Preformed Line Products Company — 2019 Q2 Form 10-Q
Business context and reporting period
PLPC designs and manufactures products and systems supporting overhead and underground energy, telecommunications, cable, data communication, solar and related networks. It operates 28 sales and manufacturing locations in 20 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific. This report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $114.8 million, up 5% | $212.0 million, up 2% |
| Gross profit | $37.8 million; 32.9% margin | $65.1 million; 30.7% margin |
| Operating income | $11.1 million; 9.7% margin | $13.2 million; 6.2% margin |
| Net income attributable to PLPC shareholders | $7.9 million; $1.56 diluted EPS | $9.7 million; $1.92 diluted EPS |
| Cash flow from operations | Not separately provided for the quarter | $5.8 million |
At June 30, 2019, cash and cash equivalents were $41.3 million, or $41.6 million including restricted cash. Total debt was $67.3 million, comprising notes payable, current debt and long-term debt. The company had $26.9 million of unused availability under its principal credit facility and was in compliance with its debt covenants. Shareholders’ equity was $257.8 million and total assets were $425.2 million.
Six-month investing cash uses included $12.0 million of capital expenditures and $19.0 million for the acquisitions of SubCon Electrical Fittings GmbH and MICOS Telcom s.r.o. Financing cash inflows included $55.6 million of long-term debt proceeds, partly offset by $25.6 million of debt repayments. The company paid $2.2 million of dividends and repurchased approximately $3.8 million of common shares.
Material changes versus the prior comparable period
- Second-quarter sales increased $5.9 million, while gross profit increased $2.6 million and operating income increased $1.8 million. Net income attributable to shareholders increased $1.2 million.
- Second-quarter gross margin improved to 32.9% from 32.3%, and operating margin improved to 9.7% from 8.6%.
- Six-month sales increased $4.9 million, but gross profit declined $1.6 million, operating income declined $3.9 million and net income attributable to shareholders declined $2.5 million.
- Six-month gross margin declined to 30.7% from 32.2%, and operating margin declined to 6.2% from 8.2%. The principal pressures were lower sales and margins in The Americas, higher raw-material costs, and increased costs in EMEA following acquisitions.
- Excluding foreign-currency translation, six-month sales increased 7%, gross profit increased 2% and costs and expenses increased 10%. Currency translation reduced reported six-month sales by $9.4 million and net income by approximately $0.2 million.
- Second-quarter growth was led by PLP-USA, EMEA and Asia-Pacific. For the six-month period, The Americas declined 5% excluding currency, while EMEA and Asia-Pacific increased 13% and 12%, respectively.
- On January 1, 2019, PLPC adopted the new lease standard, recognizing approximately $10.9 million of operating lease right-of-use assets and related liabilities. Management stated that the adoption did not materially affect earnings, cash flows or debt covenants.
Guidance, outlook, commentary, risks and unusual items
No formal revenue or earnings guidance is provided in the filing. Management stated that it believes the company is strategically positioned for profitable growth, with sound fundamentals and sufficient liquidity. It expects operating cash flows, existing cash and available credit to fund debt repayments, capital expenditures, dividends and anticipated needs for the foreseeable future.
Management highlighted continued investment in facilities, capacity, efficiency and new products, as well as the use of its global manufacturing network to manage costs. The two 2019 acquisitions expand PLPC’s European presence in substation and telecommunications markets; purchase accounting remains preliminary and includes an earn-out for SubCon.
- Material litigation: Altalink, L.P. alleges defects involving spacer dampers supplied for Alberta transmission projects and reduced its damages demand to C$29.4 million. PLPC believes the claims are without merit, but cannot predict the outcome or estimate a potential loss range. An adverse result could materially affect financial results.
- Foreign-exchange exposure remains significant. The filing estimates that a hypothetical 10% currency-rate change would affect the fair value of exposed instruments by approximately $4.9 million and pretax income by approximately $0.6 million.
- A 100-basis-point increase in interest rates would have increased six-month interest expense by approximately $0.2 million. The company had $38.1 million of variable-rate revolving and term borrowings.
- Other risks include global demand and economic conditions, customer financing, technological substitution, raw-material costs and tariffs, labor disruptions, competition and pricing pressure, international political and regulatory conditions, acquisition integration, and legal or environmental claims.
- The product warranty reserve increased to $1.4 million at June 30, 2019 from $0.9 million at June 30, 2018.
- Disclosure controls were effective as of June 30, 2019. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether The Americas’ sales and margin weakness persists, particularly in light of raw-material costs and unfavorable product mix.
- The operating contribution, integration progress and final purchase accounting for SubCon and MICOS Telcom.
- Progress and potential exposure in the Altalink litigation, including whether any loss becomes probable or estimable.
- Working-capital conversion and cash generation, given the six-month increase in accounts receivable and inventory and only $5.8 million of operating cash flow.
- Debt repayment requirements, variable interest-rate exposure, covenant compliance and remaining credit availability.
- The sustainability of reported growth after adjusting for foreign-currency effects and the effect of currency movements on future results.
- The final year-end LIFO inventory valuation and any resulting adjustment to interim results.