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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
Commission file number 0-31164
PREFORMED LINE PRODUCTS COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-0676895
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
660 Beta Drive
Mayfield Village, Ohio 44143
- --------------------------------------- ---------------------------------
(Address of Principal Executive Office) (Zip Code)
(440) 461-5200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: (None)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $2 par value per share
-------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of voting and non-voting common shares held by
non-affiliates of the registrant as of June 30, 2003 was $38,323,600, based on
the closing price of such common shares, as reported on the NASDAQ National
Market System. As of March 12, 2004, there were 5,714,433 common shares of the
Company ($2 par value) outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held April 26, 2004 are incorporated by reference into Part
III, Items 10, 11, 12, 13 and 14.
TABLE OF CONTENTS
PAGE
----
PART I.
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 11
Item 3. Legal Proceedings..................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................................... 13
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.................. 14
Item 6. Selected Financial Data............................................................... 15
Item 7. Management Discussion and Analysis of Financial Condition and Results
of Operations....................................................................... 15
Item 7A. Quantitative and Qualitative Disclosures.............................................. 23
Item 8. Financial Statements and Supplementary Data........................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 45
Item 9A. Controls and Procedures............................................................... 45
PART III.
Item 10. Directors and Executive Officers of the Registrant.................................... 45
Item 11. Executive Compensation ............................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 45
Item 13. Certain Relationships and Related Transactions........................................ 46
Item 14. Principal Accounting Fees and Services................................................ 46
PART IV.
Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K...................... 46
SIGNATURES.................................................................................................... 48
Schedule II - Valuation and Qualifying Accounts............................................................... 49
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FORWARD-LOOKING STATEMENTS
This Form 10-K and other documents we file with the Securities and
Exchange Commission contain forward-looking statements regarding the Company's
and management's beliefs and expectations. As a general matter, forward-looking
statements are those focused upon future plans, objectives or performance (as
opposed to historical items) and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature. Such forward-looking statements are subject to uncertainties and factors
relating to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the Company's control. Such
uncertainties and factors could cause the Company's actual results to differ
materially from those matters expressed in or implied by such forward-looking
statements.
The following factors, among others, could affect the Company's future
performance and cause the Company's actual results to differ materially from
those expressed or implied by forward-looking statements made in this report:
- The overall demand for cable anchoring and control hardware
for electrical transmission and distribution lines on a
worldwide basis, which has a slow growth rate in mature
markets such as the United States, Canada, Japan and Western
Europe;
- The effect on the Company's business resulting from economic
uncertainty within Latin American regions;
- Technology developments that affect longer-term trends for
communication lines such as wireless communication;
- The Company's success at continuing to develop proprietary
technology to meet or exceed new industry performance
standards and individual customer expectations;
- The rate of progress in continuing to reduce costs and in
modifying the Company's cost structure to maintain and enhance
the Company's competitiveness;
- The Company's success in strengthening and retaining
relationships with the Company's customers, growing sales at
targeted accounts and expanding geographically;
- The extent to which the Company is successful in expanding the
Company's product line into new areas for inside plant;
- The Company's ability to identify, complete and integrate
acquisitions for profitable growth;
- The potential impact of consolidation, deregulation and
bankruptcy among the Company's suppliers, competitors and
customers;
- The relative degree of competitive and customer price pressure
on the Company's products;
- The cost, availability and quality of raw materials required
for the manufacture of products;
- The effects of fluctuation in currency exchange rates upon the
Company's reported results from international operations,
together with non-currency risks of investing in and
conducting significant operations in foreign countries,
including those relating to political, social, economic and
regulatory factors;
- Changes in significant government regulations affecting
environmental compliance;
- The Company's ability to continue to compete with larger
companies who have acquired a substantial number of the
Company's former competitors;
- The Company's ability to compete in the domestic data
communications market;
2
- The Company's ability to recover sales in the
telecommunication markets;
- The Company's ability to have continued success in emerging
markets such as China;
- The Company's ability to internally develop new products;
- The effect on the Company's business resulting from global
health risks;
- The Company's successful wind-down of the European data
communications operations including the successful collection
of accounts receivable and liquidation of inventories; and
- Other factors disclosed previously and from time to time in
the Company's filings with the Securities and Exchange
Commission. These filings can be found on the Securities and
Exchange Commission's website at www.sec.gov.
PART I
ITEM 1. BUSINESS
BACKGROUND
Preformed Line Products Company ("the Company") is an international
designer and manufacturer of products and systems employed in the construction
and maintenance of overhead and underground networks for the energy,
communications, cable operators, information (data communication) and other
similar industries. The Company's primary products support, protect, connect,
terminate and secure cables and wires. The Company also manufactures a line of
products serving the voice and data transmission markets. The Company's goal is
to continue to achieve profitable growth as a leader in the innovation,
development, manufacture and marketing of technically advanced products and
services related to energy, communications and cable systems and to take
advantage of this leadership position to sell additional quality products in
familiar markets.
The Company serves a worldwide market through strategically located
domestic and international manufacturing facilities. Each of the Company's
domestic manufacturing facilities and many of the Company's foreign
manufacturing facilities are International Standards Organization ("ISO") 9001
certified. The ISO 9001 certification is an internationally recognized quality
standard for manufacturing and assists the Company in marketing its products in
certain markets. The Company's customers include public and private energy
utilities and communication companies, cable operators, financial institutions,
governmental agencies, original equipment manufacturers, contractors and
subcontractors, distributors and value-added resellers. The Company is not
dependent on a single customer or a few customers. No single customer accounts
for more than ten percent of the Company's consolidated revenues.
The Company's products include:
- Formed Wire and Related Hardware Products
- Protective Closures
- Plastic Products
- Data Communication Interconnection Devices
- Other Products
Formed Wire Products are used in the energy, communications, cable and
non-utility industries to support, protect, terminate and secure both power
conductor and communication cables and to control cable dynamics (e.g.,
vibration). These products are based on the principle of forming a variety of
stiff wire materials into a helical (spiral) shape. Advantages of using the
Company's helical formed wire products are that they are economical, dependable
and easy to use. The Company introduced formed wire products to the power
industry over 50 years ago and such products enjoy an almost universal
acceptance in the Company's markets. Formed wire and related
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hardware products are approximately 38%, 43%, and 46% of the Company's revenues
in 2001, 2002 and 2003, respectively.
Protective Closures, including splice cases, are used to protect fixed
line communication networks, such as copper cable or fiber optic cable, from
moisture, environmental hazards and other potential contaminants. Protective
closures are approximately 33%, 28% and 29% of the Company's revenues in 2001,
2002 and 2003, respectively.
Plastic Products, including guy markers, tree guards, fiber optic cable
markers and pedestal markers are used in energy, communications, cable
television and non-utility industries to identify power conductors,
communication cables and guy wires. Plastic products are approximately 3%, 3%
and 3% of the Company's revenues in 2001, 2002 and 2003, respectively.
Data Communication Interconnection Devices are products used in
high-speed data systems to connect electronic equipment. Data communication
interconnection devices are approximately 22%, 22% and 17% of the Company's
revenues in 2001, 2002 and 2003, respectively.
"Other" Products include hardware assemblies, pole line hardware,
resale products, underground connectors and urethane products. They are used by
energy, communications, cable and non-utility industries for various
applications and are defined as products that compliment the Company's core line
offerings. "Other" products are approximately 4%, 4% and 5% of the Company's
revenues in 2001, 2002 and 2003, respectively.
CORPORATE HISTORY
The Company was incorporated in Ohio in 1947 to manufacture and sell
helically shaped "armor rods," which are sets of stiff helically shaped wires
applied on an electrical conductor at the point where it is suspended or held.
Thomas F. Peterson, the Company's founder, developed and patented a unique
method to manufacture and apply these armor rods to protect electrical
conductors on overhead power lines. Over a period of years Peterson and the
Company developed, tested, patented, manufactured and marketed a variety of
helically shaped products for use by the electrical and telephone industries.
Although all of Peterson patents have now expired, those patents served as the
nucleus for licensing the Company's formed wire products abroad.
The success of the Company's formed wire products in the United States
led to expansion abroad. The first international license agreement was
established in the mid-1950s in Canada. In the late 1950s the Company's products
were being sold through joint ventures and licensees in Canada, England,
Germany, Spain and Australia. Additionally, the Company began export operations
and promoted products into other selected offshore markets. The Company
continued its expansion program, bought out most of the original licensees, and,
by the mid-1990s, had complete ownership of operations in Australia, Brazil,
Canada, Great Britain, South Africa and Spain and held a minority interest in
two joint ventures in Japan.
Recognizing the need for a stronger presence in the fast growing Asian
market, in 1996 the Company also formed a joint venture in China and, in 2000,
became sole owner of this venture. All of the Company's international
subsidiaries operate as independent business units with the necessary
infrastructure (manufacturing, engineering, marketing and general management) to
support local business activities. Each is staffed with local personnel at all
levels to ensure that the Company is well versed in local business practices,
cultural constraints, technical requirements and the intricacies of local client
relationships.
In 1968, the Company expanded into the underground telecommunications
field by acquisition of the Smith Company located in California. The Smith
Company had a patented line of buried closures and pressurized splice cases.
These closures and splice cases protect copper cable openings from environmental
damage and degradation. The Company continued to build on expertise acquired
through the acquisition of the Smith Company and in 1995 introduced the highly
successful COYOTE(R) Closure line of products. Since 1995 nine domestic and
three foreign patents have been granted to the Company on the COYOTE Closure.
None of the COYOTE Closure patents have expired. The earliest COYOTE Closure
patent was filed in April 1995 and will not expire until April 2015.
4
In 2001, the Company introduced its new ARMADILLO(R) Closure, a plastic
pressurized underground, buried and aerial splice case for copper voice, data
and video cables. This new product is an alternative to the Company's stainless
steel splice case, which for over 30 years has set an industry standard for
waterproof, re-enterable underground and buried closures and aerial
applications.
In 1993, the Company purchased the assets of Superior Modular Products
Company. Located in Asheville, North Carolina, Superior Modular Products is a
technical leader in the development and manufacture of high-speed
interconnection devices for voice, data and video applications. This acquisition
was the catalyst to expand the Company's range of communication products to
components for structuring cabling systems used inside a customer's premises.
In 2000, the Company acquired Rack Technologies Pty., Ltd,
headquartered in Sydney, Australia. Rack Technologies is a specialist
manufacturer of rack system enclosures for the communications, electronics and
securities industries. This acquisition complements and broadens the Company's
existing line of data communication products used inside a customer's premises.
In 2003, the Company acquired assets of Richardson Pacific Ltd located
in Sydney, Australia. This acquisition complements the existing product lines
manufactured at Rack Technologies for the data communications industry.
In 2003, the Company sold its 24% interest in Toshin Denko Kabushiki
Kaisha in Osaka, Japan. The Company's investment in Toshin Denko dates back to
1961 when the Joint Venture Company was founded. The Company realized a profit
of $.9 million after tax from the sale.
The Company's World headquarters is located at 660 Beta Drive, Mayfield
Village, Ohio 44143. Telephone number (440) 461-5200.
BUSINESS
The demand for the Company's products comes primarily from new,
maintenance and repair construction for the energy industry, communication and
data communication customers. The Company's customers use many of the Company's
products, including formed wire products in maintenance construction, to
revitalize the aging outside plant infrastructure. Many of the Company's
products are used on a proactive basis by the Company's customers to reduce and
prevent lost revenue. A single malfunctioning line could cause the loss of
thousands of dollars per hour for a power or communication customer. A
malfunctioning fiber cable could also result in substantial revenue loss. Repair
construction by the Company's customers generally occurs in the case of
emergency or natural disasters, such as hurricanes, tornadoes, earthquakes,
floods or ice storms. Under these circumstances, the Company provides 24-hour
service to get the repair products to customers as quickly as possible.
The Company has adapted the formed wire products' helical technology
for use in a wide variety of fiber optic cable applications that have special
requirements. The Company's formed wire products are uniquely qualified for
these applications due to the gentle gripping over a greater length of the fiber
cable. This is an advantage over traditional pole line hardware clamps that
compress the cable to the point of possible fatigue and optical signal
deterioration.
The Company's protective closures and splice cases are used to protect
cable from moisture, environmental hazards and other potential contaminants. The
Company's splice case is an easily re-enterable closure that allows utility
maintenance workers access to the cable splice closure to repair or add
communications services. Over the years, the Company has made many significant
improvements in the splice case that have greatly increased its versatility and
application in the market place. The Company also designs and markets custom
splice cases to satisfy specific customer requirements. This has allowed the
Company to remain a strong partner with several primary customers and has earned
the Company the reputation as a responsive and reliable supplier.
In the early 1980s, fiber optic cable was first deployed in the outside
plant environment. Through fiber optic technologies, a much greater amount of
both voice and data communication can be transmitted reliably. In addition, this
technology solved the cable congestion problem that the large count copper cable
was causing in
5
underground, buried and aerial applications. The Company developed and adapted
copper closures for use in the emerging fiber optic world. In the late 1980s,
the Company developed a series of splice cases designed specifically for fiber
application. In the mid-1990s, the Company developed its plastic COYOTE Closure,
and has since expanded the product line to address emerging Fiber-to-the-Premise
(FTTP) applications. The COYOTE Closure is an example of the Company developing
a new line of proprietary products to meet the changing needs of its customers.
The Company also designs and manufactures data communication
interconnect devices and enclosures for data communications networks, offering a
comprehensive line of copper and fiber optic cross-connect systems. The product
line enables reliable, high-speed transmission of data over customer's local
area networks.
JOINT VENTURES AND LICENSE AGREEMENTS
The Company is currently a minority partner in a joint venture in
Japan, holding a 49% ownership interest in Japan PLP Co. Ltd. This joint venture
is not significant to the Company's overall business. During the fourth quarter
of 2003 the Company sold its 24% ownership interest in its joint venture with
Toshin Denko Kabushiki Kaisha. 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 was taxable
resulting in a tax of $2.6 million and therefore reduces the gain to $.9 million
after tax.
The Company receives royalties under twenty separate license
agreements. The Company does not believe that its business is materially
dependent on any one license agreement.
MARKETS
The Company markets its products to the energy, communications, cable
operators, information (data communication) and non-utility industries. While
rapid changes in technology have blurred the distinctions between telephone,
cable, and data communication, the energy industry is clearly separate. The
Company's role in the energy industry is to supply formed wire products and
related hardware used with the electrical conductors, cables and wires that
transfer power from the generating facility to the ultimate user of that power.
Formed wire products are used to support, protect, terminate and secure both
power conductor and communication cables and to control cable dynamics.
Electric Utilities - Transmission. The electric transmission grid is
the interconnected network of high voltage aluminum conductors used to transport
large blocks of electric power from generating facilities to distribution
networks. Currently, there are three major power grids in the United States: the
Eastern Interconnect, the Western Interconnect and the Texas Interconnect.
Virtually all electrical energy utilities are connected with at least one other
utility by one of these major grids. The Company believes that the transmission
grid has been neglected throughout much of the United States for more than a
decade. Additionally, because of deregulation, many electric utilities have
turned this responsibility over to Independent System Operators (ISOs), who have
also been slow to add transmission lines. With demand for power now exceeding
supply in some areas, the need for the movement of bulk power from the
energy-rich states to the energy-deficient areas means that new transmission
lines will likely be built and many existing lines will likely be refurbished.
In addition, consolidations are also driving the demand for new transmission
lines, because merged utilities need to tie their systems together. The Company
believes that this will generate growth for the Company's products in this
market over at least the next several years. In addition, increased construction
of international transmission grids is occurring in many regions of the world.
However, consolidation in the markets the Company services may also have an
adverse impact on the Company's revenues.
Electric Utilities - Distribution. The distribution market includes
those utilities that distribute power from a substation where voltage is reduced
to levels appropriate for the consumer. Unlike the transmission market in this
era of deregulation, distribution is still handled primarily by local electric
utilities. These utilities are motivated to reduce cost in order to maintain and
enhance their profitability. The Company believes that its growth in the
distribution market will be achieved primarily as a result of incremental gains
in market share driven by emphasizing the Company's quality products and service
over price. Internationally, especially in the developing
6
regions, there is increasing political pressure to extend the availability of
electricity to additional populations. Through its global network of factories
and sales offices, the Company is prepared to take advantage of this new growth
in construction.
Communication and Cable. The communications and cable industries have
seen a major reduction in new and maintenance related construction both
domestically and worldwide over the past three years. Major developments,
including the Internet and other high-speed data communications technologies,
ongoing convergence between the cable and communications industries, and demand
for enhanced communications services, have led to a changing regulatory and
competitive environment in many markets throughout the world. The deployment of
new metro networks and improvements to existing networks for advanced
applications has also stopped or been put on hold for the foreseeable future.
Cable operators, local communications operators and power utilities are
building, rebuilding or upgrading signal delivery networks in developing
countries. These networks are designed to deliver video and voice transmissions
and provide Internet connectivity to individual residences and businesses.
Operators deploy a variety of network technologies and architectures, to carry
broadband and narrowband signals. These architectures are constructed of
electronic hardware connected via coaxial cables, copper wires or optic fibers.
The Company manufactures closures that these industries use when they require
connections or splice housings in a secure, protective closure and cable
management connectivity systems.
As critical components of the outdoor infrastructure, closures provide
protection against weather and vandalism and permit ready access to devices for
technicians who maintain and manage the system. Cable operators and local
telephone network operators place great reliance on manufacturers of protective
closures because any material damage to the signal delivery networks is likely
to disrupt communications services. In addition to closures, the Company
supplies the communication and cable industry with its formed wire products to
hold, support, protect and terminate the copper wires and cables and the fiber
optic cables used by that industry to transfer voice, video or data signals.
The industry has developed new technological methods to increase the
usage of copper-based plant through high-speed digital subscriber lines (DSLs).
The popularity of these services, the regulatory environment and the
increasingly fierce competition between communications and cable operators has
driven the recent move toward building out the "last mile" in fiber networks.
FTTP promises to be the next wave in broadband innovation and high-speed
delivery carrying fiber optic technology all the way into homes and businesses.
The Company has been actively pursuing the development of products that address
this shift in emphasis among our customers in this market.
Data Communication. The data communication market is being driven by
the continual demand for increased bandwidth. Growing Internet Service Providers
(ISPs), construction in Wide Area Networks (WANs) and demand for data
communication in the workplace are all key elements to the increased demand for
the connecting devices made by the Company. This market will increasingly be
focused on the systems that provide the highest speed and highest quality
signal, such as fiber optic and copper networks. The Company's connecting
devices are sold to a number of categories of customers including (i) original
equipment manufacturers (OEMs), which incorporate the Company's connector
technology in their product offering, (ii) ISPs, (iii) large companies and
organizations which have their own LAN (local area network) for data
communication, and (iv) national and international distributors of structured
cabling systems and components for use in the above markets.
Non-Utility Industries. The Company's formed wire products can also be
used in other industries which require a method of securing or terminating
cables, including the metal building and tower and antenna industries, the
arborist industry, and various applications within the marine systems industry.
Products other than formed wire products are also marketed to other industries.
For example, the Company's urethane capabilities allow it to market products to
the light rail industry. The Company continues to explore new and innovative
uses of its manufacturing capabilities; however, these markets remain a small
portion of overall consolidated sales.
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FOREIGN OPERATIONS
Except for geography, the foreign business segment of the Company is
essentially the same as its domestic business. It manufactures in its foreign
plants the same types of products as are sold domestically, it sells to the same
types of customers and faces the same types of competition (and in some cases
the same competitors). Sources of supply of raw materials are not significantly
different internationally. See Note L in the Notes To Consolidated Financial
Statements for information relating to certain foreign and domestic financial
data of the Company.
While a number of the Company's foreign plants are in developed
countries, the Company believes it has strong market opportunities in developing
countries, in particular, China, where the need for the transmission and
distribution of electrical power is significant. The Company is now serving the
Far East market, other than China and Japan, primarily from Australia. In
addition, as the need arises, the Company is prepared to establish new
manufacturing facilities abroad. For example, in January 2001 the Company moved
its Mexican manufacturing operations from a leased facility in Mexico City,
Mexico to a newly constructed facility in Queretaro, Mexico. During 2003 a
25,000 square foot addition was completed at the manufacturing facility in
China.
SALES AND MARKETING
Nationally and internationally, the Company markets its products
through a direct sales force and manufacturer's representatives. The latter are
independent organizations that represent the Company as well as other
complimentary product lines. These organizations are paid a commission based on
the sales amount. The direct sales force is employed by the Company and works
with the manufacturer's representatives as well as key direct accounts and
distributors, who also buy and resell the Company's products.
RESEARCH AND DEVELOPMENT
The Company is committed to providing technical leadership through
scientific research and product development in order to continue to expand the
Company's position as a supplier to the communications and power industries.
Research is conducted on a continuous basis using internal experience in
conjunction with outside professional expertise to develop state-of-the-art
materials for all of the Company's products that capitalize on cost-efficiency
while offering exacting mechanical performance that meets or exceeds industry
standards. The Company's research and development activities have resulted in
numerous patents being issued to the Company (see "Patents" below).
Early in its history the Company recognized the need to understand the
performance of its products and the needs of its customers. To that end, the
Company developed its own Research and Engineering Center in Cleveland, Ohio.
Using the Research and Engineering Center, engineers and technicians simulate a
wide range of external conditions encountered by the Company's products to
ensure quality, durability and performance. The work performed in the Research
and Engineering Center included advanced studies and experimentation with
various forms of vibration. This work has contributed significantly to the
collective knowledge base of the industries the Company serves and is the
subject matter of many papers and seminars presented to these industries. The
Company also developed the industry's first mobile testing laboratory, the
Dynalab, to monitor the phenomena affecting overhead conductor, wire and cable,
allowing the Company's sales representatives to work directly with customers in
the field for training, problem identification and problem solving.
In 1979, the Company relocated and expanded its Research and
Engineering Center as a 29,000-square-foot addition to its World Headquarters in
Mayfield Village, Ohio. The Company believes that this facility is one of the
most sophisticated in the world in its specialized field. The expanded Research
and Engineering Center also has an advanced prototyping technology machine
on-site to develop models of new designs where intricate part details are
studied prior to the construction of expensive production tooling. Today, the
Company's reputation for vibration testing, tensile testing, fiber optic cable
testing, environmental testing, field vibration monitoring and third-party
contract testing is a major asset. In addition to testing, the work done at the
Company's Research and Development Center continues to fuel product development
efforts. For example, the Company estimates that approximately 10% to 15% of
2003 revenues were attributed to products developed by the Company in the past
five years. In addition, the Company's position in the industry is further
reinforced by its long-standing leadership role in many key
8
international technical organizations including IEEE (Institute of Electrical
and Electronics Engineers), CIGRE (Counsiel Internationale des Grands Reseaux
Electriques a Haute Tension), and IEC (International Electromechanical
Commission). These organizations are charged with the responsibility of
establishing industrywide specifications and performance criteria. See Note A in
the Notes To Consolidated Financial Statements for information relating to the
Company's research and development expenses in 2001, 2002 and 2003.
PATENTS
The Company applies for patents in the United States and other
countries, as appropriate, to protect its significant patentable developments.
As of December 31, 2003, the Company had in force 43 U.S. patents and 39 foreign
patents in five countries and had pending seven U.S. patent applications and six
foreign applications. While such domestic and foreign patents expire from time
to time, the Company continues to apply for and obtain patent protection on a
regular basis. Patents held by the Company in the aggregate are of material
importance in the operation of the Company's business. The Company, however,
does not believe that any single patent, or group of related patents, is
essential to the Company's business as a whole or to any of its businesses.
Additionally, the Company owns and uses a substantial body of proprietary
information and numerous trademarks. The Company relies on nondisclosure
agreements to protect trade secrets and other proprietary data and technology.
As of December 31, 2003, the Company had obtained U.S. registration on 30
trademarks and two trademark applications remained pending. Foreign
registrations amounted to 171 registrations in 34 countries, with 18 pending
foreign registrations.
Since June 8, 1995, United States patents have been issued for terms of
20 years beginning with the date of filing of the patent application. Prior to
that time, a U.S. patent had a term of 17 years from the date of its issuance.
Patents issued by foreign countries generally expire 20 years after filing. U.S.
and foreign patents are not renewable after expiration of their initial term.
U.S. and foreign trademarks are generally speaking perpetual, renewable in
10-year increments upon a showing of continued use. To the knowledge of
management the Company has not been subject to any significant allegation or
charges of infringement of intellectual property rights by any organization.
In the normal course of business, the Company from time to time makes
and receives inquiries with regard to possible patent and trademark
infringement. The extent of such inquiries from third parties has been limited
to verbal remarks to Company representatives at industry trade shows. The
Company believes that it is unlikely that the outcome of these inquiries will
have a material adverse effect on the Company's financial position.
COMPETITION
All of the markets that the Company serves are highly competitive. In
each market the principal methods of competition are price, performance, and
service. The Company believes, however, that several factors (described below)
provide the Company with a competitive advantage.
- The Company has a strong and stable workforce. This consistent
and continuous knowledge base has afforded the Company the
ability to provide superior service to the Company's customers
and representatives.
- The Company's Research and Engineering Center in Cleveland,
Ohio and departments of subsidiary locations maintain a strong
technical support function to develop unique solutions to
customer problems.
- The Company is vertically integrated both in manufacturing and
distribution, continually upgrading equipment and processes.
- The Company is sensitive to the marketplace and provides an
extra measure of service in cases of emergency, storm damage
and other rush situations. This high level of customer service
and customer responsiveness has become a hallmark of the
Company.
- The Company's 14 manufacturing locations ensure close support
and proximity to customers worldwide.
9
Domestically, there are two competitors for formed wire products.
Although it has other competitors in many of the countries where it has plants,
the Company has leveraged its expertise and is very strong in the global market.
The Company believes that it is the world's largest manufacturer of formed wire
products. However, the Company's formed wire products compete against other pole
line hardware products manufactured by other companies.
Minnesota Manufacturing and Mining Company ("3M") is the primary
domestic competitor of the Company for pressurized copper closures. The Company
believes that its market share exceeds 3M's. Based on its experience in the
industry, the Company believes its market share stands at 60%. Internationally,
with the exception of Canada, the Company is in the early stages of entering the
closure market. The fiber optic closure market is one of the most competitive
product areas for the Company, with the Company competing against, among others,
Tyco International Ltd. and 3M. There are a number of primary competitors and
several smaller niche competitors that compete at all levels in the marketplace.
The Company believes that it is one of four leading suppliers of fiber optic
closures.
The Company's data communication competitors range from assemblers of
low cost, low quality components, to well-established multinational
corporations. The Company's competitive strength is its technological leadership
and worldwide presence. Additionally, the Company provides product to its
licensees and other companies on a privately branded basis. Patented technology
developed by the Company is currently licensed to many of its largest
competitors. Low-cost Asian competitors, however, keep pressure on prices and
will continue to do so.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal raw materials used by the Company are galvanized wire,
stainless steel, aluminized steel wire, aluminum re-draw rod, plastic
(polyethylene and PVC) resins, glass-filled plastic compounds, neoprene rubbers
and aluminum castings. The Company also uses certain other materials such as
fasteners, packaging materials and communications cable. The Company believes
that it has adequate sources of supply for the raw materials used in its
manufacturing processes and it regularly attempts to develop and maintain
sources of supply in order to extend availability and encourage competitive
pricing of these products.
Most plastic resins are purchased under annual contracts to stabilize
costs and improve delivery performance and are available from a number of
reliable suppliers. Aluminized steel wire and aluminum re-draw rod are purchased
in standard stock diameters and coils under annual contracts available from a
number of reliable suppliers. Rolled stainless steel is purchased under annual
contracts.
The Company also relies on certain other manufacturers to supply
products that complement the Company's product lines, such as aluminum and
ferrous castings, fiber optic cable and connectors, circuit boards and various
metal racks and cabinets. The Company believes there are multiple sources of
supply for these products.
There have been no shortages in materials that have had a material
adverse effect on the business, and none are expected.
BACKLOG ORDERS
The Company's backlog is approximately 6% of net sales in 2003. The
Company's order backlog generally represents two to four weeks of sales. All
customer orders entered are firm at the time of entry. Substantially all orders
are shipped within a two to four week period unless the customer requests an
alternative date.
SEASONALITY
The Company markets products that are used by utility maintenance and
construction crews worldwide. The products are marketed through distributors and
directly to end users, who maintain stock to ensure adequate
10
supply for their customers and construction crews. As a result, the Company does
not have wide variation in sales from quarter to quarter.
ENVIRONMENTAL
The Company is subject to extensive and changing federal, state, and
local environmental laws, including laws and regulations that (i) relate to air
and water quality, (ii) impose limitations on the discharge of pollutants into
the environment, (iii) establish standards for the treatment, storage and
disposal of toxic and hazardous waste, and (iv) require proper storage,
handling, packaging, labeling, and transporting of products and components
classified as hazardous materials. Stringent fines and penalties may be imposed
for noncompliance with these environmental laws. In addition, environmental laws
could impose liability for costs associated with investigating and remediating
contamination at the Company's facilities or at third-party facilities at which
the Company has arranged for the disposal treatment of hazardous materials.
Although no assurances can be given, the Company believes it is in
compliance in all material respects with all applicable environmental laws and
the Company is not aware of any noncompliance or obligation to investigate or
remediate contamination that could reasonably be expected to result in a
material liability. The Company does not expect to make any material capital
expenditure during 2004 for environmental control facilities. The environmental
laws continue to be amended and revised to impose stricter obligations, and
compliance with future additional environmental requirements could necessitate
capital outlays. However, the Company does not believe that these expenditures
should ultimately result in a material adverse effect on its financial position
or results of operations. The Company cannot predict the precise effect such
future requirements, if enacted, would have on the Company, although the Company
believes that such regulations would be enacted over time and would affect the
industry as a whole.
EMPLOYEES
At December 31, 2003, the Company and its consolidated subsidiaries had
1,265 employees. Approximately 52% of the Company's employees are located in the
United States.
AVAILABLE INFORMATION
We maintain an Internet site at http://www.preformed.com. There we make
available, free of charge, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and any amendments to those reports, as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the SEC. Our SEC reports can be accessed through our investor
relations section of our Internet site. The information found on our Internet
site is not part of this or any other report we file with or furnish to the SEC.
The public may read and copy any materials the Company files with or
furnishes to the SEC at the SEC's Public Reference Room at 450 Fifth Street,
NW., Washington, DC 20549. Information on the operation of the Public Reference
Room is available by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information filed with the SEC by electronic filers. The
SEC's Internet site is http://www.sec.gov. The Company also has a link from its
Internet site to the SEC's Internet site, this link can be found on the investor
relations page of our Internet site.
ITEM 2. PROPERTIES
The Company currently owns or leases 18 facilities, which together
contain approximately 1.4 million square feet of manufacturing, warehouse,
research and development, sales and office space worldwide. Most of the
Company's international facilities contain space for offices, research and
engineering (R&E), warehousing and manufacturing with manufacturing using a
majority of the space. The following table provides information regarding the
Company's facilities:
11
LOCATION USE OWNED/LEASED SQUARE FEET
-------- --- ------------ -----------
1. Mayfield Village, Ohio Corporate Headquarters Owned 62,000
Research and Engineering
Center
2. Rogers, Arkansas Manufacturing Owned 310,000
Warehouse
Office
3. Albemarle, North Carolina Manufacturing Owned 261,000
Warehouse
Office
4. Asheville, North Carolina Manufacturing Owned 46,300
R&E
Warehouse
Office
5. Sydney, Australia Manufacturing Leased 17,200
R&E
Warehouse
Office
6. Sydney, Australia Manufacturing Owned 90,950
R&E
Warehouse
Office
7. Sydney, Australia Manufacturing Leased 12,600
Warehouse
Office
8. Sao Paulo, Brazil Manufacturing Owned 146,250
R&E
Warehouse
Office
9. Cambridge, Ontario, Canada Manufacturing Owned 70,450
Warehouse
Office
10. Andover, Hampshire, England Manufacturing Owned 88,770
R&E
Warehouse
Office
11. Queretaro, Mexico Manufacturing Owned 52,870
Warehouse
Office
12. Mexico City, Mexico Office Leased 1,100
12
13. Pietermaritzburg, South Africa Manufacturing Owned 74,200
R&E
Warehouse
Office
14. Sevilla, Spain Manufacturing Owned 74,000
R&E
Warehouse
Office
15. Beijing, China Manufacturing Owned 59,100
Warehouse
Office
16. Lower Hutt, New Zealand Manufacturing Leased 10,350
Warehouse
Office
17. Glenrothes Fife, Scotland Office Leased 10,000
18. Singapore, Singapore Warehouse Leased 11,766
Office
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may be subject to litigation incidental
to its business. The Company is not a party to any pending legal proceedings
that the Company believes would, individually or in the aggregate, have a
material adverse effect on its financial condition, results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders of the
Registrant during the quarter ended December 31, 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- -------------------- ----- -----------------------------------------
Jon R. Ruhlman 76 Chairman of the Company
Robert G. Ruhlman 47 President and Chief Executive Officer
R. Jon Barnes 51 Vice President - Marketing and Sales
Eric R. Graef 51 Vice President - Finance and Treasurer
William H. Haag 40 Vice President - International Operations
Robert C. Hazenfield 50 Vice President - Research and Engineering
J. Cecil Curlee Jr. 47 Vice President - Human Resources
The following sets forth the name and recent business experience for
each person who is an executive officer of the Company at March 1, 2004.
Jon R. Ruhlman has been the Chairman of the Company since 1975. He
served as Chief Executive Officer from 1975 until July 2000. Jon R. Ruhlman
joined the Company in 1954 as an engineer in the Company's Research and
Engineering Center. He has served as a Director of the Company since 1956.
Robert G. Ruhlman became Chief Executive Officer in July 2000. He had
served as President since 1995 (a position he continues to hold) and Chief
Operating Officer from 1995 until July 2000. Robert G. Ruhlman joined
13
the Company in 1979 as an engineer in the Company's former Marine Products
Division. He served as Vice President, Corporate Planning from 1989 until
becoming Executive Vice President in 1992. He has served as a Director of the
Company since 1992.
R. Jon Barnes was elected Vice President -- Marketing and Sales in
January 1998.
Eric R. Graef was elected Vice President -- Finance and Treasurer in
December 1999. Prior to that time, Mr. Graef was employed by The Lubrizol
Corporation, a $1.7 billion specialty chemical manufacturer, in various
financial positions from 1986 until rejoining the Company in December 1999. Mr.
Graef was previously employed by the Company from 1978 through 1986.
William H. Haag was elected Vice President -- International Operations
in April 1999. From January 1997 until January 1999 he was Regional Operations
Manager and from January 1999 until April 1999 he was director of International
Operations.
Robert C. Hazenfield has served as Vice President -- Research and
Engineering since April 1998.
J. Cecil Curlee Jr. was hired in 1982 in the position of Personnel
Manager at the Albemarle, North Carolina facility. He was promoted to Director
of Employee Relations in September 2002 and was elected Vice President, Human
Resources in January 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares are traded on NASDAQ under the trading
symbol "PLPC". As of March 12, 2004, the Company had approximately 214
shareholders of record. The following table sets forth for the periods indicated
(i) the high and low closing sale prices per share of the Company's Common
Shares as reported by the NASDAQ and (ii) the amount per share of cash dividends
paid by the Company.
While the Company expects to continue to pay dividends of a comparable
amount in the near term, the declaration and payment of future dividends will be
made at the discretion of the Company's Board of Directors in light of then
current needs of the Company. Therefore, there can be no assurance that the
Company will continue to make such dividend payments in the future.
Years Ended
---------------------------------------------------------------------------
December 31, 2003 December 31, 2002
----------------------------------- -------------------------------
Quarter High Low Dividend High Low Dividend
- ---------------------------------------------------------------------------------------------
First $17.15 $13.88 $0.20 $20.25 $18.25 $0.20
Second 15.47 13.50 0.20 20.45 18.15 0.20
Third 20.00 14.70 0.20 20.23 16.80 0.20
Fourth 31.50 18.45 0.20 19.70 15.65 0.20
EQUITY COMPENSATION PLAN INFORMATION
The information required by Item 201(d) of Regulation S-K is set forth
in Note G to the Notes to Consolidated Financial Statements.
14
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
---------------------------------------------------------------
2003 2002 2001 2000 1999
---------------------------------------------------------------
THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA
NET SALES AND INCOME
Net sales $ 153,333 $ 169,842 $ 196,365 $ 207,332 $ 195,245
Operating income (loss) 5,484 (426) 7,571 18,805 14,155
Income (loss) before income taxes 8,964 (579) 7,432 17,135 14,729
Net income (loss) 4,383 (1,140) 5,176 11,051 10,201
PER SHARE AMOUNTS
Net income (loss) - basic and diluted $0.76 $(0.20) $0.90 $1.91 $1.71
Dividends declared 0.80 0.80 0.75 0.60 0.60
Shareholders' equity 20.76 19.76 20.98 21.47 20.45
OTHER FINANCIAL INFORMATION
Current assets $ 89,631 $ 78,522 $ 83,230 $ 87,783 $ 84,531
Total assets 149,622 144,784 161,190 170,611 159,664
Current liabilities 25,971 23,954 37,638 26,244 24,790
Long-term debt 2,515 5,847 2,341 20,160 14,507
Shareholders' equity 120,730 114,096 120,780 123,856 119,194
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MARKET OVERVIEW
The current domestic regulatory environment in the energy and
communication sectors continues to discourage the incumbent energy and service
providers from investing in the maintenance and upgrading of their
infrastructure as long as new companies are allowed to continue to piggyback on
the installed networks at low costs. The blackout in the northeast on August 14,
2003 focused the country's attention on the need for rebuilding and enhancing
the domestic infrastructure grid. Although the need to address rebuilding the
national power grid and communications infrastructure was pushed to the
forefront, the timing of this undertaking remains uncertain. This task will most
likely be undertaken by a combination of private companies and government
agencies over several years.
The regional Bell telephone companies (Bells) and independent telephone
companies are the Company's primary customers in the telecommunications market.
A Federal Communications Commission (FCC) ruling in 2003 dictated that these
Bells must continue leasing their lines to rivals such as WorldCom and AT&T
Corp. The Bells claim that the lease rates are below their cost of providing
service. Consequently, the incentive for the Bells to increase capital
investment is minimized.
However, the Bells and independent telephone companies are beginning to
invest in the fiber-to-the-premise (FTTP) infrastructure and service while
requesting further clarification on the FCC rules on sharing their investment in
the new infrastructure with their competitors.
While foreign energy and communications markets were flat in most
regions of the world, the markets in the Americas remained depressed in 2003.
Due to the use of wireless technology, the demand for fixed line communication
networks does not offer the same opportunity for growth in certain developing
countries' telecommunication markets.
The market demand for the Company's products is expected to remain
strong in the Asia Pacific region although the Company expects increased
competition especially from China. Local Chinese companies have developed cost
competitive products. As a result, the Company expects continued pressure on
selling prices.
15
PREFACE
The Company's net sales and gross profit continued to decline in 2003
as result of the foregoing. Net sales and the resulting gross profit decreased
approximately 10% from the previous year. Sales in the Asia Pacific markets
increased but sales in the North and Latin American marketplace decreased.
Foreign sales accounted for approximately 69% of the decrease in consolidated
net sales as a result of the Company's closing of its European data
communications operations in 2002.
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 that includes the
reversal of $1.7 million in the cumulative translation adjustment related to the
equity investment. The entire amount of the proceeds was taxable resulting in a
tax of $2.6 million which reduces the after tax gain to $.9 million or $.15 per
share. The gain and related income taxes on the sale was recorded in the fourth
quarter of 2003, and the incremental tax impact related to the Company's share
of the joint venture's historical earnings net of dividends received was
recorded during the third quarter of 2003.
During the third quarter of 2002, the Company recorded abandonment
charges of $4.7 million related to its discontinued European data communications
operations. This action was taken as a result of the continuing decline in the
global telecommunication and data communications markets and after failing to
reach agreement on an acceptable selling price on product supplied to a
significant foreign customer. Approximately $3.3 million of the charge is
related to asset write-downs, of which $2.1 million of inventory write-offs were
recorded in Costs of products sold and $1.2 million of write-offs related to
receivables were included in Costs and expenses on the Statement of Consolidated
Operations. The remaining $1.4 million of the charge, included in Costs of
products sold and Costs and expenses, relates to cash outlays for employee
severance cost, cost of exiting leased facilities, the termination of other
contractual obligations and transitional costs. Approximately $.1 million in
cash outlays remain to be paid at December 31, 2003 and are anticipated to be
paid out by March 31, 2004. Other unusual charges recorded during 2002 included
a $1.6 million asset impairment charge in accordance with Statements of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, a charge of $.8 million to expense premiums paid in excess of cash
surrender value on life insurance policies and a charge of $.5 million related
to the cumulative translation adjustment for the abandoned operation. These
unusual charges, which the Company believes to be one-time charges, reduced
pretax income by $7.6 million and resulted in a reported loss of $1.1 million or
$.20 per share in 2002.
By 2005 the Company expects an incremental external cost of complying
with section 404 of Sarbanes-Oxley Act of 2002 to be approximately $1 million.
If the Company becomes an accelerated filer in 2004 these costs will be
accelerated.
2003 RESULTS OF OPERATIONS COMPARED TO 2002
In 2003 consolidated net sales were $153.3 million, a decrease of $16.5
million, or 10% from 2002. Domestic net sales of $90.7 million decreased $5.2
million, or 5%. The majority of the decrease was due primarily to volume
decreases in the energy and communications markets. Foreign net sales of $62.6
million decreased $11.3 million, or 15%. Foreign sales related to the
abandonment of the European data communications operations in 2002 accounted for
a decrease of $15 million. Foreign net sales decreased $3.4 million in the
Americas. Foreign net sales were favorably impacted by $7.1 million when
converted to U.S. dollars as a result of the weaker U.S. dollar compared to most
foreign currencies. No individual foreign country accounted for 10% or more of
the Company's consolidated net sales.
Gross profit of $46 million for 2003 decreased $4.7 million, or 9%,
compared to 2002. Domestic gross profit of $24.6 million decreased $5.4 million,
or 18%. Domestic gross profit decreased $3.5 million due to lower sales and
customer mix and $1.9 million due to higher per unit manufacturing costs.
Foreign gross profit of $21.4 million increased by $.7 million, or 4%, due to a
$2.4 million favorable impact resulting from converting native currency to U.S.
dollars and was partially offset by a $1.7 million reduction in sales in native
currency.
16
Costs and expenses decreased $10.6 million, or 20%, compared to 2002,
as summarized in the following table:
Year ended December 31
---------------------------------------------------------
thousands of dollars %
Increase Increase
2003 2002 (decrease) (decrease)
--------- --------- ---------- ----------
Cost and expenses
Domestic:
Selling $ 11,445 $ 13,440 $ (1,995) (15)%
General and administrative 12,332 13,483 (1,151) (9)
Research and engineering 3,650 4,286 (636) (15)
Other operating expense- net 196 1,099 (903) (82)
Intercompany debt foregiveness 4,545 - 4,545
Asset impairment - 1,621 (1,621)
--------- --------- --------- -------
32,168 33,929 (1,761) (5)
--------- --------- --------- -------
Foreign:
Selling 5,647 8,430 (2,783) (33)
General and administrative 7,271 8,863 (1,592) (18)
Research and engineering 1,560 1,318 242 18
Other operating income- net (246) (79) (167) 211
Intercompany debt foregiveness (4,545) - (4,545)
--------- --------- --------- -------
9,687 18,532 (8,845) (48)
--------- --------- --------- -------
Total $ 41,855 $ 52,461 $ (10,606) (15)%
========= ========= ========= =======
During the year the domestic operations forgave foreign intercompany
debt of $4.5 million related to the abandoned European data communications
operations. This amount is included as expense for the domestic operations and
as income for the foreign operations.
Excluding intercompany debt forgiveness, domestic costs and expenses of
$27.6 million decreased $6.3 million, or 19%. Domestic selling expense decreased
primarily as a result of a $1 million reduction in commissions on lower sales
and a $.4 million reduction in advertising and sales promotion. General and
administrative expense decreased as a result of a $1.2 million decrease in bad
debt expense attributable to several telecommunication customers declaring
bankruptcy in the prior year. Research and Engineering expense decreased
principally as a result of employee reductions and lower contract development
expenses. Other operating expense improved primarily due to the $.5 million
charge recorded in 2002 related to the cumulative translation adjustment for the
abandoned European data communications operation and a $.2 million increase in
the cash surrender value related to life insurance policies. In 2002, the
Company recorded a $1.6 million asset impairment charge in accordance with SFAS
No.142.
Excluding intercompany debt forgiveness, foreign costs and expenses of
$14.2 million decreased $4.3 million, or 23%. Selling expense decreased
primarily as a result of a reduction of $3.1 million in selling expense related
to the abandoned European data communications operations in 2002. General and
administrative expense decreased primarily as a result of a $3 million reduction
related to the abandonment of the European data communications operations in
2002 partially offset by higher employee benefit costs and bad debt expense.
Research and engineering expense remained relatively unchanged from 2002, net of
the impact of currency translation. Other operating income increased primarily
due to gains on foreign currency transactions compared to losses on foreign
currency transactions in the prior year. The weaker dollar unfavorably impacted
costs and expenses by $1.3 million when foreign costs in local currency were
translated to U.S. dollars.
17
Royalty income of $1.4 million remained relatively unchanged from 2002.
Operating income of $5.5 million for the year ended December 31, 2003
increased $5.9 million compared to the previous year. This increase was a result
of the reduction in costs and expenses of $10.6 million, partially offset by the
$4.7 million decrease in gross profit. Domestic operating income decreased $3.9
million as a result of $5.4 million lower gross profit, forgiveness of
intercompany debt of $4.5 million, and the decrease of $.2 million in royalty
income partially offset by the $6.3 million reduction in costs and expenses.
Foreign operating income of $9.4 million increased $9.8 million due to the $4.5
million forgiveness of intercompany debt, the $4.3 million decrease in costs and
expenses, the increase in gross profit of $.7 million and a $.2 million decrease
in royalty expense.
Other income for the year ended December 31, 2003 of $3.5 million
improved $3.6 million compared to 2002. This increase is primarily due to the
$3.5 million gain recognized on the sale of the Company's interest in a joint
venture in Japan and is included in the line equity in net income of foreign
joint ventures.
Income tax for the year ended December 31, 2003 of $4.6 million was $4
million higher than the prior year. The effective tax rate in 2003 was 51%. The
effective tax rate is higher than the 39% expected state and federal rate
because the entire proceeds received on the sale of the Company's interest in
its joint venture in Japan was taxable (see Note O 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 $.1 million or $.01 per share for the year ended December 31,
2003 and $.8 million or $.13 per share for year ended December 31, 2002.
As a result of the preceding items, net income for the year ended
December 31, 2003 was $4.4 million, which represents an increase of $5.5 million
compared to a loss of $1.1 million in 2002.
2002 RESULTS OF OPERATIONS COMPARED TO 2001
In 2002 consolidated net sales were $169.8 million, a decrease of $26.5
million, or 14%, from 2001. Domestic sales of $95.8 million decreased $17.4
million, or 15%, due primarily to the continued softness in the data
communications market and the collapse of the fiber optic cable market. Lower
sales volume accounted for the majority of this decrease. Foreign sales of $74
million decreased $9.1 million, or 11%, compared to 2001. A decrease in sales in
Latin American countries as a result of governmental reductions of capital
expenditures for the improvement and expansion of communication and energy grids
accounted for 75% of the decrease in foreign sales. The weakening of certain
Latin American currencies against U.S. dollars accounted for 21% of the decrease
in foreign sales. These sales decreases, coupled with $2.9 million lower foreign
data communications sales, were partially offset by sales increases in the Asia
Pacific and Western European regions. No individual foreign country accounted
for 10% or more of the Company's consolidated net sales.
Gross profit of $50.7 million for 2002 declined $8.4 million, or 14%,
compared to 2001. Domestic gross profit decreased $1.8 million compared to the
prior year primarily as a result of lower net sales partially offset by a
reduction of $3 million in indirect manufacturing expenses and a $2 million
non-recurring business realignment charge recorded in 2001. Foreign gross profit
decreased $6.6 million compared to the previous year primarily as a result of
lower net sales and a $2.6 million charge for the abandonment of the European
data communications operations recorded in 2002.
18
Costs and expenses of $52.5 million decreased $1.1 million, or 2%, from
2001, as summarized in the following table:
Year ended December 31
------------------------------------------------------
thousands of dollars %
Increase Increase
2002 2001 (decrease) (decrease)
-------- -------- ---------- ----------
Cost and expenses
Domestic:
Selling $ 13,440 $ 15,793 $ (2,353) (15)%
General and administrative 13,483 12,923 560 4
Research and engineering 4,286 4,712 (426) (9)
Other operating expense- net 1,099 1,626 (527) (32)
Asset impairment 1,621 - 1,621
-------- -------- -------- --------
33,929 35,054 (1,125) (3)
-------- -------- -------- --------
Foreign:
Selling 8,430 9,131 (701) (8)
General and administrative 8,863 7,892 971 12
Research and engineering 1,318 1,524 (206) (14)
Other operating income- net (79) (58) (21) 36
-------- -------- -------- --------
18,532 18,489 43 0
-------- -------- -------- --------
Total $ 52,461 $ 53,543 $ (1,082) (2)%
======== ======== ======== ========
Domestic costs and expenses decreased $1.1 million from 2001 to $33.9
million. Selling expense decreased primarily as a result of a $.4 million
reduction in commissions on lower sales, $1 million decrease related to a
reduction in employment levels and a $.6 million reduction in advertising and
sales promotion. General and administrative expense increased primarily due to
an increase in bad debt expense of $1 million offset by decreased professional
fees of $.3 million relating to registering the Company's common shares with the
Securities and Exchange Commission during 2001. The increase in bad debt expense
was attributable to several telecommunication customers declaring bankruptcy
during 2002. Research and Engineering expense decreased principally as a result
of employee reductions. Other operating expense decreased due to lower goodwill
and intangible asset amortization of $1.1 million as a result of the adoption of
SFAS No. 142, a decrease in expense due to $.5 million in business realignment
charges recorded in 2001 and a $.2 million increase in other operating income.
These decreases in other operating expenses were partially offset by a $.8
million charge to expense in 2002 for premiums paid in excess of cash surrender
value on life insurance and a charge of $.5 million related to the cumulative
translation adjustment for the abandoned European data communications operation.
In 2002, the Company recorded a $1.6 million asset impairment charge in
accordance with SFAS No. 142.
Foreign costs and expenses for 2002 remained relatively unchanged from
2001 at $18.5 million. The stronger dollar favorably impacted costs and expenses
by $.7 million when foreign costs in local currency were translated to U.S.
dollars. Foreign selling expense decreased primarily due to lower commissions as
a result of lower sales. The reduction in marketing expenses in 2002 was a
result of the expenses incurred to market data communications globally in 2001
offset by charges incurred in 2002 for the abandonment of the Company's European
data communications operations. General and administrative expenses increased
primarily as a result of recording $1.5 million in abandonment charges partially
offset by employment reductions and other cost reduction efforts.
Royalty income for the year ended December 31, 2002 of $1.4 million is
$.6 million lower then 2001 as a result of the decline in the domestic data
communications market.
Operating income for 2002 decreased $8 million from operating income of
$7.6 million for the year ended December 31, 2001. This decrease was a result of
the $8.4 million decrease in gross profit, the decrease in royalty
19
income of $.6 million offset by the $1.1 million reduction in costs and
expenses. Domestic operating income decreased $1.5 million to $.1 million in
2002 as a result of $1.8 million lower gross profit and the $.6 million
reduction in royalty income partially offset by the $1.1 million reduction in
domestic costs and expenses. Foreign operating income decreased $6.5 million to
a $.5 million operating loss in 2002 due primarily to the $6.6 million decrease
in gross profit. The Company's 2002 foreign operating income includes income of
$3.7 million from the Asia Pacific Region and $2.8 million from North American
and European markets partially offset by operating losses of $1.4 million in
Latin America and $5.8 million in the European data communications operations.
Other expense for the year ended December 31, 2002 of $.2 million
remained relatively unchanged from 2001 because a $.7 million reduction in
interest expense resulting from lower debt was offset by a $.4 million decrease
in interest income primarily due to interest received in 2001 on a one-time
state tax refund and a $.4 million reduction in foreign joint venture equity
income.
Income tax for the year ended December 31, 2002 of $.6 million was $1.7
million lower than the prior year. The Company had taxable income in 2002
despite a loss before taxes, as a result of the Company receiving dividends of
$1.6 million from foreign equity investments (see Note F in the Notes To
Consolidated Financial Statements). The Company has a tax holiday in China 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 which begins with 2003. The aggregate tax and per share favorable
effect of this holiday was $.8 million or $.13 per share in 2002 and $.5 million
or $.08 per share in 2001. See Note F in the Notes To Consolidated Financial
Statements for further discussion of the differences between the overall
statutory tax rate and the effective rate.
As a result of the preceding, net loss for the year ended December 31,
2002 was $1.1 million, which represents a decrease of $6.3 million, compared to
comparable results in 2001.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $20.7 million for the
year ended December 31, 2003 an increase of $2.2 million when compared to the
same period in 2002. An increase of $5.5 million in net income and a decrease in
working capital of $.6 million in 2003 compared to 2002 were offset by a $3.9
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 and asset impairment recorded in 2002.
Net cash provided by investing activities of $2.7 million represents an
increase of $6.1 million when compared to cash used in investing activities in
2002. During 2003, the Company sold its 24% interest in a joint venture in Japan
with Toshin Denko Kabushiki Kaisha. The selling price was approximately $7.1
million and is included in the sale of property and equipment. During 2002, the
Company received $1.2 million on the sale of its Birmingham, Alabama facility.
Additionally, capital expenditures were $.2 million lower in 2003 compared to
2002. The Company is continually analyzing potential acquisition candidates and
business alternatives but has no commitments that would materially affect the
operations of the business.
Cash used in financing activities was $8.4 million compared to $12.2
million in the previous year. This was primarily a result of lower borrowings in
2003 compared to 2002 and therefore lower payments to reduce those borrowings.
The Company has commitments under operating leases primarily for office
and manufacturing space, transportation equipment and computer equipment. See
Note E in the Notes To Consolidated Financial Statements for further discussion
on the future minimal rental commitment under these leasing arrangements. One
such lease is for the Company's aircraft with a lease commitment through April
2012. Under the terms of the lease, the Company maintains the risk for the
residual value in excess of the market value of the aircraft. At the present
time, the Company believes its risks, if any, to be immaterial because the
estimated market value of the aircraft approximates its residual value. At
December 31, 2003, the Company had open uncompleted purchase commitments for
inventory and capital equipment of $.5 million.
The Company's financial position remains strong and its current ratio
at December 31, 2003 was 3.5:1 compared to 3.3:1 at December 31, 2002. Working
capital of $63.7 million has increased from the December 31,
20
2002 amount of $54.6 million primarily due to the cash received from the sale of
the joint venture during October 2003. At December 31, 2003, the Company's
unused balance under its main credit facility was $20 million and its debt to
equity percentage was 4%. 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.
Contractual obligations and other commercial commitments are summarized
in the following tables:
Payments Due by Period
-------------------------------------------------------------------------
Less than 1
Contractual Obligations Total year 1-3 years 4-5 years After 5 years
- ------------------------- --------- ----------- --------- --------- -------------
In thousands
Long-Term Debt $ 4,399 $ 1,884 $ 2,515 $ - $ -
Operating Leases 16,414 1,021 1,448 1,523 12,422
Purchase Commitments 525 525 - - -
Amount of Commitment Expiration Per Period
--------------------------------------------------------------------------
Total
Other Commercial Amounts Less than 1
Commitments Committed year 1-3 years 4-5 years Over 5 years
- ----------------- ------------ ----------- --------- --------- -------------
In thousands
Letter of Credit $ 244 $ 207 $ 37 $ - $ -
Guarantees 122 - - - 122
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (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
21
from other parties. In December 2003, the FASB released a revised version of FIN
46 (FIN 46R). The revision only slightly modified the variable interest model
contained in FIN 46. However, FIN 46R adopted certain scope exceptions and
clarified definitions and calculations underlying the model. FIN 46R required
the application of either FIN 46 or FIN 46R for Special Purpose Entities ("SPE")
in the annual reporting period ending after December 15, 2003. The application
of FIN 46R for non-SPEs was deferred until the quarter ending March 31, 2004.
The Company has adopted the applicable disclosure provisions of FIN 46 and FIN
46R in the financial statements.
The Company 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 $.4 million, consisting of the
limited partnership investments plus unfunded commitments. As the Company does
not consider its investment a SPE, it is currently evaluating whether such
investments should be consolidated in accordance with FIN 46 and FIN 46R for the
quarter ended March 31, 2004.
Additionally, the Company previously had two equity investments in
Japanese joint ventures. As indicated in Note O in the Notes To Consolidated
Financial Statements, the Company sold its interest in one of the investments in
October 2003. For the remaining joint venture, the Company is currently
evaluating its consolidation in accordance with FIN 46 and FIN 46R for the
quarter ended March 31, 2004. The Company has calculated a related maximum
exposure of $2.8 million as of December 31, 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, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these consolidated financial
statements requires the Company to make estimates and judgments that affect the
reported amount of assets and liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are defined as those that are reflective
of significant judgment and uncertainties, and potentially may result in
materially different outcomes under different assumptions and conditions. The
Company believes that the critical accounting policies are limited to those that
are described below.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company records estimated allowances for uncollectible accounts receivable
based upon the number of days the accounts are past due, the current business
environment, and specific information such as bankruptcy or liquidity issues of
customers. If the financial condition of the
22
Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. During 2003 the
Company recorded a provision for doubtful accounts of $.6 million and at
December 31, 2003 the allowance represents 9% of its trade receivables, compared
to 13% at December 31, 2002.
Sales Returns and Allowances
The Company records a provision for estimated sales returns and
allowances on product and service related sales in the same period as the
related revenues are recorded. These estimates are based on historical sales
returns and other known factors, such as open authorized returns. At December
31, 2003 these provisions accounted for less than .1% of consolidated net sales,
compared to less than .2% at December 31, 2002. If future returns do not reflect
the historical data the Company uses to calculate these estimates, additional
allowances or reversals of established allowances may be required.
Excess and Obsolescence Reserves
The Company has provided an allowance for excess inventory and
obsolescence based on estimates of future demand, which is subject to change.
Additionally, discrete provisions are made when facts and circumstances indicate
that particular inventories will not be utilized. At December 31, 2003, the
allowance for excess inventory and obsolescence was 9% of gross inventories,
compared to 12% at December 31, 2002. If actual market conditions are different
than those projected by management, additional inventory write-downs or
reversals of existing reserves may be necessary.
Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying value of those items. The Company's cash flows
are based on historical results adjusted to reflect the best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable is then reduced to fair value. The estimates of fair value represent
the best estimate based on industry trends and reference to market rates and
transactions.
Goodwill
The Company performs its annual impairment test for goodwill and
intangibles with indefinite lives utilizing a discounted cash flow methodology,
market comparables, and an overall market capitalization reasonableness test in
computing fair value by reporting unit. The Company then compares the fair value
of the reporting unit with its carrying value to assess if goodwill and other
indefinite life intangibles have been impaired. Based on the assumptions as to
growth, discount rates and the weighting used for each respective valuation
methodology, results of the valuations could be significantly changed. However,
the Company believes that the methodologies and weightings used are reasonable
and result in appropriate fair values of the reporting units.
The Company performs interim impairment tests if trigger events or
changes in circumstances indicate the carrying amount may not be recoverable.
There were no trigger events during 2003 and as such only an annual impairment
test was performed. During the fourth quarter 2002, the market valuation of one
domestic reporting unit had decreased, such that it was highly probable that the
related goodwill would not be recoverable. Therefore, at December 31, 2002, the
Company had recorded a goodwill impairment charge of $1.6 million.
ITEM 7A. 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.
23
The Company has foreign currency forward exchange contracts outstanding
at December 31, 2003 whose fair values and carrying values are approximately $.8
million and mature in less than one year. A 10% change in the foreign currency
rates would have resulted in a favorable/unfavorable impact on foreign currency
translation expense of less than $.1 million for the year ended December 31,
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 $5.4 million at
December 31, 2003. A 100 basis point increase in the interest rate would have
resulted in an increase in interest expense of approximately $.1 million for the
year ended December 31, 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 rates would have a
favorable/unfavorable impact on fair values of $2.2 million and on income before
tax of $.1 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
Preformed Line Products Company:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a) on page 46 present fairly, in all material respects,
the financial position of Preformed Line Products Company and its subsidiaries
at December 31, 2003 and December 31, 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under 15(a) on page 46 present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note A to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
other intangible assets to comply with the provisions of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets."
PricewaterhouseCoopers LLP
Cleveland, Ohio
March 2, 2004
24
PREFORMED LINE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
December 31
2003 2002
--------- ---------
(Thousands of dollars, except
share data)
ASSETS
Cash and cash equivalents $ 28,209 $ 11,629
Accounts receivable, less allowance of $2,463 ($3,770 in 2002) 24,225 24,763
Inventories-net 31,113 33,750
Deferred income taxes - short-term 3,740 5,276
Prepaids and other 2,344 3,104
--------- ---------
TOTAL CURRENT ASSETS 89,631 78,522
Property and equipment - net 47,888 48,569
Investments in foreign joint ventures 2,826 8,087
Deferred income taxes - long-term 434 863
Goodwill, patents and other intangibles - net 5,553 5,596
Other 3,290 3,147
--------- ---------
TOTAL ASSETS $ 149,622 $ 144,784
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to banks $ 1,019 $ 1,246
Trade accounts payable 7,648 7,844
Accrued compensation and amounts withheld from employees 3,749 3,269
Accrued expenses and other liabilities 4,356 4,251
Accrued profit-sharing and pension contributions 3,850 4,176
Dividends payable 1,163 1,155
Income taxes 2,302 337
Current portion of long-term debt 1,884 1,676
--------- ---------
TOTAL CURRENT LIABILITIES 25,971 23,954
Long-term debt, less current portion 2,515 5,847
Deferred income taxes - long-term 97 161
Minimum pension liability 309 726
SHAREHOLDERS' EQUITY
Common stock - $2 par value, 15,000,000 shares authorized, 5,814,269 and
5,772,710 issued and outstanding, net of 377,404
and 389,188 treasury shares at par, respectively. 11,629 11,545
Paid in capital 472 82
Retained earnings 123,022 123,124
Other comprehensive loss (14,393) (20,655)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 120,730 114,096
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 149,622 $ 144,784
========= =========
See notes to consolidated financial statements.
25
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED OPERATIONS
Year ended December 31
--------------------------------------------------
2003 2002 2001
--------- --------- ---------
(Thousands of dollars, except per share data)
Net sales $ 153,333 $ 169,842 $ 196,365
Cost of products sold 107,366 119,173 137,266
--------- --------- ---------
GROSS PROFIT 45,967 50,669 59,099
Costs and expenses
Selling 17,092 21,870 24,924
General and administrative 19,603 22,346 20,815
Research and engineering 5,210 5,604 6,236
Other operating (income) expenses - net (50) 1,020 1,568
Asset impairment - 1,621 -
--------- --------- ---------
41,855 52,461 53,543
Royalty income - net 1,372 1,366 2,015
--------- --------- ---------
OPERATING INCOME (LOSS) 5,484 (426) 7,571
Other income (expense)
Equity in net income of foreign joint ventures 3,710 447 803
Interest income 421 287 685
Interest expense (490) (687) (1,427)
Other expense (161) (200) (200)
--------- --------- ---------
3,480 (153) (139)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 8,964 (579) 7,432
Income taxes 4,581 561 2,256
--------- --------- ---------
NET INCOME (LOSS) $ 4,383 $ (1,140) $ 5,176
========= ========= =========
Net income (loss) per share - basic and diluted $0.76 $(0.20) $0.90
========= ========= =========
Cash dividends declared per share $0.80 $0.80 $0.75
========= ========= =========
Average number of shares outstanding - basic 5,783 5,766 5,755
========= ========= =========
Average number of shares outstanding - diluted 5,801 5,766 5,755
========= ========= =========
See notes to consolidated financial statements.
26
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Accumulated
Additional Other
Common Paid in Retained Comprehensive
Shares Capital Earnings Income(Loss) Total
--------- ---------- --------- ------------- ---------
(Thousands of dollars, except share and per share data)
Balance at January 1, 2001 $ 11,536 $ - $ 127,994 $ (15,674) $ 123,856
Net income 5,176 5,176
Foreign currency translation adjustment (3,781) (3,781)
--------
Total comprehensive income 1,395
Purchase of 11,056 common shares (22) (133) (155)
Cash dividends declared - $.75 per share (4,316) (4,316)
--------- --------- --------- --------- ---------
Balance at December 31, 2001 11,514 - 128,721 (19,455) 120,780
Net income (loss) (1,140) (1,140)
Foreign currency translation adjustment (1,218) (1,218)
Cumulative translation adjustment for
liquidation of a foreign entity 490 490
Minimum pension liability - net of tax benefit of $254 (472) (472)
--------
Total comprehensive income (loss) (2,340)
Issuance of 15,680 common shares 31 82 158 271
Cash dividends declared - $.80 per share (4,615) (4,615)
--------- --------- --------- --------- ---------
Balance at December 31, 2002 11,545 82 123,124 (20,655) 114,096
Net income 4,383 4,383
Foreign currency translation adjustment 4,276 4,276
Cumulative translation adjustment for
liquidation of a joint venture 1,709 1,709
Minimum pension liability - net of taxes of $140 277 277
--------
Total comprehensive income 10,645
Issuance of 41,559 common shares 84 390 146 620
Cash dividends declared - $.80 per share (4,631) (4,631)
--------- --------- --------- --------- ---------
Balance at December 31, 2003 $ 11,629 $ 472 $ 123,022 $ (14,393) $ 120,730
========= ========= ========= ========= =========
See notes to consolidated financial statements.
27
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
Year ended December 31
--------------------------------------
2003 2002 2001
--------- --------- ---------
(Thousands of dollars)
OPERATING ACTIVITIES
Net income (loss) $ 4,383 $ (1,140) $ 5,176
Adjustments to reconcile net income (loss) to net cash provided by operations
Depreciation and amortization 8,329 9,018 10,320
Asset impairment - 1,621 -
Noncash abandonment/realignment charges - 3,301 2,668
Deferred income taxes 1,901 (2,378) (263)
Cash surrender value of life insurance 95 821 -
Cumulative translation adjustment (53) 490 -
Earnings of joint ventures (203) (447) (803)
Dividends received from joint ventures 1,019 1,628 185
Gain on sale of joint venture (882) - -
Other - net 29 111 (6)
Changes in operating assets and liabilities
Receivables 2,999 3,910 1,588
Inventories 4,483 2,402 3,023
Trade payables and accruals (1,294) (2,083) 297
Income taxes 190 307 (2,946)
Other - net (264) 1,016 (2,059)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,732 18,577 17,180
INVESTING ACTIVITIES
Capital expenditures (4,018) (4,706) (6,196)
Business acquisitions (472) (39) (1,058)
Proceeds from the sale of equity investment, property and equipment 7,160 1,284 757
--------- --------- ---------
NET CASH PROVIDED (USED IN) INVESTING ACTIVITIES 2,670 (3,461) (6,497)
FINANCING ACTIVITIES
Increase (decrease) in notes payable to banks (234) 39 (503)
Proceeds from the issuance of long-term debt 10,658 14,588 17,673
Payments of long-term debt (14,838) (22,480) (22,651)
Dividends paid (4,623) (4,611) (4,030)
Issuance (purchase) of common shares 620 271 (155)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (8,417) (12,193) (9,666)
Effects of exchange rate changes on cash and cash equivalents 1,595 297 (2,078)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 16,580 3,220 (1,061)
Cash and cash equivalents at beginning of year 11,629 8,409 9,470
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,209 $ 11,629 $ 8,409
========= ========= =========
See notes to consolidated financial statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NOTE A SIGNIFICANT ACCOUNTING POLICIES
Reclassification
Certain amounts in the prior years' financial statements have been
reclassified to conform to the presentation of 2003.
Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries where ownership is greater than 50%. All
intercompany accounts and transactions have been eliminated upon consolidation.
Investments in Foreign Joint Ventures
Investments in joint ventures, where the Company owns at least 20% but
less than 50%, are accounted for by the equity method.
Cash Equivalents
Cash equivalents are stated at fair value and consist of highly liquid
investments with original maturities of three months or less at the time of
acquisition.
Inventories
Inventories are carried at the lower of cost or market.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, notes payable and debt. The carrying
amount of all financial instruments approximates fair value.
Property, Plant, and Equipment and Depreciation
Property, plant, and equipment is recorded at cost. Depreciation for
the majority of the Company's assets is computed using accelerated methods over
the estimated useful lives. The estimated useful lives used are: land
improvements, ten years; buildings, forty years; and machinery and equipment,
three to ten years; with the exception of personal computers which are
depreciated over three years using the straight line method.
Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying value of those items. The Company's cash flows
are based on historical results adjusted to reflect the best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable is then reduced to fair value. The estimates of fair value represent
the best estimate based on industry trends and reference to market rates and
transactions.
Goodwill and Other Intangibles
The Company has adopted SFAS No. 142, Goodwill and Other Intangible
Assets, as of January 1, 2002. Consequently, the Company has discontinued the
amortization of goodwill during 2002. Goodwill and intangible assets deemed to
have indefinite lives are not amortized but are subject to annual impairment
tests. Patents and
29
other intangible assets with definite lives represent primarily the value
assigned to patents acquired with purchased businesses and are amortized using
the straight-line method over their useful lives. Goodwill and other long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount may not be recoverable. Events or circumstances
that would result in an impairment review primarily include operations reporting
losses or a significant change in the use of an asset. Impairment charges are
recognized pursuant to SFAS No. 142.
Research and Development
Research and development costs are expensed as incurred. Company
sponsored costs for research and development of new products were $2.7 million
in 2003, $2.9 million in 2002 and $2.7 million in 2001.
Advertising
Advertising costs are expensed in the period incurred.
Foreign Currency Translation
Asset and liability accounts are translated into U.S. dollars using
exchange rates in effect at the date of the consolidated balance sheet; revenues
and expenses are translated at weighted average exchange rates in effect during
the period. Transaction gains and losses arising from exchange rate changes on
transactions denominated in a currency other than the functional currency are
included in income and expense as incurred. Such transactions have not been
material. Unrealized translation adjustments are recorded as accumulated foreign
currency translation adjustments in shareholders' equity. Upon sale or upon
substantially complete liquidation of an investment in a foreign entity, the
cumulative translation adjustment for that entity is removed from accumulated
foreign currency translation adjustment in shareholders' equity and reclassified
to earnings.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Sales Recognition
Sales are recognized when products are shipped and title and risk of
loss has passed to unaffiliated customers. Shipping and handling costs billed to
customers are included in net sales while shipping and handling costs not billed
to customers are included in cost of products sold.
Derivative Financial Instruments
The Company has foreign currency forward exchange contracts outstanding
at December 31, 2003 whose fair values and carrying values are approximately $.8
million and mature in less than one year. At December 31, 2003 the Company has
recorded a charge for the unamortized discount on the forward exchange
contracts. The Company does not hold derivatives for trading purposes.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (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
30
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. In December 2003, the FASB released a revised
version of FIN 46 (FIN 46R). The revision only slightly modified the variable
interest model contained in FIN 46. However, FIN 46R adopted certain scope
exceptions and clarified definitions and calculations underlying the model. FIN
46R required the application of either FIN 46 or FIN 46R for Special Purpose
Entities ("SPE") in the annual reporting period ending after December 15, 2003.
The application of FIN 46R for non-SPEs was deferred until the quarter ending
March 31, 2004. The Company has adopted the applicable disclosure provisions of
FIN 46 and FIN 46R in the financial statements.
The Company 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 $.4 million, consisting of the
limited partnership investments plus unfunded commitments. As the Company does
not consider its investment a SPE, it is currently evaluating whether such
investments should be consolidated in accordance with FIN 46 and FIN 46R for the
quarter ended March 31, 2004.
Additionally, the Company previously had two equity investments in
Japanese joint ventures. As indicated in Note O in the Notes To Consolidated
Financial Statements, the Company sold its interest in one of the investments in
October 2003. For the remaining joint venture, the Company is currently
evaluating its consolidation in accordance with FIN 46 and FIN 46R for the
quarter ended March 31, 2004. The Company has calculated a related maximum
exposure of $2.8 million as of December 31, 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, 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.
31
NOTE B SUPPLEMENTAL INFORMATION
December 31,
--------------------------
2003 2002
--------- --------
INVENTORIES
Finished products $ 14,065 $ 16,473
Work-in-process 1,414 1,249
Raw materials 17,369 17,568
-------- --------
32,848 35,290
Excess of current cost over LIFO cost (1,735) (1,540)
-------- --------
$ 31,113 $ 33,750
======== ========
The Company uses the last-in, first-out (LIFO) method of determining
cost for the majority (approximately $9.9 million in 2003 and $12.2 million in
2002) of its material portion of inventories in the United States. All other
inventories are determined by the FIFO method.
December 31,
--------------------------
2003 2002
--------- --------
PROPERTY AND EQUIPMENT - AT COST
Land and improvements $ 6,779 $ 6,328
Buildings and improvements 36,523 34,442
Machinery and equipment 88,881 81,396
Construction in progress 1,126 1,419
--------- --------
133,309 123,585
Less accumulated depreciation 85,421 75,016
--------- --------
$ 47,888 $ 48,569
========= ========
Depreciation of property and equipment was $7.8 million in 2003, $8.4
million in 2002 and $8.5 million in 2001.
GUARANTEES
The Company establishes a warranty reserve when a known measurable
exposure exists. Such reserves are adjusted for management's best estimate of
warranty obligations based on current and historical trends. The change in the
carrying amount of product warranty reserves for the years ended December 31,
2003 and 2002 are as follows:
2003 2002
---- ----
Balance at January 1 $ 142 $ 147
Additions charged to costs 79 142
Deductions (19) (147)
----- -----
Balance at December 31 $ 202 $ 142
===== =====
NOTE C PENSION PLANS
Domestic hourly employees of the Company and certain employees of
foreign subsidiaries who meet specific requirements as to age and service are
covered by defined benefit pension plans. Net periodic benefit costs and
obligations of the Company's foreign plans are not material. The Company uses a
December 31 measurement date for its plans.
32
Net periodic benefit cost for the Company's domestic plan included the
following components for the year ended December 31:
2003 2002 2001
------ ------ ------
Service cost $ 469 $ 470 $ 470
Interest cost 611 564 544
Expected return on plan assets (460) (490) (568)
Amortization of the unrecognized transition asset - 13 13
Recognized net actuarial loss 92 - -
------ ------ ------
Net periodic benefit cost $ 712 $ 557 $ 459
====== ====== ======
The following tables set forth benefit obligations, assets and the
accrued benefit cost of the Company's domestic defined benefit plan at December
31:
2003 2002
-------- --------
Projected benefit obligation at beginning of the year $ 9,534 $ 8,263
Service cost 469 470
Interest cost 611 564
Actuarial loss 590 428
Benefits paid (216) (191)
-------- --------
Projected benefit obligation at end of year $ 10,988 $ 9,534
======== ========
Fair value of plan assets at beginning of the year $ 6,394 $ 7,345
Actual return (loss) on plan assets 1,296 (833)
Employer contributions 1,039 73
Benefits paid (216) (191)
-------- --------
Fair value of plan assets at end of the year $ 8,513 $ 6,394
======== ========
Benefit obligations in excess of plan assets $ (2,475) $ (3,140)
Unrecognized net loss 2,272 2,610
Minimum pension liability (309) (726)
-------- --------
Accrued benefit cost $ (512) $ (1,256)
======== ========
The domestic defined benefit pension plan with accumulated benefit
obligations in excess of plan assets was:
2003 2002
-------- -------
Projected benefit obligation $ 10,988 $ 9,534
Accumulated benefit obligation 9,025 7,650
Fair market value of assets 8,513 6,394
During 2002, the Company recorded a minimum pension liability of $.7
million, $.5 million net of tax benefit, in Shareholders' equity by a charge to
other comprehensive income. During 2003, the Company reduced its minimum pension
liability by $.4 million, $.3 million net of tax benefit.
33
Weighted-average assumptions used to determine benefit obligations at
December 31:
2003 2002
---- ----
Discount rate 6.25% 6.75%
Rate of compensation increase 3.50 3.50
Weighted-average assumptions used to determine net periodic benefit
cost for the years ended December 31:
2003 2002
---- ----
Discount rate 6.75% 7.25%
Rate of compensation increase 3.50 3.50
Expected long-term return on plan assets 7.50 7.50
For 2003, the Net Periodic Pension Cost was based on a long-term asset
rate of return of 7.50%. This rate is based upon management's estimate of future
long-term rates of return on similar assets and is consistent with historical
returns on such assets. Using the plan's current mix of assets and based on the
average historical returns for such mix, an expected long-term rate-of-return of
7.50% is justified.
The Company's pension plan weighted-average asset allocations at
December 31, 2003 and 2002, by asset category, are as follows:
Plan assets
at December 31
-----------------------
Asset category 2003 2002
- ---------------------------------------- ------ ------
Equity securities 65.4% 96.3%
Debt securities and related instruments 33.1 -
Cash and equivalents 1.5 3.7
----- -----
100.0% 100.0%
===== =====
Management seeks to maximize the long-term total return of financial
assets consistent with the fiduciary standards of ERISA. The ability to achieve
these returns is dependent upon the need to accept moderate risk to achieve
long-term capital appreciation.
In recognition of the expected returns and volatility from financial
assets, retirement plan assets are invested in the following ranges with the
target allocation noted:
Range Target
----- ------
Equities 30-80% 60%
Fixed Income 20-70% 40%
Cash Equivalents 0-10%
Investment in these markets is projected to provide performance
consistent with expected long term returns with appropriate diversification.
The Company's policy is to fund amounts deductible for federal income
tax purposes. The Company expects to contribute $1 million to its pension plan
in 2004.
Expense for defined contribution plans was $2.8 million in 2003, $2.7
million in 2002 and $2.6 million in 2001.
34
NOTE D DEBT AND CREDIT ARRANGEMENTS
December 31
---------------------
2003 2002
-------- --------
SHORT-TERM DEBT
Secured Notes
Chinese Rmb denominated at 5.31% in 2003, and 5% in 2002 $ 966 $ 1,208
Unsecured short-term debt
Other short-term debt at 2.9 to 2.98% in 2003, and 3.8 to 4.8% in 2002 53 38
Current portion of long-term debt 1,884 1,676
-------- --------
Total short-term debt 2,903 2,922
-------- --------
LONG-TERM DEBT
Revolving credit agreement - 4,500
Australian dollar denominated term loans (A$5,500),
at 5.3 to 5.56%, due 2004 and 2006 4,136 2,408
Brazilian Reais denominated term loan (R$750) at 16.1%,
due 2005 259 599
Other loans in various denominations, due 2004 4 16
-------- --------
Total long-term debt 4,399 7,523
Less current portion (1,884) (1,676)
-------- --------
2,515 5,847
-------- --------
Total debt $ 5,418 $ 8,769
======== ========
The revolving credit agreement makes $20 million available to the
Company, at an interest rate of money market plus 1%. At December 31, 2003, the
interest rate on the revolving credit agreement was 2.12%. However, there was no
debt outstanding at December 31, 2003, as a result of the Company paying down
the debt with cash flow from operations. The revolving credit agreement
contains, among other provisions, requirements for maintaining levels of working
capital, net worth, and profitability. At December 31, 2003 the Company was in
compliance with these covenants
Aggregate maturities of long-term debt during the next five years are
as follows: 2004, $1.9 million; 2005, $.3 million; 2006, $2.2 million; 2006 and
2007, $0 million.
Interest paid was $.7 million in 2003, $.6 million in 2002 and $1.3
million in 2001.
NOTE E LEASES
The Company has commitments under operating leases primarily for office
and manufacturing space, transportation equipment and computer equipment. Rental
expense was $1.3 million in 2003, $1.3 million in 2002 and $1.4 million in 2001.
Future minimum rental commitments having non-cancelable terms exceeding one year
are $1 million in 2004, $.8 million in 2005, $.7 million in 2006, $.8 million in
2007, $.8 million in 2008 and an aggregate $12.4 million thereafter.
NOTE F INCOME TAXES
The provision for income taxes is based upon income before tax for
financial reporting purposes. Deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
tax basis of assets and liabilities and their carrying value for financial
statement purposes. In estimating future tax consequences, the Company considers
anticipated future events, except changes in tax laws or rates, which are
recognized when enacted.
35
The components of income tax expense are as follows:
2003 2002 2001
-------- -------- --------
Current
Federal $ 560 $ 1,070 $ 716
Foreign 1,882 1,317 1,458
State and local 378 298 345
-------- -------- --------
2,820 2,685 2,519
-------- -------- --------
Deferred
Federal 2,254 (1,713) (511)
Foreign (526) (428) 324
State and local 33 17 (76)
-------- -------- --------
1,761 (2,124) (263)
-------- -------- --------
$ 4,581 $ 561 $ 2,256
======== ======== ========
The differences between the provision for income taxes at the U.S.
statutory rate and the tax shown in the Statements of Consolidated Operations
are summarized as follows:
2003 2002 2001
-------- -------- --------
Tax at statutory rate of 35% $ 3,048 $ (197) $ 2,527
State and local taxes, net of federal benefit 271 315 175
Non-deductible expenses 91 402 344
Foreign dividends net of foreign tax credits 630 975 (393)
Non-U.S. tax rate variances (240) (1,076) (569)
Capital gain on the sale of foreign stock 1,219 - -
Valuation allowance 170 227 -
Tax credits (349) (225) (232)
Other, net (259) 140 404
-------- -------- --------
$ 4,581 $ 561 $ 2,256
======== ======== ========
36
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets (liabilities) at December 31 are
as follows:
2003 2002
-------- --------
Deferred tax assets
Accrued compensation benefits $ 716 $ 691
Depreciation and other basis differences 1,271 1,701
Inventory obsolescence 1,014 1,612
Allowance for doubtful accounts 806 1,387
Benefit plans reserves 682 896
Closure reserves - 379
NOL carryforwards 768 316
Other accrued expenses 809 736
-------- --------
Gross deferred tax assets 6,066 7,718
Valuation allowance (676) (506)
-------- --------
Net deferred tax assets 5,390 7,212
-------- --------
Deferred tax liabilities
Depreciation and other basis differences (1,032) (899)
Inventory (259) (290)
Other (22) (45)
-------- --------
Net deferred tax liabilities (1,313) (1,234)
-------- --------
Net deferred tax assets $ 4,077 $ 5,978
======== ========
2003 2002
-------- --------
Change in net deferred tax asset:
Provision for deferred tax $ 1,761 $ (2,124)
Items of other comprehensive
income (loss) 140 (254)
-------- --------
Total change in net deferred tax $ 1,901 $ (2,378)
======== ========
A deferred tax valuation allowance has been established for certain net
state deferred tax assets due to the uncertainty of realizing future benefits
from these temporary items.
The Company has not provided for U.S. income taxes or foreign
withholding taxes on undistributed earnings of foreign subsidiaries which are
considered to be indefinitely reinvested in operations outside the United
States. The amount of such earnings was approximately $48 million at December
31, 2003.
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 $.1 million, or
$.01 per share, for 2003, $.8 million, or $.13 per share, for 2002, and $.5
million, or $.08 per share for 2001.
Income taxes paid, net of refunds, were approximately $(.1) million in
2003, $2.2 million in 2002 and $4.7 million in 2001.
NOTE G STOCK OPTIONS
The 1999 Stock Option Plan (The Plan) permits the grant of 300,000
options to buy common shares of the Company to certain employees at not less
than fair market value of the shares on the date of grant. At December 31, 2003,
there were 112,000 shares remaining available for issuance under the Plan.
Options issued to date under the
37
Plan vest 50% after one year following the date of the grant, 75% after two
years, 100% after three years and expire from five to ten years from the date of
grant.
2003 2002 2001
--------------------- --------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at January 1, 149,500 $15.45 157,000 $15.32 155,000 $15.32
Granted 26,000 14.33 5,000 18.75 2,000 15.00
Exercised 29,775 15.12 6,250 15.13 - -
Forfeited 20,000 15.13 6,250 15.13 - -
------- ------- -------
Outstanding at December 31, 125,725 $15.34 149,500 $15.45 157,000 $15.32
======= ======= =======
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------------------
Range of Exercise Number Outstanding Weighted Average Weighted Average Number Exercisable Weighted Average
Prices at 12/31/03 Remaining Life Exercise Price at 12/31/03 Exercise Price
$15.13 - $16.64 93,850 5.1 years $15.38 93,850 $15.38
15.00 875 7.3 years 15.00 375 15.00
18.75 5,000 8.3 years 18.75 2,500 18.75
14.33 26,000 9.3 years 14.33 - -
------ ------ ------
125,725 6.2 years $15.34 96,725 $15.54
======= ====== ======
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 No. 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.
38
Year ended December 31,
2003 2002 2001
-------- -------- --------
Net income (loss), as reported $ 4,383 $ (1,140) $ 5,176
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards 132 277 355
-------- -------- --------
Pro forma net income (loss) $ 4,251 $ (1,417) $ 4,821
======== ======== ========
Earnings per share:
Basic - as reported $0.76 $(0.20) $0.90
======== ======== ========
Basic - pro forma $0.74 $(0.25) $0.84
======== ======== ========
Diluted - as reported $0.76 $(0.20) $0.90
======== ======== ========
Diluted - pro forma $0.73 $(0.25) $0.84
======== ======== ========
Disclosures under the fair value method are estimated using the
Black-Scholes option-pricing model with the following assumptions:
2003 2002 2001
------------- ------------ ------------
Risk-free interest rate 4.29% 4.60% 5.50%
Dividend yield 4.27% 4.22% 3.74%
Expected life 10 years 10 years 10 years
Expected volatility 22.4% 21.1% 29.5%
NOTE H COMPUTATION OF EARNINGS PER SHARE
2003 2002 2001
-------- -------- --------
Numerator
Net income (loss) $ 4,383 $ (1,140) $ 5,176
======== ======== ========
Denominator
Determination of shares
Weighted average common shares outstanding 5,783 5,766 5,755
Dilutive effect - employee stock options 18 - -
-------- -------- --------
Diluted weighted average common shares outstanding 5,801 5,766 5,755
======== ======== ========
Earnings per common share
Basic $0.76 $(0.20) $0.90
======== ======== ========
Diluted $0.76 $(0.20) $0.90
======== ======== ========
For the year ended December 31, 2003, 5,000 stock options were excluded
from the calculation of earnings per share due to the average market prices
being lower than the exercise price, and the result would have been
anti-dilutive. Due to the net loss from operations for the year ended December
31, 2002, 149,500 stock options were excluded from the calculation of earnings
per share, as the result would have been anti-dilutive. For the year ended
December 31, 2001, 157,000 stock options were excluded from the calculation of
earnings per share due to the average market price being lower than the exercise
price, and the result would have been anti-dilutive.
39
NOTE I GOODWILL AND OTHER INTANGIBLES
December 31,
---------------
2003 2002
------ ------
GOODWILL AND INTANGIBLE ASSETS
Goodwill $ 2,489 $ 2,071
Patents and other intangible assets 5,022 5,016
------- -------
7,511 7,087
Less accumulated amortization 1,958 1,491
------- -------
$ 5,553 $ 5,596
======= =======
The Company performed its annual impairment test for goodwill pursuant
to SFAS No. 142, Goodwill and Other 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 year ended December 31, 2003 was $.4 million, $.4 million in 2002
and $1.6 million in 2001. Amortization expense is estimated to be $.4 million
annually for 2004 and 2005 and $.3 million for 2006, 2007 and 2008.
During the fourth quarter of 2002, the market valuation of one domestic
reporting unit had decreased, such that it was highly probable that the related
goodwill would not be recoverable. Therefore, at December 31, 2002, the Company
had recorded a goodwill impairment charge of $1.6 million.
The following table sets forth the carrying value and accumulated
amortization of goodwill and intangibles by segment at December 31, 2003. The
second table includes the changes of net goodwill by segment for the year ended
December 31, 2003. The last table includes a reconciliation of reported net
income (loss) after goodwill amortization for the years ending December 31,
2003, 2002 and 2001.
As of December 31, 2003
------------------------------
Domestic Foreign Total
-------- -------- -------
Amortized intangible assets, including effect
of foreign currency translation
Gross carrying amount - patents and
other intangibles $ 4,947 $ 75 $ 5,022
Accumulated amortization - patents and
other intangibles (1,371) (27) (1,398)
-------- -------- -------
Total 3,576 48 3,624
-------- -------- -------
Unamortized intangible assets, including
effect of foreign currency translation
Gross carrying amount - goodwill 1,152 1,337 2,489
Accumulated amortization - goodwill (504) (56) (560)
-------- -------- -------
Total 648 1,281 1,929
-------- -------- -------
Total amortized and unamortized intangible
assets $ 4,224 $ 1,329 $ 5,553
======== ======== ========
Goodwill
-----------------------------------------
December 31, Activity and December 31,
2002 Earnouts 2003
Domestic $ 648 $ - $ 648
Foreign 953 328 1,281
------- ------- -------
Total $ 1,601 $ 328 $ 1,929
======= ======= =======
40
Reconciliation of reported net income (loss) to adjusted net income
(loss):
For the year ended December 31,
---------------------------------
2003 2002 2001
-------- -------- --------
Reported net income (loss) $ 4,383 $ (1,140) $ 5,176
Add back: Goodwill amortization, after income tax - - 694
-------- -------- --------
Adjusted net income (loss) $ 4,383 $ (1,140) $ 5,870
======== ======== ========
Basic earnings per share:
Reported net income (loss) $0.76 $(0.20) $0.90
Goodwill amortization, after income tax - - 0.12
-------- -------- --------
Adjusted net income (loss) $0.76 $(0.20) $1.02
======== ======== ========
Diluted earnings per share:
Reported net income (loss) $0.76 $(0.20) $0.90
Goodwill amortization, after income tax - - 0.12
-------- -------- --------
Adjusted net income (loss) $0.76 $(0.20) $1.02
======== ======== ========
NOTE J BUSINESS ABANDONMENT AND REALIGNMENT CHARGES
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 communications
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
December 31, 2003, and the remaining cash outlays are anticipated to be
completed by March 31, 2004. An analysis of the amount accrued in the
Consolidated Balance Sheet at December 31, 2003 is as follows:
41
December 31, 2002 Activity December 31, 2003
Accrual Cash and Accrual
Balance Payments Adjustments Balance
-------------------------------------------------------------------
Write-off of inventories, net of currency translation effect,
included in Cost of products sold $ 2,254 $ - $ (1,344) $ 910
Write-off of receivables, net of currency translation effect,
included in Costs and expenses 1,241 - (500) 741
Severance and other related expenses
included in Cost of products sold and cost and expenses 997 (428) (471) 98
Impaired asset 5 - (5) -
-------- --------
Pre-tax charge $ 4,497 $ 1,749
======== ========
SFAS No. 52, Foreign Currency Translation, provides for the transfer to
earnings of all or part of the relevant portion of the foreign currency
component of equity upon "substantially complete liquidation" of an investment
in a foreign subsidiary. At December 31, 2002, a significant portion of the
Company's European data communications operations noted above had already been
liquidated, all manufacturing had ceased, long-lived assets were transferred and
the remaining working capital was in the process of being liquidated.
Accordingly, the Company recorded a $.5 million currency translation charge to
earnings that was previously recorded as the cumulative translation adjustment
in shareholders' equity.
Business Realignment Charge
During the third quarter of 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 reevaluation of 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. Approximately $2.7 million
of the pre-tax charge was to reduce working capital and long-lived assets. The
remaining $.4 million was for cash outlays related to severance, earned
vacation, costs of exiting leased office space and other contractual
obligations. All cash outlays were completed by December 31, 2001.
NOTE K UNUSUAL CHARGES
During 2002, the Company changed its split dollar life insurance
program on certain key directors by replacing existing policies and increasing
coverage by $13 million. These new policies resulted in a cash surrender value
(CSV) lower than cumulative premiums paid on the policies primarily as a result
of penalties in the event of an early termination of the policy. As a result,
pursuant to Financial Technical Bulletin 85-4, Accounting for Purchases of Life
Insurance, the Company recorded a charge of $.8 million in 2002.
NOTE L BUSINESS SEGMENTS
The Company designs, manufactures and sells hardware employed in the
construction and maintenance of telecommunications, energy and other utility
networks. Principal products include cable anchoring and control hardware,
splice enclosures and devices which are sold primarily to customers in North and
South America, Europe and Asia.
The Company's segments are based on the way management makes operating
decisions and assesses performance. The Company's operating segments are
domestic and foreign operations. The accounting policies of the operating
segments are the same as those described in Note A in the Notes To Consolidated
Financial Statements. No individual foreign country accounted for 10% or more of
the Company's consolidated net sales or assets for the years presented. It is
not practical to present revenues by product line by segments.
42
Operating segment results are as follows for the years ended December
31:
2003 2002 2001
--------- --------- ---------
Net sales
Domestic $ 90,676 $ 95,870 $ 113,308
Foreign 62,657 73,972 83,057
--------- --------- ---------
Total net sales $ 153,333 $ 169,842 $ 196,365
========= ========= =========
Intersegment sales
Domestic $ 240 $ 2,084 $ 4,177
Foreign 818 1,066 597
--------- --------- ---------
Total intersegment sales $ 1,058 $ 3,150 $ 4,774
========= ========= =========
Operating income (loss)
Domestic $ (3,887) $ 56 $ 1,532
Foreign 9,371 (482) 6,039
--------- --------- ---------
5,484 (426) 7,571
Equity in net income of joint ventures 3,710 447 803
Interest income
Domestic 30 - 254
Foreign 391 287 431
--------- --------- ---------
421 287 685
Interest expense
Domestic (136) (270) (953)
Foreign (354) (417) (474)
--------- --------- ---------
(490) (687) (1,427)
Other expense (161) (200) (200)
--------- --------- ---------
Income (loss) before income taxes $ 8,964 $ (579) $ 7,432
========= ========= =========
Identifiable assets
Domestic $ 77,311 $ 74,388 $ 85,934
Foreign 69,485 62,309 65,280
--------- --------- ---------
146,796 136,697 151,214
Corporate 2,826 8,087 9,976
--------- --------- ---------
Total assets $ 149,622 $ 144,784 $ 161,190
========= ========= =========
Long-lived assets
Domestic $ 38,019 $ 47,302 $ 55,667
Foreign 21,538 18,097 20,858
--------- --------- ---------
$ 59,557 $ 65,399 $ 76,525
========= ========= =========
Expenditure for long-lived assets
Domestic $ 2,035 $ 2,293 $ 3,666
Foreign 1,983 2,413 2,530
--------- --------- ---------
$ 4,018 $ 4,706 $ 6,196
========= ========= =========
Depreciation and amortization
Domestic $ 6,244 $ 6,312 $ 7,905
Foreign 2,085 2,706 2,415
--------- --------- ---------
$ 8,329 $ 9,018 $ 10,320
========= ========= =========
43
Transfers between geographic areas are generally above cost and
consistent with rules and regulations of governing tax authorities. Corporate
assets are equity investments in joint ventures.
The domestic business segment operating loss for the year ended
December 31, 2003 includes an expense, recorded in the quarter ended March 31,
2003, for forgiveness of intercompany debt 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 year ended December 31, 2002 includes an expense, recorded in the
quarter ended September 30, 2003, of $4.7 million for business abandonment
charges related to the European data communications operations. The domestic
business segment operating loss for the year ended December 31, 2001 includes an
expense, recorded in the quarter ending September 30, 2001, of $2.6 million for
business realignment charges related to the data communications operations. The
international business segment operating loss for the year ended December 31,
2001 includes an expense, recorded in the quarter ending September 30, 2001, of
$.5 million for business realignment charges related to the data communications
operations.
NOTE M QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Three months ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2003
Net sales $ 35,209 $ 39,972 $ 39,473 $ 38,679
Gross profit 11,667 11,229 11,657 11,414
Income before income taxes 1,666 1,097 1,770 4,431
Net income (loss) 1,084 833 (510) 2,976
Net income (loss) per share, basic and diluted $0.19 $0.14 $(0.09) $0.52
2002
Net sales $ 44,008 $ 44,854 $ 41,587 $ 39,393
Gross profit 14,542 13,954 11,533 10,640
Income (loss) before income taxes 2,903 1,512 (2,445) (2,549)
Net income (loss) 2,001 1,037 (2,099) (2,079)
Net income (loss) per share, basic and diluted $0.35 $0.18 $(0.37) $(0.36)
Third quarter 2002 includes a business abandonment charge of $3.3
million ($.57 per share). Fourth quarter of 2002 includes a $1.1 million ($.19
per share) asset impairment charge. See Note J in the Notes To Consolidated
Financial Statements for further discussion of these business abandonment
charges.
NOTE N RELATED PARTY TRANSACTIONS
The Company is a sponsor of Ruhlman Motorsports. Ruhlman Motorsports is
owned by Randall M. Ruhlman, a director of the Company, and by his wife. The
Company paid sponsorship fees of $658,000, annually, to Ruhlman Motorsports
during 2001, 2002 and 2003, respectively. In addition, in 2001, 2002 and 2003
the Company's Canadian subsidiary, Preformed Line Products (Canada) Ltd., paid
$0, $159,000, and $99,000, respectively, to Ruhlman Motorsports in sponsorship
fees. This sponsorship provides the Company with a unique venue to entertain the
Company's customers and to advertise on the race car, which participates on the
Trans-Am racing circuit. The Company believes that its sponsorship contract with
Ruhlman Motorsports is as favorable to the Company as a similar contract with a
similar independent third-party racing team would be.
NOTE O INVESTMENTS IN FOREIGN JOINT VENTURES
Investments in joint ventures, where the Company owns at least 20% but
less than 50%, are accounted for by the equity method. The Company is currently
a minority partner in a joint venture in Japan, holding a 49% ownership interest
in Japan PLP Co. Ltd. During the fourth quarter of 2003 the Company sold its 24%
ownership interest in its joint venture in Toshin Denko Kabushiki Kaisha.
Proceeds of the sale were approximately $7.1
44
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 was taxable
resulting in a tax of $2.6 million and therefore reduces the gain to $.9 million
after tax. Dividends received from joint ventures totaled $1 million in 2003,
$1.6 million in 2002 and $.2 million in 2001.
Summarized financial information for the Company's equity-basis
investments in associated companies, combined, was as follows:
Fiscal year ended March 31,
2003 2002 2001
----------------------------
Income statement information:
Revenues $ 36,482 $ 40,088 $ 52,176
Gross profit 5,040 5,527 7,807
Operating income 1,615 2,211 3,555
Net income 1,015 1,119 2,527
Financial position information:
Current assets $ 29,593 $ 30,052 $ 32,690
Noncurrent assets 10,199 10,120 10,200
Current liabilities 5,479 5,778 7,368
Noncurrent liabilities 4,958 4,157 3,680
Net worth 29,355 30,237 31,842
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. 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 December 31,
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 December 31, 2003.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference
to the information under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Compliance" in the Company's Proxy Statement, for the
Annual Meeting of Shareholders to be held April 26, 2004 (the "Proxy
Statement"). Information relative to executive officers of the Company is
contained in Part I of this Annual Report of Form 10-K. The Company has adopted
a code of conduct. A copy of the code of conduct can be obtained from our
Internet site at http://www.preformed.com in our Employment section, and is
attached as exhibit 14.1 in this filing.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in
the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Other than the information required by Item 201(d) of Regulation S-K
the information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is
45
incorporated herein by reference. The information required by Item 201(d) of
Regulation S-K is set forth in Item 5 of this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the captions "Independent Public
Accountants", "Audit Fees", "Audit-Related Fees", "Tax Fees" and "All Other
Fees" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedule
Page Financial Statements
- ---- --------------------
25 Consolidated Balance Sheets as of December 31, 2002 and 2003
26 Statements of Consolidated Income as of December 31, 2001, 2002 and 2003
27 Statements of Consolidated Shareholders' Equity as of December 31, 2001,
2002 and 2003
28 Statements of Consolidated Cash Flows as of December 31, 2001, 2002
and 2003
29 Notes to Consolidated Financial Statements
Page Schedule
- ---- --------
49 II - Valuation and Qualifying Accounts
(b) The following reports on form 8-K were filed during the quarter ended
December 31, 2003:
On October 29, 2003 the Company furnished Form 8-K for Results of
Operations and Financial Condition.
On December 19, 2003 the Company filed Form 8-K for Other Events.
(c) Exhibits
Exhibit
Number Exhibit
- ------- -------
3.1 Amended and Restated Articles of Incorporation (incorporated
by reference to the Company's Registration Statement on Form
10).
3.2 Amended and Restated Code of Regulations of Preformed Line
Products Company (incorporated by reference to the Company's
Registration Statement on Form 10).
4 Description of Specimen Stock Certificate (incorporated by
reference to the Company's Registration Statement on Form 10).
10.1 Agreement between Ruhlman Motor Sports and Preformed Line
Products Company dated March 10, 2003 regarding sponsorship of
racing car (incorporated by reference to the Company's 10-K
filing for the year ended December 31, 2003).
10.2 Employment Agreement between Kenneth W. Brownell, Jr. and
Preformed Line Products Company dated December 3, 1998
(incorporated by reference to the Company's Registration
Statement on Form 10).
10.3 Preformed Line Products Company 1999 Employee Stock Option
Program (incorporated by reference to the Company's
Registration Statement on Form 10).
46
10.4 Preformed Line Products Company Officers Bonus Plan
(incorporated by reference to the Company's Registration
Statement on Form 10).
10.5 Preformed Line Products Company Executive Life Insurance Plan
- Summary (incorporated by reference to the Company's
Registration Statement on Form 10).
10.6 Preformed Line Products Company Supplemental Profit Sharing
Plan (incorporated by reference to the Company's Registration
Statement on Form 10).
10.7 Revolving Credit Agreement between National City Bank and
Preformed Line Products Company, dated December 30, 1994
(incorporated by reference to the Company's Registration
Statement on Form 10).
10.8 Amendment to the Revolving Credit Agreement between National
City Bank and Preformed Line Products Company, dated October
31, 2002 (incorporated by reference to the Company's 10-K
filing for the year ended December 31, 2003).
14.1 Preformed Line Products Company Code of Conduct, filed
herewith.
21 Subsidiaries of Preformed Line Products Company (incorporated
by reference to the Company's Registration Statement on Form
10).
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants, filed herewith.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants, filed herewith.
31.1 Certifications of the Principal Executive Officer, Robert G.
Ruhlman, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, filed herewith.
31.2 Certifications of the Principal Financial Officer, Eric R.
Graef, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, filed herewith.
32.1 Certification of the Principal Executive Officer, Robert G.
Ruhlman, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, furnished.
32.2 Certification of the Principal Accounting Officer, Eric R.
Graef, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, furnished.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
PREFORMED LINE PRODUCTS COMPANY
March 26, 2004 /s/ Robert G. Ruhlman
-----------------------------------------------
Robert G. Ruhlman
President and Chief Executive Officer
March 26, 2004 /s/ Eric R. Graef
-----------------------------------------------
Eric R. Graef
Vice President Finance and Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant in the capacity and on the dates indicated.
March 26, 2004 /s/ Jon R. Ruhlman
-----------------------------------------------
Jon R. Ruhlman
Chairman
March 26, 2004 /s/ Frank B. Carr
-----------------------------------------------
Frank B. Carr
Director
March 26, 2004 /s/ John D. Drinko
-----------------------------------------------
John D. Drinko
Director
March 26, 2004 /s/ Wilber C. Nordstom
-----------------------------------------------
Wilber C. Nordstrom
Director
March 26, 2004 /s/ Barbara P. Ruhlman
-----------------------------------------------
Barbara P. Ruhlman
Director
March 26, 2004 /s/ Randall M. Ruhlman
-----------------------------------------------
Randall M. Ruhlman
Director
March 26, 2004 /s/ Robert G. Ruhlman
-----------------------------------------------
Robert G. Ruhlman
President and Chief Executive Officer
48
PREFORMED LINE PRODUCTS COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2003, December 31, 2002,
and December 31, 2001
(In Thousands)
Additions
Balance at charged to Other
beginning costs and additions or Balance at
For the year ended December 31, 2003: of period expenses Deductions deductions end of period
------------ ------------ ---------- ------------- -------------
Allowance of doubtful accounts 3,770 616 (1,289) (634) 2,463
Inventory Reserve 4,798 734 (2,444) (60) 3,028
Product Return Reserve 160 - (107) - 53
Accrued Product Warranty 142 79 (17) (2) 202
Additions
Balance at charged to Other
beginning costs and additions or Balance at
For the year ended December 31, 2002: of period expenses Deductions deductions end of period
------------ ------------ ---------- ------------ -------------
Allowance of doubtful accounts 813 3,339 (380) (2) 3,770
Inventory Reserve 2,364 3,533 (995) (104) 4,798
Product Return Reserve 160 - - - 160
Accrued Product Warranty 147 142 (147) - 142
Additions
Balance at charged to Other
beginning costs and additions or Balance at
For the year ended December 31, 2001: of period expenses Deductions deductions end of period
------------ ------------ ---------- ------------ -------------
Allowance of doubtful accounts 910 447 (514) (30) 813
Inventory Reserve 2,448 1,114 (1,195) (3) 2,364
Product Return Reserve - 160 - - 160
Accrued Product Warranty 155 - (8) - 147
49
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to the Company's Registration Statement on Form 10).
3.2 Amended and Restated Code of Regulations of Preformed Line Products
Company (incorporated by reference to the Company's Registration
Statement on Form 10).
4 Description of Specimen Stock Certificate (incorporated by reference to
the Company's Registration Statement on Form 10).
10.1 Agreement between Ruhlman Motor Sports and Preformed Line Products
Company dated March 10, 2003 regarding sponsorship of racing car
(incorporated by reference to the Company's 10-K filing for the year
ended December 31, 2003).
10.2 Employment Agreement between Kenneth W. Brownell, Jr. and Preformed
Line Products Company dated December 3, 1998 (incorporated by reference
to the Company's Registration Statement on Form 10).
10.3 Preformed Line Products Company 1999 Employee Stock Option Program
(incorporated by reference to the Company's Registration Statement on
Form 10).
10.4 Preformed Line Products Company Officers Bonus Plan (incorporated by
reference to the Company's Registration Statement on Form 10).
10.5 Preformed Line Products Company Executive Life Insurance Plan - Summary
(incorporated by reference to the Company's Registration Statement on
Form 10).
10.6 Preformed Line Products Company Supplemental Profit Sharing Plan
(incorporated by reference to the Company's Registration Statement on
Form 10).
10.7 Revolving Credit Agreement between National City Bank and Preformed
Line Products Company, dated December 30, 1994 (incorporated by
reference to the Company's Registration Statement on Form 10).
10.9 Amendment to the Revolving Credit Agreement between National City Bank
and Preformed Line Products Company, dated October 31, 2002
(incorporated by reference to the Company's 10-K filing for the year
ended December 31, 2003).
14.1 Preformed Line Products Company Code of Conduct, filed herewith.
21 Subsidiaries of Preformed Line Products Company (incorporated by
reference to the Company's Registration Statement on Form 10).
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants, filed
herewith.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants, filed
herewith.
31.1 Certifications of the Principal Executive Officer, Robert G. Ruhlman,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
31.2 Certifications of the Principal Financial Officer, Eric R. Graef,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
32.1 Certification of the Principal Executive Officer, Robert G. Ruhlman,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished.
32.2 Certification of the Principal Accounting Officer, Eric R. Graef,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished.
50