Preformed Line Products Company — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014, including unaudited fourth-quarter results. The company designs and manufactures hardware and systems for energy, telecommunications, cable, data communications, and solar networks. It operates 29 sales and manufacturing locations in 17 countries and reports four geographic segments: PLP-USA, The Americas, EMEA, and Asia-Pacific.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $388.2 million | $409.8 million | Down 5% |
| Gross profit | $120.9 million | $130.9 million | Down 8% |
| Gross margin | 31.2% | 31.9% | Down 70 bps |
| Operating income | $21.2 million | $31.1 million | Down 32% |
| Operating margin | 5.5% | 7.6% | Down 210 bps |
| Net income | $12.9 million | $20.6 million | Down 38% |
| Diluted EPS | $2.39 | $3.77 | Down 37% |
| Cash flow from operations | $25.3 million | $21.5 million | Up $3.7 million |
| Capital expenditures | $17.7 million | $21.0 million | Down $3.4 million |
| Cash and equivalents | $29.6 million | $24.3 million | Up $5.4 million |
| Total debt | $33.7 million | $14.4 million | Up $19.3 million |
| Shareholders’ equity | $242.9 million | $252.3 million | Down $9.4 million |
Fourth-quarter 2014 net sales were $96.2 million, gross profit was $29.8 million, income before taxes was $4.4 million, and net income was $2.5 million, compared with fourth-quarter 2013 net sales of $98.5 million and net income of $3.1 million.
Liquidity remained strong: the current ratio was 3.6-to-1, unused borrowing capacity was $14.9 million, and the company stated that operating cash flow, cash balances, and its credit facility should fund debt service, capital expenditures, dividends, and anticipated needs.
Material changes versus the prior comparable period
- Sales declined $21.6 million. Excluding currency translation, sales declined approximately 3%; unfavorable currency translation reduced reported sales by $9.3 million.
- Asia-Pacific sales fell 13% excluding currency effects, primarily because of lower transmission and substation volumes, project deferrals, slowing economies, and political uncertainty.
- PLP-USA sales declined 5% because of fewer U.S. transmission projects. The Americas grew 5% excluding currency, aided by the Helix acquisition, while EMEA grew 7% on higher telecommunications and distribution volumes.
- Profitability weakened as lower volume and mix reduced gross profit, while reported operating expenses were essentially flat. The 2014 gross profit included a $1.9 million cost-of-products-sold impact from the fair-value step-up of Helix inventory.
- The effective tax rate increased to 39.9% from 35.3%, primarily due to a $1.9 million valuation allowance against certain foreign deferred tax assets.
- Helix Uniformed Limited was acquired on January 31, 2014 for approximately $15.0 million net of cash acquired. The acquisition was considered immaterial for accounting purposes but increased debt and contributed approximately $13.2 million of sales in The Americas.
- Debt increased primarily to fund the Helix acquisition. The company’s $50 million revolving credit facility runs through January 2017 at LIBOR plus 1.125%; all debt covenants were satisfied at year-end.
- Backlog increased to approximately $61.4 million at year-end from $47.7 million in 2013.
- Cash dividends declared increased to $0.80 per share from $0.60 per share. The company repurchased approximately $2.2 million of common shares in 2014, including related-party purchases.
Guidance, outlook, risks, and unusual items
- Management expected the energy market to be relatively flat in 2015 because of continued global uncertainty. It cited potential growth from transmission-grid upgrades, international infrastructure needs, telecommunications deployment, and broadband expansion.
- Management identified sluggish global economic conditions, geopolitical instability, low oil prices, delayed infrastructure investment, and customer funding constraints as risks to construction activity and demand.
- International sales represented 61% of 2014 net sales, exposing results to foreign currency volatility, political and regulatory risks, tariffs, collection risk, and economic instability.
- Key operating risks include intense competition and pricing pressure, technological substitution such as wireless communications, raw-material availability and pricing, dependence on energy and telecommunications capital spending, and difficulties integrating acquisitions.
- The defined-benefit pension plan was underfunded by $12.5 million at year-end, compared with $5.0 million in 2013. The increase reflected a lower discount rate and updated mortality assumptions. Management did not expect to contribute to the plan in 2015.
- Outstanding guarantees were $2.4 million and letters of credit were $5.5 million. The company disclosed no pending litigation expected to have a material adverse effect.
- The company had approximately $131 million of undistributed foreign earnings treated as permanently reinvested; no related U.S. deferred tax liability was recorded.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective, although Helix was excluded from the 2014 internal-control assessment as a recently acquired business.
Most important facts for investors to verify
- Whether the increased backlog converts into revenue and margin improvement, particularly in the energy and Asia-Pacific markets.
- The sustainability of the 31.2% gross margin and 5.5% operating margin after the Helix inventory adjustment and continued project volatility.
- Debt repayment capacity, including the approximately $31.6 million of long-term debt maturing in 2017 and the company’s compliance with credit-facility covenants.
- Foreign-exchange exposure and the effect of further currency weakness on reported sales, earnings, and accumulated comprehensive loss.
- The realization of foreign deferred tax assets and the potential effect of additional valuation allowances.
- The underfunded pension obligation, sensitivity to discount rates, and future funding requirements.
- The economic performance and integration costs of Helix, including its contribution to The Americas segment.
- Related-party share repurchases, leases, and other transactions disclosed in Note M.