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 June 30, 2014
Commission file number: 0-31164
Preformed Line Products Company
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
660 Beta Drive
Mayfield Village, Ohio
(440) 461-5200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of common shares outstanding as of August 1, 2014: 5,390,092.
Table of Contents
Part I - Financial Information
Item 1.
Item 2.
Item 3.
Item 4.
Part II - Other Information
Item 1A.
Item 5.
Item 6.
2
PART I – FINANCIAL INFORMATION
PREFORMED LINE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and cash equivalents
Accounts receivable, less allowances of $2,341 ($2,136 in 2013)
Inventories - net
Deferred income taxes
Prepaids
Prepaid taxes
Other current assets
TOTAL CURRENT ASSETS
Property, plant and equipment - net
Patents and other intangibles - net
Goodwill
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes payable to banks
Current portion of long-term debt
Trade accounts payable
Accrued compensation and amounts withheld from employees
Accrued expenses and other liabilities
Accrued profit-sharing and other benefits
Dividends payable
Income taxes payable and deferred income taxes
TOTAL CURRENT LIABILITIES
Long-term debt, less current portion
Unfunded pension obligation
Income taxes payable, noncurrent
Other noncurrent liabilities
SHAREHOLDERS’ EQUITY
PLPC Shareholders’ equity:
Common shares - $2 par value per share, 15,000,000 shares authorized, 5,389,992 and 5,391,074 issued and outstanding, net of 783,418 and 779,279 treasury shares at par, respectively, at June 30, 2014 and December 31, 2013
Common shares issued to rabbi trust, 249,557 and 253,156 shares at June 30, 2014 and December 31, 2013
Deferred compensation liability
Paid in capital
Retained earnings
Accumulated other comprehensive loss
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated financial statements (unaudited).
3
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
Net sales
Cost of products sold
GROSS PROFIT
Costs and expenses
Selling
General and administrative
Research and engineering
Other operating (income) expense
OPERATING INCOME
Other income (expense)
Interest income
Interest expense
INCOME BEFORE INCOME TAXES
Income taxes
NET INCOME
BASIC EARNINGS PER SHARE
Net income
DILUTED EARNINGS PER SHARE
Cash dividends declared per share
Weighted-average number of shares outstanding - basic
Weighted-average number of shares outstanding - diluted
4
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
Other comprehensive income, net of tax
Foreign currency translation adjustment
Recognized net actuarial loss (net of tax provision $2 and $46 for the three months ended June 30, 2014 and 2013, and net of tax provision $3 and $93 for the six months ended June 30, 2014 and 2013)
Comprehensive income
5
STATEMENTS OF CONSOLIDATED CASH FLOWS
OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation and amortization
Provision for accounts receivable allowances
Provision for inventory reserves
Share-based compensation expense
Excess tax benefits from share-based awards
Loss on sale of property and equipment
Other - net
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Trade accounts payables and accrued liabilities
Income taxes payable
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES
Capital expenditures
Business acquisitions, net of cash acquired
Proceeds from the sale of property and equipment
Fixed term deposits
NET CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
Decrease in notes payable to banks
Proceeds from the issuance of long-term debt
Payments of long-term debt
Earn-out consideration payments
Dividends paid
Proceeds from issuance of common shares
Purchase of common shares for treasury
Purchase of common shares for treasury from related parties
NET CASH PROVIDED BY FINANCING ACTIVITIES
Effects of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
CASH AND CASH EQUIVALENTS AT END OF PERIOD
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data, unless specifically noted
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Preformed Line Products Company and subsidiaries (the “Company” or “PLPC”) have been prepared in accordance with United States of America (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. However, in the opinion of management, these consolidated financial statements contain all estimates and adjustments, consisting of normal recurring accruals, required to fairly present the financial position, results of operations, and cash flows for the interim periods. Operating results for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
The Consolidated Balance Sheet at December 31, 2013 has been derived from the audited consolidated financial statements, but does not include all of the information and notes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes to consolidated financial statements included in the Company’s 2013 Annual Report on Form 10-K filed on March 14, 2014 with the Securities and Exchange Commission.
NOTE B – OTHER FINANCIAL STATEMENT INFORMATION
Inventories – net
Finished products
Work-in-process
Raw materials
Excess of current cost over LIFO cost
Noncurrent portion of inventory
Cost of inventories for certain material is determined using the last-in-first-out (LIFO) method and totaled approximately $25.9 million at June 30, 2014 and $25.1 million at December 31, 2013. An actual valuation of inventories under the LIFO method can be made only at the end of the year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these estimates are subject to change and may be different than the actual inventory levels and costs at the end of the year, interim results are subject to the final year-end LIFO inventory valuation. During the three and six month period ended June 30, 2014, the net change in LIFO inventories resulted in a $.1 million benefit to Income before income taxes for each period. During the three and six month period ended June 30, 2013, the net change in LIFO inventories resulted in a $.2 million charge to Income before income taxes for each period.
Noncurrent inventory is included in Other assets on the Consolidated Balance Sheets.
7
Major classes of property, plant and equipment are stated at cost and were as follows:
Land and improvements
Buildings and improvements
Machinery and equipment
Construction in progress
Less accumulated depreciation
Legal proceedings
From time to time, the Company may be subject to litigation incidental to its business. The Company is not a party to any pending legal proceedings that the Company believes would, individually or in the aggregate, have a material adverse effect on its financial condition, results of operations, or cash flows.
NOTE C – PENSION PLANS
The Company uses a December 31 measurement date for the Plan. Net periodic benefit cost for this plan included the following components:
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
Net periodic benefit cost
During the six month period ended June 30, 2014, $.4 million of contributions were made to the Plan. The Company presently anticipates contributing an additional $.2 million to fund the Plan in 2014.
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NOTE D – ACCUMULATED OTHER COMPREHENSIVE INCOME (“AOCI”)
The following tables set forth the total changes in AOCI by component, net of tax:
Balance at April 1
Other comprehensive income before reclassifications:
Gain (loss) on foreign currency translation adjusment
Amounts reclassified from AOCI:
Amortization of defined benefit pension actuarial loss (a)
Net current period other comprehensive income
Balance at June 30
Balance at January 1
NOTE E – COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share were computed by dividing Net income by the weighted-average number of common shares outstanding for each respective period. Diluted earnings per share were calculated by dividing Net income by the weighted-average of all potentially dilutive common stock that was outstanding during the periods presented.
The calculation of basic and diluted earnings per share for the three and six month periods ended June 30, 2014 and 2013 was as follows:
Numerator
Denominator
Determination of shares
Weighted-average common shares outstanding
Dilutive effect - share-based awards
Diluted weighted-average common shares outstanding
Earnings per common share attributable to PLPC shareholders
Basic
Diluted
For the three and six month periods ended June 30, 2014, 23,500 and 18,500 stock options, respectively, were excluded from the calculation of diluted earnings per shares as the effect would have been anti-dilutive. For the three and six month periods ended June 30, 2013, no stock options were excluded from the calculation of diluted earnings per shares as there were no stock options where the effect of the exercise would have been anti-dilutive.
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For the three and six month periods ended June 30, 2014, 59,739 and 12,066 restricted shares, respectively, were excluded from the calculation of diluted earnings per shares as the effect of the exercise would have been anti-dilutive. For the three and six month periods ended June 30, 2013, 5,614 and 3,846 restricted shares, respectively, were excluded from the calculation of diluted earnings per shares as the effect of the exercise would have been anti-dilutive.
NOTE F – GOODWILL AND OTHER INTANGIBLES
The Company’s finite and indefinite-lived intangible assets consist of the following:
Finite-lived intangible assets
Patents
Land use rights
Trademark
Customer backlog
Technology
Customer relationships
Indefinite-lived intangible assets
The aggregate amortization expense for other intangibles with finite lives for the three and six month periods ended June 30, 2014 was $.4 million and $.8 million, respectively. The aggregate amortization expense for other intangibles with finite lives for the three and six month periods ended June 30, 2013 was $.4 million and $.7 million, respectively. Amortization expense is estimated to be $.8 million for the remaining period of 2014, $1.3 million for 2015, $1.2 million for 2016, $1.2 million for 2017 and $1.1 million for 2018. The weighted-average remaining amortization period by intangible asset class is as follows: patents, 2 years; land use rights, 62.7 years; trademark, 11.1 years; technology, 17.3 years and customer relationships, 15.6 years.
The Company’s measurement date for its annual impairment test for goodwill is October 1st of each year. There were no indications of impairment during the six month period ended June 30, 2014. The Company performs its annual impairment test for goodwill utilizing a discounted cash flow methodology, market comparables, and an overall market capitalization reasonableness test in computing fair value by reporting unit. The Company then compares the fair value of the reporting unit with its carrying value to assess if goodwill has been impaired. Based on the assumptions as to growth, discount rates and the weighting used for each respective valuation methodology, results of the valuations could be significantly different. However, the Company believes that the methodologies and weightings used are reasonable and result in appropriate fair values of the reporting units.
The Company’s only intangible asset with an indefinite life is goodwill. The changes in the carrying amount of goodwill, by segment, for the six month period ended June 30, 2014, are as follows:
Balance at January 1, 2014
Additions
Currency translation
Balance at June 30, 2014
The additions to goodwill relate to the acquisition of Helix Uniformed Limited on January 31, 2014.
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NOTE G – SHARE-BASED COMPENSATION
The 1999 Stock Option Plan
Activity in the Company’s 1999 Stock Option Plan for the six month period ended June 30, 2014 was as follows:
Outstanding at January 1, 2014
Granted
Exercised
Forfeited
Outstanding (exercisable and vested) at June 30, 2014
There were 900 and 10,900 stock options exercised during the six month periods ended June 30, 2014 and 2013, respectively. The total intrinsic value of stock options exercised during the six month periods ended June 30, 2014 and 2013 was less than $.1 million and $.3 million, respectively. Cash received for the exercise of stock options during the six month periods ended June 30, 2014 and 2013 was less than $.1 million and $.5 million, respectively. Excess tax benefits from share-based awards for the six month periods ended June 30, 2014 and 2013 were $0 and $.1 million, respectively.
For the six month periods ended June 30, 2014 and 2013, the Company recorded no compensation expense related to stock options for either period as all options are fully vested.
Long Term Incentive Plan of 2008
Under the Preformed Line Products Company Long Term Incentive Plan of 2008 (the “LTIP”), certain employees, officers, and directors are eligible to receive awards of options, restricted shares and restricted share units. The purpose of this LTIP is to give the Company a competitive advantage in attracting, retaining, and motivating officers, employees and directors and to provide an incentive to those individuals to increase shareholder value through long-term incentives directly linked to the Company’s performance. The total number of Company common shares reserved for awards under the LTIP is 900,000. Of the 900,000 common shares, 800,000 common shares have been reserved for restricted share units and 100,000 common shares have been reserved for stock options. The LTIP expires on April 17, 2018.
Restricted Share Units
For all of the participants except the CEO, a portion of the restricted share units (RSUs) is subject to time-based cliff vesting and a portion is subject to vesting based upon the Company’s performance over a three year period. All of the CEO’s RSUs are subject to vesting based upon the Company’s performance over a three year period.
The RSUs are offered at no cost to the employees; however, the participant must remain employed with the Company until the restrictions on the RSUs lapse. The fair value of RSUs is based on the market price of a common share on the grant date. The Company currently estimates that no RSUs will be forfeited. Dividends declared are accrued in cash.
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A summary of the RSUs for the six month period ended June 30, 2014 is as follows:
Nonvested as of January 1, 2014
Vested
Nonvested as of June 30, 2014
For time-based RSUs, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award in General and administrative expense in the accompanying Statement of Consolidated Income. Compensation expense related to the time-based RSUs for the three and six month periods ended June 30, 2014 was $.1 million and $.2 million, respectively. Compensation expense related to the time-based RSUs for the three and six month periods ended June 30, 2013 was $.1 million for each period. As of June 30, 2014, there was $.5 million of total unrecognized compensation cost related to time-based RSUs that is expected to be recognized over the weighted-average remaining period of approximately 1.9 years.
For the performance-based RSUs, the number of RSUs in which the participants will vest depends on the Company’s level of performance measured by growth in pretax income and sales growth over a requisite performance period. Depending on the extent to which the performance criterions are probable of being satisfied under the LTIP, the participants are eligible to earn common shares over the vesting period. Performance-based compensation expense for the three month period ended June 30, 2014 was income of $.1 million. The performance-based compensation expense for the six month period ended June 30, 2014 was $.4 million. During the three month period ended June 30, 2014, a $.9 million reduction in performance-based compensation expense was recorded related to the 2013 performance-based RSU grant, due to changes in estimates for growth in pretax income. Performance-based compensation expense for the three and six month periods ended June 30, 2013 was $.8 million and $1.3 million, respectively. As of June 30, 2014, the remaining performance-based RSUs compensation expense of $3.5 million is expected to be recognized over a period of approximately 2 years.
The excess tax benefits from RSUs for the six month periods ended June 30, 2014 and 2013 was $.2 million and $0, respectively.
In the event of a Change in Control (as defined in the LTIP), vesting of the RSUs 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 RSU awards, the Company has issued new shares from its authorized but unissued shares. Any additional granted awards will also be issued from the Company’s authorized but unissued shares. Under the LTIP, there are 384,398 common shares currently available for additional RSU grants.
Deferred Compensation Plan
The Company maintains a trust, commonly referred to as a rabbi trust, in connection with the Company’s deferred compensation plan. This plan allows for two deferrals. First, Directors make elective deferrals of Director fees payable and held in the rabbi trust. The deferred compensation plan allows the Directors to elect to receive Director fees in common shares of the Company at a later date instead of fees paid each quarter in cash. Second, this plan allows certain Company employees to defer LTIP restricted shares or RSUs for future distribution in the form of common shares. Assets of the rabbi trust are consolidated, and the value of the Company’s stock held in the rabbi trust is classified in Shareholders’ equity and generally accounted for in a manner similar to treasury stock. The Company recognizes the original amount of the deferred compensation (fair value of the deferred stock award at the date of grant) as the basis for recognition in common shares issued to the rabbi trust. Changes in the fair value of amounts owed to certain employees or Directors are not recognized as the Company’s deferred compensation plan does not permit diversification and must be settled by the delivery of a fixed number of the Company’s common shares. As of June 30, 2014, 249,557 shares have been deferred and are being held by the rabbi trust.
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Share Option Awards
The LTIP plan permits the grant of 100,000 options to buy common shares of the Company to certain employees at not less than fair market value of the shares on the date of grant. At June 30, 2014 there were 40,000 shares remaining available for issuance under the LTIP. Options issued to date under the Plan vest 50% after one year following the date of the grant, 75% after two years, and 100% after three years and expire from five to ten years from the date of grant. Shares issued as a result of stock option exercises will be funded with the issuance of new shares.
The Company utilizes the Black-Scholes option pricing model for estimating fair values of options. The Black-Scholes model requires assumptions regarding the volatility of the Company’s stock, the expected life of the stock award and the Company’s dividend yield. The Company utilizes historical data in determining these assumptions. The risk-free rate for periods within the contractual life of the option is based on the U.S. zero coupon Treasury yield in effect at the time of grant. Forfeitures have been estimated to be zero.
There were 17,000 and 0 options granted for the six month periods ended June 30, 2014 and 2013.
The fair value for the stock options granted in 2014 was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Risk-free interest rate
Dividend yield
Expected life (years)
Expected volatility
Activity in the Company’s LTIP plan for the six month period ended June 30, 2014 was as follows:
Outstanding (vested and expected to vest) at June 30, 2014
Exercisable at June 30, 2014
The weighted-average grant-date fair value of options granted during 2014 was $25.79. There were 1,250 and 9,250 stock options exercised during the six month periods ended June 30, 2014 and 2013, respectively. The total intrinsic value of stock options exercised during the six month periods ended June 30, 2014 and 2013 was less than $.1 million and $.3 million, respectively. Cash received for the exercise of stock options during the six month periods ended June 30, 2014 and 2013 was $.1 million and $.4 million, respectively.
For the three and six month periods ended June 30, 2014, the Company recorded compensation expense related to the stock options currently vesting of $.1 million and $.2 million, respectively. For the three and six month periods ended June 30, 2013, the Company recorded compensation expense related to the stock options currently vesting of less than $.1 million for each period. The total compensation cost related to nonvested awards not yet recognized at June 30, 2014 is expected to be a combined total of $.4 million over a weighted-average period of approximately 2.2 years.
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NOTE H – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The carrying value of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, notes payable, and short-term debt, approximates its fair value because of the short-term maturity of these instruments. At June 30, 2014, the fair value of the Company’s long-term debt was estimated using discounted cash flows analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements which are considered to be level two inputs. There have been no transfers in or out of level two for the six month period ended June 30, 2014. Based on the analysis performed, the fair value of the Company’s long-term debt approximates its’ carrying value as of June 30, 2014 and December 31, 2013.
Long-term debt and related current maturities
NOTE I – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In March 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 clarifies the applicable guidance for the release of the cumulative translation adjustment under current U.S. GAAP by emphasizing that the accounting for the release of the cumulative translation adjustment into net income for sales or transfers of a controlling financial interest within a foreign entity is the same irrespective of whether the sale or transfer is of a subsidiary or a group of assets that is a nonprofit activity or business. When a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. The amendments are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company adopted the guidance in the first quarter of 2014 and it did not have an effect on the Company’s results of operations, financial condition or cash flow.
NOTE J – NEW ACCOUNTING STANDARDS TO BE ADOPTED
In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, or ASU 2014-08. ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation. The Company is required to adopt ASU 2014-08 prospectively for all disposals or components of the business classified as held for sale during fiscal period beginning after December 15, 2014 and is currently evaluating what impact, if any, its adoption will have to the presentation of the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” or ASU 2014-09. ASU 2014-09 requires an entity to recognize revenue in a matter that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the amendment provides five steps that an entity should apply when recognizing revenue. The amendment also specifies the accounting of some costs to obtain or fulfill a contract with a customer and expands the disclosure requirements around contracts with customers. An entity can either adopt this amendment retrospectively to each prior reporting period presented or retrospectively with cumulative effect of initially applying the update recognized at the date of initial application. The amendment is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating what impact, if any, its adoption will have to the Company’s consolidated financial statements.
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NOTE K – SEGMENT INFORMATION
The following tables present a summary of the Company’s reportable segments for the three and six month periods ended June 30, 2014 and 2013. Financial results for the PLP-USA segment include the elimination of all segments’ intercompany profit in inventory.
PLP-USA
The Americas
EMEA
Asia-Pacific
Total net sales
Intersegment sales
Total intersegment sales
Total income taxes
Net income (loss)
Total net income
Assets
Corporate assets
Total assets
NOTE L – INCOME TAXES
The Company’s effective tax rate was 33% and 40% for the three month periods ended June 30, 2014 and 2013, respectively and 33% and 36% for the six month periods ended June 30, 2014 and 2013, respectively. The effective tax rate for the three month period ended June 30, 2014 is lower than the U.S. federal statutory rate of 35% primarily due to increased earnings in jurisdictions with lower tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested. The lower effective tax rate for the three month and six month periods ended June 30, 2014 compared with the same periods for 2013 was primarily related to the Company’s decision in 2013 not to recognize the tax benefit attributable to operating losses in certain foreign jurisdictions.
The Company provides valuation allowances against deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets will not be realized. No significant changes to the valuation allowance were reflected for the period ended June 30, 2014.
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As of June 30, 2014, the Company had gross unrecognized tax benefits of approximately $.6 million with no significant changes during the period ended June 30, 2014. The Company does not anticipate any material changes to the amount of unrecognized tax benefits within the next twelve months.
NOTE M – PRODUCT WARRANTY RESERVE
The Company records an accrual for estimated warranty costs to Costs of products sold in the Consolidated Statements of Income. These amounts are recorded in Accrued expenses and other liabilities in the Consolidated Balance Sheets. The Company records and accounts for its warranty reserve based on specific claim incidents. Should the Company become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the accruals as claim information changes.
The following is a rollforward of the product warranty reserve:
Balance at the beginning of period
Additions charged to income
Warranty usage
End of period balance
NOTE N – BUSINESS COMBINATIONS
On January 31, 2014, the Company acquired Helix Uniformed Limited (Helix), located in Montreal, Quebec, Canada. From an accounting perspective, the acquisition is not considered material. The acquisition of Helix will diversify the Company’s business in Canada, expand its manufacturing footprint and enhance its engineering capabilities locally. The results of Helix are included in The Americas reportable segment. The values related to the acquisition are preliminary and subject to final opening balance sheet adjustments.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the readers of our financial statements better understand our results of operations, financial condition and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes included elsewhere in this report.
The MD&A is organized as follows:
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OVERVIEW
Preformed Line Products Company (the “Company”, “PLPC”, “we”, “us”, or “our”) was incorporated in Ohio in 1947. We are an international designer and manufacturer of products and systems employed in the construction and maintenance of overhead and underground networks for the energy, telecommunication, cable operators, information (data communication), and other similar industries. Our primary products support, protect, connect, terminate, and secure cables and wires. We also provide solar hardware systems and mounting hardware for a variety of solar power applications. Our goal is to continue to achieve profitable growth as a leader in the innovation, development, manufacture, and marketing of technically advanced products and services related to energy, communications, and cable systems and to take advantage of this leadership position to sell additional quality products in familiar markets. We have 19 sales and manufacturing operations in 15 different countries.
We report our segments in four geographic regions: PLP-USA (including Corporate), The Americas (includes operations in North and South America without PLP-USA), EMEA (Europe, Middle East & Africa) and Asia-Pacific in accordance with accounting standards codified in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 280, Segment Reporting. Each segment distributes a full range of our primary products. Our PLP-USA segment is comprised of our U.S. operations manufacturing our traditional products primarily supporting our domestic energy and telecommunications products. Our other three segments, The Americas, EMEA and Asia-Pacific, support our energy, telecommunications, data communication, and solar products in each respective geographical region.
The segment managers responsible for each region report directly to the Company’s Chief Executive Officer, who is the chief operating decision maker, and are accountable for the financial results and performance of the entire segment for which they are responsible. The business components within each segment are managed to maximize the results of the entire company rather than the results of any individual business component of the segment.
We evaluate segment performance and allocate resources based on several factors primarily based on sales and net income.
PREFACE
Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP). Our discussions of the financial results include non-GAAP measures (e.g., foreign currency impact) to provide additional information concerning our financial results and provide information that we believe is useful to the readers of our financial statements in the assessment of our performance and operating trends.
Our financial statements are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. As foreign currencies weaken against the U.S. dollar, our revenues and costs decrease as the foreign currency-denominated financial statements translate into fewer dollars. On average, foreign currencies weakened against the U.S. dollar in the first half of 2014. The most significant currencies that contributed to this movement were the South African rand, the Brazilian real and the Australian dollar. On a reportable segment basis, the unfavorable impact of foreign currency on net sales and net income for the three and six month periods ended June 30, 2014, was as follows:
Total
For the three month period ended June 30, 2014, net sales of $100 million decreased $11.7 million, or 11%, compared to 2013. Excluding the effect of currency translation, net sales decreased 9%. As a percentage of net sales, gross profit decreased from 33.6% of net sales to 31.1% of net sales. Excluding the effect of currency translation, gross profit of $31.2 million decreased $5.9 million, or 16%, compared to 2013. Costs and expenses of $23.6 million decreased $3.5 million. Excluding the effect of translation, costs and expenses decreased $3.1 million compared to 2013. Operating income for the three month period ended June 30, 2014 was $7.6 million, a decrease of $2.9 million compared to 2013. The unfavorable effect of currency translation of the preceding factors had a negligible effect on operating income compared to 2013. Net income for the three month period ended June 30, 2014 of $5.1 million decreased $1.3 million compared to 2013.
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For the six month period ended June 30, 2014, net sales of $189.9 million decreased $20.5 million, or 10%, compared to 2013. The fluctuations of foreign currencies during the six month period ended June 30, 2014 had an unfavorable impact on net sales of $6.2 million as compared to 2013. Excluding the impact of currency translation of $6.2 million, sales decreased 7% compared to 2013. As a percentage of net sales, gross profit was 30.8% and 32.7% for the six month periods ended June 30, 2014 and 2013. Excluding the unfavorable effect of currency translation of $1.6 million, gross profit of $58.6 million decreased $8.6 million. Costs and expenses of $46.8 million decreased $4.7 million. Excluding the effect of translation, costs and expenses decreased $3.3 million. Operating income for the six month period ended June 30, 2014 of $11.8 million decreased $5.5 million compared to 2013. The effect of currency translation was negligible on operating income. Net income for the six month period ended June 30, 2014 of $7.8 million decreased $3.5 million compared to 2013. The effect of currency translation was negligible on net income.
The global political and economic conditions continue to impact the building of new transmission lines throughout the world but our financial condition continues to remain strong despite the continued uncertainties in Europe and reduced growth in areas of the Asia-Pacific segment. Despite the current global economy, we believe our business fundamentals are sound and that we are strategically well-positioned as we remain focused on managing costs, increasing sales volumes and delivering value to our customers. We have continued to invest in the business to improve efficiency, develop new products, increase our capacity and become an even stronger supplier to our customers. We currently have a bank debt to equity ratio of 13.3% and can borrow needed funds at an attractive interest rate under our credit facility.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 2014 COMPARED TO THREE MONTH PERIOD ENDED JUNE 30, 2013
The following table sets forth a summary of the Company’s Statement of Consolidated Income and the percentage of net sales for the three month periods ended June 30, 2014 and 2013. The Company’s past operating results are not necessarily indicative of future operating results.
Other income
NM- Not meaningful.
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Net sales. For the three month period ended June 30, 2014, net sales were $100 million, a decrease of $11.7 million, or 11%, from the three month period ended June 30, 2013. Excluding the effect of currency translation, net sales decreased $10 million, or 9% as summarized in the following table:
Consolidated
The decrease in PLP-USA net sales of $3.8 million, or 10%, was primarily due to a volume decrease of $5.7 million partially offset by a price/mix increase of $1.9 million. International net sales for the three month period ended June 30, 2014 were unfavorably affected by $1.7 million when local currencies were converted to U.S. dollars. The following discussion of changes in net sales excludes the effect of currency translation. The Americas net sales of $25.4 million increased $3.8 million, or 17%, primarily due to the acquisition of Helix in January of 2014. EMEA net sales of $15.5 million decreased $3.8 million primarily due to a decrease in transmission projects in the region. In Asia-Pacific, net sales of $23.8 million decreased $6.3 million, or 20%, compared to 2013. The decrease in net sales was primarily due to government deferrals of the construction of transmission lines in several locations in the region.
Gross profit. Gross profit of $31.2 million for the three month period ended June 30, 2014 decreased $6.4 million, or 17%, compared to the three month period ended June 30, 2013. Excluding the effect of currency translation, gross profit decreased $5.9 million, or 16% as summarized in the following table:
Gross profit
PLP-USA gross profit of $13 million decreased $2.7 million compared to the same period in 2013. Of PLP-USA’s $2.7 million, $1.5 million was due to lower net sales partially coupled with higher labor and overhead costs. International gross profit for the three month period ended June 30, 2014 was unfavorably impacted by $.4 million when local currencies were translated to U.S. dollars. The following discussion of gross profit changes excludes the effects of currency translation. The Americas gross profit decrease of $.4 million was primarily the result of a $.4 million increase in gross profit offset by the $.9 million of inventory purchase accounting adjustment related to Helix sales in the three months ended June 30, 2014. The EMEA gross profit decreased $.9 million as a result of lower net sales as material and production margins remained relatively unchanged. Asia-Pacific gross profit decreased $2 million as a result of lower net sales.
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Costs and expenses. Costs and expenses of $23.6 million for the three month period ended June 30, 2014 decreased $3.5 million, or 13%, compared to 2013. Excluding the effect of currency translation, costs and expenses decreased $3.1 million, or 11% as summarized in the following table:
PLP-USA costs and expenses decreased $3.3 million primarily due to higher net foreign currency exchange gains of $2.8 million and a $.9 million reduction in personnel related expenses partially offset by lower intercompany income of $.4 million. The foreign currency exchange gains are primarily related to translating foreign denominated loans, trade receivables and royalty receivables from our foreign subsidiaries at the quarter end exchange rates. International costs and expenses for the three month period ended June 30, 2014 were favorably impacted by $.4 million when local currencies were translated to U.S. dollars. The following discussion of costs and expenses excludes the effect of currency translation. The Americas costs and expenses of $4.9 million increased $1 million primarily due to $.6 million of interest and inflation from an income tax refund at our Brazilian operations recorded in 2013 coupled with $.3 million increase in costs and expenses related to the acquisition of Helix. EMEA costs and expenses of $3.9 million increased $.1 million compared to 2013 due primarily to $.3 million in start-up expenses for additional offices in the region partially offset by a $.1 million decrease in commissions and a $.1 million decrease in intercompany related expenses. Asia-Pacific costs and expenses of $7.2 million decreased $.9 million primarily due to higher net foreign currency exchange gains of $.4 million, a $.2 million decrease in intercompany related expenses and a $.3 million decrease in personnel related and travel expenses.
Other income. Other income (expense) for the three month period ended June 30, 2014 improved $.2 million compared to 2013.
Income taxes. Income taxes for the three month period ended June 30, 2014 of $2.5 million were $1.8 million lower than the same period in 2013. The effective tax rate for the three month period ended June 30, 2014 was 33% compared to 40% for the same period in 2013. The effective tax rate for three month period ended June 30, 2014 is lower than the U.S. federal statutory rate of 35% primarily due to increased earnings in jurisdictions with lower tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested. The lower effective tax rate for the three month period ended June 30, 2014 compared with the same period for 2013 was primarily due our decision in 2013 not to recognize the tax benefit attributable to operating losses in certain foreign jurisdictions.
Net income. As a result of the preceding items, net income for the three month period ended June 30, 2014 was $5.1 million, compared to $6.4 million for the three month period ended June 30, 2013. The effect of currency translation, on net income was negligible as summarized in the following table:
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PLP-USA net income increased $.3 million due to a $.5 million increase in operating income partially offset by an increase in income taxes of $.2 million. International net income for the three month period ended June 30, 2014 was negligibly affected when local currencies were converted to U.S. dollars. The following discussion of net income excludes the effect of currency translation. The Americas net income decreased $1.1 million as a result of a $1.5 million decrease in operating income partially offset by a decrease in income taxes. EMEA net income decreased $.8 million as a result of a $1 million decrease in operating income partially offset by lower income taxes of $.2 million. Asia-Pacific net income increased $.3 million as a result of lower income taxes of $1.4 million partially offset by $1 million lower operating income.
SIX MONTH PERIOD ENDED JUNE 30, 2014 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30, 2013
The following table sets forth a summary of the Company’s Statements of Consolidated Income and the percentage of net sales for the six month periods ended June 30, 2014 and 2013. The Company’s past operating results are not necessarily indicative of future operating results.
Net sales. For the six month period ended June 30, 2014, net sales were $189.9 million, a decrease of $20.5 million, or 10%, from the six month period ended June 30, 2013. Excluding the unfavorable effect of currency translation, net sales decreased 7% as summarized in the following table:
The decrease in PLP-USA net sales of $12.5 million, or 16%, was primarily due to $9.9 million related to sales volume and a $2.6 decrease due to price/mix. International net sales for the six month period ended June 30, 2014 were unfavorably affected by $6.2 million when local currencies were converted to U.S. dollars. The following discussion of changes in net sales excludes the effect of currency translation. The Americas net sales increase of $10.2 million, or 24%, increased primarily due to higher transmission sales of $3.4 million, higher solar sales of $1 million and $5.6 million in sales related to the acquisition of Helix in January of 2014. EMEA net sales of $29.7 million decreased $3.3 million, or 10%, primarily due to decreased transmission sales as a result of government deferral of major projects in certain locations in the region. In Asia-Pacific, net sales of $45.6 million decreased $8.7 million, or 15%, compared to the same period in 2013. The decrease in net sales is primarily related to lower transmission and substation sales as a result of slowing economies and government deferral of projects and political unrest in certain locations within the region.
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Gross profit. Gross profit of $58.6 million for the six month period ended June 30, 2014 decreased $10.2 million, or 15%, compared to the six month period ended June 30, 2013. Excluding the effect of currency translation, gross profit decreased 13% as summarized in the following table:
PLP-USA gross profit of $23.4 million decreased $6.6 million compared to the same period in 2013. Of PLP-USA’s $6.6 million decrease in gross profit, $4.8 million was primarily due to lower net sales coupled with higher production costs and an increase in the elimination of intercompany profit in ending inventories. International gross profit for the six month period ended June 30, 2014 was unfavorably impacted by $1.6 million when local currencies were translated to U.S. dollars. The following discussion of gross profit changes excludes the effects of currency translation. The Americas gross profit increase of $1.6 million was primarily the result of the gross profit from higher net sales partially offset by $1.9 million of inventory purchase accounting adjustments related to Helix sales. The EMEA gross profit decreased $1 million as a result of lower net sales in the region. Asia-Pacific gross profit of $12.4 million decreased $2.7 million primarily due to a $3.8 million decrease in gross profit from lower net sales partially offset by a $1.3 million reduction in production costs.
Costs and expenses. Costs and expenses of $46.8 million for the six month period ended June 30, 2014 decreased $4.7 million, or 9%, compared to the six month period ended June 2013. Excluding the effect of currency translation, costs and expenses decreased 6% as summarized in the following table:
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PLP-USA costs and expenses decreased $4.1 million primarily due to higher net foreign currency exchange gains of $3.4 million, a $1.3 million reduction in personnel related expenses and lower commissions of $.6 million partially offset by a $.6 million increase in engineering expense, a $.2 million increase in consulting expense, a $.2 million increase in repairs and maintenance, and a $.2 million reduction in intercompany income. The foreign currency exchange gains are primarily related to translating foreign denominated loans, trade receivables and royalty receivables from our foreign subsidiaries at the June month-end exchange rates. International costs and expenses for the six month period ended June 30, 2014 were favorably impacted by $1.4 million when local currencies were translated to U.S. dollars. The following discussions of costs and expenses exclude the effect of currency translation. The Americas costs and expenses of $9.4 million increased $1.9 million primarily due to a $.3 million increase in intercompany expense, a $.5 million increase in costs and expenses of the acquired company in January 2014 coupled with a $1.1 million refund of VAT and related interest and inflation from an income tax refund recorded at our Brazilian location in 2013. EMEA costs and expenses of $7.6 million increased $.6 million due primarily to the start-up expenses for additional offices in the region. Asia-Pacific costs and expenses of $13.7 million decreased $1.7 million primarily due to lower intercompany expenses of $.4 million, a $.6 million increase in net foreign currency exchange gains, and a $.7 million reduction in employee related costs.
Other income (expense). Other expense for the six month period ended June 30, 2014 of $.1 million decreased $.3 million due to a $.1 million increase in interest expense and a $.2 million decrease in interest and other income.
Income taxes. Income taxes for the six month period ended June 30, 2014 of $3.9 million was $2.3 million lower than the same period in 2013. The effective tax rate for the six month period ended June 30, 2014 was 33% compared to 36% for the same period in 2013. The effective tax rate for the six month period ended June 30, 2014 is lower than the U.S. federal statutory rate of 35% primarily due to increased earnings in jurisdictions with lower tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested. The lower effective tax rate for the six month period ended June 30, 2014 compared with the same period for 2013 was primarily due to our decision in 2013 not to recognize the tax benefit attributable to operating losses in certain foreign jurisdictions.
Net income. As a result of the preceding items, net income for the six month period ended June 30, 2014 was $7.8 million, compared to $11.4 million for the six month period ended June 30, 2013. Excluding the effect of currency translation, net income decreased $3.4 million as summarized in the following table:
PLP-USA net income decreased $2.1 million due to a $2.4 million decrease in operating income and a $.1 million increase in other expense partially offset by lower income taxes of $.4 million. International net income for the six month period ended June 30, 2014 was unfavorably affected by $.1 million when local currencies were converted to U.S. dollars. The following discussion of net income excludes the effect of currency translation. The Americas net income decreased $.3 million as a result of a $.6 million decrease in operating income partially offset by lower income taxes of $.3 million. EMEA net income decreased $1.3 million due to a decrease in operating income of $1.6 million partially offset by $.3 million lower income taxes. Asia-Pacific net income increased $.2 million due to a decrease in operating income of $1 million offset by a $1.2 million reduction in income taxes.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies are consistent with the information set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K for the year ended December 31, 2013 and are, therefore, not presented herein.
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WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Management Assessment of Liquidity
We measure liquidity on the basis of our ability to meet short-term and long-term operating needs, fund additional investments, including acquisitions, and make dividend payments to shareholders. Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, cash dividends, business acquisitions and access to bank lines of credit.
Our investments include expenditures required for equipment and facilities as well as expenditures in support of our strategic initiatives. In 2014, we used cash of $14.7 million, net of cash acquired, related to the acquisition of Helix in January 2014 and $11.5 million for capital expenditures. We ended the first half of 2014 with $24.6 million of cash and cash equivalents. We believe we have adequate sources of liquidity including additional borrowing capacity of $16.3 million, $4.2 million in term deposits and the ability to generate cash to meet existing or reasonably likely future cash requirements. Our cash and cash equivalents are held in various locations throughout the world. At June 30, 2014, the majority of our cash and cash equivalents are held outside the U.S. We expect accumulated non-U.S. cash balances will remain outside of the U.S. and that we will meet U.S. liquidity needs through future cash flows, use of U.S. cash balances, external borrowings, or some combination of these sources.
We complete comprehensive reviews of our significant customers and their creditworthiness by analyzing financial statements for customers where we have identified a measure of increased risk. We closely monitor payments and developments which may signal possible customer credit issues. We currently have not identified any potential material impact on our liquidity from customer credit issues.
Our financial position remains strong and our current ratio at June 30, 2014 and December 31, 2013 was 3.8 to 1 and 3.6 to 1, respectively. At June 30, 2014, our unused availability under our line of credit was $16.3 million and our bank debt to equity percentage was 13%. On October 16, 2013, we decreased our borrowing capacity under our credit facility from $90 million to $50 million and on January 23, 2014 we extended the term to January 2017. All other terms, including the interest rate at LIBOR plus 1.125%, remain the same. The line of credit agreement contains, among other provisions, requirements for maintaining levels of working capital, net worth and profitability. At June 30, 2014 and December 31, 2013, we were in compliance with these covenants.
We expect that our major source of funding for 2014 and beyond will be our operating cash flows, our existing cash and cash equivalents as well as our line of credit agreement. We believe our future operating cash flows will be more than sufficient to cover debt repayments, other contractual obligations, capital expenditures and dividends. In addition, we believe our borrowing capacity provides substantial financial resources if needed to supplement funding of capital expenditures and/or acquisitions. We do not believe we would increase our debt to a level that would have a material adverse impact upon results of operations or financial condition.
We earn a significant amount of our operating income outside the United States, which, except for current earnings, is deemed to be indefinitely reinvested in foreign jurisdictions. We currently do not intend nor foresee a need to repatriate these funds. We expect existing domestic cash and cash equivalents from operations to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends, debt repayment, and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.
Sources and Uses of Cash
Cash increased $.3 million for the six month period ended June 30, 2014. Net cash provided by operating activities was $10.5 million. The major investing and financing uses of cash were capital expenditures of $11.5 million, the acquisition of Helix of $14.7 million, net of cash acquired, and dividends of $2.2 million, offset by net borrowings of $20.4 million. Currency had a negative $1.5 million impact on cash and cash equivalents when translating foreign denominated financial statements to U.S. dollars.
Net cash provided by operating activities for the six month period ended June 30, 2014 decreased $1.9 million compared to the six month period ended June 30, 2013 primarily as a result of a decrease in net income of $3.5 million partially offset by an increase in operating assets (net of operating liabilities) of $.7 million and an increase in non-cash items of $.9 million.
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Net cash used in investing activities for the six month period ended June 30, 2014 of $26.9 million represents an increase of $16.2 million when compared to cash used in investing activities in the six month period ended June 30, 2013. The increase was primarily related to the business acquisition of Helix of $14.7 million, net of cash acquired, in January 2014, capital expenditures increases of $.7 million in the six month period ended June 30, 2014 when compared to the same period in 2013 and an increase in 2014 of $.8 million due to fixed term deposits. The increase in capital expenditures was due mostly to the purchase of the land and building at Helix from the prior owner for $2.8 million, plant expansion of $3.3 million at our PLP-USA segment partially offset by $4 million related to the expansion of our worldwide corporate headquarters in 2013 and lower capital expenditures at our worldwide locations.
Cash provided by financing activities for the six month period ended June 30, 2014 was $18.3 million compared to $.5 million for the six month period ended June 30, 2013. The increase was primarily a result of an increase in debt borrowings in 2014 compared to 2013 of $17.4 million coupled with $2.6 million less of common shares repurchased in 2014 partially offset by a decrease of proceeds from the issuance of common shares of $.8 million and dividends paid of $2.2 million. The increase in borrowings was used primarily to finance the acquisition of Helix. In December 2012, we advanced our first and second quarter expected dividend payments (which would have been payable in January and April 2013) due to the uncertainty of the U.S. tax laws.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In March 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 clarifies the applicable guidance for the release of the cumulative translation adjustment under current U.S. GAAP by emphasizing that the accounting for the release of the cumulative translation adjustment into net income for sales or transfers of a controlling financial interest within a foreign entity is the same irrespective of whether the sale or transfer is of a subsidiary or a group of assets that is a nonprofit activity or business. When a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. The amendments are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. We adopted the guidance in the first quarter of 2014 and it did not have an effect on our results of operations, financial condition or cash flow.
NEW ACCOUNTING STANDARDS TO BE ADOPTED
In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, or ASU 2014-08. ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation. We are required to adopt ASU 2014-08 prospectively for all disposals or components of our business classified as held for sale during fiscal period beginning after December 15, 2014 and is currently evaluating what impact, if any, its adoption will have to the presentation of our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” or ASU 2014-09. ASU 2014-09 requires an entity to recognize revenue in a matter that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the amendment provides five steps that an entity should apply when recognizing revenue. The amendment also specifies the accounting of some costs to obtain or fulfill a contract with a customer and expands the disclosure requirements around contracts with customers. An entity can either adopt this amendment retrospectively to each prior reporting period presented or retrospectively with cumulative effect of initially applying the update recognized at the date of initial application. The amendment is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating what impact, if any, its adoption will have to our consolidated financial statements.
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FORWARD LOOKING STATEMENTS
Cautionary Statement for “Safe Harbor” Purposes Under The Private Securities Litigation Reform Act of 1995
This Form 10-Q and other documents we file with the Securities and Exchange Commission (“SEC”) contain forward-looking statements regarding the Company’s and management’s beliefs and expectations. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance (as opposed to historical items) and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to the Company’s operations and business environment, all of which are difficult to predict and many of which are beyond the Company’s control. Such uncertainties and factors could cause the Company’s actual results to differ materially from those matters expressed in or implied by such forward-looking statements.
The following factors, among others, could affect the Company’s future performance and cause the Company’s actual results to differ materially from those expressed or implied by forward-looking statements made in this report:
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The Company operates manufacturing facilities and offices around the world and uses fixed and floating rate debt to finance the Company’s global operations. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations and market risk related to changes in interest rates and foreign currency exchange rates. The Company believes the political and economic risks related to the Company’s international operations are mitigated due to the stability of the countries in which the Company’s largest international operations are located.
The Company does not hold derivatives for trading purposes.
The Company’s primary currency rate exposures are related to foreign denominated debt, intercompany debt, forward exchange contracts, foreign denominated receivables and cash and short-term investments. A hypothetical 10% change in currency rates would have a favorable/unfavorable impact on fair values on such instruments of $6.7 million and on income before tax of $3.5 million.
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 $34.9 million at June 30, 2014. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $.2 million for the six month period ended June 30, 2014.
Evaluation of Disclosure Controls and Procedures
The Company’s Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended, were effective as of June 30, 2014.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f)) during the quarter ended June 30, 2014 that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect our financial condition, results of operations or cash flows.
There were no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 14, 2014.
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On August 4, 2010, the Company announced that the Board of Directors authorized a plan to repurchase up to 250,000 of Preformed Line Products common shares. The repurchase plan does not have an expiration date. There were no repurchases for the three month period ended June 30, 2014. The total number of shares purchased as part of publicly announced plans or programs is 218,107. The maximum number of shares that may yet be purchased under the plans or programs is 31,893.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Robert G. Ruhlman
/s/ Eric R. Graef
Chief Financial Officer, Vice President – Finance and Treasurer
(Principal Accounting Officer)
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EXHIBIT INDEX
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