Preformed Line Products Company — Q1 2021 Form 10-Q Summary
Business context and reporting period
Preformed Line Products Company designs and manufactures products and systems used in overhead and underground energy, telecommunications, cable, data communications, solar and related infrastructure networks. It operates 30 sales and manufacturing locations in 22 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific. This filing covers the unaudited three months ended March 31, 2021, compared primarily with the three months ended March 31, 2020.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $117.6 million | $102.9 million | 14% increase |
| Gross profit | $40.2 million | $32.9 million | 22% increase |
| Gross margin | 34.2% | 32.0% | 220 basis-point increase |
| Operating income | $10.8 million | $5.2 million | $5.6 million increase |
| Operating margin | 9.2% | 5.0% | 420 basis-point increase |
| Net income attributable to PLP shareholders | $7.2 million | $3.7 million | 93% increase |
| Diluted earnings per share | $1.45 | $0.74 | 96% increase |
| Net cash provided by operating activities | $13.2 million | $(3.1) million | $16.3 million improvement |
Sales increased on higher volumes, particularly communications products in PLP-USA and EMEA and energy products in The Americas. Foreign-currency translation contributed approximately $1.8 million to sales growth. Excluding currency, sales increased approximately 13%.
Costs and expenses rose 6% to $29.4 million, slower than sales growth. Management attributed margin improvement to higher volume, favorable product mix, cost containment and manufacturing efficiencies. The effective tax rate increased to 32% from 28%.
Financial position, debt and liquidity
- Cash, cash equivalents and restricted cash were $34.7 million at March 31, 2021, compared with $45.2 million at December 31, 2020.
- Total assets were $457.0 million and shareholders’ equity was $291.1 million at quarter-end.
- Total debt, including notes payable, was approximately $59.3 million. The company had $53.5 million of unused availability under its $65 million credit facility and was in compliance with debt covenants.
- Operating cash flow of $13.2 million funded $3.5 million of capital expenditures, $27.1 million of long-term debt payments, $3.7 million of share repurchases and $1.1 million of dividends, partly offset by $11.4 million of net debt and notes-payable proceeds.
- The company entered into a $20.5 million, 10-year fixed-rate term loan at 2.744% to purchase a corporate aircraft. Approximately $20.3 million was outstanding at March 31, 2021.
Material changes versus the prior comparable period
- PLP-USA sales increased 21%, primarily from higher communications-product volume. The Americas increased 12% excluding currency, while EMEA increased 7%. Asia-Pacific declined 1% excluding currency due primarily to lower energy-product volume and continuing pandemic-related effects.
- Gross margin expanded from 32.0% to 34.2%, and operating margin expanded from 5.0% to 9.2%.
- Operating cash flow changed from a $3.1 million use of cash to $13.2 million provided, helped by higher earnings, noncash items, working-capital changes and the refund of a $6.8 million aircraft deposit made in 2020.
- Comprehensive income attributable to shareholders was $2.5 million versus a $13.1 million comprehensive loss in Q1 2020, although Q1 2021 included a $4.8 million foreign-currency translation loss.
- The company repurchased 52,590 shares for approximately $3.7 million, including purchases from current and former officers in connection with equity-award vesting. The remaining authorization was 91,964 shares at March 31, 2021.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative earnings or sales guidance. Management stated that business fundamentals and the financial position were sound, expected operating cash flows, existing cash and borrowing capacity to cover foreseeable obligations, and intended to continue investing in capacity, efficiency, products and new markets.
- COVID-19 continued to create uncertainty involving customer demand, operating restrictions, supply-chain availability, pricing and global economic conditions. Management could not reasonably estimate the potential future financial impact, which could be material.
- Foreign-exchange risk remains significant. A hypothetical 10% currency-rate change would affect the fair values of exposed instruments by approximately $4.3 million and pretax income by approximately $0.2 million. A 100-basis-point interest-rate increase was estimated to increase quarterly interest expense by approximately $0.6 million.
- The company had $6.9 million of outstanding guarantees and $9.1 million of letters of credit at March 31, 2021.
- A Canadian lawsuit alleges defective spacer dampers and seeks approximately C$56.0 million in damages jointly and severally from the defendants. The company believes the claims are without merit but has recorded a reserve for the low end of the potential loss range. An adverse outcome could materially affect results.
- Product warranty reserves increased to $1.5 million from $1.2 million at December 31, 2020. The company also maintained approximately $2.2 million of reserves for various global legal matters.
- Management stated that no material changes occurred to the risk factors in the 2020 Form 10-K. Disclosure controls and procedures were considered effective as of March 31, 2021.
Important facts for investors to verify
- Confirm whether revenue and margin momentum continued after Q1, particularly in PLP-USA and EMEA, and whether Asia-Pacific recovered from pandemic-related weakness.
- Track raw-material costs, inventory levels, pricing and the sustainability of the gross-margin improvement.
- Review debt maturities, aircraft-loan economics, credit-facility covenants and the company’s ability to maintain liquidity while funding capital expenditures, dividends and repurchases.
- Monitor the Canadian spacer-damper litigation, the adequacy of the recorded reserve and any potential insurance recovery or additional exposure.
- Assess the continuing effects of COVID-19, foreign-exchange movements, supply-chain disruption, customer infrastructure spending and interest-rate changes.
- Reconcile cash generation with working-capital movements, including the temporary benefit from the aircraft-deposit refund and the increase in inventories.