Preformed Line Products Company — Form 10-Q Summary
Business context and reporting period
Filed August 6, 2015, for the quarter and six months ended June 30, 2015. PLPC designs and manufactures products and systems supporting overhead and underground energy, telecommunications, cable, data communication, and solar networks. Operations comprise 29 sales and manufacturing locations in 17 countries, reported across PLP-USA, The Americas, EMEA, and Asia-Pacific.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Net sales | $87.9 million | $173.7 million |
| Gross profit | $26.4 million; 30.1% margin | $51.2 million; 29.5% margin |
| Operating income | $5.2 million; 5.9% margin | $5.1 million; 2.9% margin |
| Net income | $3.7 million; 4.2% margin | $3.4 million; 2.0% margin |
| Diluted EPS | $0.68 | $0.63 |
| Operating cash flow | Not separately provided | $7.7 million |
- Cash and cash equivalents were $30.7 million at June 30, 2015, compared with $29.6 million at December 31, 2014.
- Total debt was $33.3 million, including $2.4 million of notes payable to banks, $0.1 million of current long-term debt, and $30.7 million of long-term debt.
- Unused credit availability was $16.2 million. The credit facility extends through January 2017 at LIBOR plus 1.125%; the company was in compliance with its covenants.
- Current assets were $200.5 million and current liabilities were $55.3 million, producing a reported current ratio of 3.6 to 1.
- Capital expenditures were $4.6 million and dividends paid were $2.3 million during the first six months. Cash increased $1.1 million after operating, investing, financing, and foreign-exchange effects.
- Foreign currency translation reduced reported sales by $8.3 million in the quarter and $14.8 million in the first half. Transaction losses were $23,000 in the quarter and $3.4 million year to date.
Material changes versus the prior comparable periods
- Second-quarter sales declined 12% from $100.0 million to $87.9 million; excluding currency translation, sales declined 4%. First-half sales declined 9% from $189.9 million to $173.7 million; excluding currency, sales declined 1%.
- Second-quarter gross profit decreased 15%, and the gross margin declined from 31.2% to 30.1%. First-half gross profit decreased 13%, with margin declining from 30.9% to 29.5%.
- Second-quarter operating income decreased 32% to $5.2 million and net income decreased 28% to $3.7 million. First-half operating income decreased 57% to $5.1 million and net income decreased 56% to $3.4 million.
- International weakness was concentrated in The Americas, where sales fell 13% in the quarter and 17% year to date excluding currency effects, primarily because of lower transmission volume. EMEA improved 5% year to date excluding currency, while Asia-Pacific improved 10%, driven largely by solar sales.
- PLP-USA sales increased 1% year to date excluding currency, and gross profit increased 3%, supported by improved price and product mix. However, PLP-USA costs and expenses increased $4.1 million, mainly due to foreign-currency losses.
- Operating cash flow decreased from $10.5 million to $7.7 million. Investing cash use fell substantially because the prior-year period included the $14.7 million Helix acquisition and higher capital expenditures.
- The effective tax rate declined to 18% from 33% in the quarter and to 22% from 33% year to date, primarily because of earnings in lower-tax jurisdictions and a favorable Asia-Pacific tax audit resolution.
Outlook, commentary, risks, contingencies, and unusual items
- Management stated that business fundamentals remain sound and that it is focused on cost control, sales volumes, efficiency, new products, capacity, and customer value. No quantitative earnings or sales guidance was provided.
- Management expects operating cash flow, existing cash, and available credit to fund debt repayments, capital expenditures, dividends, and other commitments. It believes domestic liquidity is sufficient for at least the next 12 months and the foreseeable future.
- Key risks include global infrastructure and transmission spending, customer funding, economic conditions, technology shifts toward wireless and fiber, raw-material cost and availability, pricing pressure, labor disruptions, regulation, acquisitions, foreign-exchange volatility, and political or economic conditions in international markets.
- The quarter included a $0.7 million increase in other expense related to writing off a tax-indemnification receivable associated with a prior acquisition. The related foreign tax audit resolution reduced tax expense and lowered the effective tax rate.
- Accumulated other comprehensive loss increased to $44.0 million from $35.1 million at year-end, primarily because of a $9.0 million unfavorable foreign-currency translation adjustment in the first half.
- No material pending litigation, material changes to previously disclosed risk factors, or goodwill impairment indicators were reported. Product warranty reserves declined to $0.8 million from $1.2 million at June 30, 2014.
- A hypothetical 10% currency-rate change would affect the fair value of exposed instruments by approximately $6.3 million and pretax income by approximately $3.3 million. A 100-basis-point interest-rate increase would have increased first-half interest expense by approximately $0.3 million.
- Disclosure controls were deemed effective, and no material changes in internal control over financial reporting were identified.
Investor verification items
- Verify whether transmission-market weakness in The Americas and deferred infrastructure spending persist, and whether Asia-Pacific solar growth offsets lower-margin product mix.
- Assess the sustainability of the unusually low effective tax rate after the favorable foreign audit resolution.
- Monitor foreign-currency exposure, including transaction losses, translation effects, and the concentration of cash held outside the United States.
- Reconcile debt, credit availability, covenant compliance, and the January 2017 credit-facility maturity.
- Evaluate whether operating cash flow can support planned capital expenditures, dividends, debt service, and potential acquisitions.
- Review the effect of the $0.8 million tax-indemnification receivable write-off and other unusual tax-related items on recurring earnings.