Preformed Line Products Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019; filed November 1, 2019. PLP designs and manufactures hardware and systems for overhead and underground energy, telecommunications, data communications, solar, and related networks. Operations span 28 facilities in 20 countries across PLP-USA, The Americas, EMEA, and Asia-Pacific.
Financial Highlights
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $119.2 million | $108.4 million | $331.2 million | $315.5 million |
| Gross profit | $39.3 million | $33.5 million | $104.4 million | $100.2 million |
| Gross margin | 33.0% | 30.9% | 31.5% | 31.8% |
| Operating income | $11.6 million | $8.0 million | $24.8 million | $25.1 million |
| Operating margin | 9.8% | 7.4% | 7.5% | 8.0% |
| Net income attributable to PLP shareholders | $8.0 million | $9.1 million | $17.7 million | $21.3 million |
| Diluted EPS | $1.55 | $1.76 | $3.48 | $4.19 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $20.7 million | $7.1 million |
Liquidity, Debt, and Balance Sheet
- September 30, 2019 cash and cash equivalents were $41.2 million; cash, cash equivalents, and restricted cash totaled $41.5 million.
- Total debt was approximately $63.0 million, including $7.4 million of bank notes, $2.7 million of current long-term debt, and $52.9 million of long-term debt.
- The $65 million credit facility expires June 30, 2021. Utilization was $32.1 million, with $32.9 million of availability after letters of credit. The company was in compliance with debt covenants.
- Total assets increased to $425.0 million from $358.8 million at December 31, 2018, principally reflecting acquisitions, capital investment, and recognition of operating lease assets.
- Shareholders’ equity was $259.7 million, compared with $249.4 million at year-end 2018.
Material Changes Versus Prior Comparable Period
- Third quarter: Sales increased 10%; gross profit increased 17%; gross margin expanded 210 basis points; operating income increased 45%. Net income attributable to shareholders declined 12% because the prior-year period benefited from favorable Tax Act-related discrete tax adjustments, while 2019 included $3.2 million of tax expense.
- Nine months: Sales increased 5%, or 9% excluding a $12.7 million unfavorable foreign-currency translation impact. Gross profit increased 4%, but gross margin declined 30 basis points. Operating income decreased 1% and net income attributable to shareholders decreased 17%.
- International growth was strongest on a constant-currency basis in EMEA and Asia-Pacific. The Americas experienced a nine-month gross-profit decline due to product mix and higher raw-material costs.
- Foreign-currency translation reduced reported sales by $3.3 million in the third quarter and $12.7 million year to date. Currency translation losses reduced comprehensive income and accumulated other comprehensive income.
- PLP acquired SubCon Electrical Fittings GmbH in Austria on February 28, 2019 and MICOS Telcom s.r.o. in the Czech Republic on April 1, 2019 for aggregate cash consideration of $18.9 million, net of cash acquired. The acquisitions added preliminary goodwill and finite-lived intangible assets and were included in the EMEA segment.
- Capital expenditures were $22.0 million in the first nine months, compared with $7.3 million in the prior-year period. The company also repurchased $4.5 million of common shares and paid $3.2 million of dividends.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that business fundamentals and financial position were sound and that operating cash flow, existing cash, and available credit were expected to fund debt repayments, capital expenditures, acquisitions, dividends, and other obligations for the foreseeable future. No quantitative earnings or sales guidance was provided.
- Management continues to invest in capacity, facilities, efficiency, new products, and geographic expansion, while evaluating global manufacturing structure and redundant processes.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $10.4 million of operating lease right-of-use assets and corresponding liabilities. The adoption did not materially affect earnings, cash flows, or debt covenants.
- The company faces currency, interest-rate, raw-material, tariff, customer-credit, technology-transition, competitive, labor, regulatory, acquisition-integration, and global economic risks. A 100-basis-point increase in interest rates would have increased nine-month interest expense by approximately $0.2 million; a hypothetical 10% currency-rate change would affect the fair values of exposed instruments by approximately $4.1 million and pretax income by approximately $1.1 million.
- A Canadian lawsuit alleges defects involving spacer dampers supplied for Alberta transmission projects. The plaintiff reduced its damages demand to C$29.4 million. PLP believes the claims are without merit, but cannot predict the outcome or estimate a loss range; an adverse result could materially affect financial results.
- The company reported no material changes to previously disclosed risk factors, no defaults upon senior securities, and effective disclosure controls as of September 30, 2019.
Important Facts for Investors to Verify
- Whether the 2019 sales growth and improved third-quarter gross margin are sustainable after separating volume, product mix, acquisitions, raw-material costs, and currency effects.
- The effect of the higher 2019 effective tax rate versus the unusually favorable 2018 Tax Act-related tax benefits.
- Integration progress, final purchase-price allocations, earn-out exposure, and operating performance of SubCon and MICOS Telcom.
- Cash conversion and working-capital requirements, particularly the increases in accounts receivable and inventories.
- Capital-expenditure levels, debt utilization, covenant headroom, and the company’s ability to fund acquisitions and shareholder returns.
- The status and potential financial exposure of the Altalink litigation, for which the filing provides no reasonably estimable loss range.
- The impact of foreign exchange movements, international operating conditions, raw-material costs, and communications-technology transitions on future results.