10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

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

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

660 Beta Drive

Mayfield Village, Ohio

  44143
(Address of Principal Executive Office)   (Zip Code)

(440) 461-5200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of common shares outstanding as of May 1, 2014: 5,388,733.

 

 

 


Table of Contents

Table of Contents

 

         Page  
Part I - Financial Information   

Item 1.

 

Financial Statements

     3   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     17   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     24   

Item 4.

 

Controls and Procedures

     25   
Part II - Other Information   

Item 1.

 

Legal Proceedings

     25   

Item 1A.

 

Risk Factors

     25   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     25   

Item 3.

 

Defaults Upon Senior Securities

     25   

Item 4.

 

Mine Safety Disclosures

     25   

Item 5.

 

Other Information

     25   

Item 6.

 

Exhibits

     26   

SIGNATURES

     27   

 

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PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

PREFORMED LINE PRODUCTS COMPANY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

     March 31     December 31  
     2014     2013  
Thousands of dollars, except share and per share data       

ASSETS

    

Cash and cash equivalents

   $ 21,173      $ 24,291   

Accounts receivable, less allowances of $2,100 ($2,136 in 2013)

     74,957        67,587   

Inventories - net

     79,638        73,835   

Deferred income taxes

     6,463        7,022   

Prepaids

     6,218        6,112   

Prepaid taxes

     4,115        3,733   

Other current assets

     3,736        3,154   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     196,300        185,734   

Property, plant and equipment - net

     105,146        100,461   

Patents and other intangibles - net

     16,549        11,787   

Goodwill

     19,181        13,873   

Deferred income taxes

     3,922        3,416   

Other assets

     17,486        17,135   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 358,584      $ 332,406   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Notes payable to banks

   $ 2,923      $ 1,105   

Current portion of long-term debt

     162        195   

Trade accounts payable

     22,483        21,750   

Accrued compensation and amounts withheld from employees

     11,856        10,787   

Accrued expenses and other liabilities

     9,998        11,118   

Accrued profit-sharing and other benefits

     2,332        5,086   

Dividends payable

     1,107        1,098   

Income taxes payable and deferred income taxes

     1,501        1,076   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     52,362        52,215   

Long-term debt, less current portion

     31,931        13,054   

Unfunded pension obligation

     4,763        5,027   

Income taxes payable, noncurrent

     1,610        1,556   

Deferred income taxes

     5,584        3,621   

Other noncurrent liabilities

     5,924        4,603   

SHAREHOLDERS’ EQUITY

    

PLPC Shareholders’ equity:

    

Common shares - $2 par value per share, 15,000,000 shares authorized, 5,388,733 and 5,391,074 issued and outstanding, net of 783,418 and 779,279 treasury shares at par, respectively, at March 31, 2014 and December 31, 2013

     10,777        10,782   

Common shares issued to rabbi trust, 249,198 and 253,156 shares at March 31, 2014 and December 31, 2013

     (9,156     (9,306

Deferred compensation liability

     9,156        9,306   

Paid in capital

     21,955        21,082   

Retained earnings

     239,548        238,168   

Accumulated other comprehensive loss

     (15,870     (17,702
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     256,410        252,330   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 358,584      $ 332,406   
  

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

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PREFORMED LINE PRODUCTS COMPANY

STATEMENTS OF CONSOLIDATED INCOME

(UNAUDITED)

 

     Three month periods ended March 31  
     2014     2013  
     (Thousands, except per share data)  

Net sales

   $ 89,925      $ 98,689   

Cost of products sold

     62,477        67,390   
  

 

 

   

 

 

 

GROSS PROFIT

     27,448        31,299   

Costs and expenses

    

Selling

     8,505        9,061   

General and administrative

     11,158        11,480   

Research and engineering

     3,775        3,770   

Other operating (income) expense

     (203     121   
  

 

 

   

 

 

 
     23,235        24,432   
  

 

 

   

 

 

 

OPERATING INCOME

     4,213        6,867   

Other income (expense)

    

Interest income

     109        116   

Interest expense

     (161     (103

Other income (expense)

     (24     37   
  

 

 

   

 

 

 
     (76     50   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     4,137        6,917   

Income taxes

     1,399        1,952   
  

 

 

   

 

 

 

NET INCOME

   $ 2,738      $ 4,965   
  

 

 

   

 

 

 

BASIC EARNINGS PER SHARE

    

Net income

   $ 0.51      $ 0.92   
  

 

 

   

 

 

 

DILUTED EARNINGS PER SHARE

    

Net income

   $ 0.50      $ 0.91   
  

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.20      $ 0   
  

 

 

   

 

 

 

Weighted-average number of shares outstanding - basic

     5,392        5,377   
  

 

 

   

 

 

 

Weighted-average number of shares outstanding - diluted

     5,431        5,457   
  

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

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PREFORMED LINE PRODUCTS COMPANY

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(UNAUDITED)

 

     Three month periods ended March 31  
     2014      2013  
     (Thousands of dollars)  

Net income

   $ 2,738       $ 4,965   

Other comprehensive income, net of tax

     

Foreign currency translation adjustment

     1,830         420   

Recognized net acturial loss (net of tax provision $1 and $47 for the three months ended March 31, 2014 and 2013)

     2         77   
  

 

 

    

 

 

 

Other comprehensive income, net of tax

     1,832         497   
  

 

 

    

 

 

 

Comprehensive income

   $ 4,570       $ 5,462   
  

 

 

    

 

 

 

See notes to consolidated financial statements (unaudited).

 

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PREFORMED LINE PRODUCTS COMPANY

STATEMENTS OF CONSOLIDATED CASH FLOWS

(UNAUDITED)

 

     Three month periods ended March 31  
     2014     2013  
     (Thousands of dollars)  

OPERATING ACTIVITIES

    

Net income

   $ 2,738      $ 4,965   

Adjustments to reconcile net income to net cash provided by (used in) operations:

    

Depreciation and amortization

     3,078        2,961   

Provision for accounts receivable allowances

     14        95   

Provision for inventory reserves

     627        165   

Deferred income taxes

     313        (321

Share-based compensation expense

     612        423   

Excess tax benefits from share-based awards

     (160     0   

Other - net

     35        (1

Changes in operating assets and liabilities:

    

Accounts receivable

     (4,818     (5,616

Inventories

     (621     241   

Trade accounts payables and accrued liabilities

     (2,752     206   

Income taxes payable

     54        (2,786

Other - net

     (359     (1,728
  

 

 

   

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

     (1,239     (1,396

INVESTING ACTIVITIES

    

Capital expenditures

     (6,504     (5,883

Business acquisitions, net of cash acquired

     (13,923     0   

Proceeds from the sale of property and equipment

     20        36   
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (20,407     (5,847

FINANCING ACTIVITIES

    

Increase (decrease) in notes payable to banks

     1,700        (123

Proceeds from the issuance of long-term debt

     29,546        18,532   

Payments of long-term debt

     (10,725     (11,847

Earn-out consideration payments

     0        (112

Dividends paid

     (1,107     0   

Excess tax benefits from share-based awards

     160        0   

Proceeds from issuance of common shares

     105        20   

Purchase of common shares for treasury

     0        (134

Purchase of common shares for treasury from related parties

     (261     0   
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     19,418        6,336   

Effects of exchange rate changes on cash and cash equivalents

     (890     (189
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (3,118     (1,096

Cash and cash equivalents at beginning of year

     24,291        28,120   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 21,173      $ 27,024   
  

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

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PREFORMED LINE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share data, unless specifically noted

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Preformed Line Products Company and subsidiaries (the “Company” or “PLPC”) have been prepared in accordance with United States of America (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. However, in the opinion of management, these consolidated financial statements contain all estimates and adjustments, consisting of normal recurring accruals, required to fairly present the financial position, results of operations, and cash flows for the interim periods. Operating results for the three month period ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.

The Consolidated Balance Sheet at December 31, 2013 has been derived from the audited consolidated financial statements, but does not include all of the information and notes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes to consolidated financial statements included in the Company’s 2013 Annual Report on Form 10-K filed on March 14, 2014 with the Securities and Exchange Commission.

NOTE B – OTHER FINANCIAL STATEMENT INFORMATION

Inventories – net

 

     March 31     December 31  
     2014     2013  

Finished products

   $ 43,909      $ 37,301   

Work-in-process

     8,674        7,779   

Raw materials

     38,850        40,251   
  

 

 

   

 

 

 
     91,433        85,331   

Excess of current cost over LIFO cost

     (4,092     (4,146

Noncurrent portion of inventory

     (7,703     (7,350
  

 

 

   

 

 

 
   $ 79,638      $ 73,835   
  

 

 

   

 

 

 

Cost of inventories for certain material is determined using the last-in-first-out (LIFO) method and totaled approximately $25.7 million at March 31, 2014 and $25.1 million at December 31, 2013. An actual valuation of inventories under the LIFO method can be made only at the end of the year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these estimates are subject to change and may be different than the actual inventory levels and costs at the end of the year, interim results are subject to the final year-end LIFO inventory valuation. During the three month period ended March 31, 2014, the net change in LIFO inventories resulted in a $.1 million charge to Income before income taxes. During the three month period ended March 31, 2013, the net decrease in LIFO inventories resulted in a less than $.1 million benefit to Income before income taxes.

Noncurrent inventory is included in Other assets on the Consolidated Balance Sheets.

 

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Property, plant and equipment - net

Major classes of property, plant and equipment are stated at cost and were as follows:

 

     March 31      December 31  
     2014      2013  

Land and improvements

   $ 13,036       $ 12,141   

Buildings and improvements

     72,659         69,963   

Machinery and equipment

     145,098         141,940   

Construction in progress

     8,423         7,185   
  

 

 

    

 

 

 
     239,216         231,229   

Less accumulated depreciation

     134,070         130,768   
  

 

 

    

 

 

 
   $ 105,146       $ 100,461   
  

 

 

    

 

 

 

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.

NOTE C – PENSION PLANS

The Company uses a December 31 measurement date for the Plan. Net periodic benefit cost for this plan included the following components:

 

     Three month period ended March 31  
     2014     2013  

Service cost

   $ 23      $ 37   

Interest cost

     340        312   

Expected return on plan assets

     (449     (367

Recognized net actuarial loss

     3        124   
  

 

 

   

 

 

 

Net periodic benefit (income) expense

   $ (83   $ 106   
  

 

 

   

 

 

 

During the three month period ended March 31, 2014, $.2 million of contributions were made to the Plan. The Company presently anticipates contributing an additional $.5 million to fund the Plan in 2014.

 

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NOTE D – ACCUMULATED OTHER COMPREHENSIVE INCOME (“AOCI”)

The following tables set forth the total changes in AOCI by component, net of tax:

 

     Three months ended March 31, 2014  
     Defined benefit     Currency        
     pension plan     Translation        
     activity     Adjustment     Total  

Balance at January 1, 2014

   $ (1,905   $ (15,797   $ (17,702

Other comprehensive income before reclassifications:

      

Gain on foreign currency translation adjusment

     0        1,830        1,830   

Amounts reclassified from AOCI:

      

Amortization of defined benefit pension actuarial loss (a)

     2        0        2   
  

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income

     2        1,830        1,832   
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

   $ (1,903   $ (13,967   $ (15,870
  

 

 

   

 

 

   

 

 

 

 

(a) This AOCI component is included in the computation of net periodic pension costs.

NOTE E – COMPUTATION OF EARNINGS PER SHARE

Basic earnings per share were computed by dividing Net income by the weighted-average number of common shares outstanding for each respective period. Diluted earnings per share were calculated by dividing Net income by the weighted-average of all potentially dilutive common stock that were outstanding during the periods presented.

The calculation of basic and diluted earnings per share for the three month periods ended March 31, 2014 and 2013 was as follows:

 

     For the three month period ended March 31  
     2014      2013  

Numerator

     

Net income

   $ 2,738       $ 4,965   
  

 

 

    

 

 

 

Denominator

     

Determination of shares

     

Weighted-average common shares outstanding

     5,392         5,377   

Dilutive effect - share-based awards

     39         80   
  

 

 

    

 

 

 

Diluted weighted-average common shares outstanding

     5,431         5,457   
  

 

 

    

 

 

 

Earnings per common share attributable to PLPC shareholders

     

Basic

   $ 0.51       $ 0.92   
  

 

 

    

 

 

 

Diluted

   $ 0.50       $ 0.91   
  

 

 

    

 

 

 

For the three month periods ended March 31, 2014 and 2013, 17,000 and 0 stock options, respectively, were excluded from the calculation of diluted earnings per shares as they were anti-dilutive because the average market price was lower than the exercise price plus any unearned compensation on unvested options.

For the three month periods ended March 31, 2014 and 2013, 55,312 and 2,058 restricted shares, respectively, were excluded from the calculation of diluted earnings per shares as they were anti-dilutive because the average market price was lower than the exercise price plus any unearned compensation on unvested options.

 

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NOTE F – GOODWILL AND OTHER INTANGIBLES

The Company’s finite and indefinite-lived intangible assets consist of the following:

 

     March 31, 2014     December 31, 2013  
     Gross Carrying      Accumulated     Gross Carrying      Accumulated  
     Amount      Amortization     Amount      Amortization  

Finite-lived intangible assets

          

Patents

   $ 4,826       $ (4,510   $ 4,824       $ (4,434

Land use rights

     1,356         (155     1,380         (153

Trademark

     2,032         (734     1,590         (680

Customer backlog

     605         (605     578         (578

Technology

     3,749         (614     2,751         (538

Customer relationships

     13,931         (3,332     10,133         (3,086
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 26,499       $ (9,950   $ 21,256       $ (9,469
  

 

 

    

 

 

   

 

 

    

 

 

 

Indefinite-lived intangible assets

          
  

 

 

      

 

 

    

Goodwill

   $ 19,181         $ 13,873      
  

 

 

      

 

 

    

The aggregate amortization expense for other intangibles with finite lives for the three month periods ended March 31, 2014 and 2013 was $.4 million for each period. Amortization expense is estimated to be $1.2 million for the remaining period of 2014, $1.3 million for 2015, $1.2 million for 2016, $1.2 million for 2017 and $1.1 million for 2018. The weighted-average remaining amortization period by intangible asset class is as follows: patents, 2.1 years: land use rights, 62.9 years; trademark, 11.4 years: technology, 17.6 years and customer relationships, 15.8 years.

The Company’s measurement date for its annual impairment test for goodwill is October 1st of each year. There were no indications of impairment during the three month period ended March 31, 2014. The Company performs its annual impairment test for goodwill 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 has 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 different. However, the Company believes that the methodologies and weightings used are reasonable and result in appropriate fair values of the reporting units.

The Company’s only intangible asset with an indefinite life is goodwill. The changes in the carrying amount of goodwill, by segment, for the three month period ended March 31, 2014, are as follows:

 

     The Americas      EMEA     Asia-Pacific      Total  

Balance at January 1, 2014

   $ 3,078       $ 1,754      $ 9,041       $ 13,873   

Additions

     4,826         0        0         4,826   

Currency translation

     33         (28     477         482   
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at March 31, 2014

   $ 7,937       $ 1,726      $ 9,518       $ 19,181   
  

 

 

    

 

 

   

 

 

    

 

 

 

The additions to goodwill relate to the acquisition of Helix Uniformed Limited on January 31, 2014.

 

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NOTE G – SHARE-BASED COMPENSATION

The 1999 Stock Option Plan

Activity in the Company’s 1999 Stock Option Plan for the three month period ended March 31, 2014 was as follows:

 

     Number of
Shares
     Weighted
Average
Exercise Price
per Share
     Weighted
Average
Remaining
Contractual
Term (Years)
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2014

     13,000       $ 39.95         

Granted

     0       $ 0.00         

Exercised

     0       $ 0.00         

Forfeited

     0       $ 0.00         
  

 

 

          

Outstanding (exercisable and vested) at March 31, 2014

     13,000       $ 39.95         3.4       $ 372   
  

 

 

          

Exercisable at March 31, 2014

     13,000       $ 39.95         3.4       $ 372   
  

 

 

          

There were zero stock options exercised during the three month periods ended March 31, 2014 or 2013.

For the three months periods ended March 31, 2014 and 2013, the Company recorded no compensation expense related to stock options currently vesting of zero for either periods as all options are fully vested.

Long Term Incentive Plan of 2008

Under the Preformed Line Products Company Long Term Incentive Plan of 2008 (the “LTIP”), certain employees, officers, and directors are eligible to receive awards of options and restricted shares. The purpose of this LTIP is to give the Company a competitive advantage in attracting, retaining, and motivating officers, employees and directors and to provide an incentive to those individuals to increase shareholder value through long-term incentives directly linked to the Company’s performance. The total number of Company common shares reserved for awards under the LTIP is 900,000. Of the 900,000 common shares, 800,000 common shares have been reserved for restricted share unit awards and 100,000 common shares have been reserved for share options. The LTIP expires on April 17, 2018.

Restricted Share Units

For all of the participants except the CEO, a portion of the restricted share units (RSUs) is subject to time-based cliff vesting and a portion is subject to vesting based upon the Company’s performance over a three year period. All of the CEO’s RSUs are subject to vesting based upon the Company’s performance over a three year period.

The RSUs are offered at no cost to the employees; however, the participant must remain employed with the Company until the restrictions on the restricted shares lapse. The fair value of RSUs is based on the market price of a common share on the grant date. The Company currently estimates that no awards will be forfeited. Dividends declared are accrued in cash.

 

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A summary of the RSUs for the three month period ended March 31, 2014 is as follows:

 

     Restricted Share Awards  
     Performance             Total      Weighted-Average  
     and Service      Service      Restricted      Grant-Date  
     Required      Required      Awards      Fair Value  

Nonvested as of January 1, 2014

     89,459         10,202         99,661       $ 65.86   

Granted

     40,676         4,799         45,475         63.95   

Vested

     0         0         0         0   

Forfeited

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonvested as of March 31, 2014

     130,135         15,001         145,136       $ 65.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

For time-based RSUs, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award in General and administrative expense in the accompanying Statement of Consolidated Income. Compensation expense related to the time-based restricted shares for the three month periods ended March 31, 2014 and 2013 was $.1 million and $.1 million, respectively. As of March 31, 2014, there was $.6 million of total unrecognized compensation cost related to time-based RSUs that is expected to be recognized over the weighted-average remaining period of approximately 2.1 years.

For the performance-based RSUs, the number of RSUs in which the participants will vest depends on the Company’s level of performance measured by growth in pretax income and sales growth over a requisite performance period. Depending on the extent to which the performance criterions are probable of being satisfied under the LTIP, the participants are eligible to earn common shares over the vesting period. Performance-based compensation expense for the three month periods ended March 31, 2014 and 2013 was $.6 million and $.5 million for each period. As of March 31, 2014, the remaining performance-based RSUs compensation expense of $5.3 million is expected to be recognized over a period of approximately 2.1 years.

The excess tax benefits from RSUs for the three month periods ended March 31, 2014 and 2013 was $.2 million and $0, respectively.

In the event of a Change in Control (as defined in the LTIP), vesting of the restricted shares will be accelerated and all restrictions will lapse. Unvested performance-based awards are based on a maximum potential payout. Actual shares awarded at the end of the performance period may be less than the maximum potential payout level depending on achievement of performance-based award objectives.

To satisfy the vesting of its restricted share awards, the Company has issued new shares from its authorized but unissued shares. Any additional granted awards will also be issued from the Company’s authorized but unissued shares. Under the LTIP, there are 384,398 common shares currently available for additional restricted share grants.

Deferred Compensation Plan

The Company maintains a trust, commonly referred to as a rabbi trust, in connection with the Company’s deferred compensation plan. This plan allows for two deferrals. First, Directors make elective deferrals of Director fees payable and held in the rabbi trust. The deferred compensation plan allows the Directors to elect to receive Director fees in common shares of the Company at a later date instead of fees paid each quarter in cash. Second, this plan allows certain Company employees to defer LTIP restricted shares for future distribution in the form of common shares. Assets of the rabbi trust are consolidated, and the value of the Company’s stock held in the rabbi trust is classified in Shareholders’ equity and generally accounted for in a manner similar to treasury stock. The Company recognizes the original amount of the deferred compensation (fair value of the deferred stock award at the date of grant) as the basis for recognition in common shares issued to the rabbi trust. Changes in the fair value of amounts owed to certain employees or Directors are not recognized as the Company’s deferred compensation plan does not permit diversification and must be settled by the delivery of a fixed number of the Company’s common shares. As of March 31, 2014, 249,198 shares have been deferred and are being held by the rabbi trust.

 

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Share Option Awards

The LTIP plan permits the grant of 100,000 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 March 31, 2014 there were 40,000 shares remaining available for issuance under the LTIP. Options issued to date under the Plan vest 50% after one year following the date of the grant, 75% after two years, and 100% after three years and expire from five to ten years from the date of grant. Shares issued as a result of stock option exercises will be funded with the issuance of new shares.

The Company utilizes the Black-Scholes option pricing model for estimating fair values of options. The Black-Scholes model requires assumptions regarding the volatility of the Company’s stock, the expected life of the stock award and the Company’s dividend yield. The Company utilizes historical data in determining these assumptions. The risk-free rate for periods within the contractual life of the option is based on the U.S. zero coupon Treasury yield in effect at the time of grant. Forfeitures have been estimated to be zero.

There were 17,000 and 0 options granted for the three month periods ended March 31, 2014 and 2013.

The fair value for the stock options granted in 2014 was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

     2014  

Risk-free interest rate

     1.7

Dividend yield

     1.7

Expected life (years)

     5   

Expected volatility

     45.8

Activity in the Company’s LTIP plan for the three month period ended March 31, 2014 was as follows:

 

     Number of
Shares
    Weighted
Average
Exercise Price
per Share
     Weighted
Average
Remaining
Contractual
Term (Years)
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2014

     17,000      $ 54.20         

Granted

     17,000      $ 71.62         

Exercised

     (1,250   $ 52.10         

Forfeited

     0        0         
  

 

 

         

Outstanding (vested and expected to vest) at March 31, 2014

     32,750      $ 63.32         8.9       $ 244   
  

 

 

         

Exercisable at March 31, 2014

     9,375      $ 53.67         7.8       $ 160   
  

 

 

         

The weighted-average grant-date fair value of options granted during 2014 was $25.79. There were 1,250 and zero stock options exercised during the three month periods ended March 31, 2014 and 2013, respectively. The total intrinsic value of stock options exercised during the three month periods ended March 31, 2014 and 2013 was less than $.1 million and zero, respectively. Cash received for the exercise of stock options during the three month periods ended March 31, 2014 and 2013 was $.1 million and zero, respectively.

For the three month periods ended March 31, 2014 and 2013, the Company recorded compensation expense related to the stock options currently vesting of $.1 million and less than $.1 million, respectively. The total compensation cost related to nonvested awards not yet recognized at March 31, 2014 is expected to be a combined total of $.5 million over a weighted-average period of approximately 2.4 years.

NOTE H – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

The carrying value of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, notes payable, and short-term debt, approximates its fair value because of the short-term maturity of these instruments. At March 31, 2014, the fair value of the Company’s long-term debt was estimated using discounted cash flows analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements which are considered to be level two inputs. There have been no transfers in or out of level two for the three month period ended March 31, 2014. Based on the analysis performed, the fair value and the carrying value of the Company’s long-term debt approximates its carrying value as of March 31, 2014 and December 31, 2013.

 

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     March 31, 2014      December 31, 2013  
     Fair Value      Carrying Value      Fair Value      Carrying Value  

Long-term debt and related current maturities

   $ 35,027       $ 35,016       $ 13,279       $ 13,249   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE I – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 clarifies the applicable guidance for the release of the cumulative translation adjustment under current U.S. GAAP by emphasizing that the accounting for the release of the cumulative translation adjustment into net income for sales or transfers of a controlling financial interest within a foreign entity is the same irrespective of whether the sale or transfer is of a subsidiary or a group of assets that is a nonprofit activity or business. When a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. The amendments are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company adopted the guidance in the first quarter of 2014 and it did not have an effect on the Company’s results of operations, financial condition or cash flow.

NOTE J – NEW ACCOUNTING STANDARDS TO BE ADOPTED

In April 2014, the FASB issued Accounting Standards Update 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, or ASU 2014-08. ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation. The Company is required to adopt ASU 2014-08 prospectively for all disposals or components of the business classified as held for sale during fiscal period beginning after December 15, 2014 and are currently evaluating what impact, if any, its adoption will have to the presentation of the Company’s consolidated financial statements.

 

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NOTE K – SEGMENT INFORMATION

The following tables present a summary of the Company’s reportable segments for the three month periods ended March 31, 2014 and 2013. Financial results for the PLP-USA segment include the elimination of all segments’ intercompany profit in inventory.

 

     Three month period ended March 31  
     2014     2013  

Net sales

    

PLP-USA

   $ 30,686      $ 39,423   

The Americas

     23,234        19,417   

EMEA

     14,226        13,889   

Asia-Pacific

     21,779        25,960   
  

 

 

   

 

 

 

Total net sales

   $ 89,925      $ 98,689   
  

 

 

   

 

 

 

Intersegment sales

    

PLP-USA

   $ 2,725      $ 2,718   

The Americas

     1,365        1,934   

EMEA

     362        811   

Asia-Pacific

     2,198        2,707   
  

 

 

   

 

 

 

Total intersegment sales

   $ 6,650      $ 8,170   
  

 

 

   

 

 

 

Income taxes

    

PLP-USA

   $ 839      $ 1,458   

The Americas

     314        241   

EMEA

     338        459   

Asia-Pacific

     (92     (206
  

 

 

   

 

 

 

Total income taxes

   $ 1,399      $ 1,952   
  

 

 

   

 

 

 

Net income (loss)

    

PLP-USA

   $ 1,002      $ 3,386   

The Americas

     1,330        679   

EMEA

     853        1,376   

Asia-Pacific

     (447     (476
  

 

 

   

 

 

 

Total net income

   $ 2,738      $ 4,965   
  

 

 

   

 

 

 
     March 31     December 31  
     2014     2013  

Assets

    

PLP-USA

   $ 91,584      $ 90,414   

The Americas

     91,855        73,200   

EMEA

     54,599        51,345   

Asia-Pacific

     120,230        117,129   
  

 

 

   

 

 

 
     358,268        332,088   

Corporate assets

     316        318   
  

 

 

   

 

 

 

Total assets

   $ 358,584      $ 332,406   
  

 

 

   

 

 

 

 

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NOTE L – INCOME TAXES

The Company’s effective tax rate was 34% and 28% for the three month periods ended March 31, 2014 and 2013, respectively. The lower effective tax rate for the three month period ended March 31, 2013 compared to the U.S. federal statutory tax rate of 35% is primarily due to increased earnings in jurisdictions with lower tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested. The higher effective tax rate for the three month period ending March 31, 2014 compared with the same period for 2013 was primarily related to the recording of 2012 tax benefits attributable to the American Taxpayer Relief Act of 2012 (the “Act”), signed into law on January 2, 2013. The Act retroactively restored business tax provisions, primarily the research and experimentation credit and the Subpart F controlled foreign corporation look-through exception. There was no benefit recorded in 2014 as the Act was not extended into 2014.

The Company provides valuation allowances against deferred tax assets when it is more likely than not that some portion or all of its deferred tax assets will not be realized. No significant changes to the valuation allowance were reflected for the period ended March 31, 2014.

As of March 31, 2014, the Company had gross unrecognized tax benefits of approximately $.6 million with no significant changes during the period ended March 31, 2014. The Company does not anticipate any material changes to the amount of unrecognized tax benefits within the next nine months.

NOTE M – PRODUCT WARRANTY RESERVE

The Company records an accrual for estimated warranty costs to Costs of products sold in the Consolidated Statements of Income. These amounts are recorded in Accrued expenses and other liabilities in the Consolidated Balance Sheets. The Company records and accounts for its warranty reserve based on specific claim incidents. Should the Company become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the accruals as claim information changes.

The following is a rollforward of the product warranty reserve:

 

     Three Months Ended March 31,  
     2014     2013  

Balance at the beginning of period

   $ 1,140      $ 1,229   

Additions charged to income

     98        0   

Warranty usage

     0        (157

Currency translation

     (6     10   
  

 

 

   

 

 

 

End of period balance

   $ 1,232      $ 1,082   
  

 

 

   

 

 

 

NOTE N – BUSINESS COMBINATIONS

On January 31, 2014, the Company acquired Helix Uniformed Limited (Helix), located in Montreal, Quebec, Canada. From an accounting perspective, the acquisition is not considered material. The acquisition of Helix will diversify the Company’s business in Canada, expand its manufacturing footprint and enhance its engineering capabilities locally. The results of Helix are included in The Americas reportable segment. The values related to the acquisition are preliminary and subject to final opening balance sheet adjustments.

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the readers of our financial statements better understand our results of operations, financial condition and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and related notes included elsewhere in this report.

The MD&A is organized as follows:

 

    Overview

 

    Recent Developments

 

    Preface

 

    Results of Operations

 

    Application of Critical Accounting Policies and Estimates

 

    Working Capital, Liquidity and Capital Resources

 

    Recently Adopted Accounting Pronouncements

 

    New Accounting Standards to be Adopted

OVERVIEW

Preformed Line Products Company (the “Company”, “PLPC”, “we”, “us”, or “our”) was incorporated in Ohio in 1947. We are an international designer and manufacturer of products and systems employed in the construction and maintenance of overhead and underground networks for the energy, telecommunication, cable operators, information (data communication), and other similar industries. Our primary products support, protect, connect, terminate and secure cables and wires. We also provide solar hardware systems and mounting hardware for a variety of solar power applications. Our 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. We have 18 sales and manufacturing operations in 15 different countries.

We report our segments in four geographic regions: PLP-USA (including Corporate), The Americas (includes operations in North and South America without PLP-USA), EMEA (Europe, Middle East & Africa) and Asia-Pacific in accordance with accounting standards codified in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 280, Segment Reporting. Each segment distributes a full range of our primary products. Our PLP-USA segment is comprised of our U.S. operations manufacturing our traditional products primarily supporting our domestic energy and telecommunications products. Our other three segments, The Americas, EMEA and Asia-Pacific, support our energy, telecommunications, data communication, and solar products in each respective geographical region.

The segment managers responsible for each region report directly to the Company’s Chief Executive Officer, who is the chief operating decision maker, and are accountable for the financial results and performance of their entire segment for which they are responsible. The business components within each segment are managed to maximize the results of the entire company rather than the results of any individual business component of the segment.

We evaluate segment performance and allocate resources based on several factors primarily based on sales and net income.

RECENT DEVELOPMENTS

On January 31, 2014, we acquired Helix Uniformed Limited (Helix), located in Montreal, Quebec, Canada. From an accounting perspective, the acquisition is not considered material. The acquisition of Helix will diversify our business in Canada, expand our manufacturing footprint and enhance our engineering capabilities locally. Helix is included in our The Americas reporting segment.

 

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PREFACE

Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP). Our discussions of the financial results include non-GAAP measures (e.g., foreign currency impact) to provide additional information concerning our financial results and provide information that we believe is useful to the readers of our financial statements in the assessment of our performance and operating trends.

Our financial statements are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. As foreign currencies weaken against the U.S. dollar, our revenues and costs decrease as the foreign currency-denominated financial statements translate into less dollars. On average, foreign currencies weakened against the U.S. dollar in the first quarter of 2014. The fluctuations of foreign currencies during the three month period ended March 31, 2014 had an unfavorable impact on net sales of $4.4 million as compared to 2013. The most significant currencies that contributed to this movement were the South African rand, the Brazilian real, the Canadian dollar and the Australian dollar. On a reportable segment basis, the unfavorable impact of foreign currency on net sales and net income for the three month period ended March 31, 2014, was as follows:

 

     Foreign Currency Impact  
     Three Month Period
ended March 31
 
Thousands of dollars    Net Sales     Net Income  

The Americas

   $ (2,500   $ (170

EMEA

     (133     (47

Asia-Pacific

     (1,803     98   
  

 

 

   

 

 

 

Total

   $ (4,436   $ (119
  

 

 

   

 

 

 

The following table sets forth a summary of the Company’s Consolidated Income Statements and the percentage of net sales for the three month periods ended March 31, 2014 and 2013. The Company’s past operating results are not necessarily indicative of future operating results.

 

     Three month period ended March 31  
Thousands of dollars    2014     2013     Change     %
Change
 

Net sales

   $ 89,925        100.0   $ 98,689         100.0   $ (8,764     (9 )% 

Cost of products sold

     62,477        69.5     67,390         68.3     (4,913     (7
  

 

 

     

 

 

      

 

 

   

GROSS PROFIT

     27,448        30.5     31,299         31.7     (3,851     (12

Costs and expenses

     23,235        25.8     24,432         24.8     (1,197     (5
  

 

 

     

 

 

      

 

 

   

OPERATING INCOME

     4,213        4.7     6,867         7.0     (2,654     (39

Other income (expense)

     (76     -0.1     50         0.1     (126     NM   
  

 

 

     

 

 

      

 

 

   

INCOME BEFORE INCOME TAXES

     4,137        4.6     6,917         7.0     (2,780     (40

Income taxes

     1,399        1.6     1,952         2.0     (553     (28
  

 

 

     

 

 

      

 

 

   

NET INCOME

   $ 2,738        3.0   $ 4,965         5.0   $ (2,227     (45 )% 
  

 

 

     

 

 

      

 

 

   

 

 

 

NM- Not meaningful.

The global financial and economic conditions continue to be volatile but our financial condition remains strong despite the continued uncertainties caused by the Eurozone crisis and reduced growth in areas of the Asia-Pacific segment. Despite the current global economy, we believe our business fundamentals are sound and strategically well-positioned as we remain focused on managing costs, increasing sales volumes and delivering value to our customers. We have continued to invest in our business to improve efficiency, develop new products, increase our capacity and become an even stronger supplier to our customers. We currently have a bank debt to equity ratio of 14% and can borrow needed funds at an attractive interest rate under our credit facility.

 

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Table of Contents

RESULTS OF OPERATIONS

THREE MONTH PERIOD ENDED MARCH 31, 2014 COMPARED TO THREE MONTH PERIOD ENDED MARCH 31, 2013

Net sales. For the three month period ended March 31, 2014, net sales were $89.9 million, a decrease of $8.8 million, or 9%, from the three month period ended March 31, 2013. Excluding the effect of currency translation, net sales decreased 4% as summarized in the following table:

 

     Three month period ended March 31  
thousands of dollars    2014      2013      Change     Change
due to
currency
translation
    Change
excluding
currency
tranlation
    %
change
 

Net sales

              

PLP-USA

   $ 30,686       $ 39,423       $ (8,737   $ 0      $ (8,737     (22 )% 

The Americas

     23,234         19,417         3,817        (2,500     6,317        33   

EMEA

     14,226         13,889         337        (133     470        3   

Asia-Pacific

     21,779         25,960         (4,181     (1,803     (2,378     (9
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

Consolidated

   $ 89,925       $ 98,689       $ (8,764   $ (4,436   $ (4,328     (4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The decrease in PLP-USA net sales of $8.7 million, or 22%, was primarily due to price/mix decreases of $4.6 million and a volume decrease of $4.1 million. The volume decrease was primarily related to the completion of large transmission projects in the first quarter of 2013. International net sales for the three month period ended March 31, 2014 were unfavorably affected by $4.4 million when local currencies were converted to U.S. dollars. The following discussions of changes in net sales exclude the effect of currency translation. The Americas net sales of $23.2 million increased $6.3 million, or 33%, primarily related to higher organic net sales of $3.8 million, an increase in solar sales of $.3 million and an increase in acquisition-related net sales of $2.2 million in the region. EMEA net sales of $14.2 million increased $.5 million, or 3%, primarily due to higher overall net sales volume in the region partially offset by lower net sales in certain locations as compared with significant 2013 government investment in infrastructure. In Asia-Pacific, net sales of $21.8 million decreased $2.4 million, or 9% compared to 2013. The decrease in net sales was primarily due to lower transmission projects in the region and sales volume decreases in data communication.

Gross profit. Gross profit of $27.4 million for the three month period ended March 31, 2014 decreased $3.9 million, or 12%, compared to the three month period ended March 31, 2013. Excluding the effect of currency translation, gross profit decreased 9% as summarized in the following table:

 

     Three month period ended March 31  
thousands of dollars    2014      2013      Change     Change
due to
currency
translation
    Change
excluding
currency
translation
    %
change
 

Gross profit

              

PLP-USA

   $ 10,415       $ 14,229       $ (3,814   $ 0      $ (3,814     (27 )% 

The Americas

     6,208         4,902         1,306        (695     2,001        41   

EMEA

     4,845         5,020         (175     (60     (115     (2

Asia-Pacific

     5,980         7,148         (1,168     (404     (764     (11
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

Consolidated

   $ 27,448       $ 31,299       $ (3,851   $ (1,159   $ (2,692     (9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

PLP-USA gross profit of $10.4 million decreased $3.8 million compared to 2013. Of PLP-USA’s $3.8 million gross profit decrease, $4.4 million was due to lower net sales partially offset by $.4 million due to lower production expenses, $.1 million due to lower employee related expenses and a decrease in repairs and maintenance of $.1 million. International gross profit for the three month period ended March 31, 2014 was unfavorably impacted by $1.2 million when local currencies were translated to U.S. dollars. The following discussion of gross profit changes

 

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excludes the effects of currency translation. The Americas gross profit increase of $2 million was primarily the result a $1.8 million increase in organic gross profit and $.2 million related to acquisition-related gross profit. Of The Americas $1.8 million increase in organic gross profit, $1.8 million was from higher net sales and $.4 million from better production margins partially offset by $.4 million from higher material costs. Helix’s gross profit was negatively impacted by the sale of inventories which were adjusted to fair value on the acquisition date. The acquisition was accounted for pursuant to the current business combination standards. In accordance with the standards, we recorded, as of their respective acquisition dates, the acquired inventories at their respective fair values. We have recognized $.8 million of the acquired inventories fair value adjustment in Cost of products sold. The EMEA gross profit decreased $.1 million as a result of $.4 million from higher production costs partially offset by lower material costs. Asia-Pacific gross profit of $6 million decreased $.8 million due to $.6 million from lower net sales coupled with lower product margins in the region.

Costs and expenses. Costs and expenses of $23.2 million for the three month period ended March 31, 2014 decreased $1.2 million, or 5%, compared to 2013. Excluding the effect of currency translation, costs and expenses decreased 1% as summarized in the following table:

 

     Three month period ended March 31  
thousands of dollars    2014      2013      Change     Change
due to
currency
translation
    Change
excluding
currency
translation
    %
change
 

Costs and expenses

              

PLP-USA

   $ 8,508       $ 9,340       $ (832   $ 0      $ (832     (9 )% 

The Americas

     4,491         4,029         462        (465     927        23   

EMEA

     3,699         3,222         477        6        471        15   

Asia-Pacific

     6,537         7,841         (1,304     (530     (774     (10
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

Consolidated

   $ 23,235       $ 24,432       $ (1,197   $ (989   $ (208     (1 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

PLP-USA costs and expenses decreased $.8 million primarily due to a decrease in commission expense of $.4 million, $.6 million due to higher net foreign currency exchange gains related to intercompany receivables and loans, an increase in intercompany interest income of $.1 million, partially offset by an increase in consulting/system integration costs of $.3 million and an increase in travel expense of $.1 million. The foreign currency exchange gains are primarily related to translating foreign denominated loans, trade receivables and royalty receivables from our foreign subsidiaries at the quarter end exchange rates. International costs and expenses for the three month period ended March 31, 2014 were favorably impacted by $1 million when local currencies were translated to U.S. dollars. The following discussion of costs and expenses exclude the effect of currency translation. The Americas costs and expenses of $4.5 million increased $.9 million due to higher costs and expenses of $.3 million due to acquiring Helix on January 31, 2014, higher intercompany related expenses of $.3 million and higher personal related costs in the region partially offset by higher net foreign currency exchange gains of $.2 million and lower commissions of $.1 million. EMEA costs and expenses of $3.7 million increased $.5 million compared to 2013 due primarily to $.2 million related to the start-up related costs of two new subsidiaries in the region, higher net foreign currency exchange losses of $.1 million and higher personnel related costs in the region. Asia-Pacific costs and expenses of $6.5 million decreased $.8 million primarily due to lower employee related costs, lower net foreign currency exchange losses of $.1 million and lower intercompany related expenses of $.1 million partially offset by higher net bad debt expense of $.2 million and higher commissions of $.1 million.

Other income (expense). Other income (expense) for the three month period ended March 31, 2014 of $.1 million decreased $.1 million primarily due to an increase in interest expense coupled with higher net other expenses primarily due to our January 31, 2014 acquisition of Helix.

Income taxes. Income taxes for the three month period ended March 31, 2014 of $1.4 million was $.6 million lower than the same period in 2013. The effective tax rate for the three month period ended March 31, 2014 was 34% compared to 28% for the same period in 2013. The effective tax rate for three month period ended March 31, 2014 is lower than the U.S. federal statutory rate of 35% primarily due to increased earnings in jurisdictions with lower tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested. The higher effective tax rate for the three month period ending March 31, 2014 compared with the same period for 2013 was primarily related to

 

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the recording of 2012 tax benefits attributable to the American Taxpayer Relief Act of 2012 (the “Act”), signed into law on January 2, 2013. The Act retroactively restored business tax provisions, primarily the research and experimentation credit and the Subpart F controlled foreign corporation look-through exception. There was no benefit recorded in 2014 as the Act was not extended into 2014.

Net income. As a result of the preceding items, net income for the three month period ended March 31, 2014 was $2.7 million, compared to $5 million for the three month period ended March 31, 2013. Excluding the effect of currency translation, net income decreased $2.1 million as summarized in the following table:

 

     Three month period ended March 31  
thousands of dollars    2014     2013     Change     Change
due to
currency
translation
    Change
excluding
currency
translation
    %
change
 

Net income

            

PLP-USA

   $ 1,002      $ 3,386      $ (2,384   $ 0      $ (2,384     (70 )% 

The Americas

     1,330        679        651        (170     821        121   

EMEA

     853        1,376        (523     (47     (476     (35

Asia-Pacific

     (447     (476     29        98        (69     14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Consolidated

   $ 2,738      $ 4,965      $ (2,227   $ (119   $ (2,108     (42 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PLP-USA net income decreased $2.4 million due to a $3 million decrease in operating income partially offset by a decrease in income taxes. International net income for the three month period ended March 31, 2014 was unfavorably affected by $.1 million when local currencies were converted to U.S. dollars. The following discussion of net income excludes the effect of currency translation. The Americas net income increased $.8 million as a result of a $1.1 million increase in operating income partially offset by a decrease in other income of $.1 million and higher income taxes of $.1 million. EMEA net income decreased $.5 million due to a $.6 million decrease in operating income partially offset by lower taxes. Asia-Pacific net loss increased $.1 million due to a $.8 million decrease in gross profit partially offset by lower period expenses and income taxes.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies are consistent with the information set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K for the year ended December 31, 2013 and are, therefore, not presented herein.

WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES

Management Assessment of Liquidity

We measure liquidity on the basis of our ability to meet short-term and long-term operating needs, fund additional investments, including acquisitions, and make dividend payments to shareholders. Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, cash dividends, business acquisitions and access to bank lines of credit.

Our investments include expenditures required for equipment and facilities as well as expenditures in support of our strategic initiatives. In 2014, we used cash of $13.9 million, net of cash acquired, related to a business acquisition on January 31, 2014 and $6.5 million for capital expenditures. We ended the first quarter of 2014 with $21.2 million of cash and cash equivalents. We believe we have adequate sources of liquidity including additional borrowing capacity of $18.5 million and the ability to generate cash to meet existing or reasonably likely future cash requirements. Our cash and cash equivalents are held in various locations throughout the world. At March 31, 2014, the majority of our cash and cash equivalents are held outside the U.S. We expect accumulated non-U.S. cash balances will remain outside of the U.S. and that we will meet U.S. liquidity needs through future cash flows, use of U.S. cash balances, external borrowings, or some combination of these sources.

 

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We complete comprehensive reviews of our significant customers and their creditworthiness by analyzing financial statements for customers where we have identified a measure of increased risk. We closely monitor payments and developments which may signal possible customer credit issues. We currently have not identified any potential material impact on our liquidity from customer credit issues.

Our financial position remains strong and our current ratio at March 31, 2014 and December 31, 2013 was 3.7 to 1 and 3.6 to 1, respectively. At March 31, 2014, our unused availability under our line of credit was $18.5 million and our bank debt to equity percentage was 14%. On October 16, 2013, we decreased our borrowing capacity under our credit facility from $90 million to $50 million and on January 23, 2014 we extended the term to January 2017. All other terms, including the interest rate at LIBOR plus 1.125%, remain the same. The line of credit agreement contains, among other provisions, requirements for maintaining levels of working capital, net worth and profitability. At March 31, 2014 and December 31, 2013, we were in compliance with these covenants.

We expect that our major source of funding for 2014 and beyond will be our operating cash flows, our existing cash and cash equivalents as well as our line of credit agreement. We believe our future operating cash flows will be more than sufficient to cover debt repayments, other contractual obligations, capital expenditures and dividends. In addition, we believe our borrowing capacity provides substantial financial resources if needed to supplement funding of capital expenditures and/or acquisitions. We do not believe we would increase our debt to a level that would have a material adverse impact upon results of operations or financial condition.

We earn a significant amount of our operating income outside the United States, which, except for current earnings, is deemed to be indefinitely reinvested in foreign jurisdictions. We currently do not intend nor foresee a need to repatriate these funds. We expect existing domestic cash and cash equivalents from operations to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends, debt repayment, and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.

Sources and Uses of Cash

Cash decreased $3.1 million for the three month period ended March 31, 2014. Net cash used in operating activities was $1.2 million. The major investing and financing uses of cash were capital expenditures of $6.5 million, a business acquisition of $13.9 million, net of cash acquired, and dividends of $1.1 million, offset by net borrowings of $20.5 million. Currency had a negative $.9 million impact on cash and cash equivalents when translating foreign denominated financial statements to U.S. dollars.

Net cash used in operating activities for the three month period ended March 31, 2014 increased $.2 million compared to the three month period ended March 31, 2013 primarily as a result of an increase in non-cash items of $1.2 million coupled with a lesser increase in operating assets (net of operating liabilities) of $1.2 million, partially offset by a decrease in net income of $2.2 million.

Net cash used in investing activities for the three month period ended March 31, 2014 of $20.4 million represents a increase of $14.6 million when compared to cash used in investing activities in the three month period ended March 31, 2013. The increase was primarily related to a business acquisition of $13.9 million, net of cash acquired, on January 31, 2014 and capital expenditures increases of $.6 million in the three month period ended March 31, 2014 when compared to the same period in 2013. The business acquisition, net of cash acquired, of $13.9 million, relates to the acquisition of Helix. The increase in capital expenditures was due mostly to the purchase of the land and building at Helix from the prior owner for $2.8 million partially offset by $1.1 million related to the expansion of our worldwide corporate headquarters in 2013 and lower capital expenditures at our worldwide locations.

Cash provided by financing activities for the three month period ended March 31, 2014 was $19.4 million compared to $6.3 million for the three month period ended March 31, 2013. The increase of $13.1 million was primarily a result of an increase in debt borrowings in 2014 compared to 2013 of $14 million partially offset by dividends paid of $1.1 million. In December 2012, we advanced our first and second quarter expected dividend payments (which would have been payable in January and April 2013) due to the uncertainty of the U.S. tax laws.

 

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RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 clarifies the applicable guidance for the release of the cumulative translation adjustment under current U.S. GAAP by emphasizing that the accounting for the release of the cumulative translation adjustment into net income for sales or transfers of a controlling financial interest within a foreign entity is the same irrespective of whether the sale or transfer is of a subsidiary or a group of assets that is a nonprofit activity or business. When a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. The amendments are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We adopted the guidance in the first quarter of 2014 and it did not have an effect on our results of operations, financial condition or cash flow.

NEW ACCOUNTING STANDARDS TO BE ADOPTED

In April 2014, the FASB issued Accounting Standards Update 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, or ASU 2014-08. ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation. We are required to adopt ASU 2014-08 prospectively for all disposals or components of our business classified as held for sale during fiscal period beginning after December 15, 2014 and are currently evaluating what impact, if any, its adoption will have to the presentation of our consolidated financial statements.

FORWARD LOOKING STATEMENTS

Cautionary Statement for “Safe Harbor” Purposes Under The Private Securities Litigation Reform Act of 1995

This Form 10-Q and other documents we file with the Securities and Exchange Commission (“SEC”) 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 (U.S.), Canada, and Western Europe and may not grow as expected in developing regions;

 

    The ability of our customers to raise funds needed to build the facilities their customers require;

 

    Technological developments that affect longer-term trends for communication lines such as wireless communication;

 

    The decreasing demands for product supporting copper-based infrastructure due to the introduction of products using new technologies or adoption of new industry standards;

 

    The Company’s success at continuing to develop proprietary technology and maintaining high quality products and customer service to meet or exceed existing or new industry performance standards and individual customer expectations;

 

    The Company’s success in strengthening and retaining relationships with the Company’s customers, growing sales at targeted accounts and expanding geographically;

 

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    The extent to which the Company is successful in expanding the Company’s product line or production facilities into new areas;

 

    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 compliances;

 

    The telecommunication market’s continued deployment of Fiber-to-the-Premises;

 

    The Company’s ability to obtain funding for future acquisitions;

 

    The potential impact of the global economic condition and the depressed U.S. housing market on the Company’s ongoing profitability and future growth opportunities in our core markets in the U.S. and other foreign countries where the financial situation is expected to be similar going forward;

 

    The continued support by Federal, State, Local and Foreign Governments in incentive programs for upgrading electric transmission lines and promoting renewable energy deployment;

 

    Decrease in infrastructure spending globally as a result of worldwide depressed spending; and

 

    Those factors described under the heading “Risk Factors” on page 13 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 14, 2014.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company operates manufacturing facilities and offices around the world and uses fixed and floating rate debt to finance the Company’s global operations. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations and market risk related to changes in interest rates and foreign currency exchange rates. The Company believes the political and economic risks related to the Company’s international operations are mitigated due to the stability of the countries in which the Company’s largest international operations are located.

As of March 31, 2014, the Company had no foreign currency forward exchange contract outstanding. 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 and term notes, which consisted of borrowings of $35 million at March 31, 2014. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $.2 million for the three month period ended March 31, 2014.

The Company’s primary currency rate exposures are related to foreign denominated debt, intercompany debt, forward exchange contracts, foreign denominated receivables and cash and short-term investments. A hypothetical 10% change in currency rates would have a favorable/unfavorable impact on fair values on such instruments of $6.6 million and on income before tax of $3.8 million.

 

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended, were effective as of March 31, 2014.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f)) during the quarter ended March 31, 2014 that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect our financial condition, results of operations or cash flows.

 

ITEM 1A. RISK FACTORS

There were no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 14, 2014.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 4, 2010, the Company announced that the Board of Directors authorized a plan to repurchase up to 250,000 of Preformed Line Products common shares. The repurchase plan does not have an expiration date. The following table includes repurchases for the three month period ended March 31, 2014.

 

Period (2014)

   Total
Number of
Shares
Purchased
     Average
Price Paid
per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Number of
Shares that may yet
be Purchased under
the Plans or Programs
 

January

     0         0         213,968         36,032   

February

     0         0         213,968         36,032   

March

     4,139         0         218,107         31,893   
  

 

 

          

Total

     4,139            

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

  31.1    Certifications of the Principal Executive Officer, Robert G. Ruhlman, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
  31.2    Certifications of the Principal Accounting Officer, Eric R. Graef, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
  32.1    Certifications of the Principal Executive Officer, Robert G. Ruhlman, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished.
  32.2    Certifications of the Principal Accounting Officer, Eric R. Graef, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

May 2, 2014     /s/   Robert G. Ruhlman
      Robert G. Ruhlman
      Chairman, President and Chief Executive Officer
      (Principal Executive Officer)
May 2, 2014     /s/   Eric R. Graef
      Eric R. Graef
      Chief Financial Officer, Vice President – Finance and
      Treasurer
      (Principal Accounting Officer)

 

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EXHIBIT INDEX

 

  31.1    Certifications of the Principal Executive Officer, Robert G. Ruhlman, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
  31.2    Certifications of the Principal Accounting Officer, Eric R. Graef, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
  32.1    Certifications of the Principal Executive Officer, Robert G. Ruhlman, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished.
  32.2    Certifications of the Principal Accounting Officer, Eric R. Graef, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

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