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 September 30, 2001 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 Incorporation or Organization) Identification No.) 660 Beta Drive Mayfield Village, Ohio 44143 - ----------------------------------------------- ---------------------------- (Address of Principal Executive Office) (Zip Code) (440) 461-5200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of common shares, without par value, outstanding as of November 14, 2001: 5,757,030.
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PREFORMED LINE PRODUCTS COMPANY INDEX TO FINANCIAL STATEMENTS PREFORMED LINE PRODUCTS COMPANY: Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000...............................................3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2001 and 2000 (unaudited).......................4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 (unaudited).......................5 Notes to Consolidated Financial Statements...................................6
PREFORMED LINE PRODUCTS COMPANY CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 <TABLE> <CAPTION> September 30, December 31, (In thousands of dollars, except share and per share data) 2001 2000 ------------- ------------- (Unaudited) <S> <C> <C> ASSETS Cash and cash equivalents $ 7,362 $ 9,470 Accounts receivables, less allowance of $1,020 ($910 in 2000) 33,874 30,839 Inventories, net 40,492 43,648 Deferred income taxes - current 2,528 2,501 Prepaids and other 4,410 1,325 ------------- ------------- TOTAL CURRENT ASSETS 88,666 87,783 Property and equipment - net 55,154 58,743 Investments in foreign joint ventures 9,816 10,148 Deferred income taxes 1,396 1,323 Goodwill, patents and other intangibles - net 7,524 8,077 Other 4,678 4,537 ------------- ------------- TOTAL ASSETS $ 167,234 $ 170,611 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable to banks $ 2,651 $ 1,704 Trade accounts payable 10,352 10,289 Accrued compensation and amounts withheld from employees 3,760 3,292 Accrued expenses and other liabilities 3,880 4,762 Accrued profit-sharing and pension contributions 3,772 2,811 Dividends payable 1,151 865 Income taxes 1,460 1,976 Current portion of long-term debt 1,034 545 ------------- ------------- TOTAL CURRENT LIABILITIES 28,060 26,244 Long-term debt, less current portion 18,254 20,160 Deferred income taxes 426 307 Minority interest 45 44 SHAREHOLDERS' EQUITY Common stock - $2 par value, 15,000,000 shares authorized, 5,757,030 and 5,768,086 issued and outstanding net of 398,618 and 381,962 treasury shares at par 11,514 11,536 Retained earnings 128,846 127,994 Accumulated foreign currency translation adjustment (19,911) (15,674) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 120,449 123,856 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 167,234 $ 170,611 ============= ============= </TABLE> See notes to consolidated financial statements. 3
PREFORMED LINE PRODUCTS COMPANY CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, -------------------------------- -------------------------------- (Dollars and shares in thousands, except per share data) 2001 2000 2001 2000 ------------ ------------ ------------ ------------ (Unaudited) <S> <C> <C> <C> <C> Net sales $ 49,127 $ 53,353 $ 152,063 $ 158,161 Cost of products sold 35,609 37,251 106,354 110,250 ------------ ------------ ------------ ------------ GROSS PROFIT 13,518 16,102 45,709 47,911 Costs and expenses Selling 6,196 5,462 18,170 15,015 General and administrative 4,993 5,129 15,959 15,573 Research and engineering 1,498 1,083 4,617 4,382 Other operating expenses 995 231 2,010 901 ------------ ------------ ------------ ------------ 13,682 11,905 40,756 35,871 ------------ ------------ ------------ ------------ Royalty income - net 414 553 1,614 1,836 OPERATING INCOME 250 4,750 6,567 13,876 Other income (expense) Equity in net income of foreign joint ventures 253 -- 353 335 Interest income 67 108 612 515 Interest expense (336) (313) (1,157) (1,178) Other (expense) income - net (50) (131) (150) (347) ------------ ------------ ------------ ------------ (66) (336) (342) (675) ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 184 4,414 6,225 13,201 Income taxes 26 1,735 2,076 4,594 ------------ ------------ ------------ ------------ NET INCOME $ 158 $ 2,679 $ 4,149 $ 8,607 ============ ============ ============ ============ Net income per share - basic $ 0.03 $ 0.46 $ 0.72 $ 1.48 ============ ============ ============ ============ Net income per share - diluted $ 0.03 $ 0.46 $ 0.72 $ 1.48 ============ ============ ============ ============ Cash dividends declared per share $ 0.20 $ 0.15 $ 0.55 $ 0.45 ============ ============ ============ ============ Average number of shares outstanding 5,757 5,796 5,754 5,796 ============ ============ ============ ============ </TABLE> See notes to consolidated financial statements. 4
PREFORMED LINE PRODUCTS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 <TABLE> <CAPTION> (In thousands of dollars) NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2001 2000 ------------ ------------ (Unaudited) <S> <C> <C> OPERATING ACTIVITIES Net income $ 4,149 $ 8,607 Adjustment to reconcile net income to net cash (used in) provided by operations Depreciation and amortization 7,453 7,591 Noncash realignment charges 2,668 -- Equity in earnings of joint ventures - net of dividends received 267 8 Changes in operating assets and liabilities Receivables (3,035) (6,332) Inventories 1,168 2,943 Trade payables and accruals 896 6,151 Income taxes (2,070) 279 Other - net (3,249) (2,527) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 8,247 16,720 INVESTING ACTIVITIES Capital expenditures (4,463) (11,549) Business acquisitions (761) (5,724) Proceeds from the sale of property and equipment 81 1,887 ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (5,143) (15,386) FINANCING ACTIVITIES Increase (decrease) in notes payable to banks 947 (1,739) Proceeds from the issuance of long-term debt 12,800 21,758 Payments of long-term debt (14,217) (16,500) Dividends paid (2,880) (2,616) Purchase of treasury stock (156) (855) ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,506) 48 Effects of exchange rate changes on cash and cash equivalents (1,706) (372) ------------ ------------ Increase (decrease) in cash and cash equivalents (2,108) 1,010 Cash and cash equivalents at beginning of year 9,470 6,907 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,362 $ 7,917 ============ ============ </TABLE> See notes to consolidated financial statements. 5
PREFORMED LINE PRODUCTS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 NOTE A - BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. However, in the opinion of management, these consolidated financial statements contain all estimates and adjustments required to fairly present the financial position, results of operations and changes in cash flows for the interim periods. Operating results for the three and nine-month periods ended September 30, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes included in the Company's registration statement on Form 10 filed with the Securities and Exchange Commission. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date, 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 financial statements have been reclassified to conform to the presentation of 2001. NOTE B - SUPPLEMENTAL INFORMATION Inventories <TABLE> <CAPTION> (Dollars in thousands) September 30, 2001 December 31, 2000 ------------------ ------------------ <S> <C> <C> Finished goods $ 18,595 $ 17,882 Work-in- process 1,709 1,592 Raw material 20,188 24,174 ------------------ ------------------ $ 40,492 $ 43,648 ================== ================== </TABLE> Comprehensive income The components of comprehensive income are as follows: <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, -------------------------------- -------------------------------- (Dollars in thousands) 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net income $ 158 $ 2,679 $ 4,149 $ 8,607 Other comprehensive income: Foreign currency adjustment - net (1,140) (1,377) (4,237) (3,060) ------------ ------------ ------------ ------------ Comprehensive (loss) income $ (982) $ 1,302 $ (88) $ 5,547 ============ ============ ============ ============ </TABLE> 6
NOTE C - COMPUTATION OF EARNINGS PER SHARE <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, -------------------------------- -------------------------------- (Dollars and shares in thousands, except per share data) 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Numerator Net income $ 158 $ 2,679 $ 4,149 $ 8,607 ============ ============ ============ ============ Denominator Determination of shares Weighted average common shares outstanding 5,757 5,796 5,754 5,796 Dilutive effect - employee stock options 22 -- 8 -- ------------ ------------ ------------ ------------ Diluted weighted average common shares outstanding 5,779 5,796 5,762 5,796 ============ ============ ============ ============ Earnings per common share Basic $ 0.03 $ 0.46 $ 0.72 $ 1.48 Diluted $ 0.03 $ 0.46 $ 0.72 $ 1.48 </TABLE> NOTE D - NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. On January 1, 2001 the Company adopted this Statement along with its amendments SFAS No. 137 and SFAS No. 138. The impact from the adoption of these Statements was not material to the Company. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangibles will continue to be amortized over their useful lives. The Company will adopt the statements on accounting for goodwill and other intangible assets as of January 1, 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company is currently in the process of determining what the effect of these tests will be on the earnings and financial position of the Company. In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002. The Statement requires the current accrual of a legal obligation resulting from a contractual obligation, government mandate, or implied reliance on performance by a third party, for costs relating to retirements of long-lived assets that result from the acquisition, construction, development and/or normal operation of the asset. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period which it is incurred, if it can be reasonably estimated, and a corresponding amount be included as a capitalized cost of the related asset. The capitalized amount will be depreciated over the assets' useful life. The Statement also notes that long-lived assets with an undetermined future life would not require the recognition of a liability until sufficient information is available. The Company does not expect the adoption of this Statement to have a material impact on its financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events. 7
This Statement was issued to establish a single accounting model to address the financial accounting and reporting for the impairment on disposal of long-lived assets. Although this Statement retains many of the provisions of FAS 121, there are a number of changes including the removal of goodwill from its scope and the establishment of a primary asset approach to determine cash flow estimation. This Statement also retains the basic provision of APB Opinion No. 30. However, for long-lived assets held for sale, this Statement introduces the "components of an entity" (rather than a segment of a business) approach to determine discontinued operations. A "component of an entity" has clearly distinguishable operating and financial reporting practices. Criteria have been established to qualify an asset for held for sale status, including the asset being able to be sold immediately, and the asset transfer should take place within one year. Assets reclassified from held for sale to held for use should be adjusted for depreciation (amortization) expense that ceased when the asset was initially considered held for sale, and the asset value must be measured at the lower of carrying amount (after adjusting for depreciation) or the fair value of asset when reclassified as held and used. The Company has not completed its evaluation of the impact of the adoption of this Statement. NOTE E - BUSINESS SEGMENTS <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, -------------------------------- -------------------------------- (Dollars in thousands) 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net sales Domestic $ 27,939 $ 31,766 $ 87,463 $ 96,608 Foreign 21,188 21,587 64,600 61,553 ------------ ------------ ------------ ------------ Total net sales 49,127 53,353 152,063 158,161 ============ ============ ============ ============ Intersegment sales Domestic $ 1,164 $ 964 $ 3,962 $ 3,131 Foreign 60 179 445 495 ------------ ------------ ------------ ------------ Total intersegment sales 1,224 1,143 4,407 3,626 ============ ============ ============ ============ Operating income Domestic $ (1,763) $ 1,776 $ (298) $ 4,865 Foreign 2,013 2,974 6,865 9,011 ------------ ------------ ------------ ------------ 250 4,750 6,567 13,876 Equity in net income of joint ventures 253 -- 353 335 Interest income Domestic 5 7 251 56 Foreign 62 101 361 459 ------------ ------------ ------------ ------------ 67 108 612 515 Interest expense Domestic 225 208 818 864 Foreign 111 105 339 314 ------------ ------------ ------------ ------------ 336 313 1,157 1,178 Other (expense) income - net (50) (131) (150) (347) ------------ ------------ ------------ ------------ Income before income taxes $ 184 $ 4,414 $ 6,225 $ 13,201 ============ ============ ============ ============ Identifiable assets Domestic $ 92,072 $ 100,134 $ 92,072 $ 100,134 Foreign 65,346 61,584 65,346 61,584 ------------ ------------ ------------ ------------ 157,418 161,718 157,418 161,718 Corporate 9,816 9,243 9,816 9,243 ------------ ------------ ------------ ------------ Total assets $ 167,234 $ 170,961 $ 167,234 $ 170,961 ============ ============ ============ ============ </TABLE> 8
NOTE F - BUSINESS REALIGNMENT CHARGES During the third quarter ended September 30, 2001, the Company recorded business realignment charges to write off assets and to record severance payments related to its data communications product line. These charges included abandoning a three-year effort to expand into the market for local area network hubs and media converters and re-evaluating the strategy for penetrating the Asia-Pacific market with its data communication products. The Company incurred a pre-tax charge of $3.1 million for these activities. An analysis of the business realignment charges recorded in the Consolidated Statements of Income as of September 30, 2001 and the amount accrued in the Consolidated Balance Sheet at September 30, 2001 are as follows: <TABLE> <CAPTION> (Dollars in thousands) Business Ending Realignment Cash Accrual Description Charges Payments Balance - -------------------------------------------------------------------- ------------ ------------ ------------ <S> <C> <C> <C> Write-off of inventories included in Cost of Products Sold $ 1,988 $ -- $ -- Severance and other related expenses included in Costs and expenses 453 254 199 Impaired assets and goodwill included in Costs and expenses 680 -- -- ------------ ------------ ------------ Pre-tax charge $ 3,121 $ 254 $ 199 ============ ============ ============ </TABLE> Impaired assets and goodwill include the write-off of goodwill recorded at the time certain assets were acquired and related to the abandoned product offerings for the local area network hubs and media converter markets. Severance and other related costs include the reduction of approximately 20 employees. The severance and other related costs include payment for severance, earned vacation, costs of exiting leased office space and other contractual obligations. 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the Company's results of operations for the three and nine-month periods ended September 30, 2001 and 2000: <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, -------------------------------- -------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ (In thousands of dollars, except per share data) <S> <C> <C> <C> <C> NET SALES AND INCOME Net sales $ 49,127 $ 53,353 $ 152,063 $ 158,161 Operating income 250 4,750 6,567 13,876 Income before income taxes 184 4,414 6,225 13,201 Net income 158 2,679 4,149 8,607 Net income to net sales 0.3% 5.0% 2.7% 5.4% PER BASIC SHARE AMOUNTS Net income $ 0.03 $ 0.46 $ 0.72 $ 1.48 Dividends declared $ 0.20 $ 0.15 $ 0.55 $ 0.45 </TABLE> BUSINESS REALIGNMENT CHARGES TO OPERATIONS During the third quarter ended September 30, 2001, the Company recorded business realignment charges to write off assets and to record severance payments related to its data communications product line. These charges included abandoning a three-year effort to expand into the market for local area network hubs and media converters and re-evaluating the strategy for penetrating the Asia-Pacific market with its data communication products. As a result of these two actions, the Company recorded a pre-tax charge of $3.1 million ($2.0 million after tax) consisting of: $2.0 million of inventory write-offs (included in Cost of products sold); $.7 million write down of assets (included in Other operating expenses); and $.4 million in severance payments, lease cancellations and related expenses (included in Selling and general administrative expenses). The latter category involves the outlay of cash of which approximately one-half has been disbursed as of September 30, 2001. The Company anticipates annualized savings of approximately $1.0 million from these realignment activities. The following table sets forth the Company's summarized results of operations for the three and nine-month periods ended September 30, 2001 deducting the business realignment charges to arrive at amounts that are on a comparable basis to the reported results for 2000. 10
(In thousands of dollars, except per share data) <TABLE> <CAPTION> Three months ended September 30, ------------------------------------------------------------------------ 2001 2000 ---------------------------------------------------- ------------- Business Reported Realignment Comparable Reported Results Charges Results Results ---------------------------------------------------- ------------- NET SALES AND INCOME <S> <C> <C> <C> <C> Net sales $ 49,127 $ -- $ 49,127 $ 53,353 Gross profit 13,518 1,988 15,506 16,102 Costs and expenses 13,682 1,133 12,549 11,905 Royalty income - net 414 -- 414 553 Operating income 250 3,121 3,371 4,750 Other income (expense) (66) -- (66) (336) Income before income tax 184 3,121 3,305 4,414 Income tax 26 1,092 1,118 1,735 Net income 158 2,029 2,187 2,679 PER SHARE AMOUNTS, BASIC AND DILUTED Net income $ 0.03 $ 0.35 $ 0.38 $ 0.46 </TABLE> <TABLE> <CAPTION> Nine months ended September 30, ------------------------------------------------------------------------ 2001 2000 ---------------------------------------------------- ------------- Business Reported Realignment Comparable Reported Results Charges Results Results ---------------------------------------------------- ------------- NET SALES AND INCOME <S> <C> <C> <C> <C> Net sales $ 152,063 $ -- $ 152,063 $ 158,161 Gross profit 45,709 1,988 47,697 47,911 Costs and expenses 40,756 1,133 39,623 35,871 Royalty income - net 1,614 -- 1,614 1,836 Operating income 6,567 3,121 9,688 13,876 Other income (expense) (342) -- (342) (675) Income before income tax 6,225 3,121 9,346 13,201 Income tax 2,076 1,092 3,168 4,594 Net income 4,149 2,029 6,178 8,607 PER SHARE AMOUNTS, BASIC AND DILUTED Net income $ 0.72 $ 0.35 $ 1.07 $ 1.48 </TABLE> 11
The following discussion of the financial results is based on 2001 comparable results and 2000 reported results for the three and nine-month periods ended September 30 and excludes the business realignment charges described in the above table. THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Consolidated net sales were $49.1 million for the three months ended September 30, 2001, a decrease of $4.2 million, or 8%, from the prior year's period. Domestic sales decreased $3.8 million, or 12%, and international sales decreased $.4 million, or 2%. Continued softness in the market for the Company's data communication products accounted for 60% of the decrease in domestic sales. Volume decreases in the Company's formed wire products accounted for the remaining domestic decrease. The Company expects domestic sales for the fourth quarter of 2001 to remain at about the same level as the third quarter. Foreign sales increased in native currency but experienced an unfavorable currency impact of $2.2 million when foreign net sales were converted to U.S. dollars. This resulted from a stronger U.S. dollar against most foreign currencies compared to the three-month period last year. Excluding this unfavorable currency impact, international sales would have increased $1.8 million. One-third of this increase was attributable to the launching of data communication products in the European market. The remaining increase is a result of volume increases in certain areas of the world. Gross profit of $15.5 million for the three months ended September 30, 2001 was a decrease of $.6 million, or 4%, compared to the prior year. The resulting Gross profit as a percent of sales was 31.6% for 2001 compared to 30.2% last year. This improvement in gross profit as a percentage of sales was the result of a more favorable product mix primarily within the domestic market. The stronger dollar resulted in $.8 million lower gross profit on foreign sales. Excluding the impact of the foreign currency translation, gross profit would have improved $.2 million on a $2.0 million decrease in sales. Costs and expenses of $12.5 million were $.7 million, or 6%, higher than last year. The stronger dollar favorably impacted Costs and expenses by $.5 million. The majority of the increase in Costs and expenses was related to the incremental costs incurred in marketing data communication products globally. The Company expects Costs and expenses to continue to be higher in the fourth quarter compared to the prior year due to the continued cost of selling and marketing data communication products in the international markets. Operating income of $3.4 million for the three months ended September 30, 2001 decreased $1.4 million, or 29%, compared to $4.8 million in the previous year. This decrease was the result of the $.6 million decrease in Gross profit, the $.7 million increase in Costs and expenses coupled with the $.1 million reduction in Royalty income - net. Other expense of $.1 million for the three months ended September 30, 2001 decreased by $.3 million compared to 2000 as the result of a $.3 million increase in Equity in net income of foreign joint ventures. Income before income taxes for the three months ended September 30, 2001 of $3.3 million was $1.1 million, or 25%, lower than 2000. The decrease in Income before income taxes was due to the $.6 million decrease in Gross profit, the increase of $.7 million in Costs and expenses, the reduction in Royalty income - net of $.1 million and the reduction in Other expense of $.3 million. Income taxes for the three months ended September 30, 2001 were $1.1 million compared to $1.7 million for 2000. The decrease in 2001 is due to lower income as discussed above. As a result of the above, net income was $2.2 million for the three-month period ended September 30, 2001 which represented a decrease of $.5 million, or 18%, from the prior year. Earnings per share for the third quarter of 2001 were $.38, excluding the business realignment charges, compared to $.46 in 2000. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Consolidated net sales for the nine months ended September 30, 2001 were $152.1 million, a $6.1 million or a 4% decrease from last year. Domestic net sales were down $9.1 million, or 9%, compared to the prior year and foreign net sales were $3.0 million, or 5%, higher than last year. Continued softness in the market for the Company's 12
data communication products accounted for 67% of the decrease in domestic sales and decreases in volume in the Company's formed wire products accounted for the remaining decrease in the domestic market. Demand remains soft as the result of the current business climate compounded by the Company's customers' continuing struggle with deregulation and consolidation. The stronger U.S. dollar had an unfavorable impact of $7.0 million on foreign net sales. Excluding this unfavorable currency impact, foreign sales would have increased $10.0, million or 16%. This increase was primarily attributable to higher volume, including the results of launching the data communication products in the European market in 2001. Gross profit of $47.7 million for the nine months ended September 30, 2001 was a decrease of $.2 million compared to the prior year. The resulting gross profit as a percent of sales was 31.4% compared to 30.3% last year. This improvement in gross profit as a percentage of sales was primarily the result of favorable domestic product mix and the exclusion of the results of the foundry business, which had a negative gross profit in 2000 and was sold in the first quarter of 2000. The stronger dollar resulted in an unfavorable $2.2 million impact on gross profit when the Company's foreign results were converted to U.S. dollars. Excluding this unfavorable currency impact, gross profit would have increased $2.0 million. This improvement was the result of slightly higher sales, after considering the unfavorable $7.0 million currency impact on sales, and a more favorable product mix. Costs and expenses of $39.6 million were $3.8 million, or 10%, higher than last year. The stronger dollar resulted in a decrease in Costs and expenses of $1.4 million when foreign costs and expenses were converted to U.S. dollars. Excluding the impact of foreign currency, Costs and expenses increased $5.2 million. Approximately one-half of this increase was related to incremental costs incurred in marketing data communication products globally. The remaining amount of the increase resulted primarily from higher expenses to support the increase in foreign sales. Operating income for 2001 of $9.7 million for the nine months ended September 30, 2001 decreased $4.2 million, or 30%, compared to 2000. This decrease was the result of lower gross profit of $.2 million, higher Costs and expenses of $3.8 million and lower Royalty income - net of $.2 million. Other expense of $.3 million decreased $.3 million from other expense of $.6 million in 2000. The $.3 million decrease was due to a $.1 million increase in interest income coupled with a $.2 million reduction in the amortization of qualified affordable housing project limited partnerships. Income before income taxes for the nine months ended September 30, 2001 of $9.3 million decreased $3.9 million, or 29%, from last year. The decrease in Income before income taxes was due to the $.2 million decrease in Gross profit, the increase of $3.8 million in Costs and expenses, lower Royalty income - net of $.2 million and the $.3 million decrease in Other expense. Taxes for the nine months ended September 30, 2001 were $3.2 million compared to $4.6 million in 2000 as a result of lower Income before income taxes. As a result of the above, Net income for the first nine months of 2001 was $6.2 million which represented a decrease of $2.4 million, or 28%, from the prior year. Basic and diluted earnings per share for the nine months ended September 30, 2001 were $1.07, excluding the business realignment charges, compared to $1.48 for same period last year. WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES Net cash provided from operating activities was $8.2 million for the first nine months of 2001, a decrease of $8.5 million when compared to 2000. This decrease was primarily the result of lower net income of $4.5 million and a $4.0 million increase in working capital. Net cash used in investing activities of $5.1 million for 2001 represents a reduction of $10.2 million from the comparable period in 2000. This decrease is a result of lower capital expenditures in 2001 of $7.1 million, and lower costs for business acquisitions, net of proceeds from the sale of equipment, of $3.1 million. The Company continues to analyze potential acquisition candidates and business opportunities but has no commitments that would materially impact the operations of the Company. Cash used in financing activities was $3.5 million more than cash provided by financing activities in the previous year. This was primarily the result of reduced Proceeds from the issuance of long-term debt in 2001 compared to 2000. 13
The preceding activity combined with an unfavorable foreign currency impact of $1.7 million resulted in a decrease in cash and cash equivalents of $2.1 million for the nine-month period ended September 30, 2001 compared to a $1.0 million increase in 2000. The Company's financial position remains strong with a current ratio of 3.2:1 at September 30, 2001 compared to 3.3:1 at December 31, 2000. Working capital of $61 million represents a decrease of $.9 million over December 31, 2000. At September 30, 2001, the Company's unused balance under its credit facility was $25.5 million and its long-term debt to equity ratio was 15.2%. The Company's credit facility matures on December 31, 2002 so at year-end this facility may become a current liability. As a result, assuming the Company's outstanding balance at September 30, 2001, the current ratio would be 2.1:1 and the long-term debt to equity ratio would be 3.1%. The Company is evaluating its long-term borrowing requirements and may either extend its existing facility or pursue a long-term loan. The Company believes that its existing credit facility, internally generated funds and the ability to obtain additional financing, if desired, is sufficient to meet the Company's needs for the foreseeable future. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangibles will continue to be amortized over their useful lives. The Company will adopt the statements on accounting for goodwill and other intangible assets as of January 1, 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company is currently in the process of determining what the effect of these tests will be on the earnings and financial position of the Company. In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002. The Statement requires the current accrual of a legal obligation resulting from a contractual obligation, government mandate, or implied reliance on performance by a third party, for costs relating to retirements of long-lived assets that result from the acquisition, construction, development and /or normal operation of the asset. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period which it is incurred, if it can be reasonably estimated, and a corresponding amount be included as a capitalized cost of the related asset. The capitalized amount will be depreciated over the assets' useful life. The Statement also notes that long-lived assets with an undetermined future life would not require the recognition of a liability until sufficient information is available. The Company does not expect the adoption of this Statement to have a material impact on its financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. This Statement supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events. This Statement was issued to establish a single accounting model to address the financial accounting and reporting for the impairment on disposal of long-lived assets. Although this Statement retains many of the provisions of FAS 121, there are a number of changes including the removal of goodwill from its scope and the establishment of a primary asset approach to determine cash flow estimation. This Statement also retains the basic provision of APB Opinion No. 30. However, for long-lived assets held for sale, this Statement introduces the "components of an entity" (rather than a segment of a business) approach to determine discontinued operations. A "component of an entity" has clearly distinguishable operating and financial reporting practices. Criteria have been established to qualify an asset for held for sale status, including the asset being able to be sold immediately, and the asset transfer should take place within one year. Assets reclassified from held for sale to held for use should be adjusted for depreciation (amortization) expense that ceased when the asset was initially considered held for sale, and the asset value must be measured at the lower of carrying amount (after adjusting for depreciation) or the fair value of asset when reclassified as held and used. The Company has not completed its evaluation of the impact of the adoption of this Statement. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company operates manufacturing facilities and offices around the world and uses fixed and floating rate debt to finance the Company's global operations. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations and market risk related to changes in interest rates and foreign currency exchange rates. The Company believes the political and economic risks related to the Company's foreign operations are mitigated due to the stability of the countries in which the Company's largest foreign operations are located. Currently, the Company does not use derivative financial instruments such as interest rate swaps or foreign currency forward exchange contracts to manage the Company's market risks nor does the Company hold derivatives for trading purposes. The Company is exposed to market risk, including changes in interest rates. The Company is subject to interest rate risk on its variable rate revolving credit facilities, which consisted of borrowings of $21.9 million at September 30, 2001. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $165,000 for the nine months ended September 30, 2001. The Company's primary currency rate exposures are to foreign denominated debt, intercompany debt and cash and short-term investments. The calculation of potential loss in fair values is based on an immediate change in the U.S. dollar equivalent balances of the Company's currency exposures due to a 10% shift in exchange rates. The potential loss in income before tax is based on the change over a one-year period resulting from an immediate 10% change in currency exchange rates. A hypothetical 10% change in currency exchange rates would have a favorable/unfavorable impact on fair values of $2.0 million and income before tax of $.5 million. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Our Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect our financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 15
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Exhibits 3.1 (a) Amended and Restated Articles of Incorporation of Preformed Line Products Company 3.2 (a) Amended and Restated Code of Regulations of Preformed Line Products Company 4 (a) Description of Specimen Stock Certificate (a) Incorporated by reference to Preformed's Registration Statement on Form 10 (File No. 0-31164) (the "Form 10") filed on April 30, 2001. Each of the above exhibits has the same exhibit number in the Form 10. (b) Reports on Form 8-K None. 16
FORWARD LOOKING STATEMENTS Cautionary Statement for "Safe Harbor" Purposes Under The Private Securities Litigation Reform Act of 1995 This Form 10-Q contains forward-looking statements regarding the Company's and management's beliefs and expectations. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance (as opposed to historical items) and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the Company's control. Such uncertainties and factors could cause the Company's actual results to differ materially from those matters expressed in or implied by such forward-looking statements. The Company believes that the following factors, among others, could affect the Company's future performance and cause the Company's actual results to differ materially from those expressed or implied by forward-looking statements made in this report: - The overall demand for cable anchoring and control hardware for electrical transmission and distribution lines on a worldwide basis, which has a slow growth rate in mature markets such as the United States, Canada, Japan and Western Europe; - The effect on the Company's business resulting from economic uncertainty within Asia-Pacific and Latin American regions; - Technology developments that affect longer-term trends for communication lines such as wireless communication; - The Company's success at continuing to develop proprietary technology to meet or exceed new industry performance standards and individual customer expectations; - The rate of progress in continuing to reduce costs and in modifying the Company's cost structure to maintain and enhance the Company's competitiveness; - The Company's success in strengthening and retaining relationships with the Company's customers, growing sales at targeted accounts and expanding geographically; - The extent to which the Company is successful in expanding the Company's product lines into new areas for inside the plant; - The Company's ability to identify, complete and integrate acquisitions for profitable growth; - The potential impact of consolidation and deregulation among the Company's suppliers, competitors and customers; - The relative degree of competitive and customer price pressure on the Company's products; - The cost, availability and quality of raw materials required for the manufacture of products; - The effects of fluctuation in currency exchange rates upon the Company's reported results from international operations, together with non-currency risks of investing in and conducting significant operations in foreign countries, including those relating to political, social, economic and regulatory factors; - Changes in significant government regulations affecting environmental compliance; 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 continued limited availability of optical fiber in the marketplace that is used in conjunction with the Company's fiber optic products; and - The factors set forth under the caption "Risk Factors" in the Company Form 10 Registration Statement filed with the Securities and Exchange Commission (see Amendment No. 3 to Form 10 filed on August 24, 2001). The Form 10 can be found on the Securities and Exchange Commission's website at www.sec.gov. 18
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. /s/ Robert G. Ruhlman -------------------------------------------- November 14, 2001 Robert G. Ruhlman President and Chief Executive Officer (Principal Executive Officer) /s/ Eric R. Graef -------------------------------------------- November 14, 2001 Eric R. Graef Vice President - Finance and Treasurer (Principal Accounting Officer) 19
EXHIBIT INDEX 3.1 (a) Amended and Restated Articles of Incorporation of Preformed Line Products Company 3.2 (a) Amended and Restated Code of Regulations of Preformed Line Products Company 4 (a) Description of Specimen Stock Certificate (a) Incorporated by reference from Preformed's Registration Statement on Form 10 (File No. 0-31164) (the "Form 10") filed on April 30, 2001. Each of the above exhibits has the same exhibit number in the Form 10. 20