Preformed Line Products Company — Q1 2012 Form 10-Q Summary
Business context and reporting period
PLP designs and manufactures products and systems used in overhead and underground energy, telecommunications, cable, data communication, and solar networks. The company operated 17 sales and manufacturing locations in 14 countries and reported four geographic segments: PLP-USA, The Americas, EMEA, and Asia-Pacific. This unaudited report covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $108.8 million | $95.1 million | +$13.8 million, 14% |
| Gross profit | $36.0 million | $32.4 million | +$3.6 million, 11% |
| Gross margin | 33.1% | 34.1% | Down 1.0 percentage point |
| Operating income | $12.1 million | $10.1 million | +$2.0 million, 20% |
| Operating margin | Approximately 11.1% | Approximately 10.6% | Improved |
| Net income attributable to PLPC | $8.1 million | $7.0 million | +$1.1 million |
| Diluted EPS | $1.50 | $1.30 | +$0.20 |
| Cash dividends declared per share | $0.20 | $0.20 | Unchanged |
| Net cash provided by operating activities | $8.2 million | $(2.9) million | Improved by $11.1 million |
Net margin attributable to PLPC was approximately 7.5% in Q1 2012 versus approximately 7.4% in Q1 2011. Cash and cash equivalents were $29.2 million at March 31, 2012, down from $32.1 million at December 31, 2011. Total assets were $349.0 million and shareholders’ equity was $225.7 million.
Total debt, including current maturities, was approximately $35.7 million at March 31, 2012, compared with $30.6 million at year-end 2011. The company reported a 16% bank-debt-to-equity ratio, a 3.3-to-1 current ratio, and $36.6 million of unused availability under its main credit facility. Management stated that the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales increased 14%; excluding currency translation, management reported a 15% increase. Currency translation reduced sales by approximately $0.8 million.
- PLP-USA sales rose 29%, driven by $3.9 million of price and mix increases and $5.3 million of volume growth. The Americas increased 22% excluding currency effects, while EMEA declined 3% and Asia-Pacific increased 5%.
- Gross margin declined to 33.1%, primarily reflecting weaker Asia-Pacific product margins. Asia-Pacific gross profit fell approximately $1.8 million despite higher sales.
- Operating income increased despite higher selling, general and administrative, and research and engineering expenses. Higher sales and improved PLP-USA production margins were partially offset by higher material, personnel, pension, commission, travel, and maintenance costs.
- Operating cash flow improved substantially because of lower working-capital investment, higher net income, and higher noncash adjustments.
- Investing cash outflows increased to $15.6 million, including $9.4 million of capital expenditures and $6.2 million for acquisitions. The company acquired Australian Electricity Systems PTY Ltd. in January 2012 and the assets of Forma Line Industries CC in South Africa in March 2012.
- Net income in Asia-Pacific decreased approximately $1.9 million, primarily because of a $2.7 million decline in operating income. PLP-USA net income increased approximately $2.2 million.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal full-year revenue or earnings guidance. Management described global market conditions as improving and stated that it expected operating cash flows, existing cash, and borrowing capacity to fund debt repayments, capital expenditures, dividends, and other obligations.
- Management expects to contribute an additional approximately $1.9 million to the defined-benefit pension plan during 2012; $0.3 million had been contributed through March 31.
- An additional earn-out payment of approximately AUD $1.1 million, or $1.2 million in U.S. dollars, may be payable for the Australian acquisition, based on performance through June 30, 2012. The full $1.2 million was accrued at the acquisition date.
- Interest-rate exposure relates principally to approximately $35.7 million of variable-rate borrowings. A hypothetical 100-basis-point increase would have raised quarterly interest expense by approximately $0.3 million.
- The company reported one immaterial foreign-currency derivative and does not use derivatives for trading or speculative purposes. A hypothetical 10% currency-rate change would affect the fair value of relevant instruments by approximately $6.2 million and pretax income by less than $0.1 million.
- Key risks include global demand for network hardware, customer funding, technology shifts toward wireless and newer infrastructure, raw-material costs and availability, pricing pressure, foreign currency and international operating risks, regulatory and environmental requirements, acquisition integration, access to acquisition funding, and global economic conditions.
- Warranty reserves increased to $1.1 million at March 31, 2012 from $0.8 million at December 31, 2011. Management stated that pending legal proceedings were not expected to have a material adverse effect.
- No goodwill impairment trigger events were identified during the quarter. Interim LIFO inventory valuation remains subject to the final year-end valuation; the quarter included a $0.2 million pretax LIFO charge.
- Disclosure controls were effective as of March 31, 2012, and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the weaker Asia-Pacific margins persist and how quickly the acquired businesses contribute to earnings.
- The performance-based earn-out liability and any additional acquisition-related consideration ultimately payable.
- Execution of the elevated capital-expenditure program and integration of the Australian and South African acquisitions.
- Cash conversion, working-capital requirements, and the increase in borrowings during 2012.
- Foreign-currency effects on reported sales, earnings, assets, and accumulated other comprehensive income.
- Future pension funding requirements, warranty claims, and the final year-end LIFO inventory adjustment.
- The filing’s caution that first-quarter results are not necessarily indicative of full-year results and that no formal 2012 earnings guidance was provided.