PREFORMED LINE PRODUCTS CO (PLPC) FY 2022 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.

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 provide helical solutions, connectors, fiber optic and copper splice closures, solar hardware mounting applications, and electric vehicle charging station foundations. We also provide aerial drone inspection services for utility assets including transmission and distribution power lines, substations, and generation facilities. We are 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 sales and manufacturing operations in 20 different countries.

We report our segments in four geographic regions: PLP-USA (including corporate), The Americas (includes operations in North and South America, 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, solar framing products and inspection services. Our other three segments, The Americas, EMEA and Asia-Pacific, support our energy, telecommunications, data communication, solar and other 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, inflation, rising interest rates, 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.

Strong domestic demand in 2022 drove record net sales, in both of our core energy and communications markets. 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 and communication networks are enhanced, upgraded and extended.

Our international business is mainly concentrated in the energy and communications markets. 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 with low deployment of fixed line and wireless telecommunications services and those areas with low broadband penetration rates 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, including expansion from recent acquisitions and product designs and technologies.

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PREFACE

The following discussion describes our results of operations for the years ended December 31, 2022, 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.

Overall customer demand remained strong and contributed to record net sales revenue of $637.0 million for the year ended December 31, 2022. However, we have also experienced some inflationary pressures that has impacted our profit margins. Raw material price increases, specifically for plastic resins, aluminum, petroleum and sand (grit), coupled with increased freight costs were the primary contributing inflationary pressures. For PLP-USA, our largest business segment, the impacts of inflation on raw materials and transportation costs impacted cost of sales by approximately $23.2 million for the year ended December 31, 2022. To mitigate the ongoing inflationary pressures, we implemented price increases in the U.S. and internationally. Due to the large volume in our order backlog, we expect tailwinds from these increases into 2023; however, continued cost inflation in these areas may require further price adjustments to maintain profit margin and any price increases may have a negative effect on demand.

Due to the ongoing conflict in Ukraine and overt hostilities shown by Russia in the conflict, the Company determined to wind down its Russian operations in 2022. As a result of the decision to wind-down operations, charges of $1.0 million were recorded, mainly as a result of asset impairments, one-time termination benefits and other impacts during the twelve-month period ending December 31, 2022.

Our financial statements are subject to fluctuations in the exchange rates of foreign currencies in relation to the U.S. dollar. 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 2022 year-end exchange rates. The fluctuations of foreign currencies during the year ended December 31, 2022 had an unfavorable impact on net sales of $24.2 million and a favorable impact of $9.3 million during the year ended December 31, 2021. The effect of currency translation had a favorable impact on net income in the year ended December 31, 2022 of $0.3 million and a favorable impact of $0.4 million in the year ended December 31, 2021. On a reportable segment basis, the impact of foreign currency translation on net sales and net income for the years ended December 31, 2022 and 2021, respectively, was as follows:

Loss on foreign currency translation on operating income for the years ended December 31, 2022 and 2021 was $0.5 million and $0.7 million, respectively. There were transaction losses of $0.3 million that were combined with losses on forward currency contracts of $0.1 million for the year ended December 31, 2022 and $0.3 million of transaction losses combined with losses on forward currency contracts of $0.7 million for the year ended December 31, 2021 as summarized in the following table:

Despite the challenges noted in our operating environment, 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. The growth in PLP-USA net sales required additional investment within our PLP-USA facilities, both in the form of operational capacity as well as increased warehouse space. These investments in our U.S. operations will allow us to further enhance the service we provide to our U.S. customers in 2023. If necessary, we will modify redundant processes and further utilize our global manufacturing network to manage costs, increase sales volume and deliver value to our customers. We have continued to invest in the business to expand into new markets for the Company, evaluate strategic mergers and acquisitions, improve efficiency, develop new products and increase our capacity. Our liquidity remains strong and we currently have a bank debt to equity percentage of 25.0%. We can borrow needed funds at a competitive interest rate

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under our credit facility. A consolidated increase in debt of $30.0 million as of December 31, 2022 was primarily a result of current year funding needs for capital expenditures and business acquisitions. See Note 7 "Debt and Credit Arrangements" in the Notes to Consolidated Financial Statements for more information related to our debt position.

While the ongoing COVID-19 pandemic has not had a material effect on our overall results, it has continued to create challenges in countries that have significant or changing outbreak mitigation strategies, namely, countries in our Asia-Pacific business segment, which led to project postponements and continued to impact results in this segment. This, in part, led to the $6.5 million goodwill impairment charge recorded in the period ended September 30, 2022. 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. While the COVID-19 pandemic has waned, we cannot predict the impact that new variants may have and the related impact on our business and results of operations. In addition, the impact of COVID-19 and new variants could potentially exacerbate other risks discussed, including inflationary impacts and supply chain disruptions, any of which could have a material adverse effect on the Company. We continue to assess all challenges related to COVID-19 and related variants and plan accordingly.

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, 2022 and 2021. The Company’s past operating results are not necessarily indicative of future operating results.

2022 RESULTS OF OPERATIONS COMPARED TO 2021

Net sales. In 2022, net sales were 637.0 million, an increase of $119.6 million, or 23%, compared to 2021. Excluding the effect of currency translation, net sales increased 28% as summarized in the following table:

The increase in PLP-USA net sales of $82.7 million, or 32%, was primarily due to a volume increase in energy product and communication sales, combined with the tailwinds from previous price increases. International net sales for the year ended December 31, 2022 were unfavorably affected by $24.2 million when local currencies were converted to U.S. dollars. The following discussion of changes in net sales excludes the effect of currency translation. The Americas net sales of $85.2 million increased $16.8 million, or 24%, primarily due to contributions from the 2022 Maxxweld and Delta acquisitions. EMEA net sales of $122.7 million increased $41.9 million, or 44%, primarily due to volume increases in communication product sales in the region. Asia-Pacific net sales of $88.9 million increased $2.4 million, or 3%, compared to 2021. Asia-Pacific volume was generally flat due to the continued effects of changing COVID-19 mitigation strategies, primarily in China, as well as China’s continued buy local policies.

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Gross Profit. Gross profit of $215.2 million for 2022 increased $48.9 million, or 29%, compared to 2021. Excluding the effect of currency translation, gross profit increased $54.6 million, or 33%, as summarized in the following table:

PLP-USA gross profit of $129.2 million increased by $41.4 million, or 47%, compared to 2021, primarily due to increased sales volume of $82.7 million within communications and energy markets and operational efficiencies, which were partially offset by the negative impact of inflationary pressures impacting raw materials and transportation costs. International gross profit for the year ended December 31, 2022 was unfavorably impacted by $5.7 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 $8.6 million, or 37%, which was primarily the result of the year-over-year increase in net sales volume of $16.8 million, generally as a result of the 2022 acquisitions in the region. EMEA gross profit remained relatively flat, increasing by $2.0 million or 7% year-over-year, primarily due to increased sales volume of $41.9 million, partially offset by higher operating costs and the impacts from the exit of our Russia operations. Asia-Pacific’s gross profit increased $2.6 million, or 11% when compared to the year ended December 31, 2021, primarily due to cost containment measures.

Costs and expenses. Costs and expenses of $145.8 million for the year ended December 31, 2022 increased $27.1 million, or 23%, when compared to 2021. Excluding the effect of currency translation, costs and expenses increased $33.3 million, or 28%, as summarized in the following table:

PLP-USA costs and expenses of $73.9 million increased $18.8 million, or 34% year-over-year. PLP-USA’s increase was primarily attributable to increased sales and personnel-related expenses as well as professional services costs. PLP’s costs and expenses for the year ended December 31, 2022 were favorably impacted by $6.2 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 of $16.8 million increased $3.7 million primarily due to personnel-related expenses, purchase price accounting charges, and sales-related expenses. EMEA costs and expenses of $25.9 million increased by $3.4 million primarily due sales-related expenses, offset by decreases in personnel costs. Asia-Pacific costs and expenses of $29.2 million increased $7.4 million primarily due to the effect of a $6.5 million goodwill impairment charge.

Other income, net. Other income, net of $4.3 million for the year ended December 31, 2022 was favorable by $3.0 million when compared to Other income, net for the twelve months ended December 31, 2021 of $1.3 million. Other income, net for the year ended December 31, 2022 includes a gain of $4.4 million related to a settlement of a Company-owned life insurance policy, partially offset by an increase in interest expense.

Income taxes. Income taxes for the years ended December 31, 2022 and 2021 were $19.3 million and $13.2 million, respectively, based on pre-tax income of $73.7 million and $48.9 million, respectively. The effective tax rate for the years ended December 31, 2022 and 2021 was 26.2% and 26.9%, 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%:

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2022

1.
A $2.1 million, or 2.9%, net increase resulting from a valuation allowance recorded in certain international jurisdictions.

2.
A $2.0 million, or 2.7%, net increase resulting from a goodwill impairment charge as discussed in Note 12 of the Notes to the Consolidated Financial Statements.

3.
A $1.8 million, or 2.4%, net decrease resulting from earnings in jurisdictions with lower tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested.

4.
A $1.6 million, or 2.2%, net decrease resulting from non-taxable Company-owned life insurance policy.

2021

1.
A $2.9 million, or 6.0%, net increase resulting from earnings in jurisdictions with higher tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested.

2.
A $1.2 million, or 2.5 %, net decrease resulting from foreign tax credits.

3.
A $0.8 million, or 1.7%, net decrease resulting from other tax credits such as the Research and Development Tax Credit.

4.
A $0.8 million, or 1.6%, net increase resulting from Global Intangible Low-Taxed Income.

5.
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.

Net income. As a result of the preceding items, net income for the year ended December 31, 2022 was $54.4 million, compared to $35.7 million for 2021. Excluding the effect of currency translation, net income increased $18.3 million as summarized in the following table:

PLP-USA’s net income of $44.7 million increased $20.3 million year-over-year, mainly due to an increase in operating income of $22.4 million, partially offset by an increase in income tax expense of $7.1 million. PLP-USA’s net income also included approximately $1.6 million related to employee retention tax credits claimed under the U.S. CARES Act for fiscal year 2020. The credits were recorded as an offset to related employee expenses in both operating, selling, general and administrative expenses. International net income for the year ended December 31, 2022 was favorably affected by approximately $0.3 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 $11.4 million increased mainly as a result of an increase in operating income. EMEA net income decreased $1.1 million mainly as a result of a decrease in operating income. Asia-Pacific net income decreased $3.6 million mainly as a result of a goodwill impairment charge partially offset by cost containment measures.

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.

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Our investments include expenditures required for equipment and facilities as well as expenditures in support of our strategic initiatives. In 2022, we used cash of $40.6 million for capital expenditures. At December 31, 2022, we had $37.2 million of cash, cash equivalents and restricted cash (collectively “Cash”). Our Cash is held in various locations throughout the world. At December 31, 2022, 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 credit facility (the "Facility") contains, among other provisions, requirements for maintaining levels of net worth and profitability. At December 31, 2022, the Company was in compliance with these covenants. Our financial position remains strong and our current ratio at December 31, 2022 and 2021 was 2.8 to 1 and 2.6 to 1, respectively. Total debt, including Notes payable to banks, at December 31, 2022 was $89.5 million. At December 31, 2022, our unused availability under the Facility was $43.3 million and our bank debt to equity percentage was 25.0%. On March 2, 2022, the Company amended the Facility to increase the 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 is defined as BSBY 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 BSBY spread becomes 1.500%. The amendment also allows the Company to change its rate from BSBY to the Secured Overnight Financing Rate (“SOFR”) at the Company’s discretion. The amendment extended the maturity from June 30, 2024 to March 2, 2026. On August 31, 2022, the Company amended the Facility and elected to change its rate from BSBY to SOFR, and added its New Zealand subsidiary as a co-borrower. All other terms remain the same.

Our Asia-Pacific segment had $0.2 million in restricted cash for both years ended December 31, 2022 and 2021. The restricted cash was used to secure bank debt and is included in Cash, cash equivalents and restricted cash 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, which replaces the Company's previously-owned aircraft that was sold in December 2020. At December 31, 2022, the outstanding balance on the term loan was $16.7 million, of which $2.1 million was classified as current. See Note 7 in the Notes to Consolidated Financial Statements for more information.

We expect that our major source of funding for 2023 and beyond will be our operating cash flows, our existing cash and cash equivalents as well as our Facility agreement. Except for current earnings in certain jurisdictions, our operating income is deemed to be indefinitely reinvested in foreign jurisdictions. We currently do not intend nor foresee a need to repatriate these funds. We believe our future operating cash flows will be more than sufficient to cover debt repayments, other contractual obligations, capital expenditures and dividends for the next 12 months and thereafter for the foreseeable future. In addition, we believe our borrowing capacity provides substantial financial resources, if needed, to supplement funding of capital expenditures and/or acquisitions. We also believe that we can 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, 2022 increased $0.8 million when compared to December 31, 2021. Net Cash provided by operating activities was $26.2 million. The most significant net investing uses of Cash were capital expenditures of $40.6 million and acquisitions of businesses of $16.2 million, partially offset by life insurance proceeds of $6.9 million. The most significant contribution from financing activities included net debt proceeds of $29.1 million partially offset by share repurchases of $5.5 million and dividends paid of $4.1 million. Currency had an unfavorable impact of $1.1 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, 2022 and 2021 was $26.2 million and $33.6 million, respectively. The $7.5 million decrease was primarily a result of an increase in cash used to fund working capital of $21.2 and miscellaneous net unfavorable movements in non-cash items of $4.9 million offset by an increase in net income of $18.7 million.

Net Cash used in investing activities of $46.8 million for the year ended December 31, 2022 represents an increase of $28.5 million when compared to Cash used in investing activities for the year ended December 31, 2021. The increased use of Cash was primarily related to an increase in capital expenditures and acquisitions of businesses.

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Net Cash provided by financing activities for the year ended December 31, 2022 was $22.5 million compared to a use of cash of $23.2 million for the year ended December 31, 2021. The year-over-year change in cash was mainly due to proceeds from long-term debt.

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 8 in the Notes to Consolidated Financial Statements for more information.

As of December 31, 2022, the Company had total outstanding guarantees of $13.0 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, 2022, the Company had total outstanding letters of credit of $6.7 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 3.8% and 3.0% of our trade receivables balance at December 31, 2022 and 2021, 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 6.3% and 6.6% of gross inventory for the years ended December 31, 2022 and December 31, 2021, 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.

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Goodwill

Goodwill is reviewed for impairment annually on October 1 or more frequently when changes in circumstances indicate the carrying amount may be impaired. 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 5.55% at December 31, 2022 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 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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