Business Context and Reporting Period
Preformed Line Products Company designs and manufactures hardware and systems for overhead and underground energy, telecommunications, cable, data communications, solar and related infrastructure networks. The company operates 27 sales and manufacturing facilities in 19 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific.
This Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $97.2 million | $98.1 million | Down 1.0% |
| Gross profit | $27.3 million | $31.5 million | Down $4.3 million |
| Gross margin | 28.1% | 32.1% | Down 400 basis points |
| Operating income | $2.0 million | $7.7 million | Down $5.7 million |
| Operating margin | 2.1% | 7.9% | Down 580 basis points |
| Net income | $1.8 million | $5.5 million | Down 67% |
| Net margin | 1.9% | 5.6% | Down 370 basis points |
| Diluted EPS | $0.36 | $1.09 | Down $0.73 |
| Operating cash flow | $0.5 million | $(1.0) million | Improved $1.5 million |
Cash, cash equivalents and restricted cash totaled $43.8 million at March 31, 2019, compared with $43.9 million at December 31, 2018. Total debt was approximately $51.0 million. The company had $33.7 million of unused availability under its $65 million credit facility and was in compliance with its debt covenants.
Capital expenditures were $2.4 million, and the company used $10.2 million for the SubCon acquisition. Financing activities provided $11.1 million, including debt proceeds that substantially funded the acquisition and other cash uses. The company paid $1.0 million of dividends and repurchased shares for approximately $2.3 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Reported sales declined modestly, but sales excluding foreign-currency translation increased approximately 4%. Currency translation reduced reported sales by $4.8 million.
- PLP-USA sales increased 5% excluding currency, primarily from higher energy-product volumes. The Americas declined 18%, while EMEA and Asia-Pacific each increased 14% excluding currency.
- Gross profit declined primarily because of higher raw-material and production costs, unfavorable product mix and lower volume in The Americas. Consolidated gross margin fell to 28.1% from 32.1%.
- Operating expenses increased 6% as reported and 13% excluding currency. Drivers included higher professional fees, personnel costs, bad-debt expense and other regional operating costs.
- The effective tax rate fell to 5% from 28%, primarily because of benefits related to stock-based compensation. The lower tax rate partially offset the operating decline but did not prevent a substantial reduction in net income.
- The company acquired SubCon Electrical Fittings GmbH on February 28, 2019 for cash consideration of approximately $10.2 million net of cash acquired. The acquisition added $9.7 million of goodwill at March 31, 2019 and is included in EMEA.
- The company adopted the new lease accounting standard on January 1, 2019, recording approximately $10.4 million of operating lease right-of-use assets and corresponding liabilities. Management stated that the adoption did not materially affect earnings, cash flows or debt covenants.
Guidance, Outlook, Commentary and Risks
The filing provides no specific revenue, earnings or margin guidance. Management stated that the company remains focused on profitable growth, new products, capacity, efficiency and use of its global manufacturing network. Management expects operating cash flows, existing cash and available borrowing capacity to be sufficient for debt repayments, capital expenditures, dividends and other needs for at least the next 12 months.
Management identified raw-material and production-cost inflation, customer and market demand, foreign-exchange movements, interest rates, competitive and pricing pressure, technological changes in communications, tariffs, labor disruptions, international operating risks and acquisition execution as important risk factors.
A significant contingent matter is litigation in Alberta, Canada concerning alleged defects in spacer dampers. The plaintiff reduced its damages demand to C$29.4 million from an initial estimate of C$56.0 million. The company believes the claims are without merit, but cannot predict the outcome or reasonably estimate a potential loss. An adverse outcome could materially affect financial results.
Foreign-currency translation had a favorable $0.2 million effect on net income and a favorable $0.3 million effect on operating income in Q1 2019. The company had no foreign-currency forward contracts. Management disclosed that a hypothetical 10% currency-rate change could affect the fair value of exposed instruments by approximately $5.2 million and pretax income by approximately $1.3 million. A 100-basis-point increase in interest rates would have increased quarterly interest expense by approximately $0.4 million.
Subsequent events included the April 1, 2019 acquisition of MICOS Telcom, described as immaterial, and an April 25, 2019 $8.0 million borrowing for the Indonesian subsidiary. Disclosure controls were effective as of March 31, 2019.
Most Important Facts to Verify
- Whether gross-margin pressure from raw materials, production costs and product mix persists in subsequent quarters.
- The operating performance and integration progress of SubCon and MICOS Telcom, including the recoverability of the related goodwill.
- The status, insurance coverage and potential financial exposure of the Alberta spacer-damper litigation.
- Cash generation after acquisitions, capital expenditures, dividends, share repurchases and debt repayments.
- Compliance with credit-facility covenants and the effect of variable interest rates on borrowing costs.
- The sustainability of the unusually low 5% effective tax rate, including the impact of stock-based compensation benefits and foreign earnings.
- Exposure to currency movements, raw-material costs, tariffs, customer demand and telecommunications technology shifts.