Preformed Line Products Company — Form 10-Q Summary
Business context and reporting period
Preformed Line Products Company designs and manufactures products used in overhead and underground energy, telecommunications, cable, data communication, and solar networks. The company operates 19 sales and manufacturing locations in 15 countries and reports four geographic segments: PLP-USA, The Americas, EMEA, and Asia-Pacific. This filing covers the three and nine months ended September 30, 2013; financial statements are unaudited.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $100.8 million | $311.2 million |
| Gross profit | $31.7 million; 31.4% margin | $100.5 million; 32.3% margin |
| Operating income | $8.3 million; 8.2% margin | $25.6 million; 8.2% margin |
| Net income | $6.1 million; 6.1% margin | $17.5 million; 5.6% margin |
| Diluted EPS | $1.12 | $3.20 |
| Operating cash flow | Not separately provided | $14.5 million |
| Capital expenditures | Not separately provided | $15.9 million |
At September 30, 2013, cash and cash equivalents were $31.2 million, current assets were $198.7 million, and current liabilities were $57.1 million, producing a current ratio of 3.5 to 1. Long-term debt, including current maturities, was approximately $15.1 million, and notes payable to banks were $0.5 million. Unused credit availability was $74.4 million under a $90 million facility maturing in January 2015. Bank debt to equity was 6%, and the company reported compliance with its debt covenants.
Shareholders’ equity was $251.1 million. Inventories declined to $73.9 million from $86.9 million at December 31, 2012, while accounts receivable increased to $73.9 million from $61.7 million. Cash increased $3.0 million during the first nine months to $31.2 million.
Material changes versus the prior comparable periods
- Third-quarter sales declined 12% to $100.8 million, while nine-month sales declined 7% to $311.2 million. Excluding currency translation, sales declined 8% in the quarter and 5% year to date.
- Third-quarter gross profit decreased 18% and gross margin fell to 31.4% from 33.7%. Nine-month gross profit decreased 10% and gross margin fell to 32.3% from 33.3%.
- Third-quarter operating income fell 37% to $8.3 million, and nine-month operating income fell 27% to $25.6 million. Net income declined 34% in the quarter and 27% year to date.
- PLP-USA was the primary sales weakness, with sales down 18% in the quarter and 11% year to date, driven mainly by lower volume and price/mix. International sales were also reduced by unfavorable currency translation.
- International profitability weakened. Asia-Pacific reported a net loss of $0.2 million in the quarter and $1.3 million year to date, compared with profits in the prior-year periods. EMEA and The Americas also reported lower net income.
- Operating cash flow decreased from $35.3 million to $14.5 million, primarily because of lower earnings and increased use of cash in accounts receivable and other operating assets.
- Financing activities provided $2.4 million, compared with $20.6 million used in the prior-year period, reflecting net debt borrowings of approximately $5.7 million, share repurchases of $3.2 million, and dividends paid of $1.2 million.
Outlook, commentary, risks, contingencies, and unusual items
Management stated that global economic conditions remained volatile, including uncertainty from the Eurozone and slower growth in portions of Asia-Pacific. Management believes the company remains financially strong and focused on cost management, sales growth, efficiency, new products, capacity expansion, and customer value. No quantitative earnings or sales guidance was provided.
- Management expects operating cash flow, existing cash, and the credit facility to fund operating needs, dividends, debt repayment, capital expenditures, and reasonably likely requirements over the next 12 months. Most cash was held outside the United States and is expected to remain abroad.
- Key risks include infrastructure demand, customer funding, technological changes affecting communications, raw-material cost and availability, pricing pressure, foreign currency exposure, international political and economic conditions, regulation, global infrastructure spending, and the ability to execute acquisitions and expand products and facilities.
- Foreign currency translation reduced reported nine-month sales by $7.5 million and net income by $0.4 million. The company had no foreign currency forward contracts outstanding at September 30, 2013.
- A hypothetical 100-basis-point increase in interest rates would have increased nine-month interest expense by approximately $0.1 million. A hypothetical 10% currency-rate change would have affected the fair value of exposed instruments by approximately $6.2 million and pretax income by approximately $2.0 million.
- The hourly employee pension plan was frozen effective February 1, 2013. The company contributed $1.6 million during the first nine months and did not expect additional 2013 contributions. The unfunded pension obligation was $11.6 million.
- The company recorded a $0.5 million valuation allowance against foreign deferred tax assets during the first nine months and had approximately $0.7 million of gross unrecognized tax benefits at September 30, 2013.
- Warranty reserves declined to $1.1 million from $1.2 million at year-end 2012. Management reported no pending litigation expected to materially affect financial condition, results, or cash flows.
- The company repurchased 5,000 shares during the third quarter at an average price of $71.43, leaving 82,732 shares available under the repurchase authorization.
- Disclosure controls were effective as of September 30, 2013, and no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether the decline in PLP-USA volume and the weaker international margins are temporary or indicate sustained demand and pricing pressure.
- Whether Asia-Pacific can return to profitability and whether higher product costs in international regions will persist.
- The conversion of strong liquidity and available credit into sufficient operating cash flow, given the year-to-date decline in cash from operations.
- Capital expenditure requirements, debt levels, credit-facility maturity in January 2015, and compliance with lending covenants.
- Foreign currency sensitivity and the concentration of cash and earnings outside the United States.
- Potential effects of tax valuation allowances, unrecognized tax benefits, pension obligations, warranty claims, and year-end LIFO inventory adjustments.
- The impact of new accounting standards effective after December 15, 2013, particularly those concerning unrecognized tax benefits and foreign-currency translation adjustments.