Preformed Line Products Company — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013, with fourth-quarter results included. The company designs and manufactures hardware and systems for energy, telecommunications, cable, data communication and solar networks. Operations are reported across PLP-USA, The Americas, EMEA and Asia-Pacific. International sales represented approximately 60% of consolidated revenue.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $409.8 million | $439.2 million | Down 7% |
| Gross profit | $130.9 million | $144.4 million | Down 9% |
| Gross margin | 31.9% | 32.9% | Down 100 basis points |
| Operating income | $31.1 million | $44.1 million | Down 29% |
| Operating margin | 7.6% | 10.0% | Down 240 basis points |
| Net income | $20.6 million | $29.3 million | Down 30% |
| Diluted EPS | $3.77 | $5.45 | Down 31% |
| Net cash from operations | $18.2 million | $50.4 million | Down $32.2 million |
Fourth quarter: Net sales were $98.5 million, gross profit was $30.4 million, income before taxes was $5.7 million, and net income was $3.1 million, or $0.58 diluted EPS. Comparable fourth-quarter 2012 net sales were $104.2 million and net income was $5.3 million, or $0.98 diluted EPS.
Liquidity and capital structure: Cash and cash equivalents were $24.3 million at year-end. Total debt was $14.4 million, including $12.6 million outstanding under the revolving credit facility. The company reported $37.4 million of unused borrowing availability, a 3.6-to-1 current ratio and bank debt equal to 5.7% of equity. The $50 million credit facility, bearing interest at LIBOR plus 1.125%, was extended to January 2017 after year-end.
Capital expenditures were $21.0 million, including $10.2 million for the worldwide headquarters expansion. The company paid $2.3 million of dividends and repurchased $6.9 million of common shares during 2013. Year-end shareholders’ equity was $252.3 million.
Material changes versus FY2012
- Revenue declined $29.4 million. Excluding a $10.5 million unfavorable currency translation effect, revenue declined approximately $18.9 million.
- PLP-USA sales fell 11%, primarily from lower volume and the completion of transmission projects that contributed to 2012 sales.
- The Americas grew 4% excluding currency effects, aided by energy and solar sales. EMEA declined 4% and Asia-Pacific declined 2%, principally because of lower transmission-project activity and weaker data-communication volumes.
- Gross margin narrowed because of lower volume, higher material costs, higher product costs in Asia-Pacific and increased provisions for excess inventory.
- Asia-Pacific reported a $2.2 million net loss compared with $2.4 million of net income in 2012. The company recorded $0.9 million of non-cash goodwill impairment charges in two Asia-Pacific businesses.
- Foreign currency translation reduced reported sales by $10.5 million and reported net income by approximately $0.4 million.
- Inventory reserves increased to $8.0 million from $6.8 million, and the allowance represented 9% of gross inventory versus 7% in 2012.
- Backlog decreased to approximately $47.7 million from $58.4 million.
- The defined-benefit pension plan was frozen beginning February 1, 2013. The unfunded pension obligation declined to $5.0 million from $13.2 million.
Outlook, commentary, risks and unusual items
Management expected the energy market to be relatively flat in 2014 because of continued global-market uncertainty. Management cited potential long-term opportunities from transmission-grid upgrades, renewable-energy deployment and international infrastructure development, while noting ongoing weakness in communications spending and uncertainty in the U.S., Spain, Poland and Great Britain.
- Major risks include dependence on energy and telecommunications capital spending, customer access to financing, intense competition, technological substitution such as wireless communications, raw-material costs, foreign currency volatility and geopolitical or regulatory developments.
- International operations create exposure to currency movements, tariffs, tax and regulatory changes, payment-collection issues and political or economic instability.
- The company had $4.7 million of outstanding letters of credit and approximately $2.0 million of guarantees at year-end.
- Contractual obligations included $13.2 million of long-term debt, $18.1 million of operating leases, $3.7 million of purchase commitments and a planned 2014 pension contribution of $0.7 million.
- Approximately $129 million of undistributed foreign earnings were considered permanently reinvested; the company had not recorded the related U.S. deferred tax liability.
- The company was not involved in pending litigation expected to have a material adverse effect, and management reported effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified audit opinions.
- On January 31, 2014, the company acquired Helix Uniformed Limited in Canada. The acquisition was described as immaterial and intended to expand Canadian manufacturing and engineering capabilities.
Investor verification checklist
- Verify whether transmission-project timing and the $47.7 million backlog support the company’s flat 2014 energy-market outlook.
- Assess whether Asia-Pacific losses, goodwill impairment exposure and elevated inventory reserves are improving.
- Reconcile operating cash flow of $18.2 million with $21.0 million of capital expenditures and the company’s dividend and repurchase plans.
- Review foreign-currency sensitivity, particularly exposure to the Brazilian real, South African rand and Australian dollar.
- Evaluate the sustainability of the $0.60 per-share dividend and the remaining share-repurchase authorization.
- Monitor pension funding, permanently reinvested foreign earnings, unrecognized tax benefits and credit-facility covenant compliance.