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. It operates through four geographic segments: PLP-USA, The Americas, EMEA, and Asia-Pacific, with 17 operations in 14 countries.
This unaudited Form 10-Q covers the three- and nine-month periods ended September 30, 2012, compared with the corresponding 2011 periods. The filing was signed November 8, 2012.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $114.2m | $108.7m | $335.0m | $318.3m |
| Gross profit | $38.5m | $37.6m | $111.5m | $106.7m |
| Gross margin | 33.7% | 34.6% | 33.3% | 33.5% |
| Operating income | $13.2m | $10.1m | $34.9m | $33.3m |
| Operating margin | 11.5% | 9.3% | 10.4% | 10.5% |
| Net income | $9.3m | $6.7m | $24.0m | $22.0m |
| Net margin | 8.1% | 6.1% | 7.2% | 6.9% |
| Diluted EPS | $1.71 | $1.24 | $4.42 | $4.09 |
- Operating cash flow for the nine months was $35.3m, compared with $14.8m in 2011.
- Capital expenditures were $15.5m; acquisition spending, net of cash acquired, was $5.2m.
- Cash and cash equivalents were $28.1m at September 30, 2012, down from $32.1m at December 31, 2011.
- Bank debt was approximately $16.0m at September 30, 2012, down $14.6m from year-end 2011. The bank-debt-to-equity ratio declined to 7% from 14%.
- The current ratio was approximately 3.0 to 1, compared with 3.3 to 1 at December 31, 2011.
- Unused availability under the main credit facility was $75.2m. The facility was increased to $90m and extended to January 2015, with interest at LIBOR plus 1.125%. The company was in compliance with its covenants.
- Cash dividends declared were $0.20 per share in the quarter and $0.60 per share for the nine months.
Material Changes Versus Prior Comparable Period
- Third-quarter sales increased 5%; excluding currency translation effects, management reported a 10% increase. Nine-month sales increased 5%, or 9% excluding currency effects.
- Third-quarter net income increased 39% to $9.3m, while diluted EPS increased 38% to $1.71. Nine-month net income increased 9% to $24.0m, and diluted EPS increased 8% to $4.42.
- Third-quarter operating income benefited from lower costs and expenses, including lower consulting and acquisition-related costs and favorable foreign-exchange effects. The operating margin expanded by approximately 220 basis points.
- Nine-month gross margin declined modestly to 33.3%. PLP-USA benefited from higher volume, while Asia-Pacific experienced lower organic sales, weaker margins, and higher costs.
- Reported results were materially affected by currency translation. Foreign-exchange movements reduced sales by $5.7m in the quarter and $13.1m for the nine months, and reduced nine-month net income by approximately $1.3m.
- Segment performance was mixed. Nine-month sales increased 15% at PLP-USA and 20% at EMEA, while The Americas declined 9% as reported and Asia-Pacific increased 3%. Asia-Pacific nine-month net income fell to $0.5m from $5.4m.
- The company acquired Australian Electricity Systems PTY Ltd. in January 2012 and the assets of Forma Line Industries CC in South Africa in March 2012. The acquisitions contributed to goodwill, sales, expenses, and acquisition-related cash outflows.
Outlook, Commentary, Risks, and Unusual Items
Management described the financial condition as strong and stated that business fundamentals remained sound despite Eurozone uncertainty, slower growth in parts of Asia-Pacific, global economic volatility, and a depressed U.S. housing market. Management expects operating cash flows and existing cash to fund debt repayments, contractual obligations, capital expenditures, and dividends, with borrowing capacity providing additional resources. No specific numerical earnings or sales guidance was provided.
- Key risks include global demand for cable and electrical infrastructure, customer access to project financing, technology changes affecting communications networks, raw-material cost and availability, competitive pricing pressure, foreign-currency volatility, international political and economic conditions, regulation, and the ability to execute and integrate acquisitions.
- The company had one immaterial foreign-currency forward contract and did not hold derivatives for trading. A 100-basis-point interest-rate increase would have increased nine-month interest expense by approximately $0.2m. A hypothetical 10% currency-rate change would have affected the fair value of relevant instruments by $5.7m and pretax income by approximately $0.2m.
- An acquisition-related contingent earn-out liability was reduced to $0.8m at September 30, 2012, with a $0.4m adjustment recorded in costs and expenses. A total of $1.1m was paid during the nine months for an acquisition earn-out.
- Goodwill increased to $15.4m, including additions from acquisitions and currency translation. Management reported no goodwill impairment indicators during the nine months.
- The unfunded pension obligation was $15.2m. The company contributed $1.7m during the nine months and anticipated an additional $0.4m contribution in 2012.
- The product warranty reserve increased to $1.2m from $0.8m at year-end 2011.
- Gross unrecognized tax benefits were approximately $1.3m at September 30, 2012. No pending legal proceedings were expected to have a material adverse effect.
- The company repurchased 34,510 shares during the quarter at an average price of $55.04, leaving 138,413 shares authorized for repurchase under the announced program.
Important Facts for Investors to Verify
- Whether Asia-Pacific profitability recovers from the sharp nine-month decline and whether acquisition integration and related costs normalize.
- The sustainability of reported margin improvement after excluding favorable currency, discrete tax, foreign-exchange, and acquisition-related items.
- Foreign-currency trends and their effect on reported sales, earnings, comprehensive income, and translated balance-sheet values.
- Progress on capital expenditures, working-capital conversion, debt reduction, and utilization of the $90m credit facility.
- The final 2012 LIFO inventory valuation, goodwill impairment assessment, pension funding requirements, warranty claims, and acquisition earn-out settlement.
- Demand trends in energy, telecommunications, and solar markets, including exposure to customer financing, government incentives, technology substitution, and raw-material prices.