Preformed Line Products Company: Q1 2013 Form 10-Q Summary
Business context and reporting period
PLP designs and manufactures products and systems supporting overhead and underground energy, telecommunications, cable, data communication, and solar networks. It operated 19 sales and manufacturing locations in 15 countries and reported four geographic segments: PLP-USA, The Americas, EMEA, and Asia-Pacific. The filing covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. The financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $98.7 million | $108.8 million | Down 9% |
| Gross profit | $31.3 million | $36.0 million | Down 13% |
| Gross margin | 31.7% | 33.1% | Down 140 basis points |
| Operating income | $6.9 million | $12.1 million | Down 43% |
| Operating margin | 7.0% | 11.1% | Down 410 basis points |
| Net income | $5.0 million | $8.1 million | Down 39% |
| Diluted EPS | $0.91 | $1.50 | Down $0.59 |
| Effective tax rate | 28% | 33% | Down 5 percentage points |
- Net cash used in operating activities was $1.4 million, compared with $8.2 million of operating cash flow in Q1 2012. The decline reflected lower earnings, higher operating assets, and fewer noncash benefits.
- Capital expenditures were $5.9 million, compared with $9.4 million in the prior-year quarter. Investing cash use was $5.8 million, versus $15.6 million in Q1 2012, which included $6.2 million of acquisition spending.
- Financing activities provided $6.3 million, including $18.5 million of long-term debt proceeds and $11.8 million of debt repayments. No dividends were paid during the quarter because certain expected 2013 dividends were advanced in December 2012.
- Cash and cash equivalents were $27.0 million at March 31, 2013, compared with $28.1 million at December 31, 2012.
- Total assets were $342.8 million and shareholders’ equity was $246.8 million at March 31, 2013.
- Total debt, including current maturities and bank notes, was approximately $16.4 million. Management reported a 7% bank-debt-to-equity ratio and $74 million of unused credit availability under a $90 million facility maturing in January 2015.
- The current ratio was 3.6 to 1, compared with 3.3 to 1 at December 31, 2012. The company stated that it was in compliance with its credit-facility covenants.
Material changes versus the prior comparable period
- Sales declined $10.2 million. Excluding a $2.1 million unfavorable foreign-currency translation effect, sales declined 7%.
- PLP-USA sales declined 4%, primarily from lower price/mix and volume. The Americas declined 13% excluding currency, driven by lower energy and transmission volume and reduced solar sales. Asia-Pacific declined 13% excluding currency, partly because governments deferred transmission-line construction. EMEA increased 4% excluding currency.
- Gross profit declined $4.7 million. Excluding currency, the decline was $4.1 million, with the largest deterioration in The Americas due to lower sales, higher material costs, and higher production costs.
- Costs and expenses increased 2%, or 4% excluding currency, while sales declined 9%. The increase included higher PLP-USA employee and professional costs and lower foreign-exchange gains.
- The effective tax rate declined to 28%, benefiting from lower-tax foreign earnings and favorable discrete items related to the American Taxpayer Relief Act of 2012, including restored research and experimentation and Subpart F provisions.
- Asia-Pacific reported a net loss of $0.5 million versus net income of $0.2 million in the prior-year quarter. The Americas’ net income declined 65% excluding currency, while EMEA remained profitable.
- The company froze further benefit accruals and new participation in its PLP-USA hourly pension plan effective February 1, 2013. It contributed $0.4 million during the quarter and expected to contribute an additional $2.2 million during 2013.
Outlook, commentary, risks, and unusual items
Management stated that global economic conditions remained volatile, including uncertainty related to the Eurozone and weaker growth in Asia-Pacific. Management nevertheless characterized the financial condition as strong, citing sound business fundamentals, cost management, planned investment in efficiency and capacity, available borrowing capacity, and expected sufficient operating cash flow to fund debt repayment, capital expenditures, dividends, and other obligations. No formal quantitative revenue or earnings guidance was provided.
- Key operating pressures include weak or delayed infrastructure spending, customer funding constraints, price competition, raw-material cost and availability, and slower demand in mature markets.
- Foreign-currency translation reduced reported sales by $2.1 million and reported net income by $0.2 million compared with 2012. No foreign-currency derivatives were outstanding at quarter-end.
- A 100-basis-point increase in interest rates was estimated to increase quarterly interest expense by approximately $0.1 million. A hypothetical 10% currency-rate change was estimated to affect instrument fair values by approximately $4 million and pretax income by less than $0.2 million.
- The company paid $0.1 million of contingent consideration related to the Forma Line acquisition during the quarter and paid an additional $0.4 million AES earn-out in April 2013.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no indications of goodwill impairment during the quarter.
- Warranty reserves declined to $1.1 million from $1.2 million at the beginning of the quarter; no additions were charged to income during Q1 2013.
- Adoption of ASU 2013-02 changed accumulated-other-comprehensive-income presentation only and did not affect reported earnings, financial condition, or cash flow. The company did not expect ASU 2013-05 to have a material effect.
Important facts for investors to verify
- Whether the sales weakness in The Americas and Asia-Pacific reflects temporary project timing and government deferrals or a sustained reduction in demand.
- Whether gross-margin pressure from material costs, production costs, price/mix, and lower volume persists.
- The sustainability of operating cash flow, which was negative in Q1 2013 despite positive net income.
- Debt utilization, covenant compliance, interest-rate exposure, and the availability of the reported $74 million credit capacity.
- The effect of foreign-exchange movements on reported revenue, profitability, and accumulated other comprehensive income.
- The amount and timing of expected 2013 pension contributions, contingent consideration payments, capital expenditures, and dividend payments.
- The extent to which the lower 28% tax rate reflects recurring geographic mix versus nonrecurring tax benefits.