Preformed Line Products Company — Q1 2016 Form 10-Q Summary
Business context and reporting period
Preformed Line Products Company designs and manufactures products and systems used in overhead and underground energy, telecommunications, cable, data communication and solar networks. The company operates 29 sales and manufacturing locations in 17 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific. This filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $78.7 million | $85.8 million | Down $7.1 million, or 8% |
| Gross profit | $24.3 million | $24.8 million | Down $0.5 million, or 2% |
| Gross margin | 30.9% | 28.9% | Up 2.0 percentage points |
| Operating income | $3.7 million | $(0.1) million | Improved $3.8 million |
| Operating margin | 4.7% | (0.1)% | Up 4.8 percentage points |
| Net income (loss) | $2.7 million | $(0.3) million | Improved $2.9 million |
| Net margin | 3.4% | (0.3)% | Up 3.7 percentage points |
| Diluted EPS | $0.51 | $(0.05) | Improved $0.56 |
| Cash flow from operations | $1.2 million | $0.6 million | Up $0.6 million |
Cash and cash equivalents were $31.4 million at March 31, 2016, compared with $30.4 million at December 31, 2015. Total debt was $36.8 million, including $35.8 million of long-term debt and $0.9 million of notes payable and current long-term debt. The company reported $12.7 million of unused credit availability, a 3.6-to-1 current ratio and bank debt-to-equity of 16.4%. The credit facility extends through August 2017 at LIBOR plus 1.125%; the company was in compliance with its covenants.
Capital expenditures were $5.5 million, including a $3.5 million deposit for a corporate aircraft intended to replace the expiring lease of the existing aircraft. Investing activities used $2.2 million, while financing activities provided $2.7 million, primarily because of net debt borrowings. The company paid $1.1 million of dividends and repurchased $0.6 million of common shares.
Material changes versus the prior comparable period
- Reported sales declined 8%, but sales excluding currency translation declined only 1%. Foreign currency translation reduced sales by approximately $6.0 million and net income by approximately $0.6 million.
- Sales increased 2% in PLP-USA, 12% in The Americas and 8% in EMEA, excluding currency effects, but declined 19% in Asia-Pacific, primarily because of lower solar, transmission and distribution volumes.
- Gross margin improved despite lower reported gross profit. Excluding currency effects, gross profit increased 7%, supported by improved product mix and approximately $1.0 million of Asia-Pacific cost savings from the 2015 operational reconfiguration.
- Operating performance benefited from lower costs and expenses, including foreign-exchange gains and restructuring-related savings. Costs and expenses declined 17% as reported and 11% excluding currency effects.
- Operating income improved from a loss of $0.1 million to income of $3.7 million. Net income improved from a loss of $0.3 million to $2.7 million.
- The 2015 segment reconfiguration consolidated certain manufacturing processes from The Americas into PLP-USA; prior-period segment amounts were reclassified for comparability.
Guidance, outlook, commentary and risks
The filing does not provide formal full-year revenue or earnings guidance. Management stated that business fundamentals and the financial position remained sound, and that the company intended to continue investing in efficiency, new products, capacity and strategic initiatives. Management expects operating cash flow, existing cash and the credit facility to fund debt repayments, capital expenditures, dividends and foreseeable liquidity needs.
Management cited slow growth or delays in infrastructure spending, global economic conditions, low oil and commodity prices, customer funding constraints, technological changes affecting communications, competitive and customer price pressure, raw-material costs, labor disruptions, regulatory changes and foreign-exchange volatility as significant risks. A hypothetical 10% currency-rate change would affect the fair value of exposed instruments by approximately $5.8 million and pre-tax income by approximately $1.8 million. A 100-basis-point increase in interest rates would have increased quarterly interest expense by approximately $0.3 million.
Restructuring expense was approximately $0.1 million in Q1 2016 versus $0.5 million in Q1 2015, with $0.7 million of restructuring liabilities remaining at March 31, 2016. The company reported no pending legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors. The pension plan received no contributions during the quarter, and the company did not anticipate contributions for 2016.
The company early adopted ASU 2015-17, reclassifying deferred tax assets and liabilities as noncurrent; the change affected classification only and had no material effect on financial position or results. The company was evaluating the potential effects of several future accounting standards, including share-based compensation, leases, inventory, going concern and revenue recognition guidance.
Most important facts for investors to verify
- Whether the sharp Asia-Pacific volume decline, particularly in solar and transmission, persists in subsequent quarters.
- The sustainability of operating improvement after separating currency gains, restructuring benefits and other unusual items.
- Foreign-exchange exposure and the effect of further currency movements on sales, earnings, cash and equity.
- The use of debt and available credit to fund the corporate aircraft purchase and other capital expenditures.
- Progress and remaining costs from the 2015 restructuring and manufacturing reconfiguration.
- Future capital allocation, including the authorized repurchase of up to 250,000 shares and the $0.20-per-share quarterly dividend.
- Potential effects of pending accounting standards and the company’s use of LIFO inventory accounting, which is subject to final year-end valuation.