SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 Commission file number 0-31164 PREFORMED LINE PRODUCTS COMPANY (Exact Name of Registrant as Specified in Its Charter) Ohio 34-0676895 - --------------------------------- --------------------------------------- (State or Other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 660 Beta Drive Mayfield Village, Ohio 44143 - --------------------------------------- ------------------------------------ (Address of Principal Executive Office) (Zip Code) (440) 461-5200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of common shares, $2 par value, outstanding as of July 31, 2002: 5,766,460.
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PREFORMED LINE PRODUCTS COMPANY INDEX TO FINANCIAL STATEMENTS PREFORMED LINE PRODUCTS COMPANY: Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001........................................3 Statements of Consolidated Income for the Three and Six Months Ended June 30, 2002 and 2001 (unaudited).....................4 Statements of Consolidated Cash Flows for the Six Months Ended June 30, 2002 and 2001 (unaudited).....................5 Notes to Consolidated Financial Statements.................................6
PREFORMED LINE PRODUCTS COMPANY CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2002 AND DECEMBER 31, 2001 <TABLE> <CAPTION> June 30, December 31, Thousands of dollars except share data 2002 2001 --------- --------- (Unaudited) <S> <C> <C> ASSETS Cash and cash equivalents $ 9,305 $ 8,409 Accounts receivable, less allowance of $980 ($813 in 2001) 33,544 29,251 Inventories 39,044 38,637 Deferred income taxes 3,393 3,206 Prepaids and other 6,129 3,727 --------- --------- TOTAL CURRENT ASSETS 91,415 83,230 Property and equipment - net 50,853 54,206 Investments in foreign joint ventures 8,895 9,976 Deferred income taxes 1,520 1,435 Goodwill, patents and other intangibles 7,398 7,410 Other 4,101 4,933 --------- --------- TOTAL ASSETS $ 164,182 $ 161,190 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable to banks $ 2,588 $ 1,201 Trade accounts payable 13,282 9,560 Accrued compensation and amounts withheld from employees 3,993 3,585 Accrued expenses and other liabilities 3,586 3,890 Accrued profit-sharing and pension contributions 3,389 4,130 Dividends payable 1,153 1,151 Income taxes 1,603 923 Current portion of long-term debt 2,399 13,198 --------- --------- TOTAL CURRENT LIABILITIES 31,993 37,638 Long-term debt, less current portion 10,314 2,341 Deferred income taxes 705 431 SHAREHOLDERS' EQUITY Common shares - $2 par value, 15,000,000 shares authorized, 5,766,460 and 5,757,030 issued and outstanding, net of 389,188 and 398,618 treasury shares at par 11,533 11,514 Retained earnings 129,612 128,721 Accumulated foreign currency translation adjustment (19,975) (19,455) --------- --------- TOTAL SHAREHOLDERS' EQUITY 121,170 120,780 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 164,182 $ 161,190 ========= ========= </TABLE> See notes to consolidated financial statements. 3
PREFORMED LINE PRODUCTS COMPANY STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 <TABLE> <CAPTION> Thousands of dollars, except per share data Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 2002 2001 2002 2001 ----------- ---------- ---------- --------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Net sales $ 44,854 $ 52,863 $ 88,862 $ 102,936 Cost of products sold 30,900 35,691 60,366 70,745 --------- --------- --------- --------- GROSS PROFIT 13,954 17,172 28,496 32,191 Costs and expenses Selling 6,033 6,394 11,315 11,974 General and administrative 5,213 5,393 10,276 10,966 Research and engineering 1,518 1,422 3,134 3,119 Other operating expenses 78 641 164 1,015 --------- --------- --------- --------- 12,842 13,850 24,889 27,074 Royalty income - net (447) (580) (960) (1,200) --------- --------- --------- --------- OPERATING INCOME 1,559 3,902 4,567 6,317 Other income (expense) Equity in net income of foreign joint ventures 128 100 203 100 Interest income 62 411 120 545 Interest expense (187) (403) (375) (821) Other expense (50) (50) (100) (100) --------- --------- --------- --------- (47) 58 (152) (276) --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 1,512 3,960 4,415 6,041 Income taxes 475 1,090 1,377 2,050 --------- --------- --------- --------- NET INCOME $ 1,037 $ 2,870 $ 3,038 $ 3,991 ========= ========= ========= ========= Net income per share - basic and diluted $ 0.18 $ 0.50 $ 0.53 $ 0.69 ========= ========= ========= ========= Cash dividends declared per share $ 0.20 $ 0.20 $ 0.40 $ 0.35 ========= ========= ========= ========= Average number of shares outstanding - basic 5,763 5,754 5,760 5,753 ========= ========= ========= ========= Average number of shares outstanding - diluted 5,787 5,778 5,785 5,765 ========= ========= ========= ========= See notes to consolidated financial statements. </TABLE> 4
PREFORMED LINE PRODUCTS COMPANY STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 <TABLE> <CAPTION> Thousands of dollars SIX MONTHS ENDED JUNE 30, ------------------------- 2002 2001 --------- ---------- (Unaudited) <S> <C> <C> OPERATING ACTIVITIES Net income $ 3,038 $ 3,991 Adjustments to reconcile net income to net cash provided by operations Depreciation and amortization 4,396 5,215 Deferred income taxes (253) - Equity in earnings of joint ventures - net of dividends received 373 (85) Loss (gain) on sales of property and equipment (2) - Changes in operating assets and liabilities Receivables (4,293) (5,117) Inventories (407) (748) Trade payables and accruals 3,087 2,445 Income taxes (358) (783) Other - net (277) (2,598) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,304 2,320 INVESTING ACTIVITIES Capital expenditures (2,214) (4,068) Business acquisitions (38) (791) Proceeds from the sale of property and equipment 1,249 10 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (1,003) (4,849) FINANCING ACTIVITIES Increase in notes payable to banks 1,375 1,322 Proceeds from the issuance of debt 9,849 9,548 Payments of debt (12,652) (6,193) Dividends paid (2,304) (1,727) Issuance (purchase) of common shares 177 (156) -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,555) 2,794 Effects of exchange rate changes on cash and cash equivalents 150 (1,004) -------- -------- Increase (decrease) in cash and cash equivalents 896 (739) Cash and cash equivalents at beginning of year 8,409 9,470 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,305 $ 8,731 ======== ======== See notes to consolidated financial statements. </TABLE> 5
PREFORMED LINE PRODUCTS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2002 NOTE A - BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. However, in the opinion of management, these consolidated financial statements contain all estimates and adjustments required to fairly present the financial position, results of operations, and changes in cash flows for the interim periods. Operating results for the three-month and six-month periods ended June 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes included in the Company's 10-K filed with the Securities and Exchange Commission. The balance sheet at December 31, 2001 has been derived from the audited financial statements, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentation. NOTE B - SUPPLEMENTAL INFORMATION Inventories June 30, December 31, Dollars in thousands 2002 2001 -------- -------- Finished goods $ 17,372 $ 17,885 Work-in-process 1,376 1,022 Raw material 20,296 19,730 -------- -------- $ 39,044 $ 38,637 ======== ======== Comprehensive income The components of comprehensive income are as follows: <TABLE> <CAPTION> Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- Dollars in thousands 2002 2001 2002 2001 ----------- ------------ ---------- ----------- <S> <C> <C> <C> <C> Net income $ 1,037 $ 2,870 $ 3,038 $ 3,991 Other comprehensive income: Foreign currency adjustment (628) (865) (520) (3,097) ------- ------- ------- ------- Comprehensive income $ 409 $ 2,005 $ 2,518 $ 894 ======= ======= ======= ======= </TABLE> 6
NOTE C - COMPUTATION OF EARNINGS PER SHARE <TABLE> <CAPTION> Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- Dollars and shares in thousands, except per share data 2002 2001 2002 2001 ----------- ------------ --------- ------------ <S> <C> <C> <C> <C> Numerator Net income $1,037 $2,870 $3,038 $3,991 ====== ====== ====== ====== Denominator Determination of shares Weighted average common shares outstanding 5,763 5,754 5,760 5,753 Dilutive effect - employee stock options 24 24 25 12 ------ ------ ------ ------ Diluted weighted average common shares outstanding 5,787 5,778 5,785 5,765 ====== ====== ====== ====== Earnings per common share Basic $ 0.18 $ 0.50 $ 0.53 $ 0.69 Diluted $ 0.18 $ 0.50 $ 0.53 $ 0.69 </TABLE> NOTE D - NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangibles will continue to be amortized over their useful lives and will be assessed for impairment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company has adopted SFAS No. 142 as of January 1, 2002. Consequently, the Company has discontinued the amortization of goodwill during 2002. In accordance with the Statement, the Company has completed the impairment test for goodwill, and has determined that no adjustment to the carrying value of goodwill is required. Under this Statement goodwill will continue to be tested annually for impairment or if events or changes in circumstances indicate that the goodwill of a reporting unit might be impaired. The aggregate amortization expense for other intangibles with definite lives for the three and six months ended June 30, 2002 was $130,000 and $153,000, and amortization expense is estimated to be $368,000 annually for the next five years. The following table sets forth the carrying value and accumulated amortization of goodwill and intangibles by segment at June 30, 2002. The second table includes a reconciliation of reported net income to adjusted net income after goodwill amortization for the three and six months ending June 30, 2002 and 2001. <TABLE> <CAPTION> Dollars in thousands As of June 30, 2002 ---------------------------------- Domestic Foreign Net -------- ------- ------- <S> <C> <C> <C> Amortized intangible assets Gross carrying amount - patents and other intangibles $ 4,730 $ 275 $ 5,005 Accumulated amortization - patents and other intangibles (738) (51) (789) ------- ------- ------- Total $ 3,992 $ 224 $ 4,216 ======= ======= ======= Unamortized intangible assets Gross carrying amount - goodwill $ 9,047 $ 918 $ 9,965 Accumulated amortization - goodwill (6,778) (5) (6,783) ------- ------- ------- Total $ 2,269 $ 913 $ 3,182 ======= ======= ======= </TABLE> 7
Reconciliation of reported net income to adjusted net income. <TABLE> <CAPTION> For the three months ended June 30, For the six months ended June 30, ----------------------------------- --------------------------------- Thousands of dollars, except per share data 2002 2001 2002 2001 --------------- ---------------- -------------- --------------- <S> <C> <C> <C> <C> Reported net income $ 1,037 $ 2,870 $ 3,038 $ 3,991 Add back: Goodwill amortization after income tax - 144 - 286 --------- --------- --------- --------- Adjusted net income $ 1,037 $ 3,014 $ 3,038 $ 4,277 ========= ========= ========= ========= Basic earnings per share: Reported net income $ 0.18 $ 0.50 $ 0.53 $ 0.69 Goodwill amortization after income tax - 0.02 - 0.05 --------- --------- --------- --------- Adjusted net income $ 0.18 $ 0.52 $ 0.53 $ 0.74 ========= ========= ========= ========= Diluted earnings per share: Reported net income $ 0.18 $ 0.50 $ 0.53 $ 0.69 Goodwill amortization after income tax - 0.02 - 0.05 --------- --------- --------- --------- Adjusted net income $ 0.18 $ 0.52 $ 0.53 $ 0.74 ========= ========= ========= ========= </TABLE> In May 2002, the FASB issued SFAS No. 145, Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002. The provisions of this Statement related to the rescission of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002, while provisions related to the amendment of SFAS No. 13 are effective for transactions occurring after May 15, 2002, and all remaining provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002. This Statement eliminates SFAS No. 4, as a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. This Statement also eliminates SFAS No. 44, which was established to provide accounting requirements for effects of transition for provisions of the Motor Carrier Act of 1980. The deregulation of intrastate operating rights and transition to the provisions of those laws being complete has necessitated the rescission of SFAS No. 44. This Statement also eliminates the need to have SFAS No. 64, which was an amendment to SFAS No. 4 and has been rescinded with this Statement. Lastly, this Statement amends SFAS No. 13, requiring lease modifications that have economic effects similar to sale-leaseback transactions to be accounted for in the same manner as sale-leaseback transactions. The adoption of all the provisions of this Statement did not have a material impact on the Company. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, effective for exit or disposal activities initiated after December 31, 2002. This Statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for exit costs was recognized at the date of the entity's commitment to an exit plan. However, an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. Therefore this Statement eliminates the definition and requirements of exit costs in Issue No. 94-3. This Statement also establishes that fair value is the objective for initial measurement of the liability. The Company is currently in the process of evaluating this Statement and does not expect the adoption of this Statement to have a material impact on its financial statements and results of operations. 8
NOTE E - BUSINESS SEGMENTS <TABLE> <CAPTION> Three months ended June 30, Six months ended June 30, --------------------------- -------------------------- Dollars in thousands 2002 2001 2002 2001 -------- -------- -------- ------- <S> <C> <C> <C> <C> Net sales Domestic $ 25,922 $ 29,754 $ 52,248 $ 59,524 Foreign 18,932 23,109 36,614 43,412 ------- ------- ------- ------- Total net sales $ 44,854 $ 52,863 $ 88,862 $ 102,936 ======= ======= ======= ======= Intersegment sales Domestic $ 334 $ 269 $ 384 $ 377 Foreign 595 1,188 1,210 2,569 ------- ------- ------- ------- Total intersegment sales $ 929 $ 1,457 $ 1,594 $ 2,946 ======= ======= ======= ======= Operating income Domestic $ 1,205 $ 1,860 $ 3,283 $ 2,831 Foreign 354 2,042 1,284 3,486 ------- ------- ------- ------- 1,559 3,902 4,567 6,317 Equity in net income of joint ventures 128 100 203 100 Interest income Domestic - 243 - 246 Foreign 62 168 120 299 ------- ------- ------- ------- 62 411 120 545 Interest expense Domestic 74 272 153 593 Foreign 113 131 222 228 ------- ------- ------- ------- 187 403 375 821 Other (expense) (50) (50) (100) (100) ------- ------- ------- ------- Income before income taxes $ 1,512 $ 3,960 $ 4,415 $ 6,041 ======= ======= ======= ======= <Caption> June 30, December 31, 2002 2001 --------- --------- <S> <C> <C> Identifiable assets Domestic $ 84,734 $ 85,934 Foreign 70,553 65,280 --------- --------- 155,287 151,214 Corporate 8,895 9,976 --------- --------- Total assets $164,182 $161,190 ========= ========= </Table> NOTE F - INCOME TAXES In accordance with the applicable tax laws in a foreign jurisdiction, the Company is entitled to a preferential tax rate of 0% for the first two profit making years after utilization of any tax loss carryforwards, which may be carried forward for five years; and a 50% tax reduction for the succeeding three years. The aggregate tax and per-share effect was $200,000, or $.04 per share, for the three-month period and $300,000, or $.05 per share, for the six-month period ending June 30, 2002, while aggregate tax and per-share effect was immaterial for the three-month period and $59,000, or $.01 per share, for the six-month period ending June 30, 2001. 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the Company's results of operations for the three-month and six-month periods ended June 30, 2002 and 2001: <TABLE> <CAPTION> Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 2002 2001 2002 2001 Dollars in thousands, except per share data <S> <C> <C> <C> <C> NET SALES AND INCOME Net sales $ 44,854 $ 52,863 $ 88,862 $ 102,936 Operating income 1,559 3,902 4,567 6,317 Income before income taxes 1,512 3,960 4,415 6,041 Net income 1,037 2,870 3,038 3,991 PER SHARE AMOUNTS Net income - basic $ 0.18 $ 0.50 $ 0.53 $ 0.69 Net income - diluted $ 0.18 $ 0.50 $ 0.53 $ 0.69 Dividends declared $ 0.20 $ 0.20 $ 0.40 $ 0.35 </TABLE> The following discussion of the financial results is based on 2002 and 2001 reported results for the three and six-month periods ended June 30. THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2001 For the three months ended June 30, 2002, consolidated net sales were $44.8 million, a decrease of $8.0 million or 15%, from the prior year's comparable period. Domestic sales decreased $3.8 million, or 13% and foreign sales decreased $4.2 million, or 18%. The decrease in domestic sales is primarily attributable to lower sales volume in the telecommunications industry. The foreign sales decrease is also due primarily to lower sales volume. A decrease in foreign data communication sales accounted for approximately 57% of the decrease in foreign sales. The Company has been unable to negotiate the renewal of a supply agreement with a foreign data communication customer for the year beginning January 2003. Sales to this customer were approximately $14.0 million for 2001 and are estimated to be $10.0 million for 2002. The Company continues to see softness in its domestic and foreign communications and fiber optic hardware markets and does not expect a rebound to the previous years' sales levels for the remainder of 2002. Gross profit of $14.0 million for the three months ended June 30, 2002 decreased $3.2 million or 19% compared to the same period in the prior year as a result of lower sales. The Company expects its gross profit for 2002 to be lower than the previous year's levels as a result of lower sales. Cost and expenses of $12.8 million were $1.0 million lower or 7% less than last year. The reduction is due to lower commission expenses of $.2 million (included in selling expenses) as a result of lower sales, a $.2 million decrease in general and administrative expenses and, a $.6 million reduction in other operating expenses. The reduction in other operating expenses is primarily the result of $.2 million in lower amortization of goodwill (see NOTE D - NEW ACCOUNTING PRONOUNCEMENTS), a $.1 million gain on the exchange of foreign currencies, $.1 million of costs included in 2001 to relocate the Company's Mexican manufacturing operations, and a $.1 million decrease in other operating expense. Operating income of $1.6 million for the three months ended June 30, 2002 decreased $2.3 million, or 60%, compared to $3.9 million in the previous year. This decrease is the result of the $3.2 million decrease in gross profit, and a $.1 10
million decrease in royalty income, partially offset by the $1.0 million decrease in costs and expenses. Domestic operating income of $1.2 million for the three months ended June 30, 2002 decreased $.6 million, compared to the same period in the previous year. The decrease is primarily a result of lower gross profit of $1.6 million due to lower sales volumes partially offset by reduced selling, general, and administrative costs and expenses of $.7 million related to the business realignment of the data communication product line effected in the third quarter 2001 and the $.2 million reduction in amortization of goodwill. Foreign operating income of $.4 million for the quarter ended June 30, 2002 decreased $1.7 million, compared to the same period in 2001 primarily as a result of lower gross profit of $1.6 million on lower sales volumes. Other expense of $.1 million for the three-month period ended June 30, 2002 increased $.1 million compared to 2001. The increase in other expense is a result of a $.3 million decrease in interest income primarily as a result of interest received in 2001 on a one-time state tax refund, offset by a $.2 million reduction in interest expense, as outstanding debt was reduced by $11.3 from June 30, 2001. Income before income taxes for the quarter ended June 30, 2002 of $1.5 million was $2.4 million less than 2001. The reduction is due to the $2.3 million decrease in operating income and the $.1 million increase in other expense. The effective tax rate increased to 31.4% in 2002 from 27.5% in 2001 primarily as a result of a one-time state tax refund received in 2001, which reduced the 2001 effective tax rate. Income taxes for the quarter ended June 30, 2002 of $.5 million were $.6 million lower than the prior year's $1.1 million as a result of lower income before income taxes partially offset by a one-time state tax refund received in 2001. Net income was $1.0 million for the three months ended June 30, 2002, which represents a decrease of $1.8 million, or 64% from the prior year, primarily a result of lower operating income. Earnings per share for the quarter ended June 30, 2002 were $.18 compared to $.50 for 2001. The prior year results included $144,000 or $.02 per share of goodwill amortization. Goodwill is not being amortized in 2002 as a result of adopting a new accounting pronouncement (see NOTE D - NEW ACCOUNTING PRONOUNCEMENTS). SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 For the six months ended June 30, 2002, consolidated net sales were $88.9 million, a decrease of $14.1 million or 14% from the same period in the prior year. Domestic sales decreased $7.3 million, or 12%, and foreign sales decreased $6.8 million, or 16%. The decrease in domestic sales is primarily attributable to lower sales volume of data communication, telecommunication and fiber optic hardware products. Foreign sales in native currency were unfavorably impacted by $.9 million when converted to U.S. dollars as a result of the stronger U.S. dollar compared to most foreign currencies. Excluding this unfavorable currency impact, foreign sales declined primarily due to lower sales volume. Gross profit of $28.5 million for the six months ended June 30, 2002 was a decrease of $3.7 million, or 11% compared to the prior year. The stronger U.S. dollar resulted in $.3 million lower gross profit on foreign sales when foreign statements in native currency were translated to U.S. dollars. Excluding the impact of foreign currency translation, gross profit decreased $3.4 million as a result of lower sales. Costs and expenses of $24.9 million were $2.2 million, or 8% lower than last year. The stronger dollar favorably impacted costs and expenses by $.3 million when foreign statements in native currency were translated to U.S. dollars. The remaining improvement in costs and expenses of $1.9 million was primarily due to lower domestic selling and administrative expense of $1.6 million as a result of the realignment of the data communication product line undertaken during the third quarter 2001, partially offset by a $.5 million increase in foreign marketing and selling expenses to promote data communication products in the international markets. Lower foreign commissions of $.3 million due to lower sales and lower amortization of goodwill of $.4 million (see NOTE D - NEW ACCOUNTING PRONOUNCEMENTS) also contributed to the improvement in costs and expenses. Operating income of $4.6 million for the six months ended June 30, 2002 decreased by $1.7 million, or 28%, compared to the previous year. This decrease was a result of the $3.7 million decrease in gross profit and a $.2 million decrease in royalty income partially offset by the $2.2 million decrease in costs and expenses. Domestic 11
operating income for the six months ended June 30, 2002 of $3.3 million increased $.5 million compared to the same period in the previous year. The improvement in domestic operating income was a result of the reduction of selling, general and administrative expenses and lower amortization of goodwill more than offsetting the reduction in gross profit of $1.4 million and lower royalty income of $.2 million due to lower sales. Foreign operating income of $1.3 million for the six months ended June 30, 2002 decreased by $2.2 million, compared to the same period in the previous year. This decrease was primarily a result of lower gross profit of $2.3 million due to lower sales and an increase in marketing and selling expense partially offset by lower sales commission and royalty expense. Other income (expense) of $(.2) million for the six months ended June 30, 2002 decreased $.1 million compared to 2001. The decrease is a result of a $.4 million decrease in interest income million primarily due to interest received in 2001 on a one-time state tax refund, offset by a $.2 million reduction in interest expense, as a result of lower debt, and an increase in net income from joint ventures of $.1 million. Income before income taxes for the six months ended June 30, 2002 was $1.6 million lower than 2001 as a result of the $1.7 million decrease in operating income and the $.1 million reduction of other expense. Income taxes for the six months ended June 30, 2002 of $1.4 million were $.7 million lower than the prior year of $2.0 million. The effective tax rate for 2002 was 31.2% compared to 33.9% in 2001. The Company has a tax "holiday" in a foreign jurisdiction which grants an effective tax rate of 0% for the first two profit making years after utilizing any tax loss carryforwards, and a 50% tax reduction for the succeeding three years. The aggregate tax and per share effect of this holiday was $300,000, or $.05, per share for the six months ending June 30, 2002 and $59,000, or $.01, per share in the comparable 2001 period. As a result of the above, net income for the first six months of 2002 was $3.0 million which represents a decrease of $1.0 million, or 24%, from the same period in the prior year. Earnings per share for the six months ended June 30, 2002 were $.53 compared to $.69 for 2001. The prior year includes goodwill amortization of $287,000 or $.05 per share. Goodwill is no longer amortized beginning in 2002 (see NOTE D - NEW ACCOUNTING PRONOUNCEMENTS). WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $5.3 million for the first six months of 2002, an increase of $3.0 million when compared to 2001. This increase was primarily the result of a $3.6 million decrease in working capital and a $.6 million increase in dividends from joint ventures, partially offset by lower net income of $1.0 million. Net cash used in investing activities of $1.0 million represents a reduction of $3.8 million when compared to 2001. This reduction is primarily the result of lower capital expenditures in 2002 of $1.9 million and $1.2 million in proceeds from the sale of certain long-lived assets from the Company's Birmingham, Alabama location. The Company is continually analyzing potential acquisition candidates and business alternatives but has no commitments that would materially impact the operations of the business. Cash used in financing activities was $3.5 million compared to $2.8 million provided by financing activities in the previous year. This change of $6.3 million was primarily the result of reducing outstanding debt in the first six months of 2002 by $6.5 million. Although the Company believes its existing credit facilities, internally generated funds and ability to obtain additional financing will be sufficient to meet the Company's growth and operating needs for the next 12 months, there are inherent risks related to each of these sources. The Company has evaluated its long-term borrowing requirements and substantially completed amending its main credit facility. The lending institution has approved renewal of the credit facility and the new amendment is currently being drafted. Consequently, the credit facility is being considered as long term as of June 30, 2002. The Company's financial position remains strong and its current ratio at June 30, 2002 was 2.9:1, compared to 2.2:1 at December 31, 2001. At June 30, 2002, the Company's unused balance under its main credit facility was $32.0 million, which would be $12.0 million upon the adoption of the new amendment, and its debt to equity ratio was 10%. The ability to internally generate funds from continuing operations is contingent upon the Company's sales to its served markets remaining at current levels or improving. 12
NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangibles will continue to be amortized over their useful lives and will be assessed for impairment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company has adopted SFAS No. 142 as of January 1, 2002. Consequently, the Company has discontinued the amortization of goodwill during 2002. In accordance with the Statement, the Company has completed the impairment test for goodwill and has determined that no adjustment to the carrying value of goodwill is required. Under this Statement goodwill will continue to be tested annually for impairment or if events or changes in circumstances indicate that the goodwill of a reporting unit might be impaired. See NOTE D - NEW ACCOUNTING PRONOUNCEMENTS for further discussion. In May 2002, the FASB issued SFAS No. 145, Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002. The provisions of this Statement related to the rescission of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002, while provisions related to the amendment of SFAS No. 13 are effective for transactions occurring after May 15, 2002, and all remaining provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002. This Statement eliminates SFAS No. 4, as a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. This Statement also eliminates SFAS No. 44, which was established to provide accounting requirements for effects of transition for provisions of the Motor Carrier Act of 1980. The deregulation of intrastate operating rights and transition to the provisions of those laws being complete has necessitated the rescission of SFAS No. 44. This Statement also eliminates the need to have SFAS No. 64, which was an amendment to SFAS No. 4 and has been rescinded with this Statement. Lastly, this Statement amends SFAS No. 13, requiring lease modifications that have economic effects similar to sale-leaseback transactions to be accounted for in the same manner as sale-leaseback transactions. The adoption of all the provisions of this Statement did not have a material impact on the Company. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, effective for exit or disposal activities initiated after December 31, 2002. This Statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for exit costs was recognized at the date of the entity's commitment to an exit plan. However, an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. Therefore this Statement eliminates the definition and requirements of exit costs in Issue No. 94-3. This Statement also establishes that fair value is the objective for initial measurement of the liability. The Company is currently in the process of evaluating this Statement and does not expect the adoption of this Statement to have a material impact on its financial statements and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company operates manufacturing facilities and offices around the world and uses fixed and floating rate debt to finance the Company's global operations. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations and market risk related to changes in interest rates and foreign currency exchange rates. The Company believes the political and economic risks related to the Company's foreign operations are mitigated due to the stability of the countries in which the Company's largest foreign operations are located. Currently, the Company does not use derivative financial instruments such as interest rate swaps or foreign currency forward exchange contracts to manage the Company's market risks nor does the Company hold derivatives for trading purposes. The Company is exposed to market risk, including changes in interest rates. The Company is subject to interest rate 13
risk on its variable rate revolving credit facilities, which consisted of borrowings of $15.3 million at June 30, 2002. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $153,000 for the six months ended June 30, 2002. The Company's primary currency rate exposures are related to foreign denominated debt, intercompany debt and cash and short-term investments. A hypothetical 10% change of the U.S. dollar relative to the currencies of the Company's foreign operations would have a favorable/unfavorable impact on fair values of $2.4 million and income before taxes of $.1 million. 14
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect our financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Preformed Line Products Company held its annual meeting of shareholders on April 29, 2002 at its principal executive offices in Mayfield Village, Ohio. At the meeting, the shareholders voted to elect certain persons to the Board of Directors for terms expiring at the 2004 annual meeting of shareholders. The individuals listed below were elected to the Company's Board of Directors, each to hold office until the 2004 annual meeting or until his successor is elected and qualified, or until his earlier resignation. The table below indicates the votes for, votes withheld, as well as the abstentions and shares not voted for each nominee. <TABLE> <CAPTION> Name Votes For Votes Withheld Abstention Shares not Voted - -------------------------- ------------ ------------------ -------------- -------------------- <S> <C> <C> <C> <C> John D. Drinko 5,318,505 30,496 - 588,029 Wilber C. Nordstrom 5,139,605 29,396 - 588,029 Jon R. Ruhlman 5,087,845 81,156 - 588,029 Randall M. Ruhlman 5,143,101 25,900 - 588,029 </TABLE> The following are the names of each other director whose term of office as a director continued after the 2002 annual meeting of shareholders (in this case, for terms expiring at the 2003 annual meeting of shareholders): Robert G. Ruhlman Frank B. Carr Barbara P. Ruhlman ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Exhibits None (b) Reports on Form 8-K None. 15
FORWARD-LOOKING STATEMENTS Cautionary Statement for "Safe Harbor" Purposes Under The Private Securities Litigation Reform Act of 1995 This Form 10-Q contains forward-looking statements regarding the Company's and management's beliefs and expectations. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance (as opposed to historical items) and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the Company's control. Such uncertainties and factors could cause the Company's actual results to differ materially from those matters expressed in or implied by such forward-looking statements. The following factors, among others, could affect the Company's future performance and cause the Company's actual results to differ materially from those expressed or implied by forward-looking statements made in this report: - The overall demand for cable anchoring and control hardware for electrical transmission and distribution lines on a worldwide basis, which has a slow growth rate in mature markets such as the United States, Canada, Japan and Western Europe; - The effect on the Company's business resulting from economic uncertainty within Asia-Pacific and Latin American regions; - Technology developments that affect longer-term trends for communication lines such as wireless communication; - The Company's success at continuing to develop proprietary technology to meet or exceed new industry performance standards and individual customer expectations; - The rate of progress in continuing to reduce costs and in modifying the Company's cost structure to maintain and enhance the Company's competitiveness; - The Company's success in strengthening and retaining relationships with the Company's customers, growing sales at targeted accounts and expanding geographically; - The extent to which the Company is successful in expanding the Company's product lines into new areas for inside plant; - The Company's ability to identify, complete and integrate acquisitions for profitable growth; - The potential impact of consolidation and deregulation among the Company's suppliers, competitors and customers; - The relative degree of competitive and customer price pressure on the Company's products; - The cost, availability and quality of raw materials required for the manufacture of products; - The effects of fluctuation in currency exchange rates upon the Company's reported results from international operations, together with non-currency risks of investing in and conducting significant operations in foreign countries, including those relating to political, social, economic and regulatory factors; - Changes in significant government regulations affecting environmental compliance; 16
- The Company's ability to continue to compete with larger companies which have acquired a substantial number of the Company's former competitors; - The Company's ability to compete in the domestic data communications market and its success at penetrating the international data communication market; - The Company's ability to recover sales in the telecommunications markets; and - The factors set forth under the caption "Risk Factors" in the Company Form 10 Registration Statement filed with the Securities and Exchange Commission (see Amendment No. 3 to Form 10 filed on August 24, 2001). The Form 10 can be found on the Securities and Exchange Commission's website at www.sec.gov. 17
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. August 14, 2002 /s/ Robert G. Ruhlman ---------------------- Robert G. Ruhlman President and Chief Executive Officer (Principal Executive Officer) August 14, 2002 /s / Eric R. Graef ------------------- Eric R. Graef Vice President - Finance and Treasurer (Principal Accounting Officer) 18
EXHIBIT INDEX [NONE] 19