Polypore International (NYSE:PPO) – Fourth Quarter Earnings Review

Polypore (NYSE:PPO) reported adjusted EPS from continuing operations of $0.31 (down 14%), above the consensus estimate of $0.29. The $0.31 figure excludes $0.87 associated with the operations and gain on sale of the Microporous business, which was reported in discontinued operations. During the quarter, EPS were unfavorably affected by about $0.04-$0.05 due to a higher-than-expected tax rate.

Polypore reported consolidated revenue of $169 million (up 5% year-over-year), above the consensus estimate of $167 million. Revenue in the lithium and healthcare segments was likely above consensus. Revenue in the lead-acid and filtration/specialty businesses was likely about in line. Lead-acid segment revenue (on a continuing-operations basis) was about flat year-over-year. Revenue in the lithium segment was up 5%, to $36 million (above our estimate of $33 million and management’s preannouncement of a low- to mid-$30 million range). Management did not provide guidance.

Management went into more detail during Monday’s fourth-quarter earnings call regarding the deterioration of the relationship between Polypore and LG Chem. The following statement from CEO Bob Toth during the call summarizes the situation from Polypore’s perspective: “We worked for years to develop and qualify high-quality products which are proven and demonstrated in the marketplace and on vehicles and in the applications today. We also made major investments and built substantial capacity at their [LG Chem’s] specific request based on demand forecast they provided to us, along with promises of a long-term partnership. In reinforcing that, as I said, we have a signed memorandum of understanding, which was established with the intent to result in a long-term supply agreement. Their demands became one-sided, unacceptable—we believe [they] weren’t in the interest of our company, our shareholders. And while we were still engaged in good-faith discussions from our perspective during the third quarter, their demands became such that we simply had no agreed upon terms under which we’d do business.” At this point, according to Polypore management, Polypore stopped taking orders from LG Chem. LG Chem then informed Polypore that it would pursue alternative separator suppliers using ceramic coating. Polypore management believed this to be a direct infringement of its intellectual property, leaving the company no choice but to pursue legal action; it filed a lawsuit against LG Chem at the end of January.

In 2014, we forecast a 3% increase in revenue, to $656 million (previously $655 million), with adjusted EPS from continuing operations of $1.09 (previously $1.11). Our forecast includes 5% revenue growth in the lead-acid segment, a 4% decline in lithium, 6% growth in healthcare, and 4% growth in the specialty filtration segment.


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