Preformed Line Products Company — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended June 30, 2022, filed August 5, 2022. PLPC designs and manufactures products supporting overhead and underground energy, telecommunications, cable, data-communications, solar and related infrastructure networks. Operations span 30 sales and manufacturing locations in 22 countries and are reported through PLP-USA, The Americas, EMEA and Asia-Pacific.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $163.5 million, up 22.9% | $301.7 million, up 20.4% |
| Gross profit / margin | $52.7 million / 32.2% | $94.7 million / 31.4% |
| Operating income / margin | $17.9 million / 11.0% | $27.4 million / 9.1% |
| Net income attributable to PLPC | $13.7 million | $26.0 million |
| Diluted EPS | $2.77 | $5.25 |
- Six-month net sales increased $51.1 million; excluding currency translation, sales increased approximately 24%. PLP-USA grew 35% and EMEA grew 30% excluding currency effects, while Asia-Pacific declined 5%.
- Gross margin declined from 33.2% to 31.4% for the six-month period, primarily because of commodity, freight and other inflationary pressures. Management has implemented price increases but indicated additional increases may be required.
- Six-month operating income increased $3.9 million, but operating margin declined modestly from 9.4% to 9.1%.
- Six-month net income benefited from a $4.4 million gain on a company-owned life insurance settlement and a lower effective tax rate of 18%, compared with 31% in the prior-year period. The comparable quarter tax rates were 23% and 29%.
- Cash, cash equivalents and restricted cash totaled $30.1 million at June 30, 2022, compared with $36.4 million at December 31, 2021. Accounts receivable were $123.1 million and inventories were $127.4 million.
- Six-month cash flow from operating activities was reported as $(6.2) million, compared with $14.1 million provided in the prior-year period, primarily because of increases in receivables and inventory. The consolidated cash-flow statement shows $(6.177) million; MD&A shows $(6.234) million.
- Investing cash outflows were $16.7 million, including $13.8 million of capital expenditures and $13.0 million for acquisitions, partly offset by $6.9 million of insurance proceeds and $3.2 million from asset sales.
- Total debt, including notes payable, was $77.6 million. The amended revolving facility increased capacity from $65.0 million to $90.0 million, extended maturity to March 2, 2026, and had $58.4 million available at quarter-end. The company was in compliance with debt covenants.
- Total shareholders’ equity was $332.7 million at June 30, 2022, compared with $316.1 million at year-end 2021. Accumulated other comprehensive loss increased primarily because of an $8.1 million unfavorable foreign-currency translation adjustment for the six-month period.
Material changes versus the prior comparable period
- Demand remained strong, particularly in U.S. energy and communications products. Price and volume increases drove much of the sales growth.
- Inflation in raw materials, freight and transportation reduced gross-margin performance despite pricing actions.
- Foreign-currency translation reduced reported sales by approximately $5.5 million in the quarter and $8.0 million year-to-date. Currency effects reduced six-month net income by approximately $0.1 million.
- PLPC acquired Maxxweld in Brazil for approximately $11.2 million and Holplast in the Czech Republic for approximately $5.3 million. The acquisitions contributed approximately $4.8 million and $0.8 million of sales, respectively, from their acquisition dates through June 30.
- PLPC began winding down its Russian operations in March 2022 because of the conflict in Ukraine. It recorded approximately $1.2 million of year-to-date exit charges, primarily asset impairments and termination benefits.
- Asia-Pacific remained affected by COVID-19-related project postponements and China’s buy-local policies. Its reporting unit had $6.8 million of goodwill and remained at risk for future impairment because fair value exceeded carrying value by less than 10%; no impairment charge was recorded.
Outlook, risks and unusual items
- Management stated that customer demand and the order backlog remain strong and expects pricing benefits to continue into 2022. The company is expanding U.S. operational capacity and warehouse space, with enhanced service expected beginning in late 2022.
- Management believes operating cash flow, cash balances and borrowing capacity will be sufficient for debt repayments, capital expenditures, acquisitions and dividends for the foreseeable future.
- Key risks include inflation, raw-material and freight costs, supply-chain disruption, COVID-19, the Russia-Ukraine conflict, foreign-exchange volatility, interest rates, geopolitical conditions, customer project funding, acquisition integration, technology changes and cybersecurity.
- PLPC accrued approximately $2.1 million for global legal matters. A Canadian lawsuit seeks approximately C$56.0 million jointly and severally from multiple defendants concerning allegedly defective spacer dampers. PLPC believes the claims are without merit but states that an adverse outcome could materially affect results.
- Outstanding guarantees totaled $10.4 million and letters of credit totaled $0.5 million at June 30, 2022.
- The company-owned life insurance settlement produced approximately $6.9 million of cash proceeds and a $4.4 million gain, materially benefiting year-to-date other income and the effective tax rate.
- No material changes were reported to previously disclosed risk factors. Management concluded disclosure controls were effective as of June 30, 2022, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Reconcile the $57 thousand difference between operating cash flow reported in the cash-flow statement and MD&A.
- Assess whether pricing actions can offset continuing commodity, freight and labor inflation without weakening demand.
- Monitor working-capital usage, particularly the growth in accounts receivable and inventories, and its effect on cash conversion.
- Evaluate acquisition integration, purchase-price accounting and the final measurement-period adjustments for Maxxweld and Holplast.
- Track Asia-Pacific performance and the potential for goodwill impairment.
- Review developments in the Canadian spacer-damper litigation and the adequacy of the recorded reserve.
- Consider the recurring versus nonrecurring components of earnings, including the insurance gain, Russia exit costs, currency effects and acquisition-related expenses.