UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-K

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2018

Commission file number 0-31164

Preformed Line Products Company

(Exact name of registrant as specified in its charter)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:   (None)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “accelerated filer,” “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

The aggregate market value of voting and non-voting common shares held by non-affiliates of the registrant as of June 30, 2018 was $219,388,500 based on the closing price of such common shares, as reported on the NASDAQ National Market System.  As of March 4, 2019, there were 5,062,324 common shares of the Company ($2 par value) outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

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Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 7, 2019 are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14.

 

 

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Table of Contents

 

 

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Forward-Looking Statements

This Form 10-K and other documents filed with the Securities and Exchange Commission (“SEC”) contain forward-looking statements regarding Preformed Line Products Company’s (the “Company”) and the Company’s management’s beliefs and expectations.  As a general matter, forward-looking statements are those focused upon future plans, objectives or performance (as opposed to historical items) and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature.  Such forward-looking statements are subject to uncertainties and factors relating to the Company’s operations and business environment, all of which are difficult to predict and many of which are beyond the Company’s control.  Such uncertainties and factors could cause the Company’s actual results to differ materially from those matters expressed in or implied by such forward-looking statements.

The following factors, among others, could affect the Company’s future performance and cause the Company’s actual results to differ materially from those expressed or implied by forward-looking statements made in this report:

In light of these risks and uncertainties, the Company cautions you not to place undue reliance on these forward-looking statements. Any forward-looking statements that the Company makes in this report speaks only as of the date of such statement, and the Company undertakes no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

 

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Part I

Item 1.  Business

Background

Preformed Line Products Company and 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 are used in the energy, communications, cable and special industries (i.e., metal building, tower and antenna industries, the agriculture and arborist industries, and marine systems industry) 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 66%, 69% and 67% of the Company’s revenues in 2018, 2017 and 2016, 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 21%, 22% and 21% of the Company’s revenues in 2018, 2017 and 2016, 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 for various applications and are defined as products that complement the Company’s core line offerings.  Special industries products were approximately 13%, 9% and 12% of the Company’s revenues in 2018, 2017 and 2016, 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.

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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 practices, cultural constraints, 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.

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.

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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 market place.  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 have been neglected 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 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.

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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.

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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.

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 14.8% of 2018 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 $2.4 million in 2018, $2.1 million in 2017 and $2.7 million in 2016.

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, 2018, the Company had in force 40 U.S. patents and 109 international patents in 21 countries and had 13 pending U.S. patent applications and 34 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, 2018, the Company had obtained U.S. registration on 37 trademarks and one trademark application remained pending.  International registrations amounted to 242 registrations in 36 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.

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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.

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 Electronics and Corning Cable Systems.  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.

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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 trended up throughout 2018.  The Company expects stable prices on metals and plastics throughout 2019.  

Backlog Orders

The Company’s backlog was approximately $92.9 million at the end of 2018 and $93.8 million at the end of 2017.  All customer orders entered are firm at the time of entry.  Substantially all 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 2019 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, 2018, the Company had 2,650 employees.  Approximately 27% 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.

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Item 1A. Risk Factors

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 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 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 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 could slow production and delivery to the Company’s customers.  

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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%, 61% and 60% in 2018, 2017 and 2016) 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 result, 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, in connection with its international operations.  Additionally. uncertainty relating to the United Kingdom’s vote to leave the European Union (“Brexit”) could adversely impact the Company.  These risks of conducting business internationally may have a material adverse effect on the Company’s business, operating results and financial condition.

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 strategy, the Company faces certain risks and uncertainties relating to acquisitions.  The factors affecting this exposure are in addition to the risks faced in the Company’s day-to-day operations.  Acquisitions involve a number of special risks, 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 unrest in developing countries, 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 results of operations 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, we may also be subject to litigation or claims related to our 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 our 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 we are required to pay substantial damages and expenses as a result of these or other types of lawsuits, our business and results of operations would be adversely affected. Regardless of whether any claims against us are valid or whether we are 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 our 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 our insurance coverage for any claims could adversely affect our business and the results of our operations.

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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 results of operations 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 recently enacted 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 2017 Tax Act significantly changed the taxation of U.S. based, multinational corporations. Our compliance with the Tax Act requires the use of estimates in our financial statements and exercise of significant judgment in accounting for its provisions. The implementation of the Tax Act requires interpretations and implementing regulations by the U.S. Treasury Department and Internal Revenue Service, as well as state tax authorities. The legislation could be subject to potential amendments and technical corrections, any of which could materially lessen or increase certain adverse impacts of the legislation. As regulations and guidance evolve with respect to the Tax Act, and as we gather information and perform more analysis, our results may differ from previous estimates and may materially affect our financial position.

 

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 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.

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Item 1B. Unresolved Staff Comments

The Company does not have any unresolved staff comments.

Item 2.  Properties

The Company currently owns or leases 26 facilities, which together contain approximately 2.1 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:

 

 

Item 3. Legal Proceedings

The Company can be party to a variety of pending legal proceedings and claims arising in the normal course of business, including, but not limited to, litigation relating to employment, workers’ compensation, product liability, environmental and intellectual property. The Company has liability insurance to cover many of these claims.  

Although the outcomes of these matters are not predictable with certainty, the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and the likelihood to develop what the Company believes to be a reasonable range of potential loss exists, the Company will include disclosure related to such matters.  To the extent that there is a reasonable possibility the losses could exceed amounts already accrued, the Company will adjust the accrual in the period in which the determination is made, disclose an estimate of the additional loss or range of loss and if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.

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”).

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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. The Company is unable to predict the outcome of this case and cannot reasonably estimate a potential range of loss.  However, if the matter is to be determined in a manner adverse to the Company, it could have a material effect on the Company’s financial 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, results of operations or cash flows.

Item 4. Mine Safety Disclosures

Not applicable

Item 4A. Executive Officers of the Registrant

Each executive officer is elected by the Board of Directors, serves at its pleasure and holds office until a successor is appointed, or until the earliest of death, resignation or removal.

 

 

The following sets forth the name and recent business experience for each person who is an executive officer of the Company at March 1, 2019:

Robert G. Ruhlman was elected Chairman in July 2004.  Mr. Ruhlman has served as Chief Executive Officer since July 2000 and as President since 1995 (positions he continues to hold). Mr. Ruhlman is the father of J. Ryan Ruhlman, Vice-President – Marketing and Business Development and a Director of the Company, and of Maegan A. R. Cross, also a Director of the Company.

Dennis F. McKenna was elected Chief Operating Officer in January 2019.  Prior to that, Mr. McKenna served as Executive Vice President Global Business Development since January 2015 where he expanded his role to include worldwide marketing and business development strategies.  Prior to that, he was elected Vice President—Marketing and Global Business Development in April 2004.

William H. Haag was elected Vice President – Asia Pacific Region in January 2018.  Prior to that, Mr. Haag served as the Company’s Vice President—International Operations since April 1999.

John M. Hofstetter was elected Vice President – Sales and Global Communications Markets and Business Development in April 2012.  

Tim O’Shaughnessy was elected Vice President - Human Resources in January 2019.  Prior to that, Mr. O’Shaughnessy served as the Company’s Director of Human Resources since 2017 where he was promoted from his previous role of International Human Resource Manager which he began in 2013.  Mr. O’Shaughnessy previously held various roles within the Finance organization since joining the Company in 2005.

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J. Ryan Ruhlman was elected to the Company’s Board of Directors in July 2015 and as Vice President – Marketing and Business Development in December 2015, which expanded his role to include new acquisition and market opportunities.  Prior to that, he was promoted to Director Marketing and Business Development in January 2015 including responsibilities for Special Industries, Distribution and Transmission Markets, as well as Marketing Communications.  Mr. Ruhlman is the son of Robert G. Ruhlman, the Chief Executive Officer and Chairman of the Company, and the brother of Maegan A. R. Cross, a Director of the Company.

David C. Sunkle was elected Vice President-Research and Engineering in January 2007.  In addition, Mr. Sunkle has taken on the role of Vice President – Manufacturing since July 2008.

Caroline S. Vaccariello was elected General Counsel and Corporate Secretary in January 2007.

Michael A. Weisbarth was elected Vice President - Finance and Treasurer in May 2017.  Prior to that, Mr. Weisbarth served as the Company’s Controller and Treasurer since September 2014.  Previous to his employment with the Company, Mr. Weisbarth served as the Controller from April 2013 to April 2014 and as the Vice President, Finance/Controller from April 2008 to April 2013 of AssuraMed, Inc., a division of Cardinal, Inc.

 

 

Part II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

The Company’s common shares are traded on NASDAQ under the trading symbol “PLPC”.  As of March 4, 2019, the Company had approximately 1,900 shareholders of record.  The following table sets forth for the periods indicated (i) the high and low closing sale prices per share of the Company’s common shares as reported by the NASDAQ and (ii) the amount per share of cash dividends paid by the Company.

 

 

While the Company expects to continue to pay dividends of a comparable amount in the near term, the declaration and payment of future dividends will be made at the discretion of the Company’s Board of Directors in light of the current needs of the Company.  Therefore, there can be no assurance that the Company will continue to make such dividend payments in the future.

 

 

 

 

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Performance Graph

Set forth below is a line graph comparing the cumulative total return of a hypothetical investment in the Company’s common shares with the cumulative total return of hypothetical investments in the NASDAQ Composite Index and the Peer Group Index based on the respective market price of each investment at December 31, 2013, December 31, 2014, December 31, 2015, December 31, 2016, December 31, 2017, and December 31, 2018, assuming in each case an initial investment of $100 on December 31, 2013, and reinvestment of dividends.

 

 

 

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Purchases of Equity Securities

On December 13, 2017, the Board of Directors authorized a plan to repurchase up to an additional 228,138 of Preformed Line Products Company common shares, resulting in a total of 250,000 shares available for repurchase with no expiration date.  The following table includes repurchases for the three months ended December 31, 2018:

 

 

Item 6. Selected Financial Data

 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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 26 sales and manufacturing operations in 18 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 Electrical Fittings GmbH (“SubCon”), headquartered in Dornbirn, Austria with manufacturing operations in Brno, Czech Republic. The acquisition is not considered material as assets acquired are less than 5% of our total consolidated assets.  The acquisition of SubCon will strengthen our position in the global substation market and will expand our operational presence in Europe.  

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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 to sustain consistent sales levels over the past few years.  Prior to 2018, there had been a lack of commitment by developed countries to upgrade and strengthen their electrical grids and communication networks, despite the growing need.  Low oil prices, increasing commodity prices and changes in governmental leadership in certain markets have affected construction projects worldwide which suggests inherent uncertainty going forward.

In 2018, sales in the energy market continued to increase in the number and scale of transmission projects in North America while there was a continued decline in solar projects in the region.  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.  

Our international business is more concentrated in the energy and communications markets where we experienced our most significant top line growth in 2018.  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 2018 in contrast to the currencies strengthening in 2017.  The fluctuations of foreign currencies during the year ended December 31, 2018 had an unfavorable impact on net sales of $5.7 million as compared to a favorable impact of $5.2 million in 2017.  On a reportable segment basis, the unfavorable and favorable impact of foreign currency translation on net sales and net income for the years ended December 31, 2018 and 2017, respectively, was as follows:

 

 

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The effect of currency translation had an unfavorable impact on net income in the year ended December 31, 2018 of $.2 million and a favorable impact on net income in 2017 of $.2 million.  There was an incremental $.3 million in losses on foreign currency translation on operating income for the year ended December 31, 2018.  There was a transaction loss of $1.5 million in the year ended December 31, 2018 as compared to a transaction gain for the year ended December 31, 2017 of $.3 million as summarized in the following table:

 

 

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 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 14.2% and can borrow needed funds at a competitive interest rate under our credit facility.  Debt decreased $1.5 million as of December 31, 2018, driving the decrease in our bank debt to equity ratio, compared to 15.5% at December 31, 2017.  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, 2018 and 2017.  The Company’s past operating results are not necessarily indicative of future operating results.

 

 

2018 RESULTS OF OPERATIONS COMPARED TO 2017

Net sales.  In 2018, net sales were $420.9 million, an increase of $42.7 million, or 11%, compared to 2017.  Excluding the unfavorable effect of currency translation, net sales increased 13% as summarized in the following table:

 

 

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The increase in PLP-USA net sales of $21.4 million, or 14%, was primarily due to a volume increase in energy product sales.  International net sales for the year ended December 31, 2018 were unfavorably affected by $5.7 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 $66.9 million increased $5.3 million, or 8%, primarily due to higher volume in energy and communication product sales.  EMEA net sales of $69.8 million increased $3.4 million, or 5%, primarily due to volume increases in energy products in the region.  The Asia-Pacific net sales of $115.2 million increased $18.2 million, or 19%, compared to 2017.  The increase in net sales is primarily due to a sales volume increase in energy, communication and special industries products.

Gross Profit.  Gross profit of $132.2 million for 2018 increased $13.6 million, or 12%, compared to 2017.  Excluding the unfavorable effect of currency translation, gross profit increased $16.2 million, or 14%, as summarized in the following table:

 

 

PLP-USA gross profit of $59.0 million increased by $9.1 million compared to 2017 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, 2018 was unfavorably impacted by $2.6 million when local currencies were translated to U.S. dollars.  The following discussion of gross profit changes excludes the effects of currency translation.  The Americas gross profit increase of $4.2 million was primarily the result of product margin improvement in the region due to a favorable shift in sales mix toward higher margin products combined with the $5.3 million improvement in sales.  EMEA gross profit decreased $.4 million despite the $3.4 million increase in sales in the region, primarily in lower margin energy products.  Asia-Pacific’s gross profit increased $3.2 million as sales mix shifted to higher margin products combined with an increase in sales of $18.2 million.

Costs and expenses. Costs and expenses of $99.3 million for the year ended December 31, 2018 increased $6.8 million, or 7%, compared to 2017.  Excluding the favorable effect of currency translation, costs and expenses increased $9.1 million, or 10%, as summarized in the following table:

 

 

PLP-USA costs and expenses of $47.9 million increased $3.7 million, or 8%.  PLP-USA’s year-over-year increase was attributable to higher personnel related expenses, including benefits of $2.1 million, and a $1.1 million incremental loss in net foreign currency transaction exchange effect.  Additionally, higher commission expense of $.2 million as a result of increased sales, increased travel and entertainment expenses of $.2 million and increased professional fees of $.2 million contributed to the year-over-year increase.  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 2018 year-end exchange rates.  International costs and expenses for the year ended December 31, 2018 were favorably impacted by $2.3 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 $3.6 million was primarily due to a net loss on foreign currency transactional exchange of $1.9 million, higher personnel related costs of $1.6 million and higher professional fee expense of $.1 million.  EMEA costs and expenses of $15.2 million increased $.7 million mainly due to higher personnel related costs.  Asia-Pacific costs and expenses of $22.2 million increased $1.1 million primarily due to higher personnel related expenses of $1.0 million and increased professional fees of $.1 million.

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Other income (expense).  Other expense of $.3 million for the year ended December 31, 2018 remained flat as compared to 2017.  

 

Income taxes.  Income taxes for the years ended December 31, 2018 and 2017 were $6.0 million and $13.2 million, respectively, based on pre-tax income of $32.6 million and $25.8 million, respectively. The effective tax rate for the years ended December 31, 2018 and 2017 was 18.4% and 51.0%, respectively, compared to the U.S. federal statutory rate of 21% and 35% for the years ended December 31, 2018 and 2017, respectively.  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% and 35% for 2018 and 2017, respectively and our effective tax rate:

 

2018

2017

Net income.  As a result of the preceding items, net income for the year ended December 31, 2018 was $26.6 million, compared to $12.7 million for 2017.  Excluding the effect of currency translation, net income increased $14.1 million as summarized in the following table:

 

 

NM – Not meaningful

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PLP-USA’s net income of $9.9 million was an increase of $12.3 million year over year, mainly due to the current year favorable income tax expense impact resulting from the newly enacted Tax Act of $6.7 million combined with a year-over-year increase in operating income of $5.6 million.  International net income for the year ended December 31, 2018 was favorably affected by approximately $.2 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 $8.5 million increased $.6 million mainly as a result of a $.7 million increase in operating income, slightly offset by a $.1 million increase in income tax expense.  EMEA net income decreased $.7 million as a result of a $1.1 million decrease in operating income offset by a year-over-year decrease in income taxes of $.4 million.  Asia-Pacific net income improved $1.9 million mainly as a result of a $2.2 million increase in operating income offset by an increase in income tax expense for the region of $.3 million.

2017 RESULTS OF OPERATIONS COMPARED TO 2016

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, 2017 and 2016.

 

 

Net sales.  In 2017, net sales were $378.2 million, an increase of $41.6 million, or 12%, compared to 2016.  Excluding the favorable effect of currency translation, net sales increased 11% as summarized in the following table:

 

 

The increase in PLP-USA net sales of $12.4 million, or 9%, was primarily due to a volume increase in transmission and distribution products.  International net sales for the year ended December 31, 2017 were favorably affected by $5.2 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 $69.8 million increased $8.0 million, or 13%, primarily due to higher volume in energy and telecommunication sales.  EMEA net sales of $63.9 million increased $5.9 million, or 10%, primarily due to volume increases in the telecommunication sales and transmission projects in the region.  The Asia-Pacific net sales of $96.9 million increased $10.1 million, or 12%, compared to 2016.  The increase in net sales is primarily related to sales volume increases in transmission sales, partially offset by a decrease in solar sales.

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Gross Profit.  Gross profit of $118.6 million for 2017 increased $9.2 million, or 8%, compared to 2016.  Excluding the favorable effect of currency translation, gross profit increased $8.1 million, or 7%, as summarized in the following table:

 

 

PLP-USA gross profit of $49.9 million increased by $2.6 million compared to 2016 mostly due to a shift in sales mix toward higher margin products.  International gross profit for the year ended December 31, 2017 was favorably impacted by $1.1 million when local currencies were translated to U.S. dollars.  The following discussion of gross profit changes excludes the effects of currency translation.  The Americas gross profit increase of $3.4 million was primarily the result of product margin improvement in the region due to a favorable shift in sales mix toward higher margin products combined with the $8.0 million improvement in sales.  Higher personnel costs throughout the region due to inflation were a slight offset to the margin improvement.  EMEA gross profit decreased $1.3 million despite the $5.9 million increase in sales in the region, primarily in lower margin energy products.  Asia-Pacific’s gross profit increased $3.5 million as mix shifted to higher margin products combined with an increase in sales of $10.1 million.

Costs and expenses. Costs and expenses of $92.5 million for the year ended December 31, 2017 increased $4.6 million, or 5.2%, compared to 2016.  Excluding the unfavorable effect of currency translation, costs and expenses increased $3.7 million, or 4%, as summarized in the following table:

 

 

PLP-USA costs and expenses of $44.2 million increased $1.4 million, or 3%.  Higher personnel related expenses, which include healthcare and benefits of $2.7 million and higher commission expense of $1.0 million, were partially offset by the non-recurrence of a $1.0 million charge in 2016 related to the lease expiration of the Company aircraft, a $.6 million improvement in net foreign currency transaction exchange effect combined with lower bad debt expense of $.5 million and various net expense decreases of $.2 million.  Foreign currency exchange gains 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 2017 year-end exchange rates.  International costs and expenses for the year ended December 31, 2016 were unfavorably impacted by $.9 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 million was primarily due to a net loss on foreign currency transactional exchange of $1.0 million, partially offset by lower bad debt expense of $.5 million and lower professional fee expense of $.3 million.  EMEA costs and expenses of $13.9 million increased $1.2 million due to a net loss on foreign currency transactional exchange of $.4 million, higher personnel related costs of $.3 million, increased professional expense of $.1 million, increased commission expense of $.1 million combined with various net expense increases of $.3 million.  Asia-Pacific costs and expenses of $21.1 million increased $.8 million primarily due to higher personnel related expenses of $1.6 million, partially offset by lower commission expense of $.3 million and reduced professional fees of $.3 million combined with various net expense reductions of $.2 million.

Other income (expense).  Other expense for the year ended December 31, 2017 decreased $.2 million compared to 2016.  

 

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Income taxes.  Income taxes for the years ended December 31, 2017 and 2016 were $13.2 million and $5.7 million, respectively, based on pre-tax income of $25.8 million and $21.0 million, respectively. The effective tax rate for the years ended December 31, 2017 and 2016 was 51.0% and 27.2%, respectively, compared to the U.S. federal statutory rate of 35%.  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 35% and our effective tax rate:

 

2017

2016

Net income.  As a result of the preceding items, net income for the year ended December 31, 2017 was $12.7 million, compared to $15.3 million for 2016.  Excluding the effect of currency translation, net income decreased $2.8 million as summarized in the following table:

 

 

PLP-USA net income of $2.0 million was flat year over year.  International net income for the year ended December 31, 2016 was unfavorably affected by $1.5 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 increased $3.5 million as a result of a $5.0 million increase in operating income, offset by an income tax expense increase of $1.5 million.  EMEA net income increased $2.1 million as a result of a $2.5 million increase in operating income offset by an increase in income taxes of $.4 million.  Asia-Pacific net (loss) income improved $4.5 million mainly as a result of a $3.9 million increase in operating income, combined with the non-recurrence of a prior year receivable settlement of $.8 million, offset by a lower year over year net tax benefit for the region, which was $.2 million lower.

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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 2018, we used cash of $9.5 million for capital expenditures.  We ended 2018 with $43.9 million of cash, cash equivalents and restricted cash (“cash”).  Our cash is held in various locations throughout the world.  At December 31, 2018, 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, 2018 and 2017 was 3.1 to 1 and 3.3 to 1, respectively.  Total debt at December 31, 2018 was $35.5 million.  At December 31, 2018, our unused availability under our line of credit was $49.8 million and our bank debt to equity percentage was 14.2%.  On March 13, 2018, the Company extended the term on its $65 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, 2018, the Company’s Polish subsidiary had borrowed $.9 million at a rate of 1.125% plus the Warsaw Interbank Offer Rate with a term expiring June 30, 2021.  As of December 31, 2018, the interest rates on the U.S. and Polish line of credit agreement were 3.63% and 2.77%, respectively.  As of December 31, 2018, the Company’s Australian subsidiary had borrowed $2.1 million at a rate of 1.125% plus the Australian Bank Bill Swap Bid Rate with a term expiring June 30, 2021.  As of December 31, 2018, the interest rate on the Australian line of credit agreement was 2.96%.  Under the credit facility, at December 31, 2018, the Company had utilized $15.2 million with $49.8 million available under the line of credit net of long-term outstanding letters of credit.  The PLP-USA line of credit provides for $5.0 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, 2018 and 2017, the Company was in compliance with all covenants.

We own a corporate aircraft with a remaining balance due on the loan of $11.0 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 2019 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, 2018 decreased $1.7 million compared to December 31, 2017.  Net cash provided by operating activities was $23.0 million. The most significant net investing and financing uses of cash were payments of long-term debt of $85.5 million, capital expenditures of $9.5 million, a combined net purchase of marketable securities and a company-owned life insurance policy of $4.7 million, share repurchases of $4.2 million and dividends paid of $4.2 million, partially offset by net debt and notes payable proceeds of $85.5 million. Currency had a negative $1.6 million impact on cash when translating foreign denominated financial statements to U.S. dollars.

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Net cash provided by operating activities for the year ended December 31, 2018 and 2017 was $23.0 million and $33.8 million, respectively.  The $10.8 million decrease was primarily a result of an increase in cash usage for operating assets (net of operating liabilities) of $24.4 million, which included a $5.3 million contribution to the pension plan, partially offset by an increase in net income of $13.9 million.

Net cash used in investing activities of $14.0 million for the year ended December 31, 2018 represents an increase of $11.5 million when compared to cash used in investing activities for the year ended December 31, 2017.  The increased use of cash was primarily related to a reduction in cash provided from fixed-term deposits of $8.5 million along with net cash used of $4.7 million related to the purchase of marketable securities and a company-owned life insurance policy, partially offset by a decrease in cash used for capital expenditures of $1.7 million.

Cash used in financing activities for the year ended December 31, 2018 was $9.1 million compared to a use of $19.6 million in the year ended December 31, 2017. The $10.5 million improvement was primarily a result of a net favorable change in debt transactions of $7.9 million in 2018 as compared to 2017 and a net year-over-year decrease in cash used in capital stock transactions of $2.6 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:

 

 

 

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.

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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 3.5% and 3.8% of our trade receivables balance at December 31, 2018 and 2017, 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 allowance for excess and obsolete inventory was 9.6% and 10.6% for the years ended December 31, 2018 and December 31, 2017, 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, 2018. We did not have any impairment for goodwill for the years ended December 31, 2018 or 2017. 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

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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, 2018, we did not record any activity 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 4.25% at December 31, 2018 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 8.0% 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.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-05, “Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.” The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective immediately.  For additional details regarding SAB 118, refer to Note G “Income Taxes.”

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  The Company adopted ASU 2017-07 as of January 1, 2018.  The adoption did not have a material impact on the Company’s consolidated statements of operations and since prior period reclassifications were deemed immaterial, the Company elected to not make a retrospective adjustment to prior period income statements.  

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.”  The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  The Company adopted ASU 2016-18 as of January 1, 2018 using a retrospective transition method to each period presented.  The cash, cash equivalents and restricted cash balance on the Company’s consolidated cash flow includes $.3 million and $1.2 million of restricted cash as of December 31, 2018 and December 31, 2017, respectively.  Restricted cash is included in Other assets on the Company’s consolidated balance sheet in each period presented.  The adoption of ASU 2016-18 did not have a material impact on the Company’s consolidated financial statements.  Refer to Note E “Debt Arrangements” for additional details regarding the Company’s restricted cash.  

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.”  ASU 2016-16 modifies the recognition of income tax expense resulting from intra-entity transfers of assets other than

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inventory.  Pursuant to this amendment, entities should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  This amendment eliminates the exception for an intra-entity transfer of assets other than inventory.  The Company adopted ASU 2016-16 as of January 1, 2018 with no material impact on the Company’s consolidated financial statements.  

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, which changes how companies recognize, measure, present and make disclosures about certain financial assets and financial liabilities. Under this guidance, entities have to measure certain equity investments, including available-for-sale securities, at fair value and recognize any changes in fair value in net income. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods therein. The Company adopted ASU 2016-01 effective January 1, 2018.   Refer to Note K “Fair Value of Financial Assets and Liabilities” for additional details regarding the Company’s marketable securities.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” or ASU 2014-09.  ASU 2014-09 requires an entity to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  To achieve that core principle, the amendment provides five steps that an entity should apply when recognizing revenue.  The amendment also specifies the accounting of some costs to obtain or fulfill a contract with a customer and expands the disclosure requirements around contracts with customers.  In August 2015, the FASB issued ASU No. 2015-14 deferring the effective date of the amendment to annual reporting periods beginning after December 15, 2017, including interim periods therein.  

The Company implemented changes to processes and controls to meet the standard’s reporting and disclosure requirements and adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective transition method applied to contracts that were not yet completed at that date.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be presented based on the Company’s historic accounting policy.  The cumulative impact of adopting ASU 2014-09 as of January 1, 2018 did not have a material impact on the Company’s consolidated financial statements.  Further, the Company does not expect the impact of the adoption of ASU 2014-09 to be material to its consolidated financial statements on an ongoing basis. Refer to Note L “Revenue” for additional details regarding the Company’s revenue recognition policy.  

NEW ACCOUNTING STANDARDS TO BE ADOPTED

In February 2018, the FASB issued ASU 2018-02, “Income Statement (Topic 220), Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The FASB issued the update to provide amended guidance to allow a reclassification from Accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act.  Additionally, under the new guidance an entity will be required to provide certain disclosures regarding stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years, and the guidance may be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal income tax rate in the Tax Act is recognized. Early adoption is permitted.  The Company is currently assessing the impact, if any, that the ASU will have on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).”  The amendments in this Update require the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements.  Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation for leases classified as operating leases under previous guidance. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease.  Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities.  

This ASU is required to be applied using a modified retrospective adoption method with the option of applying the guidance either retrospectively to each prior comparative reporting period presented or retrospectively at the beginning of the period of adoption. This ASU is effective for interim and annual periods on January 1, 2019, and the Company will apply the transitional package of practical expedients allowed by the standard to not reassess the identification, classification and initial direct costs of leases commencing before this ASU's effective date; however, the Company will not elect the hindsight transitional practical expedient. The Company also will apply the practical expedient to not separate lease and non-lease components to new leases as well as existing leases through transition. The Company will elect an accounting policy to not apply recognition requirements of the guidance to short-term leases.

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In July of 2018, the FASB issued ASU 2018-11, “Targeted Improvements to ASC 842,” which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the initial application of transition.  The amendments in Topic 842 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  

The Company established a cross-functional implementation team and is finalizing policy elections, the discount rate to be used on January 1, 2019, data and business processes and controls to support recognition and disclosure under the new standard.  As discussed above, the primary impact upon adoption will be the recognition of right of use assets and lease obligations, on a discounted basis, of our minimum lease obligations as disclosed in Note F “Leases”.   The adoption of this ASU is not expected to have a material impact on the Company’s results of operations, cash flows or debt covenants.   

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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.  The impact to the Company’s Consolidated financial statements was not material and is included in the December 31, 2018 results.  Revenue from operations in Argentina was less than 2% of total consolidated net sales for the year ended December 31, 2018.

As of December 31, 2018, 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 $2.7 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 borrowings of $35.5 million at December 31, 2018.  A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $.3 million for the year ended December 31, 2018.

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 4.25% at both years ended December 31, 2018 and 2017.  The discount rate is a significant factor in determining the amounts reported.  A 50 basis point change in the discount rate of 4.25% used at December 31, 2018 would have a $.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 8.0% in both 2018 and 2017.  A 50 basis point change in the expected rate of return would have a $.3 million effect on the Plan’s subsequent year’s net periodic pension cost.

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Item 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders

of Preformed Line Products Company

 

Opinion on the Financial Statements

 

We have audited the accompanying Consolidated Balance Sheets of Preformed Line Products and subsidiaries (the Company) as of December 31, 2018 and 2017, 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, 2018 and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.  

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 8, 2019 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2008

Cleveland, Ohio

March 8, 2019

 

 

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PREFORMED LINE PRODUCTS COMPANY

CONSOLIDATED BALANCE SHEETS

 

 

See notes to consolidated financial statements.

 

 

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PREFORMED LINE PRODUCTS COMPANY

STATEMENTS OF CONSOLIDATED INCOME

 

 

See notes to consolidated financial statements.

 

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PREFORMED LINE PRODUCTS COMPANY

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

 

 

See notes to consolidated financial statements.

 

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PREFORMED LINE PRODUCTS COMPANY

STATEMENTS OF CONSOLIDATED CASH FLOWS

 

 

 

See notes to consolidated financial statements.

 

 

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PREFORMED LINE PRODUCTS COMPANY

STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY

 

 

See notes to consolidated financial statements.

 

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PREFORMED LINE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tables in thousands of dollars, except share and per share data, unless specifically noted)

Note A - Significant Accounting Policies

Nature of Operations

Preformed Line Products Company and subsidiaries (the “Company”) is a designer and manufacturer of products and systems employed in the construction and maintenance of overhead and underground networks for the energy, telecommunication, cable operators, 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 customers include public and private energy utilities and communication companies, cable operators, governmental agencies, contractors and subcontractors, distributors and value-added resellers.  The Company serves its worldwide markets through strategically located domestic and international manufacturing facilities.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries for which it has a controlling interest.  All intercompany accounts and transactions have been eliminated upon consolidation.

Cash and Cash Equivalents

Cash equivalents are stated at fair value and consist of highly liquid investments with original maturities of three months or less at the time of acquisition.

Receivable Allowances

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowances for uncollectible accounts receivable is 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.  The Company also maintains an allowance for future sales credits related to sales recorded during the year.  The estimated allowance is based on historical sales credits issued in the subsequent year related to the prior year and any significant, preapproved open return good authorizations as of the balance sheet date. 

Inventories

The Company uses the last-in, first-out (“LIFO”) method of determining cost for the majority of its material portion of inventories in PLP-USA.  All other inventories are determined by the first-in, first-out (FIFO) or average cost methods.  Inventories are carried at the lower of cost or market.  Reserves are maintained for estimated obsolescence or excess inventory based on past usage and future demand.  

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 allowance for excess and obsolete inventory was 9.6% and 10.6% for the years ended December 31, 2018 and December 31, 2017, respectively.   If the impact of market conditions deteriorates from those projected by management, additional inventory reserves may be necessary.

Fair Value of Financial Instruments

Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 825, “Disclosures about Fair Value of Financial Instruments”, requires disclosures of the fair value of financial instruments.  The estimated fair value of financial instruments was principally based on market prices where such prices were available, and when unavailable, fair values were estimated based on market prices of similar instruments.

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Property, Plant and Equipment and Depreciation

Property, plant, and equipment is recorded at cost.  Depreciation is computed using the straight-line method over the estimated useful lives.  The estimated useful lives used, when purchased new, are: land improvements, ten years; buildings, forty years; building improvements, five to forty years; machinery and equipment, three to ten years; and aircraft, fifteen years.  Appropriate reductions in estimated useful lives are made for property, plant and equipment purchased in connection with an acquisition of a business or in a used condition when purchased.

Long-Lived Assets

The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the carrying value of the assets are impaired and the undiscounted future cash flows estimated to be generated by such assets are less than the carrying value. The Company’s cash flows are based on historical results adjusted to reflect the Company’s best estimate of future market and operating conditions.  The net carrying value of assets not recoverable is then reduced to fair value.  The estimate of fair value represents the Company’s best estimate based on industry trends and reference to market rates and transactions.  The Company did not record any impairment to long-lived assets during the years ended December 31, 2018 and 2017.

Goodwill and Other Intangibles

Goodwill and other intangible assets generally result from business acquisitions. Goodwill is not subject to amortization, but is subject to annual impairment testing.  Intangible assets with definite lives, consisting primarily of purchased customer relationships, patents, technology, customer backlogs, trademarks and land use rights, are generally amortized over periods from less than one year to twenty years.  The Company’s intangible assets with finite lives are generally amortized using a projected cash flow basis method over their useful lives unless another method was demonstrated to be more appropriate.  Customer relationships, technology and trademark intangibles acquired in 2014 and 2012 are amortized using a projected cash flow basis method over the period in which the economic benefits of the intangibles are consumed.  Customer relationships, technology and trademarks acquired in July 2010 are being amortized using the straight-line method over their useful lives.  This straight-line method was more appropriate because it better reflected the pattern in which the economic benefits of the intangible asset are consumed or otherwise expire compared to using a projected cash flow basis method.  An evaluation of the remaining useful life of intangible assets with a determinable life is performed on a periodic basis and when events and circumstances warrant an evaluation. The Company assesses intangible assets with a determinable life for impairment consistent with its policy for assessing other long-lived assets.  Goodwill and intangible assets are also reviewed for impairment annually or more frequently when changes in circumstances indicate the carrying amount may be impaired, or in the case of finite-lived intangible assets, when the carrying amount may not be recoverable.  Events or circumstances that would result in an impairment review primarily include operations reporting losses or a significant change in the use of an asset.  Impairment charges are recognized pursuant to FASB ASC 350-20, “Goodwill”. 

The Company performs the annual impairment test for goodwill utilizing a combination of discounted cash flow methodology, market comparables, and an overall market capitalization reasonableness test in computing fair value by reporting unit.  The Company compares 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, the Company believes that the methodologies and weightings used are reasonable and result in appropriate fair values of the reporting units.

The Company performed its annual impairment test for goodwill as of October 1, 2018 and 2017 and determined that no adjustment to the carrying value was required for the years ended December 31, 2018 and 2017.

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.

Research and Development  

Research and development costs for new products are expensed as incurred and totaled $2.4 million in 2018, $2.1 million in 2017 and $2.7 million in 2016.

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Income Taxes

Income taxes are computed in accordance with the provisions of FASB ASC 740, “Income taxes” and includes U.S. (federal and state) and foreign income taxes. In the Consolidated Financial Statements, the benefits of a consolidated return have been reflected where such returns have or could be filed based on the entities and jurisdictions included in the financial statements. Tax legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) includes a mandatory one-time tax on certain accumulated earnings of foreign subsidiaries, and as a result, these previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company intends to continue to invest most or all of these earnings, as well as its capital in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant, additional taxes related to such amounts.  The Company will monitor cash balances at each of its foreign subsidiaries on an ongoing basis.  

In January 2018, the Financial Accounting Standard Board released guidance on the accounting for tax on the global intangible low-taxed income (GILTI) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as a period cost are both acceptable methods subject to an accounting policy election.  The Company has elected to account for GILTI as a component of tax expense in the period incurred.

Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected on the Consolidated Financial Statements. Deferred tax liabilities and assets are determined based on the differences between the book and tax basis of particular assets and liabilities and operating loss carryforwards using tax rates in effect for the years in which the differences are expected to reverse.

Deferred tax assets are recognized to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

Uncertain tax positions are recorded in accordance with ASC 740 on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Advertising

Advertising costs are expensed as incurred and totaled $1.9 million in 2018, $1.7 million in 2017 and $1.8 million in 2016.

Foreign Currency Translation

Asset and liability accounts are translated into U.S. dollars using exchange rates in effect at the date of the Consolidated Balance Sheet.  The translation adjustments are recorded in Accumulated other comprehensive income (loss).  Revenues and expenses are translated at weighted average exchange rates in effect during the period.  Transaction gains and losses arising from exchange rate changes on transactions denominated in a currency other than the functional currency are included in income and expense as incurred.  Aggregate transaction gains and losses for the years ended December 31, 2018, 2017 and 2016 were a loss of $1.5 million, a gain of $.3 million and a gain of $1.3 million, respectively.  Upon sale or substantially complete liquidation of an investment in a foreign entity, the cumulative translation adjustment for that entity is reclassified from Accumulated other comprehensive income (loss) to earnings.

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.  The impact to the Company’s Consolidated financial statements was not material and is included in the December 31, 2018 results.  Revenue from operations in Argentina was less than 2% of total consolidated net sales for the year ended December 31, 2018,

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent

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assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from these estimates.

Business Combinations

The Company accounts for acquisitions in accordance with ASC 805 “Business Combinations.”

Derivative Financial Instruments

The Company does not hold derivatives for trading purposes.

Recently Adopted Accounting Pronouncements

In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-05, “Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.” The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the U.S. Tax Cuts and Jobs Act of 2017 (“SAB 118”), which was effective immediately.  For additional details regarding SAB 118, refer to Note G “Income Taxes.”

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  The Company adopted ASU 2017-07 as of January 1, 2018.  The adoption did not have a material impact on the Company’s consolidated statements of operations and since prior period reclassifications were deemed immaterial, the Company elected to not make a retrospective adjustment to prior period income statements.  

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.”  The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  The Company adopted ASU 2016-18 as of January 1, 2018 using a retrospective transition method to each period presented.  The cash, cash equivalents and restricted cash balance on the Company’s consolidated cash flow includes $.3 million and $1.2 million of restricted cash as of December 31, 2018 and December 31, 2017, respectively.  Restricted cash is included in Other assets on the Company’s consolidated balance sheet in each period presented.  The adoption of ASU 2016-18 did not have a material impact on the Company’s consolidated financial statements.  Refer to Note E “Debt Arrangements” for additional details regarding the Company’s restricted cash.  

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.”  ASU 2016-16 modifies the recognition of income tax expense resulting from intra-entity transfers of assets other than inventory.  Pursuant to this amendment, entities should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  This amendment eliminates the exception for an intra-entity transfer of assets other than inventory.  The Company adopted ASU 2016-16 as of January 1, 2018 with no material impact on the Company’s consolidated financial statements.  

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, which changes how companies recognize, measure, present and make disclosures about certain financial assets and financial liabilities. Under this guidance, entities have to measure certain equity investments, including available-for-sale securities, at fair value and recognize any changes in fair value in net income. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods therein. The Company adopted ASU 2016-01 effective January 1, 2018.   Refer to Note K “Fair Value of Financial Assets and Liabilities” for additional details regarding the Company’s marketable securities.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” or ASU 2014-09.  ASU 2014-09 requires an entity to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  To achieve that core principle, the amendment provides five steps that an entity should apply when recognizing revenue.  The amendment also specifies the accounting of some costs to obtain or fulfill a contract with a customer and expands the disclosure requirements around contracts with customers.  In August 2015, the FASB issued ASU No. 2015-14 deferring the effective date of the amendment to annual reporting periods beginning after December 15, 2017, including interim periods therein.  

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The Company implemented changes to processes and controls to meet the standard’s reporting and disclosure requirements and adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective transition method applied to contracts that were not yet completed at that date.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be presented based on the Company’s historic accounting policy.  The cumulative impact of adopting ASU 2014-09 as of January 1, 2018 did not have a material impact on the Company’s consolidated financial statements.  Further, the Company does not expect the impact of the adoption of ASU 2014-09 to be material to its consolidated financial statements on an ongoing basis. Refer to Note L “Revenue” for additional details regarding the Company’s revenue recognition policy.  

New Accounting Standards To Be Adopted  

In February 2018, the FASB issued ASU 2018-02, “Income Statement (Topic 220), Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The FASB issued the update to provide amended guidance to allow a reclassification from Accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act.  Additionally, under the new guidance an entity will be required to provide certain disclosures regarding stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years, and the guidance may be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal income tax rate in the Tax Act is recognized. Early adoption is permitted.  The Company is currently assessing the impact, if any, that the ASU will have on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).”  The amendments in Topic 842 require the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements.  Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation for leases classified as operating leases under previous guidance. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease.  Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities.  

Topic 842 is required to be applied using a modified retrospective adoption method with the option of applying the guidance either retrospectively to each prior comparative reporting period presented or retrospectively at the beginning of the period of adoption. This ASU is effective for interim and annual periods on January 1, 2019, and the Company will apply the transitional package of practical expedients allowed by the standard to not reassess the identification, classification and initial direct costs of leases commencing before this ASU's effective date; however, the Company will not elect the hindsight transitional practical expedient. The Company also will apply the practical expedient to not separate lease and non-lease components to new leases as well as existing leases through transition. The Company will elect an accounting policy to not apply recognition requirements of the guidance to short-term leases.

In July of 2018, the FASB issued ASU 2018-11, “Targeted Improvements to ASC 842,” which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the initial application of transition.  The amendments in Topic 842 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  

The Company established a cross-functional implementation team and is finalizing policy elections, the discount rates to be used on January 1, 2019, data and business processes and controls to support recognition and disclosure under the new standard.  As discussed above, the primary impact upon adoption will be the recognition of right of use assets and lease obligations, on a discounted basis, of our minimum lease obligations as disclosed in Note F “Leases”.   The adoption of this ASU is not expected to have a material impact on the Company’s results of operations, cash flows or debt covenants.     

 

 

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Note B - Other Financial Statement Information

Inventories – net

 

 

Costs for inventories of certain material are determined using the LIFO method and totaled approximately $29.5 million and $25.1 million at December 31, 2018 and 2017, respectively.

Property and equipment – net

Major classes of property, plant and equipment are as follows:

 

 

Depreciation of property and equipment was $12.1 million in 2018, $11.8 million in 2017 and $10.8 million in 2016.  Machinery, equipment and aircraft includes $.1 million and $.2 million of capital leases at the years ended December 31, 2018 and 2017, respectively.

Legal proceedings

The Company can be party to a variety of pending legal proceedings and claims arising in the normal course of business, including, but not limited to, litigation relating to employment, workers’ compensation, product liability, environmental and intellectual property. The Company has liability insurance to cover many of these claims.  

Although the outcomes of these matters are not predictable with certainty, the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and the likelihood to develop what the Company believes to be a reasonable range of potential loss exists, the Company will include disclosure related to such matters.  To the extent that there is a reasonable possibility the losses could exceed amounts already accrued, the Company will adjust the accrual in the period in which the determination is made, disclose an estimate of the additional loss or range of loss and if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.

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”).

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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. The Company is unable to predict the outcome of this case and cannot reasonably estimate a potential range of loss.  However, if the matter is to be in a manner adverse to the Company, it could have a material effect on the Company’s financial results. 

 

 

Note C - Pension Plans

PLP-USA hourly employees of the Company who meet specific requirements as to age and length and date of service are covered by a defined benefit pension plan (“Plan”).  On December 12, 2012, the Company approved a freeze on further benefit accruals under the Plan and notified the participants of the freeze on December 19, 2012.  Beginning February 1, 2013, participants ceased earning additional benefits under the Plan and no new participants entered the Plan.  The Company uses a December 31 measurement date for its Plan.

Net periodic pension cost for the Plan consists of the following components for the year ended December 31:

 

 

The following tables set forth benefit obligations, plan assets and the accrued benefit cost of the Plan at December 31:

 

 

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In accordance with ASC 715-20, the Company recognizes the underfunded status of the Plan as a liability.  The amount recognized in Accumulated other comprehensive loss related to the Plan at December 31 is comprised of the following:

 

 

The 2018 pre-tax unfunded pension obligation loss of $0.3 million included a gain of $2.7 million due to a .5% increase in the discount rate to 4.25%, a gain of $.2 million associated with the industry updates to the mortality table used, offset by a loss of $.5 million due to demographic changes combined with a loss of $2.7 million resulting from asset performance below the 8.0% rate of return assumption.   The estimated net loss for the Plan that will be amortized from Accumulated other comprehensive income into periodic benefit cost for 2019 is $.5 million.  There is no prior service cost to be amortized in the future.

The Plan had accumulated benefit obligations in excess of Plan assets as follows:

 

 

 

Weighted-average assumptions used to determine net periodic benefit cost for the year ended December 31 are as follows:

 

 

The net periodic pension cost for 2018 was based on a long-term asset rate-of-return of 8.0%.  This rate is based upon management’s estimate of future long-term rates of return on similar assets and is consistent with historical returns on such assets.  Using the Plan’s mix of assets and based on the average historical returns and expected future returns for such mix, an expected long-term rate-of-return of 8.0% is justified.

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At December 31, 2018 and 2017, the fair value of the Plan assets included inputs in Level 1: Quoted market prices in active markets for identical assets or liabilities and Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. The fair value of the Plan assets as of December 31, 2018 and 2017, by category, are as follows:

 

 

 

The Plan weighted-average asset allocations at December 31, 2018 and 2017, by asset category, are as follows:

 

 

Management seeks to maximize the long-term total return of financial assets consistent with the fiduciary standards of ERISA.  The ability to achieve these returns is dependent upon the need to accept moderate risk to achieve long-term capital appreciation.

In recognition of the expected returns and volatility from financial assets, Plan assets are invested in the following ranges with the target allocation noted:

 

 

Investment in these markets is projected to provide performance consistent with expected long-term returns with appropriate diversification.

The Company's policy is to fund amounts deductible for federal income tax purposes.  The Company does not expect to contribute to the Plan in 2019.

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The benefits expected to be paid out of the Plan assets in each of the next five years and the aggregate benefits expected to be paid for the subsequent five years are as follows:

 

 

The Company also provides retirement benefits through various defined contribution plans including PLP-USA’s Profit Sharing Plan.  Expense for these defined contribution plans was $5.6 million in 2018, $5.1 million in 2017 and $5.8 million in 2016.

Further, the Company also provides retirement benefits through the Supplemental Profit Sharing Plan.  To the extent an employee’s award under PLP-USA’s Profit Sharing Plan exceeds the maximum allowable contribution permitted under existing tax laws, the excess is accrued for (but not funded) under a non-qualified Supplemental Profit Sharing Plan.  During January 2018, the Company amended the Supplemental Profit Sharing Plan to allow the participants the ability to hypothetically invest their proportionate award into various investment options, which primarily includes mutual funds.   Expense for the Supplemental Profit Sharing Plan was $.2 million for 2018, $.5 million for 2017 and $.5 million for 2016.  The Supplemental Profit Sharing Plan unfunded status for the years ended December 31, 2018 and 2017 was $4.9 million and $4.8 million, respectively, and is included in Other noncurrent liabilities.

 

Note D – Accumulated Other Comprehensive Income (“AOCI”)

The following tables set forth the total changes in AOCI by component, net of tax:

 

 

 

 

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Note E - Debt and Credit Arrangements

 

 

On March 13, 2018, the Company extended the term on its $65 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, 2018, the Company’s Polish subsidiary had borrowed $.9 million at a rate of 1.125% plus the Warsaw Interbank Offer Rate with a term expiring June 30, 2021.  As of December 31, 2018, the interest rates on the U.S. and Polish line of credit agreement were 3.63% and 2.77%, respectively.  As of December 31, 2018, the Company’s Australian subsidiary had borrowed $2.1 million at a rate of 1.125% plus the Australian Bank Bill Swap Bid Rate with a term expiring June 30, 2021.  As of December 31, 2018, the interest rate on the Australian line of credit agreement was 2.96%.  Under the credit facility, at December 31, 2018, the Company had utilized $15.2 million with $49.8 million available under the line of credit net of long-term outstanding letters of credit.  The PLP-USA line of credit provides for $5.0 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, 2018 and 2017, the Company was in compliance with all covenants.

The Company own a corporate aircraft with a remaining balance due on the loan of $11.0 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.

The Company’s Asia Pacific segment had $.3 million and $1.2 million in restricted cash at December 31, 2018 and 2017, respectively.  The restricted cash is used to secure bank debt and is included in Other assets on the balance sheet.

Aggregate maturities of long-term debt during the next five years are as follows: $1.4 million for 2019, $1.5 million for 2020,  $16.7 million for 2021, $1.5 million for 2022 and $5.2 million thereafter.

Interest paid was $1.8 million in 2018, $1.0 million in 2017 and $.7 million in 2016.

Guarantees and Letters of Credit

The Company has provided financial guarantees for uncompleted work and financial commitments.  The terms of these guarantees vary with end dates ranging from the current year through the completion of such transactions.  The guarantees would typically be triggered in the event of nonperformance.  As of December 31, 2018, the Company had total outstanding guarantees of $4.9 million.  Additionally, certain domestic and foreign customers require the Company to issue letters of credit or performance bonds as a condition of placing an order.  As of December 31, 2018, the Company had total outstanding letters of credit of $2.5 million.

 

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Note F - Leases

The Company has commitments under operating leases primarily for office and manufacturing space, transportation equipment, office equipment and computer equipment.  Rental expense was $2.6 million in 2018, $2.6 million in 2017 and $2.1 million in 2016.  Future minimum rental commitments having non-cancelable terms exceeding one year are $2.3 million in 2019, $1.9 million in 2020, $1.6 million in 2021, $.9 million in 2022, $.2 million in 2023, and an aggregate $6.3 million thereafter.  The total minimum sublease rentals to be received through 2024 under noncancelable subleases as of December 31, 2018 was $4.0 million.

The Company has commitments under capital leases for equipment and vehicles.  Amounts recognized as capital lease obligations are reported in Accrued expense and other liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets.   Future minimum rental commitments for capital leases are less than $.1 million for each of the years ended December 31, 2019, 2020, 2021 and 2022 and the related imputed interest for the capital leases in each of these years is less than $.1 million.  Future minimum rental commitment and imputed interest for capital leases in 2023 is $0.  Leased property and equipment under capital leases are amortized using the straight-line method over the term of the lease.  Routine maintenance, repairs and replacements are expensed as incurred.

 

 

Note G - Income Taxes

 

The Company recorded net tax provisions of $6.0 million, $13.2 million, and $5.7 million for the years ending December 31, 2018, 2017, and 2016, respectively.  Cash taxes paid net of refunds were $5.6 million, $3.4 million, and $6.9 million for the years ending December 31, 2018, 2017, and 2016, respectively.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act makes broad and complex changes to the U.S. tax code that affected 2017, including, but not limited to, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years.

The Tax Act also established new tax laws that affected 2018, including but not limited to, (1) reduction of the U.S. federal statutory rate from 35% to 21%; (2) the creation of the base erosion anti-abuse tax (BEAT), a new minimum tax; (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (4) a new provision, Global Intangible Low-Taxed Income (GILTI), which ends deferral of taxation on a significant portion of foreign earnings; (5) a new limitation on deductible interest expense; (6) the repeal of the domestic production activity deduction; (7) limitations on the deductibility of certain executive compensation; and (8) limitations on the use of FTCs to reduce the U.S. income tax liability.

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act.  SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.  To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

As a result of the application of SAB 118, the Company recorded provisional amounts related to the reduction of its deferred tax assets and liabilities resulting from the tax rate reduction from 35% to 21% and for the Transition Tax at December 31, 2017.  The Company updated these provisional amounts during the third quarter of 2018 and recorded a $.7 million decrease in tax expense related to the reduction of its deferred tax assets and liabilities, and a $.9 million decrease in tax expense related to the Transition Tax.  In the fourth quarter of 2018, the Company completed its analysis of the effects of the Tax Act and determined that no additional material adjustments were needed.

 

 

Income before income taxes was derived from the following sources:

 

 

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The components of income taxes for the year ended December 31 are as follows:

 

 

The differences between the provision for income taxes at the U.S. federal statutory rate and the tax shown in the Statements of Consolidated Income for the year ended December 31 are summarized as follows:

 

 

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Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax basis of assets and liabilities and their carrying value for financial statement purposes.  The tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities at December 31 are as follows:

 

 

 

Deferred taxes are recorded at a rate at which such items are expected to reverse based on 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.

At December 31, 2018, the Company had $9.2 million of foreign net operating loss carryforwards of which $7.7 million have an indefinite carryforward and $1.5 million will expire between the years 2024 and 2028.  

The Company assesses the available positive and negative evidence to determine if it is more likely than not sufficient future taxable income will be generated to utilize the existing deferred tax assets by jurisdiction.  Based on this evaluation, the Company has established a valuation allowance of $3.5 million at December 31, 2018 in order to measure only the portion of the deferred tax asset that is more likely than not to be realized.  The net increase in the valuation allowance during the year was $.5 million, of which $.1 million impacts the income tax provision and $.4 million relates to currency translation. 

The Company previously considered the majority of the earnings in our non-U.S. subsidiaries to be permanently reinvested and accordingly did not record any associated deferred income taxes on such earnings.  Since the Tax Act includes a mandatory one-time tax on certain accumulated earnings of foreign subsidiaries, these previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company intends to continue to invest approximately $92.0 million of the approximate total of $95.0 million of such earnings, as well as our capital in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant, additional taxes related to such amounts.  The Company has recorded a tax liability of $0.2 million related to the cost to remit such earnings not permanently reinvested, which is primarily related to local country withholding cost.

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The Company is subject to taxation in the U.S. and various state and foreign jurisdictions.  As of December 31, 2018, with few exceptions, the Company is no longer subject to U.S. federal examinations by tax authorities for years before 2014 and state, local or foreign examinations by tax authorities for years before 2012.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, for the year ended December 31:

 

 

The Company records accrued interest as well as penalties related to unrecognized tax benefits as part of the provision for income taxes.  During the years ended December 31, 2018, 2017 and 2016, the Company had no significant activity with regard to unrecognized tax benefits.  The Company had no accrued interest or penalties as of December 31, 2018, 2017 and 2016.  The Company does not anticipate a change in the unrecognized tax benefits within the next twelve months.

 

 

Note H – Share-Based Compensation

The 1999 Stock Option Plan

Activity in the Company’s 1999 Stock Option Plan for the year ended December 31, 2018 was as follows:

 

 

There were 0, 4,800 and 6,450 in stock options exercised during the years ended December 31, 2018, 2017 and 2016, respectively.  The total intrinsic value of stock options exercised during the year ended December 31, 2017 was approximately $.1 million.  No cash was received for the exercise of stock options during 2018.

The Company recorded no compensation expense related to these stock options for the years ended December 31, 2018, 2017 and 2016, as all options were fully vested as of December 31, 2012.

 

Long Term Incentive Plan of 2008 and 2016 Incentive Plan

The Company maintains an equity award program to give the Company a competitive advantage in attracting, retaining, and motivating officers, employees and directors and to provide an incentive to those individuals to increase shareholder value through long-term incentives directly linked to the Company’s performance.  Under the Preformed Line Products Company Long Term Incentive Plan of 2008 (the “LTIP”), certain employees, officers, and directors were eligible to receive awards of options, restricted shares and restricted share units (RSUs).  The total number of Company common shares reserved for awards under the LTIP was 900,000, of which 800,000 common shares were reserved for RSUs and 100,000 common shares were reserved for share options.  The Preformed Line Products Company 2016 Incentive Plan (the “Incentive Plan”) was put in place upon approval by the Company’s Shareholders at the 2016 Annual Meeting of Shareholders on May 10, 2016.  No further awards will be made under the LTIP and previously granted awards remain outstanding in accordance with their terms.  Under the Incentive Plan, certain employees, officers, and directors will be eligible to receive awards of options, restricted shares and RSUs.  The total number of Company common shares reserved for awards under the Incentive Plan is 1,000,000 of which 900,000 common shares have been reserved for restricted share awards and 100,000 common shares have been reserved for share options.  As of December 31, 2018, 10,000 options and 155,002 restricted shares have been granted under the Incentive Plan.  The Incentive Plan expires on May 10, 2026.      

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Restricted Share Units

For the regular annual grants, a portion of the RSUs is subject to time-based cliff vesting and a portion is subject to vesting based upon the Company’s performance over a set period for all participants except the CEO.  All of the CEO’s regular annual RSUs are subject to vesting based upon the Company’s performance over a set-year period.

The RSUs are offered at no cost to the employees, however, the participant must remain employed with the Company until the restrictions on the RSUs lapse.  The fair value of RSUs is based on the market price of a common share on the grant date.  Dividends declared are accrued.

A summary of the RSUs for the year ended December 31, 2018 is as follows:

 

 

For time-based RSUs, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award in General and administrative expense in the accompanying Statements of Consolidated Income.  Annual compensation expense related to the time-based RSUs for the years ended December 31, 2018, 2017 and 2016 was $.5 million, $.4 million and $.3 million, respectively.  As of December 31, 2018, there was $.6 million of total unrecognized compensation cost related to time-based RSUs that is expected to be recognized over the weighted-average remaining period of approximately 1.7 years.

For the performance-based RSUs, the number of RSUs in which the participants will vest depends on the Company’s level of performance measured by growth in pre-tax income and sales growth over a requisite performance period.  Depending on the extent to which the performance criterions are satisfied under the LTIP, the participants are eligible to earn common shares over the vesting period.  Performance-based compensation expense for the years ended December 31, 2018, 2017 and 2016 was $3.7 million, $2.7 million and $.9 million, respectively.  The Company participants forfeited 30,793 RSUs granted during 2015 upon vesting of the remaining portion of such awards at December 31, 2018 for which pre-tax income and sales growth performance were not fully achieved.  As of December 31, 2018, the remaining performance-based RSUs compensation expense of $4.6 million is expected to be recognized over a period of approximately 1.7 years.

The excess tax benefits from service and performance-based RSUs was $.2 million, $.2 million and $.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.  This represents the reduction in income taxes otherwise payable during the period attributable to the actual gross tax benefits in excess of the expected tax benefits for restricted shares vested in the current period.

In the event of a Change in Control (as defined in the LTIP and Incentive Plan), vesting of the RSUs will be accelerated and all restrictions will lapse. Nonvested performance-based awards are based on a maximum target potential payout.  Actual shares awarded at the end of the performance period may be less than the maximum potential payout level depending on achievement of performance-based award objectives.

To satisfy the vesting of its RSUs, the Company has reserved new shares from its authorized but unissued shares.  Any additional granted awards will also be issued from the Company’s authorized but unissued shares.   

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Deferred Compensation Plan

The Company maintains a trust, commonly referred to as a rabbi trust, in connection with the Company’s deferred compensation plan.  This plan allows for two deferrals.  First, Directors make elective deferrals of Director fees payable and held in the rabbi trust.  The deferred compensation plan allows the Directors to elect to receive Director fees in common shares of the Company at a later date instead of fees paid each quarter in cash.  Second, this plan allows certain Company employees to defer restricted shares or RSUs for future distribution in the form of common shares.  Assets of the rabbi trust are consolidated, and the value of the Company’s stock held in the rabbi trust is classified in Shareholders’ equity and generally accounted for in a manner similar to treasury stock.  The Company recognizes the original amount of the deferred compensation (fair value of the deferred stock award at the date of grant) as the basis for recognition in common shares issued to the rabbi trust.  Changes in the fair value of amounts owed to certain employees or Directors are not recognized as the Company’s deferred compensation plan does not permit diversification and must be settled by the delivery of a fixed number of the Company’s common shares.  As of December 31, 2018, 269,630 LTIP shares have been deferred and are being held by the rabbi trust.

Share Option Awards

The LTIP permitted and now the Incentive Plan permits the grant of 100,000 options to buy common shares of the Company to certain employees at not less than fair market value of the shares on the date of grant.   Options issued to date under the LTIP and Incentive Plan vest 50% after one year following the date of the grant, 75% after two years, and 100% after three years and expire from five to ten years from the date of grant.  Shares issued as a result of stock option exercises will be funded with the issuance of new shares.

The Company utilizes the Black-Scholes option pricing model for estimating fair values of options.  The Black-Scholes model requires assumptions regarding the volatility of the Company’s stock, the expected life of the stock award and the Company’s dividend yield.  The Company utilizes historical data in determining these assumptions.  The risk-free rate for periods within the contractual life of the option is based on the U.S. zero coupon Treasury yield in effect at the time of grant.  Forfeitures have been estimated to be zero.

There were 5,000, 5,000 and 0 options granted for the years ended December 31, 2018, 2017 and 2016, respectively.  The fair values for the stock options granted were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

Activity in the Company’s LTIP and Incentive Plan for the year ended December 31, 2018 was as follows:

 

 

The weighted-average grant-date fair value of options granted during 2018 was $61.39. There were 3,500, 28,500, and 500 stock options exercised during the years ended December 31, 2018, 2017 and 2016, respectively.  The total intrinsic value of stock options exercised was $.1 million, $.7 million and $0 for the years ended December 31, 2018, 2017 and 2016, respectively.  Cash received for the exercise of stock options during 2018 was $.2 million, $1.5 million in 2017 and less than $.1 million in 2016.

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For the years ended December 31, 2018, 2017 and 2016, the Company recorded compensation expense related to the stock options currently vested of less than $.1 million, $.1 million and $.2 million, respectively.  The total compensation cost related to nonvested awards not yet recognized at December 31, 2018 is expected to be $.1 million over a weighted-average period of approximately 2.6 years.     

The excess tax benefits from share-based awards for each of the years ended December 31, 2018, 2017 and 2016 was less than $.1 million.  This represents the reduction in income taxes otherwise payable during the period attributable to the actual gross tax benefits in excess of the expected tax benefits for options exercised in the current period.

 

 

Note I - Computation of Earnings Per Share

Basic earnings per share were computed by dividing net income by the weighted-average number of common shares outstanding for each respective period.  Diluted earnings per share were calculated by dividing net income by the weighted-average of all potentially dilutive common shares that were outstanding during the years presented.

The calculation of basic and diluted earnings per share for the year ended December 31 was as follows:

 

 

For the year ended December 31, 2018, 2017 and 2016, 260, 13,000 and 56,850 stock options, respectively, were excluded from the calculation of diluted earnings per share as the effect would have been anti-dilutive.

 

 

Note J - Goodwill and Other Intangibles

The Company’s finite and indefinite-lived intangible assets consist of the following:

 

 

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The Company performs its annual impairment test for goodwill utilizing a combination of discounted cash flow methodology, market comparables and an overall market capitalization reasonableness test in computing fair value by reporting unit.  The Company then compares 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 different. The Company believes that the methodologies and weightings used are reasonable and result in appropriate fair values of the reporting units.

The Company performed its annual impairment test for goodwill as of October 1, 2018 and October 1, 2017 and determined that no adjustment to the carrying value was required.  

 

 

The Company’s only intangible asset with an indefinite life is goodwill.  The Company’s goodwill is not deductible for tax purposes.   

The aggregate amortization expense for other intangibles with finite lives, ranging from 4 to 82 years, for each of the years ended December 31, 2018, 2017 and 2016 was $1.0 million.  Amortization expense is estimated to be $0.9 million for 2019, $0.9 million for 2020, $.8 million for 2021, $.8 million for 2022 and $.8 million for 2023.  The weighted-average remaining amortization period is approximately 16.3 years.  The weighted-average remaining amortization period by intangible asset class; patents, 7.0 years; land use rights, 57.0 years; trademark, 8.6 years; technology, 12.9 years and customer relationships, 11.4 years.

 

 

Note K – Fair Value of Financial Assets and Liabilities

The Company measures and records certain assets and liabilities at fair value. A fair value hierarchy is used for those assets and liabilities measured at fair value that distinguishes between assumptions based on market data (observable inputs), and the Company’s assumptions (unobservable inputs). The hierarchy consists of the following three levels:

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The following table summarizes the Company’s assets and liabilities, recorded and measured at fair value, in the consolidated balance sheets as of December 31, 2018 (there were no financial instruments measured at fair value at December 31, 2017):

 

 

During the year ended December 31, 2018, the Company invested $4.7 million in marketable securities, principally equity-based mutual funds, to mitigate the risk associated with the investment returns on the Company’s Supplemental Profit Sharing Plan discussed below. These marketable securities are comprised of available-for-sale securities.  During the year ended December 31, 2018, the Company sold $3.0 million from the marketable securities to fund a Corporate Owned Life Insurance Policy (“COLI”), resulting in the $1.6 million of marketable securities reported that are reported at fair value within Other current assets on the Company’s consolidated balance sheet as of December 31, 2018.  Changes in the fair value of the securities of  $.1 million were recognized within Other income, net within the consolidated statements of income for the twelve-month period ended December 31, 2018.  At December 31, 2018, the cash surrender value of the COLI was $2.8 million and is recorded in Other assets on the Company’s consolidated balance sheet.    

The Company has a non-qualified Supplemental Profit Sharing Plan for its executives. The liability for this unfunded Supplemental Profit Sharing Plan was $4.9 million and $4.8 million at December 31, 2018 and December 31, 2017, respectively, and is recorded within Other noncurrent liabilities on the Company’s consolidated balance sheets. During January 2018, the Company amended the Supplemental Profit Sharing Plan to allow the participants the ability to hypothetically invest their proportionate award into various investment options, which primarily includes mutual funds. The company then credits earnings, gains and losses to the participants’ deferred compensation account balances based on the investments selected by the participants. The Company measures the fair value of the Supplemental Profit Sharing Plan liability using the market values of the participants’ underlying investment accounts.

The carrying value of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and short-term debt, approximates fair value because of the short-term maturity of these instruments.

At December 31, 2018, the fair value of the Company’s long-term debt was estimated using discounted cash flows analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements that are considered to be Level 2 inputs. There have been no transfers in or out of Level 2 for the year ended December 31, 2018.  Based on the analysis performed, the fair value and the carrying value of the Company’s long-term debt are as follows:

 

 

 

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Note L – Revenue

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.

 

Disaggregated revenue

 

The Company’s revenues by segment and product type are as follows:

 

 

Note M – Segment Information

The Company designs, manufactures and sells hardware employed in the construction and maintenance of telecommunication, energy and other utility networks, data communication products and mounting hardware for solar power applications. Principal products include cable anchoring, control hardware and splice enclosures, which are sold primarily to customers in North and South America, Europe, South Africa and Asia Pacific.

The Company reports its segments in four geographic regions: PLP-USA, The Americas, 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 the Company’s primary products.  The PLP-USA segment is comprised of U.S. operations manufacturing the Company’s traditional products primarily supporting domestic energy, telecommunications and solar products.  The other three segments, The Americas, EMEA and Asia-Pacific support the Company’s 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 company rather than the results of any individual business component of the segment.

The amount of each segment’s performance reported to the chief operating decision maker is for purposes of making decisions about allocating resources to the segment and assessing its performance.  The Company evaluates segment performance and allocates resources based on several factors primarily based on sales and income from continuing operations, net of tax.

The accounting policies of the operating segments are the same as those described in Note A in the Notes to Consolidated Financial Statements. No single customer accounts for more than ten percent of the Company’s consolidated revenue.  U.S. net sales for the year ended December 31, 2018, 2017, and 2016 were $169.0 million, $147.6 million and $135.3 million, respectively.  U.S. long-lived assets as of December 31, 2018 and 2017 were $51.5 million and $53.2 million, respectively.

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The following table presents a summary of the Company’s reportable segments for the year ended December 31, 2018, 2017 and 2016. Financial results for the PLP-USA segment include the elimination of all segments’ intercompany profits in inventory.  

 

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Note N - Related Party Transactions

 

On February 6, 2018, the Company purchased 7,877 shares of the Company from current Officers and a retired Officer at a price per share of $80.20, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved this transaction.   

On March 15, 2018, the Company purchased 1,430 shares of the Company from a current Officer at a price per share of $63.63, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved this transaction.

On May 10, 2018, the Company purchased 3,200 shares of the Company from a current Officer at a price per share of $68.10, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved this transaction.   

On June 1, 2018, the Company purchased 8,800 shares of the Company from a retired Officer at a price per share of $73.53, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved this transaction.   

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On June 15, 2018, the Company purchased 1,500 shares of the Company from current Officers at a price per share of $77.06, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved this transaction.   

On August 7, 2018, the Company purchased 17,141 shares of the Company from current Officers and a retired officer at a price per share of $87.19, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved this transaction.   

On August 23, 2018, the Company purchased 2,000 shares of the Company from a current employee at a price per share of $83.53, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved this transaction.   

On September 14, 2018, the Company purchased 7,500 shares of the Company from a current Officer at a price per share of $80.95, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved this transaction.

On December 18, 2018, the Company purchased 35 shares of the Company from a retired Officer at a price per share of $57.85, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved this transaction

On January 3, 2017, the Company purchased 1,834 shares of the Company from current Officers at a price per share of $58.58, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved these transactions.   

On May 9, 2017, the Company purchased 2,500 shares of the Company from a current Officer at a price per share of $52.05, which was calculated from a 30-day average of market price in connection with the vesting of equity awards.  The Audit Committee of the Board of Directors approved this transaction.   

On August 16, 2017, the Company purchased 24,920 shares of the Company from a trust for the benefit of Barbara P. Ruhlman at a price per share of $50.16, which was calculated from a 30-day average of market price.  Barbara P. Ruhlman is Director Emeritus for the Company’s Board of Directors and the mother of Robert G. Ruhlman and grandmother of J. Ryan Ruhlman and Maegan A. R. Cross, all of whom are also members of the Board of Directors and Messrs. Robert G. Ruhlman and J. Ryan Ruhlman also serve as executive officers of the Company.  The purchase was consummated pursuant to a Share Purchase Agreement dated August 16, 2017, between the Company and the trust.  The Audit Committee of the Board of Directors approved this transaction.

On November 8, 2017, the Company purchased 24,874 shares of the Company from current Officers and other employees, at a price per share of $71.07, which was calculated from a 30-day average market price.  Additionally, on November 8, 2017, the Company purchased 7,000 shares of the Company from Robert G. Ruhlman, at a price per share of $71.07, which was calculated from a 30-day average market price.  Mr. Ruhlman is Chairman, President and Chief Executive Officer (CEO) of the Company, son of Barbara P. Ruhlman, Director Emeritus, and father of J. Ryan Ruhlman and Maegan A. R. Cross, each of whom are also members of the Board of Directors and Mr. J. Ryan Ruhlman is an executive officer of the Company.  The Audit Committee of the Board of Directors approved these transactions.    

On November 17, 2017, the Company purchased 7,975 shares of the Company from current Officers and other employees, at a price per share of $74.51, which was calculated from a 30-day average market price.  The Audit Committee of the Board of Directors approved these transactions.  

On November 30, 2017, the Company purchased 3,334 shares of the Company from a retired Officer of the Company, at a price per share of $75.37, which was calculated from a 30-day average market price.  The Audit Committee of the Board of Directors approved this transaction.

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On December 13, 2017, the Company purchased 21,650 shares of the Company from current Officers and other employees, at a price per share of $78.68, which was calculated from a 30-day average market price.  Additionally, on December 13, 2017, the Company purchased 7,500 shares of the Company from Randall M. Ruhlman at a price per share of $78.68, which was calculated from a 30-day average market price.  Mr. Ruhlman is the son of Barbara P. Ruhlman, Director Emeritus, brother of Robert G. Ruhlman and a former member of the Company’s Board of Directors.  The Audit Committee of the Board of Directors approved these transactions.  

On December 13, 2017, the Company purchased 15,000 shares of the Company from a trust for the benefit of Barbara P. Ruhlman, Director Emeritus, at a price per share of $78.68, which was calculated from a 30-day average of market price.  The purchase was consummated pursuant to a Share Purchase Agreement dated December 13, 2017, between the Company and the trust.  The Audit Committee of the Board of Directors approved this transaction.

In 2016, the Company purchased 7,703 common shares of the Company from current Officers and other employees, at a price per share ranging between $42.10 and $45.20, which was calculated from a 30-day average of market price.  The Audit Committee of the Board of Directors approved these transactions.

On August 23, 2016, the Company purchased 27,448 shares of the Company from a trust for the benefit of Barbara P. Ruhlman and a foundation of which Barbara P. Ruhlman, Robert G. Ruhlman and Bernard Karr are officers, at a price per share of $44.66 which was calculated from a 30-day average of market price.  The purchase was consummated pursuant to Share Purchase Agreements both dated August 23, 2016, between the Company and the foundation, and the Company and the trust.  The Audit Committee of the Board of Directors approved these transactions.

On December 29, 2016, the Company purchased 5,000 shares from a current Officer, at a price per share of $56.38, which was calculated from a 30-day average of market price.   The Audit Committee of the Board of Directors approved this transaction.

The Company’s Australian subsidiary utilizes copper extrusion services from Cast Alloy.  For each of the years ended December 31, 2018, 2017 and 2016, PLP-Australia incurred a total of $.2 million for these expenses.  Cast Alloy is owned by Simi Almasan, Continuous Improvement Engineer, a current PLP employee.  The Audit Committee of the Board of Directors approved these transactions.

The Company’s New Zealand subsidiary, Electropar currently leases one parcel of property, on which it has its corporate office, manufacturing and warehouse space.  The entities leasing the property to Electropar are owned, in part, by Grant Wallace, a former Director who is no longer with the Company as of March 2017, therefore no related party expense was incurred in 2018.  For the year ended December 31, 2017, Electropar incurred less than $.1 million for such lease expense.  For the year ended December 31, 2016, Electropar leased two parcels of property which were owned, in part, by Grant Wallace, a former Director, and incurred a total of $.3 million annually for such lease expense.   The Audit Committee of the Board of Directors approved these transactions.

The Company’s Belos operation previously hired temporary employees through a temporary work agency, Flex-Work Sp. Z.o.o., which is 50% owned by Agnieszka Rozwadowska.  Agnieszka Rozwadowska is the wife of Piotr Rozwadowska, the Managing Director of the Belos operation located in Poland.  For the years ended December 31, 2018, 2017 and 2016, Belos incurred a total of $.0 million, $.0 million and $.4 million, respectively, for such temporary labor expense.  The Audit Committee of the Board of Directors approved these transactions.

During 2018, the Company paid approximately $.1 million in legal fees to Baker & Hostetler LLP, of which R. Steven Kestner was the Chairman and the chair of its policy committee.  Mr. Kestner is a Director of the Company.

Note O -Business Combinations

None.

 

 

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Note P – Product Warranty Reserve

The Company records an accrual for estimated warranty costs to Costs of products sold in the Statements of Consolidated Income.  These amounts are recorded in Accrued expenses and other liabilities in the Consolidated Balance Sheets.  The Company records and accounts for its warranty reserve based on specific claim incidents.  Should the Company become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly.  Adjustments are made quarterly to the accruals as claim information changes.

The following is a rollforward of the product warranty reserve:

 

 

 

Note Q - Quarterly Financial Information (unaudited)

The following table summarizes the Company’s results of operations for each of the quarters in 2018 and 2017:

 

 

Note R –Subsequent Events

 

On February 28, 2019, the Company acquired SubCon Electrical Fittings GmbH (“SubCon”), headquartered in Dornbirn, Austria with manufacturing operations in Brno, Czech Republic. The acquisition is not considered material as assets acquired are less than 5% of the Company’s total consolidated assets.  The acquisition of SubCon will strengthen the Company’s position in the global substation market and will expand its operational presence in Europe.    

 

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

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, 2018.

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.

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, 2018.  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, 2018.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 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, 2018 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

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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, 2018, 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, 2018, based on the COSO criteria.

 

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, 2018 and 2017, 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, 2018 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 8, 2019 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 8, 2019

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Item 9B. Other Information

None

 

 

Part III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item 10 is incorporated by reference to the information under the captions “Corporate Governance – Board Composition”, “Corporate Governance - Election of Directors”, “Section 16(a) Beneficial Ownership Compliance”, “Corporate Governance – Code of Conduct” and “Corporate Governance – Board Committees and Meetings – Audit Committee” in the Company’s Proxy Statement, for the Annual Meeting of Shareholders to be held May 7, 2019 (the “Proxy Statement”).  Information relative to executive officers of the Company is contained in Part I of this Annual Report on Form 10-K.

Item 11. Executive Compensation

The information set forth under the caption “Directors and Executive Officers Compensation” and “Compensation Policies and Risk” in the Proxy Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Other than the information required by Item 201(d) of Regulation S-K the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.  The information required by Item 201(d) of Regulation S-K is set forth in Item 5 of this report.

Item 13. Certain Relationships, Related Transactions and Director Independence

The information set forth under the captions “Transactions with Related Persons” and “Election of Directors” in the Proxy Statement is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information set forth under the captions “Independent Registered Public Accounting Firm”, “Audit Fees”, “Audit-Related Fees”, “Tax Fees” and “All Other Fees” in the Proxy Statement is incorporated herein by reference.

 

 

Part IV

Item 15. Exhibits and Financial Statement Schedules

 

 

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacity and on the dates indicated.

 

 

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PREFORMED LINE PRODUCTS COMPANY

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

Year Ended December 31, 2018, 2017 and 2016

(Thousands of dollars)

 

 

 

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