Preformed Line Products Company 10-Q
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 September 30, 2006
Commission file number 0-31164
Preformed Line Products Company
(Exact Name of Registrant as Specified in Its Charter)
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Ohio
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34-0676895 |
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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660 Beta Drive
Mayfield Village, Ohio
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44143 |
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(Address of Principal Executive Office)
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(Zip Code) |
(440) 461-5200
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of common shares outstanding as of November 1, 2006: 5,360,259.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREFORMED LINE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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September 30, |
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December 31, |
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Thousands of dollars, except share data |
|
2006 |
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|
2005 |
|
ASSETS |
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|
|
|
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|
Cash and cash equivalents |
|
$ |
26,026 |
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|
$ |
39,592 |
|
Accounts receivable, less allowances of $976 ($789 in 2005) |
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|
36,389 |
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|
26,481 |
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Inventories net |
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|
39,316 |
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|
37,618 |
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Deferred income taxes |
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|
4,430 |
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|
3,870 |
|
Prepaids and other |
|
|
3,153 |
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|
|
2,832 |
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|
|
|
|
|
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TOTAL CURRENT ASSETS |
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|
109,314 |
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|
110,393 |
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|
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Property and equipment net |
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|
52,567 |
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|
48,804 |
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Deferred income taxes |
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|
2,410 |
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|
2,060 |
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Goodwill net |
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|
2,073 |
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|
2,018 |
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Patents and other intangibles net |
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|
2,628 |
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|
2,871 |
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Other assets |
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2,476 |
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|
2,401 |
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TOTAL ASSETS |
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$ |
171,468 |
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|
$ |
168,547 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Notes payable to banks |
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$ |
2,645 |
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$ |
1,156 |
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Current portion of long-term debt |
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|
3,404 |
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|
|
4,806 |
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Trade accounts payable |
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|
12,840 |
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|
10,878 |
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Accrued compensation and amounts withheld from employees |
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|
6,568 |
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|
5,161 |
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Accrued expenses and other liabilities |
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|
5,284 |
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|
6,406 |
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Accrued profit-sharing and pension contributions |
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|
4,385 |
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|
|
4,290 |
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Dividends payable |
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|
1,072 |
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|
|
1,147 |
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Income taxes |
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2,849 |
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|
881 |
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Deferred income taxes |
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|
11 |
|
|
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|
|
|
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TOTAL CURRENT LIABILITIES |
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39,058 |
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34,725 |
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Long-term debt, less current portion |
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1,836 |
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122 |
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Deferred income taxes |
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|
385 |
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|
157 |
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SHAREHOLDERS EQUITY |
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Common shares $2 par value, 15,000,000 shares authorized,
5,360,259 and 5,734,797 outstanding, net of
365,311 and 511,159 treasury shares at par, respectively |
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10,721 |
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11,470 |
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Paid in capital |
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1,515 |
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1,237 |
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Retained earnings |
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130,774 |
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135,481 |
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Accumulated other comprehensive loss |
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(12,821 |
) |
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(14,645 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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130,189 |
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133,543 |
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TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY |
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$ |
171,468 |
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$ |
168,547 |
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See notes to consolidated financial statements.
3
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
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Three month periods ended September 30, |
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Nine month periods ended September 30, |
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In thousands, except per share data |
|
2006 |
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2005 |
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2006 |
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|
2005 |
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Net sales |
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$ |
56,439 |
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|
$ |
55,614 |
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$ |
165,172 |
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$ |
159,078 |
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Cost of products sold |
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|
37,677 |
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36,355 |
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111,493 |
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105,775 |
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GROSS PROFIT |
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18,762 |
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19,259 |
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53,679 |
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53,303 |
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Costs and expenses |
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Selling |
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5,475 |
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5,608 |
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|
16,872 |
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|
16,182 |
|
General and administrative |
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|
5,695 |
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|
|
5,985 |
|
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17,393 |
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|
16,464 |
|
Research and engineering |
|
|
1,928 |
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|
|
1,565 |
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5,807 |
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|
4,635 |
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Other operating expenses net |
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|
136 |
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|
112 |
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|
318 |
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|
|
42 |
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|
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13,234 |
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13,270 |
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40,390 |
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37,323 |
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Royalty income net |
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|
287 |
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|
576 |
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|
1,004 |
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|
1,113 |
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OPERATING INCOME |
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|
5,815 |
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|
|
6,565 |
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|
|
14,293 |
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|
|
17,093 |
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Other income (expense) |
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Interest income |
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|
389 |
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|
|
263 |
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|
1,144 |
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|
717 |
|
Interest expense |
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|
(164 |
) |
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|
(93 |
) |
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|
(399 |
) |
|
|
(273 |
) |
Other expense net |
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|
(19 |
) |
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|
(27 |
) |
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|
(53 |
) |
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|
(81 |
) |
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|
|
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|
206 |
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|
|
143 |
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|
692 |
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|
363 |
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INCOME BEFORE INCOME TAXES |
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|
6,021 |
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|
|
6,708 |
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|
|
14,985 |
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|
|
17,456 |
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|
|
|
|
|
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|
|
|
|
|
|
|
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|
Income taxes |
|
|
2,022 |
|
|
|
2,529 |
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|
|
4,957 |
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|
|
6,353 |
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|
|
|
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|
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NET INCOME |
|
$ |
3,999 |
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|
$ |
4,179 |
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|
$ |
10,028 |
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|
$ |
11,103 |
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Net income per share basic |
|
$ |
0.71 |
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|
$ |
0.73 |
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|
$ |
1.76 |
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|
$ |
1.94 |
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|
Net income per share diluted |
|
$ |
0.70 |
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|
$ |
0.72 |
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|
$ |
1.75 |
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|
$ |
1.92 |
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Cash dividends declared per share |
|
$ |
0.20 |
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|
$ |
0.20 |
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|
$ |
0.60 |
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$ |
0.60 |
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|
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|
|
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|
Weighted average number of shares outstanding basic |
|
|
5,638 |
|
|
|
5,724 |
|
|
|
5,696 |
|
|
|
5,723 |
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Weighted
average number of shares outstanding diluted |
|
|
5,688 |
|
|
|
5,793 |
|
|
|
5,746 |
|
|
|
5,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
4
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
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|
|
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|
Nine Month Periods Ended September 30, |
|
Thousands of dollars |
|
2006 |
|
|
2005 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,028 |
|
|
$ |
11,103 |
|
Adjustments to reconcile net income to net cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,162 |
|
|
|
5,192 |
|
Deferred income taxes |
|
|
(671 |
) |
|
|
(709 |
) |
Stock based compensation expense |
|
|
193 |
|
|
|
|
|
Net investment in life insurance |
|
|
72 |
|
|
|
55 |
|
Translation adjustment |
|
|
(42 |
) |
|
|
66 |
|
Gain on sale of property and equipment |
|
|
(167 |
) |
|
|
(44 |
) |
Other net |
|
|
116 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(9,765 |
) |
|
|
(6,531 |
) |
Inventories |
|
|
(1,158 |
) |
|
|
438 |
|
Trade accounts payables and accrued liabilities |
|
|
2,021 |
|
|
|
2,709 |
|
Income taxes |
|
|
2,860 |
|
|
|
1,929 |
|
Other net |
|
|
(765 |
) |
|
|
(452 |
) |
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
7,884 |
|
|
|
13,756 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(8,463 |
) |
|
|
(4,923 |
) |
Proceeds from the sale of property and equipment |
|
|
378 |
|
|
|
121 |
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(8,085 |
) |
|
|
(4,802 |
) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Increase in notes payable to banks |
|
|
1,388 |
|
|
|
446 |
|
Proceeds from the issuance of long-term debt |
|
|
3,038 |
|
|
|
680 |
|
Payments of long-term debt |
|
|
(2,875 |
) |
|
|
(526 |
) |
Dividends paid |
|
|
(3,435 |
) |
|
|
(3,431 |
) |
Issuance of common shares |
|
|
102 |
|
|
|
686 |
|
Purchase of common shares for treasury |
|
|
(12,141 |
) |
|
|
(702 |
) |
|
|
|
|
|
|
|
NET CASH USED IN FINANCING ACTIVITIES |
|
|
(13,923 |
) |
|
|
(2,847 |
) |
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash and cash equivalents |
|
|
558 |
|
|
|
(971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(13,566 |
) |
|
|
5,136 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
39,592 |
|
|
|
29,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
26,026 |
|
|
$ |
34,880 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
5
PREFORMED LINE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Tables in thousands, except per share data
NOTE A BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these
consolidated financial statements do not include all of the information and notes required by
accounting principles generally accepted in the United States of America for complete financial
statements. The preparation of these consolidated financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from these estimates. However, in the opinion of
management, these consolidated financial statements contain all estimates and adjustments required
to fairly present the financial position, results of operations, and cash flows for the interim
periods. Operating results for the nine-month period ended September 30, 2006 are not necessarily
indicative of the results to be expected for the year ending December 31, 2006.
The consolidated balance sheet at December 31, 2005 has been derived from the audited consolidated
financial statements, but does not include all of the information and notes required by accounting
principles generally accepted in the United States of America for complete financial statements.
For further information, refer to the consolidated financial statements and notes to consolidated
financial statements included in the Companys Form 10-K for 2005 filed with the Securities and
Exchange Commission.
NOTE B OTHER FINANCIAL STATEMENT INFORMATION
Inventories
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Finished goods |
|
$ |
16,988 |
|
|
$ |
15,550 |
|
Work-in-process |
|
|
1,825 |
|
|
|
1,732 |
|
Raw material |
|
|
24,042 |
|
|
|
23,021 |
|
|
|
|
|
|
|
|
|
|
|
42,855 |
|
|
|
40,303 |
|
Excess of current cost over LIFO cost |
|
|
(3,539 |
) |
|
|
(2,685 |
) |
|
|
|
|
|
|
|
|
|
$ |
39,316 |
|
|
$ |
37,618 |
|
|
|
|
|
|
|
|
Property and equipment
Major classes of property, plant and equipment are stated at cost and were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Land and improvements |
|
$ |
8,174 |
|
|
$ |
6,762 |
|
Buildings and improvements |
|
|
41,462 |
|
|
|
37,902 |
|
Machinery and equipment |
|
|
97,395 |
|
|
|
93,619 |
|
Construction in progress |
|
|
4,433 |
|
|
|
5,627 |
|
|
|
|
|
|
|
|
|
|
|
151,464 |
|
|
|
143,910 |
|
Less accumulated depreciation |
|
|
98,897 |
|
|
|
95,106 |
|
|
|
|
|
|
|
|
|
|
$ |
52,567 |
|
|
$ |
48,804 |
|
|
|
|
|
|
|
|
Comprehensive Income
6
The components of comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended September 30, |
|
|
Nine month period ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
3,999 |
|
|
$ |
4,179 |
|
|
$ |
10,028 |
|
|
$ |
11,103 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency adjustments |
|
|
683 |
|
|
|
798 |
|
|
|
1,824 |
|
|
|
(1,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
4,682 |
|
|
$ |
4,977 |
|
|
$ |
11,852 |
|
|
$ |
10,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
|
|
|
Product warranty balance at January 1, 2006 |
|
$ |
10 |
|
Additions charged to Cost of products sold |
|
|
59 |
|
Deductions |
|
|
(10 |
) |
|
|
|
|
Product warranty balance at September 30, 2006 |
|
$ |
59 |
|
|
|
|
|
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
Net periodic benefit cost for the Companys domestic plan included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended September 30, |
|
|
Nine month period ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
209 |
|
|
$ |
180 |
|
|
$ |
595 |
|
|
$ |
540 |
|
Interest cost |
|
|
222 |
|
|
|
202 |
|
|
|
676 |
|
|
|
606 |
|
Expected return on plan assets |
|
|
(217 |
) |
|
|
(188 |
) |
|
|
(654 |
) |
|
|
(564 |
) |
Recognized net actuarial loss |
|
|
43 |
|
|
|
51 |
|
|
|
160 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
257 |
|
|
$ |
245 |
|
|
$ |
777 |
|
|
$ |
735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, $.5 million of contributions have been made. The Company presently
anticipates contributing an additional $.2 million to fund its pension plan in 2006 for a total of
$.7 million.
7
NOTE D COMPUTATION OF EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended September 30, |
|
|
Nine month period ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,999 |
|
|
$ |
4,179 |
|
|
$ |
10,028 |
|
|
$ |
11,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Determination of shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
5,638 |
|
|
|
5,724 |
|
|
|
5,696 |
|
|
|
5,723 |
|
Dilutive effect employee stock options |
|
|
50 |
|
|
|
69 |
|
|
|
50 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
5,688 |
|
|
|
5,793 |
|
|
|
5,746 |
|
|
|
5,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.71 |
|
|
$ |
0.73 |
|
|
$ |
1.76 |
|
|
$ |
1.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.70 |
|
|
$ |
0.72 |
|
|
$ |
1.75 |
|
|
$ |
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE E GOODWILL AND OTHER INTANGIBLES
The Company performed its annual impairment test for goodwill pursuant to SFAS No. 142, Goodwill
and Intangible Assets, as of January 2006 and had determined that no adjustment to the carrying
value of goodwill was required. The Companys only intangible asset with an indefinite life is
goodwill, which is included within the foreign segment. The aggregate amortization expense for
other intangibles with finite lives for each of the three-months ended September 30, 2006 and 2005
was $.1 million, and for the nine-months ended September 30, 2006 and 2005 was $.3 million and $.2
million, respectively. Amortization expense is estimated to be $.3 million for each of the full
years ended 2006 through 2010.
The following table sets forth the carrying value and accumulated amortization of intangibles,
including the effect of foreign currency translation, by segment at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006 |
|
|
|
Domestic |
|
|
Foreign |
|
|
Total |
|
Amortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount patents and other intangibles |
|
$ |
4,947 |
|
|
$ |
79 |
|
|
$ |
5,026 |
|
Accumulated amortization patents and other intangibles |
|
|
(2,344 |
) |
|
|
(54 |
) |
|
|
(2,398 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,603 |
|
|
$ |
25 |
|
|
$ |
2,628 |
|
|
|
|
|
|
|
|
|
|
|
The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2006,
is as follows:
|
|
|
|
|
Balance at January 1, 2006 |
|
$ |
2,018 |
|
Currency translation |
|
|
55 |
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
2,073 |
|
|
|
|
|
NOTE F 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 September 30, 2006 there were 42,000 shares remaining available for issuance under the
Plan. 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.
Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment
(SFAS No. 123R). SFAS No. 123R affects the value of stock options that have been granted and
requires the Company to expense
share-based payment awards with compensation cost for transactions measured at fair value. The
Company adopted the modified-prospective-transition method and accordingly has not restated amounts
in prior interim periods and fiscal years. The Company has elected to use the simplified method of
calculating the expected term of the stock options and
8
historical volatility to compute fair value
under the Black-Scholes option-pricing model. 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.
Activity in the Companys stock option plan for the nine-month period ended September 30, 2006 was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number of |
|
Exercise Price |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
per Share |
|
Term (Years) |
|
Value |
Outstanding at January 1, 2006 |
|
|
140,742 |
|
|
$ |
22.82 |
|
|
|
7.0 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(9,931 |
) |
|
$ |
16.55 |
|
|
|
|
|
|
$ |
51 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
130,811 |
|
|
$ |
23.43 |
|
|
|
6.5 |
|
|
$ |
939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
98,311 |
|
|
$ |
17.92 |
|
|
|
5.3 |
|
|
$ |
598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the nine months ended September 30,
2006 and 2005 was $.1 million and $.3 million, respectively.
For the nine-month period ended September 30, 2006 the Company recorded compensation expense
related to the stock options currently vesting, reducing income before taxes and net income by $.2
million. The impact on earnings per share was a reduction of $.03 per share, basic and diluted.
The total compensation cost related to nonvested awards not yet recognized is expected to be a
combined total of $.3 million over the next three years.
Activity for nonvested stock options for the nine-month period ended September 30, 2006 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Number of |
|
Exercise Price |
|
|
Shares |
|
per Share |
Nonvested at January 1, 2006 |
|
|
62,500 |
|
|
$ |
31.38 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(30,000 |
) |
|
$ |
28.13 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
32,500 |
|
|
$ |
34.38 |
|
|
|
|
|
|
|
|
|
|
In accordance with the provision of SFAS 148, Accounting for Stock-Based Compensation-Transition
and Disclosure an amendment of SFAS No. 123, the Company elected to continue to apply the
intrinsic value approach under APB No. 25 in accounting for its stock-based compensation plans
prior to January 1, 2006. Accordingly, the Company did not recognize compensation expense for
stock options when the exercise price at the grant date was equal to or greater than the fair
market value of the stock at that date.
9
The following table illustrates the effect on net income and net income per share for the
nine-month period ended September 30, 2005 as if the fair value based method had been applied to
all outstanding and vested awards.
|
|
|
|
|
Net income, as reported |
|
$ |
11,103 |
|
Less: Stock-based compensation expense, pro forma |
|
|
126 |
|
|
|
|
|
Pro forma net income |
|
$ |
10,977 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic as reported |
|
$ |
1.94 |
|
|
|
|
|
Basic pro forma |
|
$ |
1.92 |
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
1.92 |
|
|
|
|
|
Diluted pro forma |
|
$ |
1.90 |
|
|
|
|
|
NOTE G RELATED PARTY TRANSACTIONS
On September 8, 2006, the Company, upon the approval of a Special Committee of the Board of
Directors and the Board of Directors, purchased 365,311 Common Shares of the Company from Barbara
P. Ruhlman at a price per share of $31.48. Barbara P. Ruhlman is a member of the Companys Board
of Directors and the mother of Robert G. Ruhlman and Randall M. Ruhlman, both of whom are also
members of the Board of Directors. The purchase was consummated pursuant to a Shares Purchase
Agreement between the Company and Mrs. Ruhlman, as trustee, under trust agreement dated February
16, 1985.
In connection with the purchase the Companys status as a controlled company under the NASDAQ
Corporate Governance Rules was terminated by the Companys shareholders, who had previously formed
a group owning over 50% of the Companys outstanding stock by entering into a controlled company
agreement. As a result of the termination of the controlled status the Board adopted a resolution
that any Board nominees must be selected by a majority of the Companys independent directors. The
Company had previously adopted all other requirements for a non-controlled company.
NOTE H NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151, Inventory Costs, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs and wasted material. This standard
requires that such items be recognized as current-period charges. The standard also establishes
the concept of normal capacity and requires the allocation of fixed production overhead to
inventory based on the normal capacity of the production facilities. Any unallocated overhead must
be recognized as an expense in the period incurred. The Company adopted this standard effective
January 1, 2006, and the impact was immaterial on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets. This standard
amended APB Opinion No. 29, Accounting for Nonmonetary Transactions, to eliminate the exception
from fair value measurement for nonmonetary exchanges of similar productive assets. This standard
replaces this exception with a general exception from fair value measurement for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement is effective for all nonmonetary asset exchanges completed by the
Company starting January 1, 2006. The Company adopted this standard and it did not have an impact
on its consolidated financial statements, because the Company has not engaged in nonmonetary
exchanges of assets.
In June 2006, the FASB issued FASB interpretation No. 48, Accounting for Uncertainty in Income
taxes an interpretation of FASB Statement No. 109, Accounting for Income Taxes. This
interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. This interpretation also provides
guidance on derecognition,
10
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This interpretation is effective for the Company starting January 1,
2007. The Company is evaluating the impact this interpretation will have on its consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. This standard does not require
new fair value measurements, however the application of this standard may change current practice
for an entity. This standard is effective for financial statements issued after January 1, 2007.
The Company is evaluating the impact this standard will have on its consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans. This standard requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in the funded status in the year in which
the changes occur through comprehensive income. This standard also requires an employer to measure
the funded status of a plan as of the date of its year-end statement of financial position. This
standard also requires disclosure in the notes to financial statements, additional information
about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and transition asset or
obligation. The requirement to initially recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures is effective for an employer with
publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006.
The requirement to measure plan assets and benefit obligations as of the date of the employers
fiscal year-end statement of financial position is effective for fiscal years ending after December
15, 2008. The Company is evaluating the impact this standard will have on its consolidated
financial statements.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1, Accounting for Planned Major
Maintenance Activities. This staff position amends certain provisions in the AICPA Industry Audit
Guide, Audits of Airlines (Airline Guide), and APB No. 28, Interim Financial Reporting. This staff
position prohibits the use of the accrue-in-advance method of accounting for planned major
maintenance activities in annual and interim financial reporting periods. This staff position is
effective as of January 1, 2007. The Company is evaluating the impact this staff position will
have on its consolidated financial statements.
In September 2006, the FASB issued Emerging Issues Task Force (EITF) abstract Issue No. 06-5,
Accounting for Purchases of Life Insurance Determining the Amount that Could be Realized in
Accordance with FASB Technical Bulletin No. 85-4. This issue clarifies the calculation of the
amount that could be realized under an insurance contract as of the date of the statement of
financial position. This issue concludes the policyholder should consider any additional amounts
included in contractual terms of the policy in determining the amount that could be realized under
the insurance contract. Contractual limitations should be considered, as well as amount
recoverable by the policyholder at the discretion of the insurance company should be excluded from
the amount that could be realized. All fixed amounts recoverable by the policyholder in future
periods in excess of one year from the surrender of the policy should be recognized at their
present value. Lastly, any amount that is realized by the policyholder upon surrender of the final
policy shall be included in the amount that could be realized. This issue should be applied by
either a change in accounting principle through a cumulative-effect adjustment to retained earnings
or to other components of equity or net assets or a change in accounting principle through
retrospective application to all prior periods. This issue is effective for fiscal years beginning
after December 15, 2006. The Company is evaluating the impact this EITF issue will have on its
consolidated financial statements.
11
NOTE H BUSINESS SEGMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended September 30, |
|
|
Nine month period ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
29,168 |
|
|
$ |
32,565 |
|
|
$ |
85,723 |
|
|
$ |
90,927 |
|
Foreign |
|
|
27,271 |
|
|
|
23,049 |
|
|
|
79,449 |
|
|
|
68,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
56,439 |
|
|
$ |
55,614 |
|
|
$ |
165,172 |
|
|
$ |
159,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
1,403 |
|
|
$ |
1,648 |
|
|
$ |
4,435 |
|
|
$ |
4,669 |
|
Foreign |
|
|
1,161 |
|
|
|
965 |
|
|
|
3,447 |
|
|
|
2,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intersegment sales |
|
$ |
2,564 |
|
|
$ |
2,613 |
|
|
$ |
7,882 |
|
|
$ |
6,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
2,106 |
|
|
$ |
4,125 |
|
|
$ |
4,805 |
|
|
$ |
10,209 |
|
Foreign |
|
|
3,709 |
|
|
|
2,440 |
|
|
|
9,488 |
|
|
|
6,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,815 |
|
|
|
6,565 |
|
|
|
14,293 |
|
|
|
17,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
258 |
|
|
|
140 |
|
|
|
745 |
|
|
|
326 |
|
Foreign |
|
|
131 |
|
|
|
123 |
|
|
|
399 |
|
|
|
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
389 |
|
|
|
263 |
|
|
|
1,144 |
|
|
|
717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
(23 |
) |
|
|
(35 |
) |
Foreign |
|
|
(158 |
) |
|
|
(86 |
) |
|
|
(376 |
) |
|
|
(238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164 |
) |
|
|
(93 |
) |
|
|
(399 |
) |
|
|
(273 |
) |
Other expense net |
|
|
(19 |
) |
|
|
(27 |
) |
|
|
(53 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
6,021 |
|
|
$ |
6,708 |
|
|
$ |
14,985 |
|
|
$ |
17,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Identifiable assets |
|
|
|
|
|
|
|
|
Domestic |
|
$ |
83,947 |
|
|
$ |
93,132 |
|
Foreign |
|
|
87,521 |
|
|
|
75,415 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
171,468 |
|
|
$ |
168,547 |
|
|
|
|
|
|
|
|
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
Sales increases for the nine months ended September 30, 2006 continue to be driven by our strong
international operations. Domestic sales for the nine months ended September 30, 2006 have been
negatively impacted by decreased spending on the construction and maintenance of copper
communications networks by the telecommunication companies. Additionally, the first quarter of
2005 had strong sales for fiber-to-the-premise. Domestic sales were lower
in the third quarter than the previous year primarily because last year included $3 million of
storm-damage related sales.
Operating income for the three months ended September 30, 2006 decreased $.8 million, or 13%, after
excluding the $.1 million favorable impact of foreign currency, when compared to the same period in
2005. The decrease was a result of lower gross profit due to increased material and transportation
costs coupled with a reduction in royalty income net.
Operating income for the nine months ended September 30, 2006 decreased $2.8 million, or 16%, when
compared to the same period in 2005. The decrease was driven by an 8%
increase in cost and
expenses, which exceeded the 4% growth rate of sales with a lower gross profit percentage due to
increased raw material and transportation costs and higher manufacturing per unit cost due to lower
production volumes.
12
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2005
For the three months ended September 30, 2006, consolidated net sales were $56.4 million, an
increase of $.8 million, or 1%, from the same period in 2005. Domestic net sales decreased $3.4
million, or 10%, and foreign net sales increased $4.2 million, or 18%. Reduced sales volume
accounted for the decrease in domestic markets. We estimate that customer repairs of damage caused
by hurricanes in the Southeast United States contributed approximately $3 million to domestic net
sales for the quarter ended September 30, 2005. We expect domestic sales for the remainder of 2006
to exceed the fourth quarter 2005 as a result of anticipated higher level of activity in our
domestic markets. Foreign net sales were favorably impacted by $.6 million when native currency
financial statements were converted to U.S. dollars as a result of the weaker U.S. dollar compared
to most foreign currencies. Excluding the effect of currency conversion, foreign sales increased
$3.6 million, or 16%, compared to the same period in 2005, with stronger sales in all of our
foreign markets with the exception of Europe.
Gross profit of $18.7 million for the three months ended September 30, 2006 was a decrease of $.5
million, or 3%, compared to the prior year. The decrease in gross profit is primarily a result of
higher material and transportation costs. Domestic gross profit decreased $2 million, or 18%,
compared to the third quarter of 2005, primarily as a result of lower net sales and higher material
costs and lower production levels. We believe our raw material costs for aluminum and steel will
continue to increase for the remainder of 2006. Foreign gross profit increased $1.5 million, or
18%, primarily due to an increase in net sales.
Consolidated costs and expenses of $13.2 million for the three months ended September 30, 2006
remained relatively unchanged compared to the previous year as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month periods ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
thousands of dollars |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Change |
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
$ |
3,581 |
|
|
$ |
3,682 |
|
|
$ |
(101 |
) |
|
|
3 |
% |
General and administrative |
|
|
3,275 |
|
|
|
3,424 |
|
|
|
(149 |
) |
|
|
4 |
|
Research and engineering |
|
|
1,333 |
|
|
|
1,059 |
|
|
|
274 |
|
|
|
26 |
|
Other operating expense net |
|
|
142 |
|
|
|
152 |
|
|
|
(10 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,331 |
|
|
|
8,317 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
1,894 |
|
|
|
1,926 |
|
|
|
(32 |
) |
|
|
2 |
|
General and administrative |
|
|
2,420 |
|
|
|
2,561 |
|
|
|
(141 |
) |
|
|
6 |
|
Research and engineering |
|
|
595 |
|
|
|
506 |
|
|
|
89 |
|
|
|
18 |
|
Other operating income net |
|
|
(6 |
) |
|
|
(40 |
) |
|
|
34 |
|
|
NM |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,903 |
|
|
|
4,953 |
|
|
|
(50 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,234 |
|
|
$ |
13,270 |
|
|
$ |
(36 |
) |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic costs and expenses of $8.3 million for the three months ended September 30, 2006 remained
unchanged compared to the same period in 2005. Selling expenses decreased $.1 million due
primarily to a $.4 million reduction in commission expense on lower sales partially offset by a $.2
million increase in advertising and promotional costs. General and administrative costs decreased
$.1 million primarily as a result of lower consulting costs. Research and engineering expenses
increased $.3 million as a result of higher product testing and employee related expenses.
Foreign costs and expenses of $4.9 million for the three months ended September 30, 2006 decreased
$.1 million, or 1%, compared to the same period in 2005. The weaker dollar unfavorably affected
costs and expenses by $.1 million,
13
compared to the same period of 2005, when costs in local
currency were translated to U.S. dollars. The unfavorable effect of currency translation was
partially offset by the recovery of certain trade receivables previously written-off as
uncollectible.
Royalty income for the quarter ended September 30, 2006 of $.3 million decreased $.3 million,
primarily as a result of one-time collections in the third quarter of 2005 in the domestic data
communication market.
Operating income of $5.8 million for the quarter ended September 30, 2006 decreased $.8 million, or
11%, compared to $6.6 million in the previous year. This decrease was a result of the $.5 million
decrease in gross profit and the $.3 million decrease in royalty income. Domestic operating income
decreased $2 million compared to the same period in 2005 as a result of a $2 million decrease in
gross profit. Foreign operating income of $3.7 million increased $1.2 million compared to the same
period in 2005, primarily due to a $1.5 million increase in gross profit partially offset by a $.3
million increase
in intercompany royalty expense.
Other income of $.2 million for the three months ended September 30, 2006 increased $.1 million
compared to the same period in 2005 as a result of an increase in interest income.
Income taxes for the three months ended September 30, 2006 of $2 million decreased $.5 million
compared to the same period in 2005. The effective tax rate for the three months ended September
30, 2006 was 34% compared to 38% in 2005.
As a result of the preceding, net income for the three months ended September 30, 2006 was $4
million, or $.70 per diluted shared, which represents a decrease of $.2 million, or $.02 per
diluted share, compared to 2005.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005
For the nine months ended September 30, 2006, consolidated net sales were $165.2 million, an
increase of $6.1 million, or 4%, from the same period in 2005. Domestic net sales decreased $5.2
million, or 6%, and foreign sales increased $11.3 million, or 17%. The decrease in domestic net
sales was primarily due to volume decreases resulting from decreased spending on the construction
and maintenance of copper communication networks by the telecommunication companies, sales related
to the repair of storm damage in 2005, and an extremely strong first quarter of 2005 for
fiber-to-the-premise products. Foreign net sales were favorably impacted by $1.9 million when
foreign currencies were converted to U.S. dollars. Excluding the effect of currency conversion,
foreign net sales increased 14% when compared to the same period in 2005 as net sales increased in
all foreign markets except North America. We expect continued growth opportunities particularly in
our Latin America and Pacific Rim markets for the remainder of 2006.
Gross profit of $53.7 million for the nine months ended September 30, 2006 was an increase of $.4
million from the prior year. The increase in gross profit is primarily a result of higher foreign
net sales partially offset by higher material costs and transportation expenses. Domestic gross
profit decreased $4 million compared to the same period in 2005, primarily as a result of lower net
sales and higher material and transportation costs and lower production levels. Foreign gross
profit increased $4.4 million primarily due to the increase in net sales. The favorable impact of
converting foreign currencies to U.S. dollars accounted for $.5 million of the increase.
14
Costs and expenses of $40.4 million for the nine months ended September 30, 2006 increased $3.1
million, or 8%, compared to the previous year as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine month periods ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
thousands of dollars |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Change |
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
$ |
11,252 |
|
|
$ |
10,667 |
|
|
$ |
585 |
|
|
|
5 |
% |
General and administrative |
|
|
9,865 |
|
|
|
9,373 |
|
|
|
492 |
|
|
|
5 |
|
Research and engineering |
|
|
4,035 |
|
|
|
3,198 |
|
|
|
837 |
|
|
|
26 |
|
Other operating expense net |
|
|
129 |
|
|
|
264 |
|
|
|
(135 |
) |
|
NM |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,281 |
|
|
|
23,502 |
|
|
|
1,779 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
5,620 |
|
|
|
5,515 |
|
|
|
105 |
|
|
|
2 |
|
General and administrative |
|
|
7,528 |
|
|
|
7,091 |
|
|
|
437 |
|
|
|
6 |
|
Research and engineering |
|
|
1,772 |
|
|
|
1,437 |
|
|
|
335 |
|
|
|
23 |
|
Other operating expense (income) net |
|
|
189 |
|
|
|
(222 |
) |
|
|
411 |
|
|
NM |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,109 |
|
|
|
13,821 |
|
|
|
1,288 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40,390 |
|
|
$ |
37,323 |
|
|
$ |
3,067 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic costs and expenses of $25.3 million for the nine months ended September 30, 2006 increased
$1.8 million, or 8%, compared to the same period in 2005. Selling expenses of $11.3 million
increased $.6 million as a result of an increase of $.3 million in employee related expenses, a $.3
million increase in advertising and promotional related expenses, a $.2 million increase in travel
expenses partially offset by a $.2 million decrease in commission expense on lower net sales.
General and administrative expenses increased $.5 million primarily due to a $.5 million increase
in employee related expenses. Research and engineering expenses increased $.8 million primarily
due to a $.3 million increase in employee related expenses and a $.4 million increase in other
product development costs. Other operating expense decreased $.1 million primarily as a result of
gains on sales of capital assets.
Foreign costs and expenses of $15.1 million for the nine months ended September 30, 2006 increased
$1.3 million, or 9%, compared to the same period in 2005. The weaker dollar unfavorably affected
costs and expenses by $.2 million when foreign costs in local currency were translated to U.S.
dollars. Foreign selling expense net of currency translation remained relatively unchanged
compared to the same period in 2005. General and administrative expenses net of currency
translation increased $.3 million driven primarily by increased employee related expenses.
Research and engineering expenses net of currency translation increased $.3 million, due primarily
to an increase in employee related expenses. Other operating expense net of currency translation
increased $.5 million, primarily as a result of foreign currency transaction gains.
Royalty income for the nine months ended September 30, 2006 of $1 million decreased $.1 million as
a result of lower net royalty income related to the data communication market compared to the same
period in 2005.
Operating income of $14.3 million for the nine months ended September 30, 2006 decreased $2.8
million, or 16%, compared to the same period in 2005. This decrease was a result of the $3.1
million increase in costs and expenses and the $.1 million decrease in royalty income partially
offset by the $.4 million increase in gross profit. Domestic operating income decreased $5.4
million, or 53%, compared to the same period in 2005, primarily due to the decrease in gross profit
of $4 million, a $1.8 million increase in costs and expenses and a $.1 million decrease in third
party royalty income partially offset by a $.5 million increase in intercompany royalty income.
Foreign operating income of $9.5 million increased $2.6 million, or 38%, compared to the same
period in 2005, primarily due to the increase in gross profit of $4.4
million partially offset by an increase in costs and expenses of $1.3 million and a $.5 million
increase in intercompany royalty expense.
15
Other income for the nine months ended September 30, 2006 increased $.3 million from the same
period in 2005 primarily as a result of a $.3 million increase in interest income net of interest
expense as a result of higher cash balances and interest rates.
Income taxes for the nine months ended September 30, 2006 of $5 million were $1.4 million lower
than the same period in 2005. The effective tax rate for the nine months ended September 30, 2006
was 33% compared to 36% in 2005. The effective tax rate for 2006 is lower than the statutory rate
of 35% primarily due to an increase in the amount of foreign income taxed in jurisdictions with
lower statutory rates and an adjustment of a tax contingency reserve related to state income tax.
As a result of the preceding, net income for the nine months ended September 30, 2006 was $10
million, or $1.75 per diluted share, which represents a decrease of $1.1 million, or $.17 per
diluted share, from 2005.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7.9 million for the first nine months of 2006
compared to net cash provided by operating activities of $13.8 million for the same period in 2005.
This decrease was due to a decrease in net income of $1.1 million, a $4.9 million increase in
working capital offset by an increase in non-cash items of $.1 million in 2006. The increase in
working capital was due to higher accounts receivable in 2006 offset by a net decrease in other
working capital items.
Net cash used in investing activities for the first nine months of 2006 of $8.1 million represents
an increase of $3.3 million when compared to 2005. Capital expenditures in 2006 were $3.5 million
greater than 2005 due to the acquisition of a new facility for one of our foreign operations of
$1.5 million and greater manufacturing equipment purchases. We are continually analyzing potential
acquisition candidates and business alternatives, but we currently have no commitments that would
materially affect the operations of the business.
Cash used in financing activities for the first nine months of 2006 was $13.9 million compared to
$2.8 million in the previous year. This increase was primarily a result of the Companys repurchase
of common shares at $12 million offset by greater proceeds from debt of $1 million in 2006.
Our current ratio was 2.8 to 1 at September 30, 2006 compared to 3.2 to 1 at December 31, 2005.
Working capital of $70.3 million has decreased from the December 31, 2005 amount of $75.7 million
primarily because we used cash for the purchase of common shares, which was partially offset by
greater receivables due to higher sales levels. At September 30, 2006, our unused balance under
our main credit facility was $20 million and our bank debt to equity percentage was 6%. Our main
revolving credit agreement contains, among other provisions, requirements for maintaining levels of
working capital, net worth and profitability. At September 30, 2006 we were in compliance with
these covenants. 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 existing cash position, together with our untapped borrowing capacity, provides
substantial financial resources. If we were to incur significant indebtedness, we expect to be
able to continue to meet liquidity needs under the credit facilities but possibly at an increased
cost for interest and commitment fees. We would not increase our debt to a level that we believe
would have a material adverse impact upon the results of operations or financial condition.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151, Inventory Costs, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs and wasted material. This standard
requires that such items be recognized as current-period charges. The standard also establishes
the concept of normal capacity and requires the allocation of fixed production overhead to
inventory based on the normal capacity of the production facilities. Any unallocated overhead must
be recognized as an expense in the period incurred. The Company adopted this standard effective
January 1,
2006, and the impact was immaterial on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets. This standard
amended APB Opinion No. 29, Accounting for Nonmonetary Transactions, to eliminate the exception
from fair value measurement for nonmonetary exchanges of similar productive assets. This standard
replaces this exception with a
16
general exception from fair value measurement for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement is effective for all nonmonetary asset exchanges completed by the
Company starting January 1, 2006. The Company adopted this standard and it did not have an impact
on its consolidated financial statements, because the Company has not engaged in nonmonetary
exchanges of assets.
In June 2006, the FASB issued FASB interpretation No. 48, Accounting for Uncertainty in Income
taxes an interpretation of FASB Statement No. 109, Accounting for Income Taxes. This
interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. This interpretation is
effective for the Company starting January 1, 2007. The Company is evaluating the impact this
interpretation will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. This standard does not require
new fair value measurements, however the application of this standard may change current practice
for an entity. This standard is effective for financial statements issued after January 1, 2007.
The Company is evaluating the impact this standard will have on its consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans. This standard requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in the funded status in the year in which
the changes occur through comprehensive income. This standard also requires an employer to measure
the funded status of a plan as of the date of its year-end statement of financial position. This
standard also requires disclosure in the notes to financial statements, additional information
about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and transition asset or
obligation. The requirement to initially recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures is effective for an employer with
publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006.
The requirement to measure plan assets and benefit obligations as of the date of the employers
fiscal year-end statement of financial position is effective for fiscal years ending after December
15, 2008. The Company is evaluating the impact this standard will have on its consolidated
financial statements.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1, Accounting for Planned Major
Maintenance Activities. This staff position amends certain provisions in the AICPA Industry Audit
Guide, Audits of Airlines (Airline Guide), and APB No. 28, Interim Financial Reporting. This staff
position prohibits the use of the accrue-in-advance method of accounting for planned major
maintenance activities in annual and interim financial reporting periods. This staff position is
effective as of January 1, 2007. The Company is evaluating the impact this staff position will
have on its consolidated financial statements.
In September 2006, the FASB issued Emerging Issues Task Force (EITF) abstract Issue No. 06-5,
Accounting for Purchases of Life Insurance Determining the Amount that Could be Realized in
Accordance with FASB Technical Bulletin No. 85-4. This issue clarifies the calculation of the
amount that could be realized under an insurance contract as of the date of the statement of
financial position. This issue concludes the policyholder should consider any additional amounts
included in contractual terms of the policy in determining the amount that could be realized under
the insurance contract. Contractual limitations should be considered, as well as amount
recoverable by the policyholder at the discretion of the insurance company should be excluded from
the amount that could be realized.
All fixed amounts recoverable by the policyholder in future periods in excess of one year from the
surrender of the policy should be recognized at their present value. Lastly, any amount that is
realized by the policyholder upon surrender of the final policy shall be included in the amount
that could be realized. This issue should be applied by either a change in accounting principle
through a cumulative-effect adjustment to retained earnings or to other components of equity or net
assets or a change in accounting principle through retrospective application to all prior periods.
This issue is effective for fiscal years beginning after December 15, 2006. The Company is
evaluating the impact this EITF issue will have on its consolidated financial statements.
17
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 Companys 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
Companys foreign operations are mitigated due to the stability of the countries in which the
Companys largest foreign operations are located.
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 $7.9 million at September 30, 2006. A 100 basis point increase in the
interest rate would have resulted in an increase in interest expense of less than $.1 million for
the nine-month period ended September 30, 2006.
The Companys primary currency rate exposures are related to foreign denominated debt, intercompany
debt, 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 of $1.9 million
and on income before income taxes of less than $.1 million.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Companys
management, including the Chief Executive Officer and Vice President of Finance, of the
effectiveness of the Companys disclosure controls and procedures (as defined in Securities and
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2006. Based on the evaluation, the
Companys management, including the Chief Executive Officer and Vice President of Finance,
concluded that the Companys disclosure controls and procedures were effective as of September 30,
2006.
There were no changes in the Companys internal control over financial reporting during the quarter
ended September 30, 2006 that materially affected or are reasonably likely to materially affect the
Companys 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 or results of operations.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors previously disclosed in the Companys 10-K for
the fiscal year ended December 31, 2005 filed on March 15, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
18
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|
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Company Purchases of Equity Securities |
|
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Total Number of Shares |
|
Maximum Number of |
|
|
Total Number |
|
|
|
|
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Purchased as Part of |
|
Shares that may yet be |
|
|
of Shares |
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Average Price |
|
Publicly Announced |
|
Purchased under the |
Period |
|
Purchased |
|
Paid per Share |
|
Plans or Programs (1) |
|
Plans or Programs |
July |
|
|
|
|
|
|
|
|
|
|
51,646 |
|
|
|
48,354 |
|
August |
|
|
|
|
|
|
|
|
|
|
51,646 |
|
|
|
48,354 |
|
September |
|
|
365,311 |
(2) |
|
$ |
31.48 |
|
|
|
51,646 |
|
|
|
48,354 |
|
|
|
|
|
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|
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Total |
|
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365,311 |
|
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(1) |
|
On December 16, 2004, the Company announced the Board of Directors authorized a plan to
repurchase up to 100,000 of Preformed Line Products common shares. The repurchase plan does not
have an expiration date. During the third quarter of 2006, the Company did not
repurchase any of its common shares under this plan. The remaining shares that may be purchased
under this plan were 48,354 during the third quarter of 2006. |
|
(2) |
|
On September 8, 2006, Preformed Line Products Company, upon the approval of a Special Committee
of the Board of Directors and the Board of Directors, purchased 365,311 Common Shares of the
Company from Barbara P. Ruhlman at a price per share of $31.48. Barbara P. Ruhlman is a member of
the Companys Board of Directors and the mother of Robert G. Ruhlman and Randall M. Ruhlman, both
of whom are also members of the Board of Directors. Robert G. Ruhlman is Chairman, President and
Chief Executive Officer of the Company. The purchase was consummated pursuant to a Shares Purchase
Agreement between the Company and Mrs. Ruhlman, as trustee, under trust agreement dated February
16, 1985. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
10.11 |
|
Shares Purchase Agreement, dated September 8, 2006 by and between Barbara P. Ruhlman and the
Company (incorporated by reference from Exhibit 99.1 to the Form 8-k filed on September 11,
2006). |
|
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. |
FORWARD LOOKING STATEMENTS
Cautionary Statement for Safe Harbor Purposes Under The Private Securities Litigation Reform Act
of 1995
19
This Form 10-Q and other documents the Company files with the Securities and Exchange Commission
contain forward-looking statements regarding the Companys and managements 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 Companys
operations and business environment, all of which are difficult to predict and many of which are
beyond the Companys control. Such uncertainties and factors could cause the Companys 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 Companys future performance and cause the
Companys 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, and Western Europe; |
|
|
|
|
The effect on the Companys business resulting from economic uncertainty within Latin
American regions; |
|
|
|
|
Technology developments that affect longer-term trends for communication lines such as
wireless communication; |
|
|
|
|
The Companys 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 modify the Companys cost structure to maintain
and enhance the Companys competitiveness; |
|
|
|
|
The Companys success in strengthening and retaining relationships with the Companys
customers, growing sales at targeted accounts and expanding geographically; |
|
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The extent to which the Company is successful in expanding the Companys product line into new areas; |
|
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The Companys ability to identify, complete and integrate acquisitions for profitable growth; |
|
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|
The potential impact of consolidation, deregulation and bankruptcy among the Companys
suppliers, competitors and customers; |
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The relative degree of competitive and customer price pressure on the Companys products; |
|
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|
The cost, availability and quality of raw materials required for the manufacture of products; |
|
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|
|
The effects of fluctuation in currency exchange rates upon the Companys 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; |
|
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Changes in significant government regulations affecting environmental compliances; |
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The Companys ability to continue to compete with larger companies who have acquired a
substantial number of the Companys former competitors; |
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The Companys ability to compete in the domestic data communication market; |
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The telecommunication markets continued deployment of Fiber-to-the-Premises; |
|
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The Companys ability to increase sales or margins to recover the rising cost of
complying with Section 404 of the Sarbanes-Oxley Act of 2002; and |
20
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Those factors described under the heading Risk Factors on page 12 of the Companys
Form 10-K for the fiscal year ended December 31, 2005 filed on March 15, 2006. |
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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November 9, 2006
|
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/s/ Robert G. Ruhlman
|
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Robert G. Ruhlman |
|
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Chairman, President and Chief Executive Officer |
|
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(Principal Executive Officer) |
|
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|
November 9, 2006
|
|
/s/ Eric R. Graef |
|
|
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|
|
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|
|
Eric R. Graef |
|
|
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Vice President Finance and Treasurer |
|
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(Principal Accounting Officer) |
|
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22
EXHIBIT INDEX
10.11 |
|
Shares Purchase Agreement, dated September 8, 2006 by and between Barbara P. Ruhlman and the
Company (incorporated by reference from Exhibit 99.1 to the Form 8-k filed on September 11,
2006). |
|
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. |