Preformed Line Products Company — Q1 2014 Form 10-Q Summary
Business context and reporting period
Preformed Line Products Company designs and manufactures products and systems supporting overhead and underground energy, telecommunications, cable, data-communication and solar networks. The company operates in 15 countries through 18 sales and manufacturing operations and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific.
This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company had 5,388,733 common shares outstanding as of May 1, 2014.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $89.9 million | $98.7 million | Down 9% |
| Gross profit | $27.4 million | $31.3 million | Down 12% |
| Gross margin | 30.5% | 31.7% | Down 1.2 percentage points |
| Operating income | $4.2 million | $6.9 million | Down 39% |
| Operating margin | 4.7% | 7.0% | Down 2.3 percentage points |
| Net income | $2.7 million | $5.0 million | Down 45% |
| Net margin | 3.0% | 5.0% | Down 2.0 percentage points |
| Diluted EPS | $0.50 | $0.91 | Down $0.41 |
| Net cash used in operating activities | $1.2 million | $1.4 million | Improved by $0.2 million |
| Capital expenditures | $6.5 million | $5.9 million | Up $0.6 million |
Cash and cash equivalents were $21.2 million at March 31, 2014, down from $24.3 million at December 31, 2013. Total assets were $358.6 million, compared with $332.4 million at year-end 2013. Inventory increased to $79.6 million from $73.8 million, while accounts receivable increased to $75.0 million from $67.6 million.
Total long-term debt, including current maturities, was approximately $35.0 million at March 31, 2014, compared with $13.2 million at December 31, 2013. Notes payable to banks were $2.9 million. Management reported a 14% bank-debt-to-equity ratio, a 3.7-to-1 current ratio and $18.5 million of unused credit availability.
The company declared quarterly dividends of $0.20 per share in Q1 2014, compared with no dividend declared in Q1 2013. Comprehensive income was $4.6 million, including $1.8 million of favorable other comprehensive income, primarily from foreign-currency translation.
Material changes versus the prior comparable period
- Sales declined $8.8 million, or 9%. Excluding currency translation, sales declined 4%.
- PLP-USA sales fell 22%, primarily because of lower price and product mix and the completion of large transmission projects that benefited Q1 2013.
- The Americas sales increased 33% excluding currency effects, supported by organic growth, solar sales and acquisition-related revenue.
- EMEA sales increased 3% excluding currency effects, while Asia-Pacific sales declined 9% because of lower transmission-project and data-communication volumes.
- Foreign-currency translation reduced reported sales by approximately $4.4 million and reported net income by approximately $0.1 million.
- Gross profit declined 12%, and gross margin contracted to 30.5%. The company recorded approximately $0.8 million of cost of products sold from the fair-value step-up of acquired Helix inventory.
- Operating income decreased 39%, reflecting lower sales and gross profit despite a 5% reduction in operating expenses.
- The effective tax rate increased to 34% from 28%, partly because tax benefits restored by the American Taxpayer Relief Act in 2013 were not available in 2014.
- Net cash used in investing activities increased to $20.4 million, including $13.9 million for the Helix acquisition and $6.5 million of capital expenditures.
Outlook, management commentary, risks and unusual items
Management stated that the company’s financial condition remained strong despite global economic uncertainty, the Eurozone crisis and slower growth in parts of Asia-Pacific. Management remained focused on cost control, increasing sales volumes, product development, capacity expansion and operational efficiency. No specific quantitative earnings or sales guidance was provided in the filing.
On January 31, 2014, the company acquired Helix Uniformed Limited in Montreal, Quebec. The acquisition was described as not material for accounting purposes and is expected to diversify the Canadian business, expand manufacturing capacity and enhance local engineering capabilities. The purchase accounting remained preliminary.
The company believes it has adequate liquidity from cash, operating cash flow and borrowing capacity. Its credit facility has a $50 million capacity, matures in January 2017 and bears interest at LIBOR plus 1.125%. The company was in compliance with its financial covenants at March 31, 2014. Management expects operating cash flow, cash balances and the credit facility to fund debt repayments, capital expenditures, dividends and reasonably likely future requirements.
Principal risks include fluctuations in foreign exchange rates, demand for infrastructure products, customer and government spending, technology changes, raw-material costs and availability, competitive and pricing pressure, international operating risks, acquisition integration and funding, regulatory requirements, and global economic conditions. A hypothetical 100-basis-point increase in interest rates would have increased quarterly interest expense by approximately $0.2 million. A hypothetical 10% currency-rate change would have affected the fair value of exposed instruments by approximately $6.6 million and pretax income by approximately $3.8 million.
The company reported no material pending litigation, no material changes to previously disclosed risk factors, no goodwill impairment indicators and effective disclosure controls as of March 31, 2014. It had approximately $0.6 million of gross unrecognized tax benefits and did not anticipate material changes to that amount within the next nine months. The company expects to contribute an additional approximately $0.5 million to its pension plan during 2014.
Important facts for investors to verify
- Whether the sharp decline in PLP-USA sales and profitability reflects temporary project timing or a sustained reduction in domestic demand.
- Whether the Americas growth, including Helix, can offset weakness in PLP-USA and Asia-Pacific.
- The sustainability of gross margins after the $0.8 million Helix inventory fair-value adjustment is absorbed.
- Post-acquisition performance, integration costs and final purchase-accounting adjustments for Helix.
- Operating cash-flow conversion, given negative operating cash flow in Q1 and increased inventory and receivables.
- Debt levels, interest-rate exposure and continued compliance with credit-facility covenants.
- Foreign-exchange effects, particularly exposure to the South African rand, Brazilian real, Canadian dollar and Australian dollar.
- The effect of the higher effective tax rate and the absence of 2013 tax benefits on full-year earnings.
- The company’s ability to maintain dividends and fund capital expenditures and acquisitions without materially increasing leverage.