Preformed Line Products - 10-Q quarterly report FY

 

(Exact Name of Registrant as Specified in Its Charter)

(440) 461-5200

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 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 (S232.405 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 o No o

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange act.

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 August 1, 2010: 5,253,534.

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 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.

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 and six month periods ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.

The consolidated balance sheet at December 31, 2009 has been derived from the audited consolidated financial statements, but does not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes to consolidated financial statements included in the Company’s 2009 Annual Report on Form 10-K filed on March 15, 2010 with the Securities and Exchange Commission.

NOTE B — OTHER FINANCIAL STATEMENT INFORMATION

Noncurrent inventory is included in other assets on the consolidated balance sheets and is principally comprised of raw materials.

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

The components of comprehensive income (loss) for the three and six month periods ended June 30 are as follows:

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

PLP-USA hourly employees of the Company who meet specific requirements as to age and service are covered by a defined benefit pension plan. The Company uses a December 31 measurement date for this plan. Net periodic benefit cost for this plan included the following components:

During the six month period ended June 30, 2010, no contributions have been made to the plan. The Company presently anticipates making no contributions to fund the plan in 2010.

NOTE D — COMPUTATION OF EARNINGS PER SHARE

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

The calculation of basic and diluted earnings per share for the three and six month periods ended June 30, 2010 and 2009 were as follows:

For the three and six month periods ended June 30, 2010, 41,500 and 32,500 stock options were excluded from the calculation of diluted earnings per share due to the average market price being lower than the exercise price, and as such the stock options are anti-dilutive. For the three and six month periods ended June 30, 2009, 43,450 and 13,000 stock options were excluded from the calculation of diluted earnings per share due to the average market price being lower than the exercise price, and as such the stock options are anti-dilutive.

NOTE E — GOODWILL AND OTHER INTANGIBLES

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

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 changed. However, the Company believes that the methodologies and weightings used are reasonable and result in appropriate fair values of the reporting units.

The Company performed its annual impairment test for goodwill as of January 1, 2010, and determined that no adjustment to the carrying value was required. The aggregate amortization expense for other intangibles with finite lives for the three and six month periods ended June 30, 2010 was $.2 million and $.4 million. The aggregate amortization expense for other intangibles with finite lives for the three and six month periods ended June 30, 2009 was $.1 million and $.2 million. Amortization expense is estimated to be $.9 million for 2010, $.7 million for 2011, $.8 million for 2012 and 2013 and $.7 million for 2014.

The Company’s only intangible asset with an indefinite life is goodwill. The changes in the carrying amount of goodwill, by segment, for the six month period ended June 30, 2010, are as follows:

NOTE F — SHARE-BASED COMPENSATION

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 June 30, 2010 there were no shares remaining to be issued 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. Shares issued as a result of stock option exercises will be funded with the issuance of new shares.

There were no options granted during the six month periods ended June 30, 2010 and 2009.

Activity in the Plan for the six month period ended June 30, 2010 was as follows:

The total intrinsic value of stock options exercised during the six month periods ended June 30, 2010 and 2009 was $.1 million and $.4 million. Cash received for the exercise of stock options during 2010 was $.1 million. There were no excess tax benefits from stock based awards for the six month period ended June 30, 2010.

For the six month periods ended June 30, 2010 and 2009, the Company recorded compensation expense related to the stock options currently vesting, reducing income before taxes and net income by less than $.1 million for both periods. The total compensation cost related to nonvested awards not yet recognized at June 30, 2010 is expected to be a combined total of $.2 million over a weighted average period of 1.9 years.

Under the Preformed Line Products Company Long Term Incentive Plan of 2008 (the “LTIP Plan”), certain employees, officers, and directors will be eligible to receive awards of options and restricted shares. The purpose of this LTIP Plan is to give the Company and its subsidiaries 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 Plan is 400,000. Of the 400,000 common shares, 300,000 common shares have been reserved for restricted share awards and 100,000 common shares have been reserved for share options. The LTIP Plan expires on April 17, 2018.

For all of the participants except the CEO, a portion of the restricted share award 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 restricted shares are subject to vesting based upon the Company’s performance over a three year period.

The restricted shares 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 a restricted share award 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 in 2009 and thereafter will be accrued in cash dividends. In 2008, dividends were reinvested in additional restricted shares, and held subject to the same vesting requirements as the underlying restricted shares.

A summary of the restricted share awards for the six month period ended June 30, 2010 is as follows:

For time-based restricted shares 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 six month periods ended June 30, 2010 and 2009 was $.1 million. As of June 30, 2010, there was $.5 million of total unrecognized compensation cost related to time-based restricted share awards that is expected to be recognized over the weighted-average remaining period of approximately 1.4 years.

For the performance-based awards, the number of restricted shares in which the participants will vest depends on the Company’s level of performance measured by growth in pretax income and sales over a requisite performance period. Depending on the extent to which the performance criterions are satisfied under the LTIP Plan, the participants are eligible to earn common shares over the vesting period. Performance-based compensation expense for the six month periods ended June 30, 2010 and 2009 was $1.1 million and $.5 million, respectively. As of June 30, 2010, the remaining performance-based restricted share awards compensation expense of $3.8 million is expected to be recognized over a period of approximately 1.1 years.

In the event of a Change in Control, 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 reserved 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 Plan, there are 97,903 common shares currently available for additional restricted share grants.

The LTIP plan permits the grant of 100,000 share 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 June 30, 2010 there were 89,000 shares remaining available for issuance under the LTIP 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. Shares issued as a result of stock option exercises will be funded with the issuance of new shares.

The Company has elected to use the simplified method of calculating the expected term of the stock options and 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.

There were no options granted for the six month periods ended June 30, 2010 and 2009.

Activity in the Company’s plan for the six month period ended June 30, 2010 was as follows:

There were no stock options exercised under the LTIP Plan during the six month period ended June 30, 2010. There were no excess tax benefits from stock based awards for the six month period ended June 31, 2010.

For the six month periods ended June 30, 2010 and 2009, the Company recorded compensation expense related to the stock options currently vesting, reducing income before taxes and net income by less than $.1 million and zero, respectively. The total compensation cost related to nonvested awards not yet recognized at June 30, 2010 is expected to be a combined total of $.1 million over a weighted average period of approximately 2.3 years.

NOTE G — 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 June 30, 2010, 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 six month period ended June 30, 2010. Based on the analysis performed, the fair value and the carrying value of the Company’s long-term debt are as follows:

As a result of being a global company, the Company’s earnings, cash flows and financial position are exposed to foreign currency risk. The Company’s primary objective for holding derivative financial instruments is to manage foreign currency risks. The Company accounts for derivative instruments and hedging activities as either assets or liabilities in the consolidated balance sheet and carry these instruments at fair value. The Company does not enter into any trading or speculative positions with regard to derivative instruments.

During June 2010, the Company entered into a forward foreign exchange contract to reduce its exposure to foreign currency rate changes related to the purchase price of Electropar which closed on July 30, 2010. This contract was effective as a hedge from an economic perspective, but was not designated as a hedge for accounting purposes under ASC 815. The Company entered into this contract with a global financial institution that the Company believes to be creditworthy.

Foreign currency derivative instruments outstanding are not designated as hedges for accounting purposes, the gains and losses related to mark-to-market adjustments were recognized as other income and expense on the statement of consolidated income during the period in which the derivative instruments were outstanding.

As of June 30, 2010, the Company had a forward foreign currency contract with an exercise value of $12.9 million which matured on July 28, 2010 at a forward rate of NZD $1.00=$.6632 USD. The unrealized gain recognized into earnings as a result of revaluing the instrument to fair value on June 30, 2010 was $.5 million which was included in other income (expense) in the statement of consolidated income and other current assets on the consolidated balance sheet. Fair value of $13.3 million was determined using the market approach by references to quoted prices in active markets for similar assets, which is Level 2 as defined in the fair value hierarchy.

The following table summarizes the fair value of derivative instruments recorded in the Consolidated Balance Sheets at June 30, 2010 and 2009:

The following table shows the effects of the Company’s derivatives not designated as hedging instruments in the Consolidated Statements of Income:

NOTE H — RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB updated guidance included in FASB ASC 810-10, related to the consolidation of variable interest entities. This guidance will require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. In addition, this updated guidance amends the quantitative approach for determining the primary beneficiary of a variable interest entity. ASC 810-10 amends certain guidance for determining whether an entity is a variable interest entity and adds additional reconsideration events for determining whether an entity is a variable interest entity. Further, this guidance requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. This updated guidance is effective as of the beginning of the first annual reporting period and interim reporting periods that begin after November 15, 2009. The adoption of this guidance did not have an impact on the Company’s financial statements or disclosures.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). This Update provides amendments to Subtopic 820-10 and related guidance within U.S. GAAP to require disclosure of the transfers in and out of Levels 1 and 2 and a schedule for Level 3 that separately identifies purchases, sales, issuances and settlements and requires more detailed disclosures regarding valuation techniques and inputs. The Company adopted this new standard effective January 1, 2010 and it had no impact on the Company’s financial statements or disclosures.

NOTE I — RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 addresses the accounting for sales arrangements that include multiple products or services by revising the criteria for when deliverables may be accounted for separately rather than as a combined unit. Specifically, this guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is necessary to separately account for each product or service. This hierarchy provides more options for establishing selling price than existing guidance. ASU 2009-13 is required to be applied prospectively to new or materially modified revenue arrangements in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the effect the adoption of ASU 2009-13 will have on our financial position, results of operations, cash flows, and related disclosures; however no effect is expected.

ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures — Overall, ASU No. 2009-13 (ASC Topic 605), Multiple-Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and various other ASU’s No. 2009-2 through ASU No. 2010-19 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities, were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.

NOTE J — SEGMENT INFORMATION

The following tables present a summary of the Company’s reportable segments for the three and six month periods ended June 30, 2010 and 2009. Financial results for the PLP-USA segment include the elimination of all segments’ intercompany profit in inventory.

NOTE K — INCOME TAXES

The Company’s effective tax rate was 16% and 33% for the three month periods ended June 30, 2010 and 2009, respectively, and 20% and 35% for six month periods ended June 30, 2010 and 2009, respectively. The lower effective tax rate for the three and six month periods ended June 30, 2010 is primarily due to the favorable benefit from foreign earnings in jurisdictions with lower tax rates, a favorable tax incentive for technological innovation, and the decrease of unrecognized tax benefits effectively settled through audits.

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.

As of June 30, 2010, the Company had gross unrecognized tax positions of approximately $1.1 million. Under the provisions of ASC 740 Income Taxes, the Company may decrease its unrecognized tax benefits by $.1 million within the next twelve months due to the expiration of statues of limitations. The Company recognized less than $.2 million of a decrease in unrecognized tax benefit for the six month period ended June 30, 2010, primarily due to settlement of unrecognized tax benefits.

NOTE L — SUBSEQUENT EVENTS

On July 30, 2010, the Company completed the business combination acquiring all of the outstanding equity of Electropar Limited (Electropar) for NZ$20.5 million or $13.3 million USD in cash and the assumption of certain liabilities, subject to a customary post-closing working capital adjustment. Electropar designs, manufacturers and markets pole line and substation hardware for the global electrical utility industry. Electropar is based out of New Zealand with a subsidiary operation in Australia. The acquisition of Electropar will strengthen the Company’s position in the power distribution, transmission and substation hardware markets and will expand its presence in the Asia-Pacific region.

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.

The reportable segments are PLP-USA, Australia, Brazil, South Africa, Canada, Poland, and All Other. Our PLP-USA segment is comprised of our U.S. operations primarily supporting our domestic energy and telecommunications products. The Australia segment is comprised of all of our operations in Australia supporting energy, telecommunications, data communications and solar products. Our South Africa and Brazil segments are comprised of the manufacturing and sales operations from those locations which meet at least one of the criteria of a reportable segment. Our final two segments are Poland and Canada, which are comprised of a manufacturing and sales operation, and have been included as segments to comply with reporting segments for 75% of consolidated sales. Our remaining operations are included in the All Other segment as none of these operations meet, or the future estimated results are not expected to meet the criteria for a reportable segment.

RECENT DEVELOPMENTS

On May 15, 2010, we entered into a definitive agreement with Tony Lachlan Wallace, Grant Lachlan Wallace and Helen Amelia Wallace each of Auckland, New Zealand as trustees of the Wallace Family Trust, Grant Lachlan Wallace, Tony Lachlan Wallace and Alison Kay Wallace each of Auckland, NZ, as trustees of the T&A Wallace Family Trust, and Cameron Wallace Trust (collectively, “Sellers”) for the Sale and Purchase of Shares in Electropar Limited, a New Zealand corporation. Electropar Limited (Electropar) designs, manufactures and markets pole line and substation hardware for the global electrical utility industry. Electropar is based out of New Zealand with a subsidiary operation in Australia. The acquisition of Electropar will strengthen our position in the power distribution, transmission and substation hardware markets and will expand our presence in the Asia-Pacific region.

Pursuant to the Purchase Agreement, PLPC acquired all of the outstanding equity of Electropar for NZ$20.5 million or $13.3 million USD subject to a customary post-closing working capital adjustment. In addition, we may be required to make an additional earn-out consideration payment to the Sellers up to NZ$2 million based on Electropar achieving a financial performance target (Earnings Before Interest, Taxes, Depreciation and Amortization) for the 12 month period following closing. In addition, the Purchase Agreement includes customary representations, warranties, covenants and indemnification provisions. The acquisition of Electropar closed on July 30, 2010.

On December 18, 2009, PLPC and Tyco Electronics Group S.A. (Tyco Electronics) completed a Stock and Asset Purchase Agreement, pursuant to which, PLPC acquired from Tyco Electronics its Dulmison business for $16 million and the assumption of certain liabilities. The acquisition of Dulmison strengthened our position in the power distribution and transmission hardware market and expanded our presence in the Asia-Pacific region. As a result of the acquisition, we added operations in Indonesia and Malaysia and strengthened our existing positions in Australia, Thailand, Mexico and the United States.

Our net sales for the three month period ended June 30, 2010 increased $22.6 million, or 38%, and gross profit increased $7.6 million, or 38%, compared to the three month period ended June 30, 2009. Our net sales increase was caused by a 49% increase in foreign net sales in addition to a 25% increase in U.S. net sales. Our financial results are subject to fluctuation results in the exchange rates of foreign currencies in relation to the U.S. dollar. Of the 38% increase in net sales, 6% was from the favorable effect on the change in the translation rate of local currencies as a result of the strengthening of the U.S. dollar to certain weaker foreign currencies compared to 2009. Excluding the effect of currency translation, sales and gross profit increased 32% compared to 2009. Excluding the effect of currency translation, costs and expenses increased $5.1 million, or 34%, as foreign costs and expenses increased $2.5 million and U.S. costs and expenses increased $2.6 million. As a result of the preceding, excluding the effect of currency translation, net income increased $2.3 million compared to 2009.

Our net sales for the six month period ended June 30, 2010 increased $32.8 million, or 28%, and gross profit increased $9.1 million, or 24%, compared to the six month period ended June 30, 2009. Our net sales increase was caused by a 64% increase in total foreign net sales coupled with a 9% increase in U.S. net sales. Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. Of the 28% increase in net sales, 9% was from the favorable effect on the change in the translation rate of local currencies as a result of the U.S. dollar to certain weaker foreign currencies compared to 2009. Excluding the effect of currency translation, gross profit increased 14% compared to 2009. Excluding the effect of currency translation, cost and expenses increased $7.6 million, or 26%, as U.S. and foreign costs and expenses both increased $3.8 million. As a result of the preceding, excluding the effect of currency translation, net income increased $.3 million compared to 2009.

Despite the recent global economic downturn, we are seeing an improvement in our global marketplace and our financial condition continues to remain strong. We continue to generate cash flows from operations, have proactively managed working capital and have controlled capital spending. We currently have a debt to equity ratio of 5% and can borrow needed funds at an attractive interest rate under our credit facility. While current worldwide conditions necessitate that we concentrate our efforts on maintaining our financial strengths, we believe there are many available opportunities for growth. We are pursuing these opportunities as appropriate in the current environment in order to position ourselves for when the economic recovery ultimately happens.

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

THREE MONTH PERIOD ENDED JUNE 30, 2010 COMPARED TO THREE MONTH PERIOD ENDED JUNE 30, 2009

The following table sets forth a summary of the Company’s consolidated income statements for the three month period ended June 30, 2010 and June 30, 2009. The Company’s past operating results are not necessarily indicative of future operating results.

Net Sales. For the three month period ended June 30, 2010, net sales were $82.1 million, an increase of $22.6 million, or 38%, from the three month period ended June 30, 2009. Excluding the effect of currency translation, net sales increased 32% as summarized in the following table: