Preformed Line Products Company — Q2 2012 Form 10-Q Summary
Business context and reporting period
PLPC designs and manufactures products and systems used in overhead and underground energy, telecommunications, cable, data-communication and solar networks. It operated 17 sales and manufacturing locations in 14 countries across four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific. The filing covers the quarter and six-month periods ended June 30, 2012, with comparative periods ended June 30, 2011.
Financial performance and condition
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net sales | $111.9 million | $114.5 million | $220.8 million | $209.6 million |
| Gross profit | $37.0 million | $36.7 million | $73.0 million | $69.1 million |
| Gross margin | 33% | 32% | 33% | 33% |
| Operating income | $9.7 million | $13.1 million | $21.8 million | $23.3 million |
| Operating margin | 9% | 11% | 10% | 11% |
| Net income attributable to PLPC | $6.6 million | $8.4 million | $14.7 million | $15.4 million |
| Diluted EPS | $1.21 | $1.55 | $2.71 | $2.85 |
Six-month net cash provided by operating activities was $22.4 million, compared with $2.1 million in the prior-year period. Investing cash outflows were $16.2 million, including $12.9 million of capital expenditures and $5.2 million for acquisitions. Financing cash outflows were $7.8 million, including $2.2 million of dividends, $4.4 million of net debt payments and $1.1 million of acquisition earn-out consideration. Cash ended the period at $30.4 million, down from $32.1 million at December 31, 2011.
At June 30, 2012, current assets were $209.6 million and current liabilities were $66.5 million, producing a 3.2-to-1 current ratio. Total debt, including current maturities and notes payable, was approximately $26.2 million. The company reported a 12% bank-debt-to-equity ratio, $64.7 million of unused availability under its principal credit facility, and compliance with applicable covenants. The facility was amended to $90 million and extended to January 2015, with interest at LIBOR plus 1.125%.
Material changes versus the prior comparable period
- Second-quarter sales declined 2%, but increased 3% excluding a $6.3 million unfavorable foreign-currency translation effect. Six-month sales increased 5%, or approximately 9% excluding currency effects.
- Second-quarter operating income fell 26% and net income attributable to PLPC fell 21%, primarily because operating costs increased 16% while sales declined.
- Six-month operating income declined 6% and net income declined 4%; management stated that six-month net income was approximately unchanged excluding currency effects.
- Gross margin improved in the second quarter to 33% from 32%, while six-month gross margin remained 33%. Higher production margins and stronger PLP-USA and EMEA performance offset weakness in The Americas and Asia-Pacific.
- PLP-USA six-month sales increased 20% and net income increased 50%. EMEA sales increased 14% excluding currency effects and net income increased 84% excluding currency effects.
- The Americas experienced lower solar sales and weaker production margins. Asia-Pacific results were pressured by lower organic volume and margins, partially offset by the January 2012 acquisition.
- PLPC acquired Australian Electricity Systems PTY Ltd. in January 2012 and the assets of Forma Line Industries CC in South Africa in March 2012. The acquisitions contributed to increased goodwill, sales and expenses.
- Comprehensive income attributable to PLPC was a loss of $0.4 million in the second quarter, compared with income of $11.7 million in the prior-year quarter, principally because of a $7.2 million after-tax currency translation loss.
Outlook, commentary, risks and unusual items
Management described the financial condition as strong despite continuing global economic volatility, the Eurozone crisis and reduced growth in parts of Asia-Pacific. The company expects operating cash flows, existing cash and available borrowing capacity to fund debt repayments, contractual obligations, capital expenditures and dividends. No specific revenue or earnings guidance was provided.
- Foreign-currency translation reduced reported six-month sales by approximately $7.2 million and net income by approximately $0.7 million. Currency losses on intercompany receivables and loans also reduced pretax earnings by $1.7 million for the six-month period.
- The company expects to contribute an additional $1.5 million to its defined-benefit pension plan during 2012, following $0.7 million of contributions in the first six months.
- An acquisition-related earn-out liability was revised, with approximately $0.9 million accrued at June 30, 2012; the adjustment reduced the estimated liability by $0.3 million and was recorded in costs and expenses.
- Warranty reserves increased to $1.2 million from $0.8 million at December 31, 2011. The company reported no pending legal proceedings expected to have a material adverse effect.
- Key risks include global demand for network infrastructure products, customer funding, technological substitution, raw-material cost and availability, pricing pressure, acquisition integration, foreign-exchange movements, international political and economic conditions, regulation, renewable-energy incentives and broader economic weakness.
- A 100-basis-point increase in interest rates would have increased six-month interest expense by approximately $0.3 million. A hypothetical 10% currency-rate change would affect the fair value of exposed instruments by approximately $6.3 million and pretax income by approximately $0.1 million.
Investor verification checklist
- Reconcile reported growth with constant-currency growth and monitor currency exposure in international operations.
- Assess whether higher operating expenses, pension costs, warranty costs and acquisition-related expenses continue to pressure operating margins.
- Review the performance and integration of the Australian and South African acquisitions, including earn-out obligations and goodwill.
- Verify capital-expenditure requirements, acquisition spending, dividend commitments and debt repayments against operating cash generation.
- Monitor Asia-Pacific organic demand, solar sales in The Americas, production margins and raw-material costs.
- Confirm availability and covenant compliance under the amended $90 million credit facility.
- Consider potential variability in interim LIFO inventory valuation, pension estimates, warranty reserves, tax positions and goodwill impairment assumptions.