Preformed Line Products Company — Q1 2020 Form 10-Q Summary
Business context and reporting period
PLPC designs and manufactures products and systems for overhead and underground energy, telecommunications, data communications, cable and related infrastructure networks. It operates 29 sales and manufacturing locations in 20 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific. This report covers the unaudited three months ended March 31, 2020, compared primarily with the three months ended March 31, 2019.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $102.9 million | $97.2 million | +6% |
| Gross profit | $32.9 million | $27.3 million | +21% |
| Gross margin | 32.0% | 28.1% | +390 bps |
| Operating income | $5.2 million | $2.0 million | +$3.1 million |
| Operating margin | 5.0% | 2.1% | +290 bps |
| Net income attributable to PLPC shareholders | $3.7 million | $1.8 million | +103% |
| Diluted EPS | $0.74 | $0.36 | +$0.38 |
| Cash flow from operations | $(3.1) million | $0.5 million | $(3.6) million |
| Capital expenditures | $6.0 million | $2.4 million | +$3.6 million |
At March 31, 2020, cash and cash equivalents were $34.1 million, compared with $38.9 million at December 31, 2019. Total debt, including notes payable, was $72.5 million. The company had $26.5 million of unused credit-facility availability, net of outstanding letters of credit, and was in compliance with its debt covenants. Total assets were $413.3 million and shareholders’ equity was $251.5 million.
Cash declined by $5.1 million during the quarter. Operating cash usage reflected increased accounts receivable and inventory requirements. Financing activities provided $5.7 million, including net debt proceeds, but included $4.0 million of share repurchases and $1.2 million of dividends paid.
Material changes versus the prior comparable period
- Sales increased $5.7 million, or 6%. Excluding a $4.1 million unfavorable currency-translation effect, sales increased approximately 10%.
- PLP-USA sales increased 12% due primarily to higher energy-product volumes. The Americas and EMEA sales increased 43% and 34%, respectively, excluding currency effects, supported by energy and communications volumes and acquisitions in EMEA.
- Asia-Pacific sales decreased 25% excluding currency effects, primarily because of lower energy, communications and special-industries volumes and early COVID-19 disruption.
- Gross-margin expansion reflected higher sales volume, favorable product mix and cost containment, particularly in PLP-USA.
- Costs and expenses increased 10% as reported, or 14% excluding currency translation, driven by higher personnel costs, foreign-exchange losses and incremental costs from acquired businesses.
- The effective tax rate increased to 28% from 5%, primarily because of earnings in higher-tax jurisdictions and U.S. permanent items. The 2019 rate benefited from stock-based compensation-related tax benefits.
- Other comprehensive loss attributable to PLPC shareholders was $13.1 million, including a $16.9 million foreign-currency translation loss; this did not reduce reported net income.
- The company repurchased 75,246 shares for approximately $4.0 million during the quarter. Only 1,588 shares remained available under the announced repurchase authorization at March 31, 2020.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management stated that COVID-19 had not materially affected reported first-quarter results but had already disrupted Asia-Pacific operations and was slowing demand entering the second quarter. Nearly all North American plants remained operational, while some international plants were temporarily closed. Management was reducing operating expenses, scaling back capital expenditures and actively managing liquidity.
Management stated that the duration, scope and financial effect of COVID-19 could not be reasonably estimated and could be material. Principal risks include customer demand and project delays, supplier and global supply-chain disruption, plant closures, employee availability, transportation constraints, foreign-exchange volatility, raw-material costs, interest-rate exposure, acquisition integration and competitive or technological changes.
Foreign-currency forward contracts generated a $1.1 million net gain in Q1 2020 and partially offset transaction losses. A hypothetical 10% currency-rate change would have affected fair values by approximately $4.9 million and pretax income by approximately $1.7 million. A 100-basis-point increase in interest rates would have increased quarterly interest expense by approximately $0.7 million.
On April 17, 2020, after quarter-end, PLPC extended its $65 million credit-facility maturity from June 30, 2021 to June 30, 2024 and added its Austrian subsidiary as a borrower. The interest-rate terms otherwise remained unchanged.
PLPC and subsidiaries face an Alberta, Canada lawsuit involving alleged defects in spacer dampers. The plaintiff’s damages demand was reduced to C$29.4 million. PLPC believes the claims are without merit, but cannot predict the outcome or reasonably estimate a loss range; an adverse result could materially affect financial results.
Important facts for investors to verify
- Whether COVID-19 caused the expected second-quarter slowdown and the extent of subsequent plant, supply-chain and customer disruptions.
- Whether operating cash flow improves from the Q1 usage of $3.1 million and whether working-capital requirements remain elevated.
- Actual utilization and covenant headroom under the extended credit facility, including the effect of variable interest rates.
- The sustainability of the 32.0% gross margin and the contribution from product mix, volume and cost reductions.
- Asia-Pacific recovery prospects and the performance of the acquired EMEA businesses.
- The status and potential financial exposure of the Alberta spacer-damper litigation.
- Remaining share-repurchase authorization, dividend capacity and the effect of continued currency movements on reported results and equity.