Business Context and Reporting Period
Preformed Line Products Company designs and manufactures hardware and systems for overhead and underground energy, telecommunications, cable, data communication and solar networks. The company operates 17 sales and manufacturing locations in 14 countries and reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific.
This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods. The company had 5,258,210 common shares outstanding as of August 1, 2011.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $114.5 million, up 39% | $209.6 million, up 39% |
| Gross profit | $36.7 million; 32.1% margin | $69.1 million; 32.9% margin |
| Operating income | $13.1 million; 11.5% margin | $23.3 million; 11.1% margin |
| Net income | $8.5 million; 7.4% margin | $15.4 million; 7.3% margin |
| Net income attributable to PLPC | $8.4 million | $15.4 million |
| Diluted EPS | $1.55 | $2.85 |
| Operating cash flow | Not separately provided | $2.1 million |
At June 30, 2011, cash and cash equivalents were $23.6 million, total assets were $321.3 million, and shareholders' equity was $214.4 million. Accounts receivable were $75.0 million and inventories were $82.3 million, reflecting substantial working-capital investment.
Total debt, including notes payable to banks and current and long-term debt, was approximately $21.4 million. The company reported a bank-debt-to-equity ratio of 10%, $21.6 million of unused availability under its main credit facility, and compliance with its debt covenants. The current ratio was 2.8 to 1.
Six-month investing cash outflows were $6.7 million, primarily $6.5 million of capital expenditures. Financing activities provided $5.5 million, including a $10.0 million increase in bank borrowings, partly offset by $2.2 million of dividends and $2.5 million of share repurchases. Cash increased by $1.0 million from year-end 2010.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased $32.4 million, or 39%; excluding currency translation, growth was 31%. Six-month sales increased $58.6 million, or 39%; excluding currency, growth was 32%.
- Growth reflected higher demand, new business, acquisitions, pricing and product mix, and favorable currency translation. The July 2010 Electropar acquisition contributed materially to Asia-Pacific sales and profit.
- Quarterly gross margin declined to 32% from 33%, while six-month gross margin improved to 33% from 31%. Operating margin increased to 11% from 8% for the quarter and to 11% from 5% year to date.
- Six-month operating income increased $15.0 million to $23.3 million, and six-month net income increased $8.3 million to $15.4 million.
- Sales growth was strongest in The Americas and Asia-Pacific. EMEA quarterly sales declined 2% excluding currency, and EMEA gross profit declined because of a $1.8 million product-warranty charge and lower product margins.
- The effective tax rate increased to 34% from 16% for the quarter and to 34% from 20% year to date, primarily because 2010 included favorable discrete tax items.
- Operating cash flow declined $4.6 million year over year to $2.1 million, primarily because accounts receivable and inventories increased. Accounts receivable rose $18.9 million and inventories rose $9.2 million from December 31, 2010.
Outlook, Commentary, Risks and Unusual Items
Management stated that global market conditions were improving and that the financial position remained strong. It expects operating cash flows and existing cash to fund debt repayments, contractual obligations, capital expenditures and dividends, with borrowing capacity available for additional needs. The filing does not provide quantitative revenue or earnings guidance.
- A supplier product failure resulted in an additional $1.8 million warranty reserve during the second quarter; the reserve ended at $2.1 million.
- Management acquired the remaining 50% of BlueSky Energy in June 2011 for a nominal amount, bringing ownership to 100%.
- Foreign currency translation increased reported sales by approximately $7.0 million in the quarter and $10.3 million year to date. The company had no derivatives outstanding at June 30, 2011.
- Variable-rate borrowings totaled approximately $21.4 million. Management estimated that a 100-basis-point interest-rate increase would raise six-month interest expense by approximately $0.2 million.
- Key risks include global demand, customer financing, raw-material costs and availability, competitive pricing, acquisition integration and funding, foreign-currency and international operating risks, technological changes affecting communications infrastructure, economic conditions, and government renewable-energy incentives.
- The company had approximately $1.1 million of gross unrecognized tax benefits. No pending legal proceedings were expected to have a material adverse effect.
- Goodwill was $12.9 million at June 30, 2011. The annual impairment test performed January 1, 2011 identified no impairment, although valuation outcomes depend on growth, discount-rate and market assumptions.
Investor Verification Checklist
- Verify whether strong reported growth is sustainable after separating organic volume, pricing, acquisitions and foreign-currency effects.
- Monitor the $1.8 million supplier-related warranty exposure, subsequent claims and adequacy of the $2.1 million reserve.
- Assess working-capital conversion, particularly the sharp increases in receivables and inventories relative to the $2.1 million of year-to-date operating cash flow.
- Review debt-facility covenants, available capacity, variable-rate exposure and the effect of increased borrowings on future liquidity.
- Evaluate EMEA margin weakness, material-cost inflation and the integration and performance of Electropar and BlueSky.
- Confirm future tax rates and the sustainability of lower-tax earnings in jurisdictions where earnings are permanently reinvested.
- Review the company’s 2010 Form 10-K risk factors and subsequent filings for developments not captured in this interim report.