Preformed Line Products - 10-Q quarterly report FY

 

(Exact Name of Registrant as Specified in Its Charter)

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.
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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.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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The number of common shares outstanding as of January 4, 2008: 5,381,456.

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited financial statements of Preformed Line Products Company (“the Company”) 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. 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. Certain amounts in the prior year financial statements have been adjusted for the retrospective application of Financial Accounting Standards Board (FASB) Staff Position AUG AIR — 1, “Accounting for Planned Major Maintenance Activities,” and the beginning of the year retained earnings has been reduced for the cumulative effect of adopting FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes” (see Note H). 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, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007.

The consolidated balance sheet at December 31, 2006 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 Company’s Form 10-K/A for 2006 filed on January 4, 2008 with the Securities and Exchange Commission.

During 2007, management’s comprehensive review of the components of the Company’s Brazil operation’s excess and obsolescence reserve calculation discovered that the details of the reserve account included an inappropriate reserve of $.6 million at December 31, 2006. Based on the timing of the completion of certain aspects of this review, the Company recorded a $.4 million adjustment in the first quarter of 2007 and a $.2 million adjustment in the second quarter of 2007 related to the excess and obsolete reserve at December 31, 2006. Management determined that the total year-to-date adjustments related to Brazil’s excess and obsolete reserve of $.6 million were not material, quantitatively or qualitatively, to prior periods and are not expected to be material to the annual 2007 results of operations.

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

The components of comprehensive income 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.

Net periodic benefit cost for the Company’s domestic plan included the following components:

As of September 30, 2007, $.1 million of contributions have been made. The Company presently anticipates contributing an additional $.2 million to fund its pension plan in 2007 for a total of $.3 million.

The Company had performed its impairment test for goodwill pursuant to SFAS No. 142, “Goodwill and Intangible Assets”, as of January 2007 and had determined that no adjustment to the carrying value of goodwill was required. The aggregate amortization expense for other intangibles with finite lives for each of the three months ended September 30, 2007 and 2006 was $.1 million, and for each of the nine months ended September 30, 2007 and 2006 was $.2 million. Amortization expense is estimated to be $.3 million annually for 2007 through 2011.

The following table sets forth the carrying value and accumulated amortization of intangibles, including the effect of foreign currency translation, as of the periods ended:

The Company’s only intangible asset with an indefinite life is goodwill. The Company’s additions of $3.7 million to goodwill are related to the acquisition of Direct Power and Water Corporation (DPW) in the amount of $2.6 million and the acquisition of Belos SA of $1.2 million (see Note J — Business Combinations for further details).The changes in the carrying amount of goodwill for the nine month period ended September 30, 2007, is as follows:

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, 2007 there were 22,000 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. Shares issued as a result of stock option exercises will be funded with the issuance of new shares.

There were 20,000 options granted during the nine months ended September 30, 2007. There were no options granted during the nine months ended September 30, 2006. The fair value for the stock options granted in 2007 was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

Activity in the Company’s stock option plan for the nine months ended September 30, 2007 was as follows:

The weighted—average grant-date fair value of options granted during 2007 was $11.93. The total intrinsic value of stock options exercised during the nine months ended September 30, 2007 and 2006 was $.7 million and $.2 million, respectively. Cash received for the exercise of stock options during 2007 was $.5 million. The total fair value of stock options that vested during the nine months ended September 30, 2007 and 2006 was $.1 million and $.3 million, respectively.

For the nine months ended September 30, 2007 and 2006, the Company recorded compensation expense related to the stock options recognized over the requisite service period, reducing income before taxes and net income by $.2 million. For the nine months ended September 30, 2007 and 2006, 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 at September 30, 2007 is expected to be a combined total of $.3 million over a weighted-average period of 2 years.

The excess tax benefits from stock based awards for the nine months ended September 30, 2007 of $.2 million, as reported on the consolidated statements of cash flows in financing activities, represents the reduction in income taxes otherwise payable during the period, attributable to the actual gross tax benefits in excess of the expected tax benefits for options exercised in the current period.

Activity for nonvested stock options for the nine months ended September 30, 2007 was as follows:

In September 2006, the FASB issued Statement of Financial Account Standards (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 for fiscal years beginning after November 15, 2007 and interim periods within those fiscal periods. The Company is evaluating the impact this standard will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment to FASB No. 115.” This standard permits entities to measure certain financial assets and liabilities at fair value. The fair value option established by this standard permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair values option has been elected at each subsequent reporting period. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on earnings, but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. This standard is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is evaluating the impact this standard will have on its consolidated financial statements.

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” (FIN 48). 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. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained. 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 adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $.8 million increase in the liability for unrecognized tax benefits which was accounted for as a reduction in retained earnings. The total amount of unrecognized tax benefits including the accrual for interest and penalties, as of the date of adoption was $1.8 million, all of which would affect the effective tax rate if recognized.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income taxes. The Company had $.1 million accrued for the payment of interest and penalties at December 31, 2006. Upon adoption of FIN 48 on January 1, 2007, the Company increased its accrual for interest and penalties to $.2 million.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before 2004.

The Company does not expect that the unrecognized tax benefit will change significantly within the next twelve months.

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. The Company adopted the direct expense method effective January 1, 2007, and has retrospectively applied this new accounting principle to prior periods.

The cumulative effect of the retrospective application of the new accounting principle to the carrying value of assets and liabilities and the offsetting adjustment to opening January 1, 2006 retained earnings was a decrease in deferred tax assets of $.1 million, a decrease in accrued liabilities of $.3 million and an increase in beginning retained earnings of $.2 million. The effect on the results of operations for the nine months ended September 30, 2006 was an increase to net income of $31 thousand in the PLP-USA segment.

The following table presents a summary of the Company’s reportable segments for the three month periods and nine month periods ended September 30, 2007 and 2006. Prior year amounts have been restated to reflect the current seven reportable segments. Financial results for the PLP-USA segment include the elimination of all segments’ intercompany profits in inventory.

The identifiable assets for the Company’s Australia segment as of September 30, 2007 and December 31, 2006 have been included in All Other because the information is not separately maintained.

On March 22, 2007, the Company entered into and closed a Stock Purchase Agreement (Agreement) for $3 million, subject to a holdback of $.4 million, acquiring all of the issued and outstanding shares of Direct Power and Water Corporation (DPW), a New Mexico company that designs and installs solar systems and manufactures mounting hardware, battery, and equipment enclosures. The hold back of $.4 million is to be held as security for any liability of the sellers pursuant to the indemnity obligations set forth in the Agreement. Depending on the post-closing performance of DPW, certain earn out consideration may be paid for the three years following the closing.

The Company’s consolidated balance sheet as of September 30, 2007 reflects the acquisition of DPW under the purchase method of accounting. The Company recorded various assets acquired and liabilities assumed, primarily the working capital accounts of DPW. The allocation of the purchase price has not yet been finalized as the valuation of inventories, long lived assets and intangibles is not yet completed. The purchase price allocation remains subject to revision.

The preliminary value of assets acquired and liabilities assumed in connection with the DPW acquisition as of September 30, 2007 is as follows:

Annualized unaudited 2006 net revenues of DPW were approximately $7.1 million. The consolidated financial statements for the three month and nine month periods ended September 30, 2007 only include results of DPW from the acquisition date. The reported results of operations are not materially different from the proforma amounts that would include the impact of the acquisition from the beginning of the periods presented. DPW is included in the All Other category for segment disclosures.

On April 22, 2007, the Company entered into a Stock Purchase Agreement for $6 million to acquire approximately 83.74% of the issued and outstanding shares of Belos SA, a Polish company that manufacturers and supplies fittings for low, medium and high voltage power networks in its domestic and export markets. The agreement was closed September 6, 2007.

The Company’s consolidated balance sheet as of September 30, 2007 reflects the acquisition of Belos SA under the purchase method of accounting. The Company recorded various assets acquired and liabilities assumed of Belos SA. The allocation of the purchase price has not yet been finalized as the valuation of inventories, long lived assets and intangibles is not yet completed. The purchase price allocation remains subject to revision but it is most likely that the value of inventory, property and equipment will increase and goodwill as presently recorded will decrease.

The preliminary value of assets acquired and liabilities assumed in connection with the Belos SA acquisition as of September 30, 2007 is as follows:

Annualized unaudited 2006 net revenues of Belos SA were approximately $14 million. The consolidated financial statements for the three month and nine month periods ended September 30, 2007 only include results of Belos SA from the acquisition date. The reported results of operations are not materially different from the proforma amounts that would include the impact of the acquisition from the beginning of the periods presented. Belos SA is included in the All Other category for segment disclosures.

OVERVIEW

Our consolidated financial results for the quarter ended September 30, 2007 incorporated the financial results of our solar energy operation (Direct Power and Water Corporation) acquired on March 22, 2007 as well as the results of Belos SA acquired on September 6, 2007. The results of both these operations are included in our All Other segment.

Our sales for the quarter ended September 30, 2007 increased 17% and gross profit increased 21% compared to the same period in 2006. Net sales increased in all of our segments with the exception of Australia. Net sales increased primarily as a result of incorporating the sales from our newly acquired solar energy operation and Belos SA, the favorable impact of the conversion of local currencies to the U.S. dollar and improved sales into PLP-USA energy and telecommunications markets. The 21% increase in gross profit was partially offset by a 12% increase in costs and expenses resulting in an increase in net income of 41%, or $.35 per diluted share, when compared to the quarter ended

September 30, 2006.

For the nine months ended September 30, 2007, our net sales increased 13% and gross profit increased 17% compared to the same period in 2006. The increase in gross profit was partially offset by a 9% increase in costs and expenses resulting in an increase in net income of 31%, or $.69 per diluted share, when compared to the same period in 2006.

For the three months ended September 30, 2007, net sales were $66.1 million, an increase of $9.7 million, or 17%, from the same period in 2006 as summarized in the following table:

The increase in PLP-USA net sales of $1.2 million, or 5%, was primarily due to increases in price and mix in our energy markets and telecommunications markets. We are beginning to see sales slowing in the distribution sector of the domestic energy market as it relates to new home construction. In the domestic telecommunications markets, we believe many of the large carriers are placing greater emphasis on building out fiber networks rather than maintaining the existing copper based infrastructure. Our SMP net sales increased $.3 million, or 6%, due to increased sales volume. Foreign net sales were favorably impacted by $2.6 million when local currency was converted to U.S. dollars as a result of the weaker U.S. dollar compared to certain currencies when compared to the third quarter 2006 conversion rates. Beginning in 2006 we experienced an increase in demand in many of our foreign energy markets and anticipate the strong level of demand to continue for the remainder of 2007 and into 2008. We continue to confront aggressive pricing pressures from our competition in our foreign energy markets. Excluding the effect of currency conversion, Australia net sales decreased $1.2 million, or 22%, primarily due to a volume decrease in energy sales. Brazil net sales increased $2.1 million, or 49%, and South Africa net sales increased $.4 million, or 19%, primarily as a result of increased sales volume. Excluding the effect of currency conversion, Canada net sales increased $.1 million compared to the same period in 2006. All Other net sales of $17.9 million increased $5.2 million, or 41%, compared to 2006 primarily as a result of including the $3.8 million of net sales from the acquisition of our solar energy operation on March 22, 2007 and our acquisition of Belos SA on September 6, 2007 and a $1 million favorable impact when certain local currencies were converted to U.S. dollars when compared to the third quarter 2006 conversion rates.

Gross profit of $22.8 million for the three months ended September 30, 2007 increased $4 million, or 21%, compared to the same period in 2006. PLP-USA gross profit of $9.3 million increased $1.6 million, or 21%, compared to 2006. PLP-USA gross profit increased $.4 million due to higher net sales and $1.2 million due to lower per unit manufacturing cost as a result of higher production volumes. SMP gross profit of $1.2 million decreased $.1 million due primarily to higher material costs. Foreign gross profit was favorably impacted by $.9 million when local currency was converted to U.S. dollars when compared to the third quarter 2006 conversion rates. Australia gross profit of $1.5 million decreased $.3 million primarily as a result of a $.4 million decrease in gross profit due to lower sales partially offset by the favorable effect of currency conversion. Brazil gross profit increased $1 million primarily as a result of a $.7 million increase in gross profit on increased sales and a $.3 million favorable effect of currency conversion rates

when compared to the same period in 2006. South Africa gross profit of $1 million increased $.1 million primarily due to an increase in gross profit on increased sales. Canada gross profit of $1.3 million increased $.1 million primarily due to the increase in gross profit on higher net sales. All Other gross profit of $6.1 million increased $1.6 million primarily as a result of a $.4 million favorable impact of converting certain foreign currency into U.S. dollars conversion rates compared to the same period in 2006 and a $1.4 million increase in gross profit on increased net sales. We continue to believe the costs of some raw material are beginning to stabilize and we anticipate a slower overall rate of cost increase for raw materials during the remainder of 2007.

Costs and expenses of $14.8 million for the three months ended September 30, 2007 increased $1.6 million, or 12%, compared to the previous year as summarized in the following table:

The increase in PLP-USA costs and expenses was primarily due to a $.2 million increase in commission expense on increased sales, a $.4 million increase in personnel related expenses and a $.4 million increase in bad debt expenses as a result of recoveries made in 2006 which had previously been written off. These increases were partially offset by a $.2 million decrease in third party product testing, a $.1 million decrease in sales promotion and advertising expense and a $.2 million decrease in other operating expenses related to the write-down of certain assets in 2006 associated with certain products being removed from the market. SMP costs and expenses decreased $.1 million primarily due to a reduction in personnel expense. The change in costs and expenses at Australia, Brazil, South Africa and Canada excluding the impact of the currency conversion rate were less than $.1 million. All Other costs and expenses increased $.7 million net of the unfavorable impact of the currency conversion rate change primarily due to a $.4 million increase from the inclusion of our solar energy operations and Belos SA in our consolidated financial statements and a $.2 million increase in personnel expenses at all other operations.

Royalty income — net for the quarter ended September 30, 2007 of $.3 million increased $.1 million compared to the same period in 2006 due to increased data-communication royalty income for SMP.

Operating income of $8.3 million for the quarter ended September 30, 2007 increased $2.5 million, or 43%, compared to the same period in 2006. This increase was a result of the increase in gross profit of $4 million partially offset by the increase in costs and expenses of $1.5 million. PLP-USA operating income of $3.4 million increased $1.2 million due to the increase in gross profit of $1.6 million and a $.1 million increase in intercompany royalty income partially offset by the $.5 million increase in costs and expenses. SMP operating income remained relatively flat compared to the same period in 2006 as the decrease in costs and expenses and the increase in royalty income offset the decrease in gross profit. Australia operating profit decreased $.3 million as a result of a decrease in gross profit. Brazil operating income increased $.8 million as a result of the $1 million increase in gross profit partially offset by a $.2 million increase in costs and expenses and intercompany royalty expense. South Africa and Canada operating income remained relatively flat compared to the same period in 2006. All Other operating income increased $.7 million primarily as a result of the $1.6 million increase in gross profit partially offset by a $.9 million increase in costs and expenses and intercompany royalty expense.

Other income of $.1 million for the three months ended September 30, 2007 decreased $.1 million as a result of a decrease in interest income net of interest expense.

Income taxes for the three months ended September 30, 2007 of $2.8 million were $.8 million higher than the same period in 2006 as a result of $2.4 million of additional income before tax. The effective tax rate for the three months ended September 30, 2007 was 33% compared to 34% in 2006. The effective tax rate for three months ended September 30, 2007 is lower than the statutory federal rate of 34% primarily due to the additional tax benefits related to the reversal of uncertain tax positions as a result of the expiration of certain statutes of limitations.

As a result of the preceding items, net income for the three month period September 30, 2007 was $5.7 million, or $1.04 per diluted share, compared to net income of $4 million, or $.70 per diluted share for the same period in 2006. PLP-USA net income of $2.3 million increased $.7 million compared to the same period in 2006 as a result of a $1.2 million increase in operating income partially offset by a $.1 million decrease in interest income and a $.4 million increase in income taxes. SMP net income of $.1 million, South Africa net income of $.4 million and Canada net income of $.4 million remained relative flat compared to same period in 2006. Australia net income of $.2 million decreased $.2 million compared to the same period in 2006 primarily due to a $.3 million decrease in operating income partially offset by a $.1 million decrease in income taxes. Brazil net income of $.8 million increased $.6 million compared to the same period in 2006 as a result of a $.8 million increase in operating income partially offset by an increase in income taxes. All Other net income of $1.5 million increased $.5 million compared to the same period in 2006 as a result of a $.7 million increase in operating income partially offset by a increase in income taxes.

For the nine months ended September 30, 2007, net sales were $186.4 million, an increase of $21.2 million, or 13%, from the same period in 2006 as summarized in the following table:

PLP-USA net sales of $79 million increased $9.2 million, or 13%. The increase in PLP-USA sales for the nine month period ended September 30, 2007 is mostly due to increased volume compared to 2006. Sales in our energy markets increased 24% and sales in our telecommunications markets increased 8%. SMP net sales of $15.9 million were relatively flat compared to 2006. Foreign net sales were favorably impacted by $5.5 million when local currency was converted to U.S. dollars as a result of the weaker U.S. dollar compared to certain currencies when compared to the 2006 conversion rates for the same period. Australia net sales of $13 million increased $.5 million on increased sales volume and were favorably impacted by $1.2 million due to the change in conversion rates compared to the same period in 2006. Brazil net sales of $18.7 million increased $2.7 million primarily due to a $1.1 million increase in sales volume and $1.6 million favorable impact due to the change in conversion rates compared to the same period in 2006. South Africa net sales of $5.8 million declined $.8 million as a result of a $.4 million decrease in sales volume and a $.4 million unfavorable impact due to the change in conversion rates compared to the same period in 2006.

Canada net sales of $7.7 million increased $.7 million compared to the same period in 2006 on increased volume of $.5 million and a $.2 million favorable impact due to the change in conversion rates compared to the same period in 2006. All Other net sales increased $7.8 primarily as a result of a $2.9 million favorable impact due to the change in conversion rates compared to the same period in 2006 when certain currencies were converted to U.S. dollars. Excluding the effect of currency conversion, All Other net sales increased $4.9 million compared to the same period in 2006 due to the inclusion of the $5.3 million in sales from our solar energy operation and from Belos S.A. partially offset by $.4 million lower volume in our energy markets at all other operating locations.

Gross profit of $62.8 million for the nine months ended September 30, 2007 was an increase of $9.1 million, or 17%, compared to last year. PLP-USA gross profit increased $6 million, or 27%, compared to the same period in 2006. PLP-USA gross profit increased $2.9 million due to higher net sales and $3.1 million due to lower per unit manufacturing cost as a result of higher production volumes. SMP gross profit decreased $1.1 million, or 27%, primarily due to sales mix and increased material costs. Australia gross profit increased $.1 million primarily as a result of a $.2 million increase in gross profit on increased sales and a $.3 million favorable impact due to the change in the currency conversion rate compared to the same period in 2006 partially offset by a $.4 million increase in material cost and manufacturing expenses. Brazil gross profit increased $1.1 million primarily as a result of a $.3 million increase in gross profit on increased sales, a $.5 million favorable impact due to the currency conversion rate compared to the same period in 2006 and a $.6 million total year-to-date 2007 inventory adjustment partially offset by increased manufacturing expenses. During 2007, management’s comprehensive review of the components of the Company’s Brazil operation’s excess and obsolescence reserve calculation discovered that the details of the reserve account included an inappropriate reserve of $.6 million at December 31, 2006. Based on the timing of the completion of certain aspects of the review, the company recorded a $.4 million adjustment in the first quarter of 2007 and an additional adjustment of $.2 million in the second quarter of 2007 related to the excess and obsolete reserve. Management determined that the total year-to-date adjustments related to Brazil’s excess and obsolete reserve of $.6 million were not material, quantitatively or qualitatively, to prior periods and are not expected to be material to the annual 2007 results of operations. South Africa gross profit decreased $.5 million primarily as a result of a $.2 million decrease in gross profit on lower net sales, a $.2 million unfavorable impact due to the change in the currency conversion rate compared to the same period in 2006 and a $.1 million increase in manufacturing expenses. Canada gross profit increased $.2 million primarily due to the increase in net sales. All Other gross profit increased $3.1 million primarily as a result of a $1 million favorable impact due to the change in conversion rates compared to the same period in 2006 when certain currencies were converted to U.S. dollars, a $1.7 million increase due to increased sales and $.4 million improvement in margin due to product mix and increased production volumes.

Costs and expenses of $44 million for the nine months ended September 30, 2007 increased $3.7 million, or 9%, compared to the previous year as summarized in the following table: