Preformed Line Products Company — Form 10-Q Summary
Business context and reporting period
PLPC designs and manufactures products and systems supporting overhead and underground energy, telecommunications, cable, data communication, and solar networks. It operates 19 sales and manufacturing locations in 15 countries and reports four geographic segments: PLP-USA, The Americas, EMEA, and Asia-Pacific. This unaudited filing covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $111.7 million | $111.9 million | $210.4 million | $220.8 million |
| Gross profit | $37.5 million | $37.0 million | $68.8 million | $73.0 million |
| Gross margin | 33.6% | 33.0% | 32.7% | 33.1% |
| Operating income | $10.5 million | $9.7 million | $17.4 million | $21.8 million |
| Operating margin | 9.4% | 8.6% | 8.2% | 9.9% |
| Net income | $6.4 million | $6.6 million | $11.4 million | $14.7 million |
| Diluted EPS | $1.17 | $1.21 | $2.08 | $2.71 |
Six-month net cash provided by operating activities was $12.4 million, versus $22.4 million in the prior-year period. Capital expenditures were $10.8 million, producing net cash used in investing activities of $10.7 million. Financing activities provided $0.5 million, including $33.6 million of long-term debt borrowings and $30.4 million of debt repayments. Cash increased $3.1 million to $31.2 million at June 30, 2013.
At June 30, 2013, total assets were $335.0 million and shareholders’ equity was $242.8 million. Long-term debt and current maturities totaled $12.7 million, with no bank notes payable. The company reported $78.1 million of unused credit availability under its $90 million facility, a 5% bank-debt-to-equity ratio, and compliance with debt covenants. The facility matures in January 2015 and bears interest at LIBOR plus 1.125%.
The current ratio was 3.5 to 1. Cash and cash equivalents were predominantly held outside the United States. Quarterly dividends declared were $0.20 per share. The company repurchased 36,107 shares during the quarter and had 87,732 shares remaining under its authorized repurchase plan at June 30.
Material changes versus the prior comparable periods
- Second-quarter sales were essentially flat year over year; excluding currency translation, sales increased 1%. Six-month sales declined 5%, or 3% excluding currency effects.
- Q2 gross margin improved to 33.6% from 33.0%, and operating income increased 8% to $10.5 million. Higher gross profit and lower reported operating expenses offset modestly lower sales.
- Six-month gross margin declined to 32.7% from 33.1%, while operating income fell 20% and net income fell 23%. The decline reflected lower volumes, higher costs and unfavorable currency translation.
- PLP-USA sales declined 9% in Q2 and 7% for the six-month period, primarily because of lower volume. International sales improved in The Americas, EMEA, and Asia-Pacific during Q2, but six-month sales declined in The Americas and Asia-Pacific.
- Asia-Pacific reported a net loss of $0.7 million in Q2 and $1.2 million for the first six months, compared with near break-even or profitable results in the prior-year periods. Government deferrals of transmission-line construction and reduced acquisition-related sales affected the region.
- The effective tax rate increased to 40% from 33% in Q2 and to 36% from 33% for the six-month period. The increase was attributed primarily to unrecognized tax benefits related to losses in certain foreign jurisdictions and unfavorable discrete items.
- Accumulated other comprehensive loss increased to $21.7 million from $13.7 million at year-end 2012, primarily because of an $8.1 million unfavorable foreign-currency translation adjustment during the first six months.
- The company froze further accruals under its PLP-USA hourly pension plan beginning February 1, 2013. It contributed $0.9 million during the first six months and expected to contribute an additional $0.5 million during 2013.
Outlook, commentary, risks, and unusual items
Management stated that global economic conditions remain volatile, including Eurozone uncertainty and reduced growth in Asia-Pacific, but characterized the company’s financial condition as strong. Management expects to fund 2013 and foreseeable domestic requirements through operating cash flow, existing cash, debt capacity, and the credit facility, and does not expect debt levels to materially impair financial condition or results.
No quantitative earnings or sales guidance was provided. Management emphasized cost control, sales-volume growth, efficiency investments, new product development, capacity expansion, and customer value. The filing cautions that interim results are not necessarily indicative of full-year performance.
- Foreign-currency volatility reduced first-half sales by approximately $3.3 million and contributed to a $8.1 million cumulative translation loss in other comprehensive income. A hypothetical 10% currency-rate change could affect income before taxes by approximately $2 million.
- The company is exposed to demand for global transmission, telecommunications, solar, and infrastructure projects; customer funding constraints; technology substitution; raw-material costs; pricing pressure; international political and economic conditions; and government support for infrastructure and renewable-energy programs.
- A 100-basis-point interest-rate increase would have increased first-half interest expense by approximately $0.1 million.
- Gross unrecognized tax benefits were approximately $1.4 million; approximately $0.2 million could decrease within the next twelve months through statute-of-limitations expirations.
- Warranty reserves were $1.2 million at June 30, 2013. Management reported no pending legal proceedings expected to have a material adverse effect.
- The company adopted ASU 2013-02 concerning accumulated other comprehensive income presentation. It was evaluating the future effects of ASU 2013-11 on unrecognized tax-benefit presentation and ASU 2013-05 on foreign-currency translation adjustments.
Important facts for investors to verify
- Whether the first-half sales decline and Asia-Pacific losses persist, particularly given transmission-project deferrals and lower acquisition-related revenue.
- Whether improved Q2 gross margins are sustainable amid raw-material, production, and currency pressures.
- The effect of the higher effective tax rate and foreign-jurisdiction valuation allowances on future earnings and cash taxes.
- Cash conversion, working-capital requirements, capital expenditures, and the pace of debt repayments relative to the $78.1 million unused credit capacity.
- Foreign-currency exposure, including the sensitivity of intercompany loans and receivables to exchange-rate changes.
- Progress on pension funding, warranty claims, tax contingencies, and the company’s planned adoption of new accounting standards.