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 consolidated 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.
The MD&A is organized as follows:
•
Overview
•
Preface
•
Results of Operations
•
Application of Critical Accounting Policies and Estimates
•
Working Capital, Liquidity and Capital Resources
•
Recently Adopted Accounting Pronouncements
•
New Accounting Standards to be Adopted
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 also provide solar hardware systems, mounting hardware for a variety of solar power applications, and fiber optic and copper splice closures. PLPC is 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 29 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 without 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, communications and special industries products. Our other three segments, The Americas, EMEA and Asia-Pacific, support our energy, communications and special industries 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 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
Our consolidated financial statements are prepared in conformity with 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 consolidated financial statements in the assessment of our performance and operating trends.
The following discussion describes our results of operations for the three and six months ended June 30, 2020. The first quarter of 2020 saw the global outbreak of a novel strain of coronavirus (“COVID-19”), which in the latter part of the quarter created significant global economic disruption. While the recent outbreak did not have a material impact on our reported results for the reported periods, it created challenges for us in countries that were the earliest to be impacted by the pandemic, namely our Asia-Pacific business segment. Due to restrictions on our operations, the operations of our customers and the global supply chain, we are actively monitoring its impact on future periods.
23
As the virus spread, we took action to protect the health and safety of our employees while we maintained critical operations to protect our customers and suppliers. Currently, many of our customers are considered “essential” and are open for business, although maybe in a limited capacity, which has slowed demand into the second quarter. Nearly all of our North American plants have remained operational and only some of our international plants were closed temporarily. While there are some restrictions to the supply of products globally and those restrictions may continue or expand to other regions, our global supply chain currently remains strong.
Due to the uncertainty created by COVID-19, we are actively managing costs and our liquidity position to provide additional flexibility while still supporting our customers and their specific needs. We are scaling back capital expenditures and reducing operating expenses and could experience lower variable SG&A, primarily through a decrease in employee-related expenses and reduced travel-related expenses incurred by our associates, due to travel restrictions in place.
While we expect the COVID-19 outbreak will continue to have an adverse impact on our business, the businesses of our customers and the global economy, we cannot predict the duration or scope of the COVID-19 pandemic or the magnitude of its impact on our business and results of operations. The extent of any future impact is dependent upon several factors including those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on March 6, 2020 and the Company’s Quarterly Report on Form 10-Q file with the SEC on May 1, 2020. In addition, the impact of COVID-19 could potentially exacerbate other risks discussed, any of which could have a material adverse effect on the Company.
Our consolidated financial statements are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. As foreign currencies strengthen against the U.S. dollar, our sales and costs increase as the foreign currency-denominated financial statements translate into more U.S. dollars, and, conversely, when foreign currencies weaken, our sales and costs decrease upon translation into U.S. dollars. The fluctuations of foreign currencies during the three and six months ended June 30, 2020 had a $7.1 million and $11.3 million unfavorable effect, respectively, on net sales compared to the same period in 2019. There was a $.5 million and a $.7 million unfavorable effect, respectively, on net income for the three and six months ended June 30, 2020 as compared to the prior year. On a reportable segment basis, the impact of foreign currency on net sales and net income for the three and six months ended June 30, 2020 was as follows:
Foreign Currency Translation Impact
Net Sales
Net Income
(Thousands of dollars)
Three Months
Six Months
Three Months
Six Months
The Americas
$
(4,936
)
$
(7,368
)
$
(485
)
$
(626
)
EMEA
(1,156
)
(1,904
)
(48
)
(96
)
Asia-Pacific
(1,009
)
(2,020
)
11
23
Total
$
(7,101
)
$
(11,292
)
$
(522
)
$
(699
)
The operating results for the three months ended June 30, 2020 are compared to the same period in 2019. Net sales for the three months ended June 30, 2020 of $117.6 million increased $2.8 million, or 2%, compared to 2019. As a percentage of net sales, gross profit increased to 33.6% in 2020 from 32.9% in 2019. Gross profit for the three-month periods ended June 30, 2020 and 2019 was $39.6 million and $37.8 million, respectively. Excluding the unfavorable impact of foreign currency translation, gross profit increased $4.0 million, or 11%, compared to 2019. Costs and expenses of $24.8 million decreased $1.9 million compared to 2019 and included a favorable impact from currency translation of $1.4 million. Operating income for the three months ended June 30, 2020 was $14.8 million, an increase of $3.7 million compared to 2019. Net income for the three months ended June 30, 2020 of $10.5 million increased $2.6 million compared to the three months ended June 30, 2019. The effect of currency translation had a $.9 million and a $.5 million negative impact on operating income and net income, respectively.
The operating results for the six months ended June 30, 2020 are compared to the same period in 2019. Net sales for the six months ended June 30, 2020 of $220.5 million increased $8.5 million, or 4%, compared to 2019. As a percentage of net sales, gross profit increased to 32.9% in 2020 from 30.7% in 2019. Gross profit for the six-month periods ended June 30, 2020 and 2019 was $72.5 million and $65.1 million, respectively. Excluding the unfavorable impact of foreign currency translation, gross profit increased $10.8 million, or 17%, compared to 2019. Costs and expenses of $53.0 million increased $1.1 million compared to 2019 and included a favorable impact from currency translation of $2.4 million. Operating income for the six months ended June 30, 2020 was $19.5 million, an increase of $6.3 million compared to 2019. Net income for the six months ended June 30, 2020 of $14.2 million increased $4.5 million compared to the six months ended June 30, 2019. The year-to-date effect of currency translation had a $1.1 million and a $.7 million negative impact on operating income and net income, respectively.
24
The following table reflects the impact of foreign currency fluctuations on operating income for the three and six- month periods ended June 30 , 2020 and 201 9 :
Foreign Currency Impact
Three Months Ended June 30
Six Months Ended June 30
(Thousands of dollars)
2020
2019
2020
2019
Operating income
$
14,807
$
11,115
$
19,451
$
13,161
Translation loss
885
0
1,131
0
Transaction loss (gain)
(400
)
(109
)
1,392
(129
)
Net loss (gain) on forward currency
contracts
221
0
(904
)
0
Operating income excluding currency
impact
$
15,513
$
11,006
$
21,974
$
13,032
Despite the constant changes in the current global economy, and aside from the uncertainty created by the COVID-19 outbreak, we believe our business fundamentals and our financial position are sound and that we are strategically well-positioned. We remain focused on assessing our business structure, global facilities and overall capacity in conjunction with the requirements of local manufacturing in the markets that we serve. If necessary, we will modify redundant processes and utilize our global manufacturing network to manage costs, increase sales volumes and deliver value to our customers. We have continued to invest in the business to expand into new markets for the Company, improve efficiency, develop new products, increase our capacity and become an even stronger supplier to our customers. We currently have a bank debt to equity ratio of 27.6% and can borrow needed funds at a competitive interest rate under our credit facility.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2020 COMPARED TO THREE MONTHS ENDED JUNE 30, 2019
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 June 30, 2020 and 2019. The Company’s past operating results are not necessarily indicative of future operating results.
Three Months Ended June 30
(Thousands of dollars)
2020
2019
Change
Net sales
$
117,629
100.0%
$
114,842
100.0%
$
2,787
Cost of products sold
78,063
66.4
77,035
67.1
1,028
GROSS PROFIT
39,566
33.6
37,807
32.9
1,759
Costs and expenses
24,759
21.0
26,692
23.2
(1,933
)
OPERATING INCOME
14,807
12.6
11,115
9.7
3,692
Other expense - net
(922
)
(0.8)
(265
)
(0.2)
(657
)
INCOME BEFORE INCOME TAXES
13,885
11.8
10,850
9.4
3,035
Income tax expense
3,397
2.9
2,984
2.6
413
NET INCOME
10,488
8.9
7,866
6.8
2,622
Add: Net adjustment attributable to noncontrolling
interests
(7
)
(0.0)
38
0.0
(45
)
NET INCOME ATTRIBUTABLE TO
PREFORMED LINE PRODUCTS COMPANY
SHAREHOLDERS
$
10,481
8.9%
$
7,904
6.9%
$
2,577
25
Net sales. Net sales were $1 17.6 million for the three months ended June 30 , 2020 , an increase of $ 2.8 million, or 2 %, from the three months ended June 30 , 201 9 . Excluding the unfavorable effect of currency translation, net sales for the three months ended June 30, 2020 increased $ 9.9 million compared to the same period in 201 9 , or 9 %, as summarized in the following table:
Three Months Ended June 30
(Thousands of dollars)
2020
2019
Change
Change
Due to
Currency
Translation
Change
Excluding
Currency
Translation
%
change
Net sales
PLP-USA
$
53,966
$
46,369
$
7,597
$
0
$
7,597
16
%
The Americas
17,486
17,708
(222
)
(4,936
)
4,714
27
EMEA
21,048
22,610
(1,562
)
(1,156
)
(405
)
(2
)
Asia-Pacific
25,129
28,155
(3,026
)
(1,009
)
(2,018
)
(7
)
Consolidated
$
117,629
$
114,842
$
2,787
$
(7,101
)
$
9,888
9
%
The year-over-year increase in PLP-USA net sales of $7.6 million, or 16%, was primarily due to a volume increase in energy product sales. International net sales for the three months ended June 30, 2020 experienced an unfavorable impact of $7.1 million when local currencies were converted to U.S. dollars. The following discussion of net sales excludes the effect of currency translation. The Americas net sales of $17.5 million increased $4.7 million, or 27%, primarily due to a volume increase in energy product sales. EMEA net sales of $21.0 million decreased $.4 million, or 2%, primarily due to a volume decrease in energy and communications product sales within the region, slightly offset by additional incremental sales from a newly acquired business in the prior year. In Asia-Pacific, net sales of $25.1 million decreased $2.0 million, or 7%, compared to 2019 primarily due to a combined volume decrease in communications and special industries products mostly as a result of the disruption to the global economy caused by the COVID-19 pandemic.
Gross profit. Gross profit was $39.6 million and $37.8 million for the three-month periods ended June 30, 2020 and 2019, respectively. Excluding the unfavorable effect of currency translation, gross profit increased $4.0 million, or 11%, as summarized in the following table:
Three Months Ended June 30
(Thousands of dollars)
2020
2019
Change
Change
Due to
Currency
Translation
Change
Excluding
Currency
Translation
%
change
Gross profit
PLP-USA
$
20,370
$
18,589
$
1,781
$
0
$
1,781
10
%
The Americas
5,876
5,844
32
(1,625
)
1,657
36
EMEA
7,641
6,334
1,307
(404
)
1,711
30
Asia-Pacific
5,679
7,040
(1,361
)
(215
)
(1,146
)
(23
)
Consolidated
$
39,566
$
37,807
$
1,759
$
(2,244
)
$
4,003
11
%
PLP-USA gross profit of $20.4 million increased $1.8 million compared to the same period in 2019 as a result of increased sales volume combined with a product sales mix shift to higher margin product and continued cost containment within material, labor and manufacturing expense. International gross profit for the three months ended June 30, 2020 was unfavorably impacted by $2.2 million when local currencies were translated to U.S. dollars. The following discussion of gross profit excludes the effects of currency translation. The Americas gross profit increase of $1.7 million was primarily the result of a $4.7 million increase in sales combined with a product margin improvement in the region due to sales product mix. Despite a decrease in net sales, EMEA gross profit increased $1.7 million, mainly as a result of a shift to higher sales volume in higher margin products. Asia-Pacific gross profit decreased $1.1 million primarily as a result of a year-over-year reduction in sales volume and the negative impact related to the COVID-19 pandemic.
26
C osts and expenses. Costs and expenses of $ 2 5.8 million for the three months ended June 30 , 2020 de creased $ 1.9 million, or 7 %. Excluding the favorable effect of currency translation, costs and expenses de creased $ .6 million, or 2 %, as summarized in the following table:
Three Months Ended June 30
(Thousands of dollars)
2020
2019
Change
Change
Due to
Currency
Translation
Change
Excluding
Currency
Translation
%
change
Costs and expenses
PLP-USA
$
11,617
$
12,235
$
(618
)
$
0
$
(618
)
(5
)%
The Americas
3,182
3,401
(219
)
(838
)
619
18
EMEA
4,956
5,610
(654
)
(300
)
(354
)
(6
)
Asia-Pacific
5,004
5,446
(442
)
(221
)
(221
)
(4
)
Consolidated
$
24,759
$
26,692
$
(1,933
)
$
(1,359
)
$
(574
)
(2
)%
PLP-USA costs and expenses of $11.6 million for the three months ended June 30, 2020 decreased $.6 million compared to 2019 mainly due to $.6 million of lower travel and entertainment expenses and $.2 million of lower professional fees, which were partially offset by higher combined personnel-related costs and miscellaneous decreases of $.2 million. On a consolidated basis, costs and expenses for the three months ended June 30, 2020 were favorably impacted by $1.4 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 $3.2 million increased $.6 million for the three months ended June 30, 2020 compared to the same period in 2019 primarily due to a $.2 million increase in personnel-related expenses and an increase in foreign currency exchange losses of $.3 million, combined with higher commissions of $.1 million. EMEA costs and expenses of $5.0 million decreased $.4 million mainly due to lower travel and entertainment expenses of $.2 million, lower professional fees of $.2 and decreased personnel-related expenses of $.1 million. These decreases were offset by the remaining incremental costs incurred with our acquired businesses. Asia-Pacific costs and expenses of $5.0 million decreased $.2 million. This decrease was primarily due to a decrease in combined personnel-related and travel and entertainment expenses of $.2 million.
Other income (expense). Other expense for the three-month periods ended June 30, 2020 and 2019 was $.9 million and $.3 million, respectively.
Income taxes. Income taxes for the three months ending June 30, 2020 and 2019 were $3.4 million and $3.0 million, respectively, based on pre-tax income of $13.9 million and $10.9 million, respectively. The effective tax rate for the three-month periods ending June 30, 2020 and 2019 was 25% and 28%, respectively, compared to the U.S. federal statutory rate of 21%. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. In addition to state and local income taxes, the following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 21% and our effective tax rate :
2020:
1.
A $.4 million, or 3%, net increase resulting from U.S. permanent items, primarily related to limitations on the deductibility of executive compensation.
2.
A $.1 million, or 1%, increase resulting from earnings in jurisdictions with higher tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested.
2019:
1.
A $.6 million, or 5%, net increase resulting from U.S. permanent items, primarily related to limitations on the deductibility of executive compensation.
2.
A $.2 million, or 2%, increase resulting from earnings in jurisdictions with higher tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested.
27
Net income. As a result of the preceding items, net income for the three months ended June 30, 2020 was $ 10.5 million, compared to $ 7.9 million for the three months ended June 30 , 201 9 , a n in crease of $ 2.6 million as summarized in the following table:
Three Months Ended June 30
(Thousands of dollars)
2020
2019
Change
Change
Due to
Currency
Translation
Change
Excluding
Currency
Translation
%
change
Net income
PLP-USA
$
6,135
$
4,278
$
1,857
$
0
$
1,857
43
%
The Americas
1,695
1,659
36
(485
)
521
26
EMEA
2,247
805
1,442
(48
)
1,490
185
Asia-Pacific
404
1,162
(758
)
11
(769
)
(150
)
Consolidated
$
10,481
$
7,904
$
2,577
$
(522
)
$
3,099
39
%
PLP-USA’s net income for the three months ended June 30, 2020 increased $1.9 million compared to the same period in 2019, primarily due to an increase in operating income of $2.4, partially offset by a decrease in other income of $.2 million combined with an increase in income taxes of $.3 million. The following discussion of net income excludes the effect of currency translation. The Americas net income increased $.5 million as a result of a $1.0 million increase in operating income, partially offset by higher income taxes of $.2 million combined with an increase in other non-operating expense of $.3 million. EMEA net income increased $1.5 million as a result of a $2.0 million increase in operating income, partially offset by a $.5 million year-over-year increase in income tax expense. Asia-Pacific net income decreased $.8 million due to a $.8 million decrease in operating income and an increase in other expense of $.2 million, partially offset by a decrease in income tax expense of $.2 million.
PLP’s EMEA segment incurred a net adjustment attributable to noncontrolling interests of less than $.1 million, which when added back to net income, resulted in an immaterial change to net income attributable to PLP Shareholders.
SIX MONTHS ENDED JUNE 30, 2020 COMPARED TO SIX MONTHS ENDED JUNE 30, 2019
The following table sets forth a summary of the Company’s Statements of Consolidated Income and the percentage of net sales for the six months ended June 30, 2020 and 2019. The Company’s past operating results are not necessarily indicative of future operating results.
Six Months Ended June 30
(Thousands of dollars)
2020
2019
Change
Net sales
$
220,481
100.0
%
$
211,995
100.0
%
$
8,486
Cost of products sold
148,005
67.1
146,923
69.3
1,082
GROSS PROFIT
72,476
32.9
65,072
30.7
7,404
Costs and expenses
53,025
24.0
51,911
24.5
1,114
OPERATING INCOME
19,451
8.8
13,161
6.2
6,290
Other expense—net
(462
)
(0.2
)
(383
)
(0.2
)
(79
)
INCOME BEFORE INCOME TAXES
18,989
8.6
12,778
6.0
6,211
Income tax expense
4,848
2.2
3,088
1.5
1,760
NET INCOME
$
14,141
6.4
%
$
9,690
4.6
%
$
4,451
Net adjustment attributable to noncontrolling interests
38
0.0
38
0.0
0
NET INCOME ATTRIBUTABLE TO
PREFORMED LINE PRODUCTS COMPANY
SHAREHOLDERS
$
14,179
6.4
%
$
9,728
4.6
%
$
4,451
28
Net sales. Net sales were $ 22 0.5 million for the six months ended June 30 , 2020, an increase of $ 8.5 million, or 4 %, from the six months ended June 30 , 2019. Excluding the unfavorable effect of currency translation, net sales for the six months ended June 30 , 2020 increased $ 19.8 million compared to the same period in 2019, or 9 %, as summarized in the following table:
Six Months Ended June 30
(Thousands of dollars)
2020
2019
Change
Change
Due to
Currency
Translation
Change
Excluding
Currency
Translation
%
change
Net sales
PLP-USA
$
100,567
$
87,794
$
12,773
$
0
12,773
15
%
The Americas
34,727
31,479
3,248
(7,368
)
10,616
34
EMEA
41,408
38,244
3,164
(1,904
)
5,068
13
Asia-Pacific
43,779
54,478
(10,699
)
(2,020
)
(8,679
)
(16
)
Consolidated
$
220,481
$
211,995
$
8,486
$
(11,292
)
$
19,778
9
%
The year-over-year increase in PLP-USA net sales of $12.8 million, or 15%, was primarily due to a volume increase in energy product sales. International net sales for the six months ended June 30, 2020 experienced an unfavorable impact of $11.3 million when local currencies were converted to U.S. dollars. The following discussion of net sales excludes the effect of currency translation. The Americas net sales of $34.7 million increased $10.6 million, or 34%, primarily due to a volume increase in energy product sales. EMEA net sales of $41.4 million increased $5.1 million, or 13%, primarily due to a volume increase in energy and communications product sales within the region, including the remaining incremental sales from the newly acquired businesses. In Asia-Pacific, net sales of $43.8 million decreased $8.7 million, or 16%, compared to 2019 primarily due to a combined volume decrease in the energy, communications and special industries products mostly as a result of the disruption to the global economy caused by the COVID-19 pandemic.
Gross profit. Gross profit was $72.5 million and $65.1 million for the six-month periods ended June 30, 2020 and 2019, respectively. Excluding the unfavorable effect of currency translation, gross profit increased $10.8 million, or 17%, as summarized in the following table:
Six Months Ended June 30
(Thousands of dollars)
2020
2019
Change
Change
Due to
Currency
Translation
Change
Excluding
Currency
Translation
%
change
Gross profit
PLP-USA
$
37,767
$
30,605
$
7,162
$
0
$
7,162
23
%
The Americas
11,121
9,915
1,206
(2,399
)
3,605
36
EMEA
13,600
10,924
2,676
(566
)
3,242
30
Asia-Pacific
9,988
13,628
(3,640
)
(475
)
(3,165
)
(23
)
Consolidated
$
72,476
$
65,072
$
7,404
$
(3,440
)
$
10,844
17
%
PLP-USA gross profit of $37.8 million increased $7.2 million compared to the same period in 2019 as a result of increased sales volume of $12.8 million combined with a product sales mix shift to higher margin product and continued cost containment within material, labor and manufacturing expense. International gross profit for the six months ended June 30, 2020 was unfavorably impacted by $3.4 million when local currencies were translated to U.S. dollars. The following discussion of gross profit excludes the effects of currency translation. The Americas gross profit increase of $3.6 million was primarily the result of a $10.6 million increase in sales combined with a product margin improvement in the region due to sales product mix. EMEA gross profit increased $3.2 million, mainly as a result of increased sales volume. Asia-Pacific gross profit decreased $3.2 million primarily as a result of a year-over-year reduction in sales volume and the negative impact related to the COVID-19 pandemic.
29
C osts and expenses. Costs and expenses of $ 53.0 million for the six months ended June 30 , 2020 increased $ 1. 1 million, or 2 %. Excluding the favorable effect of currency translation, costs and expenses increased $ 3.5 million, or 7 %, as summarized in the following table:
Six Months Ended June 30
(Thousands of dollars)
2020
2019
Change
Change
Due to
Currency
Translation
Change
Excluding
Currency
Translation
%
change
Costs and expenses
PLP-USA
$
25,321
$
24,669
$
652
$
0
$
652
3
%
The Americas
6,712
6,391
321
(1,371
)
1,692
26
EMEA
10,556
9,667
889
(504
)
1,393
14
Asia-Pacific
10,436
11,184
(748
)
(480
)
(268
)
(2
)
Consolidated
$
53,025
$
51,911
$
1,114
$
(2,355
)
$
3,469
7
%
PLP-USA costs and expenses of $25.3 million for the six months ended June 30, 2020 increased $.7 million compared to 2019 mainly due to $1.1 million of higher personnel-related expenses combined with an increase in miscellaneous net expense of $.1 million, partially offset by a decrease in professional fees of $.6 million. On a consolidated basis, costs and expenses for the six months ended June 30, 2020 were favorably impacted by $2.4 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 $6.7 million increased $1.7 million for the six months ended June 30, 2020 compared to the same period in 2019 primarily due to a $.7 million increase in personnel-related expenses and an increase in foreign currency exchange losses of $.8 million combined with net increases in miscellaneous expenses of $.2 million. EMEA costs and expenses of $10.6 million increased $1.4 million mainly due to incremental costs incurred with our acquired businesses. Asia-Pacific costs and expenses of $10.4 million decreased $.3 million. This decrease was primarily due to a decrease in combined personnel-related and travel and entertainment expenses.
Other income (expense). Other expense for the six-month periods ended June 30, 2020 and 2019 was $.5 million and $.4 million, respectively.
Income taxes. Income taxes for the six months ending June 30, 2020 and 2019 were $4.8 million and $3.1 million, respectively, based on pre-tax income of $19.0 million and $12.8 million, respectively. The effective tax rate for the six-month periods ending June 30, 2020 and 2019 was 26% and 24%, respectively, compared to the U.S. federal statutory rate of 21%. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. In addition to state and local income taxes, the following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 21% and our effective tax rate :
2020:
1.
A $.5 million, or 3%, net increase resulting from U.S. permanent items, primarily related to limitations on the deductibility of executive compensation.
2.
A $.4 million, or 2%, increase resulting from earnings in jurisdictions with higher tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested.
2019:
1.
A $.2 million, or 1%, net increase resulting from U.S. permanent items, primarily related to limitations on the deductibility of executive compensation.
2.
A $.3 million, or 2%, increase resulting from earnings in jurisdictions with higher tax rates than the U.S. federal statutory rate.
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Net income. As a result of the preceding items, net income for the six months ended June 30 , 2020 was $ 14.2 million, compared to $ 9.7 million for the six months ended June 30 , 2019, an increase of $ 4.5 million as summarized in the following table:
Six Months Ended June 30
(Thousands of dollars)
2020
2019
Change
Change
Due to
Currency
Translation
Change
Excluding
Currency
Translation
%
change
Net income
PLP-USA
$
9,686
$
4,197
$
5,489
$
0
$
5,489
131
%
The Americas
2,690
2,623
67
(626
)
693
26
EMEA
2,583
1,279
1,304
(96
)
1,400
109
Asia-Pacific
(780
)
1,591
(2,371
)
23
(2,394
)
(150
)
Consolidated
$
14,179
$
9,690
$
4,489
$
(699
)
$
5,188
54
%
PLP-USA’s net income for the six months ended June 30, 2020 increased $5.5 million compared to the same period in 2019, primarily due to an increase in operating income of $6.5 million combined with an increase in other income of $.6 million, partially offset by an increase in income taxes of $1.6 million. The following discussion of net income excludes the effect of currency translation. The Americas net income increased $.7 million as a result of a $1.9 million increase in operating income, partially offset by higher income taxes of $.7 million combined with an increase in other non-operating expense of $.5 million. EMEA net income increased $1.4 million as a result of a $1.9 million increase in operating income, partially offset by a $.5 million year-over-year increase in income tax expense. Asia-Pacific net income decreased $2.4 million due to a $2.8 million decrease in operating income and an increase in other expense of $.3 million, partially offset by a decrease in income tax expense of $.7 million.
PLP’s EMEA segment incurred a net adjustment attributable to noncontrolling interests of less than $.1 million, which when added back to net income, resulted in an immaterial change to net income attributable to PLP Shareholders.
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, 2019 filed on March 6, 2020 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 six months of 2020, we used cash of $11.8 million for capital expenditures. We ended the first six months of 2020 with $36.5 million of cash, cash equivalents and restricted cash (“Cash”). Our Cash is held in various locations throughout the world. At June 30, 2020, the majority of our Cash was held outside the United States (“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 June 30, 2020 was $72.8 million. At June 30, 2020, our unused availability under our line of credit was $27.5 million and our bank debt to equity percentage was 27.6%. On April 17, 2020, we further extended the term to June 30, 2024. All other terms remain the same, including the interest rate at LIBOR plus 1.125% unless our funded debt to Earnings before Interest, Taxes and Depreciation ratio exceeds 2.25 to 1, at which point the LIBOR spread becomes 1.500%. The line of credit agreement contains, among other provisions, requirements for maintaining levels of net worth and funded debt-to-earnings before interest, taxes, depreciation and amortization along with an interest coverage ratio. The net worth and profitability requirements are calculated based on the line of credit agreement. At June 30, 2020 and December 31, 2019, we were in compliance with these covenants.
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We expect that our major source of funding for 20 20 and beyond will be our operating cash flows and our existing Cash as well as our line of credit agreement. We earn a significant amount of our operating income outside the U . S . , which, except for current earnings in certain jurisdictions, is deemed to be indefinitely reinvested in foreign jurisdictions.
As we cannot predict the duration or scope of the COVID-19 pandemic and its impact on our customers and suppliers, the negative financial impact to our financial results and liquidity cannot be reasonably estimated but could be material. We are actively managing the business to maintain cash flow and secure favorable liquidity position. We believe that our future cash flows, together with these factors, will be more than sufficient to cover debt repayments, other contractual obligations, capital expenditures and dividends for the next twelve 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 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
Cash decreased $5.1 million compared to the same period in 2019. Net Cash provided by operating activities was $9.2 million. The most significant net investing and financing uses of Cash in the six months ended June 30, 2020 were payments of long-term debt of $36.7 million, capital expenditures of $11.8 million, share repurchases of $7.0 million and dividends paid of $2.2 million, partially offset by net debt and notes payable proceeds of $46.3 million. Currency had a negative $.8 million impact on Cash when translating foreign denominated financial statements to U.S. dollars.
Net Cash provided from operating activities for the six months ended June 30, 2020 was $9.2 million compared to $5.8 million of cash generated in the comparable prior year six-month period. The $3.4 million increase was primarily a result of an increase in in net income of $4.5 million combined with an increase in cash provided by non-cash items of $.8 million, partially offset by an increase in Cash usage for operating assets (net of operating liabilities) of $1.9 million.
Net Cash used in investing activities of $11.8 million for the six months ended June 30, 2020 decreased $19.6 million when compared to Cash used in investing activities in the six months ended June 30, 2019 of $31.5 million. The change was primarily related to Cash used in the prior year to fund the SubCon and MICOS acquisitions, net of Cash, of $19.0 million combined with cash used to purchase marketable securities of $.5 million during the six months ended June 30, 2019 and a year-over-year decrease in capital expenditures of $.1 million.
Cash provided by financing activities for the six months ended June 30, 2020 was $.7 million compared to $24.7 million for the six months ended June 30, 2019. The $24.0 million reduction was primarily the result of a net decrease in net debt borrowings and payments in 2020 compared to 2019 of $21.0 million and an increase in net share repurchases and issuances of $3.0 million.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
See Note K of the Notes to the Consolidated Financial Statements
NEW ACCOUNTING STANDARDS TO BE ADOPTED
See Note L of the Notes to the Consolidated Financial Statements
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.
32
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 U.S, 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 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, terrorism, changes in diplomatic and trade relationships and public health concerns (including viral outbreaks such as COVID-19). The COVID-19 pandemic has significantly impacted worldwide economic conditions and has and will continue to have an adverse effect on the Company’s operations and businesses as government authorities impose mandatory closures, work-from-home orders and social distancing protocols along with other unknown potential restrictions. The duration and scope of the COVID-19 pandemic cannot be predicted, therefore, anticipated negative financial impact to the Company’s operating results cannot be reasonably estimated;
•
The ability of the Company’s customers to raise funds needed to build the facilities 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;
•
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 has and could continue to be disrupted by the COVID-19 pandemic 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 compliances 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; 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, 2019 which was filed on March 6, 2020 and in Item 1A of Part II of the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 1, 2020. The impact of COVID-19 could potentially exacerbate other risks discussed, any of which could have a material impact on the Company. The situation continues to change rapidly and additional impacts may arise that the Company is not aware of currently.
33
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.