Preformed Line Products Company — Q1 2015 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-communication, and solar networks. It operates 29 sales and manufacturing locations in 17 countries and reports four geographic segments: PLP-USA, The Americas, EMEA, and Asia-Pacific. This filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. The financial statements are unaudited.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $85.8 million | $89.9 million | Down 5% |
| Gross profit | $24.8 million | $27.4 million | Down 10% |
| Gross margin | 28.9% | 30.5% | Down 160 basis points |
| Operating income | $(0.1) million | $4.2 million | Down $4.3 million |
| Income before taxes | $(0.1) million | $4.1 million | Down $4.2 million |
| Net income (loss) | $(0.3) million | $2.7 million | Down $3.0 million |
| Diluted EPS | $(0.05) | $0.50 | Declined |
| Operating cash flow | $0.6 million | $(1.2) million | Improved $1.8 million |
Cash and cash equivalents were $30.5 million at March 31, 2015, compared with $29.6 million at December 31, 2014. Total debt was $32.6 million, consisting primarily of long-term debt and related current maturities. Unused availability under the credit facility was $19.5 million. The current ratio was 3.9 to 1, and the bank debt-to-equity ratio was 14.0%.
Capital expenditures were $2.3 million, dividends paid were $1.1 million, and net cash used in financing activities was $2.0 million. Cash increased $0.9 million during the quarter, including a favorable $1.7 million foreign-exchange translation effect. The company declared a quarterly dividend of $0.20 per share.
Material changes versus the prior comparable period
- Reported sales declined $4.1 million, but sales increased 3% excluding currency translation. Foreign currency translation reduced reported sales by approximately $6.5 million.
- PLP-USA sales increased 4% to $32.0 million, while The Americas declined 20% excluding currency effects, primarily because of lower solar and transmission sales. EMEA increased 14% and Asia-Pacific increased 17% excluding currency effects.
- Gross margin compressed from 30.5% to 28.9%. Excluding currency translation, gross profit decreased 4%, driven by lower sales and margin deterioration in The Americas and an unfavorable sales mix in Asia-Pacific.
- Costs and expenses increased 7% as reported and 14% excluding currency translation. PLP-USA costs rose primarily because of higher foreign-currency transaction losses and reduced royalty income.
- Foreign-currency transaction losses increased operating costs by approximately $4.0 million year over year. Operating income excluding currency impacts was $3.3 million in 2015 versus $3.8 million in 2014.
- The effective tax rate was negative 334% in Q1 2015 versus 34% in Q1 2014. The unusual rate primarily reflected losses in jurisdictions where no tax benefit was recognized and the low level of pretax loss.
- Operating cash flow improved despite the net loss, principally because of changes in operating assets and liabilities. Compared with Q1 2014, investing cash flow benefited from the absence of the $13.9 million Helix acquisition and lower capital expenditures.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide quantitative revenue or earnings guidance. Management stated that business fundamentals remained sound and that the company was focused on controlling costs, increasing sales volumes, investing in efficiency and capacity, and developing new products. Management expected operating cash flows, existing cash, and available credit to fund debt repayments, capital expenditures, dividends, and other commitments for at least the next 12 months.
The credit facility extends through January 2017 at LIBOR plus 1.125%. The company was in compliance with its covenants at March 31, 2015. Management did not identify material customer credit issues or a material liquidity risk.
- Foreign-exchange exposure is significant. A hypothetical 10% currency-rate change would affect the fair value of exposed instruments by approximately $7.1 million and pretax income by approximately $3.5 million.
- A 100-basis-point increase in interest rates would have increased quarterly interest expense by approximately $0.3 million.
- Key business risks include weak global infrastructure spending, customer funding constraints, demand changes from wireless and other technologies, raw-material costs and availability, price pressure, international political and economic conditions, labor disruptions, regulation, and acquisition execution.
- The company had no foreign-currency forward contracts outstanding at quarter-end and does not hold derivatives for trading purposes.
- No pending litigation was expected to have a material adverse effect. No material changes were reported to the risk factors in the 2014 Form 10-K.
- The company adopted new discontinued-operations guidance in Q1 2015 with no reported effect. It was evaluating the future effects of standards concerning extraordinary items, going-concern disclosures, and revenue recognition.
- Gross unrecognized tax benefits were approximately $0.8 million; the company may reduce these benefits by approximately $0.6 million within the next nine months.
- The company repurchased 4,587 shares during the quarter under its existing authorization, leaving 241,300 shares available for repurchase.
Important facts for investors to verify
- Whether currency headwinds and foreign-currency transaction losses persist or reverse.
- Whether The Americas sales weakness, particularly in solar and transmission, improves.
- Whether gross-margin compression and elevated operating costs are temporary or structural.
- Progress in restoring consistent profitability and generating stronger operating cash flow.
- Compliance with credit-facility covenants, available borrowing capacity, and the scheduled debt repayment profile.
- The sustainability of the $0.20-per-share quarterly dividend given the Q1 net loss and modest operating cash generation.
- The impact of future adoption of the revenue-recognition and other accounting standards under evaluation.