Preformed Line Products Company — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended September 30, 2018. PLP designs and manufactures hardware and systems for overhead and underground energy, telecommunications, cable, data communication, solar, and related networks. Operations include 27 sales and manufacturing facilities in 18 countries, reported through PLP-USA, The Americas, EMEA, and Asia-Pacific segments.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net sales | $108.4 million, up 9.2% | $315.5 million, up 12.1% |
| Gross profit | $33.5 million; 30.9% margin | $100.2 million; 31.8% margin |
| Operating income | $8.0 million; 7.4% margin | $25.1 million; 8.0% margin |
| Net income | $9.1 million; 8.4% margin | $21.3 million; 6.8% margin |
| Diluted EPS | $1.76 | $4.19 |
| Operating cash flow | Not separately provided | $7.1 million |
At September 30, 2018, cash and cash equivalents were $34.0 million, or $34.3 million including restricted cash. Total debt was $37.9 million, consisting primarily of revolving and term borrowings. The company had $42.5 million of unused credit-facility availability and was in compliance with its debt covenants. The $65 million credit facility maturity was extended to June 30, 2021.
Capital expenditures were $7.3 million for the first nine months. Dividends paid were $3.1 million, and the quarterly dividend remained $0.20 per share. Shareholders’ equity was $246.4 million at September 30, compared with $238.5 million at December 31, 2017.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased $9.2 million, primarily from higher PLP-USA energy sales and volume growth in EMEA and Asia-Pacific. The Americas declined because of lower energy and communications volumes.
- Third-quarter gross profit was essentially unchanged despite higher sales; gross margin fell to 30.9% from 33.8%, reflecting raw-material costs, unfavorable product mix in The Americas and EMEA, and currency translation.
- Third-quarter operating income declined $1.8 million to $8.0 million, principally because operating expenses increased and The Americas experienced higher foreign-currency transaction losses.
- Third-quarter net income increased $2.8 million, largely because income tax expense shifted to a $1.2 million benefit from $3.5 million of expense in the prior year. The effective tax rate was negative 15%, versus 36%.
- For the first nine months, sales rose 12.1%, gross profit rose 14.0%, operating income rose 36.6%, and net income rose 78.4%. Gross margin improved to 31.8% from 31.2% and operating margin improved to 8.0% from 6.5%.
- Operating cash flow declined to $7.1 million from $21.7 million, primarily because of increased accounts receivable and inventory, a $5.3 million pension contribution, and other working-capital uses.
- Accumulated other comprehensive loss increased to $57.2 million from $47.4 million at year-end, primarily because of a $10.1 million unfavorable foreign-currency translation adjustment.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide specific quantitative full-year guidance. Management stated that business fundamentals and the financial position were sound, with continued investment in efficiency, product development, capacity, and global manufacturing capabilities. Management expects operating cash flows, existing cash, and available credit to fund debt repayments, capital expenditures, dividends, and other foreseeable needs.
- Tax Act effects: The company recorded a $0.7 million decrease in tax expense from deferred-tax remeasurement and a $0.9 million decrease from revised Transition Tax calculations. Tax accounting remained provisional and future adjustments could materially affect income taxes.
- Litigation: Altalink, L.P. reduced its Canadian damages demand related to alleged defective spacer dampers from C$56.0 million to C$29.4 million. The company considers the claims without merit but cannot predict the outcome or estimate a potential loss range; an adverse result could materially affect financial results.
- Currency and interest-rate exposure: Currency translation reduced nine-month sales by $1.2 million but favorably affected net income by $0.3 million. A hypothetical 10% currency-rate change could affect instrument fair values by $5.3 million and pretax income by $1.5 million. A 100-basis-point interest-rate increase would have increased nine-month interest expense by approximately $0.4 million.
- Operating risks: Key risks include demand for infrastructure products, global economic conditions, customer financing, technological substitution, raw-material costs and tariffs, foreign operations, competition, labor disruptions, regulatory matters, and product liability.
- Accounting changes: Revenue recognition under ASC 606 was adopted January 1, 2018 with no material cumulative impact. The company planned to adopt the new lease standard on January 1, 2019 and was still assessing its effect.
- Share repurchases: The company repurchased 27,141 shares during the third quarter and had authorization to repurchase 198,452 additional shares at September 30.
Most Important Facts for Investors to Verify
- Whether the unusually favorable tax rate and Tax Act adjustments recur, reverse, or generate further provisional adjustments.
- The development, insurance coverage, and potential financial exposure of the Altalink litigation.
- Whether working-capital requirements, particularly receivables and inventory, continue to suppress operating cash flow.
- Margin trends in The Americas and EMEA, including raw-material costs, product mix, and foreign-currency transaction losses.
- Compliance with credit-facility covenants and the company’s use of its $42.5 million borrowing capacity.
- The effect of foreign exchange, interest rates, tariffs, and the January 2019 lease-standard adoption on future results.