Preformed Line Products Company: FY2017 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. Its products support, protect, connect, terminate and secure cables and wires. The company operates through four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific.
This Form 10-K covers the fiscal year ended December 31, 2017. The filing is an annual report, not a quarterly filing; selected unaudited fourth-quarter results are included.
- Formed wire and related hardware represented approximately 67% of 2017 revenue.
- Protective closures represented approximately 19%; plastic products 4%; and other products 10%.
- International sales represented 61% of consolidated sales, compared with 60% in 2016.
- Backlog increased to approximately $93.8 million at year-end 2017 from $75.3 million at year-end 2016.
Financial Performance and Position
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $378.2 million | $336.6 million | Up 12% |
| Gross profit | $118.6 million | $109.4 million | Up 8% |
| Gross margin | 31.4% | 32.5% | Down 1.1 percentage points |
| Operating income | $26.1 million | $21.5 million | Up 22% |
| Operating margin | 6.9% | 6.4% | Up 0.5 percentage points |
| Income before taxes | $25.8 million | $21.0 million | Up 23% |
| Net income | $12.7 million | $15.3 million | Down 17% |
| Diluted EPS | $2.47 | $2.95 | Down 16% |
| Operating cash flow | $33.8 million | $26.0 million | Up $7.9 million |
Revenue growth was driven primarily by higher transmission and distribution volumes in PLP-USA and increased energy and telecommunications sales internationally. Foreign currency translation contributed approximately $5.2 million to reported sales growth.
The effective tax rate increased to 51.0% from 27.2%, primarily because of the Tax Cuts and Jobs Act of 2017, including a provisional $2.6 million transition-tax charge and a $3.2 million deferred-tax remeasurement charge. Excluding the tax-law impact, PLP-USA net income would have been approximately $3.4 million rather than the reported $2.4 million loss.
| Balance-sheet and liquidity metric | December 31, 2017 |
|---|---|
| Cash and cash equivalents | $44.4 million |
| Current assets | $207.1 million |
| Current liabilities | $62.8 million |
| Current ratio | 3.3 to 1 |
| Total debt | $36.9 million |
| Shareholders’ equity | $238.5 million |
| Unused credit availability | $41.7 million under the credit facility |
Capital expenditures were $11.2 million, share repurchases totaled approximately $8.5 million, and dividends paid totaled $4.1 million. The company declared dividends of $0.80 per share for 2017 and stated that comparable dividends were expected in the near term, subject to board discretion.
Material Changes Versus Prior Comparable Period
- Sales increased 12%, with reported growth in every geographic segment: PLP-USA up 9%, The Americas up 13%, EMEA up 10% and Asia-Pacific up 12%.
- Operating income improved despite higher raw-material costs, personnel expenses and commissions. Product mix supported gross-profit improvement in PLP-USA, The Americas and Asia-Pacific, while EMEA gross profit declined because of a lower-margin energy-product mix.
- Net income and diluted EPS declined because the Tax Act increased the effective tax rate substantially.
- Operating cash flow rose to $33.8 million, while investing cash use declined sharply because 2016 included the purchase of a corporate aircraft.
- Total debt declined by $8.8 million, from $45.7 million to $36.9 million. The company remained in compliance with debt covenants.
- The company repurchased 121,626 common shares during 2017, including purchases from officers, employees and related trusts. A total of 250,000 shares remained authorized for repurchase at year-end.
- Fourth-quarter 2017 sales were $96.9 million versus $86.4 million in the fourth quarter of 2016, but fourth-quarter net income fell to $0.7 million from $5.1 million, primarily reflecting the year-end tax effects.
Outlook, Risks, Contingencies and Unusual Items
Management described the financial position as sound and expects operating cash flow, existing cash and the credit facility to fund debt repayments, capital expenditures, dividends and foreseeable operating needs. The company expects continued opportunities from North American transmission projects and international energy and telecommunications infrastructure, while noting continued weakness in certain solar markets.
- Raw-material costs, particularly metals, increased during 2017, and management expected further metal-price increases in 2018. Plastic-material prices were expected to stabilize.
- Demand depends heavily on infrastructure spending and capital budgets in the energy and telecommunications industries, customer access to financing, energy prices and general economic conditions.
- International operations expose the company to foreign-currency, political, regulatory, tax, trade and economic risks. A hypothetical 10% currency-rate change would affect the fair value of exposed instruments by approximately $5.9 million and income before tax by approximately $2.7 million.
- The company faces strong competition, technology changes including wireless communications, raw-material availability risks, cybersecurity risks, environmental regulation and acquisition-integration risks.
- Altalink, L.P. is seeking approximately $56 million in damages in Alberta, Canada, alleging defects involving spacer dampers supplied for power projects. The company believes the claims are without merit but cannot predict the outcome; an adverse result could materially affect financial results.
- The company reported an unfunded defined-benefit pension obligation of $10.7 million and does not expect to contribute to the plan in 2018.
- Outstanding guarantees were $5.4 million and letters of credit were $0.8 million at December 31, 2017.
- The company recorded less than $0.1 million of restructuring expense in 2017 and had a restructuring liability of approximately $0.4 million related primarily to lease termination costs.
- Goodwill impairment testing produced no impairment charge for 2017. The company adopted new share-based compensation and inventory guidance without a material financial-statement effect. Revenue-recognition guidance adopted January 1, 2018 was not expected to materially affect the financial statements other than disclosures.
Investor Verification Priorities
- Verify the sustainability of revenue growth and the $93.8 million backlog, particularly the contribution from transmission projects versus solar-market declines.
- Assess whether gross-margin pressure from metals, plastics, inflation and product mix could continue.
- Separate recurring operating performance from the 2017 Tax Act charges and determine the sustainable post-2017 effective tax rate.
- Review the Altalink litigation, insurance coverage, reserves and potential financial exposure.
- Confirm debt maturities, especially approximately $24.8 million due in 2019, along with credit-facility covenant compliance and refinancing capacity.
- Evaluate international currency exposure, foreign cash balances and the effect of future tax rules, including GILTI and other Tax Act provisions.
- Review related-party share repurchases and other related-party transactions for pricing, governance and disclosure considerations.