Preformed Line Products Company — Q2 2018 Form 10-Q Summary
Business context and reporting period
Preformed Line Products Company designs and manufactures products and systems for overhead and underground energy, telecommunications, cable, data communication, solar and related networks. It operates 27 sales and manufacturing facilities in 18 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific. This report covers the three and six months ended June 30, 2018; financial statements are unaudited.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $108.9 million | $97.5 million | $207.1 million | $182.1 million |
| Gross profit | $35.2 million | $29.7 million | $66.7 million | $54.3 million |
| Gross margin | 32.3% | 30.4% | 32.2% | 29.8% |
| Operating income | $9.3 million | $6.3 million | $17.1 million | $8.6 million |
| Operating margin | 8.6% | 6.5% | 8.2% | 4.7% |
| Net income | $6.7 million | $4.2 million | $12.3 million | $5.7 million |
| Net margin | 6.2% | 4.3% | 5.9% | 3.1% |
| Diluted EPS | $1.33 | $0.81 | $2.42 | $1.11 |
- Six-month net cash provided by operating activities was $7.7 million, compared with $2.0 million in the prior-year period.
- Capital expenditures were $5.6 million. Investing cash flow was negative $10.3 million, including purchases of marketable securities and a company-owned life insurance policy.
- Cash, cash equivalents and restricted cash totaled $41.7 million at June 30, 2018, including $0.3 million of restricted cash. Cash and cash equivalents alone were $41.4 million.
- Total debt was $41.5 million, consisting principally of revolving credit and term borrowings. The company had $38.2 million of unused credit availability and was in compliance with its debt covenants.
- The $65 million credit facility was extended to June 30, 2021. Borrowing costs were LIBOR plus 1.125%, increasing to LIBOR plus 1.500% if the funded-debt-to-EBITDA threshold is exceeded.
- Dividends declared were $0.20 per share for the quarter and $0.40 per share for the six-month period.
Material changes versus the prior comparable period
- Q2 sales increased 11.7%; six-month sales increased 13.7%. Excluding currency translation, sales increased approximately 11% in Q2 and 12% for the six-month period.
- Growth was led by higher energy product volumes in PLP-USA and EMEA, higher energy and communications volumes in The Americas, and higher energy, communications and special-industries volumes in Asia-Pacific.
- Gross margin expanded by 190 basis points in Q2 and 240 basis points for the six-month period, reflecting higher volumes and favorable product mix, particularly in PLP-USA and The Americas.
- Operating income rose 48% in Q2 and 100% for the six-month period. Net income rose 62% in Q2 and 116% for the six-month period.
- Foreign currency translation favorably affected reported sales by approximately $0.4 million in Q2 and $3.1 million for the six-month period, but had an immaterial effect on operating income and net income. Currency translation reduced other comprehensive income by $13.4 million in Q2 and $9.5 million for the six-month period.
- Working capital increased, including accounts receivable of $78.1 million and inventories of $83.2 million at June 30, 2018, compared with $74.0 million and $77.9 million, respectively, at December 31, 2017.
Outlook, commentary, risks and unusual items
Management stated that business fundamentals and financial position were sound, with continued investment in efficiency, new products, capacity and global manufacturing capabilities. No specific revenue, earnings or margin guidance was provided. Management expects operating cash flow, existing cash and the credit facility to fund debt repayment, capital expenditures, dividends and other anticipated needs for at least the next 12 months.
- The effective tax rate declined to 27% from 34% in Q2 and to 27% from 32% for the six-month period, primarily reflecting the Tax Cuts and Jobs Act and changes in the geographic mix of earnings. Certain Tax Act accounting remained provisional, although management did not expect future adjustments to be material.
- The company adopted revenue-recognition Topic 606, restricted-cash guidance, intra-entity transfer tax guidance and financial-instrument guidance effective January 1, 2018. The filing states that these adoptions did not have a material impact.
- Altalink, L.P. reduced its Alberta, Canada litigation demand from an estimated $56.0 million to $29.4 million on June 1, 2018. The company believes the claims are without merit but cannot predict the outcome; an adverse result could materially affect financial results.
- Key operating risks include global demand and economic conditions, customer funding, technology shifts affecting communications infrastructure, raw-material costs and tariffs, foreign exchange, international operations, competition and pricing pressure, labor disruptions, regulatory matters, acquisitions and litigation.
- A hypothetical 10% currency-rate change would have affected the fair value of exposed instruments by approximately $6.3 million and income before taxes by approximately $1.9 million. A 100-basis-point interest-rate increase would have increased six-month interest expense by approximately $1.2 million.
- Disclosure controls were effective as of June 30, 2018, and the filing reports no material changes to internal control other than changes associated with Topic 606 implementation.
Most important facts for investors to verify
- Whether sales volume and improved product mix continue to support the expanded gross and operating margins.
- The progression and potential exposure from the Altalink litigation, including the $29.4 million demand and available insurance coverage.
- Operating cash conversion, inventory and receivables growth, and the sustainability of cash flow relative to capital expenditures and dividends.
- Debt covenant compliance, utilization of the $65 million facility, floating-rate exposure and future borrowing needs.
- Finalization of provisional Tax Act accounting and the effect of foreign earnings mix, GILTI, FDII and foreign tax rates on future effective tax rates.
- Foreign exchange effects on reported results and accumulated other comprehensive loss, particularly given the company’s international footprint.