PREFORMED LINE PRODUCTS CO - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2020

or

☐  Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Transition Period From   ________To _______                     

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 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.

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    ☒

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, 2020 was $115,197,295 based on the closing price of such common shares, as reported on the NASDAQ National Market System.  As of March 1, 2021, there were 4,932,008 common shares of the Company ($2 par value) outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 5, 2020 are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14.

Table of Contents

2

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:

3

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.

4

Part I

Item 1.  Business

Background

Preformed Line Products Company together with its subsidiaries (the “Company”) is an international designer and manufacturer of products and systems employed in the construction and maintenance of overhead, ground-mounted 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.  With the exception of one sales office, 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  to support, protect, terminate and secure both power conductor and fiber 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%, 67% and 66% of the Company’s revenues in 2020, 2019 and 2018, 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 24%, 22% and 21% of the Company’s revenues in 2020, 2019 and 2018, respectively.

Special Industries Products include data communication cabinets, hardware assemblies, pole line hardware, resale products, underground connectors, solar hardware systems, guy markers, tree guards, fiber optic cable markers, pedestal markers and urethane products.  They are used by energy, renewable energy, communications, cable and special industries (i.e., metal building, tower and antenna industries, the agriculture and arborist industries, and marine systems industry) for various applications and are defined as products that complement the Company’s core line offerings.  Special industries products were approximately 10%, 11% and 13% of the Company’s revenues in 2020, 2019 and 2018, 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.

5

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

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

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

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

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

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

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

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

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

Business

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

6

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

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

Fiber optic cable was first deployed in the outside plant environment in the early 1980s.  Through fiber optic technologies, a much greater amount of both voice and data communication can be transmitted reliably.  In addition, this technology solved the cable congestion problem that the large count copper cable was causing in underground, buried and aerial applications.  The Company developed and adapted copper closures for use in the emerging fiber optic world.  In the late 1980s, the Company developed a series of splice cases designed specifically for fiber optic application.  In the mid-1990s, the Company developed its plastic COYOTE® Closure and has since expanded the product line to address Fiber-to-the-Premises (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 need upgrades throughout much of the U.S.  With demand for power now exceeding supply in some areas, the need for the movement of bulk power from the energy-rich areas to the energy-deficient areas means that new transmission lines will likely be built and many existing lines will likely be refurbished.  Connecting renewable energy sources to the grid should also continue to attract new investment to fund transmission infrastructure projects in the future.  The Company believes that this may generate opportunities for the Company’s products in this market over at least the next several years.  In addition, increased construction of international transmission grids is occurring in many regions of the world.  However, consolidations in the markets that the Company services with increased global competition, as well as stagnant or declining economic conditions, limited government funding and lower energy prices, may also have an adverse impact on the Company’s sales.

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

7

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.  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.

8

Sales and Marketing

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

Research and Development

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

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

The Company believes that its Research and Engineering Center is one of the most sophisticated in the world in its specialized field.  The Research and Engineering Center also has an advanced prototyping technology machine on-site to develop models of new designs where intricate part details are studied prior to the construction of expensive production tooling.  Today, the Company’s reputation for vibration testing, tensile testing, fiber optic cable testing, environmental testing, field vibration monitoring and third-party contract testing is a competitive advantage.  In addition to testing, the work performed at the Company’s Research and Development Center continues to fuel product development efforts.  For example, the Company estimates that approximately 16.7% of 2020 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 $2.8 million in 2020, $3.0 million in 2019 and $2.4 million in 2018.

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, 2020, the Company had in force 44 U.S. patents and 119 international patents in 21 countries and had 23 pending U.S. patent applications and 48 pending international applications.  While such domestic and international patents expire from time to time, the Company continues to apply for and obtain patent protection on a regular basis. Patents held by the Company in the aggregate are of material importance in the operation of the Company’s business.  The Company, however, does not believe that any single patent, or group of related patents, is essential to the Company’s business as a whole or to any of its businesses.  Additionally, the Company owns and uses a substantial body of proprietary information and numerous trademarks.  The Company relies on nondisclosure agreements to protect trade secrets and other proprietary data and technology.  As of December 31, 2020, the Company had obtained U.S. registration on 34 trademarks and 5 trademark application remained pending.  International registrations amounted to 241 registrations in 35 countries, with 6 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.

9

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

Sources and Availability of Raw Materials

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

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

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

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

10

Raw material costs were stable throughout most of 2020 and then began to gradually increase in the fourth quarter.  The Company expects prices on metals and plastics to continue to increase throughout 2021.  

The Company cannot currently predict the continuing impact of the COVID-19 pandemic on its supply chain or global business operations. The Company’s supply chain has been and could continue to be disrupted by the COVID-19 pandemic which could have a material, adverse effect on its ability to secure raw materials and supplies.

Backlog Orders

The Company’s backlog was approximately $115.1 million at the end of 2020 and $111.2 million at the end of 2019.  All customer orders entered are firm at the time of entry.  Most orders can be shipped within a two to four-week period unless the customer requests an alternative date.

Seasonality

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

Environmental

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

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

Human Capital  

At December 31, 2020, the Company had 2,969 employees, the overwhelming majority of which are full-time employees.  Approximately 25% of the Company’s employees are located in the U.S.

The Company views its employees and culture as keys to its success.  The Company aims to attract and retain employees who will be empowered to have the freedom to make decisions and take actions in the best interest of the Company, while being recognized and accountable for those decisions and actions.  The Company focuses on innovation, inclusion and diversity, safety and engagement to develop the best talent.  

The COVID-19 pandemic continues to impact businesses globally.  The Company has been successful with proactive measures to protect the health and safety of its employees and to maintain business continuity.  The Company has established several safety protocols in its production and office areas, including, but not limited to schedule rotations, face coverings, barriers, physical distance requirements, enhanced cleaning procedures and body temperature monitoring.  The Company continues to assess all challenges related to COVID-19 and regularly updates its employees.  

For more information on the risks related to the Company’s human capital resources, see Item 1A – Risk Factors.  

11

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.

Item 1A. Risk Factors

The Company’s business, operating results, financial condition and cash flows may be affected by a number of factors including, but not limited to those discussed below.  Any of these factors could cause the Company’s actual results to vary material from recent results of future anticipated results.  

Industry and Economic Risks

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

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

The 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.

12

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

The Company’s cost of sales may be materially adversely affected by increases in the market prices of the raw materials used in the Company’s manufacturing processes.  The Company may not be able to pass on price increases in raw materials to the Company’s customers through increases in product prices.  As a result, the Company’s operating results could be adversely affected.  In addition, any decrease or delay in the availability of these materials or interruptions generally in the global supply chain could slow production and delivery to the Company’s customers.  The Company’s supply chain has been and could continue to be disrupted by the COVID-19 pandemic which could have a material, adverse effect on the ability to secure raw materials and supplies.

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 (57%, 60% and 61% in 2020, 2019 and 2018, respectively) and the Company expects these sales could increase as a percentage of net sales in the future.  Due to its international sales, the Company is subject to the risks of conducting business internationally, including unexpected changes in, or impositions of, legislative or regulatory requirements, which could materially adversely affect U.S. dollar sales or operating expenses, tariffs and other barriers and restrictions, potentially longer payment cycles, greater difficulty in accounts receivable collection, reduced or limited protection of intellectual property rights, potentially adverse taxes and the burdens of complying with a variety of international laws and communications standards.  The Company is subject to foreign currency volatility which could materially impact the Company’s operating results, including the impact of hyper-inflationary conditions in certain economies, particularly where exchange controls limit or eliminate the Company’s ability to convert from local currency.  The Company is also subject to general geopolitical risks, such as political and economic instability, social unrest, terrorism and changes in diplomatic and trade relationships in connection with its international operations. Any such disruption could cause delays in the production and distribution of the Company’s products and the loss of sales and customers. Moreover, these types of events could negatively impact consumer spending or the economy in the impacted regions or depending upon the severity, globally.  These risks of conducting business internationally may have a material adverse effect on the Company’s business, operating results and financial condition.

Additionally, in 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union (“Brexit”).  Continued uncertainty relating to Brexit could adversely impact the Company.  The United Kingdom formally exited the European Union on January 31, 2020 and had a transition period that ended on December 31, 2020.  Since January 1, 2021, the European Union – United Kingdom Trade and Cooperative Agreement has provisionally been in effect.  Due to the lack of comparable precedent, the ongoing uncertainty regarding the current situation could continue to or have a further adverse impact on global economic conditions, the stability of global financial markets and global market liquidity, including effects on the discontinuation, reform or replacement of LIBOR as a reference interest rate included under the Company’s credit facility. Any of these factors could depress economic activity or lead to long-term volatility in the currency markets which could adversely impact the Company’s business, financial condition and results of operations.

The COVID-19 pandemic may have a material adverse effect on the Company’s business, operating results and financial condition

The Company is subject to public health concerns, including viral outbreaks such as the COVID-19 pandemic. COVID-19 has significantly impacted worldwide economic conditions and could continue to have an adverse effect on the Company’s operations and businesses as government authorities could continue to impose mandatory closures, work-from-home orders and social distancing protocols along with other unknown potential restrictions.  COVID-19 has disrupted and could continue to disrupt the Company’s supply chain, which could have a material, adverse effect on the Company’s ability to secure raw materials and supplies and could result in increased costs and the loss of sales and customers. The impact of COVID-19 could potentially exacerbate all the risks discussed and lead to the creation of new risks, any of which could have a material adverse effect on the Company’s business, operating results and financial condition. The duration and scope of the COVID-19 pandemic cannot be predicted, and therefore, any anticipated negative financial impact to the Company’s operating results cannot be reasonably estimated.

Business and Operations Risks

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

13

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

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

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

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

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

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

14

Legal, Tax and Regulatory Risks

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. It is difficult to predict what impact, if any, changes in federal policy, including environmental and tax policies, as a result of recent U.S. federal elections will have on our industry, the economy as a whole, consumer confidence and spending. As a result, the nature, timing and impact on our business of potential changes to the current legal and regulatory frameworks are uncertain.  At any given time, the Company may also be subject to litigation or claims related to its products, suppliers, customers, employees, shareholders, distributors, sales representatives, intellectual property or acquisitions, among other things, the disposition of which may have an adverse effect upon the Company’s business, financial condition, or results of operation. The outcome of litigation is difficult to assess or quantify. Lawsuits can result in the payment of substantial damages by defendants. If the Company is required to pay substantial damages and expenses as a result of these or other types of lawsuits, the Company’s business and results of operations would be adversely affected. Regardless of whether any claims against the Company are valid or whether it is liable, claims may be expensive to defend, may cause reputational harm (particularly where any claims relate to significant harm to persons and property) and may divert time and money away from the Company’s operations. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of the Company’s insurance coverage for any claims could adversely affect the Company’s business and operating results.

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

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

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

The Company is subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating the provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. The Company’s effective tax rates could be affected by numerous factors, including but not limited to, intercompany transactions, the relative amount of its foreign earnings, including earnings being lower than anticipated in jurisdictions where the Company has lower statutory rates and higher than anticipated in jurisdictions where the Company has higher statutory rates, losses incurred in jurisdictions for which the Company is not able to realize the related tax benefit, changes in foreign currency exchange rates, changes in its deferred tax assets and liabilities and any related valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations.  Finally, due to the Covid-19 pandemic foreign governments tried to help stimulate the economy by enacting new tax legislation throughout the 2020 year.  These foreign governments will continue to look into future changes to the

Risk Factors Related to Human Capital

The Company depends on maintaining a skilled workforce and any interruption in the workforce could negatively impact the Company’s operating results and financial condition.  

The Company’s ability to sustain and grow its business requires a commitment to hire, retain and develop a highly skilled and diverse management team and workforce.  Failure to ensure that we have the depth and breadth of personnel with the necessary skill

15

set and experience, or the loss of key employees, could impede the Company’s ability to deliver its growth objectives and execute its strategy.

The Company continues to develop and invest in human capital through continuing education, work-related certifications, and talent and performance management systems.  These efforts directly impact the ability to deliver its growth objectives and execute its strategy.

Item 1B. Unresolved Staff Comments

The Company does not have any unresolved staff comments.

Item 2.  Properties

The Company currently owns or leases 40 facilities, which together contain approximately 2.6 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:

16

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.  During the year ended December 31, 2020, the Company accrued approximately $2.2 million representing its best estimate for losses to be incurred on a variety of global legal matters.

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

The Complaint states that Plaintiff engaged SNC ATP to design, engineer, procure and construct numerous power distribution and transmission facilities in Alberta (the “Projects”) and that through SNC ATP and HD Supply (now Anixter), spacer dampers manufactured by Helix were procured and installed in the Projects.  The Complaint alleges that the spacer dampers have and may continue to become loose, open and detach from the conductors, resulting in damage and potential injury and a failure to perform the intended function of providing spacing and damping to the Project.  The Plaintiffs are 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 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, however, it has recorded a reserve for the low end of the range for potential loss associated with this matter.  If this matter is concluded in a manner adverse to the Company, it could have a material effect on the Company’s financial results.

Item 4. Mine Safety Disclosures

Not applicable

Item 4A. Information about our Executive Officers

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.

17

The following sets forth the name and recent business experience for each person who is an executive officer of the Company at March 1, 2021:

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.

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 Executive Vice President - U.S. Operations in October 2020.  Prior to that, Mr. Hofstetter served as Vice President – Sales and Global Communications Markets and Business Development in April 2012.  

Andrew S. Klaus was elected Chief Financial Officer in April 2020.  Previous to his employment with the Company, Mr. Klaus served as the Chief Accounting Officer and VP Corporate Controller at Vertiv Holdings Co. since 2017.  Mr. Klaus served as the Chief Financial Officer of Consolidated Precisions Products Corporation from 2013 to 2017 and Vice President, Corporate Controller for JMC Steel Group (now known as Zekelman Industries, Inc.) from 2007 to 2013.

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.

John J. Olenik was elected Vice President - Research and Engineering in January 2020.  Prior to that, Mr. Olenik was the Company’s Director of Engineering since 2013 where he was promoted from his prior role as Engineering Manager of Power Product Development.  Mr. Olenik has been with the Company since 1997.    

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.

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.

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

18

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 1, 2021, the Company had approximately 2,000 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.

19

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, 2015, December 31, 2016, December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020, assuming in each case an initial investment of $100 on December 31, 2015, and reinvestment of dividends.

Purchases of Equity Securities

On March 16, 2020, the Board of Directors authorized a plan to repurchase up to an additional 235,625 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, 2020:

20

Item 6.  Selected Financial Data

Omitted

21

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 30 sales and manufacturing operations in 21 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.

22

MARKET OVERVIEW

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

In 2020, sales in the energy market continued to increase due to the number and scale of energy and communication projects in North America.  We believe that our leadership position in the market and ability to deliver reliable products quickly will enable us to take advantage of prospects for continued growth as transmission grids are enhanced and extended.  As communication networks continue to be upgraded and expanded, our product offering positions us well to participate in the expansion.

Our international business is more concentrated in the energy and communications markets, which is where we experienced our most significant top line growth in 2020.  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.  

The following discussion describes our results of operations for the years ended December 31, 2020 and 2019. The first quarter of 2020 saw the global outbreak of a novel strain of coronavirus (“COVID-19”), which in the latter part of the quarter created significant global economic disruption.  While the recent outbreak did not have a material impact on our results for the reported periods, it created challenges for us in countries that were the earliest to be impacted by the pandemic, namely countries in our Asia-Pacific business segment. Due to restrictions on our operations, the operations of our customers and the global supply chain, we are continuing to actively monitor the impact of COVID-19 on future periods.

As the virus spread, we took action to protect the health and safety of our employees while we maintained critical operations to protect our customers and suppliers.  Many of our customers are considered “essential” and remained open for business, although in a limited capacity in some cases, which slowed demand into the second and third quarter, most notably for specific customers in our Asia Pacific business segment. Our North American plants have remained fully operational and only some of our international plants were closed temporarily. There are some restrictions on the supply of products and potential price increases globally.  The possibility of these restrictions may continue or expand to other regions, but our global supply chain currently remains strong.

Due to the uncertainty created by COVID-19, we are actively managing costs and our liquidity position to provide additional flexibility while still supporting our customers and their specific needs.  We have reduced and may continue to reduce operating expenses and could experience lower variable SG&A, primarily through a decrease in travel-related expenses incurred by our associates, due to travel restrictions.

While we expect the COVID-19 outbreak could continue to have an adverse impact on our business, the businesses of our customers and the global economy, we cannot predict the duration or scope of the COVID-19 pandemic or the magnitude of its impact on our business and results of operations.  In addition, the impact of COVID-19 could potentially exacerbate other risks discussed, any of which could have a material adverse effect on the Company.  We continue to assess all challenges related to COVID-19 and plan accordingly.

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

23

statements translate into fewer U.S. dollars.  In total, foreign currencies weakened against the U.S. dollar in both 2020 and 2019.  The fluctuations of foreign currencies during the years ended December 31, 2020 and 2019 had an unfavorable impact on net sales of $16.9 million and $14.2 million, respectively.  On a reportable segment basis, the unfavorable impact of foreign currency translation on net sales and net income for the years ended December 31, 2020 and 2019, respectively, was as follows:

The effect of currency translation had an unfavorable impact on net income in the years ended December 31, 2020 and 2019 of $1.3 million and $.3 million, respectively.  There were $2.1 million in losses on foreign currency translation on operating income for the year ended December 31, 2020.  There were transaction losses of $1.5 million that were partially mitigated by forward currency contract gains of $.4 million in the year ended December 31, 2020 and $.2 million of transaction losses in the year ended December 31, 2019 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 expand into new markets for us to improve efficiency, develop new products, increase our capacity and become an even stronger supplier to our current and new customers.  We currently have a bank debt to equity ratio of 19.2% and can borrow needed funds at a competitive interest rate under our credit facility.  A consolidated decrease in debt of $9.8 million as of December 31, 2020 was partially a result of prior year funding needs for two acquisitions and the 2020 sale of a corporate aircraft, which contributed to the decrease in our bank debt to equity ratio from 24.5% at December 31, 2019.  See Note E in the Notes to Consolidated Financial Statements for more information related to our debt position.

24

The following table sets forth a summary of the Company’s Statements of Consolidated Income and the percentage of net sales for the years ended December 31, 2020 and 2019.  The Company’s past operating results are not necessarily indicative of future operating results.

2020 RESULTS OF OPERATIONS COMPARED TO 2019

Net sales.  In 2020, net sales were $466.4 million, an increase of $21.6 million, or 5%, compared to 2019.  Excluding the unfavorable effect of currency translation, net sales increased 9% as summarized in the following table:

The increase in PLP-USA net sales of $23.0 million, or 13%, was primarily due to a volume increase in energy and communication product sales.  International net sales for the year ended December 31, 2020 were unfavorably affected by $16.9 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 $74.2 million increased $21.4 million, or 31%, primarily due to higher volume in energy and communication product sales.  EMEA net sales of $91.1 million increased $12.7 million, or 16%, primarily due to volume increases in communication products in the region, including incremental sales from businesses acquired in 2019.  The Asia-Pacific net sales of $99.9 million decreased $18.7 million, or 16%, compared to 2019 primarily due to a combined volume decrease mostly as a result of the disruption to the global economy caused by the COVID-19 pandemic.  

25

Gross Profit.  Gross profit of $154.0 million for 2020 increased $13.4 million, or 10%, compared to 2019.  Excluding the unfavorable effect of currency translation, gross profit increased $18.5 million, or 13%, as summarized in the following table:

PLP-USA gross profit of $75.2 million increased by $11.6 million, or 18%, compared to 2019 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, 2020 was unfavorably impacted by $5.1 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 increased $5.8 million, which was primarily the result of the year-over-year increase in sales of $21.4 million combined with approximately $.3 million of COVID-19 subsidies.  EMEA gross profit increased $7.8 million due to the $12.7 million increase in sales in the region, which continued to include the incremental growth from businesses acquired in 2019.  Asia-Pacific’s gross profit decreased $6.6 million primarily as a result of a year-over-year reduction in sales volume, largely caused by negative impact related to the COVID-19 pandemic.  The gross profit decrease in Asia-Pacific was partially offset by $.4 of COVID-19 subsidies.

Costs and expenses. Costs and expenses of $113.8 million for the year ended December 31, 2020 increased $5.8 million, or 5%, compared to 2019.  Excluding the favorable effect of currency translation, costs and expenses increased $8.8 million, or 8%, as summarized in the following table:

PLP-USA costs and expenses of $52.8 million increased $1.6 million, or 3%.  PLP-USA’s year-over-year increase was attributable to higher personnel related expenses, including benefits, of $1.4 million, a loss on sale of capital assets of $1.0 million, increased commissions of $1.0 million and higher insurance expense of $.4 million.  Offsetting these losses were lower travel expenses of $1.5 million, decreases in both professional fees and allowance for doubtful accounts of $.3 million and a year-over-year net incremental gain on foreign currency transactional exchange.  PLP’s 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 2020 year-end exchange rates.  PLP’s costs and expenses for the year ended December 31, 2020 were favorably impacted by $3.0 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 $4.9 million was primarily due to higher expenses related to a litigation reserve of $2.0 million, higher personnel related costs of $1.3 million, an incremental net loss on foreign currency transactions exchange of $.9 million, higher commissions of $.5 million and combined increases in allowance for doubtful accounts and professional fees of $.2 million.  EMEA costs and expenses of $22.6 million increased $2.8 million mainly due to higher personnel related costs of $1.7 million, increased rental expense of $.5 million, higher amortization expense of $.4 million, associated with acquired businesses, higher allowance for doubtful accounts of $.4 million and an increase in professional fees of $.1 million.  The increases were partially offset by a government subsidy of $.2 million.  Asia-Pacific costs and expenses of $22.4 million decreased $.4 million primarily due to a decrease in travel and entertainment expenses related to business conditions resulting from the COVID-19 pandemic combined with a government subsidy of $.4 million, which was partially offset by an incremental loss on foreign currency transactional exchange of $.7 million and an increase in professional fees of $.1 million.

26

Other income (expense).  Other income of $.4 million for the year ended December 31, 2020 was favorable by $1.6 million when compared to other (expense) for the twelve months ended December 31, 2019 of $1.2 million.  During the twelve months ended December 31, 2020, Asia-Pacific received government subsidies of $1.1 million related to COVID-19.  

Income taxes.  Income taxes for the years ended December 31, 2020 and 2019 were $10.8 million and $8.1 million, respectively, based on pre-tax income of $40.6 million and $31.5 million, respectively. The effective tax rate for the years ended December 31, 2020 and 2019 was 26.6% and 25.7%, respectively, compared to the U.S. federal statutory rate of 21%.  Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions, which differ from the U.S. federal statutory income tax rate, and the relative amount of income earned in those jurisdictions where such earnings are permanently reinvested.  It is also affected by discrete items that may occur in any given period but are not consistent from year to year.  The following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 21%:

2020

2019

Net income.  As a result of the preceding items, net income for the year ended December 31, 2020 was $29.8 million, compared to $23.3 million for 2019.  Excluding the effect of currency translation, net income increased $7.8 million as summarized in the following table:

PLP-USA’s net income of $16.6 million increased $8.5 million year over year, mainly due to a year-over-year increase in operating income of $10.0 million and a $1.4 million increase in other income, partially offset by an increase in income tax expense of $2.9 million.  International net income for the year ended December 31, 2020 was unfavorably affected by approximately $1.3 million when local currencies were converted to U.S. dollars.  The following discussion of net income excludes the effect of currency translation.  The Americas net income of $5.1 million decreased $.2 million mainly as a result of a $.9 million increase in operating income, partially offset by an increase in other expense, net of $.6 million and an increase in income tax expense of $.5 million.  EMEA net income increased $3.7 million as a result of a $5.0 million increase in operating income, partially offset by an increase in income tax expense of $1.3 million and an increase in other expense, net, of $.2 million.  Asia-Pacific net income decreased $4.2 million mainly as a result of a $6.0 million decrease in operating income partially offset by a decrease in income tax expense for the region of $1.2 million and an increase in other income, net, of $.6 million.

27

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 2020, we used cash of $24.6 million for capital expenditures.  We ended 2020 with $45.2 million of cash, cash equivalents and restricted cash (collectively “Cash”).  Our Cash is held in various locations throughout the world.  At December 31, 2020, 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, 2020 and 2019 was 2.4 to 1 and 2.9 to 1, respectively.  Total debt at December 31, 2020 was $56.0 million.  At December 31, 2020, our unused availability under our line of credit was $39.6 million and our bank debt to equity percentage was 19.2%.  On April 17, 2020, the Company extended the term on its $65.0 million credit facility from June 30, 2021 to June 30, 2024 and added its Austrian subsidiary as a borrower on the facility.  All other terms remain the same, including the interest rate at LIBOR plus 1.125% unless the Company’s funded debt to Earnings before Interest, Taxes and Depreciation ratio exceeds 2.25 to 1, at which point the LIBOR spread becomes 1.500%.  At December 31, 2020, the Company’s Polish subsidiary had borrowed $6.7 million U.S. dollars at a rate of 1.125% plus the Warsaw Interbank Offer Rate with a term expiring June 30, 2024.  At December 31, 2020, the Company’s Australian subsidiary had borrowed $5.3 million U.S. dollars, also with a term expiring June 30, 2024.  At December 31, 2020, the interest rates on the U.S., Polish and Australian line of credit agreement were 1.27%, 1.33% and 1.15%, respectively.  Under the credit facility, at December 31, 2020, the Company had utilized $25.4 million with $39.6 million available under the line of credit, net of long-term outstanding letters of credit of $.1 million.  The line of credit agreement contains, among other provisions, requirements for maintaining levels of net worth and profitability. At December 31, 2020, the Company was in compliance with all covenants.  

On February 28, 2019, the Company acquired its Austrian subsidiary, SubCon Electrical Fittings GmbH (“SubCon”), headquartered in Dornbirn, Austria.  The Company’s Austrian subsidiary had a 1.0 million euros, or $1.1 million U.S. dollars line of credit with a term expiring on May 31, 2021 with the option to renew for an additional twelve months indefinitely.  On June 26, 2020, the Company’s Austrian subsidiary borrowed $.6 million on the Company’s line of credit at an interest rate of 1.273%.  The proceeds were used to repay the previously outstanding local line of credit.  At repayment, the local line of credit was cancelled.

On April 25, 2019, the Company borrowed $8.0 million U.S. dollars on behalf of its Indonesian subsidiary at a rate of 3.501% with a term expiring on April 30, 2024.  At December 31, 2020, $6.7 million was outstanding on this debt facility, of which $.8 million is classified as current.

On August 14, 2019, the Company’s New Zealand subsidiary borrowed $5.3 million U.S. dollars at a rate of 3.900% with a term expiring on August 26, 2021.  At December 31, 2020, $4.4 million was outstanding on this facility, all of which is classified as current and is has an interest rate of 3.250%.  This loan is secured by the Company’s New Zealand subsidiary’s land and building.

The Company’s Asia Pacific segment had $.6 million and $.3 million in restricted cash at December 31, 2020 and 2019, respectively.  The restricted cash was used to secure bank debt and is included in Cash and Other assets for the years ended December 31, 2020 and 2019, respectively, on the balance sheet.

The Company sold its corporate aircraft in December of 2020, thereby eliminating the balance due on the loan which was secured by the corporate aircraft.  Of the of $8.1 million previously outstanding, $1.4 million was classified as short-term.  The proceeds of the sale were used to pay off the debt associated with the former aircraft.  On January 19, 2021, the Company received funding for a term loan in the amount of $20.5 million to fund the purchase of a corporate aircraft.  See Note Q for more information.  

We expect that our major source of funding for 2021 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

28

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, 2020 increased $5.9 million compared to December 31, 2019.  Net Cash provided by operating activities was $41.6 million. The most significant net investing and financing uses of Cash were net payments of long-term debt of $38.3 million, capital expenditures of $24.6 million, share repurchases of $9.5 million and dividends paid of $4.2 million. Currency had a positive $1.5 million impact on Cash when translating foreign denominated financial statements to U.S. dollars.

Net Cash provided by operating activities for the years ended December 31, 2020 and 2019 was $41.6 million and $27.2 million, respectively.  The $14.4 million increase was primarily a result of an increase in net income of $6.4 million and decrease in cash used to fund working capital of $7.5 million, partially offset by miscellaneous net unfavorable movements in non-cash and cash items of $.1 million.

Net Cash used in investing activities of $14.0 million for the year ended December 31, 2020 represents a decrease of $34.8 million when compared to Cash used in investing activities for the year ended December 31, 2019.  The decreased use of Cash was primarily related to the prior year Cash being used for the acquisitions of SubCon and MICOS Telcom of $18.9 million, current-year proceeds from the sale of property and equipment of $10.5 million, primarily from the sale of the corporate aircraft,  a reduction in Cash used for capital expenditures of $4.9 million and a reduction resulting from net Cash used during 2019 of $.5 million related to the purchase of marketable securities.

Cash used in financing activities for the year ended December 31, 2020 was $23.2 million compared to Cash generated from financing activities of $17.7 million for the year ended December 31, 2019. The $40.9 million unfavorable change was primarily a result of an increase in net debt payments of $38.3 million, $8.1 million of which was related to payment of remaining debt on the corporate aircraft and a year-over-year increase 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.

As of December 31, 2020, the Company had total outstanding guarantees of $9.8 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, 2020, the Company had total outstanding letters of credit of $8.0 million.

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.

29

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.

Allowance for Doubtful Accounts

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 2.8% and 3.7% of our trade receivables balance at December 31, 2020 and 2019, respectively.

Excess and Obsolescence Reserves

We provide excess and obsolescence reserves to state inventories at the lower of cost or estimated net realizable value.  We identify inventory items that have had no usage or are in excess of the usages over the historical 12 to 24 months.  A management team with representatives from marketing, manufacturing, engineering and finance reviews these inventory items, determines the disposition of the inventory and assesses the net realizable value based on their knowledge of the product and market conditions.  These conditions include, among other things, future demand for product, product utility, unique customer order patterns or unique raw material purchase patterns, changes in customer and quality issues.  The reserve for excess and obsolete inventory was 7.5% and 7.7% of gross inventory for the years ended December 31, 2020 and December 31, 2019, 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 combination of the income approach, which uses a discounted cash flow methodology, and the market approach, which uses comparable market multiples, 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 our carrying value to assess if goodwill has been impaired. The fair value estimates are subjective and sensitive to significant assumptions, such as revenue growth rates, operating margins, the weighted-average cost of capital (WACC), and estimated market multiples, of which are affected by expectations of future market or economic conditions. We believe that the methodologies, significant assumptions, 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, 2020.  We did not have any impairment for goodwill for the years ended December 31, 2020 or 2019. 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.

30

Uncertain Tax Positions

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

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

ASC 740 requires subjectivity to identify outcomes and to assign probability in order to estimate the settlement amount.  We provide estimates in order to determine settlement amounts.  During the year ended December 31, 2020, we recorded $.1 million of reserves 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 2.69% at December 31, 2020 reflects an analysis of yield curves as of the end of the year and the schedule of expected cash needs of the plan.  The expected long-term return on plan assets of 7.00% 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. 

31

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.  Revenue from operations in Argentina represented less than 1% of total consolidated net sales for the year ended December 31, 2020 and less than 2% of consolidated net sales for the years ended December 31, 2019 and 2018.

As of December 31, 2020, the Company had $.1 million in 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 $5.3 million and on income before tax of $2.5 million.

The Company is exposed to market risk, including changes in interest rates.  The Company is subject to interest rate risk on its variable rate revolving credit facilities and term notes, which consisted of long-term borrowings of $38.5 million at December 31, 2020.  A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $.6 million for the year ended December 31, 2020.

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 2.69% and 3.50% at December 31, 2020 and 2019, respectively.  The discount rate is a significant factor in determining the amounts reported.  A 50 basis point change in the discount rate of 2.69% used at December 31, 2020 would have a $3.7 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 6.50% and 7.00% for the years ended December 31, 2020 and 2019, respectively.  A 50 basis point change in the expected rate of return would have a $.2 million effect on the Plan’s subsequent year’s net periodic pension cost.

As discussed elsewhere in this report, the outbreak of COVID-19 could negatively impact the Company’s business and results of operations. Since we cannot predict the duration or scope of the COVID-19 pandemic, the potential negative financial impact to the Company’s results cannot be reasonably estimated but could be material.  Although the recent deployment of vaccinations is expected to mitigate potential future adverse impact, the impact cannot be predicted with certainty.

32

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 (the Company) as of December 31, 2020 and 2019, 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, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”).  In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 5, 2021 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

33

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2008

Cleveland, Ohio

March 5, 2021

34

PREFORMED LINE PRODUCTS COMPANY

CONSOLIDATED BALANCE SHEETS