Preformed Line Products Company — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed August 5, 2016. PLP designs and manufactures products for overhead and underground energy, telecommunications, cable, data communication, and solar networks across 29 operations in 17 countries. Reportable segments are PLP-USA, The Americas, EMEA, and Asia-Pacific.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $83.2 million | $87.9 million | $161.9 million | $173.7 million |
| Gross profit | $26.8 million | $26.4 million | $51.1 million | $51.2 million |
| Gross margin | 32.2% | 30.1% | 31.6% | 29.5% |
| Operating income | $4.1 million | $5.2 million | $7.8 million | $5.1 million |
| Operating margin | 4.9% | 5.9% | 4.8% | 2.9% |
| Net income | $2.8 million | $3.7 million | $5.4 million | $3.4 million |
| Diluted EPS | $0.53 | $0.68 | $1.04 | $0.63 |
- Q2 sales declined 5%; excluding currency translation, sales were essentially flat. Six-month sales declined 7%, or 1% excluding currency effects.
- Currency translation reduced sales by $4.6 million in Q2 and $10.6 million year to date, and reduced year-to-date operating income by approximately $1.2 million.
- Q2 operating income decreased $1.1 million, primarily because of higher operating expenses, including a $1.0 million charge related to the expiring aircraft lease, and weaker PLP-USA results.
- Six-month operating income increased $2.7 million, supported by improved gross margins, cost savings, and lower currency-related expense.
- Effective tax rates were 27% in both Q2 and the first six months, compared with 18% and 22%, respectively, in the comparable 2015 periods. The 2016 rate benefited from lower foreign tax rates and a $0.4 million Asia-Pacific valuation-allowance release.
- Cash and cash equivalents were $28.1 million at June 30, 2016, compared with $30.4 million at December 31, 2015. Current assets were $182.6 million and current liabilities were $54.4 million, producing a reported current ratio of 3.4 to 1.
- Year-to-date operating cash flow was $10.0 million, compared with $7.7 million in 2015. Capital expenditures were $19.7 million, including approximately $15.0 million associated with purchasing a corporate aircraft.
- Total debt was $47.0 million, including a new $14.5 million fixed-rate loan at 2.71% due July 1, 2026. Unused credit-facility availability was $15.5 million, and the company was in compliance with its covenants.
- Dividends declared were $0.20 per share for Q2 and $0.40 per share year to date. The company repurchased 35,227 shares during Q2 and had 208,342 shares remaining under its repurchase authorization at June 30.
Material changes versus the prior comparable period
- PLP-USA sales fell 11% in Q2, primarily from lower transmission volume; six-month sales declined 5% due to lower solar and transmission sales.
- Excluding currency, Q2 sales increased 14% in The Americas and 24% in EMEA, while Asia-Pacific sales declined 5%, primarily from lower solar volume.
- For the first six months, excluding currency, The Americas and EMEA sales increased 13% and 15%, respectively, while Asia-Pacific declined 12% and PLP-USA declined 5%.
- Gross margin improved materially because of product mix, regional margin improvement, and cost savings. Asia-Pacific maintained or improved gross profit despite lower sales following facility and personnel restructuring.
- PLP-USA reported a Q2 net loss of $37,000 and a six-month net loss of $157,000, compared with net income of $2.8 million and $1.6 million, respectively, in the prior-year periods.
- The company purchased an aircraft to replace the expiring lease, increasing capital expenditures and debt. The remaining restructuring liability was $0.6 million at June 30, 2016.
- The company early adopted ASU 2015-17, changing deferred-tax balance-sheet classification retrospectively without a material effect on financial position or results.
Outlook, risks, contingencies, and unusual items
Management stated that business fundamentals and the financial position remained sound and that the company was strategically positioned to pursue profitable growth, efficiency improvements, new products, capacity expansion, and use of its global manufacturing network. Management expected operating cash flow, existing cash, and the credit facility to fund debt repayment, capital expenditures, dividends, and potential acquisitions for the foreseeable future. No formal quantitative earnings or revenue guidance was provided.
- Key risks include weak global economic conditions, infrastructure spending delays, low oil and commodity prices, customer funding constraints, competitive and customer price pressure, raw-material availability and costs, technological shifts toward wireless and newer communications technologies, labor disruptions, regulatory changes, acquisitions, and foreign-exchange volatility.
- A hypothetical 10% currency-rate change would have affected the fair value of exposed instruments by approximately $5.2 million and pretax income by approximately $2.0 million.
- A 100-basis-point increase in interest rates would have increased six-month interest expense by approximately $0.4 million.
- No foreign-currency forward contracts were outstanding at June 30, 2016. The company does not hold derivatives for trading purposes.
- Management reported no pending legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors.
- The company had approximately $0.2 million of gross unrecognized tax benefits, which it may reduce within the following 12 months. Warranty reserves were $1.0 million at June 30, 2016.
Most important facts for investors to verify
- Whether improved gross margins and cost savings can offset continued volume pressure in PLP-USA and Asia-Pacific.
- The sustainability of sales growth in The Americas and EMEA and the recovery prospects for Asia-Pacific solar and transmission demand.
- The cash-flow and return implications of the aircraft purchase, elevated capital expenditures, and additional debt.
- Exposure to foreign-exchange movements, including the concentration of cash held outside the United States.
- The effect of higher 2016 tax rates and the $0.4 million Asia-Pacific valuation-allowance release on future effective tax rates.
- Progress in reducing restructuring costs and the remaining $0.6 million restructuring liability.
- Implementation impacts of pending accounting standards covering share-based compensation, leases, inventory, and revenue recognition.