Business Context and Reporting Period
Preformed Line Products Company designs and manufactures products and systems supporting overhead and underground energy, telecommunications, cable, data communication, solar and other infrastructure networks. The company operates 29 sales and manufacturing locations in 20 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific.
This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared primarily with the corresponding 2019 periods. The filing was signed August 6, 2020.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $117.6 million, up 2% | $220.5 million, up 4% |
| Gross profit | $39.6 million; 33.6% margin | $72.5 million; 32.9% margin |
| Operating income | $14.8 million; 12.6% margin | $19.5 million; 8.8% margin |
| Net income attributable to PLPC shareholders | $10.5 million; 8.9% margin | $14.2 million; 6.4% margin |
| Diluted EPS | $2.11 | $2.84 |
| Net cash provided by operating activities | Not separately provided | $9.2 million |
- Cash and cash equivalents were $36.5 million at June 30, 2020, compared with $38.9 million at December 31, 2019.
- Total debt, including notes payable, was $72.8 million. The company had $27.5 million of unused credit-facility availability, net of letters of credit, and remained in compliance with debt covenants.
- Total assets were $436.3 million and shareholders’ equity was $264.2 million at June 30, 2020.
- Capital expenditures were $11.8 million during the first six months. Dividends paid were $2.2 million, and share repurchases totaled approximately $7.0 million.
- Gross margin improved from 32.9% to 33.6% in the quarter and from 30.7% to 32.9% year to date. Operating margin improved from 9.7% to 12.6% in the quarter and from 6.2% to 8.8% year to date.
Material Changes Versus Prior Comparable Period
- Second-quarter net sales increased $2.8 million, while six-month sales increased $8.5 million. Excluding unfavorable currency translation, sales increased 9% in both periods.
- PLP-USA sales increased 16% in the quarter and 15% year to date, primarily due to higher energy-product volumes. The Americas also grew strongly on a constant-currency basis.
- Asia-Pacific was materially weaker, with sales down 7% in the quarter and 16% year to date on a reported basis, primarily due to COVID-19-related disruption and lower volumes.
- Second-quarter operating income rose $3.7 million, or 33%, and year-to-date operating income rose $6.3 million, or 48%. Cost containment, favorable product mix and lower travel and professional expenses contributed to the improvement.
- Net income attributable to shareholders increased $2.6 million in the quarter and $4.5 million year to date. Diluted EPS increased from $1.56 to $2.11 for the quarter and from $1.92 to $2.84 year to date.
- Foreign-currency translation reduced sales by $7.1 million in the quarter and $11.3 million year to date, and reduced net income by approximately $0.5 million and $0.7 million, respectively.
- Operating cash flow improved from $5.8 million to $9.2 million year to date, while investing cash use declined substantially because 2019 included approximately $19.0 million of acquisition spending.
- The company extended its $65 million credit facility maturity from June 30, 2021 to June 30, 2024 and added its Austrian subsidiary as a borrower.
Outlook, Commentary, Risks and Unusual Items
- Management did not provide quantitative full-year revenue, earnings or margin guidance. It stated that interim results are not necessarily indicative of full-year results.
- COVID-19 had no material impact on reported results for the periods presented, but temporarily disrupted some international plants, customers and supply chains. Management expects continuing adverse effects but cannot predict the pandemic’s duration, scope or financial magnitude.
- Management is actively managing liquidity and costs, including scaling back capital expenditures and reducing travel and other operating expenses. It stated that operating cash flow, cash balances and available credit should be sufficient for debt repayments, capital expenditures, dividends and other obligations for the foreseeable future.
- Key risks include prolonged COVID-19 disruption, foreign-exchange volatility, international operating risks, raw-material availability and pricing, customer demand, competitive and pricing pressure, technology changes, acquisitions, regulatory matters, cybersecurity and litigation.
- The company is defending litigation in Alberta, Canada concerning alleged defects in spacer dampers. The plaintiff’s damages demand was reduced to C$29.4 million; the company believes the claims are without merit, but cannot estimate the likelihood or amount of loss. An adverse outcome could materially affect results.
- Foreign-currency forward contracts produced a $0.3 million net loss in the quarter and a $0.9 million net gain year to date. A hypothetical 10% currency-rate change could affect fair values by approximately $5.2 million and pretax income by approximately $1.3 million.
- The company repurchased 61,211 shares during the quarter under an authorization permitting up to 250,000 shares, with 188,789 shares remaining available at June 30, 2020.
- The former Vice-President Finance and Treasurer departed April 9, 2020 under a separation agreement providing six months of base salary and potential prorated annual incentive compensation.
- Disclosure controls and procedures were effective as of June 30, 2020, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Whether COVID-19-related demand, plant restrictions and supply-chain effects intensified after June 30, particularly in Asia-Pacific.
- The sustainability of the higher gross margins and the extent to which product mix and temporary cost reductions contributed.
- Operating cash conversion, working-capital needs and planned capital expenditures relative to debt repayments and share repurchases.
- Available borrowing capacity, variable-rate exposure and continued compliance with credit-facility covenants.
- The status and potential financial exposure of the Alberta spacer-damper litigation.
- Foreign-currency effects on reported sales, earnings, cash and accumulated other comprehensive income.
- Any subsequent quantitative guidance or changes to the company’s capital-allocation priorities.