UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
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 November 10, 2003: 5,784,494.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREFORMED LINE PRODUCTS COMPANYINDEX TO FINANCIAL STATEMENTS
PREFORMED LINE PRODUCTS COMPANYCONSOLIDATED BALANCE SHEETSAS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
See notes to consolidated financial statements.
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PREFORMED LINE PRODUCTS COMPANYSTATEMENTS OF CONSOLIDATED INCOMEFOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
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PREFORMED LINE PRODUCTS COMPANYSTATEMENTS OF CONSOLIDATED CASH FLOWSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
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PREFORMED LINE PRODUCTS COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2003
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 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 nine-month periods ended September 30, 2003 are not necessarily indicative of the results to be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes included in the Company’s 10-K for 2002 filed with the Securities and Exchange Commission.
The consolidated balance sheet at December 31, 2002 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.
NOTE B – SUPPLEMENTAL INFORMATION (Dollars in thousands)
Inventories
Comprehensive income
The components of comprehensive income are as follows:
Guarantees
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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.
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.
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NOTE C – COMPUTATION OF EARNINGS PER SHARE
NOTE D – 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 2003 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 definite lives for the three and nine-month periods ended September 30, 2003 was $.1 million and $.3 million, respectively, and for the three and nine-month periods ended September 30, 2002 was $.1 million and $.2 million, respectively. Amortization expense is estimated to be $.4 million annually for 2003, 2004 and 2005 and $.3 million for 2006 and 2007. The following table sets forth the carrying value and accumulated amortization of goodwill and intangibles by segment at September 30, 2003. The second table includes the changes in net goodwill by segment for the nine months ended September 30, 2003.
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NOTE E – NEW ACCOUNTING PRONOUNCEMENTS
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 in 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 adoption of this statement did not have a material impact on the financial statements.
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. This Statement also establishes that fair value is the objective for initial measurement of the liability. The adoption of this Statement did not have a material impact on the Company.
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. The Company has adopted the applicable disclosure provisions of FIN 46 in the financial statements, although the accounting for variable interest entities is not required until the quarter ending December 31, 2003.
As part of its community reinvestment initiatives, the Company invests in qualified affordable housing projects as a limited partner. The Company receives affordable housing federal and state tax credits for these limited partnership investments. The Company’s maximum potential exposure to these partnerships is $.5 million, consisting of the limited partnership investments plus unfunded commitments. The Company is currently evaluating whether such investments should be consolidated in accordance with FIN 46.
Additionally, the Company has two equity investments in Japanese Companies. As indicated in Note I in the Notes To Consolidated Financial Statements, the Company sold its interest in one of the investments in October 2003, therefore, there is no related impact in accordance with FIN 46. However, the Company is currently evaluating whether or not the remaining equity joint venture should be consolidated in accordance with FIN 46. The Company has calculated a related maximum exposure of $3 million as of September 30, 2003 based on its recorded investment.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (FAS 149). This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The adoption of this Statement did not have a material impact on the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (FAS 150). This Statement establishes standards for how financial instruments with characteristics of both liabilities and equity are classified and measured. This Statement requires that an issuer classify financial instruments as a liability or asset based on the requirements of the Statement, which may have been previously classified as equity. FAS 150 is effective for financial instruments entered into or modified after May 31,
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2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement did not have a material impact on the Company.
NOTE F – BUSINESS SEGMENTS
The domestic business segment operating loss for the nine months ended September 30, 2003 includes an expense, recorded in the quarter ended March 31, 2003, 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. The foreign business segment operating loss for the three and nine months ended September 30, 2002 includes an expense of $4.7 million for business abandonment charges related to the European data communications operations.
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NOTE G – INCOME TAXES
The Company’s effective tax rate in the third quarter of 2003 is higher than the statutory rate principally because of the provision of additional deferred taxes at statutory rates on the undistributed earnings of one of its Japanese joint ventures. This additional deferred tax expense amounted to approximately $1.3 million. In accordance with the applicable tax laws in China, 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 beginning in 2003. The favorable aggregate tax and per share effect was $19,000, or less than $.01 per share, for the three-month period and $73,000, or $.01 per share, for the nine-month period ended September 30, 2003, while the favorable aggregate tax and per-share effect was $146,000, or $.03 per share, for the three-month period and $452,000, or $.08 per share, for the nine-month period ended September 30, 2002.
NOTE H – BUSINESS ABANDONMENT CHARGES
During the third quarter of 2002, the Company recorded a charge to write-off certain assets and to record severance payments related to closing its data communications operations in Europe. This entailed winding down a manufacturing operation, closing five sales offices, terminating leases and reducing personnel by approximately 130. This action was taken as a result of the continuing decline in the global telecommunication and data communication markets and after failing to reach agreement on an acceptable selling price on product supplied to a significant foreign customer. The Company incurred a pre-tax charge of $4.7 million for these activities in the third quarter of 2002. Approximately $3.3 million of the charge was related to asset write-downs, of which $2.1 million of inventory write-offs were recorded in Cost of products sold and $1.2 million of write-offs related to receivables was included in Costs and expenses on the Statements of Consolidated Operations. The remaining $1.4 million of the charge, included in Cost of products sold and Costs and expenses, primarily relates to cash outlays for employee severance cost, cost of exiting leased facilities and termination of other contractual obligations. Approximately $.9 million of the latter category of expenses was expended as of September 30, 2003, and the remaining cash outlays are anticipated to be completed by March 31, 2004. Changes to estimates based on experience and events during the second quarter of 2003 required adjustments to be made for each accrual component, resulting in a reduction in Cost of products sold and Costs and expenses of approximately $.2 million. An analysis of the amount accrued in the Consolidated Balance Sheet at September 30, 2003 is as follows:
NOTE I– SUBSEQUENT EVENTS
On October 2, 2003, the Company sold its 24% interest in a joint venture in Japan. Cash proceeds of the sale were approximately $7.1 million, and the transaction resulted in a pretax gain of $3.5 million, which includes the reversal of $1.7 million in cumulative translation adjustment related to the equity investment. The entire amount of the proceeds
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is taxable resulting in a tax of $2.6 million and therefore reduces the gain to $.9 million after tax. Since the sale occurred subsequent to the end of the quarter, it will not be recorded until the fourth quarter of 2003. However, the incremental tax impact related to the Company’s share of the joint venture’s historical earnings net of dividends received was recorded in September without any corresponding income recognition (see Note G in the Notes To Consolidated Financial Statements).
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002
For the three months ended September 30, 2003 consolidated sales were $39.5 million, a decrease of $2.1 million, or 5%, compared to the three months ended September 30, 2002. Domestic sales increased $.4 million, or 2%, and foreign sales decreased $2.5 million, or 14%.
The nominal increase in domestic sales was due primarily to an increase in the sales of data communication products. The Company does not anticipate a significant change from the present conditions in the domestic markets for the remainder of the year. While the Company remains optimistic that the blackout that occurred on August 14, 2003 will have a positive impact on sales, the timing and amount of any increase remains uncertain.
Foreign sales decreased primarily as a result of the abandonment of the European data communication operations during the third quarter of 2002. Sales related to the abandoned operation were $.1 million for the quarter ended September 30, 2003 compared to $4.3 million for the 2002 comparable period. As a result of the abandonment of the European data communication operations, the Company anticipates foreign sales will remain lower for the remainder of 2003 when compared to 2002. Foreign sales in native currency were favorably impacted by $1.9 million when converted to U.S. dollars as a result of the weaker U.S. dollar compared to most foreign currencies.
Gross profit of $11.7 million for the three months ended September 30, 2003 increased $.1 million, or 1%, compared to the same period in the prior year. Domestic gross profit decreased $1.9 million, or 23%, and foreign gross profit increased $2 million, or 60%. Higher per unit manufacturing costs due to lower production levels accounted for approximately 68% of the domestic decrease and less favorable pricing due to changes in customer mix accounted for approximately 32% of the remaining decrease. The Company anticipates continued higher per unit manufacturing costs until production returns to the previous year’s level. Foreign gross profit increased primarily as a result of a $2.6 million abandonment charge for the European data communication operations recorded in the quarter ended September 30, 2002 partially offset by a $.8 million reduction in gross profit due to the decrease in net sales for the quarter ended September 30, 2003 compared to the same period in 2002.
Costs and expenses for the three months ended September 30, 2003 were $10.1 million, a decrease of $4.1 million, or 29%, compared to the same period in 2002. Domestic costs and expenses of $6.7 million decreased $1.1 million, or 14%, from the same period in 2002 and foreign costs and expenses of $3.4 million decreased $3 million, or 47%, compared to the same period in 2002. Selling expenses of $4.4 million decreased $1.8 million, or 29%, primarily as a result of a $.7 million abandonment charge for the European data communications operations recorded in the third quarter 2002, a $.9 million reduction realized as a result of closing the European data communication operations and a $.2 million reduction in domestic commission expense. General and administrative expenses of $4.3 million decreased $2.4 million primarily as a result of a $1.5 million abandonment charge related to the European data communications operations, a $.4 million reduction in operation costs due to closing the European data communication operations and a reduction of $.8 million in bad debt expense related to a domestic telecommunications customer declaring bankruptcy in 2002. Research and engineering expenses of $1.3 million decreased $.1 million, or 6%, principally as a result of employee reductions. Other operating expense of $.1 million increased $.2 million primarily as a result of an increase in the loss on currency translations by foreign operations compared to the same period in 2002.
Royalty income of $.3 million for the three months ended September 30, 2003 remained relatively unchanged compared to the same period in 2002.
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Operating income of $1.9 million for the quarter ended September 30, 2003 increased $4.3 million compared to the previous year. This increase was due to the $.1 million increase in gross profit, $.1 million increase in royalty income and the decrease in cost and expenses of $4.1 million. Domestic operating income decreased $.7 million as a result of $1.9 million lower gross profit, the $1.1 million decrease in costs and expenses and an increase in royalty income of $.1 million. Foreign operating income of $1.4 million increased $5 million due primarily to the increase in gross profit of $2 million and the decrease in costs and expenses of $3 million.
Income before income taxes for the three months ended September 30, 2003 of $1.8 million was $4.2 million higher than 2002 as a result of the increase in operating income of $4.3 million and a $.1 million reduction in interest expense partially offset by $.2 million decrease in equity earnings.
Income taxes for the three months ended September 30, 2003 of $2.3 million increased $2.6 million compared to the same period in 2002. The effective tax rate in 2003 was 129% compared to a tax benefit rate of 14% for 2002. The effective tax rate for the third quarter is higher than the 39% expected state and federal rate because of the effect of incremental deferred taxes recorded on the Japanese joint ventures, including the deferred taxes on the undistributed earnings (see Note I in the Notes To Consolidated Financial Statements). In accordance with the applicable tax laws of China, 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 and a 50% tax reduction for the succeeding three years beginning in 2003. The favorable aggregate tax and per share effect was $19,000 or less than $.01 per share for the three months ended September 30, 2003 and $146,000 or $.03 per share for the three months ended September 30, 2002.
As a result of the above, the net loss for the three-month period ended September 30, 2003 was $.5 million, which represents an improvement of $1.6 million compared to the results for the same period in 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002
For the nine months ended September 2003 consolidated sales were $114.7 million, a decrease of $15.8 million, or 12% from the previous year. Domestic sales of $68.5 million decreased $7.3 million, or 10%. Foreign sales of $46.2 million decreased $8.5 million, or 16%. The reduction in domestic sales was due primarily to volume decreases of $4.9 million and a $2.6 million reduction due to price and mix in the communications and energy markets. Foreign sales decreased primarily as a result of the abandonment of the European data communication operations during the third quarter of 2002. Sales related to the abandoned operation were $.7 million for the nine months ended September 30, 2003 compared to $12.1 million for the 2002 comparable period. Foreign sales in native currency were favorably impacted by $4.4 million when converted to U.S. dollars as a result of the weaker U.S. dollar compared to most foreign currencies.
Gross profit of $34.6 million for the nine-month period ended September 30, 2003 decreased $5.5 million, or 14% compared to the same period in 2002. Domestic gross profit decreased $6.8 million, or 27%. Foreign gross profit increased $1.3 million, or 9%. For the nine months ended September 30, 2003 domestic gross profit decreased $5.1 million due to lower sales and customer mix and $1.7 million due to higher per unit manufacturing costs due to lower production levels. For the nine months ended September 30, 2003 foreign gross profit increased by $1.3 million primarily as a result of the $2.6 million restructuring charge related to the European data communications operations included in the third quarter of 2002 and a $1.5 million favorable impact when native currency was converted to U.S. dollars compared to the same period in 2002 partially offset by a $2.7 million decrease due to the reduction in sales.
Costs and expenses for the nine months ended September 30, 2003 of $31 million decreased $8.1 million, or 21%, compared to 2002. Domestic costs and expenses decreased $3 million, or 13%, and foreign costs and expenses decreased $5.1 million, or 33%. Selling expenses of $12.7 million decreased $4.8 million, or 27%. The abandonment of the European data communications operations in the third quarter 2002 accounted for 61% of the decrease, a reduction in domestic commission expense on lower sales accounted for 19% of the decrease, and a reduction in domestic employment levels accounted for 9% of the decrease. General and administrative expenses of $14.6 million decreased $2.4 million, or 14%, primarily due to $1.5 million for the abandonment of the European data
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communications operations in third quarter 2002 and $1 million reduction in operation costs due to closing the European data communications operation. Research and engineering expenses of $3.9 million decreased $.6 million, or 12%, principally as a result of employee reductions. Other operating income of $.2 million increased $.3 million primarily as a result of an increase in the gain on currency translations by foreign operations when compared to the same period in 2002.
Royalty income for the nine months ended September 30, 2003 of $1 million is $.2 million lower than 2002 as a result of the decline in the domestic data communication market.
Operating income of $4.6 million for the nine months ended September 30, 2003 increased $2.4 million, or 113%, compared to the previous year. This increase was a result of the reduction in costs and expenses of $8.1 million partially offset by the $5.5 million decrease in gross profit and the decrease in royalty income of $.2 million. Domestic operating income decreased $8.5 million as a result of $6.8 million lower gross profit, forgiveness of intercompany receivables of $4.5 million and the decrease of $.2 million in royalty income partially offset by the $3 million reduction in costs and expenses. Foreign operating income of $8.6 million increased $10.9 million due to the $4.5 million forgiveness of intercompany payables, the $5.1 million decrease in costs and expenses and the increase in gross profit of $1.3 million.
For the nine months ended September 30, 2003 other income (expense) improved $.2 million compared to 2002 as interest expense net of interest income decreased $.3 million and equity in net income of foreign joint ventures decreased $.1 million.
Income tax for the nine-month period ended September 30, 2003 of $3.1 million was $2.1 million higher than the prior year. The effective tax rate in 2003 was 69% compared to an effective tax rate of 52% for 2002. The effective tax rate for the nine months is higher than the 39% expected state and federal rate because of the effect of incremental deferred taxes recorded on the Japanese joint ventures including the deferred taxes on the undistributed earnings (see Note I in the Notes To Consolidated Financial Statements). In accordance with the applicable tax laws of China, the Company is entitled to a preferential tax rate of 0% for the first two years after utilization of any tax loss carryforwards and a 50% tax reduction for the succeeding three years beginning in 2003. The favorable aggregate tax and per share effect was $73,000 or $.01 per share for the nine months ended September 30, 2003 and $452,000 or $.08 per share for the nine months ended September 30, 2002.
As a result, net income for the nine months ended September 30, 2003 was $1.4 million, which represents an increase of $.5 million, or 50% compared to 2002.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $13.9 million for the first nine months of 2003 and relatively unchanged when compared to the same period in 2002. A decrease in working capital of $1.2 million in 2003 compared to 2002 and an increase of $.5 million in net income was offset by a $1.7 million reduction of non-cash expenses in 2003 when compared to 2002. Higher non-cash expenses in the previous year were primarily attributable to the abandonment charge recorded in 2002.
Net cash used in investing activities of $3.7 million represents an increase of $1.1 million when compared to 2002. This increase is primarily a result of proceeds of $1.2 million received on the Company’s sale of its Birmingham, Alabama facility in 2002. The Company is continually analyzing potential acquisition candidates and business alternatives but has no commitments that would materially impact the operations of the business.
On October 2, 2003, the Company sold its 24% interest in a joint venture in Japan. Cash proceeds of the sale were approximately $7.1 million, and he transaction resulted in a pretax gain of $3.5 million, which includes the reversal of $1.7 million in cumulative translation adjustment related to the equity investment. The entire amount of the proceeds is taxable resulting in a tax of $2.6 million and therefore reduces the gain to $.9 million after tax. Since the sale occurred subsequent to the end of the quarter, it will not be recorded until the fourth quarter of 2003. However, the incremental tax impact related to the Company’s share of the joint venture’s historical earnings net of dividends received was recorded in September without any corresponding income recognition (see Note I in the Notes To Consolidated Financial Statements).
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Cash used in financing activities was $7.8 million compared to $8.0 million in the previous year. This was primarily a result of lower borrowings in 2003 compared to 2002.
The Company’s financial position remains strong with a current ratio of 2.8:1 at September 30, 2003 compared to 3.3:1 at December 31, 2002. This decrease is primarily due to long-term debt of $1.9 million becoming current during the nine-month period ending September 30, 2003. Working capital of $52.6 million remains consistent with December 31, 2002 of $54.6 million. At September 30, 2003, the Company’s unused balance under its credit facility was $20 million and its debt to equity percentage was 3%. The Company believes its cash on hand, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
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Activities (FAS 149). This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The adoption of this Statement did not have a material impact on the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (FAS 150). This Statement establishes standards for how financial instruments with characteristics of both liabilities and equity are classified and measured. This Statement requires that an issuer classify financial instruments as a liability or asset based on the requirements of the Statement, which may have been previously classified as equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement did not have a material impact on the Company.
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 September 30, 2003 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 foreign currency translation expense of less than $.1 million for the nine months ended September 30, 2003. 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 $4.9 million at September 30, 2003. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of less than $.1 million for the nine months ended September 30, 2003.
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 exchange rates would have a favorable/unfavorable impact on fair values of $1.9 million and on income before tax of $.1 million.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Securities and Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2003. 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 September 30, 2003.
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.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
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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 the Company files 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:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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EXHIBIT INDEX
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