Preformed Line Products Company: Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Preformed Line Products Company designs and manufactures products used in overhead and underground energy, telecommunications, cable, data communication and solar networks. It operates 27 sales and manufacturing locations in 18 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $98.1 million | $84.6 million | Up 16% |
| Gross profit | $31.5 million | $24.7 million | Up 28% |
| Gross margin | 32.1% | 29.2% | Up 290 basis points |
| Operating income | $7.7 million | $2.3 million | Up $5.5 million |
| Operating margin | 7.9% | 2.7% | Up 520 basis points |
| Net income | $5.5 million | $1.5 million | Up $4.0 million |
| Net margin | 5.6% | 1.8% | Up 380 basis points |
| Diluted EPS | $1.09 | $0.30 | Up $0.79 |
| Cash dividends declared per share | $0.20 | $0.20 | No change |
Revenue growth excluding currency translation was approximately 13%. Currency translation increased sales by $2.7 million and had an immaterial favorable effect of approximately $0.1 million on operating income and net income.
- PLP-USA sales increased 13% to $39.4 million, driven primarily by higher formed wire, hardware and protective closure volumes.
- The Americas sales increased 20% excluding currency effects, primarily from higher formed wire, hardware and protective closure volumes.
- EMEA sales decreased 5% excluding currency effects, reflecting lower formed wire, hardware and protective closure volumes.
- Asia-Pacific sales increased 13% excluding currency effects, primarily from higher formed wire and hardware volumes.
Cash and cash equivalents were $45.5 million at March 31, 2018, compared with $44.4 million at December 31, 2017. Total assets were $376.0 million and shareholders’ equity was $247.0 million.
Net cash used in operating activities was $1.0 million, compared with $1.6 million used in Q1 2017. Investing activities used $7.0 million, including $2.7 million of capital expenditures and $4.3 million for marketable securities. Financing activities provided $8.3 million, including $20.3 million of long-term debt proceeds, offset by $11.1 million of debt repayments and $1.0 million of dividends paid. Cash, cash equivalents and restricted cash totaled $46.8 million at quarter-end, including $1.3 million of restricted cash.
Total debt was $47.1 million. The Company had utilized $32.9 million of its $65.0 million credit facility and reported $32.1 million of available capacity after outstanding letters of credit. The facility maturity was extended from June 30, 2019 to June 30, 2021. The Company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth, higher volumes and a more favorable product mix increased gross profit and expanded gross margin by 290 basis points.
- Operating expenses increased 7% to $23.8 million, including a $0.7 million unfavorable currency effect, but grew only 3% excluding currency.
- PLP-USA moved from a $0.6 million net loss to $1.7 million of net income. Asia-Pacific moved from a $0.3 million net loss to $0.3 million of net income.
- EMEA net income declined 45% to $0.4 million, consistent with lower sales and operating income in the region.
- Inventory increased to $83.3 million from $77.9 million at year-end, while accounts receivable increased to $77.4 million from $74.0 million.
- The Company repurchased 10,907 shares during the quarter and had authorization remaining for 239,093 shares.
- The Company adopted the new revenue standard, ASC 606, effective January 1, 2018 using the modified retrospective method. The cumulative adoption impact was not material.
Outlook, Commentary, Risks and Unusual Items
Management stated that business fundamentals and the financial position remain sound and that the Company is strategically positioned to pursue profitable growth. It expects operating cash flows, existing cash and the credit facility to fund debt repayments, capital expenditures, dividends and other foreseeable needs. No quantitative full-year revenue or earnings guidance was provided.
Management continues to invest in facilities, capacity, efficiency and new products and may adjust its global manufacturing network to manage costs and support demand. The Company expects to contribute approximately $0.5 million to its pension plan in the second quarter of 2018.
- A Canadian lawsuit alleges defects in spacer dampers supplied for Alberta power projects and seeks approximately $56.0 million in damages jointly and severally from multiple defendants. The Company believes the claims are without merit, but an adverse outcome could materially affect results.
- Foreign exchange remains material: a hypothetical 10% currency-rate change would affect the fair value of exposed instruments by approximately $6.3 million and pretax income by approximately $1.3 million.
- A 100-basis-point increase in interest rates would have increased quarterly interest expense by approximately $0.5 million.
- Key business risks include global demand, customer financing, technology changes, copper-infrastructure substitution, competition and pricing pressure, raw-material costs, international political and economic conditions, foreign exchange, labor disruptions, regulation, litigation and acquisition execution.
- Tax accounting under the 2017 Tax Cuts and Jobs Act remains provisional in certain respects under SEC Staff Accounting Bulletin 118. The effective tax rate was 28% in both comparable quarters.
- The Company adopted accounting guidance on restricted cash, intra-entity asset transfers, financial assets and pension-cost presentation; reported impacts were not material.
Investor Verification Items
- Verify whether sales momentum and gross-margin expansion continue, particularly in PLP-USA, The Americas and Asia-Pacific, and whether EMEA stabilizes.
- Review operating cash conversion, inventory growth and working-capital requirements because quarterly operating cash flow remained negative despite higher earnings.
- Monitor debt borrowings, covenant compliance, variable-rate exposure and the Company’s use of its credit facility.
- Assess the potential financial and insurance implications of the approximately $56.0 million Canadian litigation claim.
- Track finalization of provisional Tax Act accounting and the effects of the 21% U.S. statutory tax rate, GILTI, BEAT and other provisions.
- Confirm the Company’s ongoing capital expenditure, pension funding, share repurchase and dividend plans.