Preformed Line Products Company — FY2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, filed March 8, 2019. Preformed Line Products designs and manufactures hardware and systems supporting overhead and underground energy, telecommunications, cable, data communication, and solar networks. Revenue mix was approximately 66% energy, 21% communications, and 13% special industries. International sales represented approximately 60% of consolidated revenue, and no customer exceeded 10% of revenue.
The company operated 26 sales and manufacturing locations in 18 countries and had approximately 2,650 employees. Backlog was approximately $92.9 million at year-end 2018 versus $93.8 million at year-end 2017.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $420.9 million | $378.2 million | +11%; +13% excluding currency |
| Gross profit | $132.2 million | $118.6 million | +12% |
| Gross margin | 31.4% | 31.4% | Flat |
| Operating income | $32.9 million | $26.1 million | +26% |
| Operating margin | 7.8% | 6.9% | +90 basis points |
| Income before taxes | $32.6 million | $25.8 million | +26% |
| Net income | $26.6 million | $12.7 million | +111% |
| Effective tax rate | 18.4% | 51.0% | Lower due primarily to tax reform effects |
| Diluted EPS | $5.21 | $2.47 | +111% |
| Cash dividends declared per share | $0.80 | $0.80 | Flat |
Sales growth was led by PLP-USA, which increased 14%, and Asia-Pacific, which increased 19% excluding currency effects. The Americas increased 8% and EMEA increased 5% excluding currency. Growth was primarily volume-driven, particularly in energy products, with favorable product mix in PLP-USA, the Americas, and Asia-Pacific. EMEA profitability declined despite higher sales because of lower-margin energy products.
Foreign currency translation reduced 2018 sales by approximately $5.7 million and net income by approximately $0.2 million. The company also recorded a $1.5 million foreign currency transaction loss, compared with a $0.3 million transaction gain in 2017.
Cash flow, liquidity, debt, and balance sheet
| Metric | December 31, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $43.6 million | $44.4 million |
| Cash, cash equivalents, and restricted cash | $43.9 million | $45.6 million |
| Current assets | $214.3 million | $207.1 million |
| Total assets | $358.8 million | $359.8 million |
| Total debt | $35.5 million | $36.9 million |
| Shareholders’ equity | $249.4 million | $238.5 million |
| Current ratio | 3.1 to 1 | 3.3 to 1 |
- Operating cash flow was $23.0 million, down from $33.8 million in 2017, primarily because of increased working-capital usage and a $5.3 million pension contribution.
- Capital expenditures were $9.5 million, compared with $11.2 million in 2017.
- Investing activities used $14.0 million, including net investment in marketable securities and a company-owned life insurance policy.
- Financing activities used $9.1 million, including $4.1 million of dividends and approximately $4.2 million of share repurchases.
- The company had a $65 million credit facility extending to June 30, 2021, with $49.8 million of unused availability at year-end. It was in compliance with all debt covenants.
- Management stated that operating cash flows, existing cash, and borrowing capacity should be sufficient for debt repayments, capital expenditures, dividends, and expected needs.
Material changes versus the prior comparable period
- Revenue increased $42.7 million, while operating income increased $6.8 million.
- Net income increased $13.9 million, substantially reflecting the lower U.S. statutory tax rate and favorable Tax Cuts and Jobs Act adjustments. The 2018 tax provision included a $0.9 million benefit related to the transition tax and a $0.7 million benefit from finalizing deferred-tax-rate adjustments.
- Operating expenses increased 7%, but declined as a percentage of sales from 24.5% to 23.6%, supporting operating-margin expansion.
- Inventory increased to $85.3 million from $77.9 million, contributing to weaker operating cash flow.
- The funded pension obligation declined to $5.3 million from $10.7 million after a $5.3 million contribution and actuarial changes.
- Accumulated other comprehensive loss increased primarily because of a $12.3 million unfavorable foreign-currency translation adjustment.
- The company adopted the new revenue-recognition standard and other accounting updates in 2018; management reported no material cumulative impact.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued opportunities from North American transmission-grid investment, international energy and communications growth, and broadband infrastructure deployment. Solar activity in North America continued to decline in 2018. Management expected stable metal and plastic prices during 2019 after raw-material costs trended upward throughout 2018.
- Primary risks include dependence on energy and telecommunications capital spending, global economic conditions, customer financing and creditworthiness, intense competition, technological substitution, and changes in industry standards.
- International operations expose the company to foreign-currency volatility, tariffs, geopolitical conditions, regulatory changes, Brexit-related uncertainty, and difficulties collecting receivables.
- Raw-material availability and pricing, including metals, plastics, and petroleum-related surcharges, could pressure margins if cost increases cannot be passed to customers.
- A Canadian lawsuit alleges defective spacer dampers and seeks approximately C$29.4 million in damages, reduced from an initial C$56.0 million claim. The company believes the claims are without merit, but cannot predict the outcome or estimate a loss range; an adverse outcome could materially affect results.
- The company had $4.9 million of outstanding guarantees and $2.5 million of letters of credit at year-end.
- The company had an unfunded defined-benefit pension obligation of $5.3 million and does not expect to contribute to the plan in 2019.
- Management identified no material environmental compliance liability, goodwill impairment, long-lived-asset impairment, or uncertain-tax-position reserve at year-end.
- On February 28, 2019, the company acquired SubCon Electrical Fittings GmbH; the acquisition was considered immaterial, with acquired assets below 5% of consolidated assets.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Determine how much of the 2018 net-income increase is sustainable operating improvement versus one-time Tax Act benefits and the unusually low effective tax rate.
- Monitor operating cash conversion, inventory growth, pension funding requirements, and the effect of working-capital investment on liquidity.
- Assess the potential financial exposure, insurance coverage, and legal developments related to the Canadian spacer-damper litigation.
- Review foreign-currency sensitivity, including the disclosed estimated $2.7 million pretax income impact from a hypothetical 10% currency-rate change.
- Evaluate debt maturities, particularly the approximately $16.7 million due in 2021, and compliance with credit-facility covenants.
- Verify the sustainability of energy-market growth and the impact of declining solar activity and raw-material costs on future margins.
- Consider the effect of the 2019 lease-accounting adoption on reported assets and liabilities, although management did not expect a material effect on earnings, cash flow, or debt covenants.