Business Context and Reporting Period
Preformed Line Products Company designs and manufactures hardware and systems used in overhead and underground energy, telecommunications, cable, data communication and solar networks. The company operates 27 sales and manufacturing locations in 18 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Financial Performance and Position
| Metric | Three months ended Sept. 30, 2017 | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Net sales | $99.2 million | $88.3 million | $281.3 million | $250.2 million |
| Gross profit | $33.5 million | $28.9 million | $87.9 million | $80.0 million |
| Gross margin | 33.8% | 32.7% | 31.2% | 32.0% |
| Operating income | $9.8 million | $6.6 million | $18.4 million | $14.4 million |
| Operating margin | 9.9% | 7.5% | 6.5% | 5.8% |
| Net income | $6.3 million | $4.7 million | $12.0 million | $10.2 million |
| Net margin | 6.3% | 5.4% | 4.2% | 4.1% |
| Diluted EPS | $1.23 | $0.92 | $2.33 | $1.95 |
- Third-quarter sales increased 12%; nine-month sales increased 12%. Excluding currency translation, sales increased approximately 11% in both comparisons.
- Third-quarter gross margin improved to 33.8%, primarily from higher volumes and favorable product mix. Nine-month gross margin declined to 31.2%, mainly reflecting lower-margin product mix in EMEA.
- Operating income increased 48% in the quarter and 28% for the nine-month period. Net income increased 32% in the quarter and 18% year to date.
- The effective tax rate increased to 36% from 27% for the quarter and to 34% from 27% for the nine months, primarily due to U.S. tax effects associated with repatriation of foreign earnings that are not permanently reinvested.
- Nine-month net cash provided by operating activities was $21.7 million, compared with $21.0 million in 2016. Accounts receivable used $15.2 million of operating cash, partially offset by increases in trade payables and accrued liabilities.
- Capital expenditures were $7.8 million, down from $21.7 million in the prior-year period, which included significant aircraft-related spending. Investing activities were essentially cash-neutral.
- Cash and cash equivalents increased to $39.2 million at September 30, 2017 from $30.7 million at December 31, 2016. The majority of cash was held outside the United States.
- Total debt was $34.8 million, comprising current and long-term debt and notes payable. The company reported $44.0 million of unused credit availability and compliance with debt covenants.
- The company declared dividends of $0.20 per share each quarter, or $0.60 per share for the first nine months, and paid $3.2 million of dividends year to date.
- Total assets were $362.6 million and shareholders’ equity was $244.7 million at September 30, 2017.
Material Changes Versus the Prior Comparable Period
- PLP-USA quarterly sales increased 14%, driven by transmission and communication volumes, while solar sales declined. Nine-month sales increased 9%.
- The Americas quarterly and year-to-date sales increased 8% and 15%, respectively, primarily from transmission and communication volume growth.
- EMEA quarterly sales declined 6% excluding currency, while nine-month sales increased 5%. Nine-month EMEA gross profit declined 12% excluding currency because of a shift toward lower-margin products, and segment net income declined 49%.
- Asia-Pacific quarterly and year-to-date sales increased 19% and 18%, respectively, driven primarily by transmission products. The segment returned to profitability in the quarter and generated $1.3 million of net income for the nine months versus a $0.6 million loss in 2016.
- Foreign currency translation favorably affected sales by $1.6 million in the quarter and $3.0 million for the nine months. The effect on operating income and net income was immaterial.
- Costs and expenses increased 7% in the quarter and 6% year to date, with higher personnel-related costs and other operating expenses. The prior-year nine-month period included a $1.0 million aircraft lease-expiration charge that did not recur.
- The company repurchased 24,920 shares during the quarter at an average price of $50.16, leaving 114,195 shares authorized for repurchase under the announced program at quarter-end.
- The company adopted ASU 2016-09 for share-based compensation and ASU 2015-11 for inventory measurement on January 1, 2017; neither had a material effect on the financial statements.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified full-year revenue or earnings guidance. Management stated that business fundamentals and the financial position were sound, expected operating cash flows and available liquidity to cover debt repayments, capital expenditures and dividends, and believed borrowing capacity could support additional investment or acquisitions if needed.
- The company plans to adopt the new revenue recognition standard, ASC 606, effective January 1, 2018. Its analysis of point-in-time versus over-time recognition and the potential financial statement impact remained ongoing.
- The company faces a Canadian lawsuit involving alleged defects in spacer dampers supplied for Alberta transmission projects. The plaintiff seeks approximately $56 million jointly and severally from the defendants. The company considers the claims without merit but cannot predict the outcome; an adverse resolution could materially affect results.
- Other principal risks include global infrastructure and energy spending, customer financing capacity, commodity prices, technological substitution, competition and pricing pressure, raw material costs, labor disruptions, foreign currency movements, international political and regulatory conditions, acquisitions and environmental requirements.
- A 10% currency-rate change was estimated to affect the fair value of exposed instruments by approximately $1.3 million and income before taxes by approximately $0.9 million. A 100-basis-point increase in interest rates would have increased nine-month interest expense by approximately $0.2 million.
- The company had no foreign currency forward contracts outstanding and held no derivatives for trading or speculative purposes.
- A restructuring liability of approximately $0.5 million remained at September 30, 2017. No restructuring expense was recorded in the first nine months of 2017.
- Product warranty reserves were $1.1 million at September 30, 2017. The company had contributed $0.2 million to its pension plan and did not expect additional contributions during the remainder of 2017.
- Disclosure controls and procedures were effective as of September 30, 2017, with no material changes in internal control over financial reporting.
Investor Verification Points
- Verify the ultimate outcome, insurance coverage and potential financial exposure from the approximately $56 million Altalink litigation claim.
- Monitor EMEA product mix and margins, as well as whether Asia-Pacific’s improved profitability is sustained.
- Assess the effect of the higher effective tax rate and any future repatriation of foreign earnings.
- Review adoption disclosures and quantified impacts of ASC 606 beginning January 1, 2018.
- Reconcile operating cash flow with the substantial increase in accounts receivable and confirm working-capital normalization.
- Confirm debt covenant compliance, credit-facility availability and the location and repatriation constraints of international cash balances.
- Evaluate exposure to currency movements, interest rates, infrastructure spending, raw-material costs and technology changes.