Preformed Line Products Company — Form 10-Q Summary
Business context and reporting period
PLPC designs and manufactures hardware and systems supporting overhead and underground energy, telecommunications, cable, data communications, solar, and other infrastructure networks. It operates 30 sales and manufacturing locations in 22 countries and reports four geographic segments: PLP-USA, The Americas, EMEA, and Asia-Pacific. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, compared with the same periods in 2020.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $133.0 million | $117.6 million | $250.6 million | $220.5 million |
| Gross profit | $43.0 million | $39.6 million | $83.2 million | $72.5 million |
| Gross margin | 32.4% | 33.6% | 33.2% | 32.9% |
| Operating income | $12.7 million | $14.8 million | $23.5 million | $19.5 million |
| Operating margin | 9.6% | 12.6% | 9.4% | 8.8% |
| Net income attributable to PLPC shareholders | $8.9 million | $10.5 million | $16.0 million | $14.2 million |
| Diluted EPS | $1.80 | $2.11 | $3.25 | $2.84 |
| Operating cash flow | Not separately provided | Not separately provided | $14.1 million | $9.2 million |
At June 30, 2021, cash, cash equivalents, and restricted cash were $33.5 million, down from $45.2 million at December 31, 2020. Total debt, including notes payable, was $63.4 million. The company had $45.2 million of unused credit-facility availability, net of letters of credit, and remained in compliance with debt covenants. Total shareholders’ equity was $303.6 million, compared with $292.1 million at year-end 2020.
Six-month investing cash outflows included $7.3 million of capital expenditures. Financing cash outflows included $53.0 million of long-term debt repayments, $4.7 million of share repurchases, and $2.1 million of dividends, partly offset by $42.954 million of long-term debt proceeds. The company purchased a replacement corporate aircraft funded by a $20.5 million, 10-year term loan at a fixed 2.744% rate.
Material changes versus the prior comparable period
- Q2 sales increased 13%; six-month sales increased 14%. Excluding currency translation, sales increased 8% in Q2 and 10% for the six-month period.
- PLP-USA was the primary growth contributor, with Q2 sales up 15% and six-month sales up 18%, mainly from higher communications-product volumes. EMEA sales also grew, while Asia-Pacific sales declined 10% in Q2 and 6% for the six-month period on lower energy-product volumes.
- Q2 gross margin declined 120 basis points because raw-material, transportation, and other inflationary pressures outpaced pricing actions. Six-month gross margin improved 30 basis points, aided by volume, product mix, and cost containment.
- Q2 operating income declined $2.1 million and diluted EPS declined $0.31 despite higher sales. Six-month operating income increased $4.1 million and diluted EPS increased $0.41.
- Q2 net income was adversely affected by higher operating expenses, inflation, foreign-currency losses, and a higher effective tax rate of 29% versus 24% in the prior-year quarter. The six-month effective tax rate was 31% versus 26%.
- Operating cash flow improved $4.9 million year over year for the six-month period, despite increased accounts receivable and inventory investment associated with higher sales.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide formal quantitative full-year revenue or earnings guidance. Management states that operating results for the first six months are not necessarily indicative of full-year results.
- COVID-19 and the Delta variant caused temporary operating restrictions, particularly in Asia-Pacific. Management expects the pandemic to continue adversely affecting the company, customers, supply chains, and the global economy, but cannot estimate the duration or financial magnitude.
- Raw-material and transportation inflation materially reduced Q2 earnings. PLPC announced price increases in June 2021, but backlog limited their Q2 benefit; further increases may be required and could reduce demand.
- Management believes its supply chain remains strong, expects operating cash flow, existing cash, and available borrowing capacity to fund debt repayments, capital expenditures, dividends, and potential acquisitions, and believes liquidity is sufficient for the foreseeable future.
- The Asia-Pacific reporting unit’s fair value exceeded carrying value by approximately 15% at the latest annual goodwill test; its $7.6 million of goodwill is potentially at risk if COVID-19 or delayed government capital spending weakens the long-term outlook.
- PLPC and affiliates face an Alberta, Canada lawsuit seeking approximately C$56.0 million for alleged defects involving spacer dampers. The company believes the claims lack merit but has reserved the low end of its estimated loss range. An adverse resolution could materially affect results.
- Legal reserves for various global matters totaled approximately $2.2 million. Product-warranty reserves increased to $2.4 million from $1.2 million at June 30, 2020.
- Foreign-currency forward contracts generated net losses of $1.3 million in Q2 and $0.9 million for the six-month period. A hypothetical 10% currency-rate change would have affected instrument fair values by approximately $5.0 million and pretax income by approximately $0.6 million.
- At June 30, 2021, outstanding guarantees totaled $7.5 million and letters of credit totaled $4.5 million. A 100-basis-point increase in interest rates would have increased six-month interest expense by approximately $0.6 million.
- Disclosure controls and procedures were effective as of June 30, 2021, with no reported material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether pricing actions and additional price increases offset continuing commodity, freight, labor, and supply-chain inflation.
- Whether Asia-Pacific operations recover from COVID-19-related disruptions and return to profitability.
- Progress, reserve adequacy, and potential exposure in the Alberta spacer-damper litigation.
- Cash conversion and working-capital requirements, particularly the growth in receivables and inventories.
- Debt maturities, variable-rate exposure, credit-facility covenant compliance, and available borrowing capacity.
- Whether the Asia-Pacific goodwill cushion remains adequate under changing pandemic and infrastructure-spending assumptions.
- The sustainability of sales growth, gross margins, dividends, and share repurchases in light of higher taxes and operating costs.