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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 June 30, 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 August 13, 2004: 5,716,933.
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 16
Item 4. Controls and Procedures 16
PART II.
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibit and Reports on Form 8-K 17
SIGNATURES 21
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREFORMED LINE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
Thousands of dollars, except share data 2004 2003
----------- -----------
ASSETS
Cash and cash equivalents $ 23,493 $ 28,209
Accounts receivable, less allowance of $2,373 ($2,463 in 2003) 30,819 24,225
Inventories - net 30,763 31,113
Deferred income taxes 3,086 3,740
Prepaids and other 2,874 1,692
----------- -----------
TOTAL CURRENT ASSETS 91,035 88,979
Property and equipment - net 45,679 47,888
Investments in foreign joint venture 3,387 2,826
Deferred income taxes 335 434
Goodwill - net 2,029 1,929
Patents and other intangibles - net 3,434 3,624
Other 2,439 3,290
----------- -----------
TOTAL ASSETS $ 148,338 $ 148,970
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to banks $ 1,017 $ 1,019
Current portion of long-term debt 1,628 1,884
Trade accounts payable 10,568 7,648
Accrued compensation and amounts withheld from employees 4,646 3,749
Accrued expenses and other liabilities 4,032 4,356
Accrued profit-sharing and pension contributions 2,994 3,850
Dividends payable 1,143 1,163
Income taxes 1,248 1,650
----------- -----------
TOTAL CURRENT LIABILITIES 27,276 25,319
Long-term debt, less current portion 2,087 2,515
Deferred income taxes - long-term 130 97
Minimum pension liability -- 309
SHAREHOLDERS' EQUITY
Common shares - $2 par value, 15,000,000 shares authorized,
5,716,933 and 5,814,269 outstanding, net of
477,404 and 377,404 treasury shares at par 11,434 11,629
Paid in capital 503 472
Retained earnings 122,089 123,022
Accumulated other comprehensive loss (15,181) (14,393)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 118,845 120,730
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 148,338 $ 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 June 30, Six month periods ended June 30,
---------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ----------
Net sales $ 45,884 $ 39,972 $ 85,414 $ 75,181
Cost of products sold 30,785 28,743 58,245 52,285
---------- ---------- ---------- ----------
GROSS PROFIT 15,099 11,229 27,169 22,896
Costs and expenses
Selling 4,550 4,415 9,037 8,330
General and administrative 5,272 5,193 9,789 10,264
Research and engineering 1,457 1,288 2,934 2,661
Other operating expenses (income) - net 256 (447) 128 (331)
---------- ---------- ---------- ----------
11,535 10,449 21,888 20,924
Royalty income - net 321 364 747 712
---------- ---------- ---------- ----------
OPERATING INCOME 3,885 1,144 6,028 2,684
Other income (expense)
Equity in net income (loss) of foreign joint ventures (37) 17 21 216
Interest income 116 107 243 182
Interest expense (117) (130) (203) (238)
Other expense (37) (41) (73) (81)
---------- ---------- ---------- ----------
(75) (47) (12) 79
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 3,810 1,097 6,016 2,763
Income taxes 1,439 264 2,281 846
---------- ---------- ---------- ----------
NET INCOME $ 2,371 $ 833 $ 3,735 $ 1,917
========== ========== ========== ==========
Net income per share - basic $ 0.41 $ 0.14 $ 0.65 $ 0.33
========== ========== ========== ==========
Net income per share - diluted $ 0.41 $ 0.14 $ 0.64 $ 0.33
========== ========== ========== ==========
Cash dividends declared per share $ 0.20 $ 0.20 $ 0.40 $ 0.40
========== ========== ========== ==========
Average number of shares outstanding - basic 5,715 5,781 5,748 5,777
========== ========== ========== ==========
Average number of shares outstanding - diluted 5,764 5,781 5,802 5,778
========== ========== ========== ==========
See notes to consolidated financial statements.
4
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
SIX MONTH PERIODS ENDED JUNE 30,
--------------------------------
Thousands of dollars 2004 2003
---------- ----------
OPERATING ACTIVITIES
Net income $ 3,735 $ 1,917
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 3,579 4,251
Deferred income taxes 786 543
Cash surrender value of life insurance 274 (143)
Cumulative translation adjustment (40) (9)
Earnings of joint ventures (21) (216)
Changes in operating assets and liabilities:
Accounts receivable (7,744) (901)
Inventories 330 1,971
Trade accounts payables and accrued liabilities 2,768 1,530
Income taxes (414) 1,168
Other - net (378) (450)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,875 9,661
INVESTING ACTIVITIES
Capital expenditures (1,777) (2,211)
Business acquisitions (514) (447)
Proceeds from the sale of property and equipment 39 45
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (2,252) (2,613)
FINANCING ACTIVITIES
Increase (decrease) in notes payable to banks -- (234)
Proceeds from the issuance of debt 6 8,007
Payments of long-term debt (385) (10,979)
Dividends paid (2,307) (2,311)
Issuance (purchase) of common shares (2,546) 169
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (5,232) (5,348)
Effects of exchange rate changes on cash and cash equivalents (107) 673
---------- ----------
Increase (decrease) in cash and cash equivalents (4,716) 2,373
Cash and cash equivalents at beginning of year 28,209 11,629
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,493 $ 14,002
========== ==========
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 and six month periods ended June 30, 2004 are 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
June 30, December 31,
2004 2003
---------- ----------
Finished goods $ 11,423 $ 12,330
Work-in-process 1,697 1,414
Raw material 17,643 17,369
---------- ----------
$ 30,763 $ 31,113
========== ==========
COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three month periods ended June 30, Six month periods ended June 30,
---------------------------------- ------------------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income $ 2,371 $ 833 $ 3,735 $ 1,917
Other comprehensive income (loss):
Foreign currency adjustment (650) 3,234 (788) 4,348
--------- --------- --------- ---------
Comprehensive income $ 1,721 $ 4,067 $ 2,947 $ 6,265
========= ========= ========= =========
6
GUARANTEES
Product warranty balance at December 31, 2003 $ 202
Deductions (9)
-------
Product warranty balance at June 30, 2004 $ 193
=======
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 June 30, Six month periods ended June 30,
------------------------------------- -----------------------------------
2004 2003 2004 2003
----------------- ---------------- ---------------- ---------------
Net income, as reported $ 2,371 $ 833 $ 3,735 $ 1,917
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards 9 32 24 101
--------- --------- --------- ---------
Pro forma net income $ 2,362 $ 801 $ 3,711 $ 1,816
========= ========= ========= =========
Earnings per share:
Basic - as reported $ 0.41 $ 0.14 $ 0.65 $ 0.33
========= ========= ========= =========
Basic - pro forma $ 0.41 $ 0.14 $ 0.65 $ 0.31
========= ========= ========= =========
Diluted - as reported $ 0.41 $ 0.14 $ 0.64 $ 0.33
========= ========= ========= =========
Diluted - pro forma $ 0.41 $ 0.14 $ 0.64 $ 0.30
========= ========= ========= =========
7
NOTE D - PENSION PLANS
Net periodic benefit cost for the Company's domestic plan included the following
components:
Three month periods ended June 30, Six month periods ended June 30,
---------------------------------- --------------------------------
2004 2003 2004 2003
---------- --------- --------- --------
Service cost $ 144 $ 98 $ 280 $ 234
Interest cost 181 147 351 306
Expected return on plan assets (154) (115) (307) (230)
Recognized net actuarial loss 33 18 53 46
-------- -------- -------- --------
Net periodic benefit cost $ 204 $ 148 $ 377 $ 356
======== ======== ======== ========
As of June 30, 2004, $.4 million of contributions have been made. The Company
presently anticipates contributing an additional $.5 million to fund its pension
plan in 2004 for a total of $.9 million.
NOTE E - COMPUTATION OF EARNINGS PER SHARE
Three month periods ended June 30, Six month periods ended June 30,
---------------------------------- --------------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Numerator
Net income $ 2,371 $ 833 $ 3,735 $ 1,917
========= ========= ========= =========
Denominator
Determination of shares
Weighted average common shares outstanding 5,715 5,781 5,748 5,777
Dilutive effect - employee stock options 49 -- 54 1
--------- --------- --------- ---------
Diluted weighted average common shares outstanding 5,764 5,781 5,802 5,778
========= ========= ========= =========
Earnings per common share
Basic $ 0.41 $ 0.14 $ 0.65 $ 0.33
========= ========= ========= =========
Diluted $ 0.41 $ 0.14 $ 0.64 $ 0.33
========= ========= ========= =========
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 and six-month periods ended June 30, 2004 and 2003 was $.1 million and $.2
million, respectively. 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 June 30, 2004:
As of June 30, 2004
--------------------------------------------
Domestic Foreign Total
---------- ------- ----------
Amortized intangible assets, including effect of foreign currency translation
Gross carrying amount - patents and other intangibles $ 4,947 $ 74 $ 5,021
Accumulated amortization - patents and other intangibles (1,556) (31) (1,587)
---------- ------- ----------
Total $ 3,391 $ 43 $ 3,434
========== ======= ==========
8
The changes in the carrying amount of goodwill for the six-month period ended
June 30, 2004, by segment, is as follows:
Currency
December 31, 2003 Translation Additions June 30, 2004
----------------- ----------- --------- -------------
Domestic $ 648 $ -- $ -- $ 648
Foreign 1,281 (96) 196 1,381
--------- ------- ------- ---------
Total $ 1,929 $ (96) $ 196 $ 2,029
========= ======= ======= =========
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 tax credits for these
limited partnership investments. The Company's maximum potential exposure to
these partnerships is $.3 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 $3.4 million as of
June 30, 2004, which is equal to its recorded investment.
9
NOTE H - BUSINESS SEGMENTS
Three month periods ended June 30, Six month periods ended June 30,
--------------------------------- --------------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net sales
Domestic $ 26,832 $ 23,268 $ 50,221 $ 44,561
Foreign 19,052 16,704 35,193 30,620
---------- ---------- ---------- ----------
Total net sales $ 45,884 $ 39,972 $ 85,414 $ 75,181
========== ========== ========== ==========
Intersegment sales
Domestic $ 49 $ 40 $ 201 $ 61
Foreign 833 174 1,211 206
---------- ---------- ---------- ----------
Total intersegment sales $ 882 $ 214 $ 1,412 $ 267
========== ========== ========== ==========
Operating income (loss)
Domestic $ 1,883 $ (743) $ 3,064 $ (4,540)
Foreign 2,002 1,887 2,964 7,224
---------- ---------- ---------- ----------
3,885 1,144 6,028 2,684
Equity in net income (loss) of joint ventures (37) 17 21 216
Interest income
Domestic 18 -- 44 --
Foreign 98 107 199 182
---------- ---------- ---------- ----------
116 107 243 182
Interest expense
Domestic (9) (37) (19) (67)
Foreign (108) (93) (184) (171)
---------- ---------- ---------- ----------
(117) (130) (203) (238)
Other expense (37) (41) (73) (81)
---------- ---------- ---------- ----------
Income before income taxes $ 3,810 $ 1,097 $ 6,016 $ 2,763
========== ========== ========== ==========
June 30, December 31,
2004 2003
----------- ------------
Identifiable assets
Domestic $ 74,863 $ 77,007
Foreign 70,088 69,137
----------- ------------
144,951 146,144
Corporate 3,387 2,826
----------- -----------
Total assets $ 148,338 $ 148,970
=========== ===========
The domestic business segment operating loss for the six months ended June 30,
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. The favorable aggregate tax and per share effect was thirteen thousand
dollars, or less
10
than $.01 per share, for the three-month period and eleven thousand dollars, or
less than $.01 per share for the six-month period ended June 30, 2004, while the
favorable aggregate tax was twenty thousand dollars, or less than $.01 per
share, for the three-month period and fifty-four thousand dollars, or $.01 per
share, for the six-month period ended June 30, 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 in the third quarter of 2002. The
remaining $1.4 million of the charge that was included in Cost of products sold
and Costs and expenses primarily related 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 June 30, 2004. An analysis of the amount accrued in the Consolidated
Balance Sheet at June 30, 2004 is as follows:
December 31, 2003 Activity June 30, 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 $ -- $ (901) $ 9
Write-off of receivables, net of currency translation effect,
included in Costs and expenses 741 -- 9 750
Severance and other related expenses
included in Cost of products sold and cost and expenses 98 (35) (4) 59
--------- -------
$ 1,749 $ 818
========= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
For the quarter ended June 30, 2004 the Company's net sales increased 15% and
gross profit increased 34% compared to the same period in 2003. Net sales
increased primarily from volume increases in the America and European markets
coupled with the favorable impact of the conversion of local currencies to U.S.
dollars as a result of the continued weakness of the U.S. dollar compared to
most foreign currencies. The larger increase in the gross profit percentage is
primarily due to relatively stable fixed manufacturing costs being spread over
increased sales volume. The increase in gross profit and minimal increases in
costs and expenses resulted in an increase in net income of 185% when compared
to the quarter ended June 30, 2003.
For the six months ended June 30, 2004 the Company's net sales increased 14% and
gross profit increased 19% compared to the same period in 2003. Net sales and
gross profit increased for the same reasons as indicated for the quarter. The
increase in gross profit and minimal increases in costs and expenses resulted in
an increase in net income of 95% when compared to the same period in 2003.
11
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
For the three months ended June 30, 2004 consolidated net sales were $45.9
million, an increase of $5.9 million, or 15%, from the same period in 2003.
Domestic net sales increased $3.6 million, or 15%, and foreign sales increased
$2.3 million, or 14%. The increase in domestic net sales was due to volume
increases in the telecommunications and energy markets. The Company benefited
from increased spending by its energy customers who are believed to be
undertaking previously deferred projects. The Company also benefited from
telecommunication companies activities in expanding fiber to the home. The
Company believes that continued stability and strengthening of the U.S. economy
should allow spending on new construction and maintenance projects in the energy
and communications markets to outpace business levels of 2003. Foreign net sales
were favorably impacted by $1.1 million when converting local currencies to U.S.
dollars as a result of the continued weakness of the U.S. dollar compared to
most foreign currencies. Excluding the foreign currency impact, foreign sales
increased $1.2 million compared to the same period in 2003 primarily due to
stronger sales in the North American, South American and European markets. The
Company expects the improvement in 2004 in most of its foreign markets to
continue for the remainder of 2004.
Gross profit of $15.1 million for the three months ended June 30, 2004 was an
increase of $3.9 million, or 34%, compared to last year. The increase in gross
profit is primarily a result of higher net sales and relatively unchanged
manufacturing costs. Domestic gross profit increased $3.2 million compared to
the second quarter 2003 primarily as a result of higher net sales and relatively
stable manufacturing expenses compared to the same period in 2003 partially
offset by increased material cost for steel and aluminum. Foreign gross profit
increased $.7 million primarily due to the increase in net sales and a $.4
million favorable impact of converting foreign currencies to U.S. dollars. The
Company expects its raw material costs to continue to increase primarily for
steel wire and aluminum. However, the Company believes its future pricing will
enable it to recover most of the future increases in raw material costs.
Consolidated costs and expenses of $11.5 million for the three months ended
June 30, 2004 increased $1.1 million, or 10%, compared to the previous year as
summarized in the following table:
Three month periods ended June 30,
----------------------------------------------------------
thousands of dollars Increase Increase
2004 2003 (decrease) (decrease)
---------- ---------- ---------- ---------
Cost and expenses
Domestic:
Selling $ 2,944 $ 2,923 $ 21 1%
General and administrative 3,274 3,237 37 1
Research and engineering 1,035 885 150 17
Other operating (income) expense- net 201 (305) 506 NM*
---------- ---------- --------- ---------
7,454 6,740 714 11
---------- ---------- --------- ---------
Foreign:
Selling 1,606 1,492 114 8
General and administrative 1,998 1,956 42 2
Research and engineering 422 403 19 5
Other operating (income) expense- net 55 (142) 197 NM*
---------- ---------- --------- ---------
4,081 3,709 372 10
---------- ---------- --------- ---------
Total $ 11,535 $ 10,449 $ 1,086 10%
========== ========== ========= =========
*NM - Not meaningful
Domestic costs and expenses of $7.5 million for the three-month period ended
June 30, 2004 increased $.7 million, or 11%, compared to the same period in
2003. Selling expenses of $2.9 million and general and administrative of $3.3
million remained relatively unchanged compared to the same period in 2003.
Research and engineering costs of $1 million increased $.2 million primarily as
a result of an increase in employees and development resources. Other
12
operating expense increased $.5 million due to a $.4 million increase in the
costs related to officers' split dollar life insurance policies and a $.1
million increase in foreign currency transaction expense.
Foreign costs and expenses of $4.1 million for the three months ended June 30,
2004 increased $.4 million, or 10%, compared to the same period in 2003. The
weaker dollar unfavorably impacted costs and expenses by $.2 million when
foreign costs in local currency were translated to U.S. dollars. Foreign
selling, general and administrative and research and engineering costs net of
currency translation remained relatively unchanged compared to 2003. Other
operating income net of currency translation decreased $.2 million primarily due
to foreign currency transaction expense.
Royalty income for the quarter ended June 30, 2004 of $.3 million remained
relatively unchanged compared to 2003.
Operating income of $3.9 million for the quarter ended June 30, 2004 increased
$2.7 million, or 240%, compared to $1.1 million in the previous year. This
increase was a result of the $3.9 million increase in gross profit partially
offset by the $1.1 million increase in costs and expenses. Domestic operating
income increased $2.6 million, compared to the same period in 2003, primarily as
a result of the $3.2 million increase in gross profit on higher net sales
partially offset by the $.7 million increase in costs and expenses. Foreign
operating income of $2 million increased $.1 million compared to the same period
in 2003, primarily due to the $.7 million increase in gross profit partially
offset by the increase in cost and expenses of $.4 million and the $.2 million
increase in intercompany royalty expense.
Other expense for the three months ended June 30, 2004 remained relatively
unchanged from the same period in 2003.
Income taxes for the three months ended June 30, 2004 of $1.4 million increased
$1.2 million compared to the same period in 2003. The effective tax rate in 2004
was 37.8% compared to 24.1% in 2003 primarily as a result of a domestic pretax
loss in 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. The favorable aggregate tax and per share effect was thirteen
thousand dollars, or less than $.01 per share, for the three-month period ended
June 30, 2004, while the favorable aggregate tax was twenty thousand dollars, or
less than $.01 per share, for the three-month period ended June 30, 2003.
As a result of the preceding, net income for the three month period ended June
30, 2004 was $2.4 million, which represents an increase of $1.5 million, or
185%, compared to 2003.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
For the six months ended June 30, 2004 consolidated net sales were $85.4
million, an increase of $10.2 million, or 14%, from the same period in 2003.
Domestic net sales increased $5.6 million, or 13%, and foreign sales increased
$4.6 million, or 15%. The increase in domestic net sales was primarily due to
volume increases in the telecommunications and energy markets. Foreign net sales
were favorably impacted by $3.7 million when converting local currencies to U.S.
dollars as a result of the continued weakness of the U.S. dollar compared to
most foreign currencies. Excluding the foreign currency impact, foreign net
sales increased $.9 million when compared to the same period in 2003 as stronger
sales in the America and European markets were partially offset by lower sales
in the Asia Pacific market.
Gross profit of $27.2 million for the six months ended June 30, 2004 was an
increase of $4.3 million, or 19%, compared to the prior year. The increase in
gross profit is primarily a result of higher net sales while manufacturing costs
remained at relatively the same level as the previous year. Domestic gross
profit increased $2.8 million compared to the same period in 2003 primarily as a
result of higher domestic net sales and relatively stable manufacturing costs
partially offset by higher material costs for steel and aluminum. Foreign gross
profit increased $1.5 million primarily due to the increase in net sales and the
$1.2 million favorable impact of converting foreign currencies to U.S. dollars.
During the quarter ended March 31, 2003 the domestic business segment 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
business segment and as income for the foreign business segment. Consolidated
costs and expenses of $21.9 million for the six months ended June 30, 2004
increased $1 million, or 5%, compared to the previous year,
13
excluding intercompany debt forgiveness, as summarized in the following table:
Six month periods ended June 30,
--------------------------------------------------------------------
thousands of dollars Increase Increase
2004 2003 (decrease) (decrease)
---------- ---------- ---------- ----------
Cost and expenses
Domestic:
Selling $ 5,919 $ 5,599 $ 320 6%
General and administrative 5,915 6,537 (622) (10)
Research and engineering 2,065 1,910 155 8
Other operating (income) expense- net 122 (82) 204 NM*
---------- ---------- -------- --------
14,021 13,964 57 0
---------- ---------- -------- --------
Foreign:
Selling 3,118 2,731 387 14
General and administrative 3,874 3,727 147 4
Research and engineering 869 751 118 16
Other operating (income) expense- net 6 (249) 255 NM*
---------- ---------- -------- --------
7,867 6,960 907 13
---------- ---------- -------- --------
Total $ 21,888 $ 20,924 $ 964 5%
========== ========== ======== ========
*NM - Not meaningful
Domestic costs and expenses of $14 million for the six-month period ended June
30, 2004 increased $.1 million compared to the same period in 2003. Selling
expenses of $5.9 million increased $.3 million as a result of a $.2 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 $.6 million primarily due to a $.2 million reduction in bad debt
expense, a $.1 million reduction in professional fees and a $.3 million
reduction in employee and wage related expenses. Research and engineering costs
remained relatively unchanged from 2003. Other operating expense increased $.2
million due primarily to a $.2 million increase in the costs related to
officers' split dollar life insurance policies.
Foreign costs and expenses of $7.9 million for the six months ended June 30,
2004 increased $.9 million, or 13%, compared to the same period in 2003. The
weaker dollar unfavorably impacted costs and expenses by $.7 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 a reduction in administrative expenses incurred in
2003 related to the abandonment of the European data communication operations.
Research and engineering costs net of currency translation remained relatively
unchanged from the same period in 2003. Other operating income decreased $.3
million primarily due to the increase in foreign currency transaction expense.
Royalty income for the six months ended June 30, 2004 of $.7 million remained
relatively unchanged compared to 2003.
Operating income of $6 million for the six months ended June 30, 2004 increased
$3.3 million, or 125%, from $2.7 million in the previous year. This increase was
a result of the $4.3 million increase in gross profit partially offset by the $1
million increase in costs and expenses. Domestic operating income increased $7.6
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 $2.8 million
increase in gross profit and the increase in intercompany royalties of $.3
million. Foreign operating income of $3 million decreased $4.3 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 $.9 million, the
$.3 million increase in intercompany royalty expense partially offset by the
increase in gross profit of $1.5 million.
14
Other expense for the six months ended June 30, 2004 increased $.2 million from
the same period in 2003 as a result of the decrease in equity earnings from
foreign joint ventures.
Income taxes for the six months ended June 30, 2004 of $2.3 million increased
$1.4 million compared to the same period in 2003. The effective tax rate in 2004
was 37.9% compared to 30.6% in 2003 as a result of tax refunds received in the
first quarter of 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. The favorable aggregate tax and per share effect was
eleven thousand dollars, or less than $.01 per share for the six-month period
ended June 30, 2004, while the favorable aggregate tax was fifty-four thousand
dollars, or $.01 per share, for the six-month period ended June 30, 2003.
As a result of the preceding, net income for the six months ended June 30, 2004
was $3.7 million which represents an increase of $1.8 million, or 95%, compared
to 2003.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.9 million for the first six
months of 2004, a decrease of $6.8 million when compared to the same period in
2003. An increase in net income of $1.8 million and an increase in non-cash
expenses of $.6 million was offset by an increase in working capital of $8.5
million, primarily accounts receivable as a result of higher net sales, when
compared to 2003.
Net cash used in investing activities of $2.2 million represents a decrease of
$.4 million when compared to 2003. This decrease is primarily a result of lower
capital expenditures in 2004 compared to 2003. On April 2, 2004, the Company
acquired the assets of Union Electric Manufacturing Co. LTD, located in Bangkok,
Thailand for $.5 million. This acquisition did not have a material impact on the
financial position or results of operations of the Company. The Company is
continually analyzing potential acquisition candidates and business alternatives
but has no commitments that would materially impact the Company's operations or
results.
Cash used in financing activities was $5.2 million compared to $5.3 million in
the previous year. During 2004 approximately $2.6 million in cash was used to
repurchase 100,000 common shares, which was offset by the Company receiving $.1
million for the exercise of stock options. Approximately $.4 million of cash was
used for debt repayments during 2004 compared to $3.2 million used for debt
repayments in 2003. The Company's current portion of debt outstanding was
approximately $1.4 million greater at June 30, 2003 when compared to June 30,
2004.
The Company's current ratio was 3.3 to 1 at June 30, 2004 compared to 3.5 to 1
at December 31, 2003. Working capital of $63.8 million remains consistent with
December 31, 2003 of $63.6 million. At June 30, 2004, the Company's unused
balance under its credit facility was $20 million and its bank debt to equity
percentage was 4%. The revolving credit agreement contains, among other
provisions, requirements for maintaining levels of working capital, net worth,
and profitability. At June 30, 2004 the Company was in compliance with these
covenants. 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
financial resources. If the Company were to incur significant additional
indebtedness it expects to be able to continue to meet liquidity needs under the
credit facilities but at an increased cost for interest and commitment fees. The
Company does not believe it would increase its debt to a level that would have a
material adverse 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
15
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 tax credits for these
limited partnership investments. The Company's maximum potential exposure to
these partnerships is $.3 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 $3.4 million as of
June 30, 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 June
30, 2004 whose fair values and carrying values are approximately $1.3 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 expense of less than
$.1 million for the six-month period ended June 30, 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 $4.7 million at June 30, 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 six-month period ended
June 30, 2004.
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 $2.1 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 Chief Executive Officer (CEO) and Chief
Financial Officer (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 June 30, 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 June 30, 2004. There
were no changes in the Company's internal control over financial reporting
during the quarter ended June 30, 2004 that materially affected or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
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.
16
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
26, 2004 at its principal executive offices in Mayfield Village, Ohio. At the
meeting, the shareholders voted to fix the number of directors at eight with two
classes composed of four members each, both serving a staggered term; to elect
one person to the Board of Directors for a term expiring at the 2005 annual
meeting of the shareholders and to re-elect certain persons to the Board of
Directors for terms expiring at the 2006 annual meeting of shareholders. The
individuals listed below were elected to the Company's Board of Directors, each
to hold office until the designated 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 the proposal to fix the number of directors at eight and the
election of the five nominees.
Term Expiration Votes For Votes Withheld Abstention Shares not Voted
----------------- ------------ ----------------- ------------ -----------------
Proposal to fix number of directors at eight 4,919,867 121,274 1,880 671,412
John P. O'Brien 2005 5,002,384 40,637 - 671,412
John D. Drinko 2006 4,943,838 99,183 - 671,412
Wilber C. Nordstrom 2006 4,972,667 70,354 - 671,412
Jon R. Ruhlman* 2006 4,974,525 68,496 - 671,412
Randall M. Ruhlman 2006 4,941,483 101,538 - 671,412
* Jon R. Ruhlman passed away in May 2004.
The following are the names of each other director whose term of office as a
director continued after the 2004 annual meeting of shareholders (in this case,
for terms expiring at the 2006 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
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.
17
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 April 7, 2004, the Company filed a Current Report Form 8-K for a
change in registrant's certifying accountant dismissing
PricewaterhouseCoopers LLP as its independent accountant.
On April 26, 2004, the Company filed a Current Report Form 8-K for a
press release announcing first quarter of 2004 earnings.
On April 28, 2004, the Company filed a Current Report Form 8-K for a
change in registrant's certifying accountant announcing the engagement
of Deloitte & Touche LLP as its independent accountant.
18
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;
- The Company's ability to continue to compete with larger companies who
have acquired a substantial
19
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 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.
20
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 13, 2004 /s/ Robert G. Ruhlman
---------------------
Robert G. Ruhlman
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
August 13, 2004 /s/ Eric R. Graef
-----------------
Eric R. Graef
Vice President - Finance and Treasurer
(Principal Accounting Officer)
21
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.
22