Preformed Line Products Company (10-Q) — 2011 Q3
Business context and reporting period
Filed November 7, 2011, for the quarter and nine months ended September 30, 2011. PLPC designs and manufactures products for overhead and underground energy, telecommunications, cable, data-communication and solar networks. Operations comprise 17 sales and manufacturing locations in 14 countries and are reported across PLP-USA, The Americas, EMEA and Asia-Pacific.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $108.7 million | $93.9 million | $318.3 million | $245.0 million |
| Gross profit | $37.6 million | $31.7 million | $106.7 million | $79.2 million |
| Gross margin | 34.6% | 33.7% | 33.5% | 32.3% |
| Operating income | $10.1 million | $13.0 million | $33.3 million | $21.2 million |
| Net income attributable to PLPC | $6.7 million | $9.9 million | $22.0 million | $17.1 million |
| Diluted EPS | $1.24 | $1.83 | $4.09 | $3.17 |
- Q3 sales increased 16%; nine-month sales increased 30%. Excluding currency translation, increases were 11% and 24%, respectively.
- Nine-month operating margin improved to approximately 10.5% from 8.7%, while Q3 operating margin declined to approximately 9.3% from 13.8%.
- Q3 earnings declined primarily because operating expenses increased sharply, foreign-currency losses replaced prior-year gains, and the prior year included a foreign-exchange contract gain. Nine-month earnings improved despite higher taxes and expenses.
- At September 30, cash and cash equivalents were $23.8 million, current assets were $196.1 million and current liabilities were $70.8 million. The current ratio was 2.8 to 1.
- Total debt, including notes payable, current maturities and long-term debt, was approximately $16.7 million; management reported bank debt to equity of 8%. Unused availability under the main credit facility was $22.1 million, and debt covenants were met.
- Nine-month operating cash flow was $14.8 million versus $17.5 million in 2010. Capital expenditures were $12.5 million, dividends paid were $3.3 million and treasury-share purchases were $3.5 million.
- Inventory increased to $85.0 million from $73.1 million at December 31, 2010, and accounts receivable increased to $69.0 million from $56.1 million.
Material changes versus the prior comparable period
- PLP-USA drove significant growth, with nine-month sales up 23%, supported by higher price/mix and volume. The Americas and Asia-Pacific also posted strong underlying growth; Asia-Pacific benefited substantially from the July 2010 Electropar acquisition.
- Q3 consolidated costs and expenses rose 47%, including increased personnel, commissions, consulting and acquisition-related costs, as well as unfavorable currency effects. EMEA results were particularly pressured.
- Nine-month gross margin expanded by 1.2 percentage points, but the effective tax rate increased to 34% from 25%, largely because 2010 included favorable discrete tax items.
- Accumulated other comprehensive loss increased to $11.4 million from $6.0 million, principally reflecting foreign-currency translation losses.
- The company repurchased 16,000 shares under its announced plan during August; 176,173 shares remained available under the plan at September 30.
Guidance, outlook, risks and unusual items
- No specific quantitative revenue or earnings guidance is provided. Management stated that global market conditions were improving, financial condition remained strong, and operating cash flow and borrowing capacity were expected to fund debt repayments, capital expenditures, dividends and other obligations.
- A supplier product failure resulted in a $1.8 million increase to the warranty reserve during the second quarter. By September 30, $1.3 million had been paid; the warranty reserve balance was $0.7 million.
- Contingent consideration related to the Electropar acquisition was $1.3 million at September 30, including a $0.8 million adjustment for actual results and a $0.1 million time-value increase. The filing states that additional earn-out consideration could be as high as NZ$2.0 million or US$1.5 million.
- Foreign-exchange exposure is material. The company had two immaterial forward contracts outstanding; a hypothetical 10% currency-rate change would affect the fair values of exposed instruments by approximately $4.5 million and pretax income by approximately $0.1 million.
- Variable-rate borrowings totaled $16.7 million; a 100-basis-point rate increase would have increased nine-month interest expense by approximately $0.1 million.
- Key risks include demand for network infrastructure, customer funding, technological substitution, raw-material cost and availability, pricing pressure, foreign operations and currency movements, acquisition integration and funding, regulation, economic conditions, and government support for grid and renewable-energy investment.
- Management reported no material litigation, no material change in previously disclosed risk factors, and effective disclosure controls as of September 30, 2011.
Important facts for investors to verify
- Whether the Q3 decline in operating margin and earnings was temporary or reflects sustained increases in personnel, commissions, consulting, acquisition-related and currency costs.
- The collectability of the higher receivables and the level and composition of inventory, including potential year-end LIFO adjustments.
- The final cost and resolution of the supplier-related warranty matter and any additional claims.
- Electropar contingent consideration and the effect of acquisition-related expenses on future results.
- Underlying organic growth by region after separating currency translation and acquisition contributions.
- Future capital-expenditure needs, working-capital requirements, share repurchases and compliance with credit-facility covenants.
- The potential impact of currency volatility, interest rates, raw-material costs and changing telecommunications and energy technologies.