Item 2. Management’s Discussion and Analysis
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, manufacture, 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 Executive Chairman, 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 months ended March 31, 2024 and 2023. 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 $140.9 million decreased $40.9 million for the three months ended March 31, 2024 year-over-year. The inflationary headwinds we experienced in 2022 and early 2023 related to raw materials, specifically plastic resins, aluminum and sand (grit), have generally subsided. Costs related to shipping and freight have similarly fallen from their 2022 peak. While decreases in these underlying costs along with the impacts of our previous price increases benefited gross margins in 2023, they have not meaningfully impacted first quarter 2024 results. 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 financial statements are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. PLPC’s foreign currency impacts 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 March 31, 2024 exchange rates. The fluctuations of foreign currencies during the three months ended March 31, 2024 had a favorable impact on net sales of $0.7 million and an unfavorable impact of $4.6 million during the three months ended March 31, 2023. The effect of currency translation had a de minimis impact on net income and an unfavorable impact of $0.2 million for the three months ended March 31, 2024 and 2023, respectively. On a reportable segment basis, the impact of foreign currency translation on net sales and net income for the three months ended March 31, 2024 and 2023, respectively, was as follows:
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Foreign Currency Translation Impact
Net Sales
Net Income (Loss)
(Thousands of dollars)
2024
2023
2024
2023
The Americas
$
805
$
(1,157
)
$
33
$
(64
)
EMEA
788
(2,165
)
39
(91
)
Asia-Pacific
(844
)
(1,273
)
(73
)
(62
)
Total
$
749
$
(4,595
)
$
(1
)
$
(217
)
Although we experienced market headwinds that have impacted our first quarter 2024 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. As 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. Period cost containment has been a priority for the Company in 2024, shown through a reduction in costs and expenses of nearly 13%. 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. As of March 31, 2024, our liquidity remains strong and our bank debt to equity percentage was 13.7%. We can borrow needed funds at a competitive interest rate under our credit facility.
RESULTS OF OPERATIONS
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 March 31, 2024 and 2023. The Company’s past operating results are not necessarily indicative of future operating results.
Three Months Ended March 31,
(Thousands of dollars)
2024
2023
Change
Net sales
$
140,904
100.0
%
$
181,824
100.0
%
$
(40,920
)
Cost of products sold
96,773
68.7
115,541
63.5
(18,768
)
GROSS PROFIT
44,131
31.3
66,283
36.5
(22,152
)
Costs and expenses
32,572
23.1
37,302
20.5
(4,730
)
OPERATING INCOME
11,559
8.2
28,981
15.9
(17,422
)
Other income (expense), net
299
0.2
(722
)
(0.4
)
1,021
INCOME BEFORE INCOME TAXES
11,858
8.4
28,259
15.5
(16,401
)
Income taxes
2,255
1.6
6,840
3.8
(4,585
)
NET INCOME
9,603
6.8
21,419
11.8
(11,816
)
Net (income) attributable to noncontrolling interests
(7
)
(0.0
)
(21
)
(0.0
)
14
NET INCOME ATTRIBUTABLE TO PREFORMED LINE PRODUCTS COMPANY SHAREHOLDERS
$
9,596
6.8
%
$
21,398
11.8
%
$
(11,802
)
Net sales. In 2024, net sales were $140.9 million, a decrease of $40.9 million, or 23%, compared to 2023. Excluding the effect of currency translation, net sales decreased 23% as summarized in the following table:
Three Months Ended March 31,
Change
Change
(Thousands of dollars)
Due to
Excluding
Currency
Currency
%
2024
2023
Change
Translation
Translation
Change
Net sales
PLP-USA
$
70,737
$
97,177
$
(26,440
)
$
—
$
(26,440
)
(27
)
%
The Americas
18,358
22,568
(4,210
)
805
(5,015
)
(22
)
EMEA
28,654
39,034
(10,380
)
788
(11,168
)
(29
)
Asia-Pacific
23,155
23,045
110
(844
)
954
4
Consolidated
$
140,904
$
181,824
$
(40,920
)
$
749
$
(41,669
)
(23
)
%
The decrease in PLP-USA net sales of $26.4 million, or 27%, was primarily due to lower volumes and unfavorable product mix in communications sales and lower volumes in energy product sales. International net sales for the three months ended March 31, 2024 were favorably affected by $0.7 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 $18.4 million decreased $5.0 million, or 22%, primarily due to lower volumes in communications sales. EMEA net sales of $28.7 million decreased $11.2 million, or 29%, primarily due to
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lower volume predominately in communications sales and to a lesser extent energy products sales. Asia-Pacific net sales of $23.2 million increased $1.0 million, or 4%, primarily due to volume increases in energy product sales.
Gross profit. Gross profit of $44.1 million for 2024 decreased $22.2 million, or 33%, compared to 2023. Excluding the effect of currency translation, gross profit decreased $22.4 million, or 34%, as summarized in the following table:
Three Months Ended March 31,
Change
Change
(Thousands of dollars)
Due to
Excluding
Currency
Currency
%
2024
2023
Change
Translation
Translation
Change
Gross profit
PLP-USA
$
24,696
$
42,106
$
(17,410
)
$
—
$
(17,410
)
(41
)
%
The Americas
4,965
7,987
(3,022
)
253
(3,275
)
(41
)
EMEA
8,318
9,247
(929
)
179
(1,108
)
(12
)
Asia-Pacific
6,152
6,943
(791
)
(209
)
(582
)
(8
)
Consolidated
$
44,131
$
66,283
$
(22,152
)
$
223
$
(22,375
)
(34
)
%
PLP-USA gross profit of $24.7 million decreased by $17.4 million, or 41%, compared to the same period in 2023, primarily due to lower sales volumes and unfavorable product mix. International gross profit for the period ended March 31, 2024 was favorably impacted by $0.2 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 $3.3 million, or 41%, which was primarily the result of lower sales volumes. EMEA gross profit decreased $1.1 million, or 12%, primarily due to lower sales volumes, partially offset by favorable resolution of a warranty claim. Asia-Pacific’s gross profit decreased $0.6 million, or 8%, which was primarily driven by higher manufacturing costs.
Costs and expenses. Costs and expenses of $32.6 million for the three months ended March 31, 2024 decreased $4.7 million, or 13%, when compared to 2023. Excluding the effect of currency translation, costs and expenses decreased $5.0 million, or 13%, as summarized in the following table:
Three Months Ended March 31,
Change
Change
(Thousands of dollars)
Due to
Excluding
Currency
Currency
%
2024
2023
Change
Translation
Translation
Change
Costs and expenses
PLP-USA
$
18,164
$
19,906
$
(1,742
)
$
—
$
(1,742
)
(9
)
%
The Americas
4,721
5,457
(736
)
255
(991
)
(18
)
EMEA
6,129
6,693
(564
)
118
(682
)
(10
)
Asia-Pacific
3,558
5,246
(1,688
)
(107
)
(1,581
)
(30
)
Consolidated
$
32,572
$
37,302
$
(4,730
)
$
266
$
(4,996
)
(13
)
%
PLP-USA costs and expenses of $18.2 million decreased $1.7 million, or 9% year-over-year. PLP-USA’s decrease was primarily attributable to lower sales, personnel and professional services costs. International costs and expenses for the three months ended March 31, 2024 were unfavorably impacted by $0.3 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 $4.7 million decreased $1.0 million primarily due to lower sales and personnel-related costs. EMEA costs and expenses of $6.2 million decreased by $0.7 million primarily due to lower sales-related and bad debt expenses. Asia-Pacific costs and expenses of $3.6 million decreased $1.6 million primarily due to a one-time gain on the sale of capital assets.
Other (expense) income, net. Other income, net of $0.3 million for the three months ended March 31, 2024 was favorable by $1.0 million when compared to Other expense, net for the three months ended March 31, 2023 of $0.7 million. The favorable movement was due to higher interest income earned on cash balances in certain international jurisdictions and lower interest expense from reduced debt balances for the three months ended March 31, 2024.
Income taxes. Income taxes for the three months ended March 31, 2024 and 2023 were $2.3 million and $6.8 million based on pre-tax income of $11.9 million and $28.3 million, respectively. The tax rate for the three months ended March 31, 2024 and 2023 was 19% and 24%, respectively. The effective tax rate for the three months ended March 31, 2024 was lower than the effective tax rate for the same period in 2023 mainly due to an increase in excess tax benefits on share-based compensation in relation to overall lower pre-tax book income.
Net income. As a result of the preceding items, net income for the three months ended March 31, 2024 was $9.6 million, compared to $21.4 million for 2023. Excluding the effect of currency translation, net income decreased $11.8 million as summarized in the following
19
table. The decrease in net income was due to decreases in operating income described above, partially offset by higher interest income, lower interest expense, and lower tax expense:
Three Months Ended March 31,
Change
Change
(Thousands of dollars)
Due to
Excluding
Currency
Currency
%
2024
2023
Change
Translation
Translation
Change
Net income (loss)
PLP-USA
$
5,317
$
16,796
$
(11,479
)
$
—
$
(11,479
)
(68
)
%
The Americas
897
1,889
(992
)
33
(1,025
)
(54
)
EMEA
1,579
1,661
(82
)
39
(121
)
(7
)
Asia-Pacific
1,803
1,052
751
(73
)
824
78
Consolidated
$
9,596
$
21,398
$
(11,802
)
$
(1
)
$
(11,801
)
(55
)
%
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, 2023 filed on March 8, 2024 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 three months of 2024, we used cash of $3.9 million for capital expenditures. We ended the first three months of 2024 with $45.9 million of cash, cash equivalents and restricted cash (collectively, “Cash”). Our Cash is held in various locations throughout the world. At March 31, 2024, 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 March 31, 2024 was $56.5 million. At March 31, 2024, our unused availability under our credit facility (the "Facility") was $55.0 million and our bank debt to equity percentage was 13.7%. The Facility contains, among other provisions, requirements for maintaining levels of net worth and profitability. At March 31, 2024, the Company was in compliance with these covenants.
Our Asia-Pacific segment had $0.2 million in restricted cash for both periods ended March 31, 2024 and December 31, 2023. The restricted cash was used to secure bank debt and is included in Cash, cash equivalents and restricted cash on the Consolidated Balance Sheets.
On January 19, 2021, the Company received funding for a term loan from PNC Equipment Finance, LLC in the principal amount of $20.5 million for the full amount of the purchase price for a new corporate aircraft. 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 $14.2 million outstanding on this debt facility at March 31, 2024, $2.1 million was classified as current. The loan is secured by the aircraft.
We expect that our major source of funding for 2024 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.
20
Sources and Uses of Cash
Net cash provided by operating activities for the three months ended March 31, 2024 was $5.8 million compared to $25.4 million in the comparable prior year three-month period. The $19.6 million decrease was primarily a result of a decrease in net income and larger payables balances, which outpaced increases in current assets, primarily accounts receivable, inventory and prepaid expenses.
Net cash used in investing activities for the three months ended March 31, 2024 was $0.7 million compared to $22.3 million in the comparable prior year three-month period. The $21.6 million change was primarily a result of decreases in acquisition activity and capital expenditures during the current period.
Net cash used in financing activities for the three months ended March 31, 2024 was $11.7 million compared to $9.3 million in the comparable prior year three-month period. The $2.4 million change was primarily the result of an increase in payments on notes payable to banks and repurchases of Company shares.
We have commitments under operating leases primarily for office and manufacturing space, transportation equipment, office and computer equipment and finance leases primarily for equipment. At March 31, 2024, we had $1.5 million of current operating lease liabilities and $7.4 million of noncurrent operating lease liabilities. Total liabilities related to finance lease obligations were less than $0.4 million at March 31, 2024.
As of March 31, 2024, the Company had total outstanding guarantees of $13.6 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 March 31, 2024, the Company had total outstanding letters of credit of $0.9 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 March 31, 2024 and December 31, 2023, $7.3 million and $13.3 million was outstanding, of which $6.5 million and $11.4 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. Any forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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. Use of words such “anticipates,” “believes,” “may,” “should,” “will,” “would,” “could,” “plans,” “projects,” “expects,” “estimates,” “predicts,” “targets,” “forecasts,” “intends,” “contemplates,” and similar words may identify forward-looking statements. 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:
• The overall demand for cable anchoring and control hardware for electrical transmission and distribution lines on a worldwide basis, which has a slow growth rate in mature markets such as the United States, Canada, Australia and Western Europe and may grow slowly or experience prolonged delay in developing regions despite expanding power needs;
• The potential impact of global economic conditions, including the impact of inflation and rising interest rates, on the Company’s ongoing profitability and future growth opportunities in the Company’s core markets in the U.S. and other foreign countries, which may experience continued or further instability due to political and economic conditions, social unrest, acts of war, military conflict (including the ongoing Russian-Ukrainian and Israeli-Palestinian conflicts), international hostilities or the perception that hostilities may be imminent, terrorism, changes in diplomatic and trade relationships and public health concerns (including viral outbreaks such as COVID-19);
• The ability of the Company’s customers to raise funds needed to build the infrastructure projects their customers require;
• Technological developments that affect longer-term trends for communication lines, such as wireless communication;
• The decreasing demand for product supporting copper-based infrastructure due to the introduction of products using new technologies or adoption of new industry standards;
• The Company’s success at continuing to develop proprietary technology and maintaining high quality products and customer service to meet or exceed new industry performance standards and individual customer expectations;
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• The Company’s success in strengthening and retaining relationships with the Company’s customers, growing sales at targeted accounts and expanding geographically;
• The extent to which the Company is successful at expanding the Company’s product line or production facilities into new areas or implementing efficiency measures at existing facilities;
• The effects of fluctuation in currency exchange rates upon the Company’s foreign subsidiaries’ operations and reported results from international operations, together with non-currency risks of investing in and conducting significant operations in foreign countries, including those relating to political, social, economic and regulatory factors;
• The Company’s ability to identify, complete, obtain funding for and integrate acquisitions for profitable growth;
• The potential impact of consolidation, deregulation and bankruptcy among the Company’s suppliers, competitors and customers and of any legal or regulatory claims;
• The relative degree of competitive and customer price pressure on the Company’s products;
• The cost, availability and quality of raw materials required for the manufacture of products and any tariffs that may be associated with the purchase of these products. The Company’s supply chain could face disruptions and constraints from inflationary pressures and ongoing wars and military conflicts, which could have a material, adverse effect on the ability to secure raw materials and supplies;
• Strikes, labor disruptions and other fluctuations in labor costs;
• Changes in significant government regulations affecting environmental compliance or other litigation matters;
• Security breaches or other disruptions to the Company’s information technology structure;
• The telecommunication market’s continued deployment of Fiber-to-the-Premises;
• The impact of any failure to timely implement and maintain adequate financial, information technology and management processes and controls and procedures; and
• Those factors described under the heading “Risk Factors” in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 which was filed on March 8, 2024.
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