Preformed Line Products Company — Q3 2022 Form 10-Q Summary
Business context and reporting period
PLP designs and manufactures products and systems supporting overhead and underground energy, telecommunications, cable, data communications, solar and related infrastructure networks. The company operates approximately 30 sales and manufacturing operations in 21 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding periods in 2021. The company had 4,919,841 common shares outstanding as of October 19, 2022.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $165.4 million | $135.4 million | $467.1 million | $386.0 million |
| Gross profit | $58.3 million | $43.2 million | $153.0 million | $126.4 million |
| Gross margin | 35.2% | 31.9% | 32.7% | 32.7% |
| Operating income | $17.4 million | $13.1 million | $44.8 million | $36.6 million |
| Operating margin | 10.5% | 9.7% | 9.6% | 9.5% |
| Net income attributable to PLP shareholders | $11.9 million | $10.7 million | $37.9 million | $26.8 million |
| Net margin attributable to PLP shareholders | 7.2% | 7.9% | 8.1% | 6.9% |
| Diluted EPS | $2.36 | $2.15 | $7.60 | $5.40 |
- Q3 sales increased 22.2%; nine-month sales increased 21.0%. Excluding currency translation, management reported increases of 28% and 25%, respectively.
- Q3 gross profit increased 35.1%, and gross margin expanded to 35.2%, despite inflation in raw materials and transportation.
- Q3 operating income increased 32.9%, while nine-month operating income increased 22.4%.
- Q3 net income attributable to shareholders increased 11.0%; the nine-month increase was 41.6%.
- PLP-USA was the primary growth contributor. Nine-month sales increased 34% in the segment, excluding currency effects as presented by management. The Americas and EMEA also grew, while Asia-Pacific sales declined 4% on a currency-adjusted basis.
Cash flow, balance sheet, debt and liquidity
- Cash, cash equivalents and restricted cash were $30.9 million at September 30, 2022, compared with $36.4 million at December 31, 2021. The MD&A separately refers to approximately $30.1 million of cash.
- Operating cash flow was $9.1 million for the first nine months of 2022, down from $24.1 million in 2021, primarily due to increases in accounts receivable and inventory.
- Investing cash outflow was $28.1 million, including $25.2 million of capital expenditures and $13.0 million for acquisitions, partially offset by $6.9 million of insurance proceeds and $3.2 million from asset sales.
- Financing activities provided $14.6 million, reflecting net debt proceeds, partially offset by dividends and treasury-share purchases.
- Total debt, including notes payable, was approximately $77.0 million. Long-term debt and current maturities totaled $59.1 million, and notes payable to banks were $17.9 million.
- The amended revolving credit facility increased capacity from $65.0 million to $90.0 million, matures March 2, 2026, and uses SOFR after the August 2022 amendment. Borrowings under the facility totaled $31.2 million, with $58.8 million available, net of letters of credit.
- The company was in compliance with its debt covenants at September 30, 2022 and stated that expected operating cash flow, existing cash and borrowing capacity should cover debt repayments, capital expenditures, acquisitions and dividends.
- Total assets were $530.7 million and shareholders’ equity was $331.0 million at September 30, 2022. Accounts receivable were $122.9 million and inventories were $134.6 million.
Material changes versus the prior comparable period
- Price increases and higher demand for energy and communications products drove substantial PLP-USA growth. Management cited a large order backlog as a continuing benefit, while noting that additional price increases may be required to offset inflation.
- Raw-material and transportation inflation reduced profitability. For PLP-USA, management estimated unfavorable cost impacts of approximately $6.1 million in Q3 and $17.2 million for the first nine months.
- Asia-Pacific results deteriorated. The segment recorded a $6.5 million non-cash goodwill impairment in Q3 after revised forecasts, China-related market headwinds and higher discount rates reduced estimated fair value. Asia-Pacific reported a net loss attributable to PLP shareholders of $5.6 million in Q3 and $6.3 million for the nine months.
- The company acquired Maxxweld in Brazil for approximately $11.2 million and Holplast in the Czech Republic for approximately $5.3 million. These acquisitions contributed approximately $8.5 million and $1.4 million of sales, respectively, from acquisition dates through September 30.
- The company completed its exit from Russian operations during Q3. The exit generated approximately $1.0 million of charges for the first nine months, primarily asset impairments and termination benefits.
- A company-owned life insurance settlement generated approximately $6.9 million of cash proceeds and a $4.4 million gain in the first quarter, contributing to the increase in nine-month other income.
- Accumulated other comprehensive loss increased to $81.8 million from $61.7 million at year-end, primarily due to a $20.3 million foreign-currency translation loss.
Outlook, commentary, risks and contingencies
- Management stated that overall customer demand remained strong and that the company was strategically positioned to support global infrastructure, grid reliability, communications networks and renewable-energy projects.
- Investments in U.S. facilities, operational capacity and warehouse space are expected to enhance customer service beginning in late 2022.
- Management did not provide formal numerical revenue or earnings guidance in the filing. It cautioned that interim results are not necessarily indicative of full-year results.
- Key risks include inflation, raw-material and freight costs, rising interest rates, foreign-exchange volatility, supply-chain disruption, COVID-19, the Russia-Ukraine conflict, slower Asia-Pacific recovery, customer and project financing, acquisitions, competition, technology changes, labor costs and legal or regulatory matters.
- The company accrued approximately $2.0 million for global legal matters. A Canadian lawsuit seeks approximately C$56.0 million jointly and severally from the defendants, including PLP-related entities, concerning alleged defects in spacer dampers. PLP believes the claims are without merit but stated that an adverse outcome could materially affect results.
- Total outstanding guarantees were $10.7 million, and outstanding letters of credit were $0.1 million at September 30, 2022.
- A 100-basis-point increase in interest rates would have increased nine-month interest expense by approximately $0.6 million. A hypothetical 10% currency-rate change would have affected fair values by approximately $6.9 million and pre-tax income by approximately $0.9 million.
- On October 3, 2022, after the reporting period, PLP acquired Delta Conectores in Mexico for approximately $3.8 million.
- Management concluded that disclosure controls were effective as of September 30, 2022, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether price increases continue to offset inflation in resins, aluminum, petroleum, sand, ocean freight and air freight without reducing demand.
- The sustainability of Asia-Pacific operations, including the effects of COVID-19 restrictions, China’s buy-local policies, revised forecasts and the goodwill impairment.
- Working-capital conversion and whether accounts receivable and inventory growth continues to suppress operating cash flow.
- Debt levels, SOFR-based borrowing costs, covenant compliance and available revolving-credit capacity.
- Integration and financial contribution from Maxxweld, Holplast and the subsequent Delta acquisition.
- Potential exposure from the Canadian spacer-damper litigation beyond the reserve recorded and the $10.7 million of outstanding guarantees.
- The extent to which currency translation, geopolitical conditions and further supply-chain disruption affect reported sales, margins and equity.