UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal quarter ended September 30, 2023
or
☐ Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
for the Transition Period From ________To _______
Commission file number 0-31164
Preformed Line Products Company
(Exact name of registrant as specified in its charter)
Ohio
34-0676895
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
660 Beta Drive
Mayfield Village, Ohio
44143
(Address of Principal Executive Office)
(Zip Code)
(440) 461‑5200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, $2 par value per share
PLPC
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding as of October 18, 2023: 4,893,469
Table of Contents
Page
Part I – Financial Information
Item 1.
Financial Statements
3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
Item 4.
Controls and Procedures
29
Part II – Other Information
Legal Proceedings
30
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURES
32
2
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PREFORMED LINE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, 2023
December 31, 2022
(Thousands of dollars, except share and per share data)
(Unaudited)
ASSETS
Cash, cash equivalents and restricted cash
$
43,736
37,239
Accounts receivable, less allowances of $6,942 ($5,600 in 2022)
126,019
125,261
Inventories, net
149,643
147,458
Prepaid expenses
8,334
13,283
Other current assets
10,454
4,929
TOTAL CURRENT ASSETS
338,186
328,170
Property, plant and equipment, net
201,105
175,011
Operating lease, right-of-use assets
11,635
10,752
Goodwill
28,447
28,004
Other intangible assets, net
12,728
14,082
Deferred income taxes
6,925
5,320
Other assets
7,577
7,140
TOTAL ASSETS
606,603
568,479
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable
51,451
46,839
Notes payable to banks
10,893
18,098
Operating lease liabilities, current
1,631
1,606
Current portion of long-term debt
6,680
3,018
Accrued compensation
23,192
14,962
Accrued expenses and other liabilities
26,919
17,635
Accrued profit-sharing and other benefits
7,018
9,394
Dividends payable
1,262
1,318
Income taxes payable
6,756
2,465
TOTAL CURRENT LIABILITIES
135,802
115,335
Long-term debt, less current portion
45,269
68,420
Operating lease liabilities, noncurrent
7,907
7,023
2,981
4,165
Other noncurrent liabilities
14,816
14,912
SHAREHOLDERS' EQUITY
Common shares – $2 par value per share, 15,000,000 shares authorized, 4,893,469 and 4,917,020 issued and outstanding, at September 30, 2023 and December 31, 2022
13,559
13,351
Common shares issued to rabbi trust, 241,528 and 245,386 shares at September 30, 2023 and December 31, 2022, respectively
(10,069
)
(10,261
Deferred compensation liability
10,069
10,261
Paid-in capital
59,548
53,646
Retained earnings
514,839
460,930
Treasury shares, at cost, 1,891,268 and 1,758,901 shares at September 30, 2023 and December 31, 2022, respectively
(117,702
(99,303
Accumulated other comprehensive loss
(70,431
(69,987
TOTAL PREFORMED LINE PRODUCTS COMPANY SHAREHOLDERS' EQUITY
399,813
358,637
Noncontrolling interest
15
(13
TOTAL SHAREHOLDERS' EQUITY
399,828
358,624
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See notes to consolidated financial statements (unaudited).
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2022
Net sales
160,438
165,402
524,076
467,097
Cost of products sold
106,301
107,109
337,328
314,147
GROSS PROFIT
54,137
58,293
186,748
152,950
Costs and expenses
Selling
12,732
11,245
38,133
33,573
General and administrative
17,794
17,467
54,624
50,724
Goodwill impairment
—
6,529
Research and engineering
5,840
4,741
16,793
14,878
Other operating (income) expense, net
(2,307
937
(10
2,472
34,059
40,919
109,540
108,176
OPERATING INCOME
20,078
17,374
77,208
44,774
Other (expense) income
Interest income
478
143
1,201
359
Interest expense
(998
(819
(3,198
(2,129
Other income, net
18
898
165
6,497
(502
222
(1,832
4,727
INCOME BEFORE INCOME TAXES
19,576
17,596
75,376
49,501
Income tax expense
4,431
5,707
18,348
11,590
NET INCOME
15,145
11,889
57,028
37,911
Net income attributable to noncontrolling interests
(15
(2
(28
(27
NET INCOME ATTRIBUTABLE TO PREFORMED LINE PRODUCTS COMPANY SHAREHOLDERS
15,130
11,887
57,000
37,884
AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING:
Basic
4,906
4,937
4,935
Diluted
4,990
5,036
5,006
4,983
EARNINGS PER SHARE OF COMMON STOCK ATTRIBUTABLE TO PREFORMED LINE PRODUCTS COMPANY SHAREHOLDERS:
3.08
2.41
11.56
7.68
3.03
2.36
11.39
7.60
4
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Thousands of dollars)
Net income
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment
(6,934
(12,199
(711
(20,288
Recognized net actuarial gain
89
71
267
250
Other comprehensive loss, net of tax
(6,845
(12,128
(444
(20,038
Comprehensive income attributable to noncontrolling interests
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO PREFORMED LINE PRODUCTS COMPANY SHAREHOLDERS
8,285
(241
56,556
17,846
5
STATEMENTS OF CONSOLIDATED CASH FLOWS
OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation and amortization
13,602
10,188
(2,837
(1,149
Share-based compensation expense
4,090
3,409
Loss on exit of business
1,025
Loss (gain) on sale of property and equipment
(2,457
(831
Gain from company owned life insurance policy
(4,364
Other, net
6,218
192
Changes in operating assets and liabilities:
12,710
(43,788
NET CASH PROVIDED BY OPERATING ACTIVITIES
88,354
9,122
INVESTING ACTIVITIES
Capital expenditures
(27,118
(25,175
Proceeds from the sale of property and equipment
2,506
3,157
Proceeds from company owned life insurance policy
6,909
Acquisition of businesses, net of cash
(12,089
(12,990
NET CASH USED IN INVESTING ACTIVITIES
(36,701
(28,099
FINANCING ACTIVITIES
(Payments) proceeds of notes payable to banks
(6,792
3,092
Proceeds from long-term debt
131,716
126,964
Payments of long-term debt
(150,965
(108,870
Dividends paid
(3,126
(3,085
Proceeds from issuance of common shares
2,020
480
Purchase of common shares for treasury
(728
(66
Purchase of common shares for treasury from related parties
(17,671
(3,869
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(45,546
14,646
Effects of exchange rate changes on cash, cash equivalents and restricted cash
390
(1,126
Net increase (decrease) in cash, cash equivalents and restricted cash
(5,457
Cash, cash equivalents and restricted cash at beginning of year
36,406
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
30,949
6
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Accumulated OtherComprehensive Income(Loss)
Common Shares
CommonSharesIssued toRabbi Trust
DeferredCompensation Liability
Paid inCapital
RetainedEarnings
TreasuryShares
CumulativeTranslationAdjustment
UnrecognizedPensionBenefit Cost
Total Preformed Line Products Company Equity
Noncontrolling Interests
Total Equity
(In thousands, except share and per share data)
Balance at December 31, 2022
(65,495
(4,492
21,398
21,419
3,922
Recognized net actuarial gain, net of tax provision of $28
Total comprehensive income
25,409
25,430
Share-based compensation
1,066
Purchase of 41,573 common shares
(3,740
Issuance of 72,477 common shares
140
244
384
Common shares distributed from rabbi trust of 3,541, net
185
(185
Cash dividends declared – $0.20 per share
(1,050
Balance at March 31, 2023 (unaudited)
13,491
(10,076
10,076
54,956
481,278
(103,043
(61,573
(4,403
380,706
8
380,714
20,472
(8
20,464
2,301
22,862
22,854
1,725
Purchase of 40,078 common shares
(6,100
Issuance of 9,655 common shares
262
280
Common shares distributed from rabbi trust of 502, net
37
(37
(0
(1,024
Balance at June 30, 2023
13,509
(10,039
10,039
56,943
500,726
(109,143
(59,272
(4,314
398,449
8,300
1,299
Purchase of 50,717 common shares
(8,559
Issuance of 26,285 common shares
50
1,306
1,356
Common shares issued to rabbi trust of 185, net
(30
(1,018
Balance at September 30, 2023
(66,206
(4,225
7
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
Balance at December 31, 2021
13,185
(10,102
10,102
47,814
410,673
(93,836
(56,223
(5,496
316,117
(17
316,100
12,285
16
12,301
2,101
14,475
14,491
871
Purchase of 29,436 common shares
(1,795
Issuance of 62,387 common shares
117
162
279
Common shares issued to rabbi trust of 1,347, net
(99
99
(1,037
Balance at March 31, 2022
13,302
(10,201
10,201
48,847
421,921
(95,631
(54,122
(5,407
328,910
(1
328,909
13,712
9
13,721
(10,190
90
3,612
3,621
1,042
Issuance of 484 common shares
1
Common shares issued to rabbi trust of 484, net
(915
Balance at June 30, 2022
13,303
(10,231
10,231
49,918
434,718
(64,312
(5,317
332,679
332,687
Recognized net actuarial gain, net of tax provision of $23
(239
1,496
Purchase of 26,094 Shares
(2,140
Issuance of 6,167 common shares
13
335
348
Common shares issued to rabbi trust of 417, net
(1,145
Balance at September 30, 2022
13,316
51,749
445,460
(97,771
(76,511
(5,246
330,997
10
331,007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands of dollars, except share and per share data, unless specifically noted)
Note 1 – Significant Accounting Policies
The accompanying unaudited consolidated financial statements of Preformed Line Products Company and subsidiaries (the “Company” or “PLPC”) have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. This Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Form 10-K for the year ended December 31, 2022, filed on March 3, 2023 with the Securities and Exchange Commission. The interim period results are not necessarily indicative of the results to be expected for the full year. Management has evaluated subsequent events through the date this Form 10-Q was filed with the Securities and Exchange Commission.
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from these estimates. In the opinion of management, these consolidated financial statements contain all estimates and adjustments, consisting of normal recurring accruals, required to fairly present the financial position, results of operations, and cash flows for the interim periods. Operating results for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the full-year ending December 31, 2023.
Noncontrolling interests are presented in the Company’s consolidated financial statements as if parent company investors (controlling interests) and other minority investors (noncontrolling interests) in partially-owned subsidiaries have similar economic interests in a single entity. As a result, investments in noncontrolling interests are reported as equity in the Company’s consolidated financial statements. Additionally, the Company’s consolidated financial statements include 100% of a controlled subsidiary’s earnings, rather than only its share. Transactions between the parent company and noncontrolling interests are reported in equity as transactions between stockholders, provided that these transactions do not create a change in control.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recently Adopted Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates ("ASU"). In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers.” This ASU requires an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The ASU is effective for fiscal years and interim periods beginning after December 15, 2022. The adoption of this new standard did not have a material impact on the consolidated financial statements and related disclosures.
No other recently issued or effective ASUs had, or are expected to have, a material impact on the Company's results of operations, financial condition or liquidity.
Note 2 – Revenue
Revenue Recognition
Sales are recognized when obligations under the terms of the contract are satisfied and control of promised goods or services have transferred to our customers. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services and is primarily based on shipping terms. Sales are measured as the amount of consideration the Company expects to receive in exchange for transferring products.
Disaggregated Revenue
The Company’s revenues by segment and product type are as follows:
Three Months Ended September 30, 2023
Product Type
PLP-USA
The Americas
EMEA
Asia-Pacific
Consolidated
Energy
68
%
80
60
75
69
Communications
35
23
Special Industries
22
Total
100
Three Months Ended September 30, 2022
56
42
72
57
39
27
49
26
Nine Months Ended September 30, 2023
62
73
44
61
34
25
52
Nine Months Ended September 30, 2022
70
59
Credit Losses for Receivables
The Company maintains an allowance for credit losses for estimated losses resulting from the inability of its customers to make required payments. The Company uses a current expected credit loss model in order to immediately recognize an estimate of credit losses that are expected to occur over the life of the financial instruments, mainly trade receivables. Additionally, the allowance is based upon identified delinquent accounts, customer payment patterns and other analyses of historical data trends. Receivable balances are written off against an allowance for credit losses after a final determination has been made. The change in the allowance for credit losses includes expense and net write-offs, which are identified in the following table:
Allowance for credit losses, beginning of period
5,021
3,091
Additions charged to costs and expenses
1,349
2,160
Write-offs
(21
(287
Foreign exchange and other
(22
Allowance for credit losses, end of period
6,332
4,942
Note 3 – Inventories, Net
Raw materials
106,355
104,872
Work-in-process
14,587
14,450
Finished products
43,579
41,295
Inventories, net of excess and obsolete inventory reserve
164,521
160,617
Excess of current cost over LIFO cost
(14,878
(13,159
Inventories at LIFO cost
Costs for inventories of certain material, mainly in the U.S., are determined using the LIFO method and totaled approximately $71.8 million at September 30, 2023 and $68.3 million at December 31, 2022. An actual valuation of inventories under the LIFO method can be made only at the end of the year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Because these estimates are subject to change and may be different than the actual inventory levels and costs at the end of the year, interim results are subject to the final year-end LIFO inventory valuation. During the three months ended September 30, 2023 and 2022, the net change in LIFO inventories resulted in expense of $0.6 million and $1.7 million, respectively, to Cost of products sold. During the nine months ended September 30, 2023 and 2022, the net change in LIFO inventories resulted in expense of $1.7 million and $5.1 million, respectively, to Cost of products sold. The Company’s reserves for excess and obsolete inventory was $15.5 million at September 30, 2023 and $10.8 million at December 31, 2022.
Note 4 – Property and Equipment, Net
Major classes of property, plant and equipment are stated at cost and were as follows:
Land and improvements
20,417
19,609
Buildings and improvements
125,028
102,245
Machinery, equipment and aircraft
223,648
218,549
Construction in progress
27,302
31,076
Property, plant and equipment, gross
396,395
371,479
Less accumulated depreciation
(195,290
(196,468
Note 5 – Contingent Liabilities
The Company can be party to a variety of pending legal proceedings and claims arising in the normal course of business, including, but not limited to, litigation relating to employment, workers’ compensation, product liability, environmental and intellectual property. The Company has liability insurance to cover many of these claims.
Although the outcomes of these matters are not predictable with certainty, the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and the likelihood to develop what the Company believes to be a reasonable range of potential loss exists, the Company will include disclosure related to such matters. To the extent that there is a reasonable possibility the losses could exceed amounts already accrued, the Company will adjust the accrual in the period in which the determination is made, disclose an estimate of the additional loss or range of loss and if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
In November 2016, the Company and its subsidiaries Helix Uniformed Ltd. (“Helix”) and Preformed Line Products (Canada) Limited (“PLPC Canada”), were each named, jointly and severally, with each of SNC-Lavalin ATP, Inc. (“SNC ATP”), HD Supply Canada Inc., by its trade names HD Supply Power Solutions and HD Supply Utilities (“HD Supply”), and Anixter Power Solutions Canada Inc. (the corporate successor to HD Supply, “Anixter”) and, together with the Company, PLPC Canada, Helix, SNC ATP and HD Supply (the
11
“Defendants”), in a complaint filed by Altalink, L.P. (the “Plaintiff”) in the Court of Queen’s Bench of Alberta in Alberta, Canada in November 2016 (the “Complaint”).
The Complaint states that the Plaintiff engaged SNC ATP to design, engineer, procure and construct numerous power distribution and transmission facilities in Alberta (the “Projects”) and that through SNC ATP and HD Supply (now Anixter), spacer dampers manufactured by Helix were procured and installed in the Projects. The Complaint alleges that the spacer dampers have and may continue to become loose, open and detach from the conductors, resulting in damage and potential injury and a failure to perform the intended function of providing spacing and damping to the Project. The Plaintiff was seeking an estimated $56.0 million Canadian dollars in damages jointly and severally from the Defendants, representing the costs of monitoring and replacing the spacer dampers and remediating property damage, due to alleged defects in the design and construction of, and supply of materials for, the Projects by SNC ATP and HD Supply/Anixter and in the design of the spacer dampers by Helix.
On September 26, 2023, the Defendants and the Plaintiff entered into a settlement agreement which dismisses the action against all Defendants with prejudice. Net of insurance, the total settlement amount required to be paid by the Company is $4.3 million Canadian dollars ($3.2 million US dollars), of which $2.5 million Canadian dollars ($1.8 million US dollars) was previously recorded and $1.8 million Canadian dollars ($1.4 million US dollars) was recorded in the third quarter in General and administrative expense. The settlement reflects the Company’s desire to eliminate the burden, expense, distraction and further uncertainties of litigation, and settlement does not constitute an admission of liability, wrongdoing or fault by the Company and its subsidiaries.
The Company is not a party to any other pending legal proceedings that the Company believes would, individually or in the aggregate, have a material adverse effect on its financial condition, results of operations or cash flow.
Note 6 – Pension Plans
The Company uses a December 31 measurement date for the Preformed Line Products Company Employees’ Retirement Plan (the “U.S. Plan”). Net periodic pension expense (income) for the U.S. Plan for the three and nine months ended September 30, 2023 and 2022, respectively, follows:
Interest cost
392
293
1,178
887
Expected return on plan assets
(501
(653
(1,502
(1,855
Recognized net actuarial loss
94
349
328
Net periodic pension expense (income)
(266
(640
There were no contributions to the U.S. Plan during the nine months ended September 30, 2023 and 2022. The Company does not intend to contribute to the U.S. Plan during 2023. Components of retirement benefits expense (income) are included in Other (expense) income, net in the Consolidated Statements of Income.
In August 2023, the Board of Directors of the Company approved a resolution to terminate the US. Plan. However, no further action has been taken to proceed with the termination beyond this approval as of the date of these financial statements.
12
Note 7 – Accumulated Other Comprehensive Income (LOSS) (“AOCI”)
The following tables set forth the total changes in AOCI by component, net of tax:
Cumulative
Unrecognized
Translation
Benefit Cost
Adjustment
Balance at July 1
(63,586
(69,629
Other comprehensive income before reclassifications:
Amounts reclassified from AOCI:
Amortization of defined benefit pension actuarial gain (a)
Net current period other comprehensive income (loss)
Balance at September 30
(81,757
Balance at January 1
(61,719
Gain on unfunded pension obligations
Note 8 – Debt and Credit Arrangements
The Company maintains a credit facility (the "Facility") with a capacity of $90.0 million that expires March 2, 2026. The interest rate is defined as the Secured Overnight Financing Rate (“SOFR”) plus 1.125% unless the Company’s funded debt to Earnings before Interest, Taxes and Depreciation ratio exceeds 2.25 to 1, at which point the SOFR spread becomes 1.500%. At September 30, 2023, the Company had utilized $30.0 million with $60.0 million available on the Facility. There were no long-term outstanding letters of credit as of September 30, 2023. Our bank debt to equity percentage was 15.7%. The Facility contains, among other provisions, requirements for maintaining levels of net worth and profitability. At September 30, 2023, the Company was in compliance with these covenants.
On January 19, 2021, the Company purchased a new aircraft for $20.5 million and received funding for a term loan from PNC Equipment Finance, LLC for the full amount of the purchase price. The term of the loan is 120 months at a fixed interest rate of 2.744%. The loan is payable in 119 equal monthly installments, which commenced on March 1, 2021 with a final payment of any outstanding principal and accrued interest due and payable on the final monthly payment date. Of the $15.2 million outstanding on this debt facility at September 30, 2023, $2.1 million was classified as current. The loan is secured by the aircraft.
The Company has other borrowing facilities at certain of its foreign subsidiaries, which consist of overdraft lines, working capital credit lines, and facilities for the issuance of letters of credit and short-term borrowing needs. At September 30, 2023, and December 31, 2022, $17.6 million and $26.1 million was outstanding, of which $15.5 million and $19.1 million were classified as current, respectively. These facilities support commitments made in the ordinary course of business.
For both periods ended September 30, 2023 and December 31, 2022, the Company’s Asia-Pacific segment had $0.2 million in restricted cash used to secure bank debt. The restricted cash is shown on the Company’s Consolidated Balance Sheets in Cash, cash equivalents and restricted cash.
Note 9 – Income Taxes
For the three-month period ended September 30, 2023 and 2022, the Company’s effective tax rate was 23% and 33%, respectively. The effective tax rate for the three months ended September 30, 2023 was lower than the effective tax rate for the same period in 2022 mainly due to the favorable impact from the mix of taxable income in certain foreign jurisdictions, which in the third quarter of 2022 included a non-deductible goodwill impairment charge of $6.5 million in the Asia-Pacific region that was partially offset by the release of the valuation allowance on deferred tax assets for the Company’s Australian subsidiary of approximately $1.4 million, as well as the favorable impact in the third quarter of 2023 related to the excess tax benefit associated with stock compensation activity.
For the nine months ended September 30, 2023 and 2022, the Company’s effective tax rate was 24% and 23%, respectively. This change is not significant and was primarily due to the limitation on the deductibility of executive compensation partially offset by the favorable impact related to the excess tax benefit associated with stock compensation activity.
The Company provides valuation allowances against deferred tax assets when it is more likely than not that some portion or all of its deferred tax assets will not be realized. During the period ended September 30, 2023, the Company did not record any additional valuation allowances on their deferred tax assets.
For the nine-month periods ending September 30, 2023, the Company did not record any new uncertain tax positions.
Note 10 – Computation of Earnings Per Share
Basic earnings per share were computed by dividing net income by the weighted-average number of common shares outstanding for each respective period. Diluted earnings per share were calculated by dividing net income by the weighted-average of all potentially dilutive common shares that were outstanding during the periods presented.
The calculation of basic and diluted earnings per share for the three and nine months ended September 30, was as follows:
Numerator
Denominator
Determination of shares (in thousands)
Weighted-average common shares outstanding
Dilutive effect – share-based awards
84
77
48
Diluted weighted-average common shares outstanding
Earnings per common share
For the three and nine months ended September 30, 2023 and 2022, there were zero and 36,500 stock options, respectively, which were excluded from the calculation of diluted earnings per share as the effect would have been anti-dilutive.
14
Note 11 – Goodwill and Other Intangibles
The Company’s finite and indefinite-lived intangible assets consist of the following:
Gross Carrying
Accumulated
Amount
Amortization
Finite-lived intangible assets
Patents
4,806
(4,806
Land use rights
1,020
(283
1,175
(414
Trademark
1,974
(1,658
1,963
(1,576
Technology
6,813
(3,477
6,950
(3,189
Customer relationships
18,568
(10,229
18,637
(9,464
33,181
(20,453
33,531
(19,449
Indefinite-lived intangible assets
The aggregate amortization expense for other intangibles with finite lives for the three and nine months ended September 30, 2023 was $0.5 million and $1.4 million, respectively. The aggregate amortization expense for other intangibles with finite lives for the three and nine months ended September 30, 2022 was $0.5 million and $1.7 million, respectively. Amortization expense is estimated to be $0.4 million for the remainder of 2023, $1.7 million for 2024, $1.5 million for 2025, and $1.4 million for 2026 and 2027. The weighted-average remaining amortization period is approximately 11.8 years. The weighted-average remaining amortization period by intangible asset class is as follows: land use rights, 52.1 years; trademark, 13.8 years; technology, 7.4 years; and customer relationships, 10.0 years.
The Company’s measurement date for its annual impairment test for goodwill is October 1st of each year. The Company performs additional interim impairment assessments as circumstances warrant. There were no indicators of impairment noted for the period ending September 30, 2023.
The Company may use both quantitative and qualitative approaches when testing goodwill for impairment. For selected reporting units where the qualitative approach is utilized, a qualitative evaluation of events and circumstances impacting the reporting unit is performed to determine if it is more likely than not that the fair value of the reporting unit exceeds its carrying amount. If that determination is made, no further evaluation is necessary. Otherwise, the Company performs a quantitative impairment test on the reporting unit.
For the quantitative approach, the Company uses a combination of the income approach, which uses a discounted cash flow methodology, and the market approach, which uses comparable market multiples in computing fair value by reporting unit. The Company then compares the fair value of the reporting unit with its carrying value to assess if goodwill has been impaired. The fair value estimates are subjective and sensitive to significant assumptions, such as revenue growth rates, operating margins, the weighted average cost of capital, and estimated market multiples, of which are affected by expectations of future market or economic conditions. The Company believes that the methodologies, significant assumptions, and weightings used are reasonable and result in appropriate fair values of the reporting units.
As of September 30, 2022, the Company concluded that an indicator of impairment was present and conducted an interim impairment review of its goodwill in the Asia-Pacific reporting unit given the continued decline in the Company’s results in the Asia-Pacific region, the Company's reassessment of future forecasts and the rising interest rate environment. The Company reviewed current results and reassessed its previous forecasts for this reporting unit and determined the market headwinds faced in the region, particularly China, would linger for longer than previously expected as the region began to emerge from the COVID-19 pandemic. The rising interest rate environment was also a factor in the decision to perform an interim impairment assessment, given the related impact to the discounted cash flow calculation. The interim impairment assessment was performed utilizing the same methodologies as the annual assessments discussed above and included revised projections, which are subject to various risks and uncertainties, including forecasted revenues, expenses and cash flows.
Based on the interim impairment assessment, the Asia-Pacific reporting unit’s carrying value exceeded its fair value by more than the carrying amount of goodwill, which was caused by both a reduction in forecasted results and an increase in the weighted average cost of capital due to rising interest rates. As a result, the Company recognized a non-cash impairment charge of $6.5 million as of September 30, 2022. This charge was identified separately in the consolidated income statement and impacted income from operations.
The Company’s only intangible asset with an indefinite life is goodwill. The Company’s goodwill is not deductible for tax purposes. Changes in the carrying amount of goodwill by reporting unit are shown in the following table:
Balance at January 1, 2023
3,078
9,597
15,329
Acquisitions
387
20
407
Currency translation
(257
36
10,277
15,092
See note 14 for additional information about acquisitions of businesses.
Note 12 – Fair Value of Financial Assets and Liabilities
The Company measures and records certain assets and liabilities at fair value. A fair value hierarchy is used for those assets and liabilities measured at fair value that distinguishes between assumptions based on market data (observable inputs), and the Company’s assumptions (unobservable inputs). The hierarchy consists of the following three levels:
Level 1 Inputs – Quoted market prices in active markets for identical assets or liabilities.
Level 2 Inputs – Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 Inputs – Unobservable inputs that are not corroborated by market data.
The following table summarizes the Company’s assets and liabilities, recorded and measured at fair value, in the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022:
Description
Balance as of September 30, 2023
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Foreign currency forward contracts
230
Total assets
Liabilities:
Supplemental profit sharing plan
7,494
Total liabilities
7,563
Balance as of December 31, 2022
534
81
7,299
7,380
The Company operates internationally and enters into intercompany transactions denominated in foreign currencies. Consequently, the Company is subject to market risk arising from exchange rate movements between the dates foreign currency transactions occur and the dates they are settled. The Company currently uses foreign currency forward contracts to reduce the risk related to some of these transactions. These contracts usually have maturities of 90 days or less and generally require an exchange of foreign currencies for U.S. dollars at maturity at rates stated in the contracts. These contracts are not designated as hedging instruments under U.S. GAAP. Accordingly, the changes in the fair value of the foreign currency forward contracts are recognized in each accounting period in Other operating (income) expense, net on the Consolidated Statements of Income together with the transaction gain or loss from the related balance sheet position. For the three and nine months ended September 30, 2023, the Company recognized net losses of $0.5 million
and $0.9 million, respectively, on foreign currency forward contracts. For the three and nine months ended September 30, 2022, the Company recognized net gains of $1.2 million and $0.2 million, respectively, on foreign currency forward contracts. The derivative financial instrument contracts are with major investment grade financial institutions, and we do not anticipate any material non-performance by any of the counterparties.
The Company has a non-qualified Supplemental Profit Sharing Plan for its executives. The liability for this unfunded Supplemental Profit Sharing Plan was $7.5 million at September 30, 2023 and was $7.3 million at December 31, 2022. These amounts are recorded within Other noncurrent liabilities on the Company’s Consolidated Balance Sheets. The Supplemental Profit Sharing Plan allows participants the ability to hypothetically invest their proportionate award into various investment options, which primarily includes mutual funds. The Company credits earnings, gains and losses to the participants’ deferred compensation account balances based on the investments selected by the participants. The Company measures the fair value of the Supplemental Profit Sharing Plan liability using the market values of the participants’ underlying investment accounts.
The carrying value of the Company’s current financial instruments, which include cash, cash equivalents and restricted cash, accounts receivable, accounts payable and short-term debt, approximates fair value because of the short-term maturity of these instruments.
At September 30, 2023 and December 31, 2022, the fair value of the Company’s long-term debt was estimated using a discounted cash flows analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements that are considered to be Level 2 inputs. Based on the analysis performed, the fair value and the carrying value of the Company’s long-term debt are as follows:
Fair Value
Carrying Value
Long-term debt and related current maturities
46,075
51,949
68,054
71,438
17
Note 13 – Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance.
The following tables present a summary of the Company’s reportable operating segments for the three and nine months ended September 30, 2023 and 2022. Financial results for the PLP-USA segment include the elimination of all segments’ intercompany profit in inventory.
81,727
88,960
275,882
248,307
22,790
23,780
66,852
65,179
28,798
31,139
105,138
91,456
27,124
21,523
76,205
62,155
Total net sales
Intersegment sales
4,083
7,515
25,058
18,465
4,515
4,899
13,024
11,756
3,514
992
6,470
2,563
5,611
8,957
18,714
23,703
Total intersegment sales
17,723
22,363
63,266
56,487
Gross profit
30,672
34,547
114,012
90,751
8,053
10,124
24,239
23,456
7,434
7,445
26,199
21,777
7,977
6,177
22,298
16,966
Total gross profit
Net income attributable to Preformed Line Products Company shareholders
9,080
10,802
40,761
33,404
1,411
5,450
6,050
8,016
1,137
1,218
4,675
2,794
3,502
(5,583
5,514
(6,330
Total net income attributable to Preformed Line Products Company shareholders
Note 14 – Acquisitions of Businesses
Acquisition of Pilot Plastics
On February 1, 2023, the Company acquired substantially all of the assets of Pilot Plastics, headquartered in Akron, Ohio. Pilot Plastics is an injection molding manufacturer and the acquisition will expand the Company's injection molding capabilities and further enhance the Company's domestic manufacturing footprint. The purchase price was approximately $13.8 million, net of cash as of the closing date. The purchase price is subject to a holdback of approximately $1.7 million. To fund the Pilot Plastics acquisition, the Company borrowed on the Facility.
The acquisition of Pilot Plastics is accounted for using the acquisition method of accounting, which requires the assets acquired and liabilities assumed to be recognized at their respective fair values on the acquisition date. The process of estimating the fair values of certain tangible assets, and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The table below summarizes the fair values of the assets acquired and liabilities assumed on the acquisition date, inclusive of the preliminary measurement period adjustments recorded as of September 30, 2023, which were not material. The measurement period remains open and future adjustments are not expected to have a material impact to the Consolidated Statements of Income.
Adjusted Preliminary Allocation
Accounts receivable
970
Inventory
585
Property, plant and equipment and other assets
13,628
Accounts payable
(1,299
Other current liabilities
(71
Total identifiable net assets
13,813
Total consideration, net of cash received
Due to the consideration transferred equaling the fair value of the assets acquired, no residual goodwill was recognized. From the date of the acquisition through September 30, 2023, the Company’s consolidated financial statements included Pilot Plastics sales of approximately $5.3 million and are reported in the PLP-USA segment.
Acquisition of Delta Conectores, S.A. de C.V.
On October 3, 2022, the Company acquired Delta Conectores, S.A. de C.V. ("Delta"), a Mexico entity headquartered in Aguascalientes, Mexico, from its shareholders. Delta designs and manufactures substation connector systems and accessory hardware for high voltage AC systems in Mexico. The acquisition of Delta will expand the Company's operational and technical capabilities in the region while supporting its overall substation strategy. The purchase price was $3.3 million, net of cash received, subject to a holdback of $0.6 million.
The acquisition of Delta has been accounted for using the acquisition method of accounting, which requires the assets acquired and liabilities assumed to be recognized at their respective fair values on the acquisition date. The process of estimating the fair values of certain tangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The fair value of the identifiable net assets acquired was $2.9 million.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Delta. The goodwill recognized of $0.4 million is not expected to be deductible for tax purposes.
All measurement period adjustments were completed within a year from the acquisition date, and such adjustments did not have a material impact on the Company's results of operations and financial position.
Acquisition of Holplast, s.r.o.
On March 1, 2022, the Company acquired all issued and outstanding shares of Holplast, s.r.o (“Holplast”), an entity headquartered in Prostějov, Czech Republic, from its shareholder. Holplast specializes in injection molding and expands the Company’s operational capabilities in the region and strengthens the Company’s position in the global communications market. The purchase price was approximately $5.3 million with a holdback of $0.8 million, inclusive of cash and debt.
The acquisition of Holplast has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed to be recognized at their respective fair values on the acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. During the measurement period, opening balance sheet adjustments were made to finalize the fair value estimates based on the final valuations received, which are summarized in the table below.
Final Allocation
Cash
907
452
308
Prepaid expenses and other current assets
(296
(95
(1,452
2,812
2,475
Total consideration, inclusive of cash and debt
5,287
19
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Holplast. Other noncurrent liabilities assumed is mainly comprised of long-term debt totaling approximately $1.1 million at a rate of 3.21% with terms expiring between December 2026 and December 2030.
Acquisition of Maxxweld Conectores Electricos Ltda.
On January 4, 2022, the Company acquired Maxxweld Conectores Electricos Ltda. ("Maxxweld"), a Brazilian entity headquartered in Curitiba, Brazil, from its shareholders. Maxxweld designs and manufactures substation connector systems and accessory hardware for high voltage AC systems. The acquisition of Maxxweld expands and strengthens the Company's operational and technical capabilities in the region while supporting its overall substation strategy. The purchase price was approximately $11.2 million, net of cash received, as of the closing date. The purchase price is subject to a holdback of approximately $1.8 million.
The acquisition of Maxxweld has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed to be recognized at their respective fair values on the acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. During the measurement period opening balance sheet adjustments were made to finalize the fair value estimates based on the final valuations received, which are summarized in the table below.
2,132
1,367
41
Equipment and other assets
725
Other intangible assets
4,359
(599
(322
(1,561
6,142
5,068
11,210
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Maxxweld. As a result of the acquisition, goodwill of $5.1 million recognized is not expected to be deductible for tax purposes. Other intangible assets of $4.4 million include customer relationships, tradenames and backlog. The fair values of the customer relationships, trademarks and backlog were $4.0 million, $0.2 million and $0.2 million, respectively. These fair values were determined using either the relief-from-royalty model or the multi-period excess earnings model, which are discounted cash flow models that rely on the Company's estimates. These estimates require judgment of future revenue growth rates, future margins, and the applicable weighted average cost of capital used to discount those estimated cash flows. The weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. The estimated useful lives for customer relationships, trademarks and backlog were 15 years, 20 years, and 1 year, respectively. See Note 11 for additional information about goodwill and other intangible assets.
Note 15 – Exit of Russian Operations
Due to the ongoing conflict in Ukraine and overt hostilities shown by Russia in the conflict, the Company decided to exit its Russian operations in March 2022, which was completed during the third quarter of 2022. The Russian operations did not have a material impact to the consolidated financial statements with net sales of $0.3 million for the nine months ended September 30, 2022. As a result of the decision to exit operations, net charges of approximately $1.0 million were recorded for the nine months ended September 30, 2022, mainly as a result of asset impairments and one-time termination benefits. These impacts were included in Cost of products sold, General and administrative expense, or Other income, net, as appropriate. In Note 13 – Segment Information, these charges were recorded in the EMEA segment.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the readers of our financial statements better understand our results of operations, financial condition and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes included elsewhere in this report.
OVERVIEW
Preformed Line Products Company (the “Company”, “PLPC”, “we”, “us”, or “our”) was incorporated in Ohio in 1947. We are an international designer and manufacturer of products and systems employed in the construction and maintenance of overhead and underground networks for the energy, telecommunication, cable operators, information (data communication), and other similar industries. Our primary products support, protect, connect, terminate, and secure cables and wires. We provide helical solutions, connectors, fiber optic and copper splice closures, solar hardware mounting applications, and electric vehicle charging station foundations. We also provide aerial drone inspection services for utility assets including transmission and distribution power lines, substations, and generation facilities. We are respected around the world for quality, dependability and market-leading customer service. Our goal is to continue to achieve profitable growth as a leader in the research, innovation, development, manufacturing, and marketing of technically advanced products and services related to energy, communications and cable systems and to take advantage of this leadership position to sell additional quality products in familiar markets. We have sales and manufacturing operations in 20 different countries.
We report our segments in four geographic regions: PLP-USA (including corporate), The Americas (includes operations in North and South America, excluding PLP-USA), EMEA (Europe, Middle East & Africa) and Asia-Pacific, in accordance with accounting standards codified in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 280, “Segment Reporting”. Each segment distributes a full range of our primary products. Our PLP-USA segment is comprised of our U.S. operations manufacturing our traditional products primarily supporting our domestic energy, telecommunications, solar framing products and inspection services. Our other three segments, The Americas, EMEA and Asia-Pacific, support our energy, telecommunications, data communication, solar and other products in each respective geographical region.
The segment managers responsible for each region report directly to the Company’s Chief Executive Officer, who is the chief operating decision maker, and are accountable for the financial results and performance of their entire segment for which they are responsible. The business components within each segment are managed to maximize the results of the entire operating segment and the Company rather than the results of any individual business component of the segment.
We evaluate segment performance and allocate resources based on several factors primarily based on sales and net income.
PREFACE
The following discussion describes our results of operations for the three and nine months ended September 30, 2023 and 2022. Our consolidated financial statements are prepared in conformity with United States ("U.S.") generally accepted accounting principles ("GAAP"). Our discussions of the financial results include non-GAAP measures (e.g., foreign currency impact) to provide additional information concerning our financial results and provide information that we believe is useful to the readers of our financial statements in the assessment of our performance and operating trends.
Net sales of $160.4 million for the three months ended September 30, 2023, was a decrease of $5.0 million year-over-year and net sales of $524.1 million for the nine months ended September 30, 2023, was an increase of $57.0 million year-over-year. In the three and nine months ended September 30, 2023, the inflationary headwinds we experienced related to raw materials, specifically plastic resins, aluminum and sand (grit), have partially subsided. Costs related to shipping and freight have similarly fallen from their 2022 peak. The decreases in these underlying costs along with the impacts of our previous price increases have benefited gross margins. For PLP-USA, our largest business segment, we saw a year-over-year benefit for the three and nine month periods ended September 30, 2023 of $5.9 million and $14.3 million, respectively related to the reduction in these costs. Given the uncertainties in the macro-economic environment, we cannot determine if these trends will continue. If inflationary pressures increase again, it may require further price adjustments to maintain profit margin and any price increases may have a negative effect on demand.
Our consolidated financial statements are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. PLPC’s foreign currency exchange losses were primarily related to translating into U.S. dollars its foreign currency denominated loans, trade receivables and royalty receivables from its foreign subsidiaries at the September 30, 2023 exchange rates. The fluctuations of foreign currencies during the three and nine months ended September 30, 2023 had a favorable impact on net sales of $1.4 million and an unfavorable impact on net sales of $5.6 million, respectively. The fluctuations on foreign currencies during the three and nine months ended September 30, 2023 had an unfavorable impact on net income of $0.1 million and $0.7 million, respectively. On a reportable
segment basis, the impact of foreign currency translation on net sales and net income for the three and nine months ended September 30, 2023 and 2022, was as follows:
Foreign Currency Translation Impact
Net Sales
Net Income
(2,366
(242
1,870
(276
(174
(494
(150
(2,967
(265
1,447
(106
(5,609
(681
As shown in our strong financial results, we believe our business portfolio and our financial position are sound and strategically well-positioned. We remain focused on assessing our global market opportunities and overall manufacturing capacity in conjunction with the requirements of local manufacturing in the markets that we serve. The growth in PLP-USA net sales required additional investment within our PLP-USA facilities, both in the form of operational capacity as well as increased warehouse space. These investments in our U.S. operations allow us to further enhance the service we provide to our U.S. customers. If necessary, we will modify redundant processes and further utilize our global manufacturing network to manage costs, increase sales volume and deliver value to our customers. We have continued to invest in the business to expand into new markets for the Company, evaluate strategic mergers and acquisitions, improve efficiency, develop new products and increase our capacity. Our liquidity remains strong, and we currently have a bank debt to equity percentage of 15.7%. We can borrow needed funds at a competitive interest rate under our credit facility.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2023 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2022
The following table sets forth a summary of the Company’s Statements of Consolidated Income and the percentage of net sales for the three months ended September 30, 2023 and 2022. The Company’s past operating results are not necessarily indicative of future operating results.
Change
100.0
(4,964
66.3
64.8
(808
33.7
35.2
(4,156
21.2
24.7
(6,860
12.5
10.5
2,704
Other (expense) income, net
(0.3
0.1
(724
12.2
10.6
1,980
Income taxes
2.8
3.5
(1,276
9.4
7.2
3,256
Net (income) attributable to noncontrolling interests
(0.0
3,243
Net sales. In 2023, net sales were $160.4 million, a decrease of $5.0 million, or 3%, compared to 2022. Excluding the effect of currency translation, net sales decreased 4% as summarized in the following table:
Due to
Excluding
Currency
(7,233
(989
(1,060
(4
(2,341
(4,211
(14
21,524
5,600
6,094
(6,411
The decrease in PLP-USA net sales of $7.2 million, or 8%, was primarily due to volume decreases in communication sales, partially offset by the impact from previously enacted price increases. International net sales for the three months ended September 30, 2023 were favorably affected by $1.4 million when local currencies were converted to U.S. dollars. The following discussion of changes in net sales excludes the effect of currency translation. The Americas net sales of $22.8 million decreased $1.1 million, or 4%, primarily due to volume decreases within communications sales and energy products, partially offset by contributions from the October 2022 Delta acquisition. EMEA net sales of $28.8 million decreased $4.2 million, or 14%, primarily due to volume decreases in communication sales. Asia-Pacific net sales of $27.1 million increased $6.1 million, or 28%, primarily due to volume increases in energy products.
Gross profit. Gross profit of $54.1 million for 2023 decreased $4.2 million, or 7%, compared to 2022. Excluding the effect of currency translation, gross profit decreased $4.6 million, or 8%, as summarized in the following table:
(3,875
(11
(2,070
189
(2,259
454
(464
(6
6,178
1,800
(192
1,992
451
(4,607
PLP-USA gross profit of $30.7 million decreased by $3.9 million, or 11%, compared to the same period in 2022, primarily due to lower sales volumes, partially offset by previously enacted price increases and lower material costs. International gross profit for the period ended September 30, 2023 was favorably impacted by $0.5 million when local currencies were translated to U.S. dollars. The following discussion of gross profit changes excludes the effects of currency translation. The Americas gross profit decreased $2.3 million, or 22%, which was primarily the result of higher manufacturing and material costs. EMEA gross profit decreased $0.5 million, or 6%, primarily due to the lower sales volumes. Asia-Pacific’s gross profit increased $2.0 million, or 32%, which was primarily driven by the incremental margins on the increased sales volume and lower manufacturing costs.
Costs and expenses. Costs and expenses of $34.1 million for the three months ended September 30, 2023 decreased $7.0 million, or 17%, when compared to 2022. Excluding the effect of currency translation, costs and expenses decreased $7.5 million, or 18%, as summarized in the following table:
19,205
20,106
(901
5,873
3,238
2,635
2,594
5,742
6,022
(280
373
11,553
(8,315
(8,316
(72
(6,861
415
(7,276
(18
PLP-USA costs and expenses of $19.0 million decreased $1.1 million, or 5% year-over-year. PLP-USA’s decrease was primarily attributable to lower professional services costs, partially offset by higher salary-related and employee benefit costs. International costs and expenses for the three months ended September 30, 2023 were unfavorably impacted by $0.4 million when local currencies were translated to U.S. dollars. The following discussion of costs and expenses excludes the effect of currency translation. The Americas costs and expenses of $5.9 million increased $2.6 million primarily due to a one-time legal settlement and an increase in salary-related expenses. EMEA costs and expenses of $5.7 million decreased by $0.7 million primarily due to lower professional services, travel and sales related costs. Asia-Pacific costs and expenses of $3.2 million decreased $8.3 million primarily due to a one-time $6.5 million goodwill impairment charge recorded in 2022 that did not recur, and a one-time $2.5 million gain on the sale of plant and equipment during the third quarter of 2023.
Other (expense) income, net. Other expense, net of $0.5 million for the three months ended September 30, 2023 was unfavorable by $0.7 million when compared to Other income, net of $0.2 million for the three months ended September 30, 2022. The unfavorable movement was primarily due to increased interest expense.
Income taxes. Income taxes for the three months ended September 30, 2023 and 2022 were $4.4 million and $5.7 million based on pre-tax income of $19.6 million and $17.5 million, respectively. The tax rate for the three months ended September 30, 2023 and 2022
was 23% and 33%, respectively. The effective tax rate for the three months ended September 30, 2023 was lower than the effective tax rate for the same period in 2022 mainly due to the favorable impact from the mix of taxable income in certain foreign jurisdictions, which in the third quarter of 2022 included a non-deductible goodwill impairment charge of $6.5 million in the Asia-Pacific region and was partially offset by the release of the valuation allowance on deferred tax assets for the Company’s Australian subsidiary of approximately $1.4 million, as well as the favorable impact related to the excess tax benefit associated with stock compensation activity.
Net income. As a result of the preceding items, net income for the three months ended September 30, 2023 was $15.1 million, compared to $11.9 million for 2022. Excluding the effect of currency translation, net income increased $3.4 million as summarized in the following table. In all regions, the increase in net income was primarily due to increases in operating income described above, partially offset by higher interest expense:
Net income (loss)
10,834
(1,754
(16
(4,039
-
(74
1,187
(50
(94
(5,584
9,086
9,236
>100
3,244
3,350
NINE MONTHS ENDED SEPTEMBER 30, 2023 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2022
The following table sets forth a summary of the Company’s Statements of Consolidated Income and the percentage of net sales for the nine months ended September 30, 2023 and 2022. The Company’s past operating results are not necessarily indicative of future operating results.
56,979
64.4
67.3
23,181
35.6
32.7
33,798
20.9
23.2
1,364
14.7
9.6
32,434
1.0
(6,559
14.4
25,875
2.5
6,758
10.9
8.1
19,117
19,116
Net sales. Net sales were $524.1 million for the nine months ended September 30, 2023, an increase of $57.0 million, or 12%, compared to 2022. Excluding the effect of currency translation, net sales increased 13% as summarized in the following table:
27,575
1,673
4,039
13,682
13,958
14,049
17,016
62,588
The increase in PLP-USA net sales of $27.6 million, or 11%, was primarily due to a volume increase in energy products as well as the impact from previously enacted price increases. International net sales for the nine months ended September 30, 2023 were unfavorably
24
affected by $5.6 million when local currencies were converted to U.S. dollars. The following discussion of changes in net sales excludes the effect of currency translation. The Americas net sales of $66.9 million increased $4.0 million, or 6%, primarily due to the volume increases from the October 2022 acquisition of Delta partially offset by volume decreases in communication product sales. EMEA net sales of $105.1 million increased $14.0 million, or 15%, primarily due to volume increases in communication and energy product sales primarily in the first half of 2023. Asia-Pacific net sales of $76.2 million increased $17.0 million, or 27%, primarily due to volume increases in energy product and special industries sales.
Gross profit. Gross profit of $186.7 million for 2023 increased $33.8 million, or 22%, compared to 2022. Excluding the effect of currency translation, gross profit increased $35.5 million, or 23%, as summarized in the following table:
23,261
783
(454
1,237
4,423
(274
4,697
5,332
(946
6,278
(1,674
35,472
PLP-USA gross profit of $114.0 million increased by $23.3 million, or 26%, compared to the same period in 2022, primarily due to the incremental margins from the increased sales volumes and tailwinds from operational efficiencies, price increases and lower material costs. International gross profit for the period ended September 30, 2023 was unfavorably impacted by $1.7 million when local currencies were translated to U.S. dollars. The following discussion of gross profit changes excludes the effects of currency translation. The Americas gross profit increased $1.2 million, or 5%, which was primarily the result of the incremental margin from the increased sales volumes, and contributions from the October 2022 Delta acquisition. EMEA gross profit increased $4.7 million, or 22%, primarily due to the incremental margins from the increased sales volumes, lower material costs and the non-recurring charges recorded in 2022 related to the exit of our Russia operations. Asia-Pacific’s gross profit increased $6.3 million, or 37%, which was primarily driven by the incremental margins on the increased sales volume, lower material costs, and operational efficiencies.
Costs and expenses. Costs and expenses of $109.5 million for the nine months ended September 30, 2023 increased $1.4 million, or 1%, when compared to 2022. Excluding the effect of currency translation, costs and expenses increased $2.4 million, or 2%, as summarized in the following table:
59,570
53,556
6,014
16,331
12,499
3,832
(428
4,260
19,255
19,251
(41
0
14,385
22,870
(8,485
(578
(7,907
(35
(1,047
2,411
PLP-USA costs and expenses of $59.6 million increased $6.0 million, or 11% year-over-year. PLP-USA’s increase was primarily attributable to increased salary-related, sales, employee benefit and insurance costs, partially offset by lower professional services. International costs and expenses for the nine months ended September 30, 2023 were favorably impacted by $1.0 million when local currencies were translated to U.S. dollars. The following discussion of costs and expenses excludes the effect of currency translation. The Americas costs and expenses of $16.3 million increased $4.3 million primarily due to a one-time legal settlement and an increase in salary-related expenses. EMEA costs and expenses of $19.3 million was flat, as increases in salary-related expenses and professional services were offset by decreases in travel and marketing-related costs. Asia-Pacific costs and expenses of $14.4 million decreased $7.9 million primarily due to a one-time $6.5 million goodwill impairment charge recorded in 2022 that did not recur and a one-time $2.5 million gain on the sale of plant and equipment during the third quarter of 2023.
Other (expense) income, net. Other expense, net of $1.8 million for the nine months ended September 30, 2023 was unfavorable by $6.6 million when compared to Other income, net of $4.7 million for the nine months ended September 30, 2022. The unfavorable movement was primarily due to a nonrecurring gain of $4.4 million that was recorded in March 2022 related to a settlement of a Company-owned life insurance policy, and higher interest expense for the nine months ended September 30, 2023.
Income taxes. Income taxes for the nine months ended September 30, 2023 and 2022 were $18.3 million and $11.5 million based on pre-tax income of $75.3 million and $49.5 million, respectively. The tax rate for the nine months ended September 30, 2023, and 2022 was 24% and 23%, respectively. This change is not significant and was primarily due to the limitation on the deductibility of executive compensation partially offset by the favorable impact related to the excess tax benefit associated with stock compensation activity.
Net income. As a result of the preceding items, net income for the nine months ended September 30, 2023 was $57.0 million, compared to $37.9 million for 2022. Excluding the effect of currency translation, net income increased $19.8 million as summarized in the following table. In all regions, the increase in net income was primarily due to increases in operating income described above, partially offset by higher interest expense and higher tax expense:
34,460
6,301
(1,966
(1,724
1,738
2,936
3,110
11,845
12,110
19,797
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies are consistent with the information set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K for the year ended December 31, 2022 filed on March 3, 2023 with the Securities and Exchange Commission and are, therefore, not presented herein.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Management Assessment of Liquidity
We measure liquidity on the basis of our ability to meet short-term and long-term operating needs, repay debt, fund additional investments, including acquisitions, and make dividend payments to shareholders. Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, cash dividends, business acquisitions and access to bank lines of credit.
Our investments include expenditures required for equipment and facilities as well as expenditures in support of our strategic initiatives. During the first nine months of 2023, we used cash of $27.1 million for capital expenditures and $12.1 million for a business acquisition. We ended the first nine months of 2023 with $43.7 million of cash, cash equivalents and restricted cash (collectively, “Cash”). Our Cash is held in various locations throughout the world. At September 30, 2023, the majority of our Cash was held outside the U.S. We expect most accumulated non-U.S. Cash balances will remain outside of the U.S. and that we will meet U.S. liquidity needs through future operating cash flows, use of U.S. Cash balances, external borrowings, or some combination of these sources. We complete comprehensive reviews of our significant customers and their creditworthiness by analyzing financial statements for customers where we have identified a measure of increased risk. We closely monitor payments and developments which may signal possible customer credit issues. We currently have not identified any potential material impact on our liquidity from customer credit issues.
Total debt, including notes payable, at September 30, 2023 was $62.8 million. At September 30, 2023, our unused availability under our credit facility (the "Facility") was $60.0 million and our bank debt to equity percentage was 15.7%. The Facility contains, among other provisions, requirements for maintaining levels of net worth and profitability. At September 30, 2023, the Company was in compliance with these covenants.
Our Asia-Pacific segment had $0.2 million in restricted cash for both periods ended September 30, 2023 and December 31, 2022. The restricted cash was used to secure bank debt and is included in Cash, cash equivalents and restricted cash on the Consolidated Balance Sheets.
We expect that our major source of funding for 2023 and beyond will be our operating cash flows, our existing Cash as well as our Facility agreement. Except for current earnings in certain jurisdictions, our operating income is deemed to be indefinitely reinvested in foreign jurisdictions. We currently do not intend nor foresee a need to repatriate these funds. We believe our future operating cash flows will be more than sufficient to cover debt repayments, other contractual obligations, capital expenditures and dividends for the next 12 months and thereafter for the foreseeable future. In addition, we believe our borrowing capacity provides substantial financial resources, if needed, to supplement funding of capital expenditures and/or acquisitions. We also believe that we can further expand our borrowing capacity, if necessary; however, we do not believe we would increase our debt to a level that would have a material adverse impact upon results of operations or financial condition.
Sources and Uses of Cash
Net cash provided by operating activities for the nine months ended September 30, 2023 was $88.4 million compared to $9.2 million provided by operating activities in the comparable prior year nine-month period. The $79.2 million increase was primarily a result of increases in net income and changes in operating assets and liabilities.
Net cash used in investing activities for the nine months ended September 30, 2023 was $36.7 million compared to $28.1 million in the comparable prior year nine-month period. The $8.6 million change was primarily a result of an increase in capital expenditures and decreases in proceeds from the settlement of a Company-owned life insurance policy in 2022 that did not recur.
Net cash used in financing activities for the nine months ended September 30, 2023 was $45.5 million compared to cash provided by financing activities of $14.6 million in the comparable prior year nine-month period. The $60.2 million change was primarily the result of an increase in payments on long-term debt, share repurchases, and notes payable.
We have commitments under operating leases primarily for office and manufacturing space, motor vehicles, office and computer equipment and finance leases primarily for equipment. At September 30, 2023, we had $1.6 million of current operating lease liabilities and $7.9 million of noncurrent operating lease liabilities. Total liabilities related to finance lease obligations were less than $1.0 million at September 30, 2023.
As of September 30, 2023, the Company had total outstanding guarantees of $13.9 million. Additionally, certain domestic and foreign customers require the Company to issue letters of credit or performance bonds as a condition of placing an order. As of September 30, 2023, the Company had total outstanding letters of credit of $1.0 million.
The Company has borrowing facilities at certain of its foreign subsidiaries, which consist of overdraft lines, working capital credit lines, and facilities for the issuance of letters of credit and short-term borrowing needs. At September 30, 2023 and December 31, 2022, $17.6 million and $26.1 million was outstanding, of which $15.5 million and $19.1 million were classified as current, respectively. These facilities support commitments made in the ordinary course of business.
FORWARD LOOKING STATEMENTS
Cautionary Statement for “Safe Harbor” Purposes Under The Private Securities Litigation Reform Act of 1995
This Form 10-Q and other documents we file with the SEC contain forward-looking statements regarding the Company’s and management’s beliefs and expectations. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance (as opposed to historical items) and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to the Company’s operations and business environment, all of which are difficult to predict and many of which are beyond the Company’s control. Such uncertainties and factors could cause the Company’s actual results to differ materially from those matters expressed in or implied by such forward-looking statements.
The following factors, among others, could affect the Company’s future performance and cause the Company’s actual results to differ materially from those expressed or implied by forward-looking statements made in this report:
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company operates manufacturing facilities and offices around the world and uses fixed and floating rate debt to finance the Company’s global operations. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations and market risk related to changes in interest rates and foreign currency exchange rates. The Company believes that the political and economic risks related to the Company’s international operations are mitigated due to the geographic diversity in which the Company’s international operations are located.
Effective July 1, 2018, Argentina was designated as a highly inflationary economy as the projected three-year cumulative inflation rate exceeded 100%. As such, beginning July 1, 2018, the functional currency for the Company’s Argentina subsidiary became the U.S. dollar. Revenue from operations in Argentina represented less than 1% of total consolidated net sales for the nine-month periods ended September 30, 2023 and 2022.
As of September 30, 2023, the Company had $0.2 million in assets and $0.1 million in liabilities related to foreign currency forward exchange contracts outstanding. The Company does not hold derivatives for trading purposes.
The Company’s primary currency rate exposures are related to foreign denominated debt, intercompany debt, foreign denominated receivables and payables and cash and short-term investments. A hypothetical 10% change in currency rates would have an impact on fair values on such instruments of $6.4 million and a $2.6 million impact on income before income taxes at September 30, 2023.
The Company is exposed to market risk, including changes in interest rates and foreign exchange rates since we conduct business in a variety of foreign currencies. The Company is subject to interest rate risk on its variable rate revolving credit facilities, which consisted
of long-term borrowings of $31.9 million at September 30, 2023. A 100-basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $0.2 million for the nine months ended September 30, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s Principal Executive Officer and Principal Accounting Officer have concluded that the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended, were effective as of September 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f)) of the Securities and Exchange Act of 1934, as amended, during the nine-month period ended September 30, 2023 that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding the Company’s current legal proceedings is presented in Note 5 of the Notes to the Consolidated Financial Statements.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 3, 2023. In addition, the impact of COVID-19 and ongoing conflict between Russia and Ukraine could potentially exacerbate other risks discussed, any of which could have a material adverse effect on the Company. The situation continues to change, and additional impacts may arise that the Company is not aware of currently.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 28, 2021, the Board of Directors authorized a plan to repurchase up to an additional 191,163 of Preformed Line Products Company common shares, resulting in a total of 250,000 shares available for repurchase with no expiration date. The following table reflects repurchases for the three-month period ended September 30, 2023.
Period
TotalNumber ofSharesPurchased
AveragePrice Paidper Share
Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms
Maximum Numberof Shares that mayyet be Purchasedunder the Plans orPrograms
July
2,000
156.10
164,235
85,765
August
43,357
170.93
207,592
42,408
September
5,360
164.02
212,952
37,048
50,717
On November 1, 2023, the Board of Directors authorized a new plan to repurchase up to an additional 212,952 of Preformed Line Products Company common shares, resulting in a total of 250,000 shares available for repurchase with no expiration date.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
Item 6. Exhibits and Financial Statement Schedules
Exhibit
Number
31.1
Certification of the Principal Executive Officer, Robert G. Ruhlman, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2
Certification of the Principal Accounting Officer, Andrew S. Klaus, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1
Certification of the Principal Executive Officer, Robert G. Ruhlman, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished.
32.2
Certification of the Principal Accounting Officer, Andrew S. Klaus, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished.
101.INS
Inline XBRL Instance Document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
104
Cover Page Interactive Data File (embedded within the inline XBRL document)
31
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 2, 2023
/s/ Robert G. Ruhlman
Robert G. Ruhlman
Chairman, President and Chief Executive Officer
(principal executive officer)
/s/ Andrew S. Klaus
Andrew S. Klaus
Chief Financial Officer
(principal financial and accounting officer)