PREFORMED LINE PRODUCTS CO (PLPC) FY 2021 MD&A

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

➣
Market Overview

➣
Preface

➣
Results of Operations

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Working Capital, Liquidity and Capital Resources

➣
Critical Accounting Policies and Estimates

➣
Recently Adopted Accounting Pronouncements

➣
New Accounting Standards to be Adopted

OVERVIEW

Preformed Line Products Company (the “Company”, “PLPC”, “we”, “us”, or “our”) was incorporated in Ohio in 1947. We are an international designer and manufacturer of products and systems employed in the construction and maintenance of overhead and underground networks for the energy, telecommunication, cable operators, information (data communication), and other similar industries. Our primary products support, protect, connect, terminate, and secure cables and wires. We also provide solar hardware systems, mounting hardware for a variety of solar power applications, and fiber optic and copper splice closures. PLPC is respected around the world for quality, dependability and market-leading customer service. Our goal is to continue to achieve profitable growth as a leader in the research, innovation, development, manufacture, and marketing of technically advanced products and services related to energy, communications and cable systems and to take advantage of this leadership position to sell additional quality products in familiar markets. We have 30 sales and manufacturing operations in 22 different countries.

We report our segments in four geographic regions: PLP-USA (including corporate), The Americas (includes operations in North and South America, excluding 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.

MARKET OVERVIEW

Our business continues to be 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. There has also been a historical lack of commitment by developed countries to upgrade and strengthen their electrical grids and communication networks despite the growing need. More recently, increasing commodity prices, transportation costs, and foreign currency fluctuations coupled with the varying degrees of recovery from the COVID-19 pandemic throughout the global economy has led to a challenging operating environment. While these factors are likely to continue to provide inherent uncertainty going forward, the COVID-19 pandemic and other large scale environmental events have placed a renewed focus on key infrastructure priorities around the world, including bolstering grid reliability, strengthening grid resilience to climate events, upgrading aging infrastructure, enhancing communication networks and transitioning to renewable energy. Our focused portfolio is well-positioned to respond to these priorities.

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In 2021, sales in the energy market continued to remain strong while sales in the communications market increased due to the number and scale of projects in North America and globally. We believe that our leadership position in these and other markets and the ability to deliver reliable products quickly will position us 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 mostly concentrated in the energy and communications markets, which is where we experienced our most significant top line growth in 2021. 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 expect 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.

We believe that we are well positioned to supply the needs of the world’s diverse energy and communication markets as a result of our focused portfolio, strategic operational footprint and product designs and technologies.

PREFACE

The following discussion describes our results of operations for the years ended December 31, 2021 and 2020. 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.

While the ongoing COVID-19 pandemic has not had a material effect on our overall results, it has continued to create challenges for us in countries that have significant outbreak mitigation strategies, namely, countries in our Asia-Pacific business segment, which led to temporary project postponements and continued to impact results in this segment. We are continuing to actively monitor the impact of COVID-19 on current and future periods and actively manage costs and our liquidity position to provide additional flexibility while still supporting our customers and their specific needs. 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.

Overall customer demand remained strong and contributed to record net sales revenue of $517.4 million for the year ended December 31, 2021. However, we also experienced significant commodity and transportation cost inflation that negatively affected our earnings. To mitigate the ongoing inflationary pressures, we implemented several price increases in the U.S. and internationally in 2021. Due to the large volume in our order backlog, we expect tailwinds from these increases into 2022, however, continued cost inflation in these areas may require further price adjustments going forward to maintain profit margin, and any price increases may have a negative effect on demand.

Our financial statements are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. Foreign currencies strengthened against the U.S. dollar in 2021 as opposed weakening in 2020. The fluctuations of foreign currencies during the year ended December 31, 2021 had a favorable impact on net sales of $9.3 million and an unfavorable impact of $16.9 million during the year ended December 31, 2020. The effect of currency translation had a favorable impact on net income in the year ended December 31, 2021 of $0.4 million and an unfavorable impact of $1.3 million in the year ended December 31, 2020. On a reportable segment basis, the impact of foreign currency translation on net sales and net income for the years ended December 31, 2021 and 2020, respectively, was as follows:

Loss on foreign currency translation on operating income for the year ended December 31, 2021 was $0.7 million. There were transaction losses of $0.3 million that were combined with losses on forward currency contracts of $0.7 million in the year ended

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December 31, 2021 and $1.5 million of transaction losses in the year ended December 31, 2020 which were partially mitigated by forward currency contract gains of $0.4 million as summarized in the following table:

Despite the continued challenges in the global economy, we believe our business portfolio 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 our business to expand our market footprint, improve efficiency, develop new products, increase our capacity and become an even stronger supplier to our current and new customers. Our liquidity remains strong and we currently have a bank debt to equity ratio of 18.8%. We can borrow needed funds at a competitive interest rate under our credit facility. A consolidated increase in debt of $3.6 million as of December 31, 2021 was partially a result of current year funding needs for the purchase of a new corporate aircraft to replace the former aircraft which was substantially offset by decreases in debt levels globally, most notably in variable debt instruments. See Note E "Debt and Credit Arrangements" in the Notes to Consolidated Financial Statements for more information related to our debt position.

The following table sets forth a summary of the Company’s Statements of Consolidated Income and the percentage of net sales for the years ended December 31, 2021 and 2020. The Company’s past operating results are not necessarily indicative of future operating results.

2021 RESULTS OF OPERATIONS COMPARED TO 2020

Net sales. In 2021, net sales were $517.4 million, an increase of $51.0 million, or 11%, compared to 2020. Excluding the favorable effect of currency translation, net sales increased 9% as summarized in the following table:

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The increase in PLP-USA net sales of $56.3 million, or 28%, was primarily due to a volume increase in communication and energy product sales, combined with benefits resulting from price increases in June and October of 2021. International net sales for the year ended December 31, 2021 were favorably affected by $9.3 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 $70.7 million decreased $2.6 million, or 3%, primarily due to decreased volume in energy product sales, partially offset by an in increase in communication product sales. EMEA net sales of $95.9 million decreased $0.5 million, or 1%, primarily due to volume decreases in communication products in the region. The Asia-Pacific net sales of $93.2 million decreased $11.6 million, or 12%, compared to 2020 primarily due to the continued volume decreases from the postponement of large-scale projects caused by the ongoing COVID-19 pandemic.

Gross Profit. Gross profit of $166.2 million for 2021 increased $12.2 million, or 8%, compared to 2020. Excluding the favorable effect of currency translation, gross profit increased $9.2 million, or 6%, as summarized in the following table:

PLP-USA gross profit of $87.7 million increased by $12.6 million, or 17%, compared to 2020 mostly due to an increase in sales of $56.3 million and a shift in mix toward higher margin products, most notably in the communications market, partially offset by the negative impact of rising commodity prices, freight costs, inflation and an increase in warranty costs. Incremental price increases were enacted in the PLP-USA region in 2021 to further mitigate the ongoing inflation and commodity price increases. International gross profit for the year ended December 31, 2021 was favorably impacted by $3.1 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 decreased $.4 million, or 2%, which was primarily the result of the year-over-year decrease in net sales. EMEA gross profit decreased $2.0 million year-over-year, partially as a result of decreased sales of $0.5 million combined with increased expenses in the region, largely due to higher freight and raw material costs. Asia-Pacific’s gross profit decreased $1.0 million when compared to the year ended December 31, 2020, largely as a result of the year-over-year decrease in sales of $11.6 million, partially offset by manufacturing cost savings.

Costs and expenses. Costs and expenses of $118.7 million for the year ended December 31, 2021 increased $4.9 million, or 4%, when compared to 2020. Excluding the unfavorable effect of currency translation, costs and expenses increased $2.5 million, or 2%, as summarized in the following table:

PLP-USA costs and expenses of $55.1 million increased $2.3 million, or 4% year-over-year. PLP-USA’s increase was mainly attributable to increased commissions of $2.1 million, a year-over-year incremental loss on foreign currency exchange of $1.3 million, partially offset by the prior year loss on sale of capital assets of $1.0 million combined with miscellaneous net decreases of $0.1 million. 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 2021 year-end exchange rates. PLP’s costs and expenses for the year ended December 31, 2020 were unfavorably impacted by $2.3 million when local currencies were translated to U.S. dollars. The following discussions of costs and expenses exclude the effect of currency translation. The Americas costs and expenses decrease of $1.9 million was primarily due to a prior year litigation reserve of $2.2 million, partially offset by miscellaneous

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net decreases of $0.3 million. EMEA costs and expenses of $25.5 million increased $1.5 million mainly due to higher personnel related costs of $1.8 million, partially offset by a decrease in bad-debt expense of $0.3 million. Asia-Pacific costs and expenses of $24.3 million increased $0.5 million primarily due to an increase in personnel related costs.

Other income, net. Other income, net of $1.3 million for the year ended December 31, 2021 was favorable by $1.0 million when compared to other income, net for the twelve months ended December 31, 2020 of $0.4 million. Other income, net for year ended December 31, 2021 includes a pre-tax recovery of approximately $2.1 million related to a recent Brazilian Supreme Court decision that granted the Company the right to recover, through offset of federal tax liabilities, certain tax overpayments collected by the Brazilian government. During the year ended December 31, 2020, the Asia-Pacific segment recorded $1.1 million of income for COVID-19 related government subsidies which did not recur in 2021 which partially offset the current year income realized in Brazil.

Income taxes. Income taxes for the years ended December 31, 2021 and 2020 were $13.2 million and $10.8 million, respectively, based on pre-tax income of $48.9 million and $40.6 million, respectively. The effective tax rate for the years ended December 31, 2021 and 2020 was 27.0% and 26.6%, respectively, compared to the U.S. federal statutory rate of 21.0%. Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions, which differ from the U.S. federal statutory income tax rate, and the relative amount of income earned in those jurisdictions where such earnings are permanently reinvested. It is also affected by discrete items that may occur in any given period but are not consistent from year to year. The following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 21.0%:

2021

1.
A $0.8 million, or 1.6%, net increase resulting from higher U.S. permanent items primarily related to limitations on the deductibility of executive compensation, plus credits.

2.
A $1.0 million, or 2.0%, net increase resulting from earnings in jurisdictions with higher tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested.

3.
A $0.7 million, or 1.4%, net increase resulting from state and local taxes, net of federal benefit.

2020

1.
A $0.7 million, or 1.7%, net increase resulting from higher U.S. permanent items primarily related to limitations on the deductibility of executive compensation, plus credits.

2.
A $0.2 million, or 0.6%, net decrease resulting from losses in certain jurisdictions where no tax benefit was previously recognized.

3.
A $1.3 million, or 3.2%, net increase resulting from earnings in jurisdictions with higher tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested.

4.
A $0.9 million, or 2.2%, net increase resulting from state and local taxes, net of federal benefit.

Net income. As a result of the preceding items, net income for the year ended December 31, 2021 was $35.7 million, compared to $29.8 million for 2020. Excluding the effect of currency translation, net income increased $5.5 million as summarized in the following table:

PLP-USA’s net income of $24.4 million increased $7.8 million year-over-year, mainly due to an increase in operating income of $10.2 million, partially offset by an increase in income tax expense of $2.5 million. International net income for the year ended December 31, 2021 was favorably affected by approximately $0.4 million when local currencies were converted to U.S. dollars. The following discussion of net income excludes the effect of currency translation. The Americas net income of $8.4 million increased $3.2 million mainly as a result of a $1.5 million increase in operating income combined with an increase in other income (expense) of $2.5

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million, partially offset by an increase in income tax expense of $0.7 million. EMEA net income decreased $3.3 million as a result of a $3.5 million decrease in operating income, partially offset by a decrease in income tax expense. Asia-Pacific net income decreased $2.3 million mainly as a result of a $1.6 million decrease in operating income, a decrease in other income, net of $0.9 million, partially offset by a decrease in income tax expense for the region of $0.2 million.

WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES

Management Assessment of Liquidity

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

Our investments include expenditures required for equipment and facilities as well as expenditures in support of our strategic initiatives. In 2021, we used cash of $18.4 million for capital expenditures. At December 21, 2021, we had $36.4 million of cash, cash equivalents and restricted cash (collectively “Cash”). Our Cash is held in various locations throughout the world. At December 31, 2021, 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, 2021 and 2020 was 2.6 to 1 and 2.4 to 1, respectively. Total debt, including Notes payable, at December 31, 2021 was $59.6 million. On April 17, 2020, we extended the term on its $65.0 million Credit Facility (the "Facility") from June 30, 2021 to June 30, 2024 and added its Austrian subsidiary as a borrower on the Facility. All other terms remained 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, 2021, we had the following borrowings on the $65.0 million Facility; the U.S. borrowed $3.4 million at 1.205%, our Polish subsidiary borrowed $6.1 million at 2.455%, our Australian subsidiary borrowed $2.4 million at 2.980% and our Austrian subsidiary borrowed $1.4 million at 1.216%. Under the Facility, at December 31, 2021, we had utilized $13.3 million with $51.7 million available, net of long-term outstanding letters of credit of $0.1 million. Our bank debt to equity percentage was 18.8%. The Facility agreement contains, among other provisions, requirements for maintaining levels of net worth and profitability. At December 31, 2021, we were in compliance with these covenants.

On March 2, 2022, the we entered into an amendment to the Facility to increase the borrowing capacity from $65.0 million to $90.0 million. As part of this amendment, the index used to determine the interest rate changed from LIBOR to the Bloomberg Short Term Bank Yield Index ("BSBY"). The interest rate will now be defined as BSBY plus 1.125% unless the funded debt to Earnings before Interest, Taxes and Depreciation ration exceeds 2.25 to 1, at which point the BSBY spread becomes 1.500%. The amendment also allows us to change our rate from BSBY to the Second Overnight Financing Rate ("SOFR") at the its discretion. The amendment extended the maturity from June 30, 2024 to March 2, 2026. All other terms remain the same.

Our Asia-Pacific segment had $0.2 million and $0.6 million in restricted cash at December 31, 2021 and 2020, respectively. The restricted cash was used to secure bank debt and is included in Cash and Other assets for the years ended December 31, 2021 and 2020, respectively, on the balance sheet.

We sold our corporate aircraft in December of 2020, thereby eliminating the balance due on the previous loan which was secured by the corporate aircraft. 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 new corporate aircraft. At December 31, 2021, the outstanding balance on the term loan was $18.8 million, of which $2.1 million was classified as current. See Note E in the Notes to Consolidated Financial Statements for more information.

We expect that our major source of funding for 2022 and beyond will be our operating cash flows, our existing cash and cash equivalents as well as our Credit Facility agreement. We earn a significant amount of our operating income outside the United States, which, except for current earnings in certain jurisdictions, is deemed to be indefinitely reinvested in foreign jurisdictions. We currently do not intend nor foresee a need to repatriate these funds. We believe our future operating cash flows will be more than sufficient to cover debt repayments, other contractual obligations, capital expenditures and dividends for the next 12 months and thereafter for the

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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 further 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, 2021 decreased $8.8 million when compared to December 31, 2020. Net Cash provided by operating activities was $33.6 million. The most significant net investing and financing uses of Cash were net payments of debt of $14.2 million, capital expenditures of $18.4 million, share repurchases of $5.3 million and dividends paid of $4.1 million. Currency had an unfavorable impact of $0.9 million on Cash when translating foreign denominated financial statements to U.S. dollars.

Net Cash provided by operating activities for the years ended December 31, 2021 and 2020 was $33.6 million and $41.6 million, respectively. The $8.0 million decrease was primarily a result of an increase in cash used to fund working capital of $26.9, partially offset by miscellaneous net favorable movements in non-cash items of $12.9 million and an increase in net income of $6.0 million.

Net Cash used in investing activities of $18.2 million for the year ended December 31, 2021 represents an increase of $4.2 million when compared to Cash used in investing activities for the year ended December 31, 2020. The increased use of Cash was primarily related to the prior year Cash proceeds from the sale of property and equipment of $10.5 million, primarily from the sale of the corporate aircraft, partially offset by a decrease in capital expenditures of $6.2 million.

Cash used in financing activities for both years ended December 31, 2021 and 2020 was $23.2 million. The year-over-year change in cash usage was due to an increase in net debt payments of $4.5 million, partially offset by a year-over-year decrease in cash used in capital stock transactions of $4.4 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. See Note F in the Notes to Consolidated Financial Statements for more information.

As of December 31, 2021, the Company had total outstanding guarantees of $10.0 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, 2021, the Company had total outstanding letters of credit of $2.2 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.

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 Credit Losses

We maintain an allowance for credit losses 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 credit losses represents approximately 3.0% and 2.8% of our trade receivables balance at December 31, 2021 and 2020, respectively.

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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 6.6% and 7.5% of gross inventory for the years ended December 31, 2021 and December 31, 2020, 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

Our measurement date for our annual impairment test is October 1 of each year. We did not have any impairment for goodwill for the years ended December 31, 2021 or 2020. See Note J for additional information.

We may use both quantitative and qualitative approaches when testing goodwill for impairment. For selected reporting units where the qualitative approach is utilized, a qualitative evaluation of events and circumstances impacting the reporting unit is performed to determine if it is more likely than not that the fair value of the reporting unit exceeds its carrying amount. If that determination is made, no further evaluation is necessary. Otherwise, the Company performs a quantitative impairment test on the reporting unit.

For the quantitative approach, the Company uses a combination of the income approach, which uses a discounted cash flow methodology, and the market approach, which uses comparable market multiples, in computing fair value by reporting unit. The Company then compares the fair value of the reporting unit with its carrying value to assess if goodwill has been impaired. 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. The Company believes that the methodologies, significant assumptions, and weightings used are reasonable and result in appropriate fair values of the reporting units.

Impairment assessments inherently involve management judgments regarding a number of assumptions. Due to the multiple variables inherent in arriving at the estimates of the reporting unit's fair value, differences in assumptions could have an effect on the estimated fair value of a reporting unit and could result in goodwill impairment charges in a future period.

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.

Pension Obligations

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 2.92% at December 31, 2021 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 6.50% 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

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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.

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