Preformed Line Products Company — Form 10-Q Summary
Business context and reporting period
PLPC designs and manufactures products and systems used in overhead and underground energy, telecommunications, cable, data-communication and related infrastructure networks. It operates 29 sales and manufacturing locations in 20 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific.
This unaudited quarterly report covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The company had 4,914,543 common shares outstanding as of October 26, 2020.
Financial performance and position
| Metric | Three months ended September 30, 2020 | Three months ended September 30, 2019 | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 |
|---|---|---|---|---|
| Net sales | $127.5 million | $119.2 million | $347.9 million | $331.2 million |
| Gross profit | $44.9 million | $39.3 million | $117.4 million | $104.4 million |
| Gross margin | 35.2% | 33.0% | 33.7% | 31.5% |
| Operating income | $16.9 million | $11.6 million | $36.3 million | $24.8 million |
| Net income attributable to PLPC shareholders | $13.0 million | $8.0 million | $27.1 million | $17.7 million |
| Diluted EPS | $2.59 | $1.55 | $5.43 | $3.48 |
| Operating cash flow | Not separately provided | Not separately provided | $33.6 million | $20.7 million |
- Third-quarter sales increased 7%; nine-month sales increased 5%. Excluding currency translation, management reported sales growth of approximately 10% in both periods.
- Operating margins were 13.3% for the quarter and 10.4% year to date, compared with 9.8% and 7.5%, respectively, in the prior-year periods.
- The effective tax rate was 26% for the quarter and nine-month period, compared with 29% for the third quarter of 2019 and 26% for the nine-month 2019 period.
- Cash and cash equivalents were $41.2 million at September 30, 2020, compared with $38.9 million at December 31, 2019. Total assets were $452.0 million and shareholders’ equity was $279.6 million.
- Total debt, including notes payable, was approximately $68.0 million. The company had $34.9 million of unused credit availability, net of outstanding letters of credit, and was in compliance with debt covenants.
- Capital expenditures were $24.2 million, dividends paid were $3.2 million, and share repurchases totaled approximately $8.2 million during the first nine months.
Material changes versus the prior comparable period
- PLP-USA was the largest contributor to growth, with sales increasing 11% in the quarter and 13% year to date, primarily from higher energy-product volumes.
- Excluding currency effects, The Americas and EMEA reported strong sales growth, while Asia-Pacific sales declined 12% in the quarter and 15% year to date, primarily because of COVID-19-related volume reductions.
- Gross-margin expansion reflected higher sales volumes, favorable product mix and manufacturing-cost containment, particularly in PLP-USA and EMEA.
- Foreign-currency translation reduced reported sales by $3.7 million in the quarter and $15.0 million year to date, and reduced year-to-date net income by approximately $1.0 million.
- Operating cash flow increased $12.9 million year over year, primarily because of higher net income and non-cash adjustments.
- Financing cash flow shifted from a $20.0 million source in the prior-year period to a $6.5 million use, reflecting lower net debt borrowings and increased share repurchases.
- The company extended its $65 million credit facility maturity from June 2021 to June 2024 and added its Austrian subsidiary as a borrower.
Guidance, outlook, commentary and risks
- The filing does not provide formal quantitative revenue or earnings guidance. Management stated that future results remain difficult to predict because of COVID-19.
- COVID-19 caused temporary closures at some international facilities, slowed customer demand, disrupted portions of the supply chain and had the greatest effect on Asia-Pacific. North American plants remained fully operational at the reporting date.
- The company received COVID-19-related government subsidies, primarily in Asia-Pacific, totaling approximately $2.2 million during the first nine months and $1.4 million during the third quarter based on the segment disclosures.
- Management is reducing discretionary expenses, actively managing liquidity and believes operating cash flow, cash balances and borrowing capacity will be sufficient for debt repayments, capital expenditures, dividends and other obligations for the foreseeable future.
- Key ongoing risks include the duration and severity of COVID-19, global economic conditions, foreign-exchange volatility, raw-material availability and costs, supply-chain disruption, customer infrastructure spending, competition, technological change, acquisitions, cybersecurity and international political or regulatory conditions.
- A 10% currency-rate change would affect the fair value of exposed instruments by approximately $4.6 million and pretax income by approximately $2.1 million. A 100-basis-point increase in interest rates would have increased nine-month interest expense by approximately $0.7 million.
- PLPC and related subsidiaries face an Alberta, Canada lawsuit concerning allegedly defective spacer dampers. The plaintiff reduced its claim to C$29.4 million. The company believes the claims are without merit, but cannot predict the outcome or estimate a loss range; an adverse outcome could materially affect financial results.
- The company repurchased 24,335 shares during the third quarter. At September 30, 2020, 164,454 shares remained authorized for repurchase under the announced program.
Important facts for investors to verify
- Whether COVID-19-related demand and supply-chain pressures persist or spread beyond Asia-Pacific.
- The sustainability of the 2020 gross-margin and operating-margin improvement after government subsidies, product-mix benefits and currency effects.
- Foreign-exchange exposure and the effect of currency movements on reported sales, earnings and accumulated other comprehensive loss.
- Debt-covenant compliance, variable-rate borrowing exposure and available credit capacity.
- The ultimate outcome and potential financial exposure from the Alberta spacer-damper litigation.
- Capital-expenditure needs, share-repurchase activity and dividend capacity relative to operating cash flow.
- The company’s future results under the final year-end LIFO inventory valuation and other management estimates.