Preformed Line Products Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative period ended March 31, 2021. PLP designs and manufactures products supporting energy, communications, cable, data communication and related infrastructure markets across 30 operations in 22 countries.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $138.2 million | $117.6 million | +18% |
| Gross profit | $42.0 million | $40.2 million | +4% |
| Gross margin | 30.4% | 34.2% | Down 3.8 percentage points |
| Operating income | $9.5 million | $10.8 million | -12% |
| Operating margin | 6.8% | 9.2% | Down 2.4 percentage points |
| Net income attributable to PLP shareholders | $12.3 million | $7.2 million | +71% |
| Diluted EPS | $2.49 | $1.45 | +$1.04 |
| Net cash used in operating activities | $(5.2) million | $13.2 million provided | $(18.4) million |
Sales growth was driven primarily by higher PLP-USA volume, especially in energy and communications. Excluding currency translation, consolidated sales increased approximately 20%. The Americas benefited from the Maxxweld acquisition and EMEA from higher energy-product volume, while Asia-Pacific sales declined due partly to COVID-19-related economic disruption.
Commodity, freight and other inflationary costs reduced profitability despite price increases. Cost of products sold rose to 69.6% of sales from 65.8%, and operating expenses increased 10% year over year. The company reported a $4.4 million gain from a company-owned life insurance settlement, contributing to other income and materially increasing net income. The effective tax rate declined to 13% from 32%, primarily because the insurance gain was largely non-taxable.
At March 31, 2022, cash, cash equivalents and restricted cash were $34.6 million, compared with $36.4 million at December 31, 2021. Accounts receivable were $115.8 million and inventories were $126.1 million. Total assets were $534.5 million and total shareholders’ equity was $328.9 million.
Total debt, including notes payable, was approximately $78.1 million. The amended revolving credit facility increased capacity from $65.0 million to $90.0 million, extended maturity to March 2, 2026, and left $56.4 million available at quarter-end. The company was in compliance with its debt covenants. Management stated that operating cash flow, existing cash and borrowing capacity should fund expected obligations, capital expenditures, acquisitions and dividends for the foreseeable future.
Cash flow, investment and capital allocation
- Capital expenditures were $8.0 million, compared with $3.5 million in Q1 2021.
- Business acquisitions used $13.0 million, primarily for Maxxweld in Brazil and Holplast in the Czech Republic.
- Financing activities provided $15.1 million, including $50.0 million of long-term debt proceeds, partially offset by $29.5 million of debt repayments.
- The company paid $1.0 million of dividends and repurchased approximately 29,435 common shares during the quarter.
- Management expects increased investment in U.S. facilities and warehouse capacity to support customer service beginning in late 2022.
Material changes versus the prior comparable period
- Sales increased $20.7 million, but gross margin fell because inflation in raw materials, commodities, freight and other costs outpaced revenue growth.
- Operating income decreased $1.3 million despite higher sales.
- Net income increased $5.1 million, primarily because of the $4.4 million insurance-settlement gain and lower income taxes; this increase was not representative of recurring operating performance.
- Operating cash flow changed from $13.2 million provided to $5.2 million used, principally because of higher accounts receivable and inventory.
- Asia-Pacific remained loss-making, with segment net loss attributable to PLP shareholders of $1.2 million versus $0.8 million in Q1 2021. The Americas also reported a small loss of $0.1 million.
- The company began exiting its Russian operations in March 2022 and recorded approximately $1.0 million of charges, primarily asset impairments and termination benefits.
- The acquisitions increased goodwill by approximately $9.1 million and added preliminary goodwill of $5.2 million for Maxxweld and $3.9 million for Holplast.
Outlook, risks and unusual items
Management described customer demand as strong and cited infrastructure priorities, including grid reliability, communications upgrades and renewable-energy deployment. No quantitative full-year revenue or earnings guidance was provided in the filing.
- Further commodity and transportation inflation may require additional price increases, which could negatively affect demand.
- COVID-19 continues to affect Asia-Pacific activity and may disrupt customer projects, supply chains and liquidity; the potential financial impact cannot be reasonably estimated and could be material.
- The Russia-Ukraine conflict led to the Russian exit and creates broader geopolitical, supply-chain, currency and market risks.
- Asia-Pacific goodwill was $7.5 million at March 31, 2022. Its fair value exceeded carrying value by approximately 10% in the latest impairment assessment, making future performance an area to monitor.
- The company had approximately $2.2 million accrued for global legal matters. A Canadian claim seeks approximately C$56.0 million related to alleged defects in spacer dampers; the company believes the claims lack merit but cannot predict the outcome, and an adverse result could materially affect results.
- Foreign currency movements reduced reported sales by $2.5 million and net income by $0.2 million. A 100-basis-point increase in interest rates would have increased quarterly interest expense by approximately $0.3 million.
- The filing states that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting.
Investor verification checklist
- Assess recurring operating earnings excluding the $4.4 million insurance gain and the approximately $1.0 million Russia-exit charges.
- Track whether pricing actions offset commodity, freight and labor inflation without weakening demand.
- Review working-capital trends, particularly the increase in receivables and inventories and the resulting negative operating cash flow.
- Monitor Asia-Pacific losses, COVID-19 effects and the narrow goodwill valuation cushion.
- Verify acquisition integration, preliminary purchase-price allocations and expected contribution from Maxxweld and Holplast.
- Review debt utilization, floating-rate exposure, covenant compliance and the availability of the amended $90.0 million credit facility.
- Follow the Canadian spacer-damper litigation and the adequacy of the company’s recorded legal reserve.