 2004 was 38.2% compared to 34.9% in 2003 as a result of tax refunds received
in the first quarter 2003. In accordance with the applicable tax laws in China,
the Company is entitled to a preferential tax rate of a 50% reduction for the
three years beginning in 2003. There was no favorable aggregate tax as there was
a pretax loss for the three-month period ended March 2004. The favorable
aggregate tax was $33,000, or $.01 per share, for the three-month period ended
March 31, 2003.
As a result of the preceeding, net income for the three month period ended March
31, 2004 was $1.4 million which represents an increase of $.3 million, or 26%,
compared to 2003.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.1 million for the first three
months of 2004, a decrease of $3 million when compared to the same period in
2003. An increase in working capital of $3.7 million was partially offset by a
$.3 million increase in net income and an increase in non-cash expenses of $.4
million in 2004, when compared to 2003.
Net cash used in investing activities of $.9 million represents a decrease of
$.5 million when compared to 2003. This decrease is primarily a result of lower
capital expenditures in 2004 compared to 2003. The Company is continually
analyzing potential acquisition candidates and business alternatives but has no
commitments that would materially impact the operations of the business. On
April 2, 2004, the Company acquired the assets of Union Electric Manufacturing
Co. LTD, located in Bangkok, Thailand for $.5 million. This acquisition will be
reflected in the second quarter 2004 results of operations; however, the impact
is not expected to be significant.
13
Cash used in financing activities was $3.8 million compared to $2 million in the
previous year. This was primarily a result of the repurchase of 100,000 common
shares in 2004.
The Company's current ratio was 3.2 to 1 at March 31, 2004 compared to 3.5 to 1
at December 31, 2003. Working capital of $61.9 million remains consistent with
December 31, 2003 of $63.6 million. At March 31, 2004, the Company's unused
balance under its credit facility was $20 million and its bank debt to equity
percentage was 5%. The Company believes its future operating cash flows will be
more than sufficient to cover debt repayments, other contractual obligations,
capital expenditures and dividends. In addition, the Company believes its
existing cash position, together with its untapped borrowing capacity, provides
substantial additional financial resources. If the Company were to incur
significant indebtedness it expects to be able to continue to meet liquidity
needs under the credit facilities. The Company does not believe any such
increased debt would have a material impact upon results of operations or
financial condition.
NEW ACCOUNTING PRONOUNCEMENTS
During January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities an interpretation of ARB No. 51, Consolidated
Financial Statements (FIN 46). FIN 46 clarifies the accounting for certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB released a revised
version of FIN 46 (FIN 46R). The revision slightly modified the variable
interest model contained in FIN 46. However, FIN 46R adopted certain scope
exceptions and clarified definitions and calculations underlying the model. FIN
46R required the application of either FIN 46 or FIN 46R for Special Purpose
Entities ("SPE") in the annual reporting period ending after December 15, 2003.
The application of FIN 46R for non-SPEs was deferred until the quarter ending
March 31, 2004. The Company has adopted the applicable disclosure provisions of
FIN 46 and FIN 46R in the financial statements.
The Company has invested in qualified affordable housing projects as a limited
partner. The Company receives affordable housing federal and state tax credits
for these limited partnership investments. The Company's maximum potential
exposure to these partnerships is $.4 million, consisting of the limited
partnership investments plus unfunded commitments. The Company has determined
its investment should not be consolidated in accordance with FIN 46R.
The Company has an equity investment in a Japanese joint venture. The Company
has determined that the investment should not be consolidated in accordance with
FIN 46R. The maximum exposure of the Company's investment is $2.9 million as of
March 31, 2004, which is equal to its recorded investment.
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.
The Company has foreign currency forward exchange contracts outstanding at March
31, 2004 whose fair values and carrying values are approximately $1.8 million
and mature in less than one year. A 10% change in the foreign currency rates
would have resulted in a favorable/unfavorable impact on foreign currency
translation expense of less than $.2 million for the three-month period ended
March 31, 2004. The Company does not hold derivatives for trading purposes.
The Company is exposed to market risk, including changes in interest rates. The
Company is subject to interest rate risk on its variable rate revolving credit
facilities, which consisted of borrowings of $5.4 million at March 31, 2004. A
100 basis point increase in the interest rate would have resulted in an increase
in interest expense of approximately $.1 million for the three-month period
ended March 31, 2004.
14
The Company's primary currency rate exposures are related to foreign denominated
debt, intercompany debt, forward exchange contracts and cash and short-term
investments. A hypothetical 10% change in currency rates would have a
favorable/unfavorable impact on fair values of $2 million and on income before
tax of less than $.1 million.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the CEO and CFO, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Securities and
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2004. Based on the
evaluation, the Company's management, including the CEO and CFO, concluded that
the Company's disclosure controls and procedures were effective as of March 31,
2004.
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
The information required by Item 703 of Regulation S-K related to the purchase
of shares of the issuer's equity securities is included in the following table:
COMPANY PURCHASES OF EQUITY SECURITIES
Total Number of Shares Maximum Number of
Total Number Purchased as Part of Shares that may yet be
of Shares Average Price Publicly Announced Purchased under the
Period Purchased Paid per Share Plans or Programs Plans or Programs
- ------ --------- -------------- ----------------- -----------------
March 2004 100,000 $25.82 100,000 -
On December 19, 2003, the Company announced the Board of Directors authorized a
plan to repurchase up to 100,000 of shares of Preformed Line Products common
shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits
31.1 Certifications of the Principal Executive Officer, Robert G.
Ruhlman, pursuant to Section 302 of the
15
Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certifications of the Principal Financial Officer, Eric R. Graef,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
32.1 Certification of the Principal Executive Officer, Robert G. Ruhlman,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
furnished.
32.2 Certification of the Principal Accounting Officer, Eric R. Graef,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
furnished.
(b) Reports on Form 8-K
On February 25, 2004, the Company filed a Current Report Form 8-K for a
press release announcing fourth quarter of 2004 earnings.
16
FORWARD LOOKING STATEMENTS
Cautionary Statement for "Safe Harbor" Purposes Under The Private Securities
Litigation Reform Act of 1995
This Form 10-Q and other documents we file with the Securities and Exchange
Commission contain 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, Japan and Western Europe;
- The effect on the Company's business resulting from economic
uncertainty within 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 line into new areas for inside plant;
- The Company's ability to identify, complete and integrate
acquisitions for profitable growth;
- The potential impact of consolidation, deregulation and bankruptcy
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;
17
- The Company's ability to continue to compete with larger companies
who have acquired a substantial number of the Company's former
competitors;
- The Company's ability to compete in the domestic data communications
market;
- The Company's ability to recover sales in the telecommunication
markets;
- The Company's ability to have continued success in emerging markets
such as China;
- The Company's ability to internally develop new products;
- The effect on the Company's business resulting from global health
risks;
- The Company's successful wind-down of the European data
communications operations including the successful collection of
accounts receivable; and
- Other factors disclosed previously and from time to time in the
Company's filings with the Securities and Exchange Commission. These
filings can be found on the Securities and Exchange Commission's
website at www.sec.gov.
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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.
May 11, 2004 /s/ Robert G. Ruhlman
---------------------
Robert G. Ruhlman
President and Chief Executive Officer
(Principal Executive Officer)
May 11, 2004 /s/ Eric R. Graef
-----------------
Eric R. Graef
Vice President - Finance and Treasurer
(Principal Accounting Officer)
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EXHIBIT INDEX
31.1 Certifications of the Principal Executive Officer, Robert G. Ruhlman,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certifications of the Principal Financial Officer, Eric R. Graef, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1 Certification of the Principal Executive Officer, Robert G. Ruhlman,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished.
32.2 Certification of the Principal Accounting Officer, Eric R. Graef, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, furnished.
20