Preformed Line Products Company: FY2016 Form 10-K Summary
Business Context and Reporting Period
Preformed Line Products Company designs and manufactures hardware, closures, systems and related products used in overhead and underground energy, telecommunications, cable, data communication and solar networks. The filing covers the fiscal year ended December 31, 2016; fourth-quarter information is provided on an unaudited basis. The company operated 26 sales and manufacturing locations in 17 countries and had 2,579 employees at year-end. International sales represented approximately 60% of consolidated revenue.
- Formed wire and related hardware: approximately 65% of 2016 revenue.
- Protective closures: approximately 20% of revenue.
- Plastic products: approximately 4% of revenue.
- Other products, including solar hardware and data communication products: approximately 11% of revenue.
Financial Performance and Key Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $336.6 million | $354.7 million | Down 5.1% |
| Gross profit | $109.4 million | $103.5 million | Up 5.8% |
| Gross margin | 32.5% | 29.2% | Up 330 basis points |
| Operating income | $21.5 million | $12.3 million | Up $9.1 million |
| Operating margin | 6.4% | 3.5% | Up 290 basis points |
| Income before taxes | $21.0 million | $11.7 million | Up $9.2 million |
| Net income | $15.3 million | $6.7 million | Up 128.5% |
| Effective tax rate | 27.2% | 43.0% | Down 15.8 points |
| Diluted EPS | $2.95 | $1.24 | Up $1.71 |
| Operating cash flow | $26.0 million | $20.2 million | Up $5.7 million |
| Capital expenditures | $24.7 million | $10.8 million | Up $14.0 million |
Fourth-quarter 2016 net sales were $86.4 million, gross profit was $29.5 million, net income was $5.1 million and diluted EPS was $0.99, compared with fourth-quarter 2015 net sales of $92.0 million, gross profit of $26.1 million, net income of $3.0 million and diluted EPS of $0.58.
Year-end cash and cash equivalents were $30.7 million. Current assets were $189.1 million and current liabilities were $55.5 million, producing a current ratio of 3.4 to 1. Total debt was $45.7 million, compared with $32.3 million in 2015. Shareholders’ equity was $223.5 million. The company declared $0.80 per share of dividends during 2016 and repurchased approximately $5.1 million of common shares.
Material Changes Versus the Prior Comparable Period
- Reported sales declined $18.0 million, primarily because of lower solar sales in Asia-Pacific and unfavorable currency translation of $12.0 million. Excluding currency, sales declined approximately 2%.
- Asia-Pacific sales declined 13% excluding currency, primarily due to a significant reduction in solar sales. The Americas and EMEA sales increased 11% and 13%, respectively, excluding currency.
- Gross margin improved materially because of a more favorable product mix, regional cost savings and improved product margins, despite lower sales.
- Operating expenses declined 3.5% as reported and were essentially flat excluding currency. The 2015 period included approximately $4.0 million of restructuring expense, while 2016 included approximately $0.1 million.
- The effective tax rate fell substantially, aided by income earned in lower-tax foreign jurisdictions, permanently reinvested foreign earnings, reduced valuation allowances and the expiration of certain tax statutes.
- Capital expenditures increased primarily because the company purchased a corporate aircraft for approximately $14.5 million, replacing an expiring aircraft lease. The related debt was issued at a fixed 2.71% rate and is due in 2026.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific numerical revenue or earnings guidance. Management described global markets as uncertain and challenging, citing low oil and commodity prices, constrained infrastructure spending, slower transmission-project activity, currency volatility and continued pressure in solar markets. Management expects to fund 2017 needs through operating cash flow, existing cash and its credit facility and believes liquidity will be sufficient for debt service, capital expenditures and dividends.
- The revolving credit facility was increased from $50 million to $65 million and extended to June 30, 2019. Unused availability was $34.5 million at year-end. The company was in compliance with its debt covenants.
- Backlog increased to approximately $75.3 million at December 31, 2016 from $53.0 million at December 31, 2015; substantially all orders are shipped within two to four weeks.
- Currency exposure remains significant. A hypothetical 10% currency-rate change would have affected the fair value of exposed instruments by approximately $4.7 million and pretax income by approximately $2.8 million.
- A Canadian lawsuit filed by AltaLink seeks an estimated $56 million from multiple defendants, including the company and Helix, relating to alleged defects in space dampers. The case is in its early stages, and the company believes the claims are without merit but cannot predict the outcome.
- The company had an unfunded pension obligation of $10.4 million, although it did not expect to contribute to the defined benefit plan in 2017.
- Approximately $88.5 million of undistributed foreign earnings were treated as permanently reinvested outside the United States; any future repatriation could increase the company’s tax liability.
- Management reported no goodwill or long-lived-asset impairment in 2016 and concluded that there was no substantial doubt about the company’s ability to continue as a going concern.
Most Important Facts for Investors to Verify
- Whether the improved gross and operating margins are sustainable after the 2016 favorable mix, cost savings and restructuring comparisons.
- Recovery or further deterioration in Asia-Pacific solar sales and the pace of North American transmission projects.
- The effect of foreign exchange movements on reported sales, earnings, cash and equity.
- The ultimate exposure from the $56 million AltaLink litigation and the adequacy of recorded reserves, if any.
- Debt maturities, covenant compliance and the effect of the 2019 maturity concentration on liquidity.
- Whether backlog converts into revenue at expected margins and within the disclosed shipping timeframe.
- The effect of future accounting standards, particularly revenue recognition, leases, inventory, stock compensation and restricted-cash presentation.