# PREFORMED LINE PRODUCTS CO (PLPC) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from PREFORMED LINE PRODUCTS CO's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/80035/000162828025012640/plpc-20241231.htm Accession: 0001628280-25-012640 Filing date: 2025-03-13 Report date: 2024-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/PLPC/ All MD&A years: /company/PLPC/mda/ Previous year: /company/PLPC/mda/fy2023/ (FY 2023) Next year: /company/PLPC/mda/fy2025/ (FY 2025) 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. 18 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 Executive Chairman, 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 gross sales and income before income taxes. 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, tariffs, rising interest rates, transportation costs, and foreign currency fluctuations have led to a challenging operating environment. While these factors generally moderated in 2024, they may continue to provide inherent uncertainty going forward. The increasing need for power generation and efficient communication systems has highlighted the need for bolstering grid reliability, strengthening grid resilience to climate events, upgrading aging infrastructure, enhancing communication networks and transitioning to new sources of energy. Our focused portfolio is well-positioned to respond to these priorities. We believe that our leadership position in the domestic energy and communications 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 also 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 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 and strategic operational footprint, including expansion from recent acquisitions and product designs and technologies. PREFACE The following discussion describes our results of operations for the years ended December 31, 2024, 2023 and 2022. For additional discussion of our results of operations for the year ended December 31, 2022, see our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 3, 2023. 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. 19 Net sales of $593.7 million for the year ended December 31, 2024 decreased $76.0 million year-over-year, mainly due to the continued inventory destocking occurring primarily in the U.S. markets. The inflationary headwinds we experienced in 2022 and early 2023 related to raw materials, specifically plastic resins, aluminum and sand (grit), have generally subsided. Costs related to shipping and freight have similarly fallen from their 2022 peak. Decreases in these underlying costs along with the impacts of our previous price increases benefited gross margins in 2023 and have not meaningfully impacted the results during the twelve months ending December 31, 2024. If inflationary pressures persist or new tariffs are sustained, it may require further price adjustments 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. PLP’s foreign currency exchange gains or (losses) were primarily related to translating into U.S. dollars its foreign currency denominated loans, trade receivables and payables from its foreign subsidiaries at the December 2024 year-end exchange rates. The fluctuations of foreign currencies during the years ended December 31, 2024 and December 31, 2023 had an unfavorable impact on net sales of $4.2 million and a favorable impact of $0.4 million, respectively. The effect of currency translation had an unfavorable impact on net income in the year ended December 31, 2024 of $0.7 million and an unfavorable impact of $0.2 million in the year ended December 31, 2023. On a reportable segment basis, the impact of foreign currency translation on net sales and net income for the years ended December 31, 2024 and 2023, respectively, was as follows: [[GREPCENT_TABLE]] [["","Foreign Currency Translation Impact"],["","Net Sales","","Net Income"],["(Thousands of dollars)","2024","","2023","","2024","","2023"],["The Americas","$","(5,005)","","","$","1,771","","","$","(803)","","","$","166"],["EMEA","1,738","","","1,696","","","128","","","(101)"],["Asia-Pacific","(903)","","","(3,042)","","","(52)","","","(278)"],["Total","$","(4,170)","","","$","425","","","$","(727)","","","$","(213)"]] [[/GREPCENT_TABLE]] Although customer destocking efforts in the PLP-USA communications and energy markets have impacted our 2024 results, we believe our business portfolio and our financial position are sound and strategically well-positioned. While PLP-USA sales results were down compared to the period ended December 31, 2023, our international segments had sales amounts comparable with prior year, showing our international footprint provides cyclical benefits. Our cash generation remains strong as evidenced through a significant reduction in debt levels. 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. Our continued commitment to manufacturing in the U.S. positions us well for Build America, Buy America requirements of the Broadband Equity, Access, and Deployment Program. 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. Period cost containment has been a priority for the Company in 2024, shown through a reduction in costs and expenses of approximately 8%. Our liquidity remains strong with our bank debt to equity percentage at 6.8%. We can borrow needed funds at a competitive interest rate under our credit facility. A consolidated decrease in debt of $33.7 million as of December 31, 2024 was primarily a result of improved cash conversion and less funding needs for capital expenditures and business acquisitions. See Note 7 "Debt and Credit Arrangements" in the Notes to Consolidated Financial Statements for more information related to our debt position. The following table sets forth a summary of the Company’s Statements of Consolidated Income and the percentage of net sales for the years ended December 31, 2024 and 2023. The Company’s past operating results are not necessarily indicative of future operating results. 20 [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["(Thousands of dollars)","2024","","2023","","Change"],["Net sales","$","593,714","","","100.0","%","","$","669,679","","","100.0","%","","$","(75,965)"],["Cost of products sold","403,903","","","68.0","","","434,831","","","64.9","","","(30,928)"],["GROSS PROFIT","189,811","","","32.0","","","234,848","","","35.1","","","(45,037)"],["Costs and expenses","139,054","","","23.4","","","150,694","","","22.5","","","(11,640)"],["OPERATING INCOME","50,757","","","8.5","","","84,154","","","12.6","","","(33,397)"],["Other income (expense), net","13","","","0.0","","","(1,810)","","","(0.3)","","","1,823"],["INCOME BEFORE INCOME TAXES","50,770","","","8.6","","","82,344","","","12.3","","","(31,574)"],["Income taxes","13,659","","","2.3","","","19,007","","","2.8","","","(5,348)"],["NET INCOME","37,111","","","6.3","","","63,337","","","9.5","","","(26,226)"],["Net income attributable to noncontrolling interests","(17)","","","(0.0)","","(5)","","","(0.0)","","(12)"],["NET INCOME ATTRIBUTABLE TO PREFORMED LINE PRODUCTS COMPANY SHAREHOLDERS","$","37,094","","","6.2","%","","$","63,332","","","9.5","%","","$","(26,238)"]] [[/GREPCENT_TABLE]] 2024 RESULTS OF OPERATIONS COMPARED TO 2023 Net sales. In 2024, net sales were $593.7 million, a decrease of $76.0 million, or 11%, compared to 2023. Excluding the effect of currency translation, net sales decreased 11% as summarized in the following table: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["(Thousands of dollars)","2024","","2023","","Change","","Change Due to Currency Translation","","Change Excluding Currency Translation","","% Change"],["Net sales"],["PLP-USA","$","266,704","","","$","345,613","","","$","(78,909)","","","$","\u2014","","","$","(78,909)","","","(23)","%"],["The Americas","90,280","","","86,059","","","4,221","","","(5,005)","","","9,226","","","11"],["EMEA","128,241","","","135,080","","","(6,839)","","","1,738","","","(8,577)","","","(6)"],["Asia-Pacific","108,489","","","102,927","","","5,562","","","(903)","","","6,465","","","6"],["Consolidated","$","593,714","","","$","669,679","","","$","(75,965)","","","$","(4,170)","","","$","(71,795)","","","(11)","%"]] [[/GREPCENT_TABLE]] The decrease in PLP-USA net sales of $78.9 million, or 23%, was primarily due to lower volumes in communications and energy product sales due to customer destocking efforts. International net sales for the year ended December 31, 2024 were unfavorably affected by $4.2 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 $90.3 million increased $9.2 million, or 11%, primarily due to higher volumes in energy product sales, partially offset by lower communication sales. EMEA net sales of $128.2 million decreased $8.6 million, or 6%, primarily due to lower volume in communications sales, partially offset by increased volumes in energy product sales. Asia-Pacific net sales of $108.5 million increased $6.5 million, or 6%, primarily due to volume increases in energy product sales. Gross Profit. Gross profit of $189.8 million for 2024 decreased $45.0 million, or 19%, compared to 2023. Excluding the effect of currency translation, gross profit decreased $43.5 million, or 19%, as summarized in the following table: 21 [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["(Thousands of dollars)","2024","","2023","","Change","","Change Due to Currency Translation","","Change Excluding Currency Translation","","% Change"],["Gross profit"],["PLP-USA","$","92,969","","","$","138,961","","","$","(45,992)","","","$","\u2014","","","$","(45,992)","","","(33)","%"],["The Americas","28,608","","","30,005","","","(1,397)","","","(1,807)","","","410","","","1"],["EMEA","36,796","","","36,372","","","424","","","462","","","(38)","","","\u2014"],["Asia-Pacific","31,438","","","29,510","","","1,928","","","(224)","","","2,152","","","7"],["Consolidated","$","189,811","","","$","234,848","","","$","(45,037)","","","$","(1,569)","","","$","(43,468)","","","(19)","%"]] [[/GREPCENT_TABLE]] PLP-USA gross profit of $93.0 million decreased by $46.0 million, or 33%, compared to the same period in 2023, primarily due to lower sales volumes and unfavorable product mix. International gross profit for the period ended December 31, 2024 was unfavorably impacted by $1.6 million when local currencies were translated to U.S. dollars. The following discussion of gross profit changes excludes the effects of currency translation. The Americas gross profit increased $0.4 million, or 1%, which was primarily the result of higher sales volumes, offset by increased depreciation expense and freight costs. EMEA gross profit decreased nominally, which was primarily driven by decreased sales volumes offset by favorable product mix and favorable resolution of a warranty claim. Asia-Pacific gross profit increased $2.2 million, or 7%, which was primarily driven by favorable product mix. Costs and expenses. Costs and expenses of $139.1 million for the year ended December 31, 2024 decreased $11.6 million, or 8%, when compared to 2023. Excluding the effect of currency translation, costs and expenses decreased $10.9 million, or 7%, as summarized in the following table: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["(Thousands of dollars)","2024","","2023","","Change","","Change Due to Currency Translation","","Change Excluding Currency Translation","","% Change"],["Costs and expenses"],["PLP-USA","$","72,593","","","$","79,289","","","$","(6,696)","","","$","\u2014","","","$","(6,696)","","","(8)","%"],["The Americas","18,655","","","22,724","","","(4,069)","","","(799)","","","(3,270)","","","(14)"],["EMEA","26,090","","","28,193","","","(2,103)","","","257","","","(2,360)","","","(8)"],["Asia-Pacific","21,716","","","20,488","","","1,228","","","(158)","","","1,386","","","7"],["Consolidated","$","139,054","","","$","150,694","","","$","(11,640)","","","$","(700)","","","$","(10,940)","","","(7)","%"]] [[/GREPCENT_TABLE]] PLP-USA costs and expenses of $72.6 million decreased $6.7 million, or 8% year-over-year. PLP-USA’s decrease was primarily attributable to lower selling costs and lower personnel and professional services costs, primarily as a result of cost containment efforts. International costs and expenses for the year ended December 31, 2024 had a favorable impact by $0.7 million when local currencies were translated to U.S. dollars. The following discussion of costs and expenses excludes the effect of currency translation. The Americas costs and expenses of $18.7 million decreased $3.3 million primarily due to a legal settlement in the third quarter of 2023 and the impact of foreign currency remeasurement. EMEA costs and expenses of $26.1 million decreased by $2.4 million primarily due to lower personnel costs and bad debt expenses. Asia-Pacific costs and expenses of $21.7 million increased $1.4 million primarily due to the net impact of the sale of capital assets year over year and foreign currency remeasurement. Other (expense) income, net. Other income, net as of the year ended December 31, 2024 was favorable by $1.8 million when compared to Other expense, net for the year ended December 31, 2024 of $1.8 million. The favorable movement was due to higher interest income earned on cash balances in certain international jurisdictions and lower interest expense from reduced debt balances for the year ended December 31, 2024. Income taxes. Income taxes for the years ended December 31, 2024 and 2023 were $13.7 million and $19.0 million based on pre-tax income of $50.8 million and $82.3 million, respectively. The effective tax rate for the years ended December 31, 2024 and 2023 was 26.9% and 23.1%, respectively. Our effective tax rate increased primarily due to the limitations on the deductibility of compensation and the unfavorable impact from the mix of income earned in jurisdictions with a higher tax rate than the U.S. This was partially offset by a favorable impact from increase in excess tax benefit on share-based compensation. The following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 21.0%: 22 2024 1.A $2.0 million, or 4.0%, net increase resulting from Non-deductible officers' compensation. 2.A $1.6 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. 3.A $1.6 million, or 3.2%, net decrease resulting from generation of foreign tax credits. 4.A $1.2 million, or 2.4%, net decrease resulting from other stock compensation. 5.A $1.2 million, or 2.3%, net increase resulting from the inclusion of Global Intangible Low-Taxed Income. 2023 1.A $3.7 million, or 4.5%, net decrease resulting from generation of foreign tax credits. 2.A $3.0 million, or 3.6%, net increase resulting from the inclusion of Global Intangible Low-Taxed Income. 3.A $1.8 million, or 2.2%, net increase resulting from earnings in various U.S States. 4.A $1.7 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. Net income. As a result of the preceding items, net income for the year ended December 31, 2024 was $37.1 million, compared to $63.3 million for 2023. Excluding the effect of currency translation, net income decreased $25.5 million as summarized in the following table. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["(Thousands of dollars)","2024","","2023","","Change","","Change Due to Currency Translation","","Change Excluding Currency Translation","","% Change"],["Net income (loss)"],["PLP-USA","$","13,940","","","$","45,392","","","$","(31,452)","","","$","\u2014","","","$","(31,452)","","","(69)","%"],["The Americas","8,951","","","5,755","","","3,196","","","(803)","","","3,999","","","69"],["EMEA","7,762","","","5,796","","","1,966","","","128","","","1,838","","","32"],["Asia-Pacific","6,441","","","6,389","","","52","","","(52)","","","104","","","2"],["Consolidated","$","37,094","","","$","63,332","","","$","(26,238)","","","$","(727)","","","$","(25,511)","","","(40)","%"]] [[/GREPCENT_TABLE]] 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 2024, we used cash of $14.7 million for capital expenditures. At December 31, 2024, we had $57.2 million of cash, cash equivalents and restricted cash (collectively “Cash”). Our Cash is held in various locations throughout the world. At December 31, 2024, 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. Total debt, including notes payable, at December 31, 2024 was $28.6 million. At December 31, 2024, our unused availability under our credit facility (the "Facility") was $82.8 million and our bank debt to equity percentage was 6.8%. The Facility contains, 23 among other provisions, requirements for maintaining levels of net worth and profitability. At December 31, 2024, the Company was in compliance with these covenants. Our Asia-Pacific segment had $0.1 million and $0.2 million in restricted cash for the years ended December 31, 2024 and 2023. The restricted cash was used to secure bank debt and is included in Cash, cash equivalents and restricted cash on the balance sheet. On January 19, 2021, the Company received funding for a term loan from PNC Equipment Finance, LLC in the principal amount of $20.5 million for the full amount of the purchase price for a new corporate aircraft. At December 31, 2024, the outstanding balance on the term loan was $12.6 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 2025 and beyond will be our operating cash flows, our existing cash and cash equivalents as well as our Facility agreement. The Facility agreement has an expiration date of March 2, 2026. The Company expects to extend the maturity date of the Facility over the coming year. 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 Net Cash provided by operating activities for the years ended December 31, 2024 and 2023 was $67.5 million and $107.6 million, respectively. The $40.1 million decrease was primarily a result of a decrease in net income and decrease in cash from working capital. Net Cash used in investing activities for the years ended December 31, 2024 and 2023 was $12.4 million and $44.8 million, respectively. The $32.4 million decrease was primarily a result of decreases in acquisition activity and capital expenditures during the current period. Net Cash used in financing activities for the years ended December 31, 2024 and 2023 was $47.8 million and $48.9 million, respectively. The year-over-year change was primarily the result of decreased share repurchases offset by increased net payments of 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, 2024, the Company had total outstanding guarantees of $11.3 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, 2024, the Company had total outstanding letters of credit of $1.3 million. The Company has other borrowing facilities at certain of its foreign subsidiaries, which consist of overdraft lines, working capital credit lines, and facilities for the issuance of letters of credit and short-term borrowing needs. At December 31, 2024, and December 31, 2023, $8.8 million and $13.3 million were outstanding, of which $8.2 million and $11.4 million were classified as current, respectively. These facilities support commitments made in the ordinary course of business. 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 24 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. 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. 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 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, 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. 25 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 5.77% at December 31, 2024 reflects an analysis of yield curves as of the end of the year and the schedule of expected cash needs of the plan. The 2025 expected long-term return on plan assets of 4.75% 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.