Preformed Line Products Company (PLPC) — Q3 2021 Form 10-Q Summary
Business context and reporting period
PLPC designs and manufactures products supporting overhead and underground energy, telecommunications, cable, data communications, solar and special-industry networks. It operates 30 sales and manufacturing locations in 22 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific. This unaudited filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $135.4 million | $127.5 million | $386.0 million | $347.9 million |
| Gross profit | $43.2 million | $44.9 million | $126.4 million | $117.4 million |
| Gross margin | 31.9% | 35.2% | 32.7% | 33.7% |
| Operating income | $13.1 million | $16.9 million | $36.6 million | $36.3 million |
| Net income attributable to PLPC | $10.7 million | $13.0 million | $26.8 million | $27.1 million |
| Diluted EPS | $2.15 | $2.59 | $5.40 | $5.43 |
| Operating cash flow | Not separately reported | Not separately reported | $24.1 million | $33.6 million |
Q3 operating margin was 9.7%, compared with 13.3% in the prior-year quarter. Nine-month operating margin was 9.5%, compared with 10.4%. The Q3 effective tax rate was 22%, versus 26%; the nine-month rate was 28%, versus 26%.
At September 30, 2021, cash and cash equivalents were $38.3 million, compared with $45.2 million at December 31, 2020. Total assets were $493.6 million and shareholders’ equity was $308.8 million. Total debt, including notes payable, was approximately $63.2 million. The company had $50.6 million of unused credit-facility availability, net of letters of credit, and was in compliance with debt covenants.
Material changes versus the prior comparable periods
- Q3 sales increased 6%; nine-month sales increased 11%. Excluding favorable currency translation, sales increased approximately 5% in Q3 and 8% for the nine-month period.
- PLP-USA was the primary growth driver, with sales up 26% in Q3 and 21% for the nine-month period, largely from higher communications-product volumes.
- Q3 international sales declined excluding currency effects: The Americas decreased 11%, EMEA decreased 5% and Asia-Pacific decreased 16%. Asia-Pacific nine-month sales declined 10% excluding currency.
- Gross margin contracted because of raw-material, commodity, freight and transportation-cost inflation, higher warranty costs and unfavorable regional mix. The Q3 LIFO adjustment increased pre-tax expense by approximately $1.8 million; the nine-month impact was approximately $3.6 million.
- Q3 operating income declined $3.8 million and net income attributable to PLPC declined $2.2 million. Nine-month operating income increased $0.2 million, while attributable net income declined $0.4 million.
- Operating cash flow declined $9.5 million year over year, primarily because of increased working-capital investment, including higher receivables and inventories.
- Capital expenditures were $12.6 million, compared with $24.2 million in the prior-year period. Financing activities used $19.1 million, including $81.6 million of long-term debt repayments, partially offset by $69.0 million of long-term debt proceeds and $1.5 million of increased bank notes.
Guidance, outlook, commentary and risks
- Management provided no specific numerical revenue or earnings guidance. It expects operating cash flow, existing cash and available credit to fund debt repayments, capital expenditures and dividends for the foreseeable future.
- PLPC implemented a price increase in June 2021 and a second increase in October 2021 to offset inflation. Management stated that backlog timing limited the Q3 benefit and that further increases may be required; higher prices could reduce demand.
- COVID-19 and the Delta variant caused extended lockdowns and project postponements, particularly in Asia-Pacific. Management expects continued uncertainty and cannot reasonably estimate the potential financial impact.
- PLPC plans additional investment in U.S. production capacity and warehouse space to support growth, with enhanced service expected to begin in late 2022.
- The company purchased a corporate aircraft for $20.5 million, financed with a 10-year term loan at a fixed 2.744% rate. Approximately $19.3 million remained outstanding at September 30, 2021.
- An interim goodwill review for Asia-Pacific found approximately 10% excess fair value over carrying value; no impairment charge was recorded. The reporting unit remains at risk if COVID-19 effects or government-project postponements continue.
- PLPC recorded approximately $1.0 million of pre-tax income from a Brazilian tax recovery in Q3 and the nine-month period. The prior-year comparable periods included approximately $0.7 million and $0.8 million, respectively, of non-recurring COVID-19 subsidies.
- The company has accrued approximately $2.2 million for global legal matters. A Canadian claim seeks approximately C$56.0 million jointly and severally from PLPC and other defendants concerning alleged defects in spacer dampers. PLPC disputes the claims, has reserved the low end of its potential loss range and states that an adverse outcome could materially affect results.
- Other risks include foreign-exchange volatility, supply-chain and labor disruptions, raw-material availability and pricing, customer demand and infrastructure spending, technology changes, cybersecurity, regulatory matters and potential tax-law changes.
Most important facts for investors to verify
- Whether the June and October price increases offset continuing commodity, freight, transportation and other inflationary pressures.
- Whether Asia-Pacific sales and profitability recover as lockdowns ease, and whether the segment’s goodwill remains recoverable.
- Working-capital trends, particularly the increases in accounts receivable and inventories and the resulting pressure on operating cash flow.
- Debt repayment requirements, variable-rate exposure and continued compliance with credit-facility covenants.
- The status and potential exposure of the Canadian spacer-damper litigation beyond the recorded reserve.
- The effect of currency movements, COVID-19 developments, project postponements and customer response to price increases on future earnings.