Preformed Line Products Company — FY2011 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2011. The company designs and manufactures hardware and systems used in overhead and underground energy, telecommunications, cable, data communication, and solar networks. It operates through four geographic segments: PLP-USA, The Americas, EMEA, and Asia-Pacific. International sales represented 60% of consolidated sales in 2011.
The filing also provides unaudited fourth-quarter results. The 2011 results include the full-year impact of the Electropar acquisition, completed in July 2010, and the acquisition of the remaining 50% of BlueSky Energy Australia during 2011.
Financial performance and position
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $424.4 million | $338.3 million | Up 25% |
| Gross profit | $140.8 million | $108.2 million | Up 30% |
| Gross margin | 33.2% | 32.0% | Up 1.2 percentage points |
| Operating income | $45.4 million | $28.5 million | Up 59% |
| Operating margin | 10.7% | 8.4% | Improved |
| Net income | $31.0 million | $23.0 million | Up 35% |
| Diluted EPS | $5.78 | $4.33 | Up 34% |
| Cash flow from operations | $17.0 million | $28.7 million | Down $11.6 million |
| Capital expenditures | $18.9 million | $12.3 million | Up $6.6 million |
Fourth-quarter 2011 net sales were $106.1 million, compared with $93.3 million in the prior-year quarter. Gross profit was $34.2 million versus $29.1 million, pretax income was $12.5 million versus $7.4 million, net income was $8.9 million versus $6.0 million, and diluted EPS was $1.67 versus $1.13.
Sales growth was broad-based: PLP-USA increased 24%, The Americas 24%, EMEA 20%, and Asia-Pacific 20%, excluding currency effects. Currency translation added $10.7 million to reported sales. Management attributed the remaining growth primarily to acquisitions, new business, stronger demand, and higher volume and mix.
At December 31, 2011, cash and cash equivalents were $32.1 million, current assets were $205.5 million, current liabilities were $61.8 million, and shareholders’ equity was $212.9 million. The current ratio was 3.3 to 1. Total debt was $30.6 million, including $27.6 million outstanding under a $70 million revolving credit facility. Unused credit availability was $42.4 million, and the company was in compliance with its debt covenants.
Operating cash flow was pressured by increased accounts receivable and inventory needed to support higher sales. Cash uses included $18.9 million of capital expenditures, $4.4 million of dividends, and $3.5 million of share repurchases. Net debt borrowings were $19.1 million, and cash increased by $9.5 million during the year.
Material changes versus the prior comparable period
- Revenue increased 25%, with double-digit growth in all four reportable segments excluding currency translation.
- Gross margin improved as manufacturing efficiency more than offset higher material costs.
- Operating income benefited from higher sales and gross-margin expansion, partly offset by higher personnel, research and engineering, commissions, and foreign-exchange costs.
- Foreign-currency results shifted from a $2.4 million gain in 2010 to a $1.2 million loss in 2011.
- The effective tax rate increased to 32.6% from 23.8%, partly because of favorable tax items recognized in 2010.
- Asia-Pacific sales benefited from the inclusion of Electropar for a full year; the segment generated $116.7 million of 2011 sales versus $90.2 million in 2010.
- Backlog increased to approximately $74.6 million from $59.1 million, generally representing two to nine weeks of sales.
- The company increased capital investment and ended the year with higher debt to fund working capital and growth initiatives.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal numerical revenue or earnings guidance. Management expected continued opportunities in transmission, fiber-optic, renewable-energy, and international markets, while noting that communications markets remained challenging. The company expected raw-material price levels to stabilize during 2012 and believed operating cash flows, existing cash, and available borrowing capacity would fund anticipated requirements.
- Key demand risks include weak global economic conditions, depressed U.S. housing activity, customer access to financing, utility and communications capital spending, industry consolidation, and government incentive programs.
- Technology changes, including wireless deployment and evolving fiber, copper, and communications standards, could reduce demand for existing products.
- Raw-material availability and pricing, sole-source suppliers, foreign-exchange movements, international political and regulatory conditions, and competitive pricing could affect results.
- A supplier product failure led to a $1.8 million increase in the warranty reserve; $1.4 million had been paid by year-end and the remaining reserve was $824,000.
- The company recognized an additional $0.6 million expense related to the Electropar contingent earn-out, bringing the accrued obligation to $1.1 million.
- The defined-benefit pension plan was underfunded by $15.8 million at year-end, and the company expected to contribute approximately $2.2 million in 2012.
- The company changed its annual goodwill impairment testing date from January 1 to October 1 prospectively; no impairment was recorded.
- Unrecognized tax benefits totaled approximately $1.0 million, while approximately $118 million of undistributed foreign earnings were treated as permanently reinvested without a recorded U.S. tax liability.
- No material pending litigation was reported. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and the $74.6 million backlog convert into sustained organic growth after acquisition and currency effects.
- Whether gross-margin gains persist as raw-material costs, freight, labor, and warranty costs evolve.
- The company’s ability to generate operating cash flow while inventory and receivables remain elevated.
- Repayment or refinancing plans for the $27.6 million revolving-credit balance due in 2015 and compliance with related covenants.
- The financial impact of the $15.8 million pension underfunding and future required contributions.
- Resolution of the supplier warranty matter and adequacy of the remaining reserve.
- Exposure to international markets, foreign-currency volatility, customer capital spending, and technology substitution.
- Related-party transactions, including share purchases from entities associated with the Ruhlman family and property, labor, and service arrangements involving affiliated parties.