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
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For the quarterly period ended March 31, 2006 | | Commission file number 0-31164 |
For the quarterly period ended March 31, 2007Commission file number 0-31164
Preformed Line Products Company
(Exact Name of Registrant as Specified in Its Charter)
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Ohio | | 34-0676895 |
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(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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660 Beta Drive | | |
Mayfield Village, Ohio | | 44143 |
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(Address of Principal Executive Office) | | (Zip Code) |
(440) 461-5200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange act.
Large accelerated filero Accelerated filerþ Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
The number of common shares outstanding as of May 1, 2006: 5,719,285.7, 2007: 5,365,477.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our independent registered public accounting firm has not completed its review of our interim financial statements included in this Form 10-Q, as required by Rule 10-01(d) of Regulation S-X. The Company is cooperating fully to ensure that the review of the Company’s quarterly financial statements by the Company’s independent registered public accounting firm is completed as quickly as possible.
3
PREFORMED LINE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | | | | | | | | | | | | | | |
| | March 31, | | December 31, | | | March 31, | | December 31, | |
Thousands of dollars, except share data | | 2006 | | 2005 | | | 2007 | | 2006 | |
ASSETS | | |
Cash and cash equivalents | | $ | 32,443 | | $ | 39,592 | | | $ | 21,392 | | $ | 29,949 | |
Accounts receivable, less allowances of $956 ($789 in 2005) | | 33,870 | | 26,481 | | |
Accounts receivable, less allowances of $1,088 ($1,209 in 2006) | | | 38,336 | | 30,029 | |
Inventories — net | | 37,878 | | 37,618 | | | 44,183 | | 40,415 | |
Deferred income taxes | | 4,160 | | 3,870 | | | 3,380 | | 2,528 | |
Prepaids and other | | 3,421 | | 2,832 | | | 4,760 | | 2,504 | |
| | | | | | | | | | |
TOTAL CURRENT ASSETS | | 111,772 | | 110,393 | | | 112,051 | | 105,425 | |
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Property and equipment — net | | 49,928 | | 48,804 | | | 54,016 | | 52,810 | |
Deferred income taxes | | 2,214 | | 2,060 | | | 3,914 | | 5,145 | |
Goodwill — net | | 1,995 | | 2,018 | | | 4,793 | | 2,166 | |
Patents and other intangibles — net | | 2,789 | | 2,871 | | | 2,465 | | 2,546 | |
Other assets | | 2,560 | | 2,401 | | | 2,653 | | 2,760 | |
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TOTAL ASSETS | | $ | 171,258 | | $ | 168,547 | | | $ | 179,892 | | $ | 170,852 | |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
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Notes payable to banks | | $ | 1,194 | | $ | 1,156 | | | $ | 4,816 | | $ | 3,738 | |
Current portion of long-term debt | | 3,413 | | 4,806 | | | 2,168 | | 2,157 | |
Trade accounts payable | | 11,624 | | 10,878 | | | 14,865 | | 11,606 | |
Accrued compensation and amounts withheld from employees | | 5,643 | | 5,161 | | | 6,218 | | 5,556 | |
Accrued expenses and other liabilities | | 5,437 | | 6,406 | | | 4,865 | | 4,225 | |
Accrued profit-sharing and pension contributions | | 4,773 | | 4,290 | | |
Accrued profit-sharing and other benefits | | | 2,332 | | 3,596 | |
Dividends payable | | 1,144 | | 1,147 | | | 1,072 | | 1,072 | |
Income taxes | | 954 | | 881 | | | 1,041 | | 1,129 | |
Deferred income taxes | | 76 | | — | | |
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TOTAL CURRENT LIABILITIES | | 34,258 | | 34,725 | | | 37,377 | | 33,079 | |
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Long-term debt, less current portion | | 1,761 | | 122 | | | 1,740 | | 2,204 | |
Deferred income taxes | | 386 | | 157 | | | 639 | | 439 | |
Unfunded pension liabilities | | | 4,185 | | 3,982 | |
Unrecognized tax benefits | | | 1,875 | | — | |
Other non-current liabilities | | | 375 | | — | |
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SHAREHOLDERS’ EQUITY | | |
Common shares — $2 par value, 15,000,000 shares authorized, 5,717,552 and 5,734,797 outstanding, net of 529,050 and 511,159 treasury shares at par, respectively | | 11,435 | | 11,470 | | |
Common shares — $2 par value, 15,000,000 shares authorized, 5,358,437 and 5,360,259 issues and outstanding, net of 367,333 and 365,311 treasury shares at par, respectively | | | 10,717 | | 10,721 | |
Paid in capital | | 1,319 | | 1,237 | | | 1,629 | | 1,562 | |
Retained earnings | | 136,217 | | 135,481 | | | 133,686 | | 131,949 | |
Accumulated other comprehensive loss | | | (14,118 | ) | | | (14,645 | ) | | | (12,331 | ) | | | (13,084 | ) |
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TOTAL SHAREHOLDERS’ EQUITY | | 134,853 | | 133,543 | | | 133,701 | | 131,148 | |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 171,258 | | $ | 168,547 | | | $ | 179,892 | | $ | 170,852 | |
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See notes to consolidated financial statements.
34
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
| | | | | | | | | | | | | | | | |
| | Three month periods ended March 31, | | | Three month periods ended March 31, | |
In thousands, except per share data | | 2006 | | 2005 | | | 2007 | | 2006 | |
Net sales | | $ | 52,635 | | $ | 50,772 | | | $ | 56,531 | | $ | 52,635 | |
Cost of products sold | | 36,164 | | 34,145 | | | 37,623 | | 36,164 | |
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GROSS PROFIT | | 16,471 | | 16,627 | | | 18,908 | | 16,471 | |
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Costs and expenses | | |
Selling | | 5,767 | | 5,055 | | | 5,963 | | 5,767 | |
General and administrative | | 5,818 | | 4,927 | | | 5,816 | | 5,796 | |
Research and engineering | | 1,873 | | 1,543 | | | 1,946 | | 1,873 | |
Other operating expenses — net | | 61 | | 115 | | | 186 | | 61 | |
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| | 13,519 | | 11,640 | | | 13,911 | | 13,497 | |
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Royalty income — net | | 346 | | 192 | | | 381 | | 346 | |
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OPERATING INCOME | | 3,298 | | 5,179 | | | 5,378 | | 3,320 | |
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Other income (expense) | | |
Interest income | | 402 | | 213 | | | 305 | | 402 | |
Interest expense | | | (102 | ) | | | (94 | ) | | | (165 | ) | | | (102 | ) |
Other expense | | | (19 | ) | | | (27 | ) | |
Other expense — net | | | | (6 | ) | | | (19 | ) |
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| | 281 | | 92 | | | 134 | | 281 | |
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INCOME BEFORE INCOME TAXES | | 3,579 | | 5,271 | | | 5,512 | | 3,601 | |
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Income taxes | | 1,095 | | 2,043 | | | 1,794 | | 1,102 | |
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NET INCOME | | $ | 2,484 | | $ | 3,228 | | | $ | 3,718 | | $ | 2,499 | |
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Net income per share — basic | | $ | 0.43 | | $ | 0.56 | | | $ | 0.69 | | $ | 0.44 | |
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Net income per share — diluted | | $ | 0.43 | | $ | 0.56 | | | $ | 0.69 | | $ | 0.43 | |
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Cash dividends declared per share | | $ | 0.20 | | $ | 0.20 | | | $ | 0.20 | | $ | 0.20 | |
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Average number of shares outstanding — basic | | 5,731 | | 5,719 | | |
Weighted average number of shares outstanding — basic | | | 5,360 | | 5,731 | |
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Average number of shares outstanding — diluted | | 5,792 | | 5,776 | | |
Weighted average number of shares outstanding — diluted | | | 5,406 | | 5,792 | |
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See notes to consolidated financial statements.
45
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
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| | Three Month Periods Ended March 31, | | | Three Month Periods Ended March 31, | |
Thousands of dollars | | 2006 | | 2005 | | | 2007 | | 2006 | |
OPERATING ACTIVITIES | | |
Net income | | $ | 2,484 | | $ | 3,228 | | | $ | 3,718 | | $ | 2,499 | |
Adjustments to reconcile net income to net cash provided by (used in) operations: | | |
Adjustments to reconcile net income to net cash used in operations: | | |
Depreciation and amortization | | 1,669 | | 1,706 | | | 1,816 | | 1,669 | |
Deferred income taxes | | | (139 | ) | | 81 | | | 558 | | | (132 | ) |
Stock based compensation expense | | 74 | | — | | | 64 | | 74 | |
Net investment in life insurance | | | 124 | | — | |
Other — net | | | (3 | ) | | | (5 | ) | | 32 | | | (3 | ) |
Changes in operating assets and liabilities: | | |
Changes in operating assets and liabilities, net of acquisition: | | |
Accounts receivable | | | (7,300 | ) | | | (2,458 | ) | | | (8,681 | ) | | | (7,300 | ) |
Inventories | | | (43 | ) | | 806 | | | | (2,335 | ) | | | (43 | ) |
Trade accounts payables and accrued liabilities | | 658 | | 637 | | | 2,371 | | 636 | |
Income taxes | | 331 | | 575 | | | 269 | | 331 | |
Other — net | | | (841 | ) | | | (63 | ) | | | (709 | ) | | | (841 | ) |
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | (3,110 | ) | | 4,507 | | |
NET CASH USED IN OPERATING ACTIVITIES | | | | (2,773 | ) | | | (3,110 | ) |
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INVESTING ACTIVITIES | | |
Capital expenditures | | | (2,899 | ) | | | (1,364 | ) | | | (2,054 | ) | | | (2,899 | ) |
Business acquisitions, net of cash received | | | | (2,550 | ) | | — | |
Proceeds from the sale of property and equipment | | 15 | | 23 | | | 22 | | 15 | |
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NET CASH USED IN INVESTING ACTIVITIES | | | (2,884 | ) | | | (1,341 | ) | | | (4,582 | ) | | | (2,884 | ) |
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FINANCING ACTIVITIES | | |
Decrease in notes payable to banks | | — | | | (27 | ) | |
Increase in notes payable to banks | | | 460 | | — | |
Proceeds from the issuance of long-term debt | | 2,534 | | 149 | | | — | | 2,534 | |
Payments of long-term debt | | | (2,160 | ) | | | (193 | ) | | | (550 | ) | | | (2,160 | ) |
Dividends paid | | | (1,147 | ) | | | (1,141 | ) | | | (1,072 | ) | | | (1,147 | ) |
Issuance of common shares | | 10 | | 428 | | | 3 | | 10 | |
Purchase of common shares for treasury | | | (641 | ) | | | (148 | ) | | | (68 | ) | | | (641 | ) |
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NET CASH USED IN FINANCING ACTIVITIES | | | (1,404 | ) | | | (932 | ) | | | (1,227 | ) | | | (1,404 | ) |
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Effects of exchange rate changes on cash and cash equivalents | | 249 | | | (425 | ) | | 25 | | 249 | |
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Increase (decrease) in cash and cash equivalents | | | (7,149 | ) | | 1,809 | | |
Decrease in cash and cash equivalents | | | | (8,557 | ) | | | (7,149 | ) |
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Cash and cash equivalents at beginning of year | | 39,592 | | 29,744 | | | 29,949 | | 39,592 | |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 32,443 | | $ | 31,553 | | | $ | 21,392 | | $ | 32,443 | |
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See notes to consolidated financial statements.
56
PREFORMED LINE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Tables in thousands, except per share data
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited financial statements 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. Accordingly, theseHowever, the Company‘s independent registered public accounting firm has not completed its timely review of our interim financial statements included in this Form 10-Q, as required by Rule 10-01(d) 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 three-month period ended March 31, 20062007 are not necessarily indicative of the results to be expected for the year ending December 31, 2006.2007.
The consolidated balance sheet at December 31, 20052006 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 for 20052006 filed with the Securities and Exchange Commission.
NOTE B – OTHER FINANCIAL STATEMENT INFORMATION
Inventories
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| | March 31, | | December 31, | | | March 31, | | December 31, | |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
Finished goods | | $ | 15,577 | | $ | 15,550 | | | $ | 18,104 | | $ | 17,044 | |
Work-in-process | | 2,053 | | 1,732 | | | 2,506 | | 1,844 | |
Raw material | | 23,322 | | 23,021 | | | 27,382 | | 25,431 | |
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| | 40,952 | | 40,303 | | | 47,992 | | 44,319 | |
Excess of current cost over LIFO cost | | | (3,074 | ) | | | (2,685 | ) | | | (3,809 | ) | | | (3,904 | ) |
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| | $ | 37,878 | | $ | 37,618 | | | $ | 44,183 | | $ | 40,415 | |
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7
Property and equipment
Major classes of property, plant and equipment are stated at cost and were as follows:
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| | March 31, | | December 31, | | | March 31, | | December 31, | |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
Land and improvements | | $ | 7,043 | | $ | 6,762 | | | $ | 8,577 | | $ | 8,422 | |
Buildings and improvements | | 40,163 | | 37,902 | | | 42,306 | | 41,941 | |
Machinery and equipment | | 94,339 | | 93,619 | | | 101,339 | | 101,339 | |
Construction in progress | | 5,061 | | 5,627 | | | 4,159 | | 2,629 | |
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| | 146,606 | | 143,910 | | | 156,381 | | 154,331 | |
Less accumulated depreciation | | 96,678 | | 95,106 | | | 102,365 | | 101,521 | |
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| | $ | 49,928 | | $ | 48,804 | | | $ | 54,016 | | $ | 52,810 | |
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6
Comprehensive Income
The components of comprehensive income are as follows:
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| | Three month periods ended March 31, | | | Three month periods ended March 31, | |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
Net income | | $ | 2,484 | | $ | 3,228 | | | $ | 3,718 | | $ | 2,499 | |
Other comprehensive income (loss): | | |
Other comprehensive income: | | |
Foreign currency adjustments | | 527 | | | (1,260 | ) | | 753 | | 527 | |
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Comprehensive income | | $ | 3,011 | | $ | 1,968 | | | $ | 4,471 | | $ | 3,026 | |
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Guarantees
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Product warranty balance at January 1, 2006 | | $ | 10 | |
Deductions | | | (10 | ) |
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Product warranty balance at March 31, 2006 | | $ | — | |
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Product warranty balance at January 1, 2007 | | $ | 82 | |
Additions charged to Cost of products sold | | | 2 | |
Deductions | | | (20 | ) |
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Product warranty balance at March 31, 2007 | | $ | 64 | |
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Legal Proceedings
From time to time, the Company may be subject to litigation incidental to its business. The Company is not a party to any pending legal proceedings that the Company believes would, individually or in the aggregate, have a material adverse effect on its financial condition, results of operations or cash flows.
NOTE C – PENSION PLANS
Net periodic benefit cost for the Company’s domestic plan included the following components:
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| | Three month periods ended March 31, | | | Three month periods ended March 31, | |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
Service cost | | $ | 181 | | $ | 162 | | | $ | 177 | | $ | 181 | |
Interest cost | | 214 | | 192 | | | 235 | | 214 | |
Expected return on plan assets | | | (205 | ) | | | (187 | ) | | | (235 | ) | | | (205 | ) |
Recognized net actuarial loss | | 55 | | 41 | | | 26 | | 55 | |
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Net periodic benefit cost | | $ | 245 | | $ | 208 | | | $ | 203 | | $ | 245 | |
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8
The first quarterly contribution was made on April 17, 200613, 2007 in the amount of $.3$.1 million. The Company presently anticipates contributing an additional $.8$.2 million to fund its pension plan in 20062007 for a total of $1.1$.3 million.
7
NOTE D – COMPUTATION OF EARNINGS PER SHARE
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| | Three month periods ended March 31, | | | Three month periods ended March 31, | |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
Numerator | | |
Net income | | $ | 2,484 | | $ | 3,228 | | | $ | 3,718 | | $ | 2,499 | |
| | | | | | | | | | |
Denominator | | |
Determination of shares | | |
Weighted average common shares outstanding | | 5,731 | | 5,719 | | | 5,360 | | 5,731 | |
Dilutive effect — employee stock options | | 61 | | 57 | | | 46 | | 61 | |
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Diluted weighted average common shares outstanding | | 5,792 | | 5,776 | | | 5,406 | | 5,792 | |
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Earnings per common share | | |
Basic | | $ | 0.43 | | $ | 0.56 | | | $ | 0.69 | | $ | 0.44 | |
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Diluted | | $ | 0.43 | | $ | 0.56 | | | $ | 0.69 | | $ | 0.43 | |
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NOTE E – GOODWILL AND OTHER INTANGIBLES
The Company performed its annual impairment test for goodwill pursuant to SFAS No. 142, “Goodwill and Intangible Assets”, as of January 20062007 and had determined that no adjustment to the carrying value of goodwill was required. The Company’s only intangible asset with an indefinite life is goodwill, which is included within the foreign segment.goodwill. The aggregate amortization expense for other intangibles with finite lives for each of the three-months ended March 31, 20062007 and 20052006 was $.1 million. Amortization expense is estimated to be $.3 million annually for 20062007 through 2010.2011.
The following table sets forth the carrying value and accumulated amortization of intangibles, including the effect of foreign currency translation, by segment at March 31, 2006:2007:
| | | | | | | | | | | | | |
| | As of March 31, 2006 | | | | | | | | | | | | | |
| | Domestic | | Foreign | | Total | | | Domestic | | Foreign | | Total | |
Amortized intangible assets | | |
Gross carrying amount — patents and other intangibles | | $ | 4,947 | | $ | 79 | | $ | 5,026 | | | $ | 4,947 | | $ | 79 | | $ | 5,026 | |
Accumulated amortization — patents and other intangibles | | | (2,187 | ) | | | (50 | ) | | | (2,237 | ) | | | (2,502 | ) | | | (59 | ) | | | (2,561 | ) |
| | | | | | | | | | | | | | |
Total | | $ | 2,760 | | $ | 29 | | $ | 2,789 | | | $ | 2,445 | | $ | 20 | | $ | 2,465 | |
| | | | | | | | | | | | | | |
The changes in the carrying amount of goodwill for the three-month period ended March 31, 2006,2007, is as follows:
| | | | |
Balance at January 1, 2006 | | $ | 2,018 | |
Currency translation | | | (23 | ) |
| | | |
Balance at March 31, 2006 | | $ | 1,995 | |
| | | |
| | | | |
Balance at January 1, 2007 | | $ | 2,166 | |
Additions | | | 2,565 | |
Currency translation | | | 62 | |
| | | |
Balance at March 31, 2007 | | $ | 4,793 | |
| | | |
NOTE F – STOCK OPTIONS
The 1999 Stock Option Plan (the Plan) permits the grant of 300,000 options to buy common shares of the Company to certain employees at not less than fair market value of the shares on the date of grant. At March 31, 20062007 there were 42,00027,000 shares remaining available for issuance under the Plan. Options issued to date under the Plan vest 50% after one year following the date of the grant, 75% after two years, and 100% after three years and expire from five to ten years from the date of grant.
Effective January 1, 2006, Shares issued as a result of stock option exercises will be funded with the Company adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (SFAS No. 123R). SFAS No. 123R affects the stock options that have been granted and requires the Company to expense share-based payment awards with compensation cost for transactions measured at fair value. The Company adopted the modified-prospective-transition method and accordingly has not restated amounts in prior interim periods and fiscal years. The Company has elected to use the simplified methodissuance of calculating the expected term of the stock options and historical volatility to compute fair value under the Black-Scholes option-pricing model. The risk free rate for periodsnew shares.
89
withinThere were 15,000 options granted during the contractual life ofthree months ended March 31, 2007. There were no options granted during the option is based onthree months ended March 31, 2006. The fair value for the U.S zero coupon Treasury yieldstock options granted in effect2007 was estimated at the timedate of grant. Forfeitures have been estimated to be zero.grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
| | | | |
| | 2007 |
Risk-free interest rate | | | 4.3 | % |
Dividend yield | | | 3.1 | % |
Expected life | | | 6 | |
Expected volatility | | | 40.7 | % |
Activity in the Company’s stock option plan for the three-month periodsthree months ended March 31, 20062007 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted | | | | | Weighted | | |
| | Weighted | | Average | | | | | Weighted | | Average | | |
| | Average | | Remaining | | Aggregate | | | Average | | Remaining | | Aggregate |
| | Number of | | Exercise Price | | Contractual | | Intrinsic | | | Number of | | Exercise Price | | Contractual | | Intrinsic |
| | Shares | | per Share | | Term (Years) | | Value | | | Shares | | per Share | | Term (Years) | | Value |
Outstanding at January 1, 2006 | | 140,742 | | $ | 22.82 | | 7.0 | | |
Outstanding at January 1, 2007 | | | 130,811 | | $ | 23.43 | |
Granted | | — | | | 15,000 | | $ | 35.50 | |
Exercised | | | (646 | ) | | $ | 15.13 | | $ | 4 | | | | (200 | ) | | $ | 15.13 | |
Forfeited | | — | | | — | |
| | | | | | |
Outstanding at March 31, 2006 | | 140,096 | | $ | 22.82 | | 6.9 | | $ | 987 | | |
Outstanding (vested and expected to vest) at March 31, 2007 | | | 145,611 | | $ | 21.02 | | 6.4 | | $ | 1,747 | |
| | | | | | |
Exercisable at March 31, 2007 | | | 102,611 | | $ | 20.73 | | 5.4 | | $ | 1,620 | |
| | | | |
Exercisable at March 31, 2006 | | 77,596 | | $ | 16.00 | | 5.1 | | $ | 443 | | |
| | | | |
The weighted–average grant-date fair value of options granted during 2007 was $11.76. The total intrinsic value of stock options exercised during the three months ended March 31, 20062007 and 20052006 was $4 thousand and $154$17 thousand, respectively. There were no stock options that vested during the three months ended March 31, 2007 and 2006.
For the three-month periodthree months ended March 31, 2007 and 2006, the Company recorded compensation expense related to the stock options currently vesting,recognized over the requisite service period, reducing income before taxes and net income by $.1 million. TheFor the three months ended March 31, 2007 and 2006, the impact on earnings per share was a reduction of $.01 per share, basic and diluted. The total compensation cost related to nonvested awards not yet recognized at March 31, 2007 is expected to be a combined total of $.4$.3 million over the next three years. As of January 1, 2006 and March 31, 2006 nonvested stock options were 62,500, with a weighted-average grant date fair valueperiod of $31.38. There were no changes to2 years.
Activity for nonvested stock options for grants, vesting or forfeitures for the three-month period ending March 31, 2006.
In accordance with the provision of SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure – an amendment of SFAS No. 123,” the Company elected to continue to apply the intrinsic value approach under APB No. 25 in accounting for its stock-based compensation plans prior to January 1, 2006. Accordingly, the Company did not recognize compensation expense for stock options when the exercise price at the grant date was equal to or greater than the fair market value of the stock at that date.
The following table illustrates the effect on net income and net income per share for the three-month periodsthree months ended March 31, 20052007 was as if the fair value based method had been applied to all outstanding and vested awardsfollows:
| | | | |
Net income, as reported | | $ | 3,228 | |
Less: Stock-based compensation expense, pro forma | | | 26 | |
| | | |
| | | | |
Pro forma net income | | $ | 3,202 | |
| | | |
| | | | |
Earnings per share: | | | | |
Basic — as reported | | $ | 0.56 | |
| | | |
Basic — pro forma | | $ | 0.56 | |
| | | |
| | | | |
Diluted — as reported | | $ | 0.56 | |
| | | |
Diluted — pro forma | | $ | 0.55 | |
| | | |
| | | | | | | | |
| | | | | | Weighted- |
| | | | | | average grant- |
| | Number of | | date fair value |
| | Shares | | per share |
Nonvested at January 1, 2007 | | | 28,000 | | | $ | 10.61 | |
Granted | | | 15,000 | | | $ | 11.76 | |
Vested | | | — | | | | — | |
Forfeited | | | — | | | | — | |
| | | | | | | | |
Nonvested at March 31, 2007 | | | 43,000 | | | $ | 11.01 | |
| | | | | | | | |
9
NOTE G – NEW–RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004,September 2006, the Financial Accounting Standards Board (FASB)FASB issued Statement of Financial AccountingAccount Standards (SFAS) No. 151, “Inventory Costs,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This standard requires that such items be recognized as current-period charges. The standard also establishes the concept of “normal capacity” and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Any unallocated overhead must be recognized as an expense in the period incurred. The Company adopted this standard effective January 1, 2006, and the impact was immaterial on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.157, “Fair Value Measurements.” This standard amended APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” to eliminate the exception fromdefines fair value, measurementestablishes a framework for nonmonetary exchanges of similar productive assets.measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This standard replaces this exception with a general exception from fair value measurement for exchanges of nonmonetary assets that dodoes not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for all nonmonetary asset exchanges completed by the Company starting January 1, 2006. The Company adopted this standard and it did not have an impact on its consolidated financial statements, as the Company has not engaged in nonmonetary exchanges of assets.require
10
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.
NOTE H – NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
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 2003.
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 quarter ended March 31, 2006 was an increase to net income of $15 thousand in our domestic segment.
11
NOTE I – BUSINESS SEGMENTS
| | | | | | | | | | | | | | | | |
| | Three month periods ended March 31, | | | Three month periods ended March 31, | |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
Net sales | | |
Domestic | | $ | 27,961 | | $ | 29,530 | | | $ | 32,041 | | $ | 27,961 | |
Foreign | | 24,674 | | 21,242 | | | 24,490 | | 24,674 | |
| | | | | | | | | | |
Total net sales | | $ | 52,635 | | $ | 50,772 | | | $ | 56,531 | | $ | 52,635 | |
| | | | | | | | | | |
| | |
Intersegment sales | | |
Domestic | | $ | 1,494 | | $ | 1,688 | | | $ | 1,698 | | $ | 1,494 | |
Foreign | | 808 | | 573 | | | 1,667 | | 808 | |
| | | | | | | | | | |
Total intersegment sales | | $ | 2,302 | | $ | 2,261 | | | $ | 3,365 | | $ | 2,302 | |
| | | | | | | | | | |
| | |
Operating income | | |
Domestic | | $ | 894 | | $ | 3,369 | | | $ | 2,369 | | $ | 916 | |
Foreign | | 2,404 | | 1,810 | | | 3,009 | | 2,404 | |
| | | | | | | | | | |
| | 3,298 | | 5,179 | | | 5,378 | | 3,320 | |
| | | | | | |
| | |
Interest income | | |
Domestic | | 242 | | 70 | | | 185 | | 242 | |
Foreign | | 160 | | 143 | | | 120 | | 160 | |
| | | | | | |
| | | | | | | 305 | | 402 | |
| | 402 | | 213 | | | | | | |
| | |
Interest expense | | |
Domestic | | | (6 | ) | | | (7 | ) | | | (35 | ) | | | (6 | ) |
Foreign | | | (96 | ) | | | (87 | ) | | | (130 | ) | | | (96 | ) |
| | | | | | | | | | |
| | | (102 | ) | | | (94 | ) | | | (165 | ) | | | (102 | ) |
Other expense | | | (19 | ) | | | (27 | ) | |
Other expense — net | | | | (6 | ) | | | (19 | ) |
| | | | | | | | | | |
Income before income taxes | | $ | 3,579 | | $ | 5,271 | | | $ | 5,512 | | $ | 3,601 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | March 31, | | December 31, | | | March 31, | | December 31, | |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
Identifiable assets | | |
Domestic | | $ | 93,926 | | $ | 93,132 | | | $ | 88,641 | | $ | 85,814 | |
Foreign | | 77,332 | | 75,415 | | | 91,251 | | 85,038 | |
| | | | | | | | | | |
Total assets | | $ | 171,258 | | $ | 168,547 | | | $ | 179,892 | | $ | 170,852 | |
| | | | | | | | | | |
NOTE J – BUSINESS COMBINATIONS
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 March 31, 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 March 31, 2007 is as follows:
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| | | | |
| | Preliminary Value | |
| | of Net Assets | |
| | Acquired | |
Cash | | $ | 75 | |
Accounts receivable | | | 475 | |
Inventories | | | 697 | |
Prepaids and other | | | 5 | |
Property and equipment | | | 223 | |
Goodwill | | | 2,565 | |
| | | |
Total assets | | | 4,040 | |
| | | |
| | | | |
Notes payable to bank | | | 244 | |
Trade accounts payable | | | 492 | |
Accrued compensation and amounts withheld from employees | | | 31 | |
Accrued expenses and other liabilities | | | 20 | |
Deferred income taxes | | | 132 | |
Income taxes payable | | | 121 | |
| | | |
Total liabilities | | | 1,040 | |
| | | |
| | | | |
Increase in net assets from acquisition | | $ | 3,000 | |
| | | |
Annualized unaudited 2006 net revenues of DPW were approximately $7.1 million. The Company will begin including the results of DPW in its consolidated financial statements in April 2007. 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 domestic segment.
NOTE K – SUBSEQUENT EVENTS
On April 22, 2007, the Company entered into a Stock Purchase Agreement to acquire approximately 84% of the issued and outstanding shares of Belos SA (“Belos”), a joint stock company located in Bielsko – Biala, Poland, for $6 million, subject to a holdback of $1 million. Belos is a manufacturer and supplier of fittings and equipment for low, medium and high voltage power networks and mining applications in its domestic and export markets. The closing of this agreement is contingent upon clearance from the Polish Minister of Internal Affairs and Administration as required under the Act on Acquisition of Real Estates by Foreigners of 20 March 1920, which is expected to take eight weeks. Depending on the post-closing performance of Belos, certain earn out consideration may be paid for the year following the closing.
| | |
ITEM 2. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
EXECUTIVE SUMMARY
Our net sales for the quarter ended March 31, 20062007 increased 4%7% and gross profit decreased 1%increased 15% compared to the same period in 2005.2006. Net sales increased as a result of increased foreigndomestic sales coupled with the favorable impact of the conversion of local currencies to U.S. dollars partially offset by a decrease in sales intowithin our domestic communication market.South American and European markets. Gross profit decreased slightlyincreased as a result of rising material and transportationincreased sales while manufacturing fixed costs offsetting the increase in sales.remained relatively unchanged. The lowerincreased gross profit coupled with anpartially offset by a 3% increase in costs and expenses resulted in a decreasean increase in net income of 23%49%, or thirteen cents$.26 per diluted share, when compared to the same period in 2005.2006.
THREE MONTHS ENDED MARCH 31, 20062007 COMPARED TO THREE MONTHS ENDED MARCH 31, 20052006
For the three months ended March 31, 2006,2007, net sales were $52.6$56.5 million, an increase of $1.9$3.9 million, or 4%7%, from the same period in 2005.2006. Domestic net sales decreased $1.6increased $4.1 million, or 5%15%. The decreaseincrease in domestic net sales was due primarily to volume decreases in the communications market partially offset by a 21% increase in sales increases in the domestic energy markets. We anticipate the domestic energy market to show
13
continued strength for the remainder of 2007 as long as the general economy remains strong for the remainder of 2006. Despite ourstrong. Our first quarter net sales in the domestic telecommunications market increased 7% while our net sales in the data communications market not being at levels anticipated, wedecreased 13%. We expect continued growthan increase in demand for our communication products for the remainder of 2007 as a result of increasing investments by cable television companies to defend their market share as well as the investment by communication companies in Fiber-to-the-Premises (FTTP) installations in 2006 but
11
not to the levels of the second and third quarter of 2005.installations. Foreign net sales of $24.7$24.5 million increased $3.4decreased $.2 million, or 16%1%. Foreign net sales were favorably impacted by $.5$1 million when converted to U.S. dollars as a result of the weaker U.S. dollar compared to certain foreign currencies when compared to the first quarter 20052006 conversion rates. Excluding the effect of currency conversion, foreign net sales increased $2.9decreased $1.2 million primarily as a result of increaseddecreased sales in the energy markets in Latin America. AlthoughAmerica and Europe. Despite our first quarter foreign net sales not being at levels anticipated, we expect additional price competition globally, we expect the recent upward trend in foreign sales activitythat growth in the Latin American market toenergy markets will continue for the remainderforeseeable future not only as new construction projects are added in developing markets but also due to the need to rebuild and refurbish much of 2006 but at a slower pace than the double digit increases realizedforeign energy transmission and distribution infrastructure in the quarter ended March 31, 2006 when compared to 2005.developed countries.
Gross profit of $16.5$18.9 million for the three months ended March 31, 2006 decreased $.22007 increased $2.4 million, or 1%15%, compared to the same period in 2005.2006. Domestic gross profit of $8.2$9.8 million decreased $1.4increased $1.6 million, or 14%20%. Domestic gross profit decreased $.5 million due to decreased net sales and $.9increased $1.2 million due to increased costnet sales and $.4 million as a result of raw materials and transportation and a higherlower per unit manufacturing cost being realized as a result of lowerhigher production volumes when compared to 2005.2006. Foreign gross profit of $8.3$9.1 million increased $1.2$.8 million, or 17%10%. Foreign gross profit increased $1.1$.7 million due to the increase in neta $.4 million adjustment to cost of sales coupled withas a $.1result of an adjustment to correct a certain inventory reserve balance, lower fixed manufacturing expenses and a $.3 million favorable impact resulting from converting native currency to U.S. dollars.dollars partially offset by the decrease in gross profits due to lower foreign net sales. We expect continued pressure on gross profit percentage as a result of the increaseanticipated increases in our cost for basic metals, petroleum base materials and transportation.raw material costs. However, we expect the use of alternative new materialmaterials and a new production process to partially offset this impact.
Effective January 1, 2007, we applied FASB Staff Position AUG AIR – 1 retrospectively. As a result, domestic general and administrative cost and expenses for the three months ended March 31, 2006 were decreased by $22 thousand.
Costs and expenses of $13.5$13.9 million for the three month periodsperiod ended March 31, 20062007 increased $1.9$.4 million, or 16%3%, compared to the previous year, as summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three month periods ended March 31, | | | % | |
| | % | | | Increase | | Increase | |
thousands of dollars | | 2006 | | 2005 | | Change | | Change | | | 2007 | | 2006 | | (decrease) | | (decrease) | |
Cost and expenses | | |
Costs and expenses | | |
Domestic: | | |
Selling | | $ | 3,963 | | $ | 3,296 | | $ | 667 | | | 20 | % | | $ | 4,072 | | $ | 3,963 | | $ | 109 | | | 3 | % |
General and administrative | | 3,310 | | 2,765 | | 545 | | 20 | | | 3,282 | | 3,310 | | | (28 | ) | | | -1 | % |
Research and engineering | | 1,312 | | 1,078 | | 234 | | 22 | | | 1,297 | | 1,312 | | | (15 | ) | | | -1 | % |
Other operating expense- net | | — | | 101 | | | (101 | ) | | NM | |
Other operating expense — net | | | 176 | | — | | 176 | | NM | |
| | | | | | | | | | | | | | | | |
| | 8,585 | | 7,240 | | 1,345 | | 19 | | | $ | 8,827 | | $ | 8,585 | | $ | 242 | | | 3 | % |
| | | | | | | | | | | | | | | | |
| | |
Foreign: | | |
Selling | | 1,804 | | 1,759 | | 45 | | 3 | | | $ | 1,891 | | $ | 1,804 | | $ | 87 | | | 5 | % |
General and administrative | | 2,508 | | 2,162 | | 346 | | 16 | | | 2,534 | | 2,508 | | 26 | | | 1 | % |
Research and engineering | | 561 | | 465 | | 96 | | 21 | | | 649 | | 561 | | 88 | | | 16 | % |
Other operating expense- net | | 61 | | 14 | | 47 | | NM | |
Other operating expense — net | | | 10 | | 61 | | | (51 | ) | | NM | |
| | | | | | | | | | | | | | | | |
| | 4,934 | | 4,400 | | 534 | | 12 | | | $ | 5,084 | | $ | 4,934 | | $ | 150 | | | 3 | % |
| | | | | | | | | | | | | | | | |
| | |
| | $ | 13,519 | | $ | 11,640 | | $ | 1,879 | | | 16 | % | | $ | 13,911 | | $ | 13,519 | | $ | 392 | | | 3 | % |
| | | | | | | | | | | | | | | | | | |
Domestic costs and expenses of $8.6$8.8 million for the three-monththree month period ended March 31, 20062007 increased $1.4$.3 million, or 19%3%, compared to the same period in 2005.2006. Domestic selling expenses of $4$4.1 million increased $.7$.1 million primarily as a result of a $.3 million increase in commission expense due to sales increases made through third party representatives, a $.2 million increase in employee related expense, a $.1 millionan increase in advertising and promotional expense and a $.1 million increase in travel costs.expense. General and administrative expenses increased $.6of $3.3 million primarily due to a $.2 million increase in employee related expense
14
and a $.3 million increase in legal, audit and travel expenses. Researchresearch and engineering expenses of $1.3 million remained relatively unchanged from the same period in 2006. Other operating expense increased $.2 million primarily as a result of increased testingan adjustment to the carrying value of new FTTP and closure products and personnel costs. Other operating expense decreased $.1 million.certain insurance policies.
Foreign costcosts and expenses of $4.9$5.1 million for the three months ended March 31, 20062007 increased $.5$.1 million, or 12%3%, compared to the same period in 2005. Foreign selling expense2006. Net of the unfavorable impact on foreign cost and expenses when foreign costs in local currencies were translated into U.S. dollars, foreign costs and expenses remained relatively unchanged from the same period in 2005. General and administrative expense increased $.4 million primarily related to an increase in personnel costs.
12
Research and engineering expenses increased $.1 million primarily related to an increase in personnel. Other operating expense remained relatively unchanged from the same period in 2005.2006.
Royalty income — net for the quarter ended March 31, 20062007 of $.3$.4 million increased $.2 million,improved slightly compared to 2005 as a result of higher licensing income.2006.
Operating income of $3.3$5.4 million for the quarter ended March 31, 2006 decreased $1.92007 increased $2.1 million, or 36%62%, compared to the same period in 2005.2006. This decreaseincrease was primarily a result of the $.2$2.4 million decreaseincrease in gross profit coupled withpartially offset by the $1.9$.4 million increase in costs and expenses offset by the $.2 million increase in royalty income.expenses. Domestic operating income decreased $2.5increased $1.5 million compared to the same period in 20052006 as a result of the decreaseincrease in gross profit of $1.4$1.6 million and the $1.4increase in royalty income being partially offset by a $.3 million increase in costcosts and expenses offset by a $.1 million increase in intercompany royalty income and the $.2 million increase in third party royalty income.expenses. Foreign operating income of $2.4$3 million increased $.6 million, compared to the same period in 2005,2006, as a result of the increase in gross profit of $1.2$.8 million partially offset by thea $.1 million increase in costcosts and expenses of $.5 million and thea $.1 million increase in intercompany royalty expense.
Other income of $.3$.1 million for the three months ended March 31, 2006 increased $.22007 decreased $.1 million as a result of an increasea decrease in interest income.
Income taxes for the three months ended March 31, 20062007 of $1.1$1.8 million decreased $.9increased $.7 million compared to the same period in 2005.2006 as a result of $1.9 million of additional income before taxes. The effective tax rate for the quarter ended March 31, 20062007 was 31%33% compared to 39%31% in 2005.2006. The effective tax rate for 20062007 is lower than the statutory federal rate of 35%34% due primarily due to an adjustment of aforeign tax contingency reserve related to state income taxes.rate differences.
As a result of the preceding items, net income for the three-monththree month period ended March 31, 20062007 was $2.5$3.7 million, or $.43$.69 per diluted share, compared to net income of $3.2$2.5 million, or $.56$.43 per diluted share, for the same period in 2005.2006.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash decreased $8.6 million for the three months ended March 31, 2007. Net cash used in operating activities was $3.1$2.8 million primarily because accounts receivable increased as a result of higher sales in the quarter compared to year-end. The major investing and financing uses of cash were capital expenditures of $2.1 million, a cash outlay of $2.6 million for the first three months of 2006, when compared to cash provided by operating activities of $4.5 million for the same period in 2005. This decrease was due to a decrease in net income of $.7 million, a $6.7 million increase in working capitalbusiness acquisition and a decrease in non-cash items of $.2$1.1 million in 2006. The increase in working capital was due to higher accounts receivable in 2006 offset by a net decrease in other working capital items.dividend payments.
Net cash used infor investing activities of $2.8$4.6 million represents an increase of $1.5$1.7 million when compared to 2005.the cash used for investing activities in 2006. In March 2007, we acquired all the issued and outstanding shares of Direct Power and Water Corporation (DPW) for an initial cash payment of $2.6 million. Capital expenditures decreased $.8 million in 2006 were $1.5 million greater than 2005. We are continually analyzing potential acquisition candidates and business alternatives, but we currently have no commitments that would materially affect the operations ofthree months ended March 31, 2007 when compared to the business.same period in 2006.
Cash used in financing activities was $1.4$1.2 million compared to $.9$1.4 million in the previous year. This increasedecrease was primarily a result of a greater number of common shares repurchased in 2006 when compared to 2005.lower dividends paid on fewer outstanding shares.
Our current ratio was 3.33.0 to 1 at March 31, 20062007 compared to 3.2 to 1 at December 31, 2005. Working capital of 77.5 million has increased from the December 31, 2005 amount of $75.7 million2006. Our current ratio decreased primarily due to greater receivables duethe $4.6 million cash used in the quarter to higher sales levels.acquire property and equipment and the acquisition of a business. At March 31, 2006,2007, our unused balance under our main credit facility was $20 million and our bank debt to equity percentage was 5%7%. Our main revolving credit agreement contains, among other provisions, requirements for maintaining levels of working capital, net worth and profitability. At March 31, 20062007, we were in compliance with these covenants. We believe our future operating cash flows will be more than sufficient to cover debt repayments, other contractual obligations, capital expenditures and dividends. In addition, we believe our existing cash position, together with our untapped borrowing capacity, provides substantial financial resources. If we were to incur significant indebtedness, we expect to be able to continue to meet liquidity needs under the credit facilities but possibly at an increased cost for interest and commitment fees. We would not increase our debt to a level that we believe would have a material adverse impact upon the results of operations or financial condition.
1315
NEWRECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004,September 2006, the Financial Accounting Standards Board (FASB)FASB issued Statement of Financial AccountingAccount Standards (SFAS) No. 151, “Inventory Costs,157, “Fair Value Measurements.” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This standard requires that such items be recognized as current-period charges. Thedefines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This standard also establishesdoes not require new fair value measurements; however the conceptapplication of “normal capacity”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 requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Any unallocated overhead must be recognized as an expense in the period incurred.interim periods within those fiscal periods. The Company adoptedis evaluating the impact this standard effective January 1, 2006, and the impact was immaterialwill have on its consolidated financial statements.
In December 2004,February 2007, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment to FASB No. 115.” This standard amended APB Opinionpermits 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. 29,159 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.
NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Nonmonetary Transactions,” to eliminateUncertainty 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 exception from fair valuefinancial statement recognition and measurement for nonmonetary exchanges of similar productive assets. This standard replaces this exception with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity aretax position taken or expected to change significantly asbe taken in a resulttax return. Under FIN 48, the impact of an uncertain income tax position on the exchange.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 statementinterpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for all nonmonetary asset exchanges completed by the Company starting January 1, 2006. 2007.
The Company adopted this standard and it did not have an impactthe provisions of FIN 48 on its consolidated financial statements, asJanuary 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 $.2 million.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before 2003.
The Company does not expect that the unrecognized tax benefit will change significantly within the next twelve months.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1, “Accounting for Planned Major Maintenance Activities.” This staff position amends certain provisions in the AICPA Industry Audit Guide, Audits of Airlines (Airline Guide), and APB No. 28, Interim Financial Reporting. This staff position prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. The Company adopted the direct expense method effective January 1, 2007, and has not engagedretrospectively applied this new accounting principle to prior periods.
The cumulative effect of the retrospective application of the new accounting principle to the carrying value of assets and liabilities and the offsetting adjustment to opening January 1, 2006 retained earnings was a decrease in nonmonetary exchangesdeferred tax assets of assets.$.1 million, a decrease in accrued liabilities of $.3 million and an increase in beginning retained earnings
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of $.2 million. The effect on the results of operations for the quarter ended March 31, 2006 was an increase to net income of $15 thousand in our domestic segment.
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ITEM 3. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe 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 foreign operations are mitigated due to the stability of the countries in which the Company’s largest foreign operations are located.
The Company has no foreign currency forward exchange contracts outstanding at March 31, 2007. The Company does not hold derivatives for trading purposes.
The Company is exposed to market risk, including changes in interest rates. The Company is subject to interest rate risk on its variable rate revolving credit facilities and term notes, which consisted of borrowings of $6.4$8.7 million at March 31, 2006.2007. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of less than $.1 million for the three-month period ended March 31, 2006.2007.
The Company’s primary currency rate exposures are related to foreign denominated debt, intercompany debt, foreign 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 of $1.5 million and on income before income taxes of less than $.1 million.
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ITEM 4. | | CONTROLS AND PROCEDURES |
ITEM 4. CONTROLS AND PROCEDURESAn evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Vice President of Finance, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Securities and Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2006.2007. Based on the evaluation, the Company’s management, including the Chief Executive Officer and Vice President of Finance, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2006.2007.
There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 20062007 that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect our
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financial condition or results of operations.
There were no material changes from the risk factors previously disclosed in the Company’s 10-K for the fiscal year ended December 31, 20052006 filed on March 15, 2006.2007.
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ITEM 2. | | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSOn December 16, 2004, the Company announcedFebruary 15, 2007, the Board of Directors authorized a plan to repurchase up to 100,000 of200,000 shares of Preformed Line Products common shares.Company, superseding any previously authorized plan, including the December 2004 plan. The repurchase plan does not have an expiration date. The following table includes repurchases for the three-month period ending March 31, 2006.2007.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Company Purchases of Equity Securities | | | | | Company Purchases of Equity Securities |
| | Total Number of Shares | | Maximum Number of | | | Total Number of Shares | | Maximum Number of |
| | Total Number | | Purchased as Part of | | Shares that may yet be | | | Total Number | | Purchased as Part of | | Shares that may yet be |
| | of Shares | | Average Price | | Publicly Announced | | Purchased under the | | | of Shares | | Average Price | | Publicly Announced | | Purchased under the |
Period | | Purchased | | Paid per Share | | Plans or Programs | | Plans or Programs | | | Purchased | | Paid per Share | | Plans or Programs | | Plans or Programs |
January | | — | | — | | 33,755 | | 66,245 | | | — | | — | | — | | 200,000 | |
February | | — | | — | | 33,755 | | 66,245 | | | — | | — | | — | | 200,000 | |
March | | 17,891 | | $ | 35.80 | | 51,646 | | 48,354 | | | 2,022 | | $ | 33.63 | | 2,022 | | 197,978 | |
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Total | | 17,891 | | 51,646 | | 48,354 | | | 2,022 | |
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ITEM 3. | | DEFAULTS UPON SENIOR SECURITIES |
ITEM 3. DEFAULTS UPON SENIOR SECURITIESNone.
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ITEM 4. | | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNone.
ITEM 5. OTHER INFORMATION None.
ITEM 6. EXHIBITS
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ITEM 6.2.1 | | EXHIBITSStock Purchase Agreement, dated March 22, 2007, by and among the Company and Claudia W. Goodreau, Kevin M. Goodreau, Dora Ely Randall and Jeffrey J. Randall to acquire Direct Power and Water Corporation. |
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31.1 | | Certifications of the Principal Executive Officer, Robert G. Ruhlman, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
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31.2 | | Certifications of the Principal Financial Officer, Eric R. Graef, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
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32.1 | | Certification of the Principal Executive Officer, Robert G. Ruhlman, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished. |
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32.2 | | Certification of the Principal Accounting Officer, Eric R. Graef, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished. |
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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 the Company files with the Securities and Exchange Commission contain forward-looking statements regarding the Company’s and management’s beliefs and expectations. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance (as opposed to historical items) and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to the Company’s operations and business environment, all of which are difficult to predict and many of which are beyond the Company’s control. Such uncertainties and factors could cause the Company’s actual results to differ materially from those matters expressed in or implied by such forward-looking statements.
The following factors, among others, could affect the Company’s future performance and cause the Company’s actual results to differ materially from those expressed or implied by forward-looking statements made in this report:
| • | | The overall demand for cable anchoring and control hardware for electrical transmission and distribution lines on a worldwide basis, which has a slow growth rate in mature markets such as the United States, Canada, and Western Europe; |
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| • | | The effect on the Company’s business resulting from economic uncertainty within Latin American regions; |
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| • | | Technology developments that affect longer-term trends for communication lines such as wireless communication; |
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| • | | The Company’s success at continuing to develop proprietary technology to meet or exceed new industry performance standards and individual customer expectations; |
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| • | | The rate of progress in continuing to modify the Company’s cost structure to maintain and enhance the Company’s competitiveness; |
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| • | | The Company’s success in strengthening and retaining relationships with the Company’s customers, growing sales at targeted accounts and expanding geographically; |
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| • | | The extent to which the Company is successful in expanding the Company’s product line into new areas; |
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| • | | The Company’s ability to identify, complete and integrate acquisitions for profitable growth; |
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| • | | The potential impact of consolidation, deregulation and bankruptcy among the Company’s suppliers, competitors and customers; |
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| • | | The relative degree of competitive and customer price pressure on the Company’s products; |
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| • | | The cost, availability and quality of raw materials required for the manufacture of products; |
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| • | | The effects of fluctuation in currency exchange rates upon the Company’s reported results from international operations, together with non-currency risks of investing in and conducting significant operations in foreign countries, including those relating to political, social, economic and regulatory factors; |
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| • | | Changes in significant government regulations affecting environmental compliances; |
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| • | | The Company’s ability to continue to compete with larger companies who have acquired a substantial number of the Company’s former competitors; |
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| • | | The Company’s ability to compete in the domestic data communication market; |
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| • | | The telecommunication market’s continued deployment of Fiber-to-the-Premises; |
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| • | | The Company’s ability to increase sales or margins to recover the rising cost of complying with Section 404 of the Sarbanes-Oxley Act of 2002; and |
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| • | | Those factors described under the heading “Risk Factors” on page 12 of the Company’s Form 10-K for the fiscal year ended December 31, 20052006 filed on March 15, 2006.2007. |
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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.
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May 10, 20062007 | /s/ Robert G. Ruhlman | |
| Robert G. Ruhlman | |
| Chairman, President and Chief Executive Officer (Principal Executive Officer) | |
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May 10, 20062007 | /s/ Eric R. Graef | |
| Eric R. Graef | |
| Vice President - Finance and Treasurer (Principal
(Principal Accounting Officer) | |
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EXHIBIT INDEX
2.1 | | Stock Purchase Agreement, dated March 22, 2007, by and among the Company and Claudia W. Goodreau, Kevin M. Goodreau, Dora Ely Randall and Jeffrey J. Randall to acquire Direct Power and Water Corporation. |
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31.1 | | Certifications of the Principal Executive Officer, Robert G. Ruhlman, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
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31.2 | | Certifications of the Principal Financial Officer, Eric R. Graef, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
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32.1 | | Certification of the Principal Executive Officer, Robert G. Ruhlman, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished. |
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32.2 | | Certification of the Principal Accounting Officer, Eric R. Graef, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished. |
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