10-Q
Preformed Line Products Co (PLPC)
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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 quarterly period ended June 30, 2022
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<br><br>Incorporation or Organization) | (I.R.S. Employer<br><br>Identification No.) |
| 660 Beta Drive<br><br>Mayfield Village, Ohio | 44143 |
| (Address of Principal Executive Office) | (Zip Code) |
(440) 461-5200
(Registrant’s telephone number, including area code)
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 common shares outstanding as of July 22, 2022: 4,940,578.
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of exchange on which registered |
|---|---|---|
| Common stock, par value $2.00 per share | PLPC | NASDAQ |
Table of Contents
| Page | ||
|---|---|---|
| Part I - Financial Information | ||
| Item 1. | Financial Statements | 4 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 30 |
| Item 4. | Controls and Procedures | 30 |
| Part II - Other Information | ||
| Item 1. | Legal Proceedings | 31 |
| Item 1A. | Risk Factors | 31 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 31 |
| Item 3. | Defaults Upon Senior Securities | 31 |
| Item 4. | Mine Safety Disclosures | 31 |
| Item 5. | Other Information | 31 |
| Item 6. | Exhibits | 32 |
| SIGNATURES | 33 |
ITEM 1. FINANCIAL STATEMENTS
PREFORMED LINE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEETS
| December 31, 2021 | |||||
|---|---|---|---|---|---|
| (Thousands of dollars, except share and per share data) | |||||
| ASSETS | |||||
| Cash, cash equivalents and restricted cash | 30,103 | $ | 36,406 | ||
| Accounts receivable, less allowances of 4,931 (3,744 in 2021) | 123,122 | 98,203 | |||
| Inventories, net | 127,408 | 114,507 | |||
| Prepaid expenses | 20,855 | 19,778 | |||
| Other current assets | 5,561 | 3,217 | |||
| TOTAL CURRENT ASSETS | 307,049 | 272,111 | |||
| Property, plant and equipment, net | 157,444 | 149,774 | |||
| Operating lease, right-of-use assets | 10,987 | 12,400 | |||
| Goodwill | 34,792 | 28,194 | |||
| Other intangible assets, net | 15,104 | 12,039 | |||
| Deferred income taxes | 5,551 | 3,839 | |||
| Other assets | 6,129 | 10,661 | |||
| TOTAL ASSETS | 537,056 | $ | 489,018 | ||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||
| Trade accounts payable | 49,217 | $ | 42,376 | ||
| Notes payable to banks | 16,856 | 16,423 | |||
| Operating lease liabilities, current | 1,959 | 1,986 | |||
| Current portion of long-term debt | 3,217 | 3,116 | |||
| Accrued compensation and other benefits | 24,313 | 21,703 | |||
| Accrued expenses and other liabilities | 22,315 | 17,522 | |||
| Dividends payable | 1,238 | 1,301 | |||
| Income taxes payable | 555 | 1,108 | |||
| TOTAL CURRENT LIABILITIES | 119,670 | 105,535 | |||
| Long-term debt, less current portion | 57,502 | 40,048 | |||
| Pension obligation | 3,056 | 3,653 | |||
| Operating lease liabilities, non-current | 6,959 | 8,154 | |||
| Deferred income taxes | 4,246 | 2,791 | |||
| Other noncurrent liabilities | 12,936 | 12,737 | |||
| SHAREHOLDERS’ EQUITY | |||||
| Shareholders’ equity: | |||||
| Common shares - 2 par value per share, 15,000,000 shares authorized, 4,940,578 and 4,907,143 issued and outstanding, at June 30, 2022 and December 31, 2021, respectively | 13,303 | 13,185 | |||
| Common shares issued to rabbi trust, 244,969 and 243,138 shares at June 30, 2022 and December 31, 2021, respectively | (10,231 | ) | (10,102 | ) | |
| Deferred compensation liability | 10,231 | 10,102 | |||
| Paid-in capital | 49,918 | 47,814 | |||
| Retained earnings | 434,718 | 410,673 | |||
| Treasury shares, at cost, 1,714,822 and 1,685,387 shares at June 30, 2022 and December 31, 2021, respectively | (95,631 | ) | (93,836 | ) | |
| Accumulated other comprehensive loss | (69,629 | ) | (61,719 | ) | |
| TOTAL PREFORMED LINE PRODUCTS, COMPANY SHAREHOLDERS’ EQUITY | 332,679 | 316,117 | |||
| Noncontrolling interest | 8 | (17 | ) | ||
| TOTAL SHAREHOLDERS’ EQUITY | 332,687 | 316,100 | |||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 537,056 | $ | 489,018 |
All values are in US Dollars.
See notes to consolidated financial statements (unaudited).
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||||||
| (Thousands of dollars, except earnings per share data) | ||||||||||||
| Net sales | $ | 163,471 | $ | 133,038 | $ | 301,694 | $ | 250,591 | ||||
| Cost of products sold | 110,765 | 89,999 | 207,037 | 167,360 | ||||||||
| GROSS PROFIT | 52,706 | 43,039 | 94,657 | 83,231 | ||||||||
| Costs and expenses | ||||||||||||
| Selling | 11,668 | 10,099 | 22,328 | 19,701 | ||||||||
| General and administrative | 16,948 | 13,770 | 33,256 | 28,164 | ||||||||
| Research and engineering | 5,363 | 4,763 | 10,137 | 9,374 | ||||||||
| Other operating expense, net | 778 | 1,669 | 1,536 | 2,486 | ||||||||
| 34,757 | 30,301 | 67,257 | 59,725 | |||||||||
| OPERATING INCOME | 17,949 | 12,738 | 27,400 | 23,506 | ||||||||
| Other income (expense) | ||||||||||||
| Interest income | 104 | 26 | 216 | 47 | ||||||||
| Interest expense | (784 | ) | (457 | ) | (1,310 | ) | (920 | ) | ||||
| Other income, net | 495 | 270 | 5,599 | 498 | ||||||||
| (185 | ) | (161 | ) | 4,505 | (375 | ) | ||||||
| INCOME BEFORE INCOME TAXES | 17,764 | 12,577 | 31,905 | 23,131 | ||||||||
| Income tax expense | 4,043 | 3,686 | 5,883 | 7,063 | ||||||||
| NET INCOME | $ | 13,721 | $ | 8,891 | $ | 26,022 | $ | 16,068 | ||||
| Net income attributable to noncontrolling interests | (9 | ) | (22 | ) | (25 | ) | (20 | ) | ||||
| NET INCOME ATTRIBUTABLE TO PREFORMED<br> LINE PRODUCTS COMPANY SHAREHOLDERS | $ | 13,712 | $ | 8,869 | $ | 25,997 | $ | 16,048 | ||||
| AVERAGE NUMBER OF SHARES OF COMMON STOCK<br> OUTSTANDING: | ||||||||||||
| Basic | 4,940 | 4,912 | 4,934 | 4,914 | ||||||||
| Diluted | 4,955 | 4,930 | 4,954 | 4,935 | ||||||||
| EARNINGS PER SHARE OF COMMON STOCK<br> ATTRIBUTABLE TO PREFORMED LINE PRODUCTS<br> COMPANY SHAREHOLDERS: | ||||||||||||
| Basic | $ | 2.78 | $ | 1.81 | $ | 5.27 | $ | 3.27 | ||||
| Diluted | $ | 2.77 | $ | 1.80 | $ | 5.25 | $ | 3.25 |
See notes to consolidated financial statements (unaudited).
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||||||
| (Thousands of dollars) | ||||||||||||
| Net income | $ | 13,721 | $ | 8,891 | $ | 26,022 | $ | 16,068 | ||||
| Other comprehensive (loss) income, net of tax | ||||||||||||
| Foreign currency translation adjustment | (10,190 | ) | 4,311 | (8,089 | ) | (518 | ) | |||||
| Recognized net actuarial loss(1) | 90 | 113 | 179 | 227 | ||||||||
| Other comprehensive (loss) income, net of tax | (10,100 | ) | 4,424 | (7,910 | ) | (291 | ) | |||||
| Comprehensive income attributable to noncontrolling interests | (9 | ) | (22 | ) | (25 | ) | (20 | ) | ||||
| Comprehensive income attributable to Preformed Line Products Company shareholders | $ | 3,612 | $ | 13,293 | $ | 18,087 | $ | 15,757 |
(1) Net of tax provision of $27 and $35 for the three months ended June 30, 2022 and 2021, respectively. Net of tax provision of $55 and $70 for both six-month periods ended June 30, 2022 and 2021.
See notes to consolidated financial statements (unaudited).
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
| Six Months Ended June 30 | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| (Thousands of dollars) | ||||||
| OPERATING ACTIVITIES | ||||||
| Net income | $ | 26,022 | $ | 16,068 | ||
| Adjustments to net cash provided by (used in) operations: | ||||||
| Depreciation and amortization | 6,874 | 6,832 | ||||
| Deferred income taxes | (2,591 | ) | 1,575 | |||
| Share-based compensation expense | 1,913 | 1,927 | ||||
| Loss on exit of business | 1,196 | 0 | ||||
| Gain on sale of property and equipment | (842 | ) | (30 | ) | ||
| Gain from company-owned life insurance policy | (4,364 | ) | 0 | |||
| Other, net | 659 | 318 | ||||
| Changes in operating assets and liabilities | (35,044 | ) | (12,629 | ) | ||
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | (6,177 | ) | 14,061 | |||
| INVESTING ACTIVITIES (1) | ||||||
| Capital expenditures | (13,809 | ) | (7,338 | ) | ||
| Proceeds from the sale of property and equipment | 3,157 | 23 | ||||
| Proceeds from company-owned life insurance policy | 6,909 | 0 | ||||
| Acquisition of businesses, net of cash | (12,990 | ) | 0 | |||
| NET CASH USED IN INVESTING ACTIVITIES | (16,733 | ) | (7,315 | ) | ||
| FINANCING ACTIVITIES(1) | ||||||
| Increase (decrease) in notes payable to banks | 856 | (2,183 | ) | |||
| Proceeds from long-term debt | 83,352 | 42,954 | ||||
| Payments of long-term debt | (64,940 | ) | (53,029 | ) | ||
| Dividends paid | (2,061 | ) | (2,114 | ) | ||
| Proceeds from issuance of common shares | 117 | 364 | ||||
| Purchase of common shares for treasury | (66 | ) | (176 | ) | ||
| Purchase of common shares for treasury from related parties | (1,729 | ) | (4,548 | ) | ||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 15,529 | (18,732 | ) | |||
| Effects of exchange rate changes on cash, cash equivalents and restricted cash | 1,078 | 265 | ||||
| Net decrease in cash, cash equivalents and restricted cash | (6,303 | ) | (11,721 | ) | ||
| Cash, cash equivalents and restricted cash at beginning of year | 36,406 | 45,175 | ||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF<br> PERIOD | $ | 30,103 | $ | 33,454 |
(1) Non-cash investing and financing activities: The Company purchased a new corporate aircraft during the three months ended March 31, 2021 with a term loan in the principal amount of $20.5 million. For further information regarding this transaction, refer to Note M, “Debt Arrangements.”
See notes to consolidated financial statements (unaudited).
PREFORMED LINE PRODUCTS COMPANY
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
| Accumulated Other<br>Comprehensive Loss | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common<br>Shares | Common<br>Shares<br>Issued to<br>Rabbi Trust | Deferred<br>Compensation Liability | Paid in<br>Capital | Retained<br>Earnings | Treasury<br>Shares | Cumulative<br>Translation<br>Adjustment | Unrecognized<br>Pension<br>Benefit Cost | Total Preformed<br>Line Products<br>Company Equity | Noncontrolling<br>Interests | Total<br>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 | |||
| Net income | 12,285 | 12,285 | 16 | 12,301 | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | 2,101 | 2,101 | 2,101 | |||||||||||||||||||||||||||
| Recognized net actuarial gain, net of tax provision of 28 | 89 | 89 | 89 | |||||||||||||||||||||||||||
| Total comprehensive income | 14,475 | 16 | 14,491 | |||||||||||||||||||||||||||
| Share-based compensation | 871 | 871 | 871 | |||||||||||||||||||||||||||
| Purchase of 29,436 common shares | (1,795 | ) | (1,795 | ) | (1,795 | ) | ||||||||||||||||||||||||
| Issuance of 62,387 common shares | 117 | 162 | 279 | 279 | ||||||||||||||||||||||||||
| Common shares issued to rabbi trust of 12,752, net | (99 | ) | 99 | 0 | 0 | |||||||||||||||||||||||||
| Cash dividends declared - .20 per share | (1,037 | ) | (1,037 | ) | (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 | |||
| Net income | 13,712 | 13,712 | 9 | 13,721 | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | (10,190 | ) | (10,190 | ) | (10,190 | ) | ||||||||||||||||||||||||
| Recognized net actuarial gain, net of tax provision of 27 | 90 | 90 | 90 | |||||||||||||||||||||||||||
| Total comprehensive income | 3,612 | 9 | 3,621 | |||||||||||||||||||||||||||
| Share-based compensation | 1,042 | 1,042 | 1,042 | |||||||||||||||||||||||||||
| Issuance of 484 common shares | 1 | 29 | 30 | 30 | ||||||||||||||||||||||||||
| Common shares issued to rabbi trust of 484, net | (30 | ) | 30 | 0 | 0 | |||||||||||||||||||||||||
| Cash dividends declared - .20 per share | (915 | ) | (915 | ) | (915 | ) | ||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | 13,303 | $ | (10,231 | ) | $ | 10,231 | $ | 49,918 | $ | 434,718 | $ | (95,631 | ) | $ | (64,312 | ) | $ | (5,317 | ) | $ | 332,679 | $ | 8 | $ | 332,687 |
All values are in US Dollars.
| Accumulated Other<br>Comprehensive Loss | ||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common<br>Shares | Common<br>Shares<br>Issued to<br>Rabbi Trust | Deferred<br>Compensation Liability | Paid in<br>Capital | Retained<br>Earnings | Treasury<br>Shares | Cumulative<br>Translation<br>Adjustment | Unrecognized<br>Pension<br>Benefit Cost | Total Preformed Line Products Company Equity | Noncontrolling<br>Interests | Total<br>Equity | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 13,028 | $ | (10,940 | ) | $ | 10,940 | $ | 43,134 | $ | 379,035 | $ | (88,568 | ) | $ | (47,847 | ) | $ | (6,704 | ) | $ | 292,078 | $ | (9 | ) | $ | 292,069 | |||||
| Net income (loss) | 7,179 | 7,179 | (2 | ) | 7,177 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | (4,829 | ) | (4,829 | ) | (4,829 | ) | ||||||||||||||||||||||||||
| Recognized net actuarial gain, net of tax provision of 35 | 114 | 114 | 114 | |||||||||||||||||||||||||||||
| Total comprehensive income | 2,464 | (2 | ) | 2,462 | ||||||||||||||||||||||||||||
| Share-based compensation | 1,034 | (40 | ) | 994 | 994 | |||||||||||||||||||||||||||
| Purchase of 52,590 common shares | (3,678 | ) | (3,678 | ) | (3,678 | ) | ||||||||||||||||||||||||||
| Issuance of 63,316 common shares | 127 | 270 | 397 | 397 | ||||||||||||||||||||||||||||
| Common shares distributed from rabbi trust of 3,727, net | 120 | (120 | ) | 0 | 0 | |||||||||||||||||||||||||||
| Cash dividends declared - .20 per share | (116 | ) | (990 | ) | (1,106 | ) | (1,106 | ) | ||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 13,155 | $ | (10,820 | ) | $ | 10,820 | $ | 44,322 | $ | 385,184 | $ | (92,246 | ) | $ | (52,676 | ) | $ | (6,590 | ) | $ | 291,149 | $ | (11 | ) | $ | 291,138 | |||||
| Net income | 8,869 | 8,869 | 22 | 8,891 | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 4,311 | 4,311 | 4,311 | |||||||||||||||||||||||||||||
| Recognized net actuarial gain, net of tax provision of 35 | 113 | 113 | 113 | |||||||||||||||||||||||||||||
| Total comprehensive income | 13,293 | 22 | 13,315 | |||||||||||||||||||||||||||||
| Share-based compensation | 893 | (40 | ) | 853 | 853 | |||||||||||||||||||||||||||
| Purchase of 13,800 common shares | (1,046 | ) | (1,046 | ) | (1,046 | ) | ||||||||||||||||||||||||||
| Issuance of 7,400 common shares | 15 | 349 | 364 | 364 | ||||||||||||||||||||||||||||
| Common shares issued to rabbi trust of 400, net | (30 | ) | 30 | 0 | 0 | |||||||||||||||||||||||||||
| Cash dividends declared - .20 per share | (981 | ) | (981 | ) | (981 | ) | ||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | 13,170 | $ | (10,850 | ) | $ | 10,850 | $ | 45,564 | $ | 393,032 | $ | (93,292 | ) | $ | (48,365 | ) | $ | (6,477 | ) | $ | 303,632 | $ | 11 | $ | 303,643 |
All values are in US Dollars.
See notes to consolidated financial statements (unaudited).
PREFORMED LINE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In thousands, except share and per share data, unless specifically noted)
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Preformed Line Products Company and subsidiaries (the “Company” or “PLPC”) have been prepared in accordance with 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 United States generally accepted accounting principles (US GAAP) for complete financial statements. This Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in PLPC's 2021 Form 10-K filed on March 4, 2022 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 six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full-year ending December 31, 2022.
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.
Recent accounting pronouncements and new accounting standards to be adopted
The Company considers the applicability and impact of all ASUs. In October 2021, the Financial Accounting Standards Board ("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, with early adoption permitted. The Company is evaluating the impact of adopting this ASU.
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 B – REVENUE
Revenue recognition
Sales are recognized when obligations under the terms of the contract are satisfied and control of promised goods or services has 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.
9
Disaggregated revenue
The Company’s revenues by segment and product type are as follows:
| Three Months Ended June 30, 2022 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Product Type | PLP-USA | The Americas | EMEA | Asia-Pacific | Consolidated | ||||||||||
| Energy | 58 | % | 69 | % | 51 | % | 73 | % | 60 | % | |||||
| Communications | 38 | 29 | 43 | 3 | 32 | ||||||||||
| Special Industries | 4 | 2 | 6 | 24 | 8 | ||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
| Three Months Ended June 30, 2021 | |||||||||||||||
| Product Type | PLP-USA | The Americas | EMEA | Asia-Pacific | Consolidated | ||||||||||
| Energy | 61 | % | 65 | % | 51 | % | 65 | % | 60 | % | |||||
| Communications | 35 | 31 | 44 | 3 | 30 | ||||||||||
| Special Industries | 4 | 4 | 5 | 32 | 10 | ||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
| Six Months Ended June 30, 2022 | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Product Type | PLP-USA | The Americas | EMEA | Asia-Pacific | Consolidated | ||||||||||
| Energy | 57 | % | 71 | % | 53 | % | 70 | % | 60 | % | |||||
| Communications | 39 | 27 | 40 | 2 | 32 | ||||||||||
| Special Industries | 4 | 2 | 7 | 28 | 8 | ||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
| Six Months Ended June 30, 2021 | |||||||||||||||
| Product Type | PLP-USA | The Americas | EMEA | Asia-Pacific | Consolidated | ||||||||||
| Energy | 59 | % | 70 | % | 55 | % | 67 | % | 61 | % | |||||
| Communications | 36 | 26 | 39 | 5 | 30 | ||||||||||
| Special Industries | 5 | 4 | 6 | 28 | 9 | ||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
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:
| Six Months Ended June 30 | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| Allowance for credit losses, beginning of period | $ | 3,091 | $ | 2,848 | ||
| Additions charged to costs and expenses | 1,341 | 312 | ||||
| Write-offs | (237 | ) | (189 | ) | ||
| Foreign exchange and other | (24 | ) | 13 | |||
| Allowance for credit losses, end of period | $ | 4,171 | $ | 2,984 |
NOTE C – INVENTORIES, NET
| June 30, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Raw materials | $ | 88,828 | $ | 76,636 | ||
| Work-in-process | 12,879 | 10,117 | ||||
| Finished goods | 38,565 | 37,216 | ||||
| 140,272 | 123,969 | |||||
| Excess of current cost over LIFO cost | (12,864 | ) | (9,462 | ) | ||
| Inventories, net | $ | 127,408 | $ | 114,507 |
Cost of inventories for certain material is determined using the last-in-first-out (LIFO) method and totaled approximately $50.6 million at June 30, 2022 and $44.0 million at December 31, 2021. 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 and six months ended June 30, 2022, the net change in LIFO inventories resulted in expense of $2.1 million and $3.4 million, respectively, to Costs of products sold. During the three and six months ended June 30, 2021, the net change in LIFO inventories resulted in expense of $1.3 million and $1.8 million, respectively, to Costs of products sold.
NOTE D – PROPERTY, PLANT AND EQUIPMENT, NET
Major classes of property, plant and equipment are stated at cost and were as follows:
| June 30, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Land and improvements | $ | 19,042 | $ | 21,039 | ||
| Buildings and improvements | 98,634 | 99,403 | ||||
| Machinery, equipment and aircraft | 209,675 | 204,945 | ||||
| Construction in progress | 19,135 | 10,605 | ||||
| 346,486 | 335,992 | |||||
| Less accumulated depreciation | (189,042 | ) | (186,218 | ) | ||
| Property, plant and equipment, net | $ | 157,444 | $ | 149,774 |
NOTE E – CONTINGENT LIABILITIES AND OTHER FINANCIAL STATEMENT INFORMATION
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. As of June 30, 2022 and December 31, 2021, the Company has accrued approximately $2.1 million and $2.3 million, respectively, representing its best estimate for losses to be incurred on global legal matters.
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 “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”).
11
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 is 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.
The Company believes the claims against it are without merit and intends to vigorously defend against such claims. The Company is unable to predict the outcome of this case, however, it has recorded a reserve for the low end of the range for potential loss associated with this matter. If this matter is concluded in a manner adverse to the Company, it could have a material effect on the Company’s financial results.
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.
The Company does not believe, based on the information currently available, that it would be subject to any environmental liabilities as of June 30, 2022 and December 31, 2021.
Insurance Settlement
On January 2, 2022, Director Emeritus Barbara P. Ruhlman passed away at the age of 89. Mrs. Ruhlman was member of the Company’s Board of Directors from 1988 to 2016, at which time she elected to resign and was appointed as the Company’s Director Emeritus. Mrs. Ruhlman was the daughter of the Company’s founder, Thomas F. Peterson, and was the mother of the Company’s current Chief Executive Officer, Robert G. Ruhlman. A Company-owned life insurance policy was maintained for Mrs. Ruhlman until her death. During the period ended March 31, 2022, the Company received approximately $6.9 million in cash proceeds and recorded a gain of approximately $4.4 million in Other income – net, related to the settlement of this insurance policy.
NOTE F – PENSION PLANS
The Company uses a December 31 measurement date for the Preformed Line Products Company Employees’ Retirement Plan (the “Plan”). Net periodic benefit for our U.S. pension plan for the three months ended June 30, 2022 and 2021, respectively, follow:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||||||
| Service cost | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||
| Interest cost | 297 | 282 | 594 | 564 | ||||||||
| Expected return on plan assets | (601 | ) | (586 | ) | (1,202 | ) | (1,172 | ) | ||||
| Recognized net actuarial loss | 117 | 149 | 234 | 298 | ||||||||
| Net periodic pension benefit | $ | (187 | ) | $ | (155 | ) | $ | (374 | ) | $ | (310 | ) |
12
There were no contributions to the Plan during the six months ended June 30, 2022. The Company is evaluating whether to contribute additional funds to the Plan during the remainder of 2022.
NOTE G – ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI")
The following tables set forth the total changes in AOCI by component, net of tax:
| Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unrecognized<br>pension<br>benefit cost | Currency<br>Translation<br>Adjustment | Total | Unrecognized<br>pension<br>benefit cost | Currency<br>Translation<br>Adjustment | Total | |||||||||||||
| Balance at April 1 | $ | (5,407 | ) | $ | (54,122 | ) | $ | (59,529 | ) | $ | (6,590 | ) | $ | (52,676 | ) | $ | (59,266 | ) |
| Other comprehensive income before <br> reclassifications: | ||||||||||||||||||
| (Loss) gain on foreign currency<br> translation adjustment | 0 | (10,190 | ) | (10,190 | ) | 0 | 4,311 | 4,311 | ||||||||||
| Amounts reclassified from AOCI: | ||||||||||||||||||
| Amortization of defined benefit<br> pension actuarial loss (a) | 90 | 0 | 90 | 113 | 0 | 113 | ||||||||||||
| Net current period other<br> comprehensive income (loss) | 90 | (10,190 | ) | (10,100 | ) | 113 | 4,311 | 4,424 | ||||||||||
| Balance at June 30 | $ | (5,317 | ) | $ | (64,312 | ) | $ | (69,629 | ) | $ | (6,477 | ) | $ | (48,365 | ) | $ | (54,842 | ) |
| Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Unrecognized<br>pension<br>benefit cost | Currency<br>Translation<br>Adjustment | Total | Unrecognized<br>pension<br>benefit cost | Currency<br>Translation<br>Adjustment | Total | |||||||||||||
| Balance at January 1 | $ | (5,496 | ) | $ | (56,223 | ) | $ | (61,719 | ) | $ | (6,704 | ) | $ | (47,847 | ) | $ | (54,551 | ) |
| Other comprehensive income before <br> reclassifications: | ||||||||||||||||||
| Loss on foreign currency<br> translation adjustment | 0 | (8,089 | ) | (8,089 | ) | 0 | (518 | ) | (518 | ) | ||||||||
| Amounts reclassified from AOCI: | ||||||||||||||||||
| Amortization of defined benefit<br> pension actuarial loss (a) | 179 | 0 | 179 | 227 | 0 | 227 | ||||||||||||
| Net current period other<br> comprehensive income (loss) | 179 | (8,089 | ) | (7,910 | ) | 227 | (518 | ) | (291 | ) | ||||||||
| Balance at June 30 | $ | (5,317 | ) | $ | (64,312 | ) | $ | (69,629 | ) | $ | (6,477 | ) | $ | (48,365 | ) | $ | (54,842 | ) |
(a) Amounts presented net of tax. This AOCI component is included in the computation of net periodic pension costs as noted in Note F – Pension Plans.
NOTE H – 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 stock that was outstanding during the periods presented.
13
The calculation of basic and diluted earnings per share for the three and six months ended June 30, 2022 and 2021 was as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||
| Numerator | ||||||||
| Net income | $ | 13,712 | $ | 8,869 | $ | 25,997 | $ | 16,048 |
| Denominator | ||||||||
| Determination of shares | ||||||||
| Weighted-average common shares outstanding | 4,940 | 4,912 | 4,934 | 4,914 | ||||
| Dilutive effect – share-based awards | 15 | 18 | 20 | 21 | ||||
| Diluted weighted-average common shares outstanding | 4,955 | 4,930 | 4,954 | 4,935 | ||||
| Earnings per common share | ||||||||
| Basic | $ | 2.78 | $ | 1.81 | $ | 5.27 | $ | 3.27 |
| Diluted | $ | 2.77 | $ | 1.80 | $ | 5.25 | $ | 3.25 |
For the three and six months ended June 30, 2022, 18,000 and 23,000 stock options, respectively, were excluded from the calculation of diluted earnings per share as the effect would have been anti-dilutive. For the three and six months ended June 30, 2021, 0 and 10,000 stock options, respectively, were excluded from the calculation of diluted earnings per share as the effect would have been anti-dilutive.
NOTE I – GOODWILL AND OTHER INTANGIBLES
The Company’s finite and indefinite-lived intangible assets consist of the following:
| June 30, 2022 | December 31, 2021 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying<br>Amount | Accumulated<br>Amortization | Gross Carrying<br>Amount | Accumulated<br>Amortization | |||||||
| Finite-lived intangible assets | ||||||||||
| Patents | $ | 4,806 | $ | (4,806 | ) | $ | 4,806 | $ | (4,806 | ) |
| Land use rights | 1,095 | (456 | ) | 1,293 | (437 | ) | ||||
| Trademarks | 1,976 | (1,535 | ) | 1,837 | (1,533 | ) | ||||
| Technology | 6,903 | (2,930 | ) | 7,306 | (2,830 | ) | ||||
| Customer relationships | 18,978 | (8,927 | ) | 15,046 | (8,643 | ) | ||||
| $ | 33,758 | $ | (18,654 | ) | $ | 30,288 | $ | (18,249 | ) | |
| Indefinite-lived intangible assets | ||||||||||
| Goodwill | $ | 34,792 | $ | 28,194 |
The aggregate amortization expense for other intangibles with finite lives for the three and six months ended June 30, 2022 was $0.5 million and $1.1 million, respectively. The aggregate amortization expense for other intangibles with finite lives for the three and six months ended June 30, 2021 was $0.5 million and $0.9 million, respectively. Amortization expense is estimated to be $1.4 million for the remainder of 2022, $1.8 million for 2023, $1.7 for 2024, $1.6 million for 2025 and $1.5 million for 2026. The combined weighted-average remaining amortization period is approximately
12.1
years. The weighted-average remaining amortization period by intangible asset class is as follows: land use rights,
52.5
years; trademarks,
11.2
years; technology,
8.6
years; and customer relationships,
10.6
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.
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.
14
The Company believes that the methodologies, significant assumptions, and weightings used are reasonable and result in appropriate fair values of the reporting units.
Given the continued decline in the Company’s results in the Asia-Pacific region and the uncertainty surrounding COVID-19 including the lingering impacts of the numerous variants, 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 as of September 30, 2021, along with an annual impairment assessment for fiscal 2021, which did not indicate an impairment charge was warranted. The Asia-Pacific reporting unit’s fair value exceeds its carrying value by less than 10% and thus the reporting unit remains at risk for future goodwill impairment.
The Company re-evaluated the results of its Asia-Pacific region at June 30, 2022 and did not identify additional impairment indicators. The Company will continue to evaluate the results of its Asia-Pacific region as well as the geopolitical and macroeconomic environment and conduct interim testing if additional impairment indicators are present in future quarters. At June 30, 2022, the Asia-Pacific reporting unit's goodwill was $6.8 million.
No indicators of impairment were identified for the Company's other reporting units.
The Company’s only intangible asset with an indefinite life is goodwill. The changes in the carrying amount of goodwill, by segment, for the six months ended June 30, 2022 are as follows:
| USA | The Americas | EMEA | Asia-Pacific | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at January 1, 2022 | $ | 3,078 | $ | 4,244 | $ | 13,561 | $ | 7,311 | $ | 28,194 | |||
| Additions | 0 | 5,068 | 2,455 | 0 | 7,523 | ||||||||
| Currency translation | 0 | 486 | (936 | ) | (475 | ) | (925 | ) | |||||
| Balance at June 30, 2022 | $ | 3,078 | $ | 9,798 | $ | 15,080 | $ | 6,836 | $ | 34,792 |
The 2022 additions to goodwill relate to the anticipated synergies of acquiring Maxxweld Conectores Eletricos Ltda. and Holplast, s.r.o. See Note O for additional information about acquisitions of businesses.
NOTE J – 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 prioritizes the inputs into three broad 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, on the Company’s Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021:
| Description | Balance as of <br>June 30, 2022 | Quoted Prices in<br>Active Markets for<br>Identical Assets or<br>Liabilities <br>(Level 1) | Significant Other<br>Observable Inputs<br> (Level 2) | Significant<br>Unobservable<br>Inputs<br>(Level 3) | ||||
|---|---|---|---|---|---|---|---|---|
| Assets: | ||||||||
| Foreign currency forward contracts | $ | 1,612 | $ | 0 | $ | 1,612 | $ | 0 |
| Total Assets | $ | 1,612 | $ | 0 | $ | 1,612 | $ | 0 |
| Liabilities: | ||||||||
| Supplemental profit sharing plan | $ | 6,215 | $ | 0 | $ | 6,215 | $ | 0 |
| Total Liabilities | $ | 6,215 | $ | 0 | $ | 6,215 | $ | 0 |
15
| Description | Balance as of <br>December 31, 2021 | Quoted Prices in<br>Active Markets for<br>Identical Assets or<br>Liabilities <br>(Level 1) | Significant Other<br>Observable Inputs<br> (Level 2) | Significant<br>Unobservable<br>Inputs<br>(Level 3) | ||||
|---|---|---|---|---|---|---|---|---|
| Assets: | ||||||||
| Foreign currency forward contracts | $ | 534 | $ | 0 | $ | 534 | $ | 0 |
| Total Assets | $ | 534 | $ | 0 | $ | 534 | $ | 0 |
| Liabilities: | ||||||||
| Supplemental profit sharing plan | $ | 8,633 | $ | 0 | $ | 8,633 | $ | 0 |
| Total Liabilities | $ | 8,633 | $ | 0 | $ | 8,633 | $ | 0 |
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 when 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 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 six months ended June 30, 2022, the Company recognized net gains of $3.1 million and $1.0 million, respectively, on foreign currency forward contracts. For the three and six months ended June 30, 2021, the Company recognized net losses of $1.3 million and $0.9 million, respectively, on foreign currency forward contracts.
The Company has a non-qualified Supplemental Profit Sharing Plan for its executives and directors. The liability for this unfunded Supplemental Profit Sharing Plan was $6.2 million and $8.6 million at June 30, 2022 and December 31, 2021, respectively. 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 include 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.
NOTE K – BUSINESS 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 six months ended June 30, 2022 and 2021. Financial results for the PLP-USA segment include the elimination of all segments’ intercompany profit in inventory.
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||||||||
| Net sales | |||||||||||
| PLP-USA | $ | 83,422 | $ | 62,087 | $ | 159,347 | $ | 118,316 | |||
| The Americas | 22,436 | 18,625 | 41,399 | 36,146 | |||||||
| EMEA | 32,845 | 27,352 | 60,317 | 50,834 | |||||||
| Asia-Pacific | 24,768 | 24,974 | 40,631 | 45,295 | |||||||
| Total net sales | $ | 163,471 | $ | 133,038 | $ | 301,694 | $ | 250,591 | |||
| Intersegment sales | |||||||||||
| PLP-USA | $ | 6,830 | $ | 3,779 | $ | 10,950 | $ | 6,164 | |||
| The Americas | 4,142 | 2,556 | 6,857 | 4,622 | |||||||
| EMEA | 884 | 1,421 | 1,570 | 1,932 | |||||||
| Asia-Pacific | 8,064 | 4,812 | 14,748 | 8,465 | |||||||
| Total intersegment sales | $ | 19,920 | $ | 12,568 | $ | 34,125 | $ | 21,183 | |||
| Gross profit | |||||||||||
| PLP-USA | $ | 29,940 | $ | 22,826 | $ | 56,204 | $ | 43,904 | |||
| The Americas | 7,967 | 5,892 | 13,332 | 11,435 | |||||||
| EMEA | 7,958 | 8,325 | 14,332 | 16,459 | |||||||
| Asia-Pacific | 6,841 | 5,996 | 10,789 | 11,433 | |||||||
| Gross profit | $ | 52,706 | $ | 43,039 | $ | 94,657 | $ | 83,231 | |||
| Net income attributable to Preformed Line Products Company shareholders | |||||||||||
| PLP-USA | $ | 9,360 | $ | 6,319 | $ | 22,602 | $ | 11,895 | |||
| The Americas | 2,637 | 1,962 | 2,566 | 3,153 | |||||||
| EMEA | 1,293 | 1,043 | 1,576 | 2,239 | |||||||
| Asia-Pacific | 422 | (455 | ) | (747 | ) | (1,239 | ) | ||||
| Total net income attributable to Preformed Line Products Company shareholders | $ | 13,712 | $ | 8,869 | $ | 25,997 | $ | 16,048 |
NOTE L – INCOME TAXES
The Company’s effective tax rate was 23% and 29% for the three-month periods ended June 30, 2022 and 2021, and 18% and 31% for the six-month periods ended June 30, 2022 and 2021, respectively. The lower effective tax rate for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to the favorable impact from the mix of earned income in certain foreign jurisdictions, as well as a decrease in the limitations on the deductibility of executive compensation. The lower effective tax rate for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily due to non-taxable benefit of $4.4 million related to the proceeds from a settlement of a Company-owned life insurance policy and other favorable discrete items.
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 first half of the year ended June 30, 2022, the Company recorded additional valuation allowances in various jurisdictions on their deferred tax assets, that are not expected to be realizable.
There were no significant changes to any of the balances of unrecognized tax benefits for the six-month period ended June 30, 2022 or the year ended December 31, 2021.
NOTE M – DEBT ARRANGEMENTS
On March 2, 2022, the Company amended its credit facility ("the Facility") to increase the capacity from $65.0 million to $90.0 million. As part of this amendment, the index used to determine the interest rate changed from LIBOR to the Bloomberg Short Term Bank Yield Index (“BSBY”). The interest rate will now be defined as BSBY 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 BSBY spread becomes 1.500%. The amendment also allows the Company to change its rate from BSBY to the Secured Overnight Financing Rate (“SOFR”) at the Company’s discretion. The amendment extended the maturity from June 30, 2024 to March 2, 2026. All other terms remain the same. At June 30, 2022, the Company had the following borrowings on the Facility: the U.S. borrowed $22.0 million at 2.9117%, the Company’s Polish subsidiary borrowed $5.6 million at 7.445%, the Company’s Australian subsidiary borrowed $2.6 million at 1.270%, and the Company’s Austrian subsidiary borrowed $1.3 million at 1.125%. At June 30, 2022, the Company had utilized $31.6 million with $58.4 million available on the Facility, net of long-term outstanding letters of credit of $0.1 million. The Facility contains, among other provisions, requirements for maintaining levels of net worth and profitability. At June 30, 2022, the Company was in compliance with these covenants.
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 to fund the purchase of a corporate aircraft. In September 2020, the Company made a deposit of $6.8 million toward the purchase of the aircraft which was subsequently refunded in January 2021 and the full amount of the $20.5 million purchase price was drawn on the loan. The aircraft replaces the Company’s previously owned aircraft, which was sold in December 2020. The proceeds of the sale were used to pay off the debt associated with the previously-owned aircraft. The term of the new 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 $17.8 million outstanding on this debt facility at June 30, 2022, $2.1 million was classified as current. The loan is secured by the aircraft.
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 June 30, 2022, and December 31, 2021, $11.4 million and $11.1 million was outstanding, of which $1.2 million and $1.0 million were classified as current, respectively. These facilities support commitments made in the ordinary course of business.
For the periods ended June 30, 2022 and December 31, 2021, the Company’s Asia-Pacific segment had $0.2 million and $0.6 million, respectively, in restricted cash used to secure bank debt. The restricted cash is shown on the Company’s Consolidated Balance Sheets in Cash and cash equivalents.
NOTE N – PRODUCT WARRANTY RESERVE
The Company records an accrual for estimated warranty costs to Costs of products sold in the Statements of Consolidated Income. These amounts are recorded in Accrued expenses and other liabilities on the Company’s Consolidated Balance Sheets. The Company records and accounts for its warranty reserve based on specific claim incidents. Should the Company become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the accruals as claim information changes.
The following is a rollforward of the product warranty reserve:
| Six Months Ended June 30 | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| Beginning of period balance | $ | 1,635 | $ | 1,282 | ||
| Additions charged to income | 101 | 1,325 | ||||
| Warranty usage | (27 | ) | (244 | ) | ||
| Currency translation | (38 | ) | 0 | |||
| End of period balance | $ | 1,671 | $ | 2,363 |
NOTE O – ACQUISITIONS OF BUSINESSES
Acquisition of Maxxweld Conectores Electricos Ltda.
On January 4, 2022, the Company acquired Maxxweld Conectores Eletricos 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.
18
The acquisition of Maxxweld has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. The table below summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the acquisition date, as well as measurement period adjustments recorded as of June 30, 2022. These estimates will continue to be revised during the measurement period as further information becomes available and additional analyses are performed. The current measurement period adjustments did not have a material impact to the Consolidated Statements of Income.
| Preliminary Allocation | Measurement Period Adjustments | Adjusted Preliminary Allocation | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Accounts receivable | $ | 2,080 | $ | 52 | $ | 2,132 | |||
| Inventory | 1,291 | 76 | 1,367 | ||||||
| Prepaid expenses and other current assets | 41 | 0 | 41 | ||||||
| Equipment and other assets | 725 | 0 | 725 | ||||||
| Other intangible assets | 4,359 | 0 | 4,359 | ||||||
| Accounts payable | (599 | ) | 0 | (599 | ) | ||||
| Other current liabilities | (322 | ) | 0 | (322 | ) | ||||
| Other non-current liabilities | (1,560 | ) | (1 | ) | (1,561 | ) | |||
| Total identifiable net assets | 6,015 | 127 | 6,142 | ||||||
| Goodwill | 5,195 | (127 | ) | 5,068 | |||||
| Total consideration, net of cash received | $ | 11,210 | $ | 0 | $ | 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 preliminary estimated fair values of the customer relationships, trademarks and technology intangible assets of $4.0 million, $0.2 million and $0.2 million, respectively, 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 I for additional information about goodwill and other intangible assets.
From the date of the acquisition through June 30, 2022, the Company’s Consolidated Financial Statements included Maxxweld sales of approximately $4.8 million and is reported in The Americas segment.
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 Prostejov, 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 be recognized at their respective fair values on the acquisition date. The table below summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the acquisition date, as well as measurement period adjustments recorded as of June 30, 2022. These estimates will continue to be revised during the measurement period as further information becomes available and additional analyses are performed. The current measurement period adjustments did not have a material impact to the Consolidated Statements of Income.
19
| Preliminary Allocation | Measurement Period Adjustments | Adjusted Preliminary Allocation | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Cash | $ | 907 | 0 | $ | 907 | ||||
| Accounts receivable | 452 | 0 | 452 | ||||||
| Inventory | 285 | 31 | 316 | ||||||
| Prepaid expenses and other current assets | 7 | 0 | 7 | ||||||
| Property, plant and equipment and other assets | 1,221 | 1,760 | 2,981 | ||||||
| Accounts payable | (283 | ) | 0 | (283 | ) | ||||
| Other current liabilities | (95 | ) | 0 | (95 | ) | ||||
| Other non-current liabilities | (1,119 | ) | (334 | ) | (1,453 | ) | |||
| Total identifiable net assets | 1,375 | 1,457 | 2,832 | ||||||
| Goodwill | 3,912 | (1,457 | ) | 2,455 | |||||
| Total consideration, inclusive of cash and debt | $ | 5,287 | $ | 0 | $ | 5,287 |
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Holplast. Other non-current liabilities assumed is mainly comprised of long-term debt totaling approximately $1.1 million at a rate of 3.21% with terms expiring between May 2023 and December 2030.
From the date of the acquisition through June 30, 2022, the Company’s Consolidated Financial Statements included Holplast sales of approximately $0.8 million and is reported in the EMEA segment.
NOTE P – EXIT OF RUSSIAN OPERATIONS
Due to the ongoing conflict in Ukraine and overt hostilities shown by Russia in the conflict, the Company determined to exit its Russian operations in March 2022, at which time exit activities began. The Russia operations did not have a material impact to the consolidated financial statements with net sales of $0.2 million and $0.3 million for the three and six months ended June 30, 2022 and $0.2 million and $0.4 million for the three and six months ended June 30, 2021, respectively. Total annual sales were $1.0 million for the 2021 fiscal year. As a result of the decision to exit operations, net charges of approximately $0.2 million and $1.2 million were recorded for the three and six months ended June 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 Business Segment Information, these charges are recorded in the EMEA segment. The Company does not expect future charges incurred to be material.
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
• Forward Looking Statements
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, manufacturing, and marketing of technically advanced products and services related to energy, communications and cable systems. Our priority is responding to key infrastructure priorities around the world, including bolstering grid reliability, strengthening grid resilience to climate events, upgrading aging infrastructure, enhancing communication networks and assisting in the transition to renewable energy. We have 30 sales and manufacturing operations in 22 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 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 six months ended June 30, 2022 and 2021. 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.
While the ongoing COVID-19 pandemic has not had a material effect on our overall results, it has continued to create challenges for us in countries that have significant outbreak mitigation strategies, namely, countries in our Asia-Pacific business segment, which has led to temporary project postponements and has continued to impact results in this segment. We are continuing to actively monitor the impact of COVID-19 on current and future periods and actively manage costs and our liquidity position to provide additional flexibility while still supporting our customers and their specific needs. 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. 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. We continue to assess all challenges related
to COVID-19 and plan accordingly. 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, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 4, 2022.
Overall customer demand has remained very strong, which is reflected in net sales of $163.5 million for the three months ended June 30, 2022, an increase of $30.4 million year-over-year and net sales of $301.7 million for the six months ended June 30, 2022, an increase of $51.1 million year-over-year. However, we have also experienced significant commodity and transportation cost inflation that has impacted our profit margins. To mitigate the ongoing inflationary pressures, we implemented several price increases in the U.S. and internationally in 2021 and again in 2022. Due to the large volume in our order backlog, we will continue to experience tailwinds from these increases well into 2022, however, continued cost inflation in these areas may require further price adjustments to maintain profit margin, and any price increases may have a negative effect on demand.
The geopolitical environment has created challenges in the operating environment particularly in eastern Europe. Due to the ongoing conflict in Ukraine and overt hostilities shown by Russia in the conflict, the Company determined to wind down its Russian operations in March 2022. As a result of the decision to wind-down operations, asset impairment, one-time termination benefits and other impacts were recorded in the six-month period ending June 30, 2022.
Our consolidated financial statements are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. The fluctuations of foreign currencies during the three and six months ended June 30, 2022 had a $5.5 million unfavorable effect and a $8.0 million unfavorable effect on net sales, respectively. There was a favorable effect of $0.1 million and an unfavorable effect of $0.1 million on net income for the three and six months ended June 30, 2022. 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, 2022 and 2021 was as follows:
| Foreign Currency Translation Impact | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||
| Net Sales | Net Income | Net Sales | Net Income | |||||||||
| (Thousands of dollars) | ||||||||||||
| The Americas | $ | 217 | $ | 278 | $ | 81 | $ | 384 | ||||
| EMEA | (4,011 | ) | (96 | ) | (5,679 | ) | (459 | ) | ||||
| Asia-Pacific | (1,682 | ) | (90 | ) | (2,424 | ) | (33 | ) | ||||
| Total | $ | (5,476 | ) | $ | 92 | $ | (8,022 | ) | $ | (108 | ) |
The following table reflects the impact of foreign currency fluctuations on operating income for the three and six months ended June 30, 2022 and 2021:
| Foreign Currency Impact | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||
| (Thousands of dollars) | 2022 | 2021 | 2022 | 2021 | ||||||||
| Operating income | $ | 17,949 | $ | 12,738 | $ | 27,400 | $ | 23,506 | ||||
| Translation loss (gain) | 19 | (429 | ) | (503 | ) | (469 | ) | |||||
| Transaction loss (gain) | 3,266 | (441 | ) | 1,383 | 173 | |||||||
| Net (gain) loss on forward currency<br> contracts | (3,114 | ) | 1,266 | (1,049 | ) | 938 | ||||||
| Operating income excluding currency<br> impact | $ | 18,120 | $ | 13,134 | $ | 27,231 | $ | 24,148 |
Despite the current geopolitical environment, and aside from the uncertainty created by the ongoing COVID-19 pandemic, we believe our business fundamentals and our financial position are sound and 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. 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 will allow us to further enhance the service we provide to our U.S. customers beginning in late 2022. If necessary, we will modify redundant processes and further 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, evaluate strategic mergers and acquisitions, improve efficiency, develop new products, and increase our capacity. We currently have a bank debt to equity ratio of 23.4% and have the continued ability to borrow needed funds at a competitive interest rate under the Facility.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO THREE MONTHS ENDED JUNE 30, 2021
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, 2022 and 2021. The Company’s past operating results are not necessarily indicative of future operating results.
| Three Months Ended June 30 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | ||||||||||
| Net sales | $ | 163,471 | 100.0 | % | $ | 133,038 | 100.0 | % | $ | 30,433 | |||
| Cost of products sold | 110,765 | 67.8 | 89,999 | 67.6 | 20,766 | ||||||||
| GROSS PROFIT | 52,706 | 32.2 | 43,039 | 32.4 | 9,667 | ||||||||
| Costs and expenses | 34,757 | 21.3 | 30,301 | 22.8 | 4,456 | ||||||||
| OPERATING INCOME | 17,949 | 11.0 | 12,738 | 9.6 | 5,211 | ||||||||
| Other income (expense), net | (185 | ) | (0.1 | ) | (161 | ) | (0.1 | ) | (24 | ) | |||
| INCOME BEFORE INCOME TAXES | 17,764 | 10.9 | 12,577 | 9.5 | 5,187 | ||||||||
| Income tax expense | 4,043 | 2.5 | 3,686 | 2.8 | 357 | ||||||||
| NET INCOME | 13,721 | 8.4 | 8,891 | 6.7 | 4,830 | ||||||||
| Net (gain) loss attributable to noncontrolling interests | (9 | ) | (0.0 | ) | (22 | ) | (0.0 | ) | 13 | ||||
| NET INCOME ATTRIBUTABLE TO<br> PREFORMED LINE PRODUCTS COMPANY<br> SHAREHOLDERS | $ | 13,712 | 8.4 | % | $ | 8,869 | 6.7 | % | $ | 4,843 |
Net sales. Net sales were $163.5 million for the three months ended June 30, 2022, an increase of $30.4 million, or 22.9%, from the three months ended June 30, 2021. Excluding the unfavorable effect of currency translation, net sales for the three months ended June 30, 2022 increased $35.9 million compared to the same period in 2021, or 27%, as summarized in the following table:
| Three Months Ended June 30 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | Change<br>Due to<br>Currency<br>Translation | Change<br>Excluding<br>Currency<br>Translation | %<br>change | |||||||||
| Net sales | |||||||||||||||
| PLP-USA | $ | 83,422 | $ | 62,087 | $ | 21,335 | $ | 0 | $ | 21,335 | 34 | % | |||
| The Americas | 22,436 | 18,625 | 3,811 | 217 | 3,594 | 19 | |||||||||
| EMEA | 32,845 | 27,352 | 5,493 | (4,011 | ) | 9,504 | 35 | ||||||||
| Asia-Pacific | 24,768 | 24,974 | (206 | ) | (1,682 | ) | 1,476 | 6 | |||||||
| Consolidated | $ | 163,471 | $ | 133,038 | $ | 30,433 | $ | (5,476 | ) | $ | 35,909 | 27 | % |
The year-over-year increase in PLP-USA net sales of $21.3 million, or 34%, was primarily due to price and volume increases in energy and communication product sales from increased demand. International net sales for the three months ended June 30, 2022 experienced an unfavorable impact of $5.5 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 $22.4 million increased $3.6 million, or 19%, primarily due to the contributions from the Company's acquisition of Maxxweld. EMEA net sales of $32.8 million increased $9.5 million, or 35%, primarily due to a volume increase in energy product sales within the region. Asia-Pacific net sales of $24.8 million increased $1.5 million, or 6%, compared to 2021 primarily due to a slight volume increase in energy products, partially offset by the decrease of volume in special industries products and headwinds related to China's buy local policies.
Gross profit. Gross profit was $52.7 million and $43.0 million for the three months ended June 30, 2022 and 2021, respectively. Excluding the unfavorable effect of currency translation, gross profit increased $10.8 million, or 25%, as summarized in the following table:
| Three Months Ended June 30 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | Change<br>Due to<br>Currency<br>Translation | Change<br>Excluding<br>Currency<br>Translation | %<br>change | |||||||||
| Gross profit | |||||||||||||||
| PLP-USA | $ | 29,940 | $ | 22,826 | $ | 7,114 | $ | 0 | $ | 7,114 | 31 | % | |||
| The Americas | 7,967 | 5,892 | 2,075 | 260 | 1,815 | 31 | |||||||||
| EMEA | 7,958 | 8,325 | (367 | ) | (975 | ) | 608 | 7 | |||||||
| Asia-Pacific | 6,841 | 5,996 | 845 | (442 | ) | 1,287 | 21 | ||||||||
| Consolidated | $ | 52,706 | $ | 43,039 | $ | 9,667 | $ | (1,157 | ) | $ | 10,824 | 25 | % |
PLP-USA gross profit of $29.9 million increased $7.1 million compared to the same period in 2021 mainly as a result of increased sales volume of $21.3 million. International gross profit for the three months ended June 30, 2022 was unfavorably impacted by $1.2 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 $1.8 million was primarily due to the favorable sales mix from the increased volume discussed above as well as contributions from the Maxxweld acquisition. EMEA’s gross profit increased $0.6 million, mainly due to an increase in sales volume, offset by higher freight and raw material costs. Asia-Pacific’s gross profit increase of $1.3 million was primarily due to a favorable sales mix from the increased volume discussed above.
Costs and expenses. Costs and expenses of $34.8 million for the three months ended June 30, 2022 increased $4.5 million, or 14.7%. Excluding the favorable effect of currency translation, costs and expenses increased $5.6 million, or 18%, as summarized in the following table:
| Three Months Ended June 30 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | Change<br>Due to<br>Currency<br>Translation | Change<br>Excluding<br>Currency<br>Translation | %<br>change | |||||||||
| Costs and expenses | |||||||||||||||
| PLP-USA | $ | 17,701 | $ | 14,011 | $ | 3,690 | $ | 0 | $ | 3,690 | 26 | % | |||
| The Americas | 4,130 | 3,324 | 806 | (50 | ) | 856 | 26 | ||||||||
| EMEA | 6,488 | 6,784 | (296 | ) | (752 | ) | 456 | 7 | |||||||
| Asia-Pacific | 6,438 | 6,182 | 256 | (336 | ) | 592 | 10 | ||||||||
| Consolidated | $ | 34,757 | $ | 30,301 | $ | 4,456 | $ | (1,138 | ) | $ | 5,594 | 18 | % |
PLP-USA costs and expenses of $17.7 million for the three months ended June 30, 2022 increased when compared to the same period in 2021 due to increases in professional services and sales-related expenses. International costs and expenses for the three months ended June 30, 2022 were favorably impacted by $1.1 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 $4.1 million increased by $0.9 million mainly due to increases in salary-related expense and purchase accounting adjustments. EMEA costs and expenses of $6.5 million increased $0.5 million mainly due to higher salary-related expenses. Asia-Pacific costs and expenses of $6.4 million increased by $0.6 million primarily due to one-time expenses incurred to streamline operations.
Other income (expense), net. Other income (expense), net was flat for both the three months ended June 30, 2022 and 2021 at ($0.2) million.
Income taxes. Income taxes for the three months ended June 30, 2022 and 2021 were $4.0 million and $3.7 million, based on pre-tax income of $17.8 million and $12.6 million, respectively. The effective tax rate for the three months ended June 30, 2022 and 2021 was 23% and 29%, respectively, compared to the U.S. federal statutory rate of 21%. The higher effective tax rate was primarily related to limitations on the deductibility of executive compensation. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earned 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.
Net income. As a result of the preceding items, net income for the three months ended June 30, 2022 was $13.7 million, compared to $8.9 million for the three months ended June 30, 2021, an increase of $4.8 million as summarized in the following table:
| Three Months Ended June 30 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | Change<br>Due to<br>Currency<br>Translation | Change<br>Excluding<br>Currency<br>Translation | %<br>change | ||||||||||
| Net income | ||||||||||||||||
| PLP-USA | $ | 9,360 | $ | 6,319 | $ | 3,041 | $ | 0 | $ | 3,041 | 48 | % | ||||
| The Americas | 2,637 | 1,962 | 675 | 278 | 397 | 20 | ||||||||||
| EMEA | 1,293 | 1,043 | 250 | (96 | ) | 346 | 33 | |||||||||
| Asia-Pacific | 422 | (455 | ) | 877 | (90 | ) | 967 | (213 | ) | |||||||
| Consolidated | $ | 13,712 | $ | 8,869 | $ | 4,843 | $ | 92 | $ | 4,751 | 54 | % |
PLP-USA’s net income for the three months ended June 30, 2022 increased $3.0 million compared to the same period in 2021, primarily due to an increase in operating income of $3.4 million driven by higher sales volumes. The following discussion of net income excludes the effect of currency translation. The Americas net income increased $0.4 million mainly as a result of an increase in operating income, partially offset by higher income tax expense. EMEA net income increased $0.3 million mainly as a result of the flow through from higher gross profit. Asia-Pacific net income increased $1.0 million due to an increase in operating income and decreased income tax expense.
SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO SIX MONTHS ENDED JUNE 30, 2021
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, 2022 and 2021. The Company’s past operating results are not necessarily indicative of future operating results.
| Six Months Ended June 30 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | ||||||||||
| Net sales | $ | 301,694 | 100.0 | % | $ | 250,591 | 100.0 | % | $ | 51,103 | |||
| Cost of products sold | 207,037 | 68.6 | 167,360 | 66.8 | 39,677 | ||||||||
| GROSS PROFIT | 94,657 | 31.4 | 83,231 | 33.2 | 11,426 | ||||||||
| Costs and expenses | 67,257 | 22.3 | 59,725 | 23.8 | 7,532 | ||||||||
| OPERATING INCOME | 27,400 | 9.1 | 23,506 | 9.4 | 3,894 | ||||||||
| Other income, net | 4,505 | 1.5 | (375 | ) | (0.1 | ) | 4,880 | ||||||
| INCOME BEFORE INCOME TAXES | 31,905 | 10.6 | 23,131 | 9.2 | 8,774 | ||||||||
| Income tax expense | 5,883 | 1.9 | 7,063 | 2.8 | (1,180 | ) | |||||||
| NET INCOME | $ | 26,022 | 8.6 | $ | 16,068 | 6.4 | $ | 9,954 | |||||
| Net (gain) loss attributable to noncontrolling interests | (25 | ) | (0.0 | ) | (20 | ) | (0.0 | ) | (5 | ) | |||
| NET INCOME ATTRIBUTABLE TO<br> PREFORMED LINE PRODUCTS COMPANY<br> SHAREHOLDERS | $ | 25,997 | 8.6 | % | $ | 16,048 | 6.4 | % | $ | 9,949 |
Net sales. Net sales were $301.7 million for the six months ended June 30, 2022, an increase of $51.1 million, or 20.4%, from the six months ended June 30, 2021. Excluding the unfavorable effect of currency translation, net sales for the six months ended June 30, 2022 increased $59.1 million compared to the same period in 2021, or 24%, as summarized in the following table:
| Six Months Ended June 30 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | Change<br>Due to<br>Currency<br>Translation | Change<br>Excluding<br>Currency<br>Translation | %<br>change | ||||||||||
| Net sales | ||||||||||||||||
| PLP-USA | $ | 159,347 | $ | 118,316 | $ | 41,031 | $ | 0 | 41,031 | 35 | % | |||||
| The Americas | 41,399 | 36,146 | 5,253 | 81 | 5,172 | 14 | ||||||||||
| EMEA | 60,317 | 50,834 | 9,483 | (5,679 | ) | 15,162 | 30 | |||||||||
| Asia-Pacific | 40,631 | 45,295 | (4,664 | ) | (2,424 | ) | (2,240 | ) | (5 | ) | ||||||
| Consolidated | $ | 301,694 | $ | 250,591 | $ | 51,103 | $ | (8,022 | ) | $ | 59,125 | 24 | % |
The year-over-year increase in PLP-USA net sales of $41.0 million, or 35%, was primarily due to price and volume increases in energy and communication product sales from increased demand. International net sales for the six months ended June 30, 2022 experienced an unfavorable impact of $8.0 million when local currencies were converted to U.S. dollars. The following discussion of net sales excludes the net effect of currency translation. The Americas net sales of $41.4 million increased $5.2 million or 14%, primarily due to contributions from the Maxxweld acquisition. EMEA net sales of $60.3 million increased $15.2 million, or 30%, primarily due to volume increases in energy and communication product sales within the region. Asia-Pacific net sales of $40.6 million decreased $2.2 million, or 5%, compared to 2021 primarily due to a year-over-year volume decrease in energy product sales and headwinds related to China's buy local policies.
Gross profit. Gross profit was $94.7 million and $83.2 million for the six months ended June 30, 2022 and 2021, respectively. Excluding the unfavorable effect of currency translation, gross profit increased $12.9 million, or 15%, as summarized in the following table:
| Six Months Ended June 30 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | Change<br>Due to<br>Currency<br>Translation | Change<br>Excluding<br>Currency<br>Translation | %<br>change | ||||||||||
| Gross profit | ||||||||||||||||
| PLP-USA | $ | 56,204 | $ | 43,904 | $ | 12,300 | $ | 0 | $ | 12,300 | 28 | % | ||||
| The Americas | 13,332 | 11,435 | 1,897 | 285 | 1,612 | 14 | ||||||||||
| EMEA | 14,332 | 16,459 | (2,127 | ) | (1,169 | ) | (958 | ) | (6 | ) | ||||||
| Asia-Pacific | 10,789 | 11,433 | (644 | ) | (557 | ) | (87 | ) | (1 | ) | ||||||
| Consolidated | $ | 94,657 | $ | 83,231 | $ | 11,426 | $ | (1,441 | ) | $ | 12,867 | 15 | % |
PLP-USA gross profit of $56.2 million increased $12.3 million compared to the same period in 2021 as a result of increased sales volume of $41.0 million, partially offset by the negative impact of commodity prices, freight costs, and inflation. International gross profit for the six months ended June 30, 2022 was unfavorably impacted by $1.4 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 $1.6 million was largely the result of an increased sales volume of $5.2 million. EMEA’s gross profit decreased $1.0 million, primarily as a result of higher commodity and freight costs and the impacts from the decision to wind down the Russia operations. Despite the year-over-year decrease in sales, Asia-Pacific’s gross profit remained relatively flat, partially as a result of continued cost containment measures.
Costs and expenses. Costs and expenses of $67.3 million for the six months ended June 30, 2022 increased $7.5 million, or 12.6%. Excluding the favorable effect of currency translation, costs and expenses increased $9.5 million, or 16%, as summarized in the following table:
| Six Months Ended June 30 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | Change<br>Due to<br>Currency<br>Translation | Change<br>Excluding<br>Currency<br>Translation | %<br>change | ||||||||||
| Costs and expenses | ||||||||||||||||
| PLP-USA | $ | 33,450 | $ | 27,143 | $ | 6,307 | $ | 0 | $ | 6,307 | 23 | % | ||||
| The Americas | 9,260 | 7,045 | 2,215 | (124 | ) | 2,339 | 33 | |||||||||
| EMEA | 13,229 | 13,249 | (20 | ) | (1,315 | ) | 1,295 | 10 | ||||||||
| Asia-Pacific | 11,318 | 12,288 | (970 | ) | (506 | ) | (464 | ) | (4 | ) | ||||||
| Consolidated | $ | 67,257 | $ | 59,725 | $ | 7,532 | $ | (1,945 | ) | $ | 9,477 | 16 | % |
PLP-USA costs and expenses of $33.5 million for the six months ended June 30, 2022 increased $6.3 million when compared to the same period in 2021 primarily due to increased sales-related expense, salary-related expense, and professional services. International costs and expenses for the six months ended June 30, 2022 were favorably impacted by $1.9 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 $9.3 million increased $2.3 million for the six months ended June 30, 2022 compared to the same period in 2021 primarily due to an increase in salary-related expense, and incremental costs and expenses and purchase price adjustments related to the Maxxweld acquisition. EMEA costs and expenses of $13.2 million increased $1.3 million mainly due to higher salary-related expenses, travel and entertainment expenses and professional services. Asia-Pacific costs and expenses of $11.3 million decreased $0.5 million primarily due to cost containment initiatives.
Other income (expense), net. Other income (expense), net for the six months ended June 30, 2022 and 2021 was $4.5 million and ($.4) million, respectively. Other income (expense), net for the six months ended June 30, 2022 was primarily related to the settlement of a Company-owned life insurance policy that was maintained for Director Emeritus Barbara P. Ruhlman until her death in January 2022. The cash proceeds of approximately $6.9 million resulted in a gain of $4.4 million recorded in Other income, net.
Income taxes. Income taxes for the six months ended June 30, 2022 and 2021 were $5.9 million and $7.1 million, respectively, based on pre-tax income of $31.9 million and $23.1 million, respectively. The effective tax rate for the six months ended June 30, 2022 and 2021 was 18% and 31%, respectively. The decrease in the effective tax rate for the period ended June 30, 2022 is due to a favorable change in the discrete items. The change in the discrete items was primarily due to a non-taxable benefit of $4.4 million related to the proceeds from a settlement of a Company-owned life insurance policy that was maintained for Director Emeritus Barbara P. Ruhlman until her death in January 2022, in addition to a decrease in unfavorable permanent adjustments.
Net income. As a result of the preceding items, net income for the six months ended June 30, 2022 was $26.0 million, compared to $16.0 million for the six months ended June 30, 2021, a decrease of $10.0 million as summarized in the following table:
| Six Months Ended June 30 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | Change<br>Due to<br>Currency<br>Translation | Change<br>Excluding<br>Currency<br>Translation | %<br>change | ||||||||||||
| Net income | ||||||||||||||||||
| PLP-USA | $ | 22,602 | $ | 11,895 | $ | 10,707 | $ | 0 | $ | 10,707 | 90 | % | ||||||
| The Americas | 2,566 | 3,153 | (587 | ) | 384 | (971 | ) | (31 | ) | |||||||||
| EMEA | 1,576 | 2,239 | (663 | ) | (459 | ) | (204 | ) | (9 | ) | ||||||||
| Asia-Pacific | (747 | ) | (1,239 | ) | 492 | (33 | ) | 525 | (42 | ) | ||||||||
| Consolidated | $ | 25,997 | $ | 16,048 | $ | 9,949 | $ | (108 | ) | $ | 10,057 | 63 | % |
PLP-USA’s net income for the six months ended June 30, 2022 increased $10.7 million, or 90%, compared to the same period in 2021, primarily due to an increase in operating income of $6.0 million driven by higher sales volumes and the gain from proceeds on insurance settlement. The following discussion of net income excludes the effect of currency translation. The Americas net income decreased $1.0 million, primarily due to a decrease in operating income. EMEA net income decreased $0.2 million primarily as a result of the charges recorded to exit the Russia business. Asia-Pacific net income increased $0.5 million primarily due to an increase in operating income from cost containment initiatives.
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, 2021 filed on March 4, 2022 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 2022, we used cash of $13.8 million for capital expenditures and $13.0 million for acquisitions of businesses. We ended the first half of 2022 with $30.1 million of cash, cash equivalents and restricted cash (collectively, “Cash”). Our Cash is held in various locations throughout the world. At June 30, 2022, 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, 2022 was $77.6 million. At June 30, 2022, our unused availability under the Facility was $58.4 million and our bank debt to equity percentage was 23.4%. On March 2, 2022, we amended the Facility to increase the capacity from $65.0 million to $90.0 million. As part of this amendment, the index used to determine the interest rate changed from LIBOR to the Bloomberg Short Term Bank Yield Index (“BSBY”). The interest rate will now be defined as BSBY 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 BSBY spread becomes 1.500%. The amendment also allows the Company to change its rate from BSBY to the Secured Overnight Financing Rate (“SOFR”) at the Company’s discretion. The amendment extended the maturity from June 30, 2024 to March 2, 2026. All other terms remain the same. The Facility agreement contains, among other provisions, requirements for maintaining levels of net worth and profitability. At June 30, 2022 and December 31, 2021, we were in compliance with these covenants.
We expect that our major source of funding for 2022 and beyond will be our operating cash flows and our existing Cash as well as the Facility. We earn a portion 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 continuing COVID-19 pandemic or long-term impacts of the conflict in Ukraine and the impacts 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 a 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
A summary of cash flows is as follows:
| Six Months Ended June 30 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (Thousands of dollars) | 2022 | 2021 | Change | ||||||
| Net cash (used in) provided by operating activities | $ | (6,234 | ) | $ | 14,061 | $ | (20,295 | ) | |
| Net cash used in investing activities | (16,676 | ) | (7,315 | ) | (9,361 | ) | |||
| Net cash provided by (used in) financing activities | 15,529 | (18,732 | ) | 34,261 | |||||
| Effects of exchange rate changes on cash, cash equivalents and restricted cash | 1,078 | 265 | 813 | ||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (6,303 | ) | $ | (11,721 | ) | $ | 5,418 |
Net cash used in operating activities for the six months ended June 30, 2022 was $6.2 million compared to $14.1 million provided by operating activities in the comparable prior year six-month period. The $20.3 million decrease was primarily a result of increases in accounts receivable, and inventory, partially offset by an increase in net income of $10.1 million.
Net cash used in investing activities for the six months ended June 30, 2022 was $16.7 million compared to $7.3 million in the comparable prior year six-month period. The $9.4 million increase was primarily a result of increased capital expenditures, and acquisition of businesses, partially offset by proceeds from the settlement of a Company-owned life insurance policy and sale of property and equipment.
Net cash provided by financing activities for the six months ended June 30, 2022 was $15.5 million compared to cash used in financing activities of $18.7 million in the comparable prior year six-month period. The $34.3 million increase was primarily the result of an increase in proceeds from long-term debt, net of borrowings and notes payable to banks.
We have commitments under operating leases, primarily for office and manufacturing space, transportation equipment, office and computer equipment and capital leases primarily for equipment. See the Consolidated Balance Sheets for related operating lease assets and liabilities.
As of June 30, 2022, the Company had total outstanding guarantees of $10.4 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 June 30, 2022, the Company had total outstanding letters of credit of $0.5 million.
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:
• 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 (“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, including the impact of inflation, 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 conflict between Russia and Ukraine), 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;
• 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 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;
• The effects of the potential enactment of the U.S. Build Back Better Plan which could potentially increase the U.S. federal corporate income tax rate on U.S. income and, also, reduce tax credits from foreign sourced income;
• 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, 2021 which was filed on March 4, 2022. 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 and additional impacts may arise that the Company is not aware of currently.
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 six months ended June 30, 2022 and 2021.
As of June 30, 2022, the Company had $1.6 million in assets 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 a favorable/unfavorable impact on fair values on such instruments of $4.9 million and a $0.6 million favorable/unfavorable impact on income before income taxes at June 30, 2022.
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 and term notes, which consisted of long-term borrowings of $60.7 million at June 30, 2022. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $0.4 million for the six months ended June 30, 2022.
As discussed elsewhere in this report, the outbreak of COVID-19 could negatively impact the Company’s business and results of operations. Since the Company cannot predict the duration or scope of the COVID-19 pandemic, the potential negative financial impact to the Company’s results cannot be reasonably estimated but could be material.
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 June 30, 2022.
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 six months ended June 30, 2022 that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
Information regarding the Company’s current legal proceedings is presented in Note E 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, 2021 filed with the SEC on March 4, 2022. 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 Company did not repurchase any shares during the three months ended June 30, 2022:
| Period | Total<br>Number of<br>Shares<br>Purchased | Average<br>Price Paid<br>per Share | Total Number of<br>Shares Purchased as<br>Part of Publicly<br>Announced Plans<br>or Programs | Maximum Number<br>of Shares that may<br>yet be Purchased<br>under the Plans or<br>Programs | |||
|---|---|---|---|---|---|---|---|
| April | 0 | N/A | 0 | 213,945 | |||
| May | 0 | N/A | 0 | 213,945 | |||
| June | 0 | N/A | 0 | 213,945 | |||
| Total | 0 |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
SIGNATURES
Pursuant to the requirements 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.
| August 5, 2022 | /s/ Robert G. Ruhlman |
|---|---|
| Robert G. Ruhlman | |
| Chairman, President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| August 5, 2022 | /s/ Andrew S. Klaus |
| Andrew S. Klaus | |
| Chief Financial Officer | |
| (Principal Accounting Officer) |
EX-31.1
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert G. Ruhlman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Preformed Line Products Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 5, 2022 | /s/ Robert G. Ruhlman |
|---|---|
| Robert G. Ruhlman | |
| Chairman, President and Chief Executive Officer | |
| (Principal Executive Officer) |
EX-31.2
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Andrew S. Klaus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Preformed Line Products Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 5, 2022 | /s/ Andrew S. Klaus |
|---|---|
| Andrew S. Klaus | |
| Chief Financial Officer<br><br>(Principal Accounting Officer) |
EX-32.1
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert G. Ruhlman, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Quarterly Report on Form 10-Q of Preformed Line Products Company for the period ended June 30, 2022 which this certification accompanies fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Preformed Line Products Company.
| August 5, 2022 | /s/ Robert G. Ruhlman |
|---|---|
| Robert G. Ruhlman | |
| Chairman, President and Chief Executive Officer | |
| (Principal Executive Officer) |
A signed original of this written statement required by Section 906 has been provided to Preformed Line Products Company and will be retained by Preformed Line Products Company and furnished to the Securities and Exchange Commission or its staff upon request.
EX-32.2
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Andrew S. Klaus, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Quarterly Report on Form 10-Q of Preformed Line Products Company for the period ended June 30, 2022 which this certification accompanies fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Preformed Line Products Company.
| August 5, 2022 | /s/ Andrew S. Klaus |
|---|---|
| Andrew S. Klaus | |
| Chief Financial Officer | |
| (Principal Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to Preformed Line Products Company and will be retained by Preformed Line Products Company and furnished to the Securities and Exchange Commission or its staff upon request.