# Preformed Line Products Co: Form 10-K for the period ended Dec 31, 2019

- Company: [Preformed Line Products Co](/companies/plpc.md) (CIK 80035)
- Form: 10-K
- Filed: 2020-03-06
- Accepted by EDGAR: Mar 6, 2020, 17:25 ET
- Period: 2019-12-31
- Accession: 0001564590-20-009196
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/80035/000156459020009196/plpc-10k_20191231.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/80035/000156459020009196/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-10-01 to 2019-12-31 | $113.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 12 months, 2019-01-01 to 2019-12-31 | $444.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 12 months, 2019-01-01 to 2019-12-31 | $304.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-10-01 to 2019-12-31 | $36.2m | us-gaap:GrossProfit |
| Gross profit | 12 months, 2019-01-01 to 2019-12-31 | $140.6m | us-gaap:GrossProfit |
| Research and development | 12 months, 2019-01-01 to 2019-12-31 | $3.0m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 12 months, 2019-01-01 to 2019-12-31 | $32.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 12 months, 2019-01-01 to 2019-12-31 | $2.2m | us-gaap:InterestExpense |
| Income tax | 12 months, 2019-01-01 to 2019-12-31 | $8.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-10-01 to 2019-12-31 | $5.6m | us-gaap:NetIncomeLoss |
| Net income | 12 months, 2019-01-01 to 2019-12-31 | $23.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-10-01 to 2019-12-31 | $1.09 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 12 months, 2019-01-01 to 2019-12-31 | $4.58 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-10-01 to 2019-12-31 | $1.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 12 months, 2019-01-01 to 2019-12-31 | $4.63 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 12 months, 2019-01-01 to 2019-12-31 | 5,087,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 12 months, 2019-01-01 to 2019-12-31 | $27.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 12 months, 2019-01-01 to 2019-12-31 | $29.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 12 months, 2019-01-01 to 2019-12-31 | $4.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 12 months, 2019-01-01 to 2019-12-31 | $2.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-12-31 | $38.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-12-31 | $232.0m | us-gaap:AssetsCurrent |
| Total assets | at 2019-12-31 | $433.6m | us-gaap:Assets |
| Current liabilities | at 2019-12-31 | $81.1m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2019-12-31 | $53.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2019-12-31 | $3.4m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2019-12-31 | $12.1m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2019-12-31 | $268.5m | us-gaap:StockholdersEquity |

## Business

As filed, 35,961 characters.

### Background

Preformed Line Products Company together with its subsidiaries (the “Company”) is an international designer and manufacturer of products and systems employed in the construction and maintenance of overhead and underground networks for the energy, telecommunication, cable operators, information (data communication) and other similar industries. The Company’s primary products support, protect, connect, terminate and secure cables and wires. The Company also provides solar hardware systems and mounting hardware for a variety of solar power applications. The Company’s goal is to continue to achieve profitable growth as a leader in the research, innovation, development, manufacture and marketing of technically advanced products and services related to energy, communications and cable systems and to take advantage of this leadership position to sell additional quality products in familiar markets.

The Company serves a worldwide market through strategically located domestic and international manufacturing facilities. Each of the Company’s domestic and international manufacturing facilities have obtained an International Organization of Standardization (“ISO”) 9001:2015 Certified Management System Certificate. The ISO 9001:2015 certified management system is a globally recognized certified quality standard for manufacturing and assists the Company in marketing its products throughout the world. The Company’s customers include public and private energy utilities and communication companies, cable operators, financial institutions, governmental agencies, contractors and subcontractors, distributors and value-added resellers. The Company is not dependent on a single customer or small group of customers. No single customer accounts for more than 10% of the Company's consolidated revenues.

The Company’s products include:

- Energy Products
- Communications Products
- Special Industries Products

*Energy Products* are used to support, protect, terminate and secure both power conductor and communication cables and to control cable dynamics (e.g., vibration). Formed wire products are based on the principle of forming a variety of stiff wire materials into a helical (spiral) shape. Advantages of using the Company’s helical formed wire products are that they are economical, dependable and easy to use. The Company introduced formed wire products to the power industry over 70 years ago and such products enjoy an almost universal acceptance in the Company’s markets. Related hardware products include hardware for supporting and protecting transmission conductors, spacers, spacer-dampers, stockbridge dampers, corona suppression devices and various compression fittings for dead-end applications. Energy products were approximately 67%, 66% and 69% of the Company’s revenues in 2019, 2018 and 2017, respectively.

*Communications Products*, including splice cases, are used to protect fixed line communication networks, such as copper cable or fiber optic cable, from moisture, environmental hazards and other potential contaminants. Communications products were approximately 22%, 21% and 22% of the Company’s revenues in 2019, 2018 and 2017, respectively.

*Special Industries Products* include data communication cabinets, hardware assemblies, pole line hardware, resale products, underground connectors, solar hardware systems, guy markers, tree guards, fiber optic cable markers, pedestal markers and urethane products. They are used by energy, renewable energy, communications, cable and special industries (i.e., metal building, tower and antenna industries, the agriculture and arborist industries, and marine systems industry) for various applications and are defined as products that complement the Company’s core line offerings. Special industries products were approximately 11%, 13% and 9% of the Company’s revenues in 2019, 2018 and 2017, respectively.

### Corporate History

The Company was incorporated in Ohio in 1947 to manufacture and sell helically shaped “armor rods” which are sets of stiff helically shaped wires applied on an electrical conductor at the point where they are suspended or held. Thomas F. Peterson, the Company’s founder, developed and patented a unique method to manufacture and apply these armor rods to protect electrical conductors on overhead power lines. Over the years, Mr. Peterson and the Company developed, tested, patented, manufactured and marketed a variety of helically shaped products for use by the electrical and telephone industries. Although all of Mr. Peterson’s patents have now expired, those patents served as the nucleus for licensing the Company’s formed wire products abroad.

The success of the Company’s formed wire products in the U.S. led to expansion abroad. The first international license agreement was established in the mid-1950s in Canada. In the late 1950s, the Company’s products were being sold through joint ventures and licensees in Canada, England, Germany, Spain and Australia. Additionally, the Company began export operations and promoted products into other selected offshore markets. The Company continued its expansion program, bought out most of the original licensees, and, by the mid-1990s, had complete ownership of operations in Australia, Brazil, Canada, Great Britain, South Africa and Spain. By 2002, it also had complete ownership of operations in Mexico and China. The Company’s international subsidiaries have the necessary infrastructure (i.e., manufacturing, engineering, marketing and general management) to support local business activities. Each is staffed with local personnel to ensure that the Company is well versed in local business and cultural practices, technical requirements and the intricacies of local client relationships.

In 1968, the Company expanded into the underground telecommunications field by its acquisition of the Smith Company located in California. The Smith Company had a patented line of buried closures and pressurized splice cases. These closures and splice cases protect copper cable openings from environmental damage and degradation. The Company continued to build on expertise acquired through the acquisition of the Smith Company and in 1995 introduced the highly successful COYOTE® Closure line of products. Since 1995, 14 domestic and three international patents have been granted to the Company on the COYOTE Closure. The earliest COYOTE Closure patent was filed April 1995 and expired in April 2015.

In 2007, the Company acquired 83.74% of Belos SA (Belos), located in Bielsko-Biala, Poland. Belos is a manufacturer and supplier of fittings for various voltage power networks. This acquisition complemented the Company’s existing line of energy products. From 2008 to 2010, the Company acquired the remaining outstanding shares of Belos.

In 2009, the Company acquired the Dulmison business from Tyco Electronics Group S.A. (Tyco Electronics), which included both the acquisition of equity of certain Tyco Electronics entities and the acquisition of assets from other Tyco Electronics entities. Dulmison was a leader in the supply and manufacturer of electrical transmission and distribution products. Dulmison designed, manufactured and marketed pole line hardware and vibration control products for the global electrical utility industry. Dulmison had operations in Australia, Thailand, Indonesia, Malaysia, Mexico and the United States. The Dulmison business has been fully integrated into the Company’s core businesses.

In 2010, the Company acquired Electropar Limited (Electropar), a New Zealand corporation. Electropar designs, manufactures and markets pole line and substation hardware for the global electrical utility industry. Electropar is based in New Zealand with a subsidiary operation in Australia. The acquisition has strengthened the Company’s position in the power distribution, transmission and substation hardware markets and expanded the Company’s presence in the Asia-Pacific region.

In 2014, the Company acquired Helix Uniformed Limited (Helix), located in Montreal, Quebec, Canada. Helix designs, manufacturers and markets helical products and spacer dampers for the electrical utility industry. The acquisition has diversified the Company’s business in Canada, extended its customers access in Canadian markets, expanded its manufacturing footprint and enhanced its engineering capabilities.

In 2019, the Company acquired SubCon Electrical Fittings GmbH (“SubCon”), headquartered in Dornbirn, Austria with manufacturing operations in Brno, Czech Republic. The acquisition of SubCon will strengthen the Company’s position in the global substation market and will expand the Company’s operational presence in Europe.

In 2019, the Company acquired 90% of MICOS Telcom s.r.o (“MICOS Telcom”) headquartered in Prostějov, Czech Republic with the remaining 10% to be acquired over the next three years. The acquisition of MICOS Telcom will strengthen the Company’s position in the global telecom market and also will expand its operational presence in Europe.

The Company’s World headquarters is located at 660 Beta Drive, Mayfield Village, Ohio, U.S.A. 44143.

### Business

The demand for the Company’s products comes primarily from new, maintenance and repair construction for the energy (including solar), telecommunication, data communication and special industries. The Company’s customers use many of the Company’s products, including formed wire products, to revitalize the aging outside plant infrastructure. Many of the Company’s products are used on a proactive basis by the Company’s customers to reduce and prevent lost revenue. A single malfunctioning line could cause the loss of thousands of dollars per hour for a power or communication customer. A malfunctioning fiber cable could also result in substantial revenue loss to the Company’s customers. Repair construction by the Company’s customers generally occurs in the case of emergencies or natural disasters, such as hurricanes, tornados, earthquakes, floods or ice storms. Under these circumstances, the Company quickly provides the repair products to customers.

The Company has adapted the formed wire products’ helical technology for use in a wide variety of fiber optic cable applications that have special requirements. The Company’s formed wire products are uniquely qualified for these applications due to the gentle gripping over a greater length of the fiber cable. This is an advantage over traditional pole line hardware clamps that compress the cable to the point of possible fatigue and optical signal deterioration.

The Company’s protective closures and splice cases are used to protect cable from moisture, environmental hazards and other potential contaminants. The Company’s splice cases are easily re-enterable closures that allow utility maintenance workers access to the cables located inside the closure to repair or add communications services. Over the years, the Company has made many significant improvements in splice cases that have greatly increased its versatility and application in the marketplace. The Company also designs and markets custom splice cases to satisfy specific customer requirements. This has allowed the Company to remain a strong partner with several primary customers and has earned the Company the reputation as a responsive and reliable supplier.

Fiber optic cable was first deployed in the outside plant environment in the early 1980s. Through fiber optic technologies, a much greater amount of both voice and data communication can be transmitted reliably. In addition, this technology solved the cable congestion problem that the large count copper cable was causing in underground, buried and aerial applications. The Company developed and adapted copper closures for use in the emerging fiber optic world. In the late 1980s, the Company developed a series of splice cases designed specifically for fiber optic application. In the mid-1990s, the Company developed its plastic COYOTE® Closure and has since expanded the product line to address Fiber-to-the-Premise (FTTP) applications. The COYOTE Closure is an example of the Company developing a new line of proprietary products to meet the changing needs of its customers.

The Company also designs and manufactures data communication cabinets and enclosures for data communication networks, offering a comprehensive line of fiber optic cross-connect systems. The product line enables reliable, high-speed transmission of data over customers’ local area networks.

In 2007, the Company expanded into the renewable energy sector. It provides a comprehensive line of mounting hardware for a variety of solar power applications including residential roof mounting, commercial roofing systems, utility scale ground-mount, top of pole mounting and customized solutions.

### Markets

The Company markets its products to the energy, telecommunication, cable, data communication and special industries. While rapid changes in technology have blurred the distinctions between telephone, cable, and data communication, the energy industry is clearly distinct. The Company’s role in the energy industry is to supply formed wire products and related hardware used with the electrical conductors, cables and wires that transfer power from the generating facility to the ultimate user of that power. Formed wire products are used to support, protect, terminate and secure both power conductor and communication cables and to control cable dynamics.

*Electric Utilities - Transmission*. The electric transmission grid is the interconnected network of high voltage aluminum conductors used to transport large blocks of electric power from generating facilities to distribution networks. Currently, there are three major power grids in the U.S.: the Eastern Interconnect, the Western Interconnect and the Texas Interconnect. Virtually all electrical energy utilities are connected with at least one other utility by one of these major grids. The Company believes that transmission grids are in need of upgrades throughout much of the U.S. With demand for power now exceeding supply in some areas, the need for the movement of bulk power from the energy-rich areas to the energy-deficient areas means that new transmission lines will likely be built and many existing lines will likely be refurbished. Connecting renewable energy sources to the grid should also continue to attract new investment to fund transmission infrastructure projects in the future. The Company believes that this may generate opportunities for the Company’s products in this market over at least the next several years. In addition, increased construction of international transmission grids is occurring in many regions of the world. However, consolidations in the markets that the Company services with increased global competition, as well as stagnant or declining economic conditions, limited government funding and lower energy prices, may also have an adverse impact on the Company’s sales.

*Electric Utilities - Distribution.* The distribution market includes those utilities that distribute power from a substation where voltage is reduced to levels appropriate for the consumer. Unlike the transmission market, distribution is still handled primarily by local electric utilities. These utilities are motivated to reduce cost in order to maintain and enhance their profitability. The Company believes that its growth in the distribution market will be achieved primarily as a result of incremental gains in market share driven by emphasizing the Company’s quality products and service over price. Internationally, particularly in the developing regions, there is increasing political pressure to extend the availability of electricity to additional populations. Through its global network of factories and sales offices, the Company is prepared to take advantage of this new growth in construction.

*Renewable Energy.* The renewable energy market includes residential consumers, commercial businesses, off-grid operators, and utility companies that have an interest in alternative energy sources. Environmental concerns along with federal, state and local utility incentives have fueled demand for renewable energy systems including solar, wind and biofuel. While low prices of traditional energy sources have slowed or stalled demand in some areas, the industry continues to grow as advancements in technology lead to greater efficiencies which drive down overall system costs. The Company currently provides hardware solutions and system design for solar power applications. The Company markets and sells these products and services to end-users, distributors, installers and integrators.

*Communication and Cable*. Major developments, including growing competition between the cable and communications industries and increasing overall demand for high-speed communication services, have led to a changing regulatory and competitive environment in many markets throughout the world. The deployment of new access networks and improvements to existing networks for advanced applications continues to gain momentum.

Cable operators, local communication operators and power utilities are building, rebuilding or upgrading signal delivery networks in developed countries. These networks are designed to deliver video and voice transmissions and provide Internet connectivity to individual residences and businesses. Operators deploy a variety of network technologies and architectures to carry broadband and narrowband signals. These architectures are constructed of electronic hardware connected via coaxial cables, copper wires or optical fibers. The Company manufactures closures that these industries use to securely connect and protect these vital networks.

As critical components of the outdoor infrastructure, closures provide protection against weather and vandalism, and permit technicians who maintain and manage the system ready access to the devices. Cable operators and local telephone network operators place great reliance on manufacturers of protective closures because any material damage to the signal delivery networks is likely to disrupt communication services. In addition to closures, the Company supplies the communication and cable industry with its formed wire products to hold, support, protect and terminate the copper wires and cables and the fiber optic cables used by that industry to transfer voice, video or data signals.

The industry has developed technological methods to increase the usage of copper-based products through high-speed digital subscriber lines (DSLs). The popularity of these services, the regulatory environment and the increasingly fierce competition between communications and cable operators has driven the move toward building out the “last mile” in fiber optic networks. FTTP technology supports the next wave in broadband innovation by carrying fiber optic technology into homes and businesses. The Company has been actively developing products that address this market.

*Data Communication.* The data communication market is driven by the continual demand for increased bandwidth. Growing Internet Service Providers (ISPs), construction in Wide Area Networks (WANs) and demand for products in the workplace are all key elements to the increased demand for the racking and cabinet products offered by the Company. The Company’s products are sold to a number of categories of customers including, (i) ISPs, (ii) large companies and organizations which have their own local area network for data communication, and (iii) distributors of structured cabling systems and components for use in the above markets.

*Special Industries.* The Company’s formed wire products are also used in other industries which require a method of securing or terminating cables, including the metal building, tower and antenna industries, the agriculture and arborist industries, and various applications within the marine systems industry. Products other than formed wire products are also marketed to other industries. For example, the Company’s urethane capabilities allow it to market products to the light rail industry. The Company continues to explore new and innovative uses of its manufacturing capabilities; however, these markets remain a small portion of overall consolidated sales.

### International Operations

The international operations of the Company are essentially the same as its domestic (PLP-USA) business. The Company manufactures similar types of products in its international plants as are sold domestically, sells to similar types of customers and faces similar types of competition (and in some cases, the same competitors). Sources of supply of raw materials are not significantly different internationally. See Note M in the Notes to Consolidated Financial Statements for information and financial data relating to the Company’s international operations that represent reportable segments.

While a number of the Company’s international plants are in developed countries, the Company believes it has strong market opportunities in developing countries where the need for the transmission and distribution of electrical power is significant, although the pace of this development may remain slow. In addition, as the need arises, the Company is prepared to acquire or establish new manufacturing facilities abroad.

### Sales and Marketing

Domestically and internationally, the Company markets its products through a direct sales force and manufacturing representatives. The direct sales force is employed by the Company and works with manufacturers’ representatives, as well as key direct accounts and distributors who also buy and resell the Company’s products. The manufacturer’s representatives are independent organizations that represent the Company as well as other complimentary product lines. These organizations are paid a commission based on the sales amount they generate.

### Research and Development

The Company is committed to providing technical leadership through scientific research and product development in order to continue to expand the Company’s position as a supplier to the communications and power industries. Research is conducted on a continuous basis using internal experience in conjunction with outside professional expertise to develop state-of-the-art materials for several of the Company’s products. These products capitalize on cost-efficiency while offering exacting mechanical performance that meets or exceeds industry standards. The Company’s research and development activities have resulted in numerous patents being issued to the Company (see “Patents and Trademarks” below).

Early in its history, the Company recognized the need to understand the performance of its products and the needs of its customers. To that end, the Company developed a 29,000 square foot Research and Engineering Center located at its corporate headquarters in Mayfield Village, Ohio. In 2013, the Company expanded its Research and Engineering Center by an additional 8,000 square feet. Using the Research and Engineering Center, engineers and technicians simulate a wide range of external conditions encountered by the Company’s products to ensure quality, durability and performance. The work performed in the Research and Engineering Center includes advanced studies and experimentation with various forms of vibration and environmental changes. This work has contributed significantly to the collective knowledge base of the industries the Company serves and is the subject matter of many papers and seminars presented to these industries, and has led to the expansion and support of 12 research labs located in its facilities around the world.

The Company believes that its Research and Engineering Center is one of the most sophisticated in the world in its specialized field. The Research and Engineering Center also has an advanced prototyping technology machine on-site to develop models of new designs where intricate part details are studied prior to the construction of expensive production tooling. Today, the Company’s reputation for vibration testing, tensile testing, fiber optic cable testing, environmental testing, field vibration monitoring and third-party contract testing is a competitive advantage. In addition to testing, the work performed at the Company’s Research and Development Center continues to fuel product development efforts. For example, the Company estimates that approximately 18.4% of 2019 revenues were attributed to products developed by the Company in the past five years. In addition, the Company’s position in the industry is further reinforced by its long-standing leadership role in many key international technical organizations which are charged with the responsibility of establishing industry-wide specifications and performance criteria, including IEEE (Institute of Electrical and Electronics Engineers), CIGRE (Counsiel Internationale des Grands Reseaux Electriques a Haute Tension), and IEC (International Electromechanical Commission). Research and development costs are expensed as incurred. Research and development costs for new products were $3.0 million in 2019, $2.4 million in 2018 and $2.1 million in 2017.

### Patents and Trademarks

The Company applies for patents in the U.S. and other countries, as appropriate, to protect its significant patentable developments. As of December 31, 2019, the Company had in force 44 U.S. patents and 109 international patents in 21 countries and had 19 pending U.S. patent applications and 48 pending international applications. While such domestic and international patents expire from time to time, the Company continues to apply for and obtain patent protection on a regular basis. Patents held by the Company in the aggregate are of material importance in the operation of the Company’s business. The Company, however, does not believe that any single patent, or group of related patents, is essential to the Company’s business as a whole or to any of its businesses. Additionally, the Company owns and uses a substantial body of proprietary information and numerous trademarks. The Company relies on nondisclosure agreements to protect trade secrets and other proprietary data and technology. As of December 31, 2019, the Company had obtained U.S. registration on 36 trademarks and one trademark application remained pending. International registrations amounted to 234 registrations in 35 countries, with two pending international registrations.

U.S. patents are issued for terms of 20 years beginning with the date of filing of the patent application. Patents issued by international countries generally expire 20 years after filing. U.S. and international patents are not renewable after expiration of their initial term. U.S. and international trademarks are generally perpetual, renewable in 10-year increments upon a showing of continued use. To the knowledge of management, the Company is not subject to any significant allegation or charges of infringement of intellectual property rights by any organization.

In the normal course of business, the Company occasionally makes and receives inquiries with regard to possible patent and trademark infringement. The extent of such inquiries from third parties has been limited generally to verbal remarks to Company representatives. The Company believes that it is unlikely that the outcome of these inquiries will have a material adverse effect on the Company’s financial position.

### Competition

All of the markets that the Company serves are highly competitive. In each market, the principal methods of competition are price, performance, and service. The Company believes, however, that several factors (described below) provide the Company with a competitive advantage.

- The Company has a strong and stable workforce. This consistent and continuous knowledge base has afforded the Company the ability to provide superior service to the Company’s customers and representatives.
- The Company’s Research and Engineering Center in Mayfield Village, Ohio and the engineering departments at the Company’s subsidiary operations around the world maintain a strong technical support function to develop unique solutions to customer problems.
- The Company is vertically integrated both in manufacturing and distribution and is continually upgrading equipment and processes.
- The Company is sensitive to the marketplace and provides an extra measure of service in cases of emergency, storm damage and other supply delivery situations. This high level of customer service and customer responsiveness is a hallmark of the Company.
- The Company’s 29 sales and manufacturing locations ensure close support and proximity to customers worldwide.

Domestically, there are several competitors for formed wire products. Although it has other competitors in many of the countries where it has plants, the Company has leveraged its expertise and is very strong in the global market. The Company believes that it is the world’s largest manufacturer of formed wire products for energy and communications markets. However, the Company’s formed wire products compete against other pole line hardware products manufactured by other companies.

The Company’s primary domestic competitor for pressurized copper closures is Corning. Based on its experience in the industry, the Company believes it maintains a strong market share position.

The fiber optic closure market is one of the most competitive product areas for the Company, with the Company competing against, among others, CommScope and Corning. There are a number of primary competitors and several smaller niche competitors that compete at all levels in the marketplace. The Company believes that it is one of four leading suppliers of fiber optic closures.

### Sources and Availability of Raw Materials

The principal raw materials used by the Company are galvanized wire, stainless steel, aluminum covered steel wire, aluminum rod, plastic resins, glass-filled plastic compounds, neoprene rubbers and aluminum castings. The Company also uses certain other materials such as fasteners, packaging materials and communications cable. The Company believes that it has adequate sources of supply for the raw materials used in its manufacturing processes and it regularly attempts to develop and maintain sources of supply in order to extend availability and encourage competitive pricing of these products.

Most plastic resins are purchased under contracts to stabilize costs and improve delivery performance and are available from a number of reliable suppliers. Wire and aluminum rods are purchased in standard stock diameters and coils under contracts from a number of reliable suppliers. Contracts have firm prices except for fluctuations of base metals and petroleum prices, which result in surcharges when global demand is greater than the available supply.

The Company also relies on certain other manufacturers to supply products that complement the Company’s product lines, such as ferrous castings, fiber optic cable and connectors and various metal racks. The Company believes there are multiple sources of supply for these products.

The Company relies on sole source manufacturers for certain raw materials used in production. The current state of economic uncertainty presents a risk that existing suppliers could go out of business. However, there are other potential sources available for these materials, and the Company could relocate the tooling and processes to other manufacturers if necessary.

Raw material costs were stable throughout 2019. The Company expects prices on metals and plastics to remain stable throughout 2020.

The Company cannot currently predict the impact of COVID-19 on its supply chain or global business operations in general, but does expect some disruption with respect to certain products and materials currently sourced from China.

### Backlog Orders

The Company’s backlog was approximately $111.2 million at the end of 2019 and $92.9 million at the end of 2018. All customer orders entered are firm at the time of entry. Most orders are shipped within a two to four-week period unless the customer requests an alternative date.

### Seasonality

The Company markets products that are used by utility maintenance and construction crews worldwide. The products are marketed through distributors and directly to end users, who maintain stock to ensure adequate supply for their customers or construction crews. As a result, the Company does not have a wide variation in sales from quarter to quarter.

### Environmental

The Company is subject to extensive and changing federal, state, and local environmental laws, including laws and regulations that (i) relate to air and water quality, (ii) impose limitations on the discharge of pollutants into the environment, (iii) establish standards for the treatment, storage and disposal of toxic and hazardous waste, and (iv) require proper storage, handling, packaging, labeling, and transporting of products and components classified as hazardous materials. Stringent fines and penalties may be imposed for noncompliance with these environmental laws. In addition, environmental laws could impose liability for costs associated with investigating and remediating contamination at the Company’s facilities or at third-party facilities at which the Company has arranged for the disposal treatment of hazardous materials.

The Company believes it is in compliance in all material respects, with all applicable environmental laws and the Company is not aware of any noncompliance or obligation to investigate or remediate contamination that could reasonably be expected to result in a material liability. The Company does not expect to make any material capital expenditures during 2020 for environmental control facilities. The environmental laws continue to be amended and revised to impose stricter obligations, and compliance with future additional environmental requirements could necessitate capital outlays. However, the Company does not believe that these expenditures will ultimately result in a material adverse effect on its financial position or results of operations. The Company cannot predict the precise effect such future requirements, if enacted, would have on the Company. The Company believes that such regulations would be enacted over time and would affect the industry as a whole.

### Employees

At December 31, 2019, the Company had 2,983 employees. Approximately 24% of the Company’s employees are located in the U.S.

### Available Information

The Company maintains an Internet site at http://www.preformed.com, on which the Company makes available, free of charge, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. The Company’s SEC reports can be accessed through the investor relations section of its Internet site. The information found on the Company’s Internet site is not part of this or any other report that is filed or furnished to the SEC.

The public may read and copy any materials the Company files with or furnishes to the SEC at the SEC’s Public Reference Room at 100 F. Street, NE., Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information filed with the SEC by electronic filers. The SEC’s Internet site is http://www.sec.gov. The Company also has a link from its Internet site to the SEC’s Internet site. This link can be found on the investor relations page of the Company’s Internet site.

## Risk factors

As filed, 18,300 characters.

***Due to the Company’s dependency on the energy and telecommunication industries, the Company is susceptible to negative trends relating to those industries that could adversely affect the Company’s operating results.***

The Company’s sales to the energy and telecommunication industries represent a substantial portion of the Company’s historical sales. The concentration of revenue in such industries is expected to continue into the foreseeable future. Demand for products to these industries depends primarily on capital spending by customers for constructing, rebuilding, maintaining or upgrading their systems. The amount of capital spending and, therefore, the Company’s sales and profitability are affected by a variety of factors, including general economic conditions, access by customers to financing, government regulation, demand for energy and cable services, energy prices and technological factors. As a result, some customers may significantly reduce or delay their spending or may not continue as going concerns, which could have a material adverse effect on the Company’s business, operating results and financial condition. In addition, the Company may incur exit-related costs and impairments of goodwill, definite and indefinite-lived intangible assets and property, fixtures and equipment as the Company makes corresponding changes to its business to reflect these changes and uncertainties in the Company’s industries and customer demand, and these costs and impairments could have a significant negative impact on the Company’s operating results for the period in which they are incurred. Consolidation presents an additional risk to the Company in that merged customers will rely on relationships with a source other than the Company. Consolidation may also increase the pressure on suppliers, such as the Company, to sell product at lower prices.

***The Company’s business will suffer if the Company fails to develop and successfully introduce new and enhanced products that meet the changing needs of the Company’s customers.***

The Company’s ability to anticipate changes in technology and industry standards and to successfully develop and introduce new products on a timely basis is a significant factor in the Company’s ability to grow and remain competitive. New product development often requires long-term forecasting of market trends, development and implementation of new designs and processes and a substantial capital commitment. The trend toward consolidation of the energy, telecommunication and data communication industries may require the Company to quickly adapt to rapidly changing market conditions and customer requirements. Any failure by the Company to anticipate or respond in a cost-effective and timely manner to technological developments or changes in industry standards or customer requirements, or any significant delays in product development or introduction or any failure of new products to be widely accepted by the Company’s customers, could have a material adverse effect on the Company’s business, operating results and financial condition as a result of reduced net sales.

***The intense competition in the Company’s markets, particularly telecommunication, may lead to a reduction in sales and earnings.***

The markets in which the Company operates are highly competitive. The level of intensity of competition may increase in the foreseeable future due to anticipated growth in the telecommunication and data communication industries. The Company’s competitors in the telecommunication and data communication markets are larger companies with significant influence over the distribution network. The Company may not be able to compete successfully against its competitors, many of which may have access to greater financial resources than the Company. In addition, the pace of technological development in the telecommunication market is rapid and these advances (i.e., wireless, fiber optic network infrastructure, etc.) may adversely affect the Company’s ability to compete in this market.

***Competitors’ introduction of products embodying new technologies or the emergence of new industry standards can render existing products or products under development obsolete or unmarketable and result in lost sales.***

The energy and telecommunication industries are characterized by rapid technological change. Satellite, wireless and other communication technologies currently being deployed may represent a threat to copper, coaxial and fiber optic-based systems by reducing the need for wire-line networks. Future advances or further development of these or other new technologies may have a material adverse effect on the Company’s business, operating results and financial condition as a result of lost sales.

***Price increases or decreased or delayed availability of raw materials could result in lower earnings.***

The Company’s cost of sales may be materially adversely affected by increases in the market prices of the raw materials used in the Company’s manufacturing processes. The Company may not be able to pass on price increases in raw materials to the Company’s customers through increases in product prices. As a result, the Company’s operating results could be adversely affected. In addition, any decrease or delay in the availability of these materials or interruptions generally in the global supply chain could slow production and delivery to the Company’s customers.

***The Company’s international operations subject the Company to additional business risks that may have a material adverse effect on the Company’s business, operating results and financial condition.***

International sales account for a substantial portion of the Company’s net sales (60%, 60% and 61% in 2019, 2018 and 2017, respectively) and the Company expects these sales could increase as a percentage of net sales in the future. Due to its international sales, the Company is subject to the risks of conducting business internationally, including unexpected changes in, or impositions of, legislative or regulatory requirements, which could materially adversely affect U.S. dollar sales or operating expenses, tariffs and other barriers and restrictions, potentially longer payment cycles, greater difficulty in accounts receivable collection, reduced or limited protection of intellectual property rights, potentially adverse taxes and the burdens of complying with a variety of international laws and communications standards. The Company is subject to foreign currency volatility which could materially impact the Company’s operating results, including the impact of hyper-inflationary conditions in certain economies, particularly where exchange controls limit or eliminate the Company’s ability to convert from local currency. The Company is also subject to general geopolitical risks, such as political and economic instability, social unrest, terrorism and changes in diplomatic and trade relationships as well as public health concerns (including viral outbreaks such as COVID-19), in connection with its international operations. Any such disruption could cause delays in the production and distribution of our products and the loss of sales and customers. Moreover, these types of events could negatively impact consumer spending or the economy in the impacted regions or depending upon the severity, globally. These risks of conducting business internationally may have a material adverse effect on the Company’s business, operating results and financial condition.

Additionally, uncertainty relating to the United Kingdom’s departure from the European Union (“Brexit”) could adversely impact the Company. The UK formally exited the European Union on January 31, 2020 and a transition period is in place until December 31, 2020 during which the UK will maintain access to the European Union single market and to the global trade deals negotiated by the European Union and remain subject to European Union law. The ongoing uncertainty regarding the transition could continue to or have a further adverse impact on global economic conditions, the stability of global financial markets and global market liquidity, including due to the widespread use, including under the Company’s credit facility, of LIBOR as a reference interest rate. Any of these factors could depress economic activity or lead to long-term volatility in the currency markets, which could adversely impact the Company’s business, financial condition and results of operations.

***The Company may not be able to successfully integrate businesses that it may acquire in the future or complete acquisitions on satisfactory terms, which could have a material adverse effect on the Company’s business, operating results and financial condition.***

A portion of the Company’s growth in sales and earnings has been generated from acquisitions. The Company expects to continue a strategy of identifying and acquiring businesses with complementary products. In connection with this growth strategy, the Company faces certain risks and uncertainties in addition to the risks faced in the Company’s day-to-day operations, including the risks pertaining to integrating acquired businesses, realizing the benefits of acquired technology and utilizing new personnel. In addition, the Company may incur debt to finance future acquisitions, and the Company may issue securities in connection with future acquisitions that may dilute the holdings of current and future shareholders. Covenant restrictions relating to additional indebtedness could restrict the Company’s ability to pay dividends, fund capital expenditures, consummate additional acquisitions and significantly increase the Company’s interest expense. Any failure to successfully complete acquisitions or to successfully integrate such strategic acquisitions could have a material adverse effect on the Company’s business, operating results and financial condition.

***The Company may have interruptions in or lose business due to the uncertainty of the global economy, specifically related to the lack of available funding for the Company’s customers.***

The demand for the Company’s products is significantly affected by the amount of discretionary business and consumer spending, each of which is impacted by the continued uncertainty of the global economy. The Company’s operations could be adversely affected by global economic conditions such as recession, political or social unrest, economic instability, terrorism and changes in diplomatic and trade relationships, public health concerns or otherwise. The liquidity and financial position of the Company’s customers could also impact their ability to pay in full and/or on a timely basis. This lack of funding could have a negative impact on the Company’s operating results and financial condition.

### The Company may be adversely impacted by laws, regulation, and litigation.

The Company is subject to various laws and regulation. For example, extensive environmental regulations related to air and water quality, the discharge of pollutants, the handling of toxic waste and the handling and transport of products and components classified as hazardous impact its daily operations. The introduction of new laws or regulations, or changes in existing laws or regulations, could increase the costs of doing business. At any given time, the Company may also be subject to litigation or claims related to its products, suppliers, customers, employees, shareholders, distributors, sales representatives, intellectual property or acquisitions, among other things, the disposition of which may have an adverse effect upon the Company’s business, financial condition, or results of operation. The outcome of litigation is difficult to assess or quantify. Lawsuits can result in the payment of substantial damages by defendants. If the Company is required to pay substantial damages and expenses as a result of these or other types of lawsuits, the Company’s business and results of operations would be adversely affected. Regardless of whether any claims against the Company are valid or whether it is liable, claims may be expensive to defend, may cause reputational harm (particularly where any claims relate to significant harm to persons and property) and may divert time and money away from the Company’s operations. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of the Company’s insurance coverage for any claims could adversely affect the Company’s business and operating results.

***The Company may not be able to successfully manage its intellectual property and may be subject to infringement claims.***

The Company relies on a combination of contractual rights and patent, trademark, copyright and trade secret laws to establish and protect its proprietary technology. Third parties may challenge, invalidate, circumvent, infringe or misappropriate the Company’s intellectual property, or such intellectual property may not be sufficient to permit the Company to take advantage of current market trends or otherwise to provide competitive advantages, which could result in costly redesign efforts, discontinuance of certain product offerings or other competitive harm. Others, including its competitors may independently develop similar technology, duplicate or design around the Company’s intellectual property, and in such cases, it could not assert its intellectual property rights against such parties. The Company may also be subject to costly litigation in the event its technology infringes upon or otherwise violate a third party’s proprietary rights. Any claim from third parties may result in a limitation on its ability to use the intellectual property subject to these claims. The Company may be forced to litigate to enforce or determine the scope and enforceability of its intellectual property rights, trade secrets and know-how, which is expensive, could cause a diversion of resources and may not prove successful, especially in countries where such rights are more difficult to enforce. The loss of intellectual property protection or the inability to obtain third party intellectual property could harm its business and ability to compete.

***Tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes could impact the Company’s operating results and financial condition.***

The Company is subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating the provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. The Company’s effective tax rates could be affected by numerous factors, including but not limited to, intercompany transactions, the relative amount of its foreign earnings, including earnings being lower than anticipated in jurisdictions where the Company has lower statutory rates and higher than anticipated in jurisdictions where the Company has higher statutory rates, losses incurred in jurisdictions for which the Company is not able to realize the related tax benefit, changes in foreign currency exchange rates, changes in its deferred tax assets and liabilities and any related valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations. In addition, many countries are actively pursuing changes to their tax laws applicable to corporate multinationals, such as the U.S. tax reform legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”). Finally, foreign governments may enact tax laws in response to the Tax Act that could result in further changes to global taxation and materially affect the Company’s financial position and results of operations.

***The Company employs information technology systems to support its business, and any material breach, interruption or failure may adversely impact the Company’s business.***

The Company employs information technology systems to support its business. Security breaches and other disruptions to the Company’s information technology infrastructure could interfere with the Company’s operations, and compromise information belonging to the Company and its customers, suppliers and employees, exposing the Company to liability which could adversely impact the Company’s business and reputation. In the ordinary course of business, the Company relies on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. Additionally, the Company collects and stores certain data, including proprietary business information, and may have access to confidential or personal information in certain of its businesses that is subject to privacy and security laws, regulations and customer-imposed controls. Despite the Company’s cybersecurity measures and oversight of such matters by the Board of Directors, which are continuously reviewed and upgraded, the Company’s information technology networks and infrastructure and protected data may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, service providers including cloud services, natural disasters or other catastrophic events. It is possible for such vulnerabilities to remain undetected for an extended period, up to and including several years. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to the Company’s reputation, which could adversely affect the Company’s business.

## Properties

As filed, 1,489 characters.

The Company currently owns or leases 29 facilities, which together contain approximately 2.4 million square feet of manufacturing, warehouse, research and development, sales and office space worldwide. Most of the Company’s international facilities contain space for offices, research and engineering (R&E), warehousing and manufacturing with manufacturing using a majority of the space. The following table provides information regarding the Company’s principal facilities:

| Segment | Location | Number of Facilities Manufacturing | Warehouse | R&E | Office | Total Approximate Square Feet Owned | Leased |
| --- | --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | United States | 2 | 2 | 1 | 3 | 704,900 |  |
| Americas | Brazil | 1 | 1 | 1 | 1 | 167,600 |  |
|  | Argentina | 1 | 1 |  | 1 |  | 26,400 |
|  | Canada | 2 | 2 | 1 | 2 | 124,400 |  |
|  | Mexico | 1 | 1 |  | 2 | 113,000 | 1,100 |
| Asia-Pac | Australia | 1 | 1 | 1 | 4 | 122,900 | 79,200 |
|  | China | 1 | 1 | 1 | 1 | 132,100 |  |
|  | Indonesia | 2 | 1 |  | 2 | 197,900 |  |
|  | Malaysia | 1 | 1 |  |  |  | 18,600 |
|  | Thailand | 1 | 3 |  | 1 | 80,000 | 49,500 |
|  | New Zealand | 1 | 2 | 1 | 2 | 34,200 | 6,200 |
| EMEA | Great Britain | 1 | 1 | 1 | 1 | 90,400 |  |
|  | Austria | 1 |  |  | 1 |  | 14,100 |
|  | Czech Republic | 2 | 1 | 1 | 1 |  | 66,700 |
|  | South Africa | 1 | 1 | 1 | 1 | 68,800 |  |
|  | Spain | 1 | 1 | 1 | 1 | 63,300 | 10,800 |
|  | Poland | 1 | 1 | 1 | 1 | 175,000 |  |

14

## Legal proceedings

As filed, 2,704 characters.

In the course of business, the Company is subject to a variety of claims and lawsuits, including, but not limited to, litigation relating to employment, workers’ compensation, products liability, environmental and intellectual property. The ultimate outcomes of these matters are not predictable with certainty. The Company has liability insurance to cover many of these claims.

The Company and its subsidiaries, Helix Uniformed Ltd. (“Helix”) and Preformed Line Products (Canada) Limited (“PLPC Canada”), were each named, jointly and severally, with each of SNC-Lavalin ATP, Inc. (“SNC ATP”), HD Supply Canada Inc., by its trade names HD Supply Power Solutions and HD Supply Utilities (“HD Supply”), and Anixter Power Solutions Canada Inc. (the corporate successor to HD Supply), “Anixter” and, together with the Company, PLPC Canada, Helix, SNC ATP and HD Supply, the (“Defendants”) in a complaint filed by Altalink, L.P. (the “Plaintiff”) in the Court of Queen’s Bench of Alberta in Alberta, Canada in November 2016 (the “Complaint”).

The Complaint states that Plaintiff engaged SNC ATP to design, engineer, procure and construct numerous power distribution and transmission facilities in Alberta (the “Projects”) and that through SNC ATP and HD Supply (now Anixter), spacer dampers manufactured by Helix were procured and installed in the Projects. The Complaint alleges that the spacer dampers have and may continue to become loose, open and detach from the conductors, resulting in damage and potential injury and a failure to perform the intended function of providing spacing and damping to the Project. The Plaintiffs were initially seeking an estimated $56.0 million Canadian dollars in damages jointly and severally from the Defendants, representing the costs of monitoring and replacing the spacer dampers and remediating property damage, due to alleged defects in the design and construction of, and supply of materials for, the Projects by SNC ATP and HD Supply/Anixter and in the design of the spacer dampers by Helix. The Plaintiffs reduced their demand for damages to $29.4 million Canadian dollars on June 1, 2018.

The Company believes the claims against it are without merit and intends to vigorously defend against such claims. We are unable to predict the outcome of this case and cannot reasonably estimate a potential range of loss. However, if it is determined adverse to the Company, it could have a material effect on the Company’s operating results.

The Company is not a party to any other pending legal proceedings that the Company believes would, individually or in the aggregate, have a material adverse effect on its financial condition, operating results or cash flow.

## Management's discussion and analysis

As filed, 40,398 characters.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the readers of our financial statements better understand our results of operations, financial condition and present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and related notes included elsewhere in this report.

The MD&A is organized as follows:

- Overview
- Recent Developments
- Market Overview
- Preface
- Results of Operations
- Working Capital, Liquidity and Capital Resources
- Critical Accounting Policies and Estimates
- Recently Adopted Accounting Pronouncements
- New Accounting Standards to be Adopted

OVERVIEW

Preformed Line Products Company (the “Company”, “PLPC”, “we”, “us”, or “our”) was incorporated in Ohio in 1947. We are an international designer and manufacturer of products and systems employed in the construction and maintenance of overhead and underground networks for the energy, telecommunication, cable operators, information (data communication), and other similar industries. Our primary products support, protect, connect, terminate, and secure cables and wires. We also provide solar hardware systems, mounting hardware for a variety of solar power applications, and fiber optic and copper splice closures. PLPC is respected around the world for quality, dependability and market-leading customer service. Our goal is to continue to achieve profitable growth as a leader in the research, innovation, development, manufacture, and marketing of technically advanced products and services related to energy, communications and cable systems and to take advantage of this leadership position to sell additional quality products in familiar markets. We have 29 sales and manufacturing operations in 20 different countries.

We report our segments in four geographic regions: PLP-USA (including corporate), The Americas (includes operations in North and South America without PLP-USA), EMEA (Europe, Middle East & Africa) and Asia-Pacific in accordance with accounting standards codified in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 280, “Segment Reporting”. Each segment distributes a full range of our primary products. Our PLP-USA segment is comprised of our U.S. operations manufacturing our traditional products primarily supporting our domestic energy, telecommunications and solar products. Our other three segments, The Americas, EMEA and Asia-Pacific, support our energy, telecommunications, data communication and solar products in each respective geographical region.

The segment managers responsible for each region report directly to the Company’s Chief Executive Officer, who is the chief operating decision maker, and are accountable for the financial results and performance of their entire segment for which they are responsible. The business components within each segment are managed to maximize the results of the entire operating segment and the Company rather than the results of any individual business component of the segment.

We evaluate segment performance and allocate resources based on several factors primarily based on sales and net income.

RECENT DEVELOPMENTS

On February 28, 2019, the Company acquired SubCon, headquartered in Dornbirn, Austria with manufacturing operations in Brno, Czech Republic. The acquisition of SubCon will strengthen the Company’s position in the global substation market and will expand its operational presence in Europe.

On April 1, 2019, the Company acquired 90% of MICOS Telcom, headquartered in Prostějov, Czech Republic. The acquisition of MICOS Telcom will strengthen the Company’s position in the global telecom market and also will expand its operational presence in Europe.

See Note O in the notes to Consolidated Financial Statements for more information regarding the aforementioned acquisitions.

MARKET OVERVIEW

Our business continues to be highly concentrated in the energy and communications markets. During the past several years, industry consolidation continued as distributor and service provider integrations occurred in our major markets. The fluctuation of foreign currencies coupled with the varying degrees of recovery throughout the global economy has led to a challenging environment. In addition, low oil prices, increasing commodity prices and changes in governmental leadership in certain markets have affected construction projects worldwide and there has been a historical lack of commitment by developed countries to upgrade and strengthen their electrical grids and communication networks, despite the growing need. While these factors are likely to continue to provide inherent uncertainty going forward, the Company has increased its sales over the past few years despite the global economic instability.

In 2019, sales in the energy market continued to increase due to the number and scale of transmission projects in North America. We believe that our leadership position in the market and ability to deliver reliable products quickly will enable us to take advantage of prospects for continued growth as transmission grids are enhanced and extended. As communication networks continue to be upgraded and expanded, our product offering positions us well to participate in the expansion.

Our international business is more concentrated in the energy and communications markets, which is where we experienced our most significant top line growth in 2019. Historically, our international sales were primarily related to the medium voltage distribution segment of the energy market but have grown through acquisition and new product development to include a significant contribution from the transmission and telecommunications markets. We believe that we are well positioned to supply the needs of the world’s diverse energy market requirements as a result of our strategically located operations and array of product designs and technologies.

As economic conditions evolve, we believe our efforts internationally will lead to growth in our communications business from opportunities where deployment of fixed line and wireless telecommunications services and broadband penetration rates remain low as a percentage of the total population.

PREFACE

Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP). Our discussions of the financial results include non-GAAP measures (e.g., foreign currency impact) to provide additional information concerning our financial results and provide information that we believe is useful to the readers of our financial statements in the assessment of our performance and operating trends.

Our financial statements are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. As foreign currencies weaken against the U.S. dollar, our sales and costs decrease as the foreign currency-denominated financial statements translate into fewer U.S. dollars. In total, foreign currencies weakened against the U.S. dollar in both 2019 and 2018. The fluctuations of foreign currencies during the years ended December 31, 2019 and 2018 had an unfavorable impact on net sales of $14.2 million and $5.7 million, respectively. On a reportable segment basis, the unfavorable impact of foreign currency translation on net sales and net income for the years ended December 31, 2019 and 2018, respectively, was as follows:

| (Thousands of dollars) | Foreign Currency Translation Impact Net Sales 2019 | 2018 | Net Income (Loss) 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| The Americas | $(6,752) | $(8,173) | $(121) | $(311) |
| EMEA | (4,323) | 2,443 | (233) | 157 |
| Asia-Pacific | (3,092) | 75 | 11 | (22) |
| Total | $(14,167) | $(5,655) | $(343) | $(176) |

20

The effect of currency translation had an unfavorable impact on net income in the years ended December 31, 2019 and 2018 of $.3 million and $.2 million, respectively. There were $.4 million in losses on foreign currency translation on operating income for the year ended December 31, 2019. There were transaction losses of $.2 million and $1.5 million in the years ended December 31, 2019 and 2018, respectively, as summarized in the following table:

| (Thousands of dollars) | Foreign Currency Translation Impact Year Ended December 31 2019 | 2018 |
| --- | ---: | ---: |
| Operating income | $32,627 | $32,934 |
| Translation loss | 432 | 0 |
| Transaction loss | 211 | 1,528 |
| Operating income excluding currency impact | $33,270 | $34,462 |

Despite the continued changes in the current global economy, we believe our business fundamentals and our financial position are sound and strategically well-positioned. We remain focused on assessing our global market opportunities and overall manufacturing capacity in conjunction with the requirements of local manufacturing in the markets that we serve. If necessary, we will utilize our global manufacturing network to manage costs, while driving sales and delivering value to our customers. We have continued to invest in the business to expand into new markets for us to improve efficiency, develop new products, increase our capacity and become an even stronger supplier to our current and new customers. We currently have a bank debt to equity ratio of 24.5% and can borrow needed funds at a competitive interest rate under our credit facility. A consolidated increase in debt of $30.2 million as of December 31, 2019 in order to fund two acquisitions, acquire certain manufacturing facilities and acquire properties for plant relocations during 2019 drove the increase in our bank debt to equity ratio from 14.2% at December 31, 2018. See Note E in the Notes to Consolidated Financial Statements for more information related to our debt position.

The following table sets forth a summary of the Company’s consolidated income statements and the percentage of net sales for the years ended December 31, 2019 and 2018. The Company’s past operating results are not necessarily indicative of future operating results.

| (Thousands of dollars) | Year Ended December 31 2019 |  | 2018 |  | Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $444,861 | 100.0% | $420,878 | 100.0% | $23,983 |
| Cost of products sold | 304,266 | 68.4 | 288,647 | 68.6 | 15,619 |
| **GROSS PROFIT** | 140,595 | 31.6 | 132,231 | 31.4 | 8,364 |
| Costs and expenses | 107,968 | 24.3 | 99,297 | 23.6 | 8,671 |
| **OPERATING INCOME** | 32,627 | 7.3 | 32,934 | 7.8 | (307) |
| Other expense, net | (1,169) | (0.3) | (346) | (0.1) | (823) |
| **INCOME BEFORE INCOME TAXES** | 31,458 | 7.1 | 32,588 | 7.7 | (1,130) |
| Income taxes | 8,122 | 1.8 | 6,007 | 1.4 | 2,115 |
| **NET INCOME** | 23,336 | 5.2 | 26,581 | 6.3 | (3,245) |
| Less: Net income attributable to noncontrolling interests | (33) | (0.0) | 0 | 0.0 | (33) |
| **NET INCOME ATTRIBUTABLE TO PREFORMED LINE PRODUCTS COMPANY SHAREHOLDERS** | $23,303 | 5.2% | $26,581 | 6.3% | $(3,278) |

21

2019 RESULTS OF OPERATIONS COMPARED TO 2018

*Net sales.* In 2019, net sales were $444.9 million, an increase of $24.0 million, or 6%, compared to 2018. Excluding the unfavorable effect of currency translation, net sales increased 9% as summarized in the following table:

| (Thousands of dollars) Net sales | Year Ended December 31 2019 | 2018 | Change | Change Due to Currency Translation | Change Excluding Currency% Translation | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| PLP-USA | $178,301 | $169,040 | $9,261 | $0 | $9,261 | 5% |
| The Americas | 68,293 | 66,868 | 1,425 | (6,752) | 8,177 | 12 |
| EMEA | 79,158 | 69,773 | 9,385 | (4,323) | 13,708 | 20 |
| Asia-Pacific | 119,109 | 115,197 | 3,912 | (3,092) | 7,004 | 6 |
| Consolidated | $444,861 | $420,878 | $23,983 | $(14,167) | $38,150 | 9% |

The increase in PLP-USA net sales of $9.3 million, or 5%, was primarily due to a volume increase in energy product sales. International net sales for the year ended December 31, 2019 were unfavorably affected by $14.2 million when local currencies were converted to U.S. dollars. The following discussion of changes in net sales excludes the effect of currency translation. The Americas net sales of $68.3 million increased $8.2 million, or 12%, primarily due to higher volume in energy and communication product sales. EMEA net sales of $79.2 million increased $13.7 million, or 20%, primarily due to volume increases in energy products in the region as well as incremental sales growth from the newly acquired businesses. The Asia-Pacific net sales of $119.1 million increased $7.0 million, or 6%, compared to 2018. The increase in net sales is primarily due to a combined sales volume increase in energy, communication and special industries products.

*Gross Profit.* Gross profit of $140.6 million for 2019 increased $8.4 million, or 6%, compared to 2018. Excluding the unfavorable effect of currency translation, gross profit increased $13.1 million, or 10%, as summarized in the following table:

| (Thousands of dollars) Gross profit | Year Ended December 31 2019 | 2018 | Change | Change Due to Currency Translation | Change Excluding Currency% Translation | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| PLP-USA | $63,630 | $59,012 | $4,618 | $0 | $4,618 | 8% |
| The Americas | 22,912 | 25,570 | (2,658) | (2,573) | (85) | 0 |
| EMEA | 23,435 | 19,747 | 3,688 | (1,269) | 4,957 | 25 |
| Asia-Pacific | 30,618 | 27,902 | 2,716 | (864) | 3,580 | 13 |
| Consolidated | $140,595 | $132,231 | $8,364 | $(4,706) | $13,070 | 10% |

PLP-USA gross profit of $63.6 million increased by $4.6 million compared to 2018 mostly due to an increase in sales volume and a shift in mix toward higher margin products. International gross profit for the year ended December 31, 2019 was unfavorably impacted by $4.7 million when local currencies were translated to U.S. dollars. The following discussion of gross profit changes excludes the effects of currency translation. Despite the increase in sales, the Americas gross profit decreased $.1 million, which was primarily the result of a year-over-year product margin decline in the region due to sales mix and increases in raw material costs. EMEA gross profit increased $5.0 million due to the $13.7 million increase in sales in the region, which includes the incremental growth from newly acquired businesses. Asia-Pacific’s gross profit increased $3.6 million as sales mix shifted to higher margin products alongside an increase in sales of $7.0 million.

*Costs and expenses.* Costs and expenses of $108.0 million for the year ended December 31, 2019 increased $8.7 million, or 9%, compared to 2018. Excluding the favorable effect of currency translation, costs and expenses increased $12.9 million, or 13%, as summarized in the following table:

| (Thousands of dollars) Costs and expenses | Year Ended December 31 2019 | 2018 | Change | Change Due to Currency Translation | Change Excluding Currency% Translation | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| PLP-USA | $51,216 | $47,866 | $3,350 | $0 | $3,350 | 7% |
| The Americas | 13,807 | 14,053 | (246) | (2,425) | 2,179 | 16 |
| EMEA | 20,058 | 15,198 | 4,860 | (1,015) | 5,875 | 39 |
| Asia-Pacific | 22,887 | 22,180 | 707 | (833) | 1,540 | 7 |
| Consolidated | $107,968 | $99,297 | $8,671 | $(4,273) | $12,944 | 13% |

PLP-USA costs and expenses of $51.2 million increased $3.4 million, or 7%. PLP-USA’s year-over-year increase was attributable to higher personnel related expenses, including benefits, of $1.4 million, increased professional fees of $1.1 million, higher allowance for doubtful accounts of $.6 million, an increase in travel and entertainment expenses of $.3 million combined with a net increase in miscellaneous expenses of $.2 million The increases were offset by a $.2 million incremental gain in net foreign currency transaction exchange effect. Foreign currency exchange losses were primarily related to translating into U.S. dollars its foreign currency denominated loans, trade receivables and royalty receivables from its foreign subsidiaries at the December 2019 year-end exchange rates. International costs and expenses for the year ended December 31, 2019 were favorably impacted by $4.3 million when local currencies were translated to U.S. dollars. The following discussions of costs and expenses exclude the effect of currency translation. The Americas costs and expenses increase of $2.2 million was primarily due to higher personnel related costs of $.4 million, higher professional fee expenses of $.2 million, higher facility and maintenance expenses of $.2 million and a combined net loss on foreign currency transactional exchange and loss on sale of assets of $.5 million, along with higher combined travel and miscellaneous expenses of $.9 million, which includes higher expenses related to bank guarantees associated with large projects in the region. EMEA costs and expenses of $20.1 million increased $5.9 million mainly due to incremental costs incurred with our newly acquired businesses. Asia-Pacific costs and expenses of $22.9 million increased $1.5 million primarily due to higher personnel related expenses of $.2 million, increased professional fees of $.2 million, a higher allowance for doubtful accounts of $.2 million, increased commissions of $.2 million and a combined increase in travel, plant relocation and maintenance and miscellaneous expenses of $.7 million.

*Other income (expense).* Other expense of $1.2 million for the year ended December 31, 2019 increased $.8 million when compared to the twelve months ended December 31, 2018 mainly due to higher interest expense.

*Income taxes.* Income taxes for the years ended December 31, 2019 and 2018 were $8.1 million and $6.0 million, respectively, based on pre-tax income of $31.5 million and $32.6 million, respectively. The effective tax rate for the years ended December 31, 2019 and 2018 was 25.8% and 18.4%, respectively, compared to the U.S. federal statutory rate of 21%. Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions, which differ from the U.S. federal statutory income tax rate, and the relative amount of income earned in those jurisdictions where such earnings are permanently reinvested. It is also affected by discrete items that may occur in any given period but are not consistent from year to year. The following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 21.0%:

2019

1\. A $.9 million, or 3%, net increase resulting from higher U.S. permanent items primarily related to limitations on the deductibility of executive compensation.

2\. A $.4 million, or 1.2%, net decrease resulting from losses in certain jurisdictions where no tax benefit was previously recognized.

3\. A $.9 million, or 3%, net increase resulting from earnings in jurisdictions with higher tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested.

2018

1\. A $1.2 million, or 3.6%, net decrease resulting primarily from a final measurement of the provisional amount of the Deemed Repatriation Transition Tax and other U.S. permanent items and state and local income taxes.

2\. A $.7 million, or 2.1%, net decrease resulting from a net increase of the prior year provisional adjustment of our deferred taxes due to the result of U.S. federal statutory rate decrease included in the Tax Act.

3\. A $1.1 million, or 3.1%, net increase resulting from earnings in jurisdictions with higher tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested.

*Net income.* As a result of the preceding items, net income for the year ended December 31, 2019 was $23.3 million, compared to $26.6 million for 2018. Excluding the effect of currency translation, net income decreased $2.9 million as summarized in the following table:

| (Thousands of dollars) Net income | Year Ended December 31 2019 | 2018 | Change | Change Due to Currency Translation | Change Excluding Currency% Translation | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| PLP-USA | $8,054 | $9,900 | $(1,846) | $0 | $(1,846) | (19)% |
| The Americas | 6,657 | 8,479 | (1,822) | (121) | (1,701) | (20) |
| EMEA | 2,935 | 3,527 | (592) | (233) | (359) | (10) |
| Asia-Pacific | 5,657 | 4,675 | 982 | 11 | 971 | 21 |
| Consolidated | $23,303 | $26,581 | $(3,278) | $(343) | $(2,935) | (11)% |

PLP-USA’s net income of $8.1 million decreased $1.8 million year over year, mainly due to a year-over-year increase in income tax expense of $3.3 million resulting from favorable prior year adjustments related to the Tax Act, partially offset by a $1.0 million increase in operating income. International net income for the year ended December 31, 2019 was unfavorably affected by approximately $.3 million when local currencies were converted to U.S. dollars. The following discussion of net income excludes the effect of currency translation. The Americas net income of $6.7 million decreased $1.7 million mainly as a result of a $1.9 million decrease in operating income, slightly offset by a $.2 million decrease in income tax expense. EMEA net income decreased $.4 million as a result of a $.3 million decrease in operating income combined with a year-over-year increase in income taxes of $.1 million. Asia-Pacific net income improved $1.0 million mainly as a result of a $1.6 million increase in operating income offset by an increase in income tax expense for the region of $.6 million.

WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES

#### Management Assessment of Liquidity

We measure liquidity on the basis of our ability to meet short-term and long-term operating needs, fund additional investments, including acquisitions, and make dividend payments to shareholders. Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, cash dividends, business acquisitions and access to bank lines of credit.

Our investments include expenditures required for equipment and facilities as well as expenditures in support of our strategic initiatives. In 2019, we used cash of $29.5 million for capital expenditures. We ended 2019 with $39.3 million of cash, cash equivalents and restricted cash (“Cash”). Our Cash is held in various locations throughout the world. At December 31, 2019, the majority of our cash is held outside the U.S.

We expect the majority of accumulated non-U.S. cash balances will remain outside of the U.S. and that we will meet U.S. liquidity needs through future cash flows, use of U.S. cash balances, external borrowings, or some combination of these sources.

We complete comprehensive reviews of our significant customers and their creditworthiness by analyzing financial statements for customers where we have identified a measure of increased risk. We closely monitor payments and developments that may signal possible customer credit issues. We currently have not identified any potential material impact on our liquidity from customer credit issues.

Our financial position remains strong and our current ratio at December 31, 2019 and 2018 was 2.9 to 1 and 3.1 to 1, respectively. Total debt at December 31, 2019 was $65.8 million. At December 31, 2019, our unused availability under our line of credit was $31.4 million and our bank debt to equity percentage was 24.5%. On March 13, 2018, the Company extended the term on its $65.0 million credit facility from June 30, 2019 to June 30, 2021. All other terms remain the same, including the interest rate at LIBOR plus 1.125% unless its funded debt to Earnings before Interest, Taxes and Depreciation ratio exceeds 2.25 to 1, then the LIBOR spread becomes 1.500%. As of December 31, 2019, the Company’s Polish subsidiary had borrowed $6.5 million at a rate of 1.125% plus the Warsaw Interbank Offer Rate with a term expiring June 30, 2021. At December 31, 2019, the Company’s Australian subsidiary had borrowed $5.5 million U.S. dollars, also with a term expiring June 30, 2021. As of December 31, 2019, the interest rates on the U.S., Polish and Australian lines of credit agreement were 2.89% and 2.76% and 1.96%, respectively. Under the credit facility, at December 31, 2019, the Company had utilized $33.6 million with $31.4 million available under the line of credit net of long-term outstanding letters of credit. The PLP-USA line of credit provides for $20.0 million to be available to the Company’s subsidiaries. The line of credit agreement contains, among other provisions, requirements for maintaining levels of net worth and profitability. At both December 31, 2019 and 2018, the Company was in compliance with all covenants.

On February 28, 2019, the Company acquired its Austrian subsidiary, SubCon. The Company’s Austrian subsidiary has a 1.0 million euros, or $1.1 million U.S. dollars line of credit with a term expiration of May 31, 2020 with the option to renew for an additional twelve months indefinitely. At December 31, 2019, the Company’s Austrian subsidiary had borrowed $.6 million, all of which is current, on the line of credit at an interest rate of 1.400%.

On April 25, 2019, the Company borrowed the U.S. equivalent of $8.3 million dollars on behalf of its Indonesian subsidiary at a rate of 3.501% with a term expiring on April 30, 2024. At December 31, 2019, $7.5 million was outstanding on this debt facility, of which $.8 million is classified as current.

On August 14, 2019, the Company’s New Zealand subsidiary borrowed the U.S. dollar equivalent of $5.3 million at a rate of 3.900% with a term expiring on August 26, 2021. At December 31, 2019, $5.4 million was outstanding on this facility, of which $.5 million is classified as current. This loan is secured by the Company’s New Zealand subsidiary’s land and building.

The Company owns a corporate aircraft with a remaining balance due on the loan of $8.1 million, of which $1.4 million is classified as short-term, with a term expiring in 2026. The loan is secured by the purchased aircraft.

We expect that our major source of funding for 2020 and beyond will be our operating cash flows, our existing cash and cash equivalents as well as our line of credit agreement. We earn a significant amount of our operating income outside the United States, which, except for current earnings in certain jurisdictions, is deemed to be indefinitely reinvested in foreign jurisdictions. We currently do not intend nor foresee a need to repatriate these funds. We believe our future operating cash flows will be more than sufficient to cover debt repayments, other contractual obligations, capital expenditures and dividends for the next 12 months and thereafter for the foreseeable future. In addition, we believe our borrowing capacity provides substantial financial resources, if needed, to supplement funding of capital expenditures and/or acquisitions. We also believe that we can expand our borrowing capacity, if necessary; however, we do not believe we would increase our debt to a level that would have a material adverse impact upon results of operations or financial condition.

#### Sources and Uses of Cash

Cash at December 31, 2019 decreased $4.6 million compared to December 31, 2018. Net Cash provided by operating activities was $27.2 million. The most significant net investing and financing uses of Cash were payments of long-term debt of $64.1 million, capital expenditures of $29.5 million, Cash used to fund the acquisition of SubCon and MICOS Telcom of $18.9 million, share repurchases of $6.8 million and dividends paid of $4.2 million, partially offset by net debt and notes payable proceeds of $93.0+ million. Currency had a negative $.8 million impact on Cash when translating foreign denominated financial statements to U.S. dollars.

Net Cash provided by operating activities for the years ended December 31, 2019 and 2018 was $27.2 million and $23.0 million, respectively. The $4.2 million increase was primarily a result of a prior year, non-recurring, contribution to the pension plan of $5.3 million, partially offset by a decrease in net income and miscellaneous net unfavorable movements in non-cash and cash items.

Net Cash used in investing activities of $48.8 million for the year ended December 31, 2019 represents an increase of $34.8 million when compared to cash used in investing activities for the year ended December 31, 2018. The increased use of Cash was primarily related to an increase in Cash used for capital expenditures of $29.5 million, cash used for the acquisition of SubCon and MICOS Telcom of $18.9 million, partially offset by a reduction in net Cash used of $4.8 million related to the purchase of marketable securities and company-owned life insurance policies.

Cash from financing activities for the year ended December 31, 2019 was $17.7 million compared to a use of $9.1 million in the year ended December 31, 2018. The $26.8 million increase was primarily a result of a net increase in debt transactions of $29.6 million in 2019 as compared to 2018, partially offset by a net year-over-year increase in cash used in capital stock transactions of $2.7 million combined with an increase in dividends paid of $.1 million.

We have commitments under operating leases primarily for office and manufacturing space, transportation equipment, office and computer equipment and capital leases primarily for equipment.

Contractual obligations and other commercial commitments are summarized in the following tables:

| Contractual Obligations (Thousands of dollars) | Payments Due by Period Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Notes payable to bank (A) | $8,696 | $8,696 | $0 | $0 | $0 |
| Long-term debt (B) | 57,076 | 3,353 | 39,335 | 5,535 | 8,853 |
| Financing leases | 202 | 109 | 93 | 0 | 0 |
| Operating leases | 16,274 | 2,462 | 4,699 | 340 | 8,773 |
| Pension contribution and other retirement plans (C) | 0 | 0 | 0 | 0 | 0 |

| Other Commercial Commitments (Thousands of dollars) | Amount of Commitment Expiration by Period Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Letters of credit | $7,564 | $7,564 | $0 | $0 | $0 |
| Guarantees | 11,479 | 2,952 | 6,950 | 1,376 | 201 |

(A) Interest on short-term debt is included in the table at interest rates from 1.40% to 9.40% in effect at December 31, 2019.

(B) Interest on long-term debt is included in the table at interest rates from 1.40% to 4.60% based on the variable interest rates in effect at December 31, 2019.

(C) The Company does not expect to make contributions to the Company’s defined benefit pension plan in 2020. Future expected amounts beyond one year have not been disclosed as such amounts are subject to change based on performance of the assets in the plan as well as the discount rate used to determine the obligation.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgment and uncertainties, and potentially may result in materially different outcomes under different assumptions and conditions.

Revenue Recognition

Net sales include products and shipping and handling charges, net of estimates for product returns. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies the performance obligations under the contract and control of the product is transferred to the customer, primarily based on shipping terms. Revenue for shipping and handling charges are recognized at the time the products are shipped to, delivered to or picked up by the customer. The Company estimates product returns based on historical return rates.

Receivable Allowances

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We record estimated allowances for uncollectible accounts receivable based upon the number of days the accounts are past due, the current business environment, and specific information such as bankruptcy or liquidity issues of customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The allowance for doubtful accounts represents approximately less than 3.7% and 3.5% of our trade receivables balance at December 31, 2019 and 2018, respectively.

Excess and Obsolescence Reserves

We provide excess and obsolescence reserves to state inventories at the lower of cost or estimated net realizable value. We identify inventory items that have had no usage or are in excess of the usages over the historical 12 to 24 months. A management team with representatives from marketing, manufacturing, engineering and finance reviews these inventory items, determines the disposition of the inventory and assesses the net realizable value based on their knowledge of the product and market conditions. These conditions include, among other things, future demand for product, product utility, unique customer order patterns or unique raw material purchase patterns, changes in customer and quality issues. The reserve for excess and obsolete inventory was 7.7% and 9.6% of gross inventory for the years ended December 31, 2019 and December 31, 2018, respectively. If the impact of market conditions deteriorates from those projected by management, additional inventory reserves may be necessary.

Impairment of Long-Lived Assets

We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets are impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying value of those items. Our cash flows are based on historical results adjusted to reflect the best estimate of future market and operating conditions. The net carrying value of assets not recoverable is then reduced to fair value. The estimates of fair value represent the best estimate based on industry trends and reference to market rates and transactions.

Goodwill

We perform our annual impairment test for goodwill utilizing a discounted cash flow methodology, market comparables, and an overall market capitalization reasonableness test in computing fair value by reporting unit. We then compare the fair value of the reporting unit with its carrying value to assess if goodwill has been impaired. Based on the assumptions as to growth, discount rates and the weighting used for each respective valuation methodology, results of the valuations could be significantly changed. However, we believe that the methodologies and weightings used are reasonable and result in appropriate fair values of the reporting units.

Our measurement date for our annual impairment test is October 1 of each year. We performed our annual impairment tests for goodwill as of October 1, 2019. We did not have any impairment for goodwill for the years ended December 31, 2019 or 2018. See Note J for additional information.

Deferred Tax Assets

Deferred taxes are recognized at currently enacted tax rates for temporary differences between the financial reporting and income tax basis of assets and liabilities and operating loss and tax credit carryforwards. We establish a valuation allowance to record our deferred tax assets at an amount that is more-likely-than-not to be realized. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of their recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would be charged to expense in the period such determination was made.

Uncertain Tax Positions

We identify tax positions taken on the federal, state, local and foreign income tax returns filed or to be filed. A tax position can include: a reduction in taxable income reported in a previously filed tax return or expected to be reported on a future tax return that impacts the measurement of current or deferred income tax assets or liabilities in the period being reported; a decision not to file a tax return; an allocation or a shift of income between jurisdictions; the characterization of income or a decision to exclude reporting taxable income in a tax return; or a decision to classify a transaction, entity or other position in a tax return as tax exempt. We determine whether a tax position is an uncertain or a routine business transaction tax position that is more-likely-than-not to be sustained at the full amount upon examination.

Under FASB ASC 740 (“ASC 740”), “Tax Benefits from Uncertain Tax Positions” that reduce our current or future income tax liability are reported in our financial statements only to the extent that each benefit is recognized and measured under a two-step approach. The first step requires us to assess whether each tax position based on its technical merits and facts and circumstances as of the reporting date, is more-likely-than-not to be sustained upon examination. The second step measures the amount of tax benefit that we would recognize in the financial statements based on a cumulative probability approach. A tax position that meets the more-likely-than-not threshold that is not highly certain is measured based on the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming that the tax authority has examined the position and has full knowledge of all relevant information.

ASC 740 requires subjectivity to identify outcomes and to assign probability in order to estimate the settlement amount. We provide estimates in order to determine settlement amounts. During the year ended December 31, 2019, we recorded $.1 million of reserves for uncertain tax positions. At December 31, 2018, there was no reserve requirement for uncertain tax positions.

Pensions

We record obligations and expenses related to a pension benefit plan based on actuarial valuations, which include key assumptions on discount rates, expected returns on plan assets and compensation increases. These actuarial assumptions are reviewed annually and modified as appropriate. The effect of modifications is generally recorded or amortized over future periods. The discount rate of 3.50% at December 31, 2019 reflects an analysis of yield curves as of the end of the year and the schedule of expected cash needs of the plan. The expected long-term return on plan assets of 7.0% reflects the plan’s historical returns and represents our best estimate of the likely future returns on the plan’s asset mix. We believe the assumptions used in recording obligations under the plans are reasonable based on prior experience, market conditions and the advice of plan actuaries. However, an increase in the discount rate would decrease the plan obligations and the net periodic benefit cost, while a decrease in the discount rate would increase the plan obligations and the net periodic benefit cost. In addition, an increase in the expected long-term return on plan assets would decrease the net periodic pension cost, while a decrease in expected long-term return on plan assets would increase the net periodic pension cost.

## Market risk

As filed, 3,590 characters.

The Company operates manufacturing facilities and offices around the world and uses fixed and floating rate debt to finance the Company's global operations. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations and market risk related to changes in interest rates and foreign currency exchange rates. The Company believes that the political and economic risks related to the Company's international operations are mitigated due to the geographic diversity in which the Company's international operations are located.

Effective July 1, 2018, Argentina was designated as a highly inflationary economy as the projected three-year cumulative inflation rate exceeded 100%. As such, beginning July 1, 2018, the functional currency for the Company’s Argentina subsidiary became the U.S. dollar. Revenue from operations in Argentina represented less than 2% of total consolidated net sales for the years ended December 31, 2019 and 2018.

As of December 31, 2019, the Company had no foreign currency forward exchange contracts outstanding. The Company does not hold derivatives for trading purposes.

The Company's primary currency rate exposures are related to foreign denominated debt, intercompany debt, forward exchange contracts, foreign denominated receivables and payables and cash and short-term investments. A hypothetical 10% change in currency rates would have a favorable/unfavorable impact on fair values on such instruments of $6.0 million and on income before tax of $2.3 million.

The Company is exposed to market risk, including changes in interest rates. The Company is subject to interest rate risk on its variable rate revolving credit facilities and term notes, which consisted of long-term borrowings of $57.1 million at December 31, 2019. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $.5 million for the year ended December 31, 2019.

Included in the Company’s accounting for defined benefit pension plan (“Plan”) are assumptions on future discount rates and the expected return on Plan assets. The Company considers current market conditions, including changes in interest rates and Plan asset investment returns. Actuarial assumptions may differ materially from actual results due to changing market and economic conditions or higher or lower withdrawal rates. These differences may result in a significant impact to the amount of net pension expense or income recorded in the future.

A discount rate is used to determine the present value of future payments. In general, our liability increases as the discount rate decreases and decreases as the discount rate increases. The discount rate used to determine the future benefit obligation was 3.50% and 4.25% at December 31, 2019 and 2018, respectively. The discount rate is a significant factor in determining the amounts reported. A 50 basis point change in the discount rate of 3.50% used at December 31, 2019 would have a $3.1 million effect on the Plan’s projected benefit obligation.

The Company developed the expected return on Plan assets by considering various factors which include targeted asset allocation percentages, historical returns, and expected future returns. The Company assumed an expected rate of return of 7.00% and 8.00% at December 31, 2019 and 2018, respectively. A 50 basis point change in the expected rate of return would have a $.2 million effect on the Plan’s subsequent year’s net periodic pension cost.

## Controls and procedures

As filed, 8,363 characters.

### Evaluation of Disclosure Controls and Procedures

The Company’s Principal Executive Officer and Principal Financial Officer have concluded based on their review thereof that the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended, were effective as of December 31, 2019.

### Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of the consolidated financial statements in accordance with generally accepted accounting principles.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation.

The Company completed the acquisitions of SubCon Electrical Fittings GmbH (“SubCon”) and 90% of MICOS Telcom s.r.o. (“MICOS Telcom”). As permitted by SEC guidance, the scope of our evaluation of internal control over financial reporting as of December 31, 2019 did not include the internal control over SubCon and MICOS. The results of SubCon and MICOS are included in the Company’s consolidated financial statements from the date at which the businesses were acquired. The combined total assets of SubCon and MICOS represented approximately 7% of the Company’s total assets at December 31, 2019. The combined Net sales and Net income of SubCon and MICOS represented approximately 3% of the Company’s consolidated Net sales and less than 1% of the Company’s Net income for the year ended December 31, 2019.

Management, with the participation of the Company's Chief Executive Officer and Vice President of Finance and Treasurer, assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework (2013).*

Based upon its assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2019.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited by Ernst & Young LLP, an independent registered public accounting firm, who expressed an unqualified opinion as stated in their report, a copy of which is included below.

### Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2019 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

### Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

of Preformed Line Products Company

### Opinion on Internal Control over Financial Reporting

We have audited Preformed Line Products Company and subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Preformed Line Products and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Subcon Electrical Fittings GmbH (SubCon) and MICOS Telecom s.r.o. (MICOS Telcom), which are included in the 2019 consolidated financial statements of the Company and on a combined basis constituted 7% of total assets as of December 31, 2019 and 3% of consolidated net sales and less than 1% of consolidated net income for the year then ended. Our audit of internal control over financial reporting of Preformed Line Products and subsidiaries also did not include an evaluation of the internal control over financial reporting of SubCon and MICOS Telecom.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated Balance Sheets of Preformed Line Products and subsidiaries as of December 31, 2019 and 2018, and the related Statements of Consolidated Income, Comprehensive Income, Cash Flows, and Shareholders’ Equity for each of the three years in the period ended December 31, 2019 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”) of the Company and our report dated March 6, 2020 expressed an unqualified opinion thereon.

### Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

### Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Cleveland, Ohio

March 6, 2020

Filed Mar 6, 2020.
Source: SEC EDGAR, the filing index for accession 0001564590-20-009196. Last ingested by Listed: Nov 6, 2026, 07:10 ET. No prices; not investment advice.