Preformed Line Products Company — Q1 2017 Form 10-Q
Business context and reporting period
PLP designs and manufactures products and systems supporting 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 filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Financial performance and condition
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $84.6 million | $78.7 million | 7% |
| Gross profit | $24.7 million | $24.3 million | 2% |
| Gross margin | 29.2% | 30.9% | Down 170 bps |
| Operating income | $2.3 million | $3.7 million | Down $1.4 million |
| Operating margin | 2.7% | 4.7% | Down 200 bps |
| Net income | $1.5 million | $2.7 million | Down 43% |
| Diluted EPS | $0.30 | $0.51 | Down $0.21 |
- Sales growth excluding currency translation was approximately 6%, or $4.5 million. The Americas increased 23% on higher transmission and communications volume; Asia-Pacific increased 7%; EMEA increased 2%; and PLP-USA increased 1%.
- Gross profit growth was limited by unfavorable product mix, particularly in EMEA and Asia-Pacific. Costs and expenses increased 9%, driven by personnel, advertising, depreciation and lower foreign-exchange gains.
- Net sales benefited by $1.3 million from currency translation, while currency translation had an immaterial effect on operating income and net income.
- Net cash used in operating activities was $1.6 million, compared with $1.2 million provided in Q1 2016. Working-capital investment included a $6.1 million increase in accounts receivable and a $1.5 million increase in inventories.
- Capital expenditures were $2.2 million, compared with $5.5 million in Q1 2016. Investing activities provided $0.4 million, primarily reflecting changes in restricted cash and fixed-term deposits.
- Cash and cash equivalents were $31.0 million at March 31, 2017, up from $30.7 million at December 31, 2016. The majority of cash was held outside the United States.
- Total debt was $47.4 million. The company had $31.8 million of unused credit-facility availability and was in compliance with its debt covenants. The credit facility has $65 million of borrowing capacity and matures June 30, 2019.
- The company declared a quarterly dividend of $0.20 per share. It paid $1.0 million of dividends during the quarter.
Material changes versus the prior comparable period
- Revenue increased $5.9 million, but higher operating expenses and weaker product mix reduced operating income by $1.4 million and net income by $1.1 million.
- PLP-USA reported a $0.6 million net loss versus a $0.1 million net loss in Q1 2016. The Americas improved net income by $0.7 million, while EMEA net income declined by $1.1 million and Asia-Pacific’s net loss increased by $0.2 million.
- Interest expense increased to $0.3 million from $0.2 million, partly reflecting higher debt levels.
- Comprehensive income increased to $7.1 million from $6.6 million, primarily because of a $5.5 million favorable foreign-currency translation adjustment.
- The company adopted ASU 2016-09 on share-based compensation and ASU 2015-11 on inventory measurement. Neither adoption had a material effect on the financial statements.
Outlook, commentary, risks and unusual items
- Management stated that business fundamentals and the financial position remain sound and that the company is strategically positioned for profitable growth. It expects operating cash flow, cash balances and available credit to fund debt repayment, capital expenditures and dividends for the foreseeable future.
- No quantitative revenue or earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Key risks include slow infrastructure demand in mature markets, global economic conditions, commodity prices, customer funding constraints, technological substitution, foreign-currency volatility, raw-material costs, competitive pricing, labor disruptions, regulatory changes and acquisition execution.
- The company faces a Canadian lawsuit brought by Altalink seeking approximately $56 million jointly and severally from multiple defendants. The allegations concern defective spacer dampers supplied by Helix Uniformed Ltd. The company considers the claims without merit but cannot predict the outcome; an adverse result could materially affect results.
- The remaining restructuring liability related to an Asia-Pacific operation was approximately $0.5 million, with no restructuring expense recorded in Q1 2017.
- A 10% change in currency rates would have an estimated $1.1 million favorable or unfavorable effect on the fair value of exposed instruments and a $0.3 million effect on pretax income. A 100-basis-point increase in interest rates would have increased quarterly interest expense by approximately $0.5 million.
- The company expects to adopt the new revenue-recognition standard effective January 1, 2018 and is still evaluating the impact. It is also evaluating other pending accounting standards, including leases and restricted cash.
Most important facts for investors to verify
- Whether revenue growth continues after excluding the $1.3 million currency benefit.
- Whether gross-margin pressure from product mix, particularly in EMEA and Asia-Pacific, reverses.
- Whether operating cash flow improves as receivables and inventories normalize.
- The company’s ongoing compliance with debt covenants and utilization of its $65 million credit facility.
- The status, potential exposure and insurance coverage related to the approximately $56 million Altalink litigation claim.
- The effect of foreign-currency movements and interest-rate changes on earnings and cash flow.
- The eventual impact of the January 1, 2018 revenue-recognition adoption and other pending accounting standards.