NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In thousands, except share and per share data, unless specifically noted)
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Preformed Line Products Company and subsidiaries (the “Company” or “PLPC”) have been prepared in accordance with United States of America (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from these estimates. In the opinion of management, these consolidated financial statements contain all estimates and adjustments, consisting of normal recurring accruals, required to fairly present the financial position, results of operations, and cash flows for the interim periods. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full-year ending December 31, 2020.
Noncontrolling interests are presented in the Company’s consolidated financial statements as if parent company investors (controlling interests) and other minority investors (noncontrolling interests) in partially-owned subsidiaries have similar economic interests in a single entity. As a result, investments in noncontrolling interests are reported as equity in our consolidated financial statements. Additionally, the Company’s consolidated financial statements include 100% of a controlled subsidiary’s earnings, rather than only its share. Transactions between the parent company and noncontrolling interests are reported in equity as transactions between stockholders, provided that these transactions do not create a change in control.
The Consolidated Balance Sheet at December 31, 2019 has been derived from the audited consolidated financial statements but does not include all of the information and notes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes to consolidated financial statements included in the Company’s 2019 Annual Report on Form 10-K filed on March 6, 2020 with the Securities and Exchange Commission.
NOTE B – REVENUE
Revenue recognition
Net sales include products and shipping and handling charges, net of estimates for product returns. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies the performance obligations under the contract and control of the product is transferred to the customer, primarily based on shipping terms. Revenue for shipping and handling charges are recognized at the time the products are shipped to, delivered to or picked up by the customer. The Company estimates product returns based on historical return rates.
7
Disaggregated revenue
The Company’s revenues by segment and product type are as follows:
|
|
|
Three Months Ended March 31, 2020
|
|
|
Product Type
|
|
PLP-USA
|
|
|
The Americas
|
|
|
EMEA
|
|
Asia-Pacific
|
|
Consolidated
|
|
|
Energy
|
|
|
64
|
%
|
|
|
71
|
%
|
|
|
62
|
%
|
|
74
|
%
|
|
66
|
%
|
|
Communications
|
|
|
30
|
|
|
|
22
|
|
|
|
30
|
|
|
4
|
|
|
24
|
|
|
Special Industries
|
|
|
6
|
|
|
|
7
|
|
|
|
8
|
|
|
22
|
|
|
10
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
Product Type
|
|
PLP-USA
|
|
|
The Americas
|
|
|
EMEA
|
|
Asia-Pacific
|
|
Consolidated
|
|
|
Energy
|
|
|
64
|
%
|
|
|
59
|
%
|
|
|
77
|
%
|
|
63
|
%
|
|
65
|
%
|
|
Communications
|
|
|
30
|
|
|
|
34
|
|
|
|
14
|
|
|
6
|
|
|
22
|
|
|
Special Industries
|
|
|
6
|
|
|
|
7
|
|
|
|
9
|
|
|
31
|
|
|
13
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
NOTE C – OTHER FINANCIAL STATEMENT INFORMATION
Inventories – net
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
Raw materials
|
|
$
|
46,620
|
|
|
$
|
49,729
|
|
|
Work-in-process
|
|
|
9,270
|
|
|
|
9,352
|
|
|
Finished Goods
|
|
|
44,690
|
|
|
|
45,760
|
|
|
|
|
|
100,580
|
|
|
|
104,841
|
|
|
Excess of current cost over LIFO cost
|
|
|
(4,849
|
)
|
|
|
(4,667
|
)
|
|
Noncurrent portion of inventory
|
|
|
(3,218
|
)
|
|
|
(4,456
|
)
|
|
|
|
$
|
92,513
|
|
|
$
|
95,718
|
|
Cost of inventories for certain material is determined using the last-in-first-out (LIFO) method and totaled approximately $30.8 million at March 31, 2020 and $32.0 million at December 31, 2019. An actual valuation of inventories under the LIFO method can be made only at the end of the year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Because these estimates are subject to change and may be different than the actual inventory levels and costs at the end of the year, interim results are subject to the final year-end LIFO inventory valuation. During the three-month periods ended March 31, 2020 and 2019, the net change in LIFO inventories resulted in $.2 million and $.3 million, respectively, of expense to Income before income taxes.
Noncurrent inventory is included in Other assets on the Consolidated Balance Sheets.
Property, plant and equipment—net
Major classes of Property, plant and equipment are stated at cost and were as follows:
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
Land and improvements
|
|
$
|
20,519
|
|
|
$
|
22,218
|
|
|
Buildings and improvements
|
|
|
80,885
|
|
|
|
82,811
|
|
|
Machinery, equipment and aircraft
|
|
|
172,777
|
|
|
|
180,221
|
|
|
Construction in progress
|
|
|
10,947
|
|
|
|
9,460
|
|
|
|
|
|
285,128
|
|
|
|
294,710
|
|
|
Less accumulated depreciation
|
|
|
(165,772
|
)
|
|
|
(170,692
|
)
|
|
|
|
$
|
119,356
|
|
|
$
|
124,018
|
|
8
Legal proceedings
The Company can be party to a variety of pending legal proceedings and claims arising in the normal course of business, including, but not limited to, litigation relating to employment, workers’ compensation, product liability, environmental and intellectual property. The Company has liability insurance to cover many of these claims.
Although the outcomes of these matters are not predictable with certainty, the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and the likelihood to develop what the Company believes to be a reasonable range of potential loss exists, the Company will include disclosure related to such matters. To the extent that there is a reasonable possibility the losses could exceed amounts already accrued, the Company will adjust the accrual in the period in which the determination is made, disclose an estimate of the additional loss or range of loss and if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
The Company and its subsidiaries Helix Uniformed Ltd. (“Helix”) and Preformed Line Products (Canada) Limited (“PLPC Canada”), were each named, jointly and severally, with each of SNC-Lavalin ATP, Inc. (“SNC ATP”), HD Supply Canada Inc., by its trade names HD Supply Power Solutions and HD Supply Utilities (“HD Supply”), and Anixter Power Solutions Canada Inc. (the corporate successor to HD Supply), “Anixter” and, together with the Company, PLPC Canada, Helix, SNC ATP and HD Supply, the (“Defendants”) in a complaint filed by Altalink, L.P. (the “Plaintiff”) in the Court of Queen’s Bench of Alberta in Alberta, Canada in November 2016 (the “Complaint”).
The Complaint states that Plaintiff engaged SNC ATP to design, engineer, procure and construct numerous power distribution and transmission facilities in Alberta (the “Projects”) and that through SNC ATP and HD Supply (now Anixter), spacer dampers manufactured by Helix were procured and installed in the Projects. The Complaint alleges that the spacer dampers have and may continue to become loose, open and detach from the conductors, resulting in damage and potential injury and a failure to perform the intended function of providing spacing and damping to the Project. The Plaintiffs were initially seeking an estimated $56.0 million Canadian dollars in damages jointly and severally from the Defendants, representing the costs of monitoring and replacing the spacer dampers and remediating property damage, due to alleged defects in the design and construction of, and supply of materials for, the Projects by SNC ATP and HD Supply/Anixter and in the design of the spacer dampers by Helix. The Plaintiffs reduced their demand for damages to $29.4 million Canadian dollars on June 1, 2018.
The Company believes the claims against it are without merit and intends to vigorously defend against such claims. The Company is unable to predict the outcome of this case and cannot reasonably estimate a potential range of loss. However, if it is to be determined to be adverse to the Company, it could have a material effect on the Company’s financial results.
The Company is not a party to any other pending legal proceedings that the Company believes would, individually or in the aggregate, have a material adverse effect on its financial condition, results of operations or cash flows.
9
NOTE D – SHARE HOLDERS EQUITY
The following table reflects the changes in shareholders equity for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Common
Shares
Issued to
Rabbi Trust
|
|
|
Deferred
Compensation
Liability
|
|
|
Paid in
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Shares
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Unrecognized
Pension
Benefit Cost
|
|
|
Total
Preformed
Line
Products
Company
Equity
|
|
|
Noncontrolling
Interests
|
|
|
Total
Equity
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2019
|
|
$
|
12,848
|
|
|
$
|
(10,981
|
)
|
|
$
|
10,981
|
|
|
$
|
38,854
|
|
|
$
|
353,292
|
|
|
$
|
(79,106
|
)
|
|
$
|
(51,682
|
)
|
|
$
|
(5,671
|
)
|
|
$
|
268,535
|
|
|
$
|
33
|
|
|
$
|
268,568
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,698
|
|
|
|
(45
|
)
|
|
|
3,653
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,881
|
)
|
|
|
|
|
|
|
(16,881
|
)
|
|
|
|
|
|
|
(16,881
|
)
|
|
Recognized net actuarial gain,
net of tax provision of $31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
98
|
|
|
|
|
|
|
|
98
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,085
|
)
|
|
|
(45
|
)
|
|
|
(13,130
|
)
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
976
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
933
|
|
|
|
|
|
|
|
933
|
|
|
Purchase of 75,246 common
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,980
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,980
|
)
|
|
|
|
|
|
|
(3,980
|
)
|
|
Issuance of 77,381 common
shares
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
|
|
|
|
|
|
|
|
155
|
|
|
Common shares distributed
from rabbi trust of 3,358,
net
|
|
|
|
|
|
|
101
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
Cash dividends declared
- $.20 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
|
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,046
|
)
|
|
|
|
|
|
|
(1,046
|
)
|
|
Balance at March 31, 2020
|
|
$
|
13,003
|
|
|
$
|
(10,880
|
)
|
|
$
|
10,880
|
|
|
$
|
39,747
|
|
|
$
|
355,984
|
|
|
$
|
(83,086
|
)
|
|
$
|
(68,563
|
)
|
|
$
|
(5,573
|
)
|
|
$
|
251,512
|
|
|
$
|
(12
|
)
|
|
$
|
251,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
Common
Shares
Issued to
Rabbi Trust
|
|
|
Deferred
Compensation
Liability
|
|
|
Paid in
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Shares
|
|
|
Cumulative
Translation
Adjustment
|
|
|
Unrecognized
Pension
Benefit Cost
|
|
|
Total
Preformed
Line
Products
Company
Equity
|
|
|
Noncontrolling
Interests
|
|
|
Total
Equity
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
12,662
|
|
|
$
|
(11,008
|
)
|
|
$
|
11,008
|
|
|
$
|
34,401
|
|
|
$
|
334,170
|
|
|
$
|
(72,280
|
)
|
|
$
|
(53,710
|
)
|
|
$
|
(5,873
|
)
|
|
$
|
249,370
|
|
|
$
|
0
|
|
|
$
|
249,370
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,824
|
|
|
|
|
|
|
|
1,824
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,353
|
|
|
|
|
|
|
|
1,353
|
|
|
|
|
|
|
|
1,353
|
|
|
Recognized net actuarial gain,
net of tax provision of $32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
93
|
|
|
|
|
|
|
|
93
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,270
|
|
|
|
0
|
|
|
|
3,270
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
928
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892
|
|
|
|
|
|
|
|
892
|
|
|
Purchase of 40,891 common
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,294
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,294
|
)
|
|
|
|
|
|
|
(2,294
|
)
|
|
Issuance of 78,821 common
shares
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
141
|
|
|
Common shares issued to rabbi
trust of 705, net
|
|
|
|
|
|
|
(30
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
Cash dividends declared - $.20
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
(1,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,176
|
)
|
|
|
|
|
|
|
(1,176
|
)
|
|
Balance at March 31, 2019
|
|
$
|
12,821
|
|
|
$
|
(11,038
|
)
|
|
$
|
11,038
|
|
|
$
|
35,146
|
|
|
$
|
334,947
|
|
|
$
|
(74,574
|
)
|
|
$
|
(52,357
|
)
|
|
$
|
(5,780
|
)
|
|
$
|
250,203
|
|
|
$
|
0
|
|
|
$
|
250,203
|
|
10
NOTE E – PENSION PLANS
The Company uses a December 31 measurement date for the Preformed Line Products Company Employees’ Retirement Plan (the “Plan”). Net periodic pension cost for this plan included the following components:
|
|
|
Three Months Ended March 31
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Service cost
|
|
$
|
91
|
|
|
$
|
47
|
|
|
Interest cost
|
|
|
327
|
|
|
|
354
|
|
|
Expected return on plan assets
|
|
|
(557
|
)
|
|
|
(488
|
)
|
|
Recognized net actuarial loss
|
|
|
129
|
|
|
|
125
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
(10
|
)
|
|
$
|
38
|
|
No contributions were made to the Plan during the three months ended March 31, 2020. The Company does not plan to contribute additional funds to the Plan during the remainder of 2020.
NOTE F – ACCUMULATED OTHER COMPREHENSIVE INCOME (“AOCI”)
The following tables set forth the total changes in AOCI by component, net of tax:
|
|
|
Three Months Ended March 31, 2020
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
Unrecognized
pension
benefit cost
|
|
|
Currency
Translation
Adjustment
|
|
|
Total
|
|
|
Unrecognized
pension
benefit cost
|
|
|
Currency
Translation
Adjustment
|
|
|
Total
|
|
|
Balance at January 1
|
|
$
|
(5,671
|
)
|
|
$
|
(51,682
|
)
|
|
$
|
(57,353
|
)
|
|
$
|
(5,873
|
)
|
|
$
|
(53,710
|
)
|
|
$
|
(59,583
|
)
|
|
Other comprehensive loss before
reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on foreign currency
translation adjustment
|
|
|
0
|
|
|
|
(16,881
|
)
|
|
|
(16,881
|
)
|
|
|
0
|
|
|
|
1,353
|
|
|
|
1,353
|
|
|
Amounts reclassified from AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension
actuarial gain (a)
|
|
|
98
|
|
|
|
0
|
|
|
|
98
|
|
|
|
93
|
|
|
|
0
|
|
|
|
93
|
|
|
Net current period other comprehensive
income (loss)
|
|
|
98
|
|
|
|
(16,881
|
)
|
|
|
(16,783
|
)
|
|
|
93
|
|
|
|
1,353
|
|
|
|
1,446
|
|
|
Balance at March 31
|
|
$
|
(5,573
|
)
|
|
$
|
(68,563
|
)
|
|
$
|
(74,136
|
)
|
|
$
|
(5,780
|
)
|
|
$
|
(52,357
|
)
|
|
$
|
(58,137
|
)
|
|
(a)
|
This AOCI component is included in the computation of net periodic pension costs.
|
NOTE G – COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share were computed by dividing Net income by the weighted-average number of common shares outstanding for each respective period. Diluted earnings per share were calculated by dividing Net income by the weighted-average of all potentially dilutive common stock that was outstanding during the periods presented.
11
The calculation of basic and diluted earnings per share for the three months ended March 31, 2020 and 2019 was as follows:
|
|
|
Three Months Ended March 31
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,698
|
|
|
$
|
1,824
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Determination of shares
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
5,008
|
|
|
|
5,045
|
|
|
Dilutive effect - share-based awards
|
|
|
9
|
|
|
|
9
|
|
|
Diluted weighted-average common shares outstanding
|
|
|
5,017
|
|
|
|
5,054
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.74
|
|
|
$
|
0.36
|
|
|
Diluted
|
|
$
|
0.74
|
|
|
$
|
0.36
|
|
For the three-month period ended March 31, 2020, 20,000 stock options were excluded from the calculation of diluted earnings per share as the effect would have been anti-dilutive. For the three-month period ended March 31, 2019, no stock options were excluded from the calculation of diluted earnings per share as there was no anti-dilutive effect.
NOTE H – GOODWILL AND OTHER INTANGIBLES
The Company’s finite and indefinite-lived intangible assets consist of the following:
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Finite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
4,806
|
|
|
$
|
(4,806
|
)
|
|
$
|
4,806
|
|
|
$
|
(4,806
|
)
|
|
Land use rights
|
|
|
1,078
|
|
|
|
(432
|
)
|
|
|
1,128
|
|
|
|
(331
|
)
|
|
Trademarks
|
|
|
1,579
|
|
|
|
(1,291
|
)
|
|
|
1,718
|
|
|
|
(1,358
|
)
|
|
Technology
|
|
|
6,687
|
|
|
|
(1,776
|
)
|
|
|
7,185
|
|
|
|
(1,708
|
)
|
|
Customer relationships
|
|
|
14,895
|
|
|
|
(7,260
|
)
|
|
|
15,811
|
|
|
|
(7,329
|
)
|
|
|
|
$
|
29,045
|
|
|
$
|
(15,565
|
)
|
|
$
|
30,648
|
|
|
$
|
(15,532
|
)
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
25,814
|
|
|
|
|
|
|
$
|
27,840
|
|
|
|
|
|
The aggregate amortization expense for other intangibles with finite lives for the three month periods ended March 31, 2020 and 2019 was $.4 million and $.3 million, respectively. Amortization expense is estimated to be $1.2 million for the remaining period of 2020, $1.5 million for each of the years 2021, 2022 and 2023 and $1.4 million for 2024. The combined weighted-average remaining amortization period is approximately 13.0 years. The weighted-average remaining amortization period by intangible asset class is as follows: patents, 5.8 years; land use rights, 55.4 years; trademarks, 8.6 years; technology, 10.8 years; and customer relationships, 10.2 years.
12
The Company’s measurement date for its annual impairment test for goodwill is October 1st of each year. The Company performs its annual impairment test for goodwill utilizing a discounted cash flow methodology, market comparables, and an overall market capitalization reasonableness test in computing fair value by reporting unit. The Company then compares the fair value of the reporting unit with its carrying value to assess if goodwill has been impaired. Based on the assumptions as to growth, discount rates and the weighting used for each respective valuation methodology, results of the valuations could be significantly different. However, the Company believes that the methodologies and weightings used are reasonable and result in appropriate fair values of the reporting units. The Company’s valuation method uses Level 3 inputs under the fair value hierarchy.
The Company’s only intangible asset with an indefinite life is goodwill. The changes in the carrying amount of goodwill, by segment, for the three months ended March 31, 2020 are as follows:
|
|
|
USA
|
|
|
The Americas
|
|
|
EMEA
|
|
|
Asia-Pacific
|
|
|
Total
|
|
|
Balance at January 1, 2020
|
|
$
|
3,078
|
|
|
$
|
4,158
|
|
|
$
|
13,442
|
|
|
$
|
7,162
|
|
|
$
|
27,840
|
|
|
Currency translation
|
|
|
0
|
|
|
|
(316
|
)
|
|
|
(769
|
)
|
|
|
(941
|
)
|
|
|
(2,026
|
)
|
|
Balance at March 31, 2020
|
|
$
|
3,078
|
|
|
$
|
3,842
|
|
|
$
|
12,673
|
|
|
$
|
6,221
|
|
|
$
|
25,814
|
|
NOTE I – SHARE-BASED COMPENSATION
Long Term Incentive Plan of 2008 and 2016 Incentive Plan
The Company maintains an equity award program to give the Company a competitive advantage in attracting, retaining, and motivating officers, employees and directors and to provide an incentive to those individuals to increase shareholder value through long-term incentives directly linked to the Company’s performance. Under the Preformed Line Products Company Long Term Incentive Plan of 2008 (the “LTIP”), certain employees, officers, and directors were eligible to receive awards of options, restricted shares and restricted share units (RSUs). The total number of Company common shares reserved for awards under the LTIP was 900,000, of which 800,000 common shares were reserved for RSUs and 100,000 common shares have been reserved for share options. The LTIP was terminated and replaced with the Preformed Line Products Company 2016 Incentive Plan (the “Incentive Plan”) in May 2016 upon approval by the Company’s Shareholders at the 2016 Annual Meeting of Shareholders on May 10, 2016. No further awards will be made under the LTIP and previously granted awards remain outstanding in accordance with their terms. Under the Incentive Plan, certain employees, officers, and directors will be eligible to receive awards of options, restricted shares and RSUs. The total number of Company common shares reserved for awards under the Incentive Plan is 1,000,000 of which 900,000 common shares have been reserved for restricted share awards and 100,000 common shares have been reserved for share options. The Incentive Plan expires on May 10, 2026.
Restricted Share Units
For the regular annual grants, a portion of the RSUs is subject to time-based cliff vesting and a portion is subject to vesting based upon the Company’s performance over a set period for all participants except the CEO. All of the CEO’s regular annual RSUs are subject to vesting based upon the Company’s performance over a set-year period.
The RSUs are offered at no cost to the employees. The fair value of RSUs is based on the market price of a common share on the grant date and the shares underlying the awards are not issued until they vest. Dividends declared are accrued in cash.
A summary of the RSUs outstanding under the LTIP for the three months ended March 31, 2020 is as follows:
|
|
|
Restricted Share Units
|
|
|
|
|
Performance
and Service
Required (1)
|
|
|
Service
Required
|
|
|
Total
Restricted
Share
Units
|
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
|
Nonvested as of January 1, 2020
|
|
|
196,342
|
|
|
|
15,292
|
|
|
|
211,634
|
|
|
$
|
53.68
|
|
|
Granted
|
|
|
71,539
|
|
|
|
9,547
|
|
|
|
81,086
|
|
|
|
55.63
|
|
|
Vested
|
|
|
73,053
|
|
|
|
0
|
|
|
|
73,053
|
|
|
|
54.60
|
|
|
Forfeited
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
|
|
Nonvested as of March 31, 2020
|
|
|
194,828
|
|
|
|
24,839
|
|
|
|
219,667
|
|
|
$
|
61.10
|
|
|
(1)
|
Nonvested, performance-based RSUs are reflected above at the maximum performance achievement level.
|
13
For time-based RSUs, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award in General and administrative expense in the accompanying Statements of Consolidated Income. Compensation expense related to the time-based RSUs for both three-month periods ended March 31, 2020 and 2019 was $.1 million. As of March 31, 2020, there was $.9 million of total unrecognized compensation cost related to time-based RSUs that is expected to be recognized over the weighted-average remaining period of approximately 2.2 years.
For the performance-based RSUs, the number of RSUs in which the participants will vest depends on the Company’s level of performance measured by growth in either operating or pre-tax income and sales growth over a requisite performance period. Depending on the extent to which the performance criterions are satisfied under the LTIP and the Incentive Plan, the participants are eligible to earn common shares over the vesting period. Performance-based compensation expense for both three-month periods ended March 31, 2020 and 2019 was $.8 million. As of March 31, 2020, the remaining compensation expense of $5.1 million for outstanding performance-based RSU’s is expected to be recognized over a period of approximately 1.9 years.
In the event of a Change in Control (as defined in the LTIP and the Incentive Plan), vesting of the RSUs will be accelerated and all restrictions will lapse. Unvested performance-based awards will vest on a target potential payout.
To satisfy the vesting of its RSU awards, the Company has reserved new shares from its authorized but unissued shares. Any additional awards granted will also be issued from the Company’s authorized but unissued shares.
Share Option Awards
The LTIP permitted and now the Incentive Plan permits the grant of 100,000 options to buy common shares of the Company to certain employees at not less than fair market value of the shares on the date of grant. Options issued to date under the LTIP and the Incentive Plan vest 50% after one year following the date of the grant, 75% after two years, and 100% after three years, and expire from five to ten years from the date of grant. Shares issued as a result of stock option exercises will be funded with the issuance of new shares.
The Company utilizes the Black-Scholes option pricing model for estimating fair values of options. The Black-Scholes model requires assumptions regarding the volatility of the Company’s stock, the expected life of the stock award and the Company’s dividend yield. The Company utilizes historical data in determining these assumptions. The risk-free rate for periods within the contractual life of the option is based on the U.S. zero coupon Treasury yield in effect at the time of grant.
There were no options granted for either of the three-month periods ended March 31, 2020 and 2019.
Stock option activity under the Company’s LTIP for three months ended March 31, 2020 was as follows:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
per Share
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value (000's)
|
|
|
Outstanding at January 1, 2020
|
|
|
31,750
|
|
|
$
|
58.77
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
0
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding (vested and expected to vest) at March 31, 2020
|
|
|
31,750
|
|
|
$
|
58.77
|
|
|
|
6.4
|
|
|
$
|
46
|
|
|
Exercisable at March 31, 2020
|
|
|
23,000
|
|
|
$
|
56.58
|
|
|
|
5.4
|
|
|
$
|
43
|
|
There were no shares exercised during either of the three-month periods ended March 31, 2020 and 2019.
For both three-month periods ended March 31, 2020 and 2019, the Company recorded compensation expense related to the stock options currently vested of less than $.1 million. The total compensation cost related to nonvested awards not yet recognized at March 31, 2020 is expected to be $.1 million over a weighted-average period of approximately 2.3 years.
Deferred Compensation Plan
The Company maintains a trust, commonly referred to as a rabbi trust, in connection with the Company’s deferred compensation plan. This plan allows for two deferrals. First, Directors make elective deferrals of Director fees payable and held in the rabbi trust. The
14
deferred compensation plan allows the Directors to elect to receive Director fees in common shares of the Company at a later date instead of fees paid each quarter in cash. Second, this plan allows certain Company employees to defer restricted shares or RSUs for future distribution in the form of common shares. Assets of the rabbi trust are consolidated, and the value of the Company’s common shares held in the rabbi trust is classified in Shareholders’ equity and generally accounted for in a manner similar to treasury stock. The Company recognizes the original amount of the deferred compensation (fair value of the deferred stock award at the date of grant) as the basis for recognition in common shares issued to the rabbi trust. Changes in the fair value of amounts owed to certain employees or Directors are not recognized as the Company’s deferred compensation plan does not permit diversification and must be settled by the delivery of a fixed number of the Company’s common shares. As of March 31, 2020, 264,283 shares have been deferred and are being held in the rabbi trust.
NOTE J – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The Company measures and records certain assets and liabilities at fair value. A fair value hierarchy is used for those assets and liabilities measured at fair value that distinguishes between assumptions based on market data, (observable inputs), and the Company’s assumptions (unobservable inputs). The hierarchy consists of the following three levels:
|
Level 1
|
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
Level 2
|
Inputs other than Level 1 inputs that are either directly or indirectly observable, which may include:
|
|
|
o
|
Quoted prices for similar assets in active markets;
|
|
|
o
|
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
|
o
|
Inputs other than quoted prices that are observable for the asset or liability; and
|
|
|
o
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
Level 3
|
Inputs to the valuation methodology are unobservable and developed using estimates and assumptions developed by the Company which reflect those that a market participant would use.
|
The following table summarizes the Company’s assets and liabilities, recorded and measured at fair value, in the consolidated balance sheets as of March 31, 2020 and December 31, 2019:
|
Description
|
|
Balance as of
March 31, 2020
|
|
|
Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts, net
|
|
$
|
456
|
|
|
$
|
0
|
|
|
$
|
456
|
|
|
$
|
0
|
|
|
Total Assets
|
|
$
|
456
|
|
|
$
|
0
|
|
|
$
|
456
|
|
|
$
|
0
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental profit sharing plan
|
|
$
|
5,326
|
|
|
$
|
0
|
|
|
$
|
5,326
|
|
|
$
|
0
|
|
|
Earn-out
|
|
|
192
|
|
|
|
0
|
|
|
|
0
|
|
|
|
192
|
|
|
Total Liabilities
|
|
$
|
5,518
|
|
|
$
|
0
|
|
|
$
|
5,326
|
|
|
$
|
192
|
|
|
Description
|
|
Balance as of
December 31, 2019
|
|
|
Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental profit sharing plan
|
|
$
|
6,059
|
|
|
$
|
0
|
|
|
$
|
6,059
|
|
|
$
|
0
|
|
|
Earn-out
|
|
|
581
|
|
|
|
0
|
|
|
|
0
|
|
|
|
581
|
|
|
Total Liabilities
|
|
$
|
6,640
|
|
|
$
|
0
|
|
|
$
|
6,059
|
|
|
$
|
581
|
|
The Company operates internationally and enters into intercompany transactions denominated in foreign currencies. Consequently, the Company is subject to market risk arising from exchange rate movements between the dates foreign currency transactions occur and the dates they are settled. We currently use foreign currency forward contracts to reduce the risk related to some of these transactions. These contracts usually have maturities of 90 days or less and generally require an exchange of foreign currencies for U.S. dollars at maturity at rates stated in the contracts. These contracts are not designated as hedging instruments under U.S. GAAP. Accordingly, the changes in the fair value of the foreign currency forward contracts are recognized in each accounting period in “Other operating expense - net” on the Consolidated Statements of Income together with the transaction gain or loss from the related balance sheet position. For the three months ended March 31, 2020, the Company recognized net gains of $1.1 million on foreign currency forward contracts. There were no foreign currency contracts in place at March 31, 2019.
15
The Company has a non-qualified Supplemental Profit Sharing Plan for its executives. The liability for this unfunded Supplemental Profit Sharing Plan was $5.3 million at March 31, 2020 and $6.1 million at December 31, 2019. These amounts are recorded within Other noncurrent liabilities on the Company’s consolidated balance sheets. The Supplemental Profit Sharing Plan allows participants the ability to hypothetically invest their proportionate award into various investment options, which primarily include mutual funds. The Company credits earnings, gains and losses to the participants’ deferred compensation account balances based on the investments selected by the participants. The Company measures the fair value of the Supplemental Profit Sharing Plan liability using the market values of the participants’ underlying investment accounts.
The earn-out represents the estimated fair value of additional cash consideration payable in connection with a recent acquisition that is contingent upon the achievement of certain performance milestones using expected future cash flows over the earn-out period while applying a discount rate that appropriately captures the risk associated with the obligation. These are considered to be Level 3 inputs. The contingent liabilities at March 31, 2020 and December 31, 2019 of $.2 million and $.6 million, respectively, are recorded in Other noncurrent liabilities on the Company’s consolidated balance sheet.
NOTE K – RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which will modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including the removal of certain disclosure requirements. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the new disclosure requirements for the period ending March 31, 2020. The additional components of this release did not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 changes how entities will measure credit losses for most financial assets and other instruments that are not measured at fair value through net income. This update introduces the current expected credit loss (CECL) model, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. ASU 2016-13 is effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has completed its evaluation process and the January 1, 2020 adoption did not have a material impact to the Company’s consolidated financial statements for the three months ended March 31, 2020.
16
NOTE L – NEW ACCOUNTING STANDARDS TO BE ADOPTED
The Company considers the applicability and impact of all ASUs. Recently issued ASUs that are not considered were assessed and determined to be not applicable in the current reporting period.
NOTE M – SEGMENT INFORMATION
The following tables present a summary of the Company’s reportable segments for the three months ended March 31, 2020 and 2019. Financial results for the PLP-USA segment include the elimination of all segments’ intercompany profit in inventory.
|
|
|
Three Months Ended March 31
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
PLP-USA
|
|
$
|
46,601
|
|
|
$
|
41,425
|
|
|
The Americas
|
|
|
17,241
|
|
|
|
13,771
|
|
|
EMEA
|
|
|
20,360
|
|
|
|
15,634
|
|
|
Asia-Pacific
|
|
|
18,650
|
|
|
|
26,323
|
|
|
Total net sales
|
|
$
|
102,852
|
|
|
$
|
97,153
|
|
|
Intersegment sales
|
|
|
|
|
|
|
|
|
|
PLP-USA
|
|
$
|
2,860
|
|
|
$
|
2,263
|
|
|
The Americas
|
|
|
1,863
|
|
|
|
2,130
|
|
|
EMEA
|
|
|
450
|
|
|
|
237
|
|
|
Asia-Pacific
|
|
|
2,087
|
|
|
|
3,195
|
|
|
Total intersegment sales
|
|
$
|
7,260
|
|
|
$
|
7,825
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
PLP-USA
|
|
$
|
845
|
|
|
$
|
(513
|
)
|
|
The Americas
|
|
|
634
|
|
|
|
176
|
|
|
EMEA
|
|
|
86
|
|
|
|
75
|
|
|
Asia-Pacific
|
|
|
(114
|
)
|
|
|
366
|
|
|
Total income taxes
|
|
$
|
1,451
|
|
|
$
|
104
|
|
|
Net income attributable to Preformed Line
Products Company shareholders
|
|
|
|
|
|
|
|
|
|
PLP-USA
|
|
$
|
3,550
|
|
|
$
|
(81
|
)
|
|
The Americas
|
|
|
995
|
|
|
|
964
|
|
|
EMEA
|
|
|
337
|
|
|
|
513
|
|
|
Asia-Pacific
|
|
|
(1,184
|
)
|
|
|
428
|
|
|
Total net income attributable to Preformed
Line Products Company shareholders
|
|
$
|
3,698
|
|
|
$
|
1,824
|
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
PLP-USA
|
|
$
|
129,042
|
|
|
$
|
127,428
|
|
|
The Americas
|
|
|
66,056
|
|
|
|
71,908
|
|
|
EMEA
|
|
|
94,510
|
|
|
|
97,126
|
|
|
Asia-Pacific
|
|
|
123,649
|
|
|
|
137,109
|
|
|
Total identifiable assets
|
|
$
|
413,257
|
|
|
$
|
433,571
|
|
NOTE N – INCOME TAXES
The Company’s effective tax rate was 28% and 5% for the three months ended March 31, 2020 and 2019, respectively. The higher effective tax rate for the three months ended March 31, 2020 compared to the U.S. federal statutory rate of 21% was primarily due to increase in earnings in jurisdictions with higher tax rates than the U.S. federal statutory rate where such earnings are permanently reinvested and an increase in various U.S. permanent items, primarily limitations on the deductibility of executive compensation. The lower effective tax rate for the three months ended March 31, 2019 compared to the U.S. federal statutory rate of 21% was primarily due to the recognition of benefits related to stock based compensation, partially offset by U.S. permanent items primarily related to deductibility of executive compensation and increased earnings in jurisdictions with higher tax rates than the U.S. statutory rate.
17
The Company provides valuation allowances against deferred tax assets when it is more likely than not that some portion or all of its deferred tax assets will not be realized. No significant changes to the valuation allowances were reflected for the periods ended March 31, 2020 or March 31, 2019.
The Company previously considered the majority of the earnings in non-U.S. subsidiaries to be permanently reinvested and accordingly did not record any associated deferred income taxes on such earnings. The Company intends to continue to invest most or all of these earnings, as well as its capital in these subsidiaries, indefinitely, outside of the U.S. and does not expect to incur any significant additional taxes related to such amounts.
NOTE O – PRODUCT WARRANTY RESERVE
The Company records an accrual for estimated warranty costs to Costs of products sold in the Statements of Consolidated Income. These amounts are recorded in Accrued expenses and other liabilities in the Consolidated Balance Sheets. The Company records and accounts for its warranty reserve based on specific claim incidents. Should the Company become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the accruals as claim information changes.
The following is a rollforward of the product warranty reserve:
|
|
|
Three Months Ended March 31
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Beginning of period balance
|
|
$
|
1,309
|
|
|
$
|
928
|
|
|
Additions charged to income
|
|
|
38
|
|
|
|
4
|
|
|
Warranty usage
|
|
|
(28
|
)
|
|
|
(43
|
)
|
|
Currency translation
|
|
|
(152
|
)
|
|
|
9
|
|
|
End of period balance
|
|
$
|
1,167
|
|
|
$
|
898
|
|
NOTE P – DEBT ARRANGEMENTS
On March 13, 2018, the Company extended the term on its $65 million credit facility from June 30, 2019 to June 30, 2021. All other terms remain the same, including the interest rate at LIBOR plus 1.125% unless its funded debt to Earnings before Interest, Taxes and Depreciation ratio exceeds 2.25 to 1, at which point the LIBOR spread becomes 1.500%. At March 31, 2020, the Company’s Polish subsidiary had borrowed $6.0 million U.S. dollars at a rate of 1.125% plus the Warsaw Interbank Offer Rate with a term expiring June 30, 2021. At March 31, 2020, the Company’s Australian subsidiary had borrowed $4.5 million U.S. dollars, also with a term expiring June 30, 2021. At March 31, 2020, the interest rates on the U.S., Polish and Australian line of credit agreement were 2.118%, 2.755% and 1.955%, respectively. Under the credit facility, at March 31, 2020, the Company had utilized $38.5 million with $26.5 million available under the line of credit, net of long-term outstanding letters of credit. The line of credit agreement contains, among other provisions, requirements for maintaining levels of net worth and profitability. At March 31, 2020, the Company was in compliance with these covenants.
On February 28, 2019, the Company acquired its Austrian subsidiary, SubCon Electrical Fittings GmbH (“SubCon”), headquartered in Dornbirn, Austria. The Company’s Austrian subsidiary has a 1.0 million euros, or $1.1 million U.S. dollars line of credit with a term expiration of May 31, 2020 with the option to renew for an additional twelve months indefinitely. At March 31, 2020, the Company’s Austrian subsidiary had borrowed $.5 million on the line of credit at an interest rate of 1.400%.
On April 25, 2019, the Company borrowed $8.0 million U.S. dollars on behalf of its Indonesian subsidiary at a rate of 3.501% with a term expiring on April 30, 2024. At March 31, 2020, $7.3 million was outstanding on this debt facility, of which $.8 million is classified as current.
On August 14, 2019, the Company’s New Zealand subsidiary borrowed $5.3 million U.S. dollars at a rate of 3.900% with a term expiring on August 26, 2021. At March 31, 2020, $4.6 million was outstanding on this facility, of which $.4 million is classified as current. This loan is secured by the Company’s New Zealand subsidiary’s land and building.
For the periods ended March 31, 2020 and December 31, 2019, the Company’s Asia Pacific segment had none and $.3 million, respectively, in restricted cash used to secure bank debt. The restricted cash is shown on the balance sheet in Other assets.
18
NOTE Q – LEASES
The Company regularly enters into leases in the normal course of business. As of March 31, 2020, the leases in effect were related to land, buildings, vehicles, office equipment and other production equipment under operating leases with lease terms of up to 99 years. The Company often has the option to renew lease terms for buildings and other assets. The exercise of lease renewal options are generally at the Company’s sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at the Company’s discretion. The Company evaluates renewal and termination options at the lease commencement date to determine if the Company is reasonably certain to exercise the option on the basis of economic factors. The weighted average remaining lease term for the Company’s operating and financing leases as of March 31, 2020 was 17.3 and 2.2 years, respectively.
Lease expense is recognized for these leases on a straight-line basis over the lease term with variable lease payments recognized in the period those payments are incurred. The components of operating and finance lease costs are recognized in Costs and expenses and Interest expense, respectively, on the Company’s Consolidated Statements of Income. The Company’s operating and finance lease costs for the three months ended March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2020
|
|
|
Three Months Ended
March 31, 2019
|
|
|
Components of lease expense
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
709
|
|
|
$
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
|
16
|
|
|
|
18
|
|
|
Interest on lease liabilities
|
|
|
2
|
|
|
|
3
|
|
|
Total lease cost
|
|
$
|
727
|
|
|
$
|
686
|
|
The discount rate implicit within each lease is often not determinable and, therefore, the Company establishes the discount rate based on its incremental borrowing rate. The incremental borrowing rate for the Company’s leases is determined based on lease term and currency in which lease payments are made, adjusted for impacts of collateral. The weighted average discount rate used to measure the Company’s operating and finance lease liabilities as of March 31, 2020 was 4.71% and 4.24%, respectively.
Future maturities of the Company’s lease liabilities as of March 31, 2020 are as follows:
|
|
|
Operating Leases
|
|
|
Finance Leases
|
|
|
2020
|
|
$
|
1,781
|
|
|
$
|
91
|
|
|
2021
|
|
|
2,106
|
|
|
|
59
|
|
|
2022
|
|
|
1,671
|
|
|
|
40
|
|
|
2023
|
|
|
1,190
|
|
|
|
35
|
|
|
2024 and thereafter
|
|
|
9,406
|
|
|
|
6
|
|
|
Total lease payments
|
|
$
|
16,154
|
|
|
$
|
231
|
|
|
Less amount of lease payment representing interest
|
|
|
5,488
|
|
|
|
69
|
|
|
Total present value of lease payments
|
|
$
|
10,666
|
|
|
$
|
162
|
|
The total minimum sublease rentals under noncancelable subleases to be received through 2023 is $3.4 million.
Supplemental cash flow information related to leases for the three-month period ended March 31, 2020 was as follows:
|
|
|
Three Months Ended
March 31, 2020
|
|
|
Three Months Ended
March 31, 2019
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
2
|
|
|
$
|
3
|
|
|
Operating cash flows from finance leases
|
|
|
730
|
|
|
|
702
|
|
|
Financing cash flows from finance leases
|
|
|
29
|
|
|
|
26
|
|
NOTE R – RELATED PARTY TRANSACTIONS
On January 2, 2020, the Company purchased 1,157 shares of the Company from a retired Officer at a price per share of $67.71, which was calculated from a 30-day average market price in connection with the vesting of equity awards. The Audit Committee of the Board of Directors approved this transaction.
19
On February 5, 2020, the Company purchased 39,208 shares of the Company from current and retired Officers at a price per share of $58.65, which was calculated from a 30-day average market price in connection with the vesting of equity awards. The Audit Committee of the Board of Directors approved this transaction.
NOTE S – BUSINESS COMBINATIONS
The Company accounts for business combinations using the acquisition method of accounting and, accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the date of acquisition.
On February 28, 2019, the Company acquired 100% of SubCon. Subcon is headquartered in Dornbirn, Austria with manufacturing operations in Brno, Czech Republic. The acquisition of SubCon will strengthen the Company’s position in the global substation market and will expand its operational presence in Europe. The total purchase price was $10.1 million in cash, net of $1.9 million in cash acquired. The purchase price was predominantly allocated to Goodwill of $6.6 million and Intangible assets of $4.7 million with useful lives ranging from 10 to 11 years. SubCon’s overall purchase price included an estimated contingent liability of $.6 million for an earn-out consideration with a potential maximum payment of 4.0 million Euros that will be considered for remeasurement during each reporting period as the operating results of SubCon are evaluated during each reporting period based upon operating results over a four year period. At March 31, 2020, the current earnout value of $.2 million is recorded in Other noncurrent liabilities on the Company’s consolidated balance sheet.
On April 1, 2019, the Company acquired MICOS Telcom s.r.o (“MICOS Telcom”) headquartered in Prostějov, Czech Republic. The acquisition of MICOS Telcom will strengthen the Company’s position in the global telecom market and will also expand its operational presence in Europe. The total purchase price was $8.8 million in cash, net of $.5 million in cash acquired, including a hold-back liability of $1.5 million payable in two years from the date of purchase and $.9 million of deferred consideration for the remaining 10%. The hold-back liability and deferred consideration are recorded in Other noncurrent liabilities on the Company’s consolidated balance sheet. The purchase price was predominantly allocated to Goodwill of $5.6 million and Intangible assets of $3.4 million. The Intangible assets included in the acquisition of MICOS have useful lives of 12 years.
The operating results and financial position of both SubCon and MICOS Telcom are included in the Company’s EMEA reportable segment as of their respective dates of acquisition. Pro-forma results of the Company’s consolidated operations for the three-month periods ended March 31, 2020 and 2019 would not have been materially different from reported results and are, therefore, not presented.
The following table summarizes the final fair values of the assets acquired and liabilities assumed at the acquisition dates:
|
Assets acquired
|
|
|
|
|
|
Current assets, net of cash
|
|
$
|
5,976
|
|
|
Property, plant and equipment
|
|
|
1,189
|
|
|
Goodwill
|
|
|
12,132
|
|
|
Finite-lived intangible assets
|
|
|
8,092
|
|
|
Other long-term assets
|
|
|
1,883
|
|
|
Total assets acquired
|
|
$
|
29,272
|
|
|
Liabilities assumed
|
|
|
(10,378
|
)
|
|
Net assets acquired
|
|
$
|
18,894
|
|
NOTE T – SUBSEQUENT EVENTS
On April 17, 2020, the Company extended the term on its $65 million credit facility from June 30, 2021 to June 30, 2024. All other terms remain the same. In addition to extending the term, the Company added its Austrian subsidiary as a borrower on the credit facility. For further information regarding this debt, refer to Exhibit 10.1, Term Note dated April 17, 2020 between the Company and PNC Bank, National Association and Exhibit 10.2, Amended and Restated Loan Agreement dated April 17, 2020 between the Company and PNC Bank, National Association.
20