Preformed Line Products Company — Q3 2016 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. 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 unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The company had 5,120,394 common shares outstanding as of November 1, 2016.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $88.3 million | $89.0 million | $250.2 million | $262.7 million |
| Gross profit | $28.9 million | $26.2 million | $80.0 million | $77.4 million |
| Gross margin | 32.7% | 29.4% | 32.0% | 29.4% |
| Operating income | $6.6 million | $2.1 million | $14.4 million | $7.2 million |
| Operating margin | 7.5% | 2.3% | 5.8% | 2.7% |
| Net income | $4.7 million | $0.2 million | $10.2 million | $3.6 million |
| Net margin | 5.4% | 0.2% | 4.1% | 1.4% |
| Diluted EPS | $0.92 | $0.04 | $1.95 | $0.67 |
For the first nine months, operating cash flow was $21.0 million, compared with $7.9 million in 2015. Capital expenditures were $21.7 million, including spending related primarily to the purchase of a corporate aircraft. Investing cash flow was negative $23.0 million, while financing cash flow was positive $6.5 million. Cash and cash equivalents increased $2.5 million to $32.9 million at September 30, 2016.
At September 30, 2016, total debt was $46.1 million, consisting primarily of $44.2 million of long-term debt and $1.6 million of current maturities. The current ratio was 3.1 to 1, unused credit availability was $30.2 million, and bank debt to equity was 20.4%. Shareholders’ equity was $226.5 million, compared with $219.0 million at December 31, 2015.
Material changes versus the prior comparable period
- Third-quarter sales decreased 0.8%, while nine-month sales decreased 4.8%. Excluding currency translation, third-quarter sales increased approximately $0.3 million and nine-month sales decreased approximately $0.8 million.
- Foreign currency translation reduced sales by $1.0 million in the quarter and $11.7 million year to date. It reduced nine-month operating income by approximately $1.6 million and net income by approximately $1.2 million.
- Gross margin improved substantially, rising 330 basis points in the quarter and 260 basis points for the first nine months. Management attributed the improvement to product mix, cost savings, and prior restructuring actions.
- Third-quarter operating income increased $4.5 million, and nine-month operating income increased $7.2 million. Lower operating costs, favorable product mix, and reduced Asia-Pacific costs were key contributors.
- PLP-USA sales declined primarily because of lower transmission and solar volumes. The Americas and EMEA reported higher volume, while Asia-Pacific sales declined primarily because of lower solar and transmission volumes.
- Asia-Pacific remained unprofitable, reporting a third-quarter net loss of $0.3 million and a nine-month net loss of $0.6 million, although losses improved materially from 2015.
- The effective tax rate declined to 27% from 90% in the third quarter and to 27% from 45% for the first nine months. Benefits included lower-tax foreign earnings, a $0.4 million release of an Asia-Pacific valuation allowance, and a $0.2 million reversal of unrecognized tax benefits.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide formal quantitative revenue or earnings guidance. Management stated that business fundamentals and the financial position remained sound, while emphasizing continued investment in efficiency, new products, capacity, and the global manufacturing network. Management expects operating cash flow, existing cash, and available credit to fund debt service, capital expenditures, dividends, and other requirements for the foreseeable future.
- The credit facility was increased from $50 million to $65 million and extended to June 30, 2019. The company was in compliance with its debt covenants at September 30, 2016.
- The company borrowed $14.5 million at a fixed 2.71% rate, due July 1, 2026, to purchase a corporate aircraft. The aircraft secures the loan.
- Restructuring expense was $0.1 million in the first nine months of 2016, compared with $2.7 million in 2015. The remaining restructuring liability was $0.6 million at September 30, 2016.
- The company repurchased 50,701 shares during the third quarter and had 157,641 shares remaining under its repurchase authorization at quarter-end. Year-to-date treasury-share purchases totaled approximately $4.4 million, including related-party purchases.
- Material risks include global infrastructure and energy demand, low commodity prices, customer funding constraints, competitive pricing, raw-material costs, technology shifts affecting communications infrastructure, foreign currency fluctuations, international political and economic conditions, and execution of manufacturing and growth initiatives.
- A hypothetical 10% currency-rate change would have affected the fair value of exposed instruments by approximately $5.6 million and pretax income by approximately $2.3 million. A 100-basis-point increase in variable interest rates would have increased nine-month interest expense by approximately $0.3 million.
- The filing states that no pending litigation is expected to have a material adverse effect. There were no material changes to previously disclosed risk factors, and disclosure controls were effective.
Important facts for investors to verify
- Whether improved margins and earnings are sustainable after separating operating improvements from favorable product mix, tax benefits, foreign-exchange gains, and other discrete items.
- Demand trends in solar, transmission, and telecommunications markets, particularly the continued weakness in Asia-Pacific and PLP-USA volumes.
- Progress in reducing or eliminating Asia-Pacific losses and the effect of prior restructuring and cost-saving initiatives.
- Capital expenditure requirements following the $21.7 million year-to-date spending level and the aircraft purchase.
- Debt covenant compliance, variable-rate exposure, credit-facility availability, and the company’s reliance on foreign cash balances that management expects to remain outside the United States.
- The effect of future currency movements on reported sales, earnings, cash, and accumulated other comprehensive loss.
- The potential impact of pending accounting standards for share-based compensation, leases, inventory, and revenue recognition.