Preformed Line Products Company — FY2015 Form 10-K Summary
Business context and reporting period
Preformed Line Products Company designs and manufactures hardware and systems used in overhead and underground energy, telecommunications, cable, data communication and solar networks. The company operates through PLP-USA, The Americas, EMEA and Asia-Pacific segments, with 60% of sales generated internationally in 2015. This filing covers the fiscal year ended December 31, 2015; fourth-quarter data are included but the filing is an annual report.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $354.7 million | $388.2 million | Down 9% |
| Gross profit | $103.5 million | $120.9 million | Down 14% |
| Gross margin | 29.2% | 31.2% | Down 200 bps |
| Operating income | $12.3 million | $21.2 million | Down 42% |
| Operating margin | 3.5% | 5.5% | Down 200 bps |
| Net income | $6.7 million | $12.9 million | Down 48% |
| Diluted EPS | $1.24 | $2.39 | Down 48% |
| Operating cash flow | $20.2 million | $25.3 million | Down $5.0 million |
Fourth-quarter 2015 net sales were $92.0 million, compared with $96.2 million in the prior-year quarter. Fourth-quarter net income was $3.0 million, or $0.58 diluted EPS, compared with $2.5 million, or $0.46 diluted EPS, in fourth-quarter 2014. The first quarter of 2015 generated a net loss of $0.3 million, while the remaining quarters were profitable.
- International currency translation reduced reported 2015 sales by $36.9 million versus 2014. Excluding currency translation, sales increased approximately 1%.
- Asia-Pacific sales increased 18% excluding currency effects, primarily from solar products, while PLP-USA sales declined 7% and EMEA sales declined 5%.
- Energy-market sales declined because of fewer transmission projects in North America and reduced transmission, substation and distribution activity in Asia-Pacific.
- Research and development expense was $2.9 million, and approximately 16.4% of 2015 revenue came from products developed during the prior five years.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $30.4 million at December 31, 2015, compared with $29.6 million at year-end 2014.
- Capital expenditures were $10.8 million; share repurchases totaled $7.6 million; and dividends paid totaled $4.4 million.
- Total debt was $32.3 million, down from $33.7 million. The company reported $16.8 million of unused credit availability under its facilities.
- The principal credit facility provides up to $50 million at LIBOR plus 1.125% and expires in August 2017. The company was in compliance with its debt covenants.
- The current ratio was 3.6 to 1, and management reported a bank-debt-to-equity ratio of 14.7%.
- Long-term debt maturities include approximately $31.7 million due in 2017. The company stated that operating cash flow, existing cash and borrowing capacity should fund expected operations, capital expenditures, debt service and dividends.
Material changes versus prior comparable period
- Reported sales, operating income and net income declined materially, driven by currency depreciation, lower transmission activity, weaker international markets and margin pressure.
- Gross margin fell to 29.2% from 31.2%, partly because of lower-margin product mix in Asia-Pacific and restructuring costs.
- Foreign-currency transaction losses increased to $7.4 million from $2.9 million and reduced operating results.
- The company reconfigured an Asia-Pacific operation and began restructuring PLP-USA operations. Total 2015 restructuring charges were approximately $4.0 million, with $1.1 million remaining accrued at year-end.
- During the fourth quarter, the company consolidated a product line from The Americas into PLP-USA and integrated DPW manufacturing processes into other domestic operations to reduce future infrastructure and manufacturing costs.
- Backlog declined to approximately $53.0 million at year-end 2015 from $61.4 million at year-end 2014.
- Shareholders’ equity declined to $219.0 million from $242.9 million, primarily reflecting foreign-currency translation losses and share repurchases.
Guidance, outlook, risks and unusual items
Management did not provide formal numerical revenue or earnings guidance. Management expects the energy market to be relatively flat in 2016 because of continued global-market uncertainty, while seeking growth from grid investment, communications infrastructure, solar products, geographic expansion and operating-efficiency initiatives.
- Key risks include dependence on energy and telecommunications capital spending, weak infrastructure spending, low oil and commodity prices, customer financing constraints and intense competition.
- International operations expose the company to foreign-exchange volatility, political and economic instability, tariffs, regulatory changes, collection risk and differing tax regimes.
- Raw-material availability and pricing, especially wire, aluminum, plastics and petroleum-linked inputs, could pressure margins. Management expected generally stable prices with possible increases toward late 2016.
- The company had no material pending legal proceedings and reported no material environmental liabilities, although future regulation could require additional spending.
- Goodwill impairment testing identified no impairment in 2015, but two reporting units had reduced valuation cushions after the company’s market capitalization fell below book equity. Management noted a reasonable possibility of future impairment.
- The company had an unfunded pension obligation of $11.6 million, outstanding letters of credit of $6.1 million and guarantees of $0.5 million.
- Approximately $130.6 million of undistributed foreign earnings were considered permanently reinvested abroad and had no recorded U.S. deferred tax liability.
- The effective tax rate increased to 43.0% from 39.9%, reflecting losses in jurisdictions without tax benefits, foreign-earnings repatriation taxes and other discrete items.
Important facts for investors to verify
- Whether solar growth can offset continued weakness in transmission, distribution and telecommunications markets.
- The sustainability of the 2015 Asia-Pacific solar growth and whether the segment can reduce its reported net loss of $3.4 million.
- Progress and cash savings from the Asia-Pacific, PLP-USA and product-line restructuring actions.
- Exposure to further foreign-currency depreciation, transaction losses and potential goodwill impairment.
- The company’s ability to refinance or repay approximately $31.7 million of debt due in 2017.
- Inventory quality and reserves: the excess and obsolete inventory reserve increased to 12.9% of gross inventory from 9.3%.
- The discretionary nature of future dividends and the effect of continued share repurchases on liquidity and equity.
- Future tax costs if foreign earnings are repatriated or if tax authorities challenge the company’s positions.