Preformed Line Products Company — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
Preformed Line Products Company designs and manufactures products and systems supporting overhead and underground energy, telecommunications, data communication, cable, and solar networks. The company operates 27 sales and manufacturing locations in 18 countries and reports four geographic segments: PLP-USA, The Americas, EMEA, and Asia-Pacific. This report covers the three and six months ended June 30, 2017; the financial statements are unaudited.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Net sales | $97.5 million | $83.2 million | $182.1 million | $161.9 million |
| Gross profit | $29.7 million | $26.8 million | $54.3 million | $51.1 million |
| Gross margin | 30.4% | 32.2% | 29.8% | 31.6% |
| Operating income | $6.3 million | $4.1 million | $8.6 million | $7.8 million |
| Operating margin | 6.5% | 4.9% | 4.7% | 4.8% |
| Net income | $4.2 million | $2.8 million | $5.7 million | $5.4 million |
| Diluted EPS | $0.81 | $0.53 | $1.11 | $1.04 |
For the six months ended June 30, 2017, net cash provided by operating activities was $2.0 million, compared with $10.0 million in the prior-year period. Capital expenditures were $4.6 million, compared with $19.7 million in 2016. Cash and cash equivalents were $28.0 million at June 30, 2017, compared with $30.7 million at December 31, 2016.
Total debt was $39.4 million at June 30, 2017. The company had $40.1 million of unused availability under its $65 million credit facility, net of outstanding letters of credit, and was in compliance with its debt covenants. The company declared quarterly dividends of $0.20 per share, or $0.40 per share for the first six months.
Material Changes Versus Prior Comparable Period
- Q2 sales increased 17%, while six-month sales increased 12%. Excluding currency translation, six-month sales increased approximately 12%.
- Q2 operating income increased $2.2 million, or 54%; six-month operating income increased $0.8 million, or 10%.
- Q2 net income increased $1.4 million, or 53%; six-month net income increased $0.3 million, or 5%.
- Gross margin declined 180 basis points in Q2 and 180 basis points for the six-month period, primarily reflecting product mix and higher product costs relative to sales.
- Q2 sales growth was led by Asia-Pacific, up 26% excluding currency effects, The Americas, up 16%, and EMEA, up 19%. PLP-USA sales increased 11%.
- EMEA gross profit declined despite higher sales because of a shift toward lower-margin products. Asia-Pacific gross profit increased substantially with higher transmission-product volumes.
- Operating cash flow declined by $8.0 million year over year, principally because accounts receivable used $15.3 million of cash in 2017 compared with a small source of cash in 2016.
- Financing activities used $8.8 million in the first six months of 2017, compared with $10.6 million provided in the prior-year period, reflecting substantial debt repayments partially offset by new borrowings.
Outlook, Commentary, Risks, and Unusual Items
Management stated that business fundamentals and the financial position were sound and that the company remained strategically positioned for growth. Management expects operating cash flow, existing cash, and available borrowing capacity to fund debt repayments, capital expenditures, dividends, and other needs for the next 12 months and foreseeable future. No formal revenue or earnings guidance was provided.
Management highlighted continued investment in efficiency, new products, capacity, and global manufacturing flexibility. Foreign currency translation favorably affected six-month sales by approximately $1.4 million but had an immaterial unfavorable effect on operating income and net income.
- A Canadian lawsuit alleges defects involving spacer dampers supplied for Alberta power projects. The plaintiff seeks approximately $56 million from the defendants jointly and severally. The company believes the claims are without merit but cannot predict the outcome; an adverse result could materially affect financial results.
- Key operating risks include global infrastructure and energy spending, low commodity prices, customer financing capacity, competition and pricing pressure, raw-material costs, foreign currency movements, international political and economic conditions, technological changes, labor disruptions, regulation, and potential acquisitions.
- The effective tax rate increased to 34% in Q2 and 32% for the six-month period, compared with 27% in both prior-year periods, partly because 2016 benefited from valuation-allowance releases.
- The company completed restructuring actions in Asia-Pacific in prior periods. No restructuring expense was recorded in the first six months of 2017; the remaining restructuring liability was approximately $0.5 million.
- The company adopted accounting updates on stock compensation and inventory effective January 1, 2017, with no material reported impact. The company is evaluating future standards involving revenue recognition, leases, restricted cash, pension-cost presentation, income taxes, and goodwill impairment.
- The company had no foreign currency forward contracts at June 30, 2017. Management estimated that a hypothetical 10% currency-rate change would affect the fair value of exposed instruments by approximately $0.9 million and pretax income by approximately $0.7 million.
Important Facts for Investors to Verify
- Whether sales growth and transmission-product demand remain durable, particularly in Asia-Pacific and The Americas.
- Whether gross-margin pressure from product mix, pricing, and input costs persists, especially in EMEA.
- The timing and magnitude of accounts-receivable conversion into cash and the resulting effect on operating cash flow.
- Debt repayment requirements, credit-facility availability, covenant compliance, and variable-rate exposure.
- The potential financial exposure and development of the approximately $56 million Canadian litigation matter.
- Foreign currency effects on reported sales, earnings, cash, and shareholders’ equity.
- Any material effects from adoption of the new revenue-recognition standard planned for January 1, 2018 and other pending accounting standards.
- The filing states that disclosure controls and procedures were effective as of June 30, 2017 and that no material changes affected internal control over financial reporting.