Business Context and Reporting Period
Preformed Line Products Company designs and manufactures hardware and systems supporting overhead and underground energy, telecommunications, cable, data communications and solar networks. The company operates 29 sales and manufacturing locations in 17 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific.
This Form 10-Q covers the three and nine months ended September 30, 2015. Financial statements are unaudited and presented under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months 2015 | Three Months 2014 | Nine Months 2015 | Nine Months 2014 |
|---|---|---|---|---|
| Net sales | $89.0 million | $102.1 million | $262.7 million | $292.0 million |
| Gross profit | $26.2 million | $32.5 million | $77.4 million | $91.1 million |
| Gross margin | 29.4% | 31.8% | 29.4% | 31.2% |
| Operating income | $2.1 million | $5.1 million | $7.2 million | $17.0 million |
| Net income | $0.2 million | $2.6 million | $3.6 million | $10.4 million |
| Diluted EPS | $0.04 | $0.48 | $0.67 | $1.92 |
| Cash dividends per share | $0.20 | $0.20 | $0.60 | $0.60 |
For the nine months, net cash provided by operating activities was $7.9 million, compared with $21.1 million in 2014. Capital expenditures were $6.7 million, and net cash used in investing activities was $8.2 million. Cash used in financing activities was $6.9 million, including $3.2 million of dividends and $3.6 million of treasury-share purchases. Ending cash and cash equivalents were $26.9 million, down from $29.6 million at December 31, 2014.
At September 30, 2015, total debt was $32.8 million, including $1.0 million of notes payable to banks, $0.1 million of current long-term debt and $31.7 million of long-term debt. Unused credit availability was $15.5 million. The credit facility extends through August 2017 at LIBOR plus 1.125%; the company was in compliance with its covenants. The current ratio was 3.4 to 1 and bank debt to equity was 14.9%.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales decreased 13%; excluding currency translation, sales declined 1%. Nine-month sales decreased 10%; excluding currency, sales declined 1%.
- Foreign currency translation reduced sales by $11.6 million in the quarter and $26.3 million year to date. Currency transaction losses also increased by approximately $1.7 million in the quarter and $6.7 million year to date.
- Gross margin declined to 29.4% from 31.8% in the quarter and to 29.4% from 31.2% year to date, reflecting lower volume, unfavorable product mix, price pressure and restructuring costs.
- Operating income fell 59% in the quarter and 58% year to date. Net income fell 92% in the quarter and 65% year to date.
- Asia-Pacific sales increased 25% excluding currency in the quarter and 15% year to date, primarily from solar products, but the segment remained loss-making. Asia-Pacific reported net losses of $2.5 million in the quarter and $3.4 million year to date.
- PLP-USA sales declined 13% in the quarter and 4% year to date, primarily due to lower domestic energy sales and unfavorable price/mix.
- The company adopted ASU 2014-08 regarding discontinued operations prospectively; adoption had no reported effect on results, financial condition or cash flows.
Guidance, Outlook, Commentary and Risks
Management stated that business fundamentals remain sound and that it is focused on cost management, sales growth, product development, efficiency and facility consolidation. Management expects operating cash flow, existing cash and available credit to fund debt repayments, capital expenditures and dividends, and does not anticipate a material liquidity issue.
During 2015, the company began restructuring operations in Asia-Pacific and The Americas in response to economic slowdown, price pressure and lower-cost production opportunities. Total expected Asia-Pacific costs are approximately $2.7 million; The Americas charges are expected to be less than $1 million. Charges recorded through September 30 totaled $2.7 million, including $2.1 million in the third quarter. Production is expected to transfer to PLP-USA over the following six months.
Market capitalization fell below book equity during the third quarter, triggering interim goodwill testing for Asia-Pacific and one Americas reporting unit. No impairment was recorded, but management identified a reasonable possibility of a future impairment charge because of uncertainty around recoverability.
The third-quarter effective tax rate was 90%, compared with 52% in 2014, primarily because of losses in jurisdictions where no tax benefit was recognized and relatively low pretax income. The nine-month effective tax rate was 45%, compared with 39% in 2014.
Principal risks include global infrastructure and customer spending, economic weakness, currency volatility, price pressure, raw-material costs, technological changes affecting communications infrastructure, foreign operating risks, labor disruptions, competition, acquisitions and potential goodwill impairment. A hypothetical 10% currency-rate change would have affected the fair value of exposed instruments by approximately $5.7 million and pretax income by approximately $3.0 million. A 100-basis-point increase in interest rates would have increased nine-month interest expense by approximately $0.3 million.
No material pending litigation was disclosed, no material changes were reported to previously disclosed risk factors, and disclosure controls were effective as of September 30, 2015.
Important Facts for Investors to Verify
- Whether restructuring actions deliver the expected infrastructure and manufacturing cost savings and whether additional charges arise.
- Whether Asia-Pacific and Americas reporting units avoid future goodwill impairment charges.
- The sustainability of solar-driven Asia-Pacific growth amid continued transmission-project delays and lower-margin product mix.
- The effect of foreign exchange movements and transaction losses on future sales, margins and earnings.
- Whether operating cash flow recovers from the year-to-date decline and remains sufficient to fund dividends, capital spending and debt obligations.
- Compliance with credit-facility covenants and the availability of the $15.5 million unused borrowing capacity.
- The impact of unusually high effective tax rates caused by jurisdictions where losses do not generate tax benefits.
- The company’s ability to offset weak domestic energy demand, lower pricing and global infrastructure spending pressures through new products, solar growth and efficiency measures.