Preformed Line Products Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014; filed November 7, 2014. PLP designs and manufactures products and systems supporting overhead and underground energy, telecommunications, cable, data-communication and solar networks. Operations span 19 locations in 15 countries across PLP-USA, The Americas, EMEA and Asia-Pacific.
Financial Results and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $102.1 million, up 1% | $292.0 million, down 6% |
| Gross profit | $32.5 million; 31.8% margin | $91.1 million; 31.2% margin |
| Operating income | $5.1 million; 5.0% margin | $17.0 million; 5.8% margin |
| Income before taxes | $5.3 million | $17.0 million |
| Net income | $2.6 million; diluted EPS $0.48 | $10.4 million; diluted EPS $1.92 |
| Effective tax rate | 52% | 39% |
- Cash flow: Nine-month operating cash flow was $21.1 million versus $14.5 million in the prior-year period. Investing cash use was $30.2 million, including $15.0 million for the Helix acquisition and $14.5 million of capital expenditures. Financing provided $14.0 million, primarily from net debt borrowings.
- Cash and liquidity: Cash and equivalents were $28.7 million at September 30, 2014, compared with $24.3 million at December 31, 2013. Management reported $18.2 million of unused credit availability, $3.9 million of term deposits and a 3.4-to-1 current ratio.
- Debt: Balance-sheet debt totaled approximately $33.5 million, including $32.1 million of long-term debt, $0.1 million of current maturities and $1.2 million of bank notes. The credit facility has $50 million of borrowing capacity, matures in January 2017 and bears interest at LIBOR plus 1.125%. The company was in compliance with its covenants.
- Shareholder returns: Dividends declared were $0.20 per share in the quarter and $0.60 per share year to date. The company repurchased 36,006 shares during the first nine months, including 31,893 shares under the 2010 plan and 4,113 under the 2014 plan.
Material Changes Versus Prior Comparable Period
- Third-quarter sales increased $1.3 million, but operating income fell $3.1 million and net income declined $3.5 million, or 58%, to $2.6 million.
- Third-quarter gross margin improved to 31.8% from 31.4%, but costs and expenses increased 17%, primarily from foreign-exchange losses, repairs and maintenance, higher Americas expenses and Helix-related costs.
- Year-to-date sales declined $19.2 million, or 6%; excluding currency translation, sales declined 4%. Gross margin fell to 31.2% from 32.3%, operating income declined 34% and net income declined 41%.
- Asia-Pacific was the principal weakness: third-quarter sales decreased 21% excluding currency effects and the segment reported a $2.1 million net loss. Year-to-date sales decreased 17% excluding currency effects and the segment reported a $2.9 million net loss.
- PLP-USA year-to-date sales decreased 7%, while The Americas increased 15% excluding currency effects, partly reflecting $8.7 million of Helix sales following its January 2014 acquisition.
- The company recorded $1.9 million of acquired-inventory fair-value adjustment in cost of products sold during the first nine months.
- Foreign-currency translation reduced year-to-date sales by $5.6 million and increased accumulated other comprehensive loss to $23.4 million at September 30, 2014.
Guidance, Outlook, Risks and Unusual Items
- No specific earnings or revenue guidance was provided. Management stated that business fundamentals remained sound and emphasized cost management, sales-volume growth, operational efficiency, new products and capacity investment.
- Management expects operating cash flows, existing cash and the credit facility to fund debt repayments, capital expenditures and dividends for at least the next 12 months. It does not expect debt levels to have a material adverse effect on financial condition.
- Demand softened at an Asia-Pacific location, reducing the margin in the company’s interim goodwill impairment test to 7% from 41% at October 1, 2013. No impairment was recorded, but the location’s $3.5 million goodwill and $3.6 million of intangible assets require monitoring.
- The elevated tax rates reflected valuation allowances against certain foreign deferred tax assets and lower earnings in jurisdictions with favorable tax rates. A $0.7 million valuation allowance was recorded during the first nine months.
- Key risks include global infrastructure and transmission-project delays, political and economic uncertainty, weaker Asia-Pacific demand, currency volatility, customer and credit risk, raw-material costs, labor disruptions, competitive pricing, technology changes and acquisition integration.
- A hypothetical 10% currency-rate change would affect the fair value of exposed instruments by approximately $6.8 million and income before taxes by approximately $3.3 million. A 100-basis-point increase in interest rates would have increased nine-month interest expense by approximately $0.2 million.
- No pending legal proceeding was identified as likely to have a material adverse effect. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether Asia-Pacific demand and profitability recover, particularly for transmission and substation projects.
- Whether the Asia-Pacific reporting unit’s reduced goodwill-impairment cushion leads to a future impairment charge.
- The sustainability of the 31%–32% gross-margin range amid lower volumes, product mix and acquired-inventory effects.
- Foreign-exchange exposure, the location of cash held outside the United States and the potential tax consequences of repatriation.
- Actual borrowing capacity and compliance with working-capital, net-worth and profitability covenants under the credit facility.
- The integration, profitability and cash requirements of Helix, including the effect of the acquisition on future margins.
- The impact of pending accounting standards for revenue recognition, discontinued operations and going-concern disclosures, whose effects had not yet been determined.