Preformed Line Products Company: FY2019 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. The filing covers the fiscal year ended December 31, 2019, with comparisons to 2018 and 2017. The company reports four geographic segments: PLP-USA, The Americas, EMEA and Asia-Pacific.
- Revenue mix in 2019: energy 67%, communications 22% and special industries 11%.
- International sales represented approximately 60% of consolidated revenue.
- Backlog increased to approximately $111.2 million at year-end 2019 from $92.9 million at year-end 2018.
- No customer accounted for more than 10% of consolidated revenue.
Financial performance and key metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $444.9 million | $420.9 million | +6% |
| Gross profit | $140.6 million | $132.2 million | +6% |
| Gross margin | 31.6% | 31.4% | +20 bps |
| Operating income | $32.6 million | $32.9 million | -1% |
| Operating margin | 7.3% | 7.8% | -50 bps |
| Net income attributable to shareholders | $23.3 million | $26.6 million | -12% |
| Net margin | 5.2% | 6.3% | -110 bps |
| Diluted EPS | $4.58 | $5.21 | -12% |
| Operating cash flow | $27.2 million | $23.0 million | +18% |
Revenue growth excluding unfavorable currency translation was approximately 9%. Regional growth excluding currency effects was strongest in EMEA at 20%, followed by The Americas at 12%, Asia-Pacific at 6% and PLP-USA at 5%. Currency translation reduced reported revenue by approximately $14.2 million and net income by approximately $0.3 million.
The effective tax rate increased to 25.8% from 18.4%, principally reducing net income despite higher sales and gross profit. Interest expense increased to $2.2 million from $1.3 million as debt increased to fund acquisitions and capital investments.
Fourth-quarter 2019 net sales were $113.6 million, gross profit was $36.2 million, net income attributable to shareholders was $5.6 million and diluted EPS was $1.09. Fourth-quarter figures are unaudited.
Liquidity, capital resources and debt
- Cash and cash equivalents were $38.9 million; cash, cash equivalents and restricted cash totaled $39.3 million at December 31, 2019.
- Current assets were $232.0 million and current liabilities were $81.1 million, producing a current ratio of 2.9 to 1.
- Total debt was $65.8 million, compared with $35.5 million at year-end 2018. Long-term debt, including current maturities, was $57.1 million.
- The company had $31.4 million of unused availability under its $65.0 million credit facility and was in compliance with all debt covenants.
- Capital expenditures were $29.5 million, compared with $9.5 million in 2018.
- Cash used for acquisitions was $18.9 million. Dividends paid were $4.2 million and share repurchases totaled $6.8 million.
- Declared dividends remained $0.80 per share for 2019. Management expected comparable near-term dividends but stated that future payments remain at the board’s discretion.
Management stated that operating cash flows, existing cash and borrowing capacity should be sufficient for debt repayments, capital expenditures, dividends and other needs for the foreseeable future. The filing also identifies $11.5 million of guarantees and $7.6 million of letters of credit outstanding at year-end.
Material changes versus the prior comparable period
- Sales increased primarily from higher energy and communications volumes, including transmission-related activity in North America and incremental revenue from acquisitions.
- Gross margin improved modestly, aided by product mix in PLP-USA and Asia-Pacific, but Americas margins declined because of mix and higher raw-material costs.
- Operating income was essentially flat because operating expenses increased 9%, including higher personnel, professional fees, doubtful-account provisions and acquisition-related costs.
- Net income declined because of higher taxes, higher interest expense and weaker results in PLP-USA, The Americas and EMEA; Asia-Pacific net income improved.
- The company acquired SubCon Electrical Fittings GmbH in February 2019 and 90% of MICOS Telcom s.r.o. in April 2019. Both acquisitions were included in EMEA.
- Goodwill increased to $27.8 million from $15.6 million, while total assets increased to $433.6 million from $358.8 million, primarily reflecting acquisitions and capital investment.
- The company adopted the new lease accounting standard, recognizing approximately $10.4 million of operating lease right-of-use assets and liabilities at January 1, 2019.
Guidance, outlook, commentary and risks
The filing does not provide formal quantitative revenue or earnings guidance. Management expressed a constructive qualitative outlook based on transmission-grid upgrades, communications-network expansion, broadband deployment, international growth and the company’s global manufacturing footprint. Management also stated that 2020 metal and plastics pricing was expected to remain stable, although the filing cautioned that the impact of COVID-19 on supply chains and operations could not yet be predicted and that certain China-sourced products and materials could be disrupted.
- Key risks include dependence on energy and telecommunications capital spending, customer financing availability, intense competition and rapid technological change.
- International operations expose the company to foreign-exchange volatility, tariffs, geopolitical conditions, regulatory changes, Brexit-related uncertainty and public-health events.
- Raw-material availability and pricing, labor disruptions, cybersecurity incidents, environmental regulation, litigation and intellectual-property claims could affect results.
- A Canadian lawsuit alleges defective spacer dampers and seeks approximately C$29.4 million in damages. The company believes the claims are without merit, but cannot predict the outcome or estimate a loss range; an adverse result could materially affect operating results.
- The defined-benefit pension plan was underfunded by $5.3 million at year-end. The company did not expect to contribute to the plan in 2020.
- Goodwill impairment testing produced no impairment, but valuations depend on projected growth, discount rates, margins and market multiples.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. However, management’s and the auditor’s assessments excluded the internal controls of SubCon and MICOS, which represented approximately 7% of total assets and 3% of revenue at the relevant reporting date and less than 1% of 2019 net income.
Most important facts for investors to verify
- Whether the elevated backlog converts into revenue and profit without further margin pressure.
- The sustainability of international and acquisition-driven growth after adjusting for currency effects.
- Debt reduction, 2021 credit-facility maturities and compliance with leverage and other covenants.
- The cash-flow impact of capital expenditures, acquisitions, dividends and share repurchases.
- The effect of COVID-19, tariffs, foreign exchange and supply-chain disruptions on 2020 operations.
- The status and potential financial exposure of the Canadian spacer-damper litigation.
- The integration and operating performance of SubCon and MICOS, including the remaining 10% MICOS acquisition obligation.
- The company’s ability to maintain its dividend and manage pension, lease, guarantee and other contractual obligations.