Preformed Line Products Company — Q2 2014 Form 10-Q Summary
Business context and reporting period
Filed August 8, 2014, for the quarter and six months ended June 30, 2014. PLPC designs and manufactures products supporting overhead and underground energy, telecommunications, cable, data communication and solar networks. It operated 19 sales and manufacturing locations in 15 countries and reported four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $100.0 million | $111.7 million | $189.9 million | $210.4 million |
| Gross profit | $31.2 million | $37.5 million | $58.6 million | $68.8 million |
| Gross margin | 31.1% | 33.6% | 30.8% | 32.7% |
| Operating income | $7.6 million | $10.5 million | $11.8 million | $17.4 million |
| Operating margin | 7.6% | 9.4% | 6.2% | 8.2% |
| Net income | $5.1 million | $6.4 million | $7.8 million | $11.4 million |
| Diluted EPS | $0.94 | $1.17 | $1.44 | $2.08 |
All dollar amounts are approximate unless otherwise stated. The filing reports amounts in thousands, except per-share data.
- Six-month operating cash flow was $10.5 million, compared with $12.4 million in the prior-year period.
- Six-month investing cash use was $26.9 million, including $14.7 million for the Helix acquisition and $11.5 million of capital expenditures.
- Six-month financing cash inflow was $18.3 million, principally reflecting $45.5 million of long-term debt issuance partially offset by $24.5 million of debt repayments and $2.2 million of dividends.
- Cash and cash equivalents were $24.6 million at June 30, 2014, versus $24.3 million at December 31, 2013.
- Total debt, including current maturities and bank notes, was approximately $34.9 million at June 30, 2014, compared with approximately $14.4 million at year-end 2013. Management reported a bank debt-to-equity ratio of approximately 13%.
- Current assets were $204.1 million and current liabilities were $53.3 million, producing a reported current ratio of 3.8 to 1.
- The company had $16.3 million of unused credit availability and reported compliance with its debt covenants.
- Cash dividends declared were $0.20 per share in Q2 and $0.40 per share for the first six months.
Material changes versus the prior comparable period
- Q2 sales declined 11%; excluding currency translation, sales declined 9%. Six-month sales declined 10%, or 7% excluding currency effects.
- The principal sales weakness was in PLP-USA, EMEA and Asia-Pacific. Q2 Asia-Pacific sales fell 20% excluding currency effects, primarily because governments deferred transmission-line projects. Six-month Asia-Pacific sales declined 15% excluding currency effects.
- The Americas grew 17% in Q2 and 24% for the six months excluding currency effects, primarily reflecting the January 2014 acquisition of Helix Uniformed Limited and higher transmission and solar sales.
- Gross margin contracted by 250 basis points in Q2 and 190 basis points for the six months. Lower volumes, higher production costs and Helix purchase-accounting inventory adjustments contributed to the decline.
- Q2 operating income fell 27% and six-month operating income fell 32%. Six-month net income decreased 31% and diluted EPS decreased from $2.08 to $1.44.
- The effective tax rate decreased to 33% from 40% in Q2 and to 33% from 36% for the six months, primarily due to earnings in lower-tax jurisdictions and the absence of the prior-year treatment of certain foreign operating-loss tax benefits.
- Foreign currency translation reduced six-month sales by approximately $6.2 million and increased accumulated other comprehensive income by $4.1 million during the period. Currency translation had a negligible effect on operating income and net income.
Outlook, commentary, risks and unusual items
- Management stated that global political and economic conditions, reduced Asia-Pacific growth and deferred transmission projects continued to affect demand, but characterized the company’s fundamentals and financial condition as sound.
- Management intends to focus on cost control, increasing sales volumes, product development, capacity expansion and efficiency improvements. No specific quantitative revenue or earnings guidance was provided.
- Helix was acquired on January 31, 2014, to diversify Canadian operations, expand manufacturing capacity and enhance local engineering. The acquisition was described as immaterial for accounting purposes; purchase-accounting adjustments reduced Q2 gross profit by approximately $0.9 million and six-month gross profit by approximately $1.9 million.
- Management expected an additional $0.2 million of pension contributions during 2014 after contributing $0.4 million during the first half.
- Key risks include global infrastructure spending, customer financing capacity, project deferrals, raw-material costs and availability, competitive pricing, technological changes, foreign exchange, political and regulatory conditions, acquisition integration and access to funding.
- A hypothetical 10% currency-rate change would affect the fair value of exposed instruments by approximately $6.7 million and income before tax by approximately $3.5 million. A 100-basis-point interest-rate increase would have increased six-month interest expense by approximately $0.2 million.
- No material litigation, material risk-factor changes, debt defaults or material control deficiencies were reported. The company stated that no pending legal proceedings were expected to materially affect its financial condition, results or cash flows.
- The company adopted ASU 2013-05 without effect on results. It was evaluating the future effects of ASU 2014-08 on discontinued operations and ASU 2014-09 on revenue recognition.
Important facts for investors to verify
- Whether deferred transmission projects in Asia-Pacific and EMEA resume and whether PLP-USA volume declines stabilize.
- Whether gross-margin pressure from lower volumes, production costs and Helix purchase accounting is temporary or persists.
- Helix integration, expected contribution to sales and earnings, and the finalization of its preliminary opening balance sheet.
- Debt repayment requirements, covenant compliance, borrowing capacity and the use of foreign-held cash.
- Execution of planned capital expenditures and the company’s ability to fund acquisitions, dividends and operations from cash flow.
- Exposure to foreign currency movements, raw-material costs, infrastructure spending and government project timing.
- The impact and adoption timing of the new discontinued-operations and revenue-recognition standards.