Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
Aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant: Approximately $423,938,000$238,663,000 based on the closing price of $48.46$28.28 per share of the registrant’s Common Stock on June 30, 2015.2016.
Number of shares outstanding of registrant’s Common Stock, par value $1.00 per share, as of February 29, 201628, 2017: 12,392,62612,415,301 shares of the registrant’s common stock, $1 par value, were outstanding..
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the Annual Meeting of Shareholders to be held on or about May 19, 201611, 2017 are incorporated by reference into Part III of this Form 10-K.
PARK-OHIO HOLDINGS CORP.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20152016
TABLE OF CONTENTS
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Part I
Item 1. Business
Overview
Park-Ohio Holdings Corp. (“Holdings” or “ParkOhio”) was, incorporated as anin Ohio corporation in 1998. Holdings, primarily through the subsidiaries owned by its direct subsidiary, Park-Ohio Industries, Inc. (“Park-Ohio”),since 1998, is an industriala diversified international company providing world-class customers with a supply chain logisticsmanagement outsourcing service, capital equipment used on their production lines, and diversified manufacturing business operating in three segments: Supply Technologies, Assembly Components and Engineered Products.manufactured components used to assemble their products.
References herein to “we” or “the Company” include, where applicable, Holdings and Park-Ohio Industries, Inc. and Holdings’ other direct and indirect subsidiaries.
The Company operates through three reportable segments: Supply Technologies, Assembly Components and Engineered Products. Supply Technologies provides our customers with Total Supply Management™ services for a broad range of high-volume, specialty production components. Total Supply Management™ manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation, and includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support. The principal customers of Supply Technologies are in the following industries: heavy-duty truck; automotive, truck and vehicle parts; power sports and recreational equipment; bus and coaches; electrical distribution and controls; agricultural and construction equipment; consumer electronics; HVAC; lawn and garden; semiconductor equipment; aerospace and defense; and plumbing. Assembly Components manufactures products oriented toward fuel efficiency and reduced emission requirements. Assembly Components manufactures cast and machined aluminum components, automotive and industrial rubber and thermoplastic products, gasoline direct injection systems, fuel filler and hydraulic assemblies for automotive, agricultural equipment, construction equipment, heavy-duty truck and marine equipment industries. Assembly Components also provides value-added services such as design and engineering, machining and assembly. Engineered Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of high quality products engineered for specific customer applications. The principal customers of Engineered Products are original equipment manufacturers (“OEMs”) and end users in the ferrous and non-ferrous metals, silicon, coatings, forging, foundry, heavy-duty truck, construction equipment, automotive, oil and gas, rail and locomotive manufacturing and aerospace and defense industries.
The following table summarizes the key attributes of each of our business segments:
| Supply Technologies | Assembly Components | Engineered Products | |||
| NET SALES FOR | $ | $ | $ | ||
| SELECTED PRODUCTS | Sourcing, planning and procurement of over 190,000 production components, including: • Fasteners • Pins • Valves • Hoses • Wire harnesses • Clamps and fittings • Rubber and plastic components | • Control arms • Knuckles • Injection molded rubber products • • • Rubber and thermoplastic hose • Oil pans • Flywheel spacers • Fuel filler assemblies • Gasoline direct injection systems | • Induction heating and melting systems • Pipe threading systems • Industrial oven systems • Forging presses • Forged steel and machined products | ||
| SELECTED INDUSTRIES SERVED | • Heavy-duty truck • Power sports and recreational equipment • Aerospace and defense • Electrical distribution and controls • Consumer electronics • Bus and coaches • Automotive • Agricultural and construction equipment • HVAC • Lawn and garden • Semiconductor equipment • Plumbing • Medical | • Automotive • Agricultural equipment • Construction equipment • Heavy-duty truck • Marine equipment | • Ferrous and non-ferrous metals • Coatings • Forging • Foundry • Heavy-duty truck • Construction equipment • • Oil and gas • Rail • Aerospace and defense | ||
The Company consists of the following segments:
Supply Technologies
Our Supply Technologies business provides our customers with Total Supply Management™, a proactive solutions approach that manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation. Total Supply Management™ includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support. We operate 5465 logistics service centers in the United States, Mexico, Canada, Puerto Rico, Scotland, Hungary, China, Taiwan, Singapore, India, United Kingdom,England, France, Spain, Poland, Northern Ireland and Ireland, as well as production sourcing and support centers in Asia. Through our supply chain management programs, we supply more than 190,000 globally-sourced production components, many of which are specialized and customized to meet individual customers’ needs.
quality assurance, inventory management and delivery to the production line. In addition, Supply
Technologies delivers an increasingly broad range of higher-cost production components including valves, fuel hose assemblies, electro-mechanical hardware, labels, fittings, steering components and many others. Applications engineering specialists and the direct sales force work closely with the engineering staff of OEM customers to recommend the appropriate production components for a new product or to suggest alternative components that reduce overall production costs, streamline assembly or enhance the appearance or performance of the end product. As an additional service, Supply Technologies also provides spare parts and aftermarket products to end users of its customers’ products.
Total Supply Management™ services are typically provided to customers pursuant to sole-source arrangements. We believe our services distinguish us from traditional buy/sell distributors, as well as manufacturers who supply products directly to customers, because we outsource our customers’ high-volume production components supply chain management, providing processes customized to each customer’s needs and replacing numerous current suppliers with a sole-source relationship. Our highly-developed, customized, information systems provide global transparency and flexibility through the complete supply chain. This enables our customers to: (1) significantly reduce the direct and indirect cost of production component processes by outsourcing internal purchasing, quality assurance and inventory fulfillment responsibilities; (2) reduce the amount of working capital invested in inventory and floor space; (3) reduce component costs through purchasing efficiencies, including bulk buying and supplier consolidation; and (4) receive technical expertise in production component selection and design and engineering. Our sole-source arrangements foster long-term, entrenched supply relationships with our customers and, as a result, the average tenure of service for our top 50 Supply Technologies clients exceeds sixseven years. Supply Technologies’ remaining sales are generated through the wholesale supply of industrial products to other manufacturers and distributors pursuant to master or authorized distributor relationships.
The Supply Technologies segment also engineers and manufactures precision cold formed and cold extruded products, including locknuts, SPAC® nuts and wheel hardware, which are principally used in applications where controlled tightening is required due to high vibration. Supply Technologies produces both standard items and specialty products to customer specifications, which are used in large volumes by customers in the automotive, heavy-duty truck and rail industries.
Supply Technologies expanded its industry focus with the 2014 acquisition of Apollo Aerospace. Apollo Aerospace provides similar Total Supply Management™ services across a broad range of customers in the commercial aerospace and defense industries serving customers throughout the United States, Europe, and Asia.
Markets and Customers. For the year ended December 31, 2015,2016, approximately 71%70% of Supply Technologies’ net sales were to domestic customers. Remaining sales were primarily to manufacturing facilities of large, multinational customers located in Canada, Mexico, Europe and Asia. Total Supply Management™ services and production components are used extensively in a variety of industries, and demand is generally related to the state of the economy and to the overall level of manufacturing activity.
Supply Technologies markets and sells its services to over 7,8007,300 customers domestically and internationally. The principal industries served by Supply Technologies are the heavy-duty truck; automotive, truck and vehicle parts; power sports and recreational equipment; bus and coaches; electrical distribution and controls; agricultural and construction equipment; consumer electronics; HVAC; lawn and garden; semiconductor equipment; aerospace and defense; and plumbing. The five largest customers, within which Supply Technologies sells through sole-source contracts to multiple operating divisions or locations, accounted for approximately 34%35% of the sales of Supply Technologies in 20152016 and 32%34% in 2014.2015. The loss of any two or more of its top five customers could have a material adverse effect on the results of operations and financial condition of this segment.
Competition. A limited number of companies compete with Supply Technologies to provide supply management services for production parts and materials. Some global competitors include Bossard, Fastenal, Optimus, Wolseley and Wurth. Supply Technologies competes in North America, Mexico, Europe and Asia, primarily on the basis of its Total Supply Management™ services, including engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support, and its geographic reach, extensive product selection, price and reputation for high service levels. Numerous North AmericanU.S. and foreign companies compete with Supply Technologies in manufacturing cold-formed and cold-extruded products.
Assembly Components
Assembly Components manufactures products oriented towards fuel efficiency and reduced emission standards. Assembly Components designs, develops and manufactures aluminum products and highly efficient, high pressure Direct Fuel
Injection fuel rails and pipes, fuel filler pipes that mount onroute fuel from the gas cap to the gas tank, as well as flexible multi-layer plastic and rubber
assemblies used to transport fuel tofrom the vehicle's gas tank and then, at extreme high pressure, to the engine's fuel injector nozzles. These advanced products, coupled with Turbo Enabled engines, make up large and growing engine architecture for all worldwide car manufacturers. Assembly Components also designs and manufactures Turbo Charging hoses along with Turbo Coolant hoses that will be required as engines get downsized to 3 and 4 cylinders from 6 or 8 cylinders. This engine downsizing increases efficiency, while dramatically decreasing pollution levels. In addition, our Assembly Components segment operates what we believe is one of the few aluminum component suppliers that have the capability to provide a wide range of high-volume, high-quality products utilizing a broad range of processes including gravity and low pressure permanent mold, die-cast and lost-foam, as well as emerging alternative casting technologies. In 2012, we addedWe also provide machining capabilities to our aluminum products service offerings.customers.
Markets and Customers. The five largest customers to whichof Assembly Components sells toaccounted for approximately 45% of segment sales for 2016 and 49% for 2015. These sales, across multiple operating divisions, are through sole-source contracts, accounted for approximately 49% of Assembly Components sales for 2015 and 46% for 2014.sole source contracts. The loss of any one of these customers could have a material adverse effect on the results of operations and financial condition of this segment.
Competition. Assembly Components competes principally on the basis of its ability to: (1) engineer and manufacture high-quality, cost-effective, assemblies utilizing multiple technologies in large volumes; (2) provide timely delivery; and (3) retain the manufacturing flexibility necessary to quickly adjust to the needs of its customers. There are few domestic companies with capabilities able to meet the customers’ stringent quality and service standards and lean manufacturing techniques. As one of these suppliers, Assembly Components is well-positioned to benefit as customers continue to consolidate their supplier base. Principal competitors in the Assembly Components segment are Chassix, Compass Automotive, Martinrea and Stant.
Engineered Products
Our Engineered Products segment operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of highly-engineered products, including induction heating and melting systems, pipe threading systems and forged and machined products. We manufacture these products in twelve13 domestic facilities throughout the United States and twelve22 international facilities in Canada, Mexico, the United Kingdom, Belgium, Germany, China, Italy, India, Japan, Spain and Japan.Brazil.
Markets and Customers. We sell induction heating and other capital equipment to component manufacturers and OEMs in the ferrous and non-ferrous metals, silicon, coatings, forging, foundry, automotive, truck, construction equipment and oil and
gas industries. We sell forged and machined products to locomotive manufacturers, machining companies and sub-assemblers who finish aerospace and defense products for OEMs, and railcar builders and maintenance providers.
Competition. We compete with small-to medium-sized domestic and international equipment manufacturers on the basis of service capability, ability to meet customer specifications, delivery performance and engineering expertise. We compete domestically and internationally with small-to medium-sized forging and machining businesses on the basis of product quality and precision.
Sales and Marketing
Supply Technologies markets its products and services in the United States, Mexico, Canada, Western and Eastern Europe and East and South Asia primarily through its direct sales force, which is assisted by applications engineers who provide the technical expertise necessary to assist the engineering staff of OEM customers in designing new products and improving existing products. Assembly Components primarily markets and sells its products in North America through internal sales personnel and independent sales representatives. Engineered Products primarily markets and sells its products in North America through both internal sales personnel and independent sales representatives. Induction heating and pipe threading equipment is also marketed and sold in Europe, Asia, Latin America and Africa through both internal sales personnel and independent sales representatives. In some instances, the internal engineering staff assists in the sales and marketing effort through joint design and applications-engineering efforts with major customers.
Raw Materials and Suppliers
Supply Technologies purchases substantially all of its production components from third-party suppliers. Supply Technologies has multiple sources of supply for its components. An increasing portion of Supply Technologies’ production components are purchased from suppliers in foreign countries, primarily Canada, Taiwan, China, South Korea, Singapore, India and multiple European countries. Supply Technologies is dependent upon the ability of such suppliers to meet stringent quality and performance standards and to conform to delivery schedules. Assembly Components and Engineered Products purchase substantially all of their raw materials, principally metals and certain component parts incorporated into their products, from third-party suppliers and manufacturers. Most raw materials required by Assembly Components and Engineered Products are commodity products available from several domestic suppliers. Management believes that raw materials and component parts other than certain specialty products are available from alternative sources.
Our suppliers of raw materials and component parts may significantly and quickly increase their prices in response to increases in costs of the raw materials, such as steel, that they use to manufacture our raw materials and component parts. WeWhile we generally attempt to pass along increased raw materialsmaterial prices to our customers in the form of price increases, there may be a time delay between the increased raw materialsmaterial prices and our ability to increase the price of our products, or we may be unable to increase the prices of our products due to pricing pressure or othervarious factors. See the discussion of risks associated with raw material supply and costs in Item 1A "Risk Factors".
Backlog
Management believes that backlog is not a meaningful measure for Supply Technologies, as a majority of Supply Technologies’ customers require just-in-time delivery of production components. Management believes that Assembly Components’ backlog as of any particular date is not a meaningful measure, of sales for any future period as a significant portion of sales are on a release or firm order basis. The backlog of Engineered Products’ orders believed to be firm as of December 31, 20152016 was $147.2$137.6 million, including $24.8 million from the acquisition of GH, compared with $199.7$147.2 million as of December 31, 2014.2015. Approximately 90%91% of Engineered Products’ backlog as of December 31, 20152016 is scheduled to be shipped in 2016.2017.
Environmental, Health and Safety Regulations
We are subject to numerous federal, state and local laws and regulations designed to protect public health and the environment, particularly with regard to discharges and emissions, as well as handling, storage, treatment and disposal of various substances and wastes. Our failureFailure to comply with applicable environmental laws and regulations and permit requirements could result in civil and criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures. Pursuant to certain environmental laws, owners or operators of facilities may be liable for the costs of response or other corrective actions for contamination identified at or emanating from
current or former locations, without regard to whether the owner or operator knew of, or was responsible for, the presence of any such contamination, and for related damages to natural resources. Additionally, persons who arrange for the disposal or treatment of hazardous substances or materials may be liable for costs of response at sites where they are located, whether or not the site is owned or operated by such person.
From time to time, we have incurred, and are presently incurring, costs and obligations for correcting environmental noncompliance and remediating environmental conditions at certain of our properties. In general, we have not experienced difficulty in complying with environmental laws in the past, and compliance with environmental laws has not had a material
adverse effect on our financial condition, liquidity and results of operations. Our capital expenditures on environmental control facilities were not material during the past five years and such expenditures are not expected to be material to us in the foreseeable future.
We are currently, and may in the future be, required to incur costs relating to the investigation or remediation of property, including property where we have disposed of our waste, and for addressing environmental conditions. For instance, we have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certain clean-up efforts at several of these sites. The availability of third-party payments or insurance for environmental remediation activities is subject to risks associated with the willingness and ability of the third party to make payments. However, our share of such costs has not been material and, based on available information, we do not expect our exposure at any of these locations to have a material adverse effect on our results of operations, liquidity or financial condition.
Information as to Segment Reporting and Geographic Areas
The information contained in Note 2 to the consolidated financial statements included elsewhere herein relating to (1) net sales, operating income, before income taxes, identifiable assets and other information by segment and (2) net sales and assets by geographic region for the years ended December 31, 2016, 2015 and 2014 and 2013 is incorporated herein by reference.included elsewhere herein.
Available Information
We file annual reportsAnnual Reports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, proxy statementsProxy Statements and other information including amendments to these reports and statements, with the Securities and Exchange Commission (“SEC”). The public can obtain copies of these materials by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330, or by accessing the SEC’s website at http://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, we make such materials available on our website free of charge at http://www.pkoh.com. The information on our website is not a part of this annual reportAnnual Report on Form 10-K.
Executive Officers of the Registrant
Information with respect to our executive officers as of March 14, 20169, 2017, is as follows:
| Name | Age | Position | |||
| Edward F. Crawford | Chairman of the Board, Chief Executive Officer and Director | ||||
| Matthew V. Crawford | President and Chief Operating Officer and Director | ||||
| Patrick W. Fogarty | Vice President and Chief Financial Officer | ||||
| Robert D. Vilsack | Secretary and General Counsel | ||||
Mr. E. Crawford has been a director and our Chairman of the Board and Chief Executive Officer since 1992. He has also served as the Chairman of Crawford Group, Inc., a management company for a group of manufacturing companies, since 1964.
Mr. M. Crawford has been President and Chief Operating Officer since 2003 and joined us in 1995 as Assistant Secretary and Corporate Counsel. He was also our Senior Vice President from 2001 to 2003. Mr. M. Crawford became one of our directors in August 1997 and has served as President of Crawford Group, Inc. since 1995. Mr. E. Crawford is the father of Mr. M. Crawford.
Mr. Fogarty has been Vice President and Chief Financial Officer since 2015. Prior to that, Mr. Fogarty was Director of Corporate Development since 1997 and served as Director of Finance from 1995 to 1997. Prior to 1995, Mr. Fogarty was employed by Ernst & Young from 1983 to 1995.
Mr. Vilsack has been Secretary and General Counsel since joining us in 2002. From 1999 until his employment with us, Mr. Vilsack was engaged in the private practice of law. From 1997 to 1999, Mr. Vilsack was Vice President, General Counsel and Secretary of Medusa Corporation, a manufacturer of Portland cement, and prior to that he was Vice President, General Counsel and Secretary of Figgie International Inc., a manufacturing conglomerate.
Item 1A. Risk Factors
The following are certain risk factors that could affect our business, results of operations and financial condition. These risks are not the only ones we face. If any of the following risks occur, our business, results of operations or financial condition could be adversely affected.
The industries in which we operate are cyclical and are affected by the economy in general.
We sell products to customers in industries that experience cyclicality (expectancy of recurring periods of economic growth and slowdown) in demand for products and may experience substantial increases and decreases in business volume throughout economic cycles. Industries we serve, including the automotive and vehicle parts, heavy-duty truck, industrial equipment, steel, rail, oil and gas, electrical distribution and controls, aerospace and defense, recreational equipment, HVAC, electrical components, appliance and semiconductor equipment industries, are affected by consumer spending, general economic conditions and the impact of international trade. A downturn in any of the industries we serve could have a material adverse effect on our financial condition, liquidity and results of operations.
Adverse credit market conditions may significantly affect our access to capital, cost of capital and ability to meet liquidity needs.
Disruptions, uncertainty or volatility in the credit markets may adversely impact our ability to access credit already arranged and the availability and cost of credit to us in the future. These market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to grow and maintain our business. Accordingly, we may be forced to delay raising capital or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility. Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged.
Such measures could include deferring capital expenditures and reducing or eliminating future share repurchases or other discretionary uses of cash. Overall, our results of operations, financial condition and cash flows could be materially adversely affected by disruptions in the credit markets.
Adverse global economic conditions may have significant effects on our customers and suppliers that could result in material adverse effects on our business and operating results.
Significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and fluctuations in equity and currency values worldwide, volatility in commodity prices for such items as crude oil, and concerns that the worldwide economy may enter into a prolonged recessionary period, may materially adversely affect our customers’ access to capital or willingness to spend capital on our products or their ability to pay for products that they will order or have already ordered from us. In addition, unfavorable global economic conditions may materially adversely affect our suppliers’ access to capital and liquidity with which they maintain their inventories, production levels and product quality, which could cause them to raise prices or lower production levels.
These potential effects of adverse global economic conditions are difficult to forecast and mitigate. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing effects could have a material adverse effect on our business, results of operations and financial condition.
Adverse global economic conditions may have significant effects on our customers that would result in our inability to borrow or to meet our debt service coverage ratio in our revolving credit facility.
As of December 31, 2015,2016, we were in compliance with our debt service coverage ratio covenant and other covenants contained in our revolving credit facility. While we expect to remain in compliance throughout 2016,2017, declines in demand in the automotive industry and in sales volumes could adversely impact our ability to remain in compliance with certain of these financial covenants. Additionally, to the extent our customers are adversely affected by a decline in the economy in general,
they may not be able to pay their accounts payable to us on a timely basis or at all, which would make the accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our ability to borrow.
Because a significant portion of our sales is to the automotive and heavy-duty truck industries, a decrease in the demand of these industries or the loss of any of our major customers in these industries could adversely affect our financial health.
Demand for certain of our products is affected by, among other things, the relative strength or weakness of the automotive and heavy-duty truck industries. The domestic automotive and heavy-duty truck industries are highly cyclical and may be adversely affected by international competition. In addition, the automotive and heavy-duty truck industries are significantly unionized and subject to work slowdowns and stoppages resulting from labor disputes. We derived 43%47% and 7% of our net sales during the year ended December 31, 20152016 from the automotive and heavy-duty truck industries, respectively.
The loss of a portion of business to any of our major automotive or heavy-duty truck customers could have a material adverse effect on our financial condition, cash flow and results of operations. We cannot assure you that we will maintain or improve our relationships in these industries or that we will continue to supply these customers at current levels.
Our Supply Technologies customers are generally not contractually obligated to purchase products and services from us.
We are dependent on key customers.
We rely on several key customers. For the year ended December 31, 2015,2016, our ten largest customers accounted for approximately 35%33% of our net sales. Many of our customers place orders for products on an as-needed basis and operate in cyclical industries and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future. Due to competitive issues, we have lost key customers in the past and may again in the future. Customer orders are dependent upon their markets and may be subject to delays or cancellations. As a result of dependence on our key customers, we could experience a material adverse effect on our business and results of operations if any of the following were to occur:
the loss of any key customer, in whole or in part;
the insolvency or bankruptcy of any key customer;
a declining market in which customers reduce orders or demand reduced prices; or
a strike or work stoppage at a key customer facility, which could affect both their suppliers and customers.
If any of our key customers become insolvent or file for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payments we received in the preference period prior to a bankruptcy filing may be potentially recoverable,forfeitable, which could adversely impact our results of operations.
We operate in highly competitive industries.
The markets in which all three of our segments sell their products are highly competitive. Some of our competitors are large companies that have greater financial resources than we have. We believe that the principal competitive factors for our Supply Technologies segment are an approach reflecting long-term business partnership and reliability, sourced product quality and conformity to customer specifications, timeliness of delivery, price and design and engineering capabilities. We believe that the principal competitive factors for our Assembly Components and Engineered Products segments are product quality and conformity to customer specifications, design and engineering capabilities, product development, timeliness of delivery and price. The rapidly evolving nature of the markets in which we compete may attract new entrants as they perceive opportunities, and our competitors may foresee the course of market development more accurately than we do. In addition, our competitors may develop products that are superior to our products or may adapt more quickly than we do to new technologies or evolving customer requirements.
We expect competitive pressures in our markets to remain strong. These pressures arise from existing competitors, other companies that may enter our existing or future markets and, in some cases, our customers, which may decide to internally produce items we sell. We cannot assure you that we will be able to compete successfully with our competitors. Failure to compete successfully could have a material adverse effect on our financial condition, liquidity and results of operations.
The loss of key executives could adversely impact us.
Our success depends upon the efforts, abilities and expertise of our executive officers and other senior managers, including Edward Crawford, our Chairman and Chief Executive Officer, and Matthew Crawford, our President and Chief Operating Officer, as well as the president of each of our operating units. An event of default occurs under our revolving credit facility if Messrs. E. Crawford and M. Crawford or certain of their related parties own in the aggregate less than 15% of Holdings’ outstanding common stock and, if at such time, neither Mr. E. Crawford nor Mr. M. Crawford holds the office of chairman, chief executive officer or president. The loss of the services of Messrs. E. Crawford and M. Crawford, senior and executive officers, and/or other key individuals could have a material adverse effect on our financial condition, liquidity and results of operations.
We may encounter difficulty in expanding our business through targeted acquisitions.
We have pursued, and may continue to pursue, targeted acquisition opportunities that we believe would complement our business. We cannot assure you that we will be successful in consummating any acquisitions.
Any targeted acquisitions will be accompanied by the risks commonly encountered in acquisitions of businesses. We may not successfully overcome these risks or any other problems encountered in connection with any of our acquisitions, including the possible inability to integrate an acquired business’ operations, information technology, services and products into our business,business; diversion of management’s attention,attention; the assumption of unknown liabilities,liabilities; increases in our indebtedness,indebtedness; the failure to achieve the strategic objectives of those acquisitionsacquisitions; and other unanticipated problems, some or all of which could materially and adversely affect us. The process of integrating operations could cause an interruption of, or loss of momentum in, our activities. Any delays or difficulties encountered in connection with any acquisition and the integration of our operations could have a material adverse effect on our business, results of operations, financial condition or prospects of our business.
Our Supply Technologies business depends upon third parties for substantially all of our component parts.
Our Supply Technologies business purchases substantially all of its component parts from third-party suppliers and manufacturers. As such, it is subject to the risk of price fluctuations and periodic delays in the delivery of component parts. Failure by suppliers to continue to supply us with these component parts on commercially reasonable terms, or at all, could have a material adverse effect on us. We depend upon the ability of these suppliers, among other things, to meet stringent performance and quality specifications and to conform to delivery schedules. Failure by third-party suppliers to comply with these and other requirements could have a material adverse effect on our financial condition, liquidity and results of operations.
The raw materials used in our production processes and by our suppliers of component parts are subject to price and supply fluctuations that could increase our costs of production and adversely affect our results of operations.
Our supply of raw materials for our Assembly Components and Engineered Products businesses could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect our results of operations and profit margins. While we generally attempt to pass along increased raw materials prices to our customers in the form of price increases, there may be a time delay between the increased raw materials prices and our ability to increase the price of our products, or we may be unable to increase the prices of our products due to pricing pressure or othervarious factors.
Our suppliers of component parts, particularly in our Supply Technologies business, may significantly and quickly increase their prices in response to increases in costs of the raw materials, such as steel, that they use to manufacture our component parts. We may not be able to increase our prices commensurate with our increased costs. Consequently, our results of operations and financial condition may be materially adversely affected.
The energy costs involved in our production processes and transportation are subject to fluctuations that are beyond our control and could significantly increase our costs of production.
Our manufacturing process and the transportation of raw materials, components and finished goods are energy intensive. Our manufacturing processes are dependent on adequate supplies of electricity and natural gas. A substantial increase in the cost of transportation fuel, natural gas or electricity could have a material adverse effect on our margins. We may experience higher than anticipated gas costs in the future, which could adversely affect our results of operations. In addition, a disruption or curtailment in supply could have a material adverse effect on our production and sales levels.
Potential product liability risks exist from the products that we sell.
Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and sale of our products and products of third-party vendors that we use or resell. While we currently maintain what we believe to be suitable and adequate product liability insurance, we cannot assure you that we will be able to maintain our insurance on acceptable terms or that our insurance will provide adequate protection against potential liabilities. In the event of a claim against us, a lack of sufficient insurance coverage could have a material adverse effect on our financial condition, liquidity and results of operations. Moreover, even if we maintain adequate insurance, any successful claim could have a material adverse effect on our financial condition, liquidity and results of operations.
Some of our employees belong to labor unions, and strikes or work stoppages could adversely affect our operations.
As of December 31, 2015,2016, we were a party to seven collective bargaining agreements with various labor unions that covered approximately 600 full-time employees. Our inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. If the unionized workers were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized, we could experience a significant disruption of our operations and higher ongoing labor costs, which could have a material adverse effect on our business, financial condition and results of operations.
We operate and source internationally, which exposes us to the risks of doing business abroad.
Our operations are subject to the risks of doing business abroad, including the following:
fluctuations in currency exchange rates;
limitations on ownership and on repatriation of earnings;
transportation delays and interruptions;
political, social and economic instability and disruptions;
potential disruption that could be caused withby the partial or complete reconfiguration of the European Union;
government embargoes or foreign trade restrictions;
the imposition of duties and tariffs and other trade barriers;
import and export controls;
labor unrest and current and changing regulatory environments;
the potential for nationalization of enterprises;
disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”);
difficulties in staffing and managing multinational operations;
limitations on our ability to enforce legal rights and remedies; and
potentially adverse tax consequences.
We are also exposed to risks relating to U.S. policy with respect to companies doing business in foreign jurisdictions, particularly in light of the new U.S. presidential administration. Legislation or other changes in the U.S. tax laws could increase our U.S. income tax liability and adversely affect our after-tax profitability. For example, U.S. lawmakers are considering several U.S. corporate tax reform proposals, including, among others, proposals which could reduce or eliminate U.S. income tax deferrals on unrepatriated foreign earnings and eliminate tax incentives in exchange for a lower U.S. statutory tax rate. In addition, the new U.S. presidential administration has introduced greater uncertainty with respect to future tax, trade regulations
and trade agreements. Changes in tax policy, trade regulations or trade agreements, such as the disallowance of tax deductions on imported merchandise or the imposition of new tariffs on imported products, could have a material adverse effect on our business and results of operations.
In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal controls and procedures always will protect us from the reckless or criminal acts committed by our employees or agents. For example, in connection with responding to a subpoena from the staff of the SEC, regarding a third party, we disclosed to the staff that the third party participated in a payment on our behalf to a foreign tax official that implicates the FCPA. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
Any of the events enumerated above could have an adverse effect on our operations in the future by reducing the demand for our products and services, decreasing the prices at which we can sell our products or otherwise having an adverse effect on our business, financial condition or results of operations. We cannot assure you that we will continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject. We also cannot assure you that these laws will not be modified.
We are subject to significant environmental, health and safety laws and regulations and related compliance expenditures and liabilities.
Our businesses are subject to many foreign, federal, state and local environmental, health and safety laws and regulations, particularly with respect to the use, handling, treatment, storage, discharge and disposal of substances and hazardous wastes used or generated in our manufacturing processes. Compliance with these laws and regulations is a significant factor in our business. We have incurred and expect to continue to incur significant expenditures to comply with applicable environmental laws and regulations. Our failure to comply with applicable environmental laws and regulations and permit requirements could
result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions.
We are currently, and may in the future be, required to incur costs relating to the investigation or remediation of property, including property where we have disposed of our waste, and for addressing environmental conditions. Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities. Consequently, we cannot assure you that existing or future circumstances, the development of new facts or the failure of third parties to address contamination at current or former facilities or properties will not require significant expenditures by us.
We expect to continue to be subject to increasingly stringent environmental and health and safety laws and regulations. It is difficult to predict the future interpretation and development of environmental and health and safety laws and regulations or their impact on our future earnings and operations. We anticipate that compliance will continue to require increased capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities arising from, among other things, discovery of previously unknown conditions or more aggressive enforcement actions, could adversely affect our results of operations, and there is no assurance that they will not exceed our reserves or have a material adverse effect on our financial condition.
If our information systems fail, our business could be materially affected.
We believe that our information systems are an integral part of the Supply Technologies segment and, to a lesser extent, the Assembly Components and Engineered Products segments. We depend on our information systems to process orders, manage inventory and accounts receivable collections, purchase products, maintain cost-effective operations, route and re-route orders, maintain confidential and proprietary information and provide superior service to our customers. These systems are subject to failure due to design flaws, improper use, cyber intrusions and other electronic service breaches. We cannot assure you that a failure of or a disruption in the operation of our information systems used by Supply Technologies, including the failure of the supply chain management software to function properly, or those used by Assembly Components and Engineered Products, will not occur. Any such failure or disruption could damage our relation with our customer in our industries or otherwise have a material adverse effect on our financial condition, liquidity and results of operations.
Operating problems in our business may materially adversely affect our financial condition and results of operations.
We are subject to the usual hazards associated with manufacturing and the related storage and transportation of raw materials, products and waste, including explosions, fires, leaks, discharges, inclement weather, natural disasters, mechanical failure, unscheduled downtime and transportation interruption or calamities. The occurrence of material operating problems at our facilities may have a material adverse effect on our operations as a whole, both during and after the period of operational difficulties.
We have a significant amount of goodwill, and any future goodwill impairment charges could adversely impact our results of operations.
As of December 31, 2015,2016, we had goodwill of $82.0$86.6 million. The future occurrence of a potential indicator of impairment, such as a significant adverse change in legal factors or business climate, unanticipated competition, a material negative change in relationships with significant customers, strategic decisions made in response to economic or competitive conditions, loss of key personnel or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of, could result in goodwill impairment charges, which could adversely impact our results of operations. We have recorded goodwill impairment charges in the past, and such charges materially impacted our historical results of operations. For additional information, see Note 54, Goodwill, to the consolidated financial statements included elsewhere herein.
Our Chairman of the Board and Chief Executive Officer and our President and Chief Operating Officer collectively beneficially own a significant portion of Holdings’ outstanding common stock and their interests may conflict with yours.
As of December 31, 2015,2016, Edward Crawford, our Chairman of the Board and Chief Executive Officer, and Matthew Crawford, our President and Chief Operating Officer, collectively beneficially owned approximately 28% of Holdings’ common stock. Mr. E. Crawford is Mr. M. Crawford’s father. Their interests could conflict with your interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of Messrs. E. Crawford and M. Crawford may conflict with your interests.
Our business and operating results may be adversely affected by natural disasters or other catastrophic events beyond our control.
While we have taken precautions to prevent production and service interruptions at our global facilities, severe weather conditions such as hurricanes or tornadoes, as well as major earthquakes and other natural disasters, in areas in which we have manufacturing facilities or from which we obtain products may cause physical damage to our properties, closure of one or more of our business facilities, lack of adequate work force in a market, temporary disruption in the supply of inventory, disruption in the transport of products and utilities, andor delays in the delivery of products to our customers. Any of these factors may disrupt our operations and adversely affect our financial condition and results of operations.
The insurance that we maintain may not fully cover all potential expenses.
We maintain property, business interruption and casualty insurance, but such insurance may not cover all risks associated with the hazards of our business and is subject to limitation, including deductible and maximum liabilities covered. We are potentially at risk if one or more of our insurance carriescarriers fail. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2015,2016, our operations included numerous manufacturing and supply chain logistics services facilities located in 25 states in the United States and in Puerto Rico, as well as in Asia, Canada, Europe, Mexico and Mexico.Brazil. We lease our world headquarters located in Cleveland, Ohio, which includes the world headquarters for certain of our businesses. We believe our manufacturing, logistics and corporate office facilities are well-maintained and are suitable and adequate, and have sufficient productive capacity to meet our current needs.
The following table provides information relative to our principal facilities as of December 31, 2015.2016.
Related Industry Segment | Location | Owned or Leased | Approximate Square Footage | Use | ||||
| SUPPLY | Leased | 145,000 | Manufacturing | |||||
| TECHNOLOGIES (1) | Lawrence, PA | Leased | 116,000 | Logistics and Manufacturing | ||||
| Minneapolis, MN | Leased | 87,100 | Logistics | |||||
| Cleveland, OH (2) | Leased | 60,450 | Supply Technologies Corporate Office | |||||
| Dayton, OH | Leased | 56,000 | Logistics | |||||
| Carol Stream, IL | Leased | 51,000 | Logistics | |||||
| Memphis, TN | Leased | 48,750 | Logistics | |||||
| Solon, OH | Leased | 47,100 | Logistics | |||||
| Streetsboro, OH | Leased | 45,000 | Manufacturing | |||||
| Allentown, PA | Leased | 43,800 | Logistics | |||||
| Suwanee, GA | Leased | 42,500 | Logistics | |||||
| Dublin, VA | Leased | 40,000 | Logistics | |||||
| Tulsa, OK | Leased | 40,000 | Logistics | |||||
| ASSEMBLY | Ocala, FL | Owned | 433,000 | Manufacturing | ||||
| COMPONENTS | Conneaut, OH (4) | Leased/Owned | 283,800 | Manufacturing | ||||
| Lexington, TN | Owned | 240,000 | Manufacturing | |||||
| Lobelville, TN (5) | Owned | 208,700 | Manufacturing | |||||
| Rootstown, OH | Owned | 208,000 | Manufacturing | |||||
| Cleveland, OH (3) | Leased/Owned | 190,000 | Manufacturing | |||||
| Wapakoneta, OH | Owned | 188,000 | Manufacturing | |||||
| Angola, IN | Owned | 135,000 | Manufacturing | |||||
| Huntington, IN | Leased | 124,500 | Manufacturing | |||||
| Fremont, IN | Owned | 112,000 | Manufacturing | |||||
| Big Rapids, MI | Owned | 97,000 | ||||||
| Manufacturing | ||||||||
| Delaware, OH | Owned | 45,000 | Manufacturing | |||||
| ENGINEERED | Cicero, IL | Owned | 450,000 | Manufacturing | ||||
| PRODUCTS (6) | Cuyahoga Heights, OH | Owned | 427,000 | Manufacturing | ||||
| Pune, India | Owned | 275,000 | Manufacturing | |||||
| Newport, AR | Owned | 200,000 | Manufacturing | |||||
| Warren, OH | Owned | 195,000 | Manufacturing | |||||
| Leini, Italy | Owned | 161,500 | Manufacturing | |||||
| Madison Heights, MI | Leased | 128,000 | Manufacturing | |||||
| Canton, OH | Leased | 124,000 | Manufacturing | |||||
| La Roeulx, Belgium | Owned | 120,000 | Manufacturing | |||||
| Brookfield, WI | Leased | 116,000 | Manufacturing | |||||
| Wickliffe, OH | Owned | 110,000 | Manufacturing | |||||
| Valencia, Spain | Owned | 81,000 | Manufacturing | |||||
| Albertville, AL | Leased | 56,000 | Office | |||||
| Chennai, India | Owned | 54,000 | Manufacturing | |||||
| Leini, Italy | Leased | 53,800 | Manufacturing | |||||
| Leini, Italy | Leased | 37,700 | Manufacturing | |||||
| Cortland, OH | Owned | 30,000 | Office and Manufacturing | |||||
| (1) | Supply Technologies has other facilities, none of which is deemed to be a principal facility. |
| (2) | Includes 20,150 square feet used by Holdings’ |
| (3) | Includes one leased property with 150,000 square feet and one owned property with 40,000 square feet. |
| (4) | Includes three leased properties with square footage of 91,800, 64,000 and 45,700, respectively, and one owned property with 82,300 square feet. |
| (5) | Includes five facilities, which make up the total square footage of 208,700. |
| (6) | Engineered Products has other owned and leased facilities, none of which is deemed to be a principal facility. |
Item 3. Legal Proceedings
We are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation are not expected to have a material adverse effect on our financial condition, liquidity or results of operations.
In addition to the routine lawsuits and asserted claims noted above, we were a party to the lawsuits and legal proceedings described below as of December 31, 20152016:
We were a co-defendant in approximately 110103 cases asserting claims on behalf of approximately 287199 plaintiffs alleging personal injury as a result of exposure to asbestos. These asbestos cases generally relate to production and sale of asbestos-containing products and allege various theories of liability, including negligence, gross negligence and strict liability, and seek compensatory and, in some cases, punitive damages.
In every asbestos case in which we are named as a party, the complaints are filed against multiple named defendants. In substantially all of the asbestos cases, the plaintiffs either claim damages in excess of a specified amount, typically a minimum amount sufficient to establish jurisdiction of the court in which the case was filed (jurisdictional minimums generally range from $25,000 to $75,000), or do not specify the monetary damages sought. To the extent that any specific amount of damages is sought, the amount applies to claims against all named defendants.
There are only eightsix asbestos cases, involving 2624 plaintiffs, that plead specified damages against named defendants. In each of the eightsix cases, the plaintiff is seeking compensatory and punitive damages based on a variety of potentially alternative causes of action. In three cases, the plaintiff has alleged compensatory and punitive damages in the amount of $3.0 million and $10.0 million, respectively, for four separate causes of action, and $1.0 million for anothera fifth cause of action and $3 million for a sixth cause of action. In the fourth and fifth cases, the plaintiff has alleged compensatory and punitive damages, each in the amount of $10.0 million.$20.0 million, for three and six separate causes of action, respectively and $5.0 million compensatory for the fifth and seventh cause of actions, respectively. In the fourthsixth case, the plaintiff has alleged compensatory and punitive damages, each in the amount of $10.0 million for seven separate causes of action. In the fifth case, the plaintiff has alleged compensatory damages in the amount of $20.0 million for eight separate causes of action and punitive damages in the amount of $20.0 million. In two cases, the plaintiff has alleged compensatory damages in the amount of $10.0 million for five separate causes of actioncounts, and $5.0 million for thea sixth cause of action and punitive damages in the amount for $10.0 million for each cause of action. In the eighth case the plaintiff has alleged compensatory and punitive damages, each in the amount $10.0 million, for five separate causes of action.
Historically, we have been dismissed from asbestos cases on the basis that the plaintiff incorrectly sued one of our subsidiaries or because the plaintiff failed to identify any asbestos-containing product manufactured or sold by us or our subsidiaries. We intend to vigorously defend these asbestos cases, and believe we will continue to be successful in being dismissed from such cases. However, it is not possible to predict the ultimate outcome of asbestos-related lawsuits, claims and proceedings due to the unpredictable nature of personal injury litigation. Despite this uncertainty, and although our results of operations and cash flows for a particular period could be adversely affected by asbestos-related lawsuits, claims and proceedings, management believes that the ultimate resolution of these matters will not have a material adverse effect on our financial condition, liquidity or results of operations. Among the factors management considered in reaching this conclusion were: (a) our historical success in being dismissed from these types of lawsuits on the bases mentioned above; (b) many cases have been improperly filed against one of our subsidiaries; (c) in many cases the plaintiffs have been unable to establish any causal relationship to us or our products or premises; (d) in many cases, the plaintiffs have been unable to demonstrate that they have suffered any identifiable injury or compensable loss at all or that any injuries that they have incurred did in fact result from alleged exposure to asbestos; and (e) the complaints assert claims against multiple defendants and, in most cases, the damages alleged are not attributed to individual defendants. Additionally, we do not believe that the amounts claimed in any of the asbestos cases are meaningful indicators of our potential exposure because the amounts claimed typically bear no relation to the extent of the plaintiff's injury, if any.
Our cost of defending these lawsuits has not been material to date and, based upon available information, our management does not expect its future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial position.
IPSCO Tubulars Inc. d/b/a TMK IPSCO sued ATM,Ajax Tocco Magnethermic Corporation (“ATM”), a subsidiary of Park-Ohio Holdings Corporation, in the United States District Court for the Eastern District of Arkansas claiming that equipment supplied by ATM for heat treating certain steel pipe at IPSCO’sIPSCO's Blytheville, Arkansas facility did not perform as required by the contract. The complaint alleged causes of action for breach of contract, gross negligence and constructive fraud. IPSCO sought approximately $10 million in damages plus an unspecified amount of punitive damages. ATM denied the allegations. ATM subsequently obtained summary judgment on the constructive fraud claim, which was dismissed by the district court prior to trial. The remaining claims were the subject of a bench trial that occurred in May 2013. After IPSCO presented its case, the district court entered partial judgment in favor of ATM, dismissing the gross negligence claim, a portion of the breach of contract claim, and any claim for punitive damages. The trial proceeded with respect to the remainder of IPSCO’sIPSCO's claim for breach of contract. In September 2013, the district court issued a judgment in favor of IPSCO in the amount of $5.2 million, which the Company recognized and accrued for at that time. IPSCO subsequently filed a motion seeking to recover $3.8 million in attorneys’ fees and costs. The district court reserved ruling on that issue pending an appeal. In October 2013, ATM filed an appeal with the U.S. Court of Appeals for the Eighth Circuit seeking reversal of the judgment in favor of IPSCO. In November 2013, IPSCO filed a cross-appeal seeking reversal of the dismissal of its claimsclaim for gross negligence and punitive damages. The Eighth Circuit issued an opinion in March 2015 affirming in part, reversing in part, and remanding the case. It affirmed the district court's determination that ATM was liable for breach of contract. It also affirmed the district court's dismissal of IPSCO's claimsclaim for gross negligence and punitive damages. However, the Eighth Circuit reversed nearly all of the damages awarded by the district court and remanded for further findings on the issue of damages, including whether consequential damages are barred under the express language of the contract. Because IPSCO did not appeal the award of $5.2 million in its favor, those damages could be decreased, but could not be increased, on remand. On remand, the district court entered an order once again awarding IPSCO $5.2 million in damages. In December 2015, ATM filed a second appeal with the Eighth Circuit seeking reversal of the damages award. That appeal is pending. In March 2016, the district court issued an order granting, in part, IPSCO's motion for fees and costs and awarding $2.2 million to IPSCO.IPSCO, which the Company accrued for as of December 31, 2015. ATM expects tofiled a third appeal of that decision. As of December 31, 2016, the Company had $7.4 million accrued for this matter.
In August 2013, we received a subpoena from the staff of the SEC in connection with the staff’s investigation of a third party. At that time, we also learned that the Department of Justice (“DOJ”) is conducting a criminal investigation of the third party. In connection with its initial response to the staff’s subpoena, we disclosed to the staff of the SEC that, in November 2007, the third party participated in a payment on behalf of us to a foreign tax official that implicates the Foreign Corrupt Practices Act.
The Board of Directors formed a special committee to review our transactions with the third party and to make any recommendations to the Board of Directors with respect thereto.
The Company intends to cooperate fully with the SEC and the DOJ in connection with their investigations of the third party and with the SEC in light of ourthe Company’s disclosure. We areThe Company is unable to predict the outcome or impact of the special committee’s investigation or the length, scope or results of the SEC’s review or the impact on ourits results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock, par value $1.00 per share, trades on the Nasdaq Global Select Market under the symbol “PKOH”. The table below presents the intra-day high and low sales prices of the common stock during the periods presented. The Company declared and paid a quarterly cash dividend of $0.125 per share commencing in the second quarter of 2014 and has continued with quarterly dividends of $0.125 per share through the first quarter of 2016.2017. Prior to the second quarter of 2014, no dividends were declared or paid during the prior quarterly periods in the last four years. Additionally, the terms of the credit agreement governing our revolving credit facility and the indenture governing the 8.125% senior notes due 2021 provide some restrictions on the amounts of dividends.
| Quarterly Common Stock Price Ranges | ||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||||
| Quarter | High | Low | High | Low | High | Low | High | Low | ||||||||||||||||||||||||
| 1st | $ | 61.33 | $ | 49.00 | $ | 57.21 | $ | 44.06 | $ | 43.47 | $ | 23.55 | $ | 62.98 | $ | 46.86 | ||||||||||||||||
| 2nd | $ | 54.35 | $ | 44.97 | $ | 60.67 | $ | 51.05 | $ | 42.94 | $ | 23.21 | $ | 55.31 | $ | 44.12 | ||||||||||||||||
| 3rd | $ | 50.97 | $ | 28.30 | $ | 60.98 | $ | 47.86 | $ | 38.79 | $ | 27.37 | $ | 51.50 | $ | 28.11 | ||||||||||||||||
| 4th | $ | 42.73 | $ | 28.82 | $ | 64.74 | $ | 45.01 | $ | 44.65 | $ | 30.01 | $ | 44.79 | $ | 28.11 | ||||||||||||||||
The number of shareholders of record forof our common stock as of February 29, 201628, 2017 was 412.388.
Issuer Purchases of Equity Securities
Set forth below is information regarding repurchases of our common stock during the fourth quarter of the fiscal year ended December 31, 20152016.
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans (1) | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Program (1) | |||||||||||
| October 1 — October 31, 2015 | 796 | (2) | $ | 33.63 | — | 988,334 | |||||||||
| November 1 — November 30, 2015 | 149,834 | 39.25 | 149,834 | 838,500 | |||||||||||
| December 1 — December 31, 2015 | 116,867 | (2) | 39.45 | 112,473 | 726,027 | ||||||||||
| Total | 267,497 | $ | 39.32 | 262,307 | 726,027 | ||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans (1) | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Program (1) | |||||||||||
| October 1 — October 31, 2016 | — | $ | — | — | 724,120 | ||||||||||
| November 1 — November 30, 2016 | 309 | 38.45 | — | 724,120 | |||||||||||
| December 1 — December 31, 2016 | 4,688 | 42.90 | — | 724,120 | |||||||||||
| Total | 4,997 | (2) | $ | 42.62 | — | 724,120 | |||||||||
| (1) | On March 4, 2013, we announced a share repurchase program whereby we may repurchase up to 1.0 million shares of our outstanding common stock. |
| (2) | Consists of an aggregate total of |
Item 6. Selected Financial Data
| Year Ended December 31, | |||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
| (In millions, except per share data) | |||||||||||||||||||
| Selected Statement of Operations Data: | |||||||||||||||||||
| Net sales | $ | 1,463.8 | $ | 1,378.7 | $ | 1,203.2 | $ | 1,128.2 | $ | 961.4 | |||||||||
| Cost of sales | 1,228.6 | 1,144.2 | 992.2 | 920.9 | 793.7 | ||||||||||||||
| Gross profit | 235.2 | 234.5 | 211.0 | 207.3 | 167.7 | ||||||||||||||
| Selling, general and administrative expenses | 135.1 | 136.6 | 120.2 | 113.8 | 102.5 | ||||||||||||||
| Asset impairment charges | — | — | — | — | 5.4 | ||||||||||||||
| Litigation judgment and settlement costs | 2.2 | — | 5.2 | 13.0 | — | ||||||||||||||
| Operating income | 97.9 | 97.9 | 85.6 | 80.5 | 59.8 | ||||||||||||||
| Gain on acquisition of business | — | — | (0.6 | ) | — | — | |||||||||||||
| Interest expense | 27.9 | 26.1 | 25.9 | 26.0 | 31.9 | ||||||||||||||
| Income from continuing operations before income taxes | 70.0 | 71.8 | 60.3 | 54.5 | 27.9 | ||||||||||||||
| Income tax expense | 21.3 | 24.9 | 19.4 | 20.3 | (3.8 | ) | |||||||||||||
| Net income from continuing operations | 48.7 | 46.9 | 40.9 | 34.2 | 31.7 | ||||||||||||||
| Income (loss) from discontinued operations, net of taxes | — | — | 3.0 | (2.4 | ) | (2.3 | ) | ||||||||||||
| Net income | 48.7 | 46.9 | 43.9 | 31.8 | 29.4 | ||||||||||||||
| Net income attributable to noncontrolling interest | (0.6 | ) | (1.3 | ) | (0.5 | ) | — | — | |||||||||||
| Net income attributable to ParkOhio common shareholders | $ | 48.1 | $ | 45.6 | $ | 43.4 | $ | 31.8 | $ | 29.4 | |||||||||
| Earnings (loss) per common share attributable to ParkOhio common shareholders - Basic: | |||||||||||||||||||
| Continuing operations | $ | 3.94 | $ | 3.77 | $ | 3.40 | $ | 2.87 | $ | 2.74 | |||||||||
| Discontinued operations | — | — | 0.25 | (0.20 | ) | (0.20 | ) | ||||||||||||
| Total | $ | 3.94 | $ | 3.77 | $ | 3.65 | $ | 2.67 | $ | 2.54 | |||||||||
| Earnings (loss) per common share attributable to ParkOhio common shareholders - Diluted: | |||||||||||||||||||
| Continuing operations | $ | 3.88 | $ | 3.68 | $ | 3.31 | $ | 2.82 | $ | 2.64 | |||||||||
| Discontinued operations | — | — | 0.25 | (0.20 | ) | (0.19 | ) | ||||||||||||
| Total | $ | 3.88 | $ | 3.68 | $ | 3.56 | $ | 2.62 | $ | 2.45 | |||||||||
| Weighted-average shares used to compute earnings per share: | |||||||||||||||||||
| Basic | 12.2 | 12.1 | 11.9 | 11.9 | 11.6 | ||||||||||||||
| Diluted | 12.4 | 12.4 | 12.2 | 12.1 | 12.0 | ||||||||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
| (In millions, except per share data) | |||||||||||||||||||
| Income Statement Data: | |||||||||||||||||||
| Net sales | $ | 1,276.9 | $ | 1,463.8 | $ | 1,378.7 | $ | 1,203.2 | $ | 1,128.2 | |||||||||
| Operating income | 69.2 | 97.9 | 97.9 | 85.6 | 80.5 | ||||||||||||||
| Net income from continuing operations attributable to ParkOhio shareholders | 32.2 | 48.7 | 46.9 | 40.9 | 34.2 | ||||||||||||||
| Earnings per common share attributable to ParkOhio shareholders: | |||||||||||||||||||
| Basic | $ | 2.62 | $ | 3.94 | $ | 3.77 | $ | 3.40 | $ | 2.87 | |||||||||
| Diluted | $ | 2.58 | $ | 3.88 | $ | 3.68 | $ | 3.31 | $ | 2.82 | |||||||||
| Cash dividend per common share | $ | 0.50 | $ | 0.50 | $ | 0.375 | — | — | |||||||||||
Results for 2016 include an asset impairment charge of $4.0 million.
| Year Ended December 31, | |||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
| (In millions) | |||||||||||||||||||
| Other Financial Data: | |||||||||||||||||||
| Net cash flows provided by operating activities | $ | 44.7 | $ | 53.6 | $ | 60.3 | $ | 55.9 | $ | 35.9 | |||||||||
| Net cash flows used by investing activities | (36.5 | ) | (96.4 | ) | (54.3 | ) | (120.3 | ) | (11.1 | ) | |||||||||
| Net cash flows provided by financing activities | 0.7 | 48.6 | 3.9 | 30.5 | 17.9 | ||||||||||||||
| Depreciation and amortization | 28.7 | 23.2 | 19.2 | 18.0 | 16.2 | ||||||||||||||
| Capital expenditures, net | (36.5 | ) | (25.8 | ) | (30.1 | ) | (29.6 | ) | (12.7 | ) | |||||||||
| Dividends paid | (6.3 | ) | (4.7 | ) | — | — | — | ||||||||||||
Selected Balance Sheet Data (as of period end) (1): | |||||||||||||||||||
| Cash and cash equivalents | 62.0 | 58.0 | 55.2 | 44.4 | 78.0 | ||||||||||||||
| Working capital | 324.4 | 318.3 | 298.3 | 273.5 | 293.8 | ||||||||||||||
| Property, plant and equipment | 151.3 | 141.1 | 115.4 | 100.0 | 61.4 | ||||||||||||||
| Total assets | 946.6 | 974.2 | 818.7 | 726.6 | 614.8 | ||||||||||||||
| Long-term debt | 450.3 | 434.4 | 379.2 | 374.2 | 346.2 | ||||||||||||||
| Total debt | 468.1 | 443.8 | 383.6 | 378.6 | 347.6 | ||||||||||||||
| Shareholders’ equity | 212.2 | 191.9 | 164.0 | 101.8 | 65.4 | ||||||||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
| (In millions) | |||||||||||||||||||
| Other Financial Data: | |||||||||||||||||||
| Net cash flows provided by operating activities | $ | 72.9 | $ | 44.7 | $ | 53.6 | $ | 60.3 | $ | 55.9 | |||||||||
| Capital expenditures, net | (28.5 | ) | (36.5 | ) | (25.8 | ) | (30.1 | ) | (29.6 | ) | |||||||||
Selected Balance Sheet Data (as of period end) (1): | |||||||||||||||||||
| Cash and cash equivalents | 64.3 | 62.0 | 58.0 | 55.2 | 44.4 | ||||||||||||||
Total assets(2) | 974.3 | 942.1 | 969.1 | 813.0 | 719.6 | ||||||||||||||
Long-term debt(2) | 439.0 | 445.8 | 429.3 | 373.5 | 367.2 | ||||||||||||||
(1) Adjusted to reflect the discontinued operations.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our consolidated financial statements include the accounts of Park-Ohio Holdings Corp. and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The historical financial information discussed below is not directly comparable on a year-to-year basis, primarily due to acquisitions and litigation costs in 2014 and 2013 and dispositions in 2013.
EXECUTIVE OVERVIEW
General
We are an industrial Total Supply Management™a diversified international company providing world-class customers with a supply chain management outsourcing service, capital equipment used on their production lines, and diversified manufacturing business, operating inmanufactured components used to assemble their products. We operate through three reportable segments: Supply Technologies, Assembly Components and Engineered Products. Refer to Part 1, Item 1. Business for descriptions of our business segments.
In December 2016, we acquired GH Electrotermia S.A. (“GH”), headquartered in Valencia, Spain, for $23.4 million in cash (net of $6.3 million cash acquired), plus the assumption of $13.9 million in debt. GH, which had 2016 revenues of approximately $55 million, is a global leader in the design, manufacturing and testing of induction heating equipment and heat treat solutions. GH, which operates through its locations in Spain, India, Germany, China and the United States, strengthens our customers with Total Supply Management™, a proactive solutions approach that managesposition as the efficienciesglobal leader of every aspect of supplying production partsinduction products and materialsadds key technologies to our customers’ manufacturing floor, from strategic planning to program implementation. Total Supply Management™ includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support. Our Supply Technologies business services customers in the following principal industries: heavy-duty truck; automotive, truck and vehicle parts; power sports and recreational equipment; bus and coaches; electrical distribution and controls; agricultural and construction equipment; consumer electronics; HVAC; lawn and garden; semiconductor equipment; aerospace and defense; and plumbing.
Subsequent EventsEvent
On February 1, 2016,January 31, 2017, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend was paid on February 29, 2016,March 1, 2017, to shareholders of record as of the close of business on February 15, 2016,2017, and resulted in a cash outlay of approximately $1.5$1.6 million.
RESULTS OF OPERATIONS
2016 Compared with 2015 and 2015 Compared with 2014 and 2014 Compared with 2013
| 2015 vs. 2014 | 2014 vs. 2013 | ||||||||||||||||||||||||
| 2015 | 2014 | 2013 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| (Dollars in millions, except per share data) | |||||||||||||||||||||||||
| Net sales | $ | 1,463.8 | $ | 1,378.7 | $ | 1,203.2 | $ | 85.1 | 6 | % | $ | 175.5 | 15 | % | |||||||||||
| Cost of sales | 1,228.6 | 1,144.2 | 992.2 | 84.4 | 7 | % | 152.0 | 15 | % | ||||||||||||||||
| Gross profit | 235.2 | 234.5 | 211.0 | 0.7 | — | % | 23.5 | 11 | % | ||||||||||||||||
| Gross profit as a percentage of net sales | 16.1 | % | 17.0 | % | 17.5 | % | |||||||||||||||||||
| Selling, general and administrative expenses ("SG&A") | 135.1 | 136.6 | 120.2 | (1.5 | ) | (1 | )% | 16.4 | 14 | % | |||||||||||||||
| SG&A as a percentage of net sales | 9.2 | % | 9.9 | % | 10.0 | % | |||||||||||||||||||
| Litigation judgment and settlement costs | 2.2 | — | 5.2 | 2.2 | * | (5.2 | ) | * | |||||||||||||||||
| Operating income | 97.9 | 97.9 | 85.6 | — | — | % | 12.3 | 14 | % | ||||||||||||||||
| Gain on acquisition of business | — | — | (0.6 | ) | — | * | 0.6 | * | |||||||||||||||||
| Interest expense | 27.9 | 26.1 | 25.9 | 1.8 | 7 | % | 0.2 | 1 | % | ||||||||||||||||
| Income from continuing operations before income taxes | 70.0 | 71.8 | 60.3 | (1.8 | ) | (3 | )% | 11.5 | 19 | % | |||||||||||||||
| Income tax expense | 21.3 | 24.9 | 19.4 | (3.6 | ) | (14 | )% | 5.5 | 28 | % | |||||||||||||||
| Net income from continuing operations | 48.7 | 46.9 | 40.9 | 1.8 | 4 | % | 6.0 | 15 | % | ||||||||||||||||
| Income from discontinued operations, net of taxes | — | — | 3.0 | — | * | (3.0 | ) | * | |||||||||||||||||
| Net income | 48.7 | 46.9 | 43.9 | 1.8 | 4 | % | 3.0 | 7 | % | ||||||||||||||||
| Net income attributable to noncontrolling interest | (0.6 | ) | (1.3 | ) | (0.5 | ) | 0.7 | * | (0.8 | ) | * | ||||||||||||||
| Net income attributable to ParkOhio common shareholders | $ | 48.1 | $ | 45.6 | $ | 43.4 | $ | 2.5 | 5 | % | $ | 2.2 | 5 | % | |||||||||||
| Earnings per common share attributable to ParkOhio common shareholders - Basic: | |||||||||||||||||||||||||
| Continuing operations | $ | 3.94 | $ | 3.77 | $ | 3.40 | $ | 0.17 | 5 | % | $ | 0.37 | 11 | % | |||||||||||
| Discontinued operations | — | — | 0.25 | — | * | (0.25 | ) | * | |||||||||||||||||
| Total | $ | 3.94 | $ | 3.77 | $ | 3.65 | $ | 0.17 | 5 | % | $ | 0.12 | 3 | % | |||||||||||
| Earnings per common share attributable to ParkOhio common shareholders - Diluted: | |||||||||||||||||||||||||
| Continuing operations | $ | 3.88 | $ | 3.68 | $ | 3.31 | $ | 0.20 | 5 | % | $ | 0.37 | 11 | % | |||||||||||
| Discontinued operations | — | — | 0.25 | — | * | (0.25 | ) | * | |||||||||||||||||
| Total | $ | 3.88 | $ | 3.68 | $ | 3.56 | $ | 0.20 | 5 | % | $ | 0.12 | 3 | % | |||||||||||
| 2016 vs. 2015 | 2015 vs. 2014 | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| (Dollars in millions, except per share data) | |||||||||||||||||||||||||
| Net sales | $ | 1,276.9 | $ | 1,463.8 | $ | 1,378.7 | $ | (186.9 | ) | (13 | )% | $ | 85.1 | 6 | % | ||||||||||
| Cost of sales | 1,073.9 | 1,228.6 | 1,144.2 | (154.7 | ) | (13 | )% | 84.4 | 7 | % | |||||||||||||||
| Gross profit | 203.0 | 235.2 | 234.5 | (32.2 | ) | (14 | )% | 0.7 | — | % | |||||||||||||||
| Gross profit as a percentage of net sales | 15.9 | % | 16.1 | % | 17.0 | % | |||||||||||||||||||
| Selling, general and administrative expenses ("SG&A") | 129.8 | 135.1 | 136.6 | (5.3 | ) | (4 | )% | (1.5 | ) | (1 | )% | ||||||||||||||
| SG&A as a percentage of net sales | 10.2 | % | 9.2 | % | 9.9 | % | |||||||||||||||||||
| Asset impairment charge | 4.0 | — | — | 4.0 | * | — | * | ||||||||||||||||||
| Litigation judgment costs | — | 2.2 | — | (2.2 | ) | * | 2.2 | * | |||||||||||||||||
| Operating income | 69.2 | 97.9 | 97.9 | (28.7 | ) | (29 | )% | — | — | % | |||||||||||||||
| Interest expense | 28.2 | 27.9 | 26.1 | 0.3 | 1 | % | 1.8 | 7 | % | ||||||||||||||||
| Income before income taxes | 41.0 | 70.0 | 71.8 | (29.0 | ) | (41 | )% | (1.8 | ) | (3 | )% | ||||||||||||||
| Income tax expense | 8.8 | 21.3 | 24.9 | (12.5 | ) | (59 | )% | (3.6 | ) | (14 | )% | ||||||||||||||
| Net income | 32.2 | 48.7 | 46.9 | (16.5 | ) | (34 | )% | 1.8 | 4 | % | |||||||||||||||
| Net income attributable to noncontrolling interest | (0.5 | ) | (0.6 | ) | (1.3 | ) | 0.1 | * | 0.7 | * | |||||||||||||||
| Net income attributable to ParkOhio common shareholders: | $ | 31.7 | $ | 48.1 | $ | 45.6 | $ | (16.4 | ) | (34 | )% | $ | 2.5 | 5 | % | ||||||||||
| Earnings per common share attributable to ParkOhio common shareholders: | |||||||||||||||||||||||||
| Basic | $ | 2.62 | $ | 3.94 | $ | 3.77 | $ | (1.32 | ) | (34 | )% | $ | 0.17 | 5 | % | ||||||||||
| Diluted | $ | 2.58 | $ | 3.88 | $ | 3.68 | $ | (1.30 | ) | (34 | )% | $ | 0.20 | 5 | % | ||||||||||
* Calculation not meaningful
Net Sales:Sales
Net sales increaseddecreased 13% to $1,276.9 million in 2016 compared to $1,463.8 million in 2015. The decrease in net sales is mainly due to lower end-market demand for our products in each of our segments, primarily in our aluminum products, heavy-duty truck and power sport end markets.
The factors explaining the changes in segment revenues for 2016 compared to the prior year are contained within the “Segment Results” section below.
Cost of Sales & Gross Profit
Cost of sales decreased 13% to $1,073.9 million in 2016 compared to $1,228.6 million in 2015. The decrease in cost of sales was primarily due to the decrease in net sales of 13%. Our gross margin percentage was 15.9% in 2016 compared to 16.1% in 2015. This 20 basis point decline was largely due to lower fixed cost absorption in certain of our manufacturing locations affected by lower customer demand, partially offset by the favorable impact of manufacturing efficiencies and cost reduction actions taken in response to lower sales levels.
SG&A Expenses
SG&A expenses decreased to $129.8 million in 2016 from $135.1 million in 2015, driven by the favorable impact of cost reduction actions and lower selling expenses as a result of lower sales volumes. SG&A expenses as a percent of sales increased to 10.2% in 2016 compared to 9.2% in 2015, due primarily to the lower revenue base in 2016 compared to the prior year.
Asset Impairment Charge
An asset impairment charge of $4.0 million was recorded in the first quarter of 2016 due to the accelerated end of production in certain programs with an automotive customer.
Litigation Judgment Costs
In 2015, the Company accrued $2.2 million in response to a district court’s award in connection with ongoing litigation. See Note 9 to the consolidated financial statements included elsewhere herein for further discussion.
Interest Expense
| Year Ended December 31, | |||||||
| 2016 | 2015 | ||||||
| (Dollars in millions) | |||||||
| Interest expense | $ | 28.2 | $ | 27.9 | |||
| Average outstanding borrowings | $ | 462.1 | $ | 461.7 | |||
| Average borrowing rate | 6.10 | % | 6.04 | % | |||
Interest expense was approximately $28 million in 2016 and 2015. During 2016, we reduced outstanding indebtedness by $33.4 million, using cash flow from operating activities, before borrowing $26.4 million to fund the GH acquisition. The average borrowing rate increased slightly from the prior year due to rising interest rates. See Note 6 to the consolidated financial statements included elsewhere herein for further discussion.
Income Tax Expense
The provision for income taxes was $8.8 million in 2016 (an effective rate of 21.5%) and $21.3 million in 2015 (an effective rate of 30.4%). The amount in 2016 includes reversal of various income tax accruals of approximately $4.0 million relating to previous uncertain tax positions for which the statutes of limitations expired. The effective rates in both years are lower than the U.S. statutory rate of 35% due primarily to earnings in jurisdictions in which the income tax rates are lower than the U.S. statutory income tax rate.
Net Income from Continuing Operations and Net Income
Net income from continuing operations and net income both decreased in 2016 compared to 2015, due to the reasons described above.
Net Income Attributable to Noncontrolling Interest
As a result of the sale of a 25% equity interest in one of our forging businesses in 2013, we recognize net income attributable to noncontrolling interest as a deduction from consolidated net income to derive net income attributable to ParkOhio common shareholders. Such noncontrolling interest was immaterial in both periods.
Net Income Attributable to ParkOhio Common Shareholders
Net income attributable to ParkOhio common shareholders decreased to $31.7 million in 2016 compared to $48.1 million in 2015, due to the reasons described above.
2015Compared with2014
Net Sales
Net sales increased $85.1 million, or 6%, to $1,463.8 million in 2015,, compared to $1,378.7 million in 2014.2014. The increase in net sales is mainly due to the incremental sales from acquisitions of $97.4 million and organic volume increase from our Supply Technologies and Assembly Component segments partially offset by reduced sales in our Engineered Products segment.
The factors explaining the changes in segment revenues for 2015 compared to the prior year are contained within the “Segment Analysis” section.
Cost of Sales & Gross Profit:Profit
Cost of sales increased $84.4 million, or 7%, to $1,228.6 million in 2015,, compared to $1,144.2 million in 2014.2014. The increase in cost of sales was primarily due to the increase in net sales volumes, which increased 6%. The gross profit margin percentage was 16.1% in 2015 compared to 17.0% in 2014.2014. This 90 basis point decline in gross margin percentage is largely due to a decrease in higher margin new equipment and aftermarket sales volume to the oil and gas, steel and military and commercial aerospace end markets in our Engineered Products segment.
SG&A Expenses:Expenses
Consolidated SG&A expenses decreased 1% in 2015 compared to 2014.2014. SG&A expenses as a percent of sales decreased by 70 basis points to 9.2%. SG&A expenses decreased in 2015 compared to 2014,, primarily due to a reduction in professional fees.
Litigation Judgment and Settlement Costs:Costs
Interest Expense:Expense
| Year Ended December 31, | Percent Change | Year Ended December 31, | |||||||||||||||||||
| 2015 | 2014 | Change | 2015 | 2014 | |||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | ||||||||||||||||||||
| Interest expense | $ | 27.9 | $ | 26.1 | $ | 1.8 | 6.9 | % | $ | 27.9 | $ | 26.1 | |||||||||
| Average outstanding borrowings | $ | 461.6 | $ | 397.1 | $ | 64.5 | 16.2 | % | $ | 461.6 | $ | 397.1 | |||||||||
| Average borrowing rate | 6.04 | % | 6.57 | % | (53 | ) | basis points | 6.04 | % | 6.57 | % | ||||||||||
Interest expense increased$1.8 $1.8 million in 2015 compared to 2014 as average borrowings in 2015 were higher when compared to 2014 due to additional borrowings to fund acquisitions that occurred in the fourth quarter of 2014, capital expenditures and working capital.
Income Tax Expense:Expense
The provision for income taxes was $21.3$21.3 million in 2015,, which was a 30.4% effective income tax rate, compared to income taxes of $24.9$24.9 million provided in 2014,, a 34.7% effective income tax rate. The decrease in the effective tax rate in 2015 is primarily due to the reversal of a valuation allowance against certain foreign net deferred tax assets and an increase in earnings in jurisdictions in which the income tax rates are lower than the U.S. statutory income tax rate.
Net sales increased $175.5 million, or 15%, to $1,378.7 million in 2014, compared to $1,203.2 million in 2013. The increase in net sales is principally attributable to strong organic growth of 9% and the strategic acquisitions in 2014 and 2013. Supply Technologies and Assembly Components segments were the primary contributors to the strong organic growth. Overall, our organic growth increased in 2014 on the strength of new automotive platform business in our Aluminum business within the Assembly Components segment, growth in the heavy-duty truck, power sports and recreational equipment, semiconductor and HVAC markets in the Supply Technologies segment and increased sales in the industrial equipment business of Engineered Products segment. These increases were offset by a slight decline in sales in the forging business. The 2013 acquisitions of Bates, Henry Halstead and QEF and the 2014 acquisitions of Apollo, Autoform and Saet also contributed to the 2014 revenue growth. Combined, these acquisitions contributed $70.8 million of the increase in net sales in 2014.
| Year Ended December 31, | Percent Change | |||||||||||||
| 2014 | 2013 | Change | ||||||||||||
| (Dollars in millions) | ||||||||||||||
| Interest expense | $ | 26.1 | $ | 25.9 | $ | 0.2 | 1 | % | ||||||
| Average outstanding borrowings | $ | 397.1 | $ | 385.5 | $ | 11.6 | 3 | % | ||||||
| Average borrowing rate | 6.57 | % | 6.71 | % | (14 | ) | basis points | |||||||
Income Tax Expense:
Net income from continuing operations increased $6.0$1.8 million to $48.7 million in 2015, compared to $46.9 million in 2014, compared to $40.9 million in 2013, due to the reasons described above.
Net Income Attributable to Noncontrolling Interest:
As a result of the sale of the 25% equity interest in a small forging business in 2013, the income of $1.3$0.6 million attributable to the noncontrolling interest is deducted from the net income to derive net income attributable to ParkOhio common shareholders.
Net Income Attributable to ParkOhio Common Shareholders:Shareholders
Net income attributable to ParkOhio common shareholders increased $2.2$2.5 million to $48.1 million in 2015, compared to $45.6 million in 2014, compared to $43.4 million in 2013, due to the reasons described above.
SEGMENT ANALYSISRESULTS
| Year Ended December 31, | ||||||||
| 2015 | 2014 | 2013 | ||||||
| Revenues: | ||||||||
| Supply Technologies | 40 | % | 40 | % | 39 | % | ||
| Assembly Components | 39 | % | 36 | % | 34 | % | ||
| Engineered Products | 21 | % | 24 | % | 27 | % | ||
| Segment Operating Income: | ||||||||
| Supply Technologies | 39 | % | 33 | % | 31 | % | ||
| Assembly Components | 45 | % | 33 | % | 28 | % | ||
| Engineered Products | 16 | % | 34 | % | 41 | % | ||
Supply Technologies Segment
| 2015 vs. 2014 | 2014 vs. 2013 | Year Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | $ Change | % Change | $ Change | % Change | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 578.7 | $ | 559.6 | $ | 471.9 | $ | 19.1 | 3 | % | $ | 87.7 | 19 | % | $ | 502.1 | $ | 578.7 | $ | 559.6 | ||||||||||||||||
| Segment operating income | $ | 50.3 | $ | 42.5 | $ | 35.0 | $ | 7.8 | 18 | % | $ | 7.5 | 21 | % | $ | 40.0 | $ | 50.3 | $ | 42.5 | ||||||||||||||||
| Segment operating income margin | 8.7 | % | 7.6 | % | 7.4 | % | 8.0 | % | 8.7 | % | 7.6 | % | ||||||||||||||||||||||||
2016 Compared to 2015
Net Sales: Net sales were down 13% in 2016 compared to 2015 due primarily to lower customer demand in the Company's heavy-duty truck and related market, which was down 33%; the Company's power sports and recreational equipment market, which was down 20%; and the Company's bus and coach market, which was down 33%. These declines were partially offset by an increase in sales in the Company's aerospace market, which was up 72% compared to 2015.
Segment Operating Income: Segment operating income decreased by $10.3 million, and segment operating income margin declined by 70 basis points, due primarily to the volume reductions noted above. This negative impact was partially offset by the benefits of our 2016 cost reduction actions.
2015 Compared withto 2014
Net Sales: The majority of our growth in 2015 was organic growth in our diversified markets. This growth was driven by strong demand in the Company's heavy-duty truck market, which was up 12%; the Company's power sports and recreational equipment market, which increased 12%; and the Company's semiconductor market, which was up 21%. Approximately 28% of the sales increase in the year ended December 31, 2015, compared to 2014, is directly attributable to the acquisition of Apollo.Apollo Aerospace (“Apollo”). In addition, our fastener manufacturing division generated an increase of sales of 20% in 2015 primarily from the automotive market.
Segment Operating Income: With increases in net sales, segment operating income increased $7.8 million,, or 18%, to $50.3 million. Segment operating income margin was 8.7%, which was a 110 basis point increase compared to the operating margin of 7.6% in 2014. These improvements were driven largely by improved operating leverage in several facilities, the full integration of the Apollo acquisition and continued focus on more highly engineered products in the portfolio.
Assembly Components Segment
| 2015 vs. 2014 | 2014 vs. 2013 | Year Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | $ Change | % Change | $ Change | % Change | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 569.2 | $ | 490.5 | $ | 412.8 | $ | 78.7 | 16 | % | $ | 77.7 | 19 | % | $ | 529.4 | $ | 569.2 | $ | 490.5 | ||||||||||||||||
| Segment operating income | $ | 57.9 | $ | 42.0 | $ | 31.8 | $ | 15.9 | 38 | % | $ | 10.2 | 32 | % | $ | 50.5 | $ | 57.9 | $ | 42.0 | ||||||||||||||||
| Segment operating income margin | 10.2 | % | 8.6 | % | 7.7 | % | 9.5 | % | 10.2 | % | 8.6 | % | ||||||||||||||||||||||||
2016 Compared to 2015
Net Sales: Net sales were down 7% in 2016 compared to 2015 due primarily to the accelerated end of production resulting in volume reductions from certain programs with an automotive customer in our aluminum business. This decline was partially offset by higher sales in our gasoline direct injection fuel rail systems, which was up 36%, and rubber products businesses, which was up 13%, driven by new product launches.
Segment Operating Income: Segment operating income decreased by $7.4 million, and segment operating income margin declined by 70 basis points, compared to 2015. These decreases were due primarily to lower sales in our aluminum business as described above, unfavorable sales mix and excess start-up costs related to our launch of new high-volume products in our fuel rail and fuel filler plants. These factors were partially offset by the impact of higher sales in our gasoline direct injection fuel rail systems and rubber products businesses in 2016 compared to 2015, as well as benefits of our 2016 cost reduction actions.
2015 Compared withto 2014
Net Sales: The significant increase in net sales in 2015 is primarily due to the incremental sales from new programs with our automotive customers in our aluminum business of $30.4 million and the incremental sales in 2015 associated with the acquisition of Autoform Tool and Manufacturing (“Autoform”) of approximately $51.8 million offset by a decline in our other assembly components businesses.
Segment Operating Income: Segment operating income increased 38% in 2015 compared to 2014. Our segment operating income margin was 10.2%, which was a 160 basis point increase compared to operating income margin of 8.6% in 2014. The increase in margin is primarily attributable to operating improvements in our aluminum business.
Engineered Products Segment
| 2015 vs. 2014 | 2014 vs. 2013 | Year Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | $ Change | % Change | $ Change | % Change | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 315.9 | $ | 328.6 | $ | 318.5 | $ | (12.7 | ) | (4 | )% | $ | 10.1 | 3 | % | $ | 245.4 | $ | 315.9 | $ | 328.6 | |||||||||||||||
| Segment operating income | $ | 20.9 | $ | 42.7 | $ | 47.1 | $ | (21.8 | ) | (51 | )% | $ | (4.4 | ) | (9 | )% | $ | 10.6 | $ | 20.9 | $ | 42.7 | ||||||||||||||
| Segment operating income margin | 6.6 | % | 13.0 | % | 14.8 | % | 4.3 | % | 6.6 | % | 13.0 | % | ||||||||||||||||||||||||
2016 Compared to 2015
Net Sales: Net sales were down 22% in 2016 compared to 2015 due primarily to lower customer demand in the oil and gas, rail, steel, commercial aerospace and military end markets.
Segment Operating Income: Segment operating income decreased by $10.3 million, and segment operating income margin declined by 230 basis points, due primarily to volume declines in our induction heating, pipe threading and forging businesses related to the weak market demand noted above. These factors were partially offset by the benefits of cost reduction actions.
2015 Compared withto 2014
Net Sales: The decrease in net sales of 4% in 2015 is primarily attributable to a 15% decrease in the forged and machine products business, which was impacted by reduced demand in aircraft forging products and a decrease in our capital equipment group and its aftermarket business, which was impacted by reduced demand from the oil and gas and steel industries. This reduction was offset by incremental sales of $38.5 million related to the Saet S.p.A. (“Saet”) acquisition.
Segment Operating Income: Segment operating income decreased to 6.6%$20.9 million in 2015. The decrease in operating income dollars and the segment operating income margin are associated with the sales mix in 2015 and the associated reduction in overhead absorption related to the decline in volume in our forging business.
| 2015 | 2014 | ||||||
| (Dollars in millions) | |||||||
| Cash and cash equivalents | $ | 62.0 | $ | 58.0 | |||
| Working capital | $ | 324.4 | $ | 318.3 | |||
| Current ratio | 2.44 | 2.21 | |||||
| Debt as a % of capitalization | 69 | % | 70 | % | |||
| Net debt as a % of capitalization | 60 | % | 61 | % | |||
The following table summarizes the major components of cash flows:
| 2016 | 2015 | 2014 | |||||||||
| Cash provided (used) by: | (In millions) | ||||||||||
| Operating activities | $ | 72.9 | $ | 44.7 | $ | 53.6 | |||||
| Investing activities | (51.9 | ) | (36.5 | ) | (96.4 | ) | |||||
| Financing activities | (17.2 | ) | 0.7 | 48.6 | |||||||
| Effect of exchange rate on cash | (1.5 | ) | (4.9 | ) | (3.0 | ) | |||||
| Increase in cash and cash equivalents | $ | 2.3 | $ | 4.0 | $ | 2.8 | |||||
Operating Activities
Cash provided by operating activities increased by $28.2 million to $72.9 million in 2016 compared to 2015, driven by lower working capital needs (accounts receivable, inventories and accounts payable and other accrued expenses) in 2016 compared to last year. Lower sales levels in 2016 resulted in lower inventory and accounts receivable balances, and, in the 2015 period, higher inventories and lower accounts payable balances combined to use cash of $52.3 million. The lower working capital in 2016 was partially offset by lower net income of $16.5 million.
Cash provided by operating activities decreased $8.9 million to $44.7 million in 2015 compared to $53.6 million in 2014. The decrease in operating cash flows of $8.9 million in 2015 compared to 2014 was primarily the result of higher working capital in 2015 compared to 2014.
Investing Activities
Capital expenditures were $28.5 million in 2016, $36.5 million in 2015 and $25.8 million in 2014. These capital expenditures were primarily for growth initiatives, with the majority in our Assembly Component businesses as we launch new fuel rail and fuel filler products, and aluminum products for the automotive industry.
In 2016, we spent $23.4 million (net of cash acquired) on the strategic acquisition of GH. See Note 3 to the consolidated financial statements included elsewhere hereinfor additional information.
In 2014, we spent a combined $72.7 million (net of cash acquired) on the acquisitions of Apollo, Autoform and Saet. See Note 3 to the consolidated financial statements included elsewhere hereinfor additional information.
Financing Activities
Cash used by financing activities in 2016 consisted primarily of the net payments of debt instruments of $7.0 million, payment of cash dividends of $6.2 million and payment of an acquisition earn-out of $2.0 million. During the year, we reduced outstanding indebtedness by $33.4 million using cash flow from operating activities, before borrowing $26.4 million to fund the GH acquisition. See Note 6 to the consolidated financial statements included elsewhere hereinfor further discussion.
Cash provided by financing activities in 2015 consisted of net borrowings on debt instruments of $20.4 million, partially offset by payment of cash dividends of $6.3 million and purchases of treasury stock of $15.5 million.
Cash provided by financing activities in 2014 consisted of net borrowings on debt instruments of $57.9 million primarily to fund the 2014 acquisitions, partially offset by payment of cash dividends of $4.7 million and purchases of treasury stock of $4.4 million.
Liquidity
The following table summarizes our indicators of liquidity:
| 2015 | 2014 | 2013 | |||||||||
| Cash provided (used) by: | (In millions) | ||||||||||
| Operating activities | $ | 44.7 | $ | 53.6 | $ | 60.3 | |||||
| Investing activities | (36.5 | ) | (96.4 | ) | (54.3 | ) | |||||
| Financing activities | 0.7 | 48.6 | 3.9 | ||||||||
| Effect of exchange rate changes on cash | (4.9 | ) | (3.0 | ) | 0.9 | ||||||
| Increase (decrease) in cash and cash equivalents | $ | 4.0 | $ | 2.8 | $ | 10.8 | |||||
| 2016 | 2015 | ||||||
| (Dollars in millions) | |||||||
| Cash and cash equivalents | $ | 64.3 | $ | 62.0 | |||
| Gross debt (excluding unamortized debt issuance costs) | $ | 475.0 | $ | 468.1 | |||
| Working capital | $ | 310.8 | $ | 324.4 | |||
| Net debt as a % of capitalization | 58 | % | 60 | % | |||
As of December 31, 2015,2016, we had $169.0$132.8 million outstanding under the revolving credit facility, approximately $69.3$106.2 million of unused borrowing availability and cash and cash equivalents of $62.0 million.$64.3 million.
Our liquidity needs are primarily for working capital and capital expenditures. Our primary sources of liquidity have been funds provided by operations and funds available from existing bank credit arrangements and the sale of our debt securities. On April 7, 2011, we completed the sale of $250.0 million aggregate principal amount of Senior Notes.senior notes (the “Senior Notes”). The Senior Notes bear an interest rate of 8.125% per annum payable semi-annually in arrears on April 1 and October 1 of each year. The Senior Notes mature on April 1, 2021.
The Company is a party to a credit and security agreement, dated November 5, 2003, as amended and restated (the “Credit Agreement”), with a group of banks, under which it may borrow or issue standby letters of credit or commercial letters of credit. As of December 31, 2015, we had $196.9 million total outstanding borrowings and approximately $69.3 million of unused borrowing availability under the revolving credit facility provided by the Credit Agreement. Also, as of December 31, 2015, we had cash and cash equivalents of $62.0 million. On July 31, 2014, the Company entered into a sixth amendment and restatement of the credit agreement (the “Amended Credit Agreement”), which was further amended on October 24, 2014, January 20, 2015 and March 12, 2015. Please refer to Note 9 - Financing Arrangements 6 to the consolidated financial statements included elsewhere hereinfor further discussion.
Current financial resources (working capital and available bank borrowing arrangements) and anticipated funds from operations are expected to be adequate to meet current cash requirements for at least the next twelve months. The future availability of bank borrowings under the revolving credit facility provided by the Credit Agreement is based on our ability to meet a debt service ratio covenant, which could be materially impacted by negative economic trends. Failure to meet the debt service ratio could materially impact the availability and interest rate of future borrowings.
We may from time to time seek to refinance, retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. We may also repurchase shares of our outstanding common stock. Any such actions will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Disruptions, uncertainty or volatility in the credit markets may adversely impact the availability of credit already arranged and the availability and cost of credit in the future. These market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to grow and maintain its business.our businesses. Accordingly, we may be forced to delay raising capital or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce itsour financial flexibility.
The Company had cash and cash equivalents held by foreign subsidiaries of $54.4 million at December 31, 2016 and $48.4 million at December 31, 2015 and $44.5 million at December 31, 2014.2015. For each of our foreign subsidiaries, we make a determination regarding the amount of earnings intended for permanent reinvestment, with the balance, if any, available to be repatriated to the United States. The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the foreign subsidiaries’ operational activities and/or future foreign investments. At December 31, 2015, management believed2016, we believe that sufficient liquidity was available in the United States, and it is our current intention to permanently reinvest undistributed earnings of our foreign subsidiaries outside of the United States. Although we have no intention to repatriate the approximately $91.2$131.1 million of undistributed earnings of our foreign subsidiaries as of December 31, 2015,2016, if we were to repatriate these earnings, there would potentially be an adverse tax impact.
At December 31, 2015,2016, our debt service coverage ratio was 2.4, and, therefore, we were2.0, which is in compliance with the debt service coverage ratio covenant contained in the revolving credit facility provided by theour Credit Agreement. We were also in compliance with the other covenants contained in the revolving credit facility as of December 31, 20152016. The debt service coverage ratio is calculated at the end
of each fiscal quarter and is based on the following ratio: (1) the most recently ended four fiscal quarters of consolidated EBITDA, minus cash taxes paid, plus dividends paid from Industries to Holdings, minus unfunded capital expenditures, plus cash tax refundsrefunds; to (2) consolidated debt charges, that arewhich consist of consolidated cash interest expense plus scheduled principal payments on indebtedness, plus scheduled reductions in our term debt as defined in the Credit Agreement. The debt service coverage ratio must be greater than 1.0 and not less than 1.1 for any two consecutive fiscal quarters. While we expect to remain in compliance throughout 2016,2017, declines in sales volumes in 20162017 could adversely impact our ability to remain in compliance with certain of these financial covenants. Additionally, to the extent our customers are adversely affected by declines in the economy in general, they may not be able to pay their accounts payable to us on a timely basis or at all, which would make theour accounts receivable from them ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our ability to borrow under such facility.
The following table summarizes our principal contractual obligations and other commercial commitments over various future periods as of December 31, 2015:2016:
| Payments Due or Commitment Expiration Per Period | Payments Due or Commitment Expiration Per Period | |||||||||||||||||||||||||||||||||||||||
| (In millions) | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||||||||||||||||||
| Long-term debt obligations | $ | 450.3 | $ | 13.4 | $ | 19.7 | $ | 167.2 | $ | 250.0 | ||||||||||||||||||||||||||||||
| Short-term and long-term debt obligations | $ | 456.2 | $ | 24.7 | $ | 159.2 | $ | 271.2 | $ | 1.1 | ||||||||||||||||||||||||||||||
Interest obligations (1) | 106.6 | 20.3 | 40.6 | 40.6 | 5.1 | 86.3 | 20.3 | 40.6 | 25.4 | — | ||||||||||||||||||||||||||||||
| Operating lease obligations | 45.5 | 14.5 | 18.6 | 7.3 | 5.1 | 62.5 | 15.8 | 19.9 | 9.2 | 17.6 | ||||||||||||||||||||||||||||||
| Capital lease obligations | 17.7 | 4.4 | 6.9 | 6.4 | — | 18.8 | 6.1 | 8.0 | 4.7 | — | ||||||||||||||||||||||||||||||
Purchase obligations (2) | 174.0 | 172.1 | 1.8 | 0.1 | — | 172.0 | 170.2 | 1.7 | 0.1 | — | ||||||||||||||||||||||||||||||
Postretirement obligations (3) | 12.2 | 1.6 | 2.9 | 2.5 | 5.2 | 9.5 | 1.3 | 2.3 | 1.9 | 4.0 | ||||||||||||||||||||||||||||||
| Standby letters of credit and bank guarantees | 25.3 | 11.6 | 13.7 | — | — | 47.8 | 23.9 | 10.8 | 13.1 | — | ||||||||||||||||||||||||||||||
| Total | $ | 831.6 | $ | 237.9 | $ | 104.2 | $ | 224.1 | $ | 265.4 | $ | 853.1 | $ | 262.3 | $ | 242.5 | $ | 325.6 | $ | 22.7 | ||||||||||||||||||||
| (1) | Interest obligations are included on the Senior Notes |
| (2) | Purchase obligations include contractual obligations for raw materials and services. |
| (3) | Postretirement obligations include projected postretirement benefit payments to participants only through 2025. |
The table above excludes the liability for unrecognized income tax benefits disclosed in Note 107 to the consolidated financial statements included elsewhere herein, since we cannot predict with reasonable reliability, the timing of potential cash settlements with the respective taxing authorities.
We expect that funds provided by operations plus available borrowings under our revolving credit facility to be adequate to meet our cash requirements for at least the next twelve months.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financing or other relationships with unconsolidated entities or other persons or derivative instruments.
Critical Accounting Policies and Estimates
Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements.
On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the Board of Directors.
Revenue Recognition: We recognize revenue, other than from long-term contracts, when title is transferred to the customer, typically upon shipment. Revenue from long-term contracts (approximately 4% of consolidated revenue) is accounted for under the percentage of completion method, and recognized on the basis of the percentage each contract’s cost to date bears to the total estimated contract cost. We follow this method since reasonably dependable estimates of revenue and costs of a contract can be made. Revenue earned on contracts in process that are in excess of billings is classified in unbilled contract revenueOther current assets in the accompanying consolidated balance sheet.Consolidated Balance Sheet. Billings that are in excess of revenuerevenues earned on contracts in process are classified in Other accrued expenses onin the accompanying balance sheet. Our revenue recognition policies are in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
Allowance for Obsolete and Slow Moving Inventory: Inventories are valued using First-In, First-Out (“FIFO”) and stated at the lower of cost or market value and have been reduced by an allowance for obsolete and slow-moving inventories. The estimated allowance is based on management’s review of inventories on hand with minimal sales activity, which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for based on estimated selling prices less disposal costs. Though we consider these allowances adequate and proper, changes in economic conditions in specific markets in which we operate could have a material effect on reserve allowances required.
Impairment of Long-Lived Assets: In accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment,” management performs impairment tests of long-lived assets, including property and equipment, whenever an event occurs or circumstances change that indicate that the carrying value may not be recoverable or the useful life of the asset has changed. We review our long-lived assets for indicators of impairment such as a decision to idle certain facilities and consolidate certain operations, a current-period operating or cash flow loss or a forecast that demonstrates continuing losses associated with the use of a long-lived asset and the expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. When we identify impairment indicators, we determine whether the carrying amount of our long-lived assets is recoverable by comparing the carrying value to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. We consider whether impairments exist at the lowest level of independent identifiable cash flows within a reporting unit (for example, plant location, program level or asset level). If the carrying value of the assets exceeds the expected cash flows, we estimate the fair value of these assets by using appraisals or recent selling experience in selling similar assets or for certain assets with reasonably predictable cash flows by performing discounted cash flow analysis to estimate fair value when market information is not available to determine whether an impairment existed. An asset impairment charge of $4.0 million was recognized in the first quarter of 2016 due to sales volume declines in certain programs with an automotive customer.
Business Combinations, Goodwill and Indefinite-Lived Assets: Business combinations are accounted for using the purchase method of accounting. This method requires the Company to record assets and liabilities of the business acquired at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The Company uses valuation specialists to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions.
As required by ASC 350, “Intangibles - Goodwill and Other” (“ASC 350”), management performs impairment testing of goodwill at least annually, as of October 1 of each year, or more frequently if impairment indicators arise. In accordance with ASC 350, management tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment pursuant to ASC 280, “Segment Reporting”, or one level below the operating segment (component level) as determined by the
availability of discrete financial information that is regularly reviewed by operating segment management. Our reporting units
have been identified at the component level.
The quantitative goodwill impairment analysis is a two-step process. Step one compares the carrying amount of the reporting unit to its estimated fair value. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, step two is performed, where the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value of goodwill exceeds the implied fair value of goodwill, impairment exists and must be recognized. In applying the quantitative approach, we rely on a number of factors, including future business plans, actual and forecasted operating results, and market data. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; future capital expenditures and working capital needs; and operating margins used to project future cash flows for a reporting unit. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate ample sensitivity ranges into our analysis of goodwill impairment testing for a reporting unit, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.
Additionally, we test all indefinite-lived intangible assets for impairment at least annually, as of October 1 of each year, or more frequently if impairment indicators arise. We follow the guidance provided by ASC 350 that simplifies how an entity tests indefinite-lived intangible assets for impairment. It provides an option to first assessIn 2016, we utilized a quantitative approach. In 2015 and 2014, we utilized a combination of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount.and quantitative assessments. Our fiscal 2016, 2015 2014 and 20132014 annual impairment tests of each of our indefinite-lived intangible assets did not result in any impairment loss. The significant assumptions employed under this method include discount rates and revenue growth rates, including assumed terminal growth rates. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate ample sensitivity ranges into our analysis of intangible impairment testing, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.
See Notes 54 and 65 of the consolidated financial statements included elsewhere herein for additional disclosure on goodwill and indefinite-lived intangibles.
Income Taxes: In accordance with ASC 740, “Income Taxes” (“ASC 740”), we account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. Specifically, we measure gross deferred tax assets for deductible temporary differences and carryforwards, such as operating losses and tax credits, using the applicable enacted tax rates and apply the more likely than not measurement criterion.
In determining the adequacy of valuation allowances, we consider cumulative and anticipated amounts of domestic and international earnings or losses, anticipated amounts of foreign source income, as well asand the anticipated taxable income resulting from the reversal of future taxable temporary differences. We intend to maintain any recorded valuation allowances until sufficient positive evidence, for examplesuch as cumulative positive foreign earnings or additional foreign source income, exists to support reversal of the tax valuation allowances.
Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual annual effective income tax rates
and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.
During 2016, the Company reversed various income tax accruals totaling approximately $4.0 million relating to previous uncertain tax positions for which the statutes of limitations expired.
Pension and Other Postretirement Benefit Plans: We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans and postretirement benefit plans covering substantially all employees. The measurement of liabilities related to these plans is based on management’s assumptions related to future events, including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trends. Pension plan asset performance in the future will directly impact our net income. We have evaluated our pension and other postretirement benefit assumptions, considering current trends in interest rates and market conditions and believe our assumptions are appropriate.
Effective on December 31, 2015, the Company adopted a change in the method used to estimate the service and interest cost components of net periodic benefit cost for its defined benefit pension plans and postretirement benefit plans. Historically, the service and interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. For 2016, the Company used a spot rate approach by applying the specific spot rates along the yield curve to the relevant projected cash flows in the estimation of the service and interest components of benefit cost, resulting in a more precise measurement. These spot rates were determined as of the measurement date of December 31, 2015. This change does not affect the measurement of total benefit obligations. The change was accounted for as a change in estimate and, accordingly, was accounted for prospectively starting in 2016. The reductions in service and interest costs for 2016 associated with this change were $0.1 million and $0.6 million, respectively.
We consult with our actuaries at least annually when reviewing and selecting the discount rates to be used. The discount rates used by the Company are based on yields of various corporate and governmental bond indices with actual maturity dates that approximate the estimated benefit payment streams of the related pension plans. The discount rates are also reviewed in comparison with current benchmark indices, economic market conditions and the movement in the benchmark yield since the previous fiscal year. The liability weighted-average discount rate for the defined benefit pension plan is 4.13%3.91% for 2015,2016, compared with 3.82%4.13% in 2014.2015. For the other postretirement benefit plan, the rate is 3.63% for 2016 and 3.80% for 2015 and 3.60% for 2014.2015. This rate represents the interest rates generally available in the United States, which is the Company’s only country with other postretirement benefit liabilities. Another assumption that affects the Company’s pension expense is the expected long-term rate of return on assets. The Company’s pension plans are funded. The weighted-average expected long-term rate of return on assets assumption is 8.25% for 2015.2016. In determining the expected return on plan assets, we consider both historical performance and an estimate of future long-term rates of return on assets similar to those in our plan. We consult with and consider opinions of financial and actuarial experts in developing appropriate return assumptions.
Changes in the related pension benefit costs may occur in the future due to changes in assumptions. The following table illustrates the sensitivity to a change in the assumed discount rate and expected long-term rate of return on assets for the Company’s pension plans and other postretirement plans as of December 31, 2015:2016:
| Change in Assumption | Impact on 2015 Benefit Expense | Impact on 2015 Projected Benefit Obligation for Pension Benefits | Impact on 2015 Projected Benefit Obligation for Postretirement Benefits | Impact on 2016 Benefit Expense | Impact on 2016 Projected Benefit Obligation for Pension Benefits | Impact on 2016 Projected Benefit Obligation for Postretirement Benefits | ||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
| 50 basis point decrease in discount rate | $ | — | $ | 2.9 | $ | 0.5 | $ | — | $ | 2.9 | $ | 0.4 | ||||||||||||
| 50 basis point increase in discount rate | $ | — | $ | (2.8 | ) | $ | (0.5 | ) | $ | — | $ | (2.7 | ) | $ | (0.3 | ) | ||||||||
| 50 basis point decrease in expected return on assets | $ | 0.6 | $ | — | $ | — | $ | 0.6 | $ | — | $ | — | ||||||||||||
See Note 1311 of the consolidated financial statements included elsewhere herein for further analysis regarding the sensitivity of the key assumptions applied in the actuarial valuations.
Legal Contingencies: We are involved in a variety of claims, suits, investigations and administrative proceedings with respect to commercial, premises liability, product liability, employment and environmental matters arising from the ordinary course of business. We accrue reserves for legal contingencies, on an undiscounted basis, when it is probable that we have incurred a liability and we can reasonably estimate an amount. When a single amount cannot be reasonably estimated, but the cost can be estimated within a range and when no amount within the range is a better estimate than any other amount, we accrue the minimum amount in the range. Based upon facts and information currently available, we believe the amounts reserved are
adequate for such pending matters. We monitor the development of legal proceedings on a regular basis and will adjust our reserves when, and to the extent, additional information becomes available.
Recent and Future Adoption of Accounting Pronouncements Not Yet Adopted
Standards
Standards
Environmental
We have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certain clean-up efforts at several of these sites. However, our share of such costs has not been material and based on available information, our management does not expect our exposure at any of these locations to have a material adverse effect on our results of operations, liquidity or financial condition.
We have been named as one of many defendants in a number of asbestos-related personal injury lawsuits. Our cost of defending such lawsuits has not been material to date and, based upon available information, our management does not expect our future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial condition. We caution, however, that inherent in management’s estimates of our exposure are expected trends in claims severity, frequency and other factors that may materially vary as claims are filed and settled or otherwise resolved.
Seasonality; Variability of Operating Results
The timing of orders placed by our customers has varied with, among other factors, orders for customers’ finished goods, customer production schedules, competitive conditions and general economic conditions. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations in the operations of our business units. Such variability is particularly evident atin the industrial equipment business unit included in the Engineered Products segment, which typically ships a few large systems per year.
Forward-Looking Statements
This Annual Report on Form 10-K contains certain statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and similar expressions are intended to identify forward-looking statements.
These forward-looking statements, involveincluding statements regarding future performance of the Company, that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors that could cause actual results to differ materially from expectations include, but are not limited to, the following: our ability to successfully integrate acquired companies and achieve the expected results of such acquisitions; our substantial indebtedness; the uncertainty of the global economic environment; general business conditions and competitive factors, including pricing pressures and product innovation; demand for our products and services; raw material availability and pricing; fluctuations in energy costs; component part availability and pricing; changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate recent and future acquisitions into existing operations; the amounts and timing, if any, of purchases of our common stock; changes in general domestic economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations, including those related to the current global uncertainties and crises; adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities; our ability to meet various covenants, including financial covenants, contained in the agreements governing our indebtedness; disruptions, uncertainties or volatility in the credit markets that may limit our access to capital; potential disruption due to a partial or complete reconfiguration of the European Union; increasingly stringent domestic and foreign governmental regulations, including those affecting the environment;environment or import and export controls and other trade barriers; inherent uncertainties involved in assessing our potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims and disputes with customers; the
outcome of the review conducted by the special committee of our Boardboard of Directors;directors; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending; our ability to negotiate contracts with labor unions; our dependence on key management; our dependence on information systems; our ability to continue to pay cash dividends;dividends, and the other factors we describe under the “Item 1A. Risk Factors” included in this annual reportAnnual Report on Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or
otherwise, except as required by law. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved. The Company assumes no obligation to update the information in this Annual Report on Form 10-K, except to the extent required by law.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk, including changes in interest rates. We are subject to interest rate risk on borrowings under the floating rate revolving credit facility and term loan provided by our Credit Agreement, which consisted of borrowings of $196.9156.2 million at December 31, 20152016. A 100 basis point increase in the interest raterates would have resulted in an increase in interest expense of approximately $2.01.6 million duringfor the year ended December 31, 20152016.
Our foreign subsidiaries generally conduct business in local currencies. During 2015, we recorded an unfavorableWe face translation risks related to the changes in foreign currency translation adjustment of $11.8 million related to net assets located outside the United States. This foreign currency translation adjustment resulted primarily from the strengthening of the U.S. dollar. Ourexchange rates. Amounts invested in our foreign operations are also subject totranslated in U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as a component of Accumulated other customary riskscomprehensive loss in the Shareholders' equity section of operatingthe accompanying Consolidated Balance Sheets. Net sales and expenses in a global environment, such as unstable political situations, the effect of local laws and taxes, tariff increases and regulations and requirements for export licenses, the potential imposition of trade orour foreign exchange restrictions and transportation delays.
Our largest exposures to commodity prices relate to steel and natural gas prices, which have fluctuated widely in recent years. We do not have any commodity swap agreements, forward purchase or hedge contracts.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Financial Data
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Park-Ohio Holdings Corp.
We have audited the accompanying consolidated balance sheets of Park-Ohio Holdings CorpCorp. and Subsidiaries as of December 31, 20152016 and 2014,2015, and the related consolidated statements of income, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2015.2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Park-Ohio Holdings Corp. and Subsidiaries at December 31, 20152016 and 2014,2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015,2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Park-Ohio Holdings Corp. and Subsidiaries' internal control over financial reporting as of December 31, 2015,2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 14, 20169, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 14, 20169, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Park-Ohio Holdings Corp.
We have audited Park-Ohio Holdings Corp. and Subsidiaries’ internal control over financial reporting as of December 31, 2015,2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Park-Ohio Holdings Corp. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of GH Electrotermia S.A., which is included in the 2016 consolidated financial statements of Park-Ohio Holdings Corp. and Subsidiaries and constituted approximately seven percent of total assets as of December 31, 2016. Our audit of internal control over financial reporting of Park-Ohio Holdings Corp. and Subsidiaries also did not include an evaluation of the internal control over financial reporting of GH Electrotermia S.A.
In our opinion, Park-Ohio Holdings Corp. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Park-Ohio Holdings Corp. and Subsidiaries as of December 31, 20152016 and 2014,2015, and the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 20152016 of Park-Ohio Holdings Corp. and Subsidiaries and our report dated March 14, 20169, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 14, 20169, 2017
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Balance Sheets
| December 31, 2015 | December 31, 2014 | ||||||
| (In millions, except share and per share data) | |||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 62.0 | $ | 58.0 | |||
| Accounts receivable, less allowances for doubtful accounts of $3.3 million at December 31, 2015 and $4.1 million at December 31, 2014 | 199.3 | 208.0 | |||||
| Inventories, net | 249.0 | 238.4 | |||||
| Deferred tax assets | — | 28.9 | |||||
| Unbilled contract revenue | 26.5 | 26.8 | |||||
| Prepaid and other current assets | 12.8 | 22.1 | |||||
| Total current assets | 549.6 | 582.2 | |||||
| Net property, plant and equipment | 151.3 | 141.1 | |||||
| Goodwill | 82.0 | 89.5 | |||||
| Intangible assets, net | 92.8 | 88.1 | |||||
| Other long-term assets | 70.9 | 73.3 | |||||
| Total assets | $ | 946.6 | $ | 974.2 | |||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
| Current liabilities: | |||||||
| Trade accounts payable | $ | 129.7 | $ | 160.3 | |||
| Accrued expenses and other | 95.5 | 103.6 | |||||
| Total current liabilities | 225.2 | 263.9 | |||||
| Long-term liabilities, less current portion: | |||||||
| Debt | 450.3 | 434.4 | |||||
| Deferred tax liabilities | 20.4 | 43.9 | |||||
| Other postretirement benefits and other long-term liabilities | 38.5 | 40.1 | |||||
| Total long-term liabilities | 509.2 | 518.4 | |||||
| Park-Ohio Holdings Corp. and Subsidiaries shareholders' equity: | |||||||
| Capital stock, par value $1 a share | |||||||
| Serial preferred stock: Authorized -- 632,470 shares: Issued and outstanding -- none | — | — | |||||
| Common stock: Authorized - 40,000,000 shares; Issued - 14,653,985 shares in 2015 and 14,513,821 in 2014 | 14.7 | 14.5 | |||||
| Additional paid-in capital | 99.0 | 89.8 | |||||
| Retained earnings | 168.3 | 126.5 | |||||
| Treasury stock, at cost, 2,383,903 shares in 2015 and 2,014,692 shares in 2014 | (46.7 | ) | (31.2 | ) | |||
| Accumulated other comprehensive loss | (30.0 | ) | (14.0 | ) | |||
| Total Park-Ohio Holdings Corp. and Subsidiaries shareholders' equity | 205.3 | 185.6 | |||||
| Noncontrolling interest | 6.9 | 6.3 | |||||
| Total equity | 212.2 | 191.9 | |||||
| Total liabilities and shareholders' equity | $ | 946.6 | $ | 974.2 | |||
| Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| (In millions, except earnings per share data) | |||||||||||
| Net sales | $ | 1,463.8 | $ | 1,378.7 | $ | 1,203.2 | |||||
| Cost of sales | 1,228.6 | 1,144.2 | 992.2 | ||||||||
| Gross profit | 235.2 | 234.5 | 211.0 | ||||||||
| Selling, general and administrative expenses | 135.1 | 136.6 | 120.2 | ||||||||
| Litigation judgment and settlement costs | 2.2 | — | 5.2 | ||||||||
| Operating income | 97.9 | 97.9 | 85.6 | ||||||||
| Gain on acquisition of business | — | — | (0.6 | ) | |||||||
| Interest expense | 27.9 | 26.1 | 25.9 | ||||||||
| Income from continuing operations before income taxes | 70.0 | 71.8 | 60.3 | ||||||||
| Income tax expense | 21.3 | 24.9 | 19.4 | ||||||||
| Net income from continuing operations | 48.7 | 46.9 | 40.9 | ||||||||
| Income from discontinued operations, net of taxes | — | — | 3.0 | ||||||||
| Net income | 48.7 | 46.9 | 43.9 | ||||||||
| Net income attributable to noncontrolling interest | (0.6 | ) | (1.3 | ) | (0.5 | ) | |||||
| Net income attributable to ParkOhio common shareholders | $ | 48.1 | $ | 45.6 | $ | 43.4 | |||||
| Earnings per common share attributable to ParkOhio common shareholders - Basic: | |||||||||||
| Continuing operations | $ | 3.94 | $ | 3.77 | $ | 3.40 | |||||
| Discontinued operations | — | — | 0.25 | ||||||||
| Total | $ | 3.94 | $ | 3.77 | $ | 3.65 | |||||
| Earnings per common share attributable to ParkOhio common shareholders - Diluted: | |||||||||||
| Continuing operations | $ | 3.88 | $ | 3.68 | $ | 3.31 | |||||
| Discontinued operations | — | — | 0.25 | ||||||||
| Total | $ | 3.88 | $ | 3.68 | $ | 3.56 | |||||
| Weighted-average shares used to compute earnings per share: | |||||||||||
| Basic | 12.2 | 12.1 | 11.9 | ||||||||
| Diluted | 12.4 | 12.4 | 12.2 | ||||||||
| Dividend per common share | $ | 0.500 | $ | 0.375 | $ | — | |||||
| December 31, 2016 | December 31, 2015 | ||||||
| (In millions, except share data) | |||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 64.3 | $ | 62.0 | |||
| Accounts receivable, less allowances for doubtful accounts of $4.0 million at December 31, 2016 and $3.3 million at December 31, 2015 | 194.4 | 199.3 | |||||
| Inventories, net | 240.6 | 249.0 | |||||
| Other current assets | 53.4 | 39.3 | |||||
| Total current assets | 552.7 | 549.6 | |||||
| Property, plant and equipment, net | 167.1 | 151.3 | |||||
| Goodwill | 86.6 | 82.0 | |||||
| Intangible assets, net | 96.6 | 92.8 | |||||
| Pension assets | 61.7 | 58.9 | |||||
| Other long-term assets | 9.6 | 7.5 | |||||
| Total assets | $ | 974.3 | $ | 942.1 | |||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
| Current liabilities: | |||||||
| Trade accounts payable | $ | 133.6 | $ | 129.7 | |||
| Current portion of long-term debt and short-term debt | 30.8 | 17.8 | |||||
| Accrued employee compensation | 18.8 | 26.1 | |||||
| Other accrued expenses | 58.7 | 51.6 | |||||
| Total current liabilities | 241.9 | 225.2 | |||||
| Long-term liabilities, less current portion: | |||||||
| Debt | 439.0 | 445.8 | |||||
| Deferred income taxes | 27.7 | 20.4 | |||||
| Other long-term liabilities | 29.7 | 38.5 | |||||
| Total long-term liabilities | 496.4 | 504.7 | |||||
| Park-Ohio Holdings Corp. and Subsidiaries shareholders' equity: | |||||||
| Capital stock, par value $1 a share | |||||||
| Serial preferred stock: Authorized -- 632,470 shares: Issued and outstanding -- none | — | — | |||||
| Common stock: Authorized - 40,000,000 shares; Issued - 14,846,035 shares in 2016 and 14,653,985 in 2015 | 14.9 | 14.7 | |||||
| Additional paid-in capital | 108.8 | 99.0 | |||||
| Retained earnings | 193.6 | 168.3 | |||||
| Treasury stock, at cost, 2,446,111 shares in 2016 and 2,383,903 shares in 2015 | (48.6 | ) | (46.7 | ) | |||
| Accumulated other comprehensive loss | (42.7 | ) | (30.0 | ) | |||
| Total Park-Ohio Holdings Corp. and Subsidiaries shareholders' equity | 226.0 | 205.3 | |||||
| Noncontrolling interests | 10.0 | 6.9 | |||||
| Total equity | 236.0 | 212.2 | |||||
| Total liabilities and shareholders' equity | $ | 974.3 | $ | 942.1 | |||
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Income
| Year Ended December 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (In millions, except per share data) | |||||||||||
| Net sales | $ | 1,276.9 | $ | 1,463.8 | $ | 1,378.7 | |||||
| Cost of sales | 1,073.9 | 1,228.6 | 1,144.2 | ||||||||
| Gross profit | 203.0 | 235.2 | 234.5 | ||||||||
| Selling, general and administrative expenses | 129.8 | 135.1 | 136.6 | ||||||||
| Asset impairment charge | 4.0 | — | — | ||||||||
| Litigation judgment costs | — | 2.2 | — | ||||||||
| Operating income | 69.2 | 97.9 | 97.9 | ||||||||
| Interest expense | 28.2 | 27.9 | 26.1 | ||||||||
| Income before income taxes | 41.0 | 70.0 | 71.8 | ||||||||
| Income tax expense | 8.8 | 21.3 | 24.9 | ||||||||
| Net income | 32.2 | 48.7 | 46.9 | ||||||||
| Net income attributable to noncontrolling interest | (0.5 | ) | (0.6 | ) | (1.3 | ) | |||||
| Net income attributable to ParkOhio common shareholders | $ | 31.7 | $ | 48.1 | $ | 45.6 | |||||
| Earnings per common share attributable to ParkOhio common shareholders: | |||||||||||
| Basic | $ | 2.62 | $ | 3.94 | $ | 3.77 | |||||
| Diluted | $ | 2.58 | $ | 3.88 | $ | 3.68 | |||||
| Weighted-average shares used to compute earnings per share: | |||||||||||
| Basic | 12.1 | 12.2 | 12.1 | ||||||||
| Diluted | 12.3 | 12.4 | 12.4 | ||||||||
| Cash dividend per common share | $ | 0.50 | $ | 0.50 | $ | 0.375 | |||||
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
| Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| (In millions) | |||||||||||
| Net income | $ | 48.7 | $ | 46.9 | $ | 43.9 | |||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation (loss) | (11.8 | ) | (7.9 | ) | (2.6 | ) | |||||
| Pension and postretirement benefit adjustments, net of tax | (4.2 | ) | (9.5 | ) | 12.8 | ||||||
| Total other comprehensive (loss) income | (16.0 | ) | (17.4 | ) | 10.2 | ||||||
| Total comprehensive income, net of tax | 32.7 | 29.5 | 54.1 | ||||||||
| Comprehensive income attributable to noncontrolling interest | (0.6 | ) | (1.3 | ) | (0.5 | ) | |||||
| Comprehensive income attributable to ParkOhio common shareholders | $ | 32.1 | $ | 28.2 | $ | 53.6 | |||||
| Common Stock | ||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interest | Total | |||||||||||||||||||||||
| (In whole shares) | (In millions) | |||||||||||||||||||||||||||||
| Balance at December 31, 2012 | 14,109,255 | $ | 14.1 | $ | 76.9 | $ | 42.2 | $ | (24.6 | ) | $ | (6.8 | ) | $ | — | $ | 101.8 | |||||||||||||
| Other comprehensive income | — | — | — | 43.4 | — | 10.2 | 0.5 | 54.1 | ||||||||||||||||||||||
| Share-based compensation | — | — | 4.1 | — | — | — | — | 4.1 | ||||||||||||||||||||||
| Restricted stock awards and options exercised | 204,650 | 0.2 | (0.2 | ) | — | — | — | — | — | |||||||||||||||||||||
| Restricted stock cancelled | (4,000 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||
| Performance shares issued | 14,000 | — | 0.4 | — | — | — | — | 0.4 | ||||||||||||||||||||||
| Capital contribution from non-controlling interest | — | — | 0.5 | — | — | — | 4.5 | 5.0 | ||||||||||||||||||||||
| Purchase of treasury stock (62,694 shares) | — | — | — | — | (2.2 | ) | — | — | (2.2 | ) | ||||||||||||||||||||
| Exercise of stock options | 40,334 | 0.1 | 0.3 | — | — | — | — | 0.4 | ||||||||||||||||||||||
| Income tax effect of share-based compensation exercises and vesting | — | — | 0.4 | — | — | — | — | 0.4 | ||||||||||||||||||||||
| Balance at December 31, 2013 | 14,364,239 | 14.4 | 82.4 | 85.6 | (26.8 | ) | 3.4 | 5.0 | 164.0 | |||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 45.6 | — | (17.4 | ) | 1.3 | 29.5 | |||||||||||||||||||||
| Share-based compensation | — | — | 5.8 | — | — | — | — | 5.8 | ||||||||||||||||||||||
| Restricted stock awards | 140,250 | 0.1 | (0.1 | ) | — | — | — | — | — | |||||||||||||||||||||
| Restricted stock cancelled | (4,668 | ) | — | (0.1 | ) | — | — | — | — | (0.1 | ) | |||||||||||||||||||
| Performance shares issued | 14,000 | — | 0.7 | — | — | — | — | 0.7 | ||||||||||||||||||||||
| Dividends | — | — | — | (4.7 | ) | — | — | — | (4.7 | ) | ||||||||||||||||||||
| Purchase of treasury stock (79,733 shares) | — | — | — | — | (4.4 | ) | — | — | (4.4 | ) | ||||||||||||||||||||
| Income tax effect of share-based compensation exercises and vesting | — | — | 1.1 | — | — | — | — | 1.1 | ||||||||||||||||||||||
| Balance at December 31, 2014 | 14,513,821 | 14.5 | 89.8 | 126.5 | (31.2 | ) | (14.0 | ) | 6.3 | 191.9 | ||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 48.1 | — | (16.0 | ) | 0.6 | 32.7 | |||||||||||||||||||||
| Share-based compensation | — | — | 7.3 | — | — | — | — | 7.3 | ||||||||||||||||||||||
| Restricted stock awards | 72,500 | 0.1 | (0.1 | ) | — | — | — | — | — | |||||||||||||||||||||
| Restricted stock cancelled | (29,836 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||
| Performance shares issued | 14,000 | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Exercise of stock options | 83,500 | 0.1 | 1.1 | — | — | — | — | 1.2 | ||||||||||||||||||||||
| Dividends | — | — | — | (6.3 | ) | — | — | — | (6.3 | ) | ||||||||||||||||||||
| Purchase of treasury stock (369,211 shares) | — | — | — | — | (15.5 | ) | — | — | (15.5 | ) | ||||||||||||||||||||
| Income tax effect of share-based compensation exercises and vesting | — | — | 0.9 | — | — | — | — | 0.9 | ||||||||||||||||||||||
| Balance at December 31, 2015 | 14,653,985 | $ | 14.7 | $ | 99.0 | $ | 168.3 | $ | (46.7 | ) | $ | (30.0 | ) | $ | 6.9 | $ | 212.2 | |||||||||||||
| Year Ended December 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (In millions) | |||||||||||
| Net income | $ | 32.2 | $ | 48.7 | $ | 46.9 | |||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation adjustments | (13.9 | ) | (11.8 | ) | (7.9 | ) | |||||
| Pension and postretirement benefit adjustments, net of tax | 1.2 | (4.2 | ) | (9.5 | ) | ||||||
| Total other comprehensive (loss) income | (12.7 | ) | (16.0 | ) | (17.4 | ) | |||||
| Total comprehensive income, net of tax | 19.5 | 32.7 | 29.5 | ||||||||
| Comprehensive income attributable to noncontrolling interest | (0.5 | ) | (0.6 | ) | (1.3 | ) | |||||
| Comprehensive income attributable to ParkOhio common shareholders | $ | 19.0 | $ | 32.1 | $ | 28.2 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
| Common Stock | ||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interest | Total | |||||||||||||||||||||||
| (In whole shares) | (In millions) | |||||||||||||||||||||||||||||
| Balance at January 1, 2014 | 14,364,239 | $ | 14.4 | $ | 82.4 | $ | 85.6 | $ | (26.8 | ) | $ | 3.4 | $ | 5.0 | $ | 164.0 | ||||||||||||||
| Other comprehensive income (loss) | — | — | — | 45.6 | — | (17.4 | ) | 1.3 | 29.5 | |||||||||||||||||||||
| Share-based compensation | — | — | 5.8 | — | — | — | — | 5.8 | ||||||||||||||||||||||
| Restricted stock awards | 140,250 | 0.1 | (0.1 | ) | — | — | — | — | — | |||||||||||||||||||||
| Restricted stock cancelled | (4,668 | ) | — | (0.1 | ) | — | — | — | — | (0.1 | ) | |||||||||||||||||||
| Performance shares issued | 14,000 | — | 0.7 | — | — | — | — | 0.7 | ||||||||||||||||||||||
| Dividends | — | — | — | (4.7 | ) | — | — | — | (4.7 | ) | ||||||||||||||||||||
| Purchase of treasury stock (79,733 shares) | — | — | — | — | (4.4 | ) | — | — | (4.4 | ) | ||||||||||||||||||||
| Income tax effect of share-based compensation exercises and vesting | — | — | 1.1 | — | — | — | — | 1.1 | ||||||||||||||||||||||
| Balance at December 31, 2014 | 14,513,821 | 14.5 | 89.8 | 126.5 | (31.2 | ) | (14.0 | ) | 6.3 | 191.9 | ||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 48.1 | — | (16.0 | ) | 0.6 | 32.7 | |||||||||||||||||||||
| Share-based compensation | — | — | 7.3 | — | — | — | — | 7.3 | ||||||||||||||||||||||
| Restricted stock awards | 72,500 | 0.1 | (0.1 | ) | — | — | — | — | — | |||||||||||||||||||||
| Restricted stock cancelled | (29,836 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||
| Performance shares issued | 14,000 | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Exercise of stock options | 83,500 | 0.1 | 1.1 | — | — | — | — | 1.2 | ||||||||||||||||||||||
| Dividends | — | — | — | (6.3 | ) | — | — | — | (6.3 | ) | ||||||||||||||||||||
| Purchase of treasury stock (369,211 shares) | — | — | — | — | (15.5 | ) | — | — | (15.5 | ) | ||||||||||||||||||||
| Income tax effect of share-based compensation exercises and vesting | — | — | 0.9 | — | — | — | — | 0.9 | ||||||||||||||||||||||
| Balance at December 31, 2015 | 14,653,985 | 14.7 | 99.0 | 168.3 | (46.7 | ) | (30.0 | ) | 6.9 | 212.2 | ||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 31.7 | — | (12.7 | ) | 0.5 | 19.5 | |||||||||||||||||||||
| Share-based compensation | — | — | 10.6 | — | — | — | — | 10.6 | ||||||||||||||||||||||
| Restricted stock awards | 172,550 | 0.2 | (0.2 | ) | — | — | — | — | — | |||||||||||||||||||||
| Restricted stock cancelled | (4,000 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||
| Performance shares issued | 1,500 | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Exercise of stock options | 22,000 | — | 0.5 | — | — | — | — | 0.5 | ||||||||||||||||||||||
| Dividends | — | — | (6.2 | ) | — | — | — | (6.2 | ) | |||||||||||||||||||||
| Purchase of treasury stock (62,208 shares) | — | — | — | — | (1.9 | ) | — | — | (1.9 | ) | ||||||||||||||||||||
| Income tax effect of share-based compensation exercises and vesting | — | — | (0.6 | ) | — | — | — | — | (0.6 | ) | ||||||||||||||||||||
| Acquisition | — | — | — | — | — | — | 2.1 | 2.1 | ||||||||||||||||||||||
| Other | — | — | (0.5 | ) | (0.2 | ) | — | — | 0.5 | (0.2 | ) | |||||||||||||||||||
| Balance at December 31, 2016 | 14,846,035 | $ | 14.9 | $ | 108.8 | $ | 193.6 | $ | (48.6 | ) | $ | (42.7 | ) | $ | 10.0 | $ | 236.0 | |||||||||||||
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Cash Flows
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
| 2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
| OPERATING ACTIVITIES | (In millions) | (In millions) | ||||||||||||||||||||
| Net income | $ | 48.7 | $ | 46.9 | $ | 43.9 | $ | 32.2 | $ | 48.7 | $ | 46.9 | ||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||
| Depreciation and amortization | 28.7 | 23.2 | 19.2 | 29.5 | 28.7 | 23.2 | ||||||||||||||||
| Asset impairment charges | 4.0 | — | — | |||||||||||||||||||
| Share-based compensation | 7.3 | 5.8 | 4.7 | 10.6 | 7.3 | 5.8 | ||||||||||||||||
| Gain on sale of business and assets | — | (1.9 | ) | (6.0 | ) | |||||||||||||||||
| Gain on acquisition of business | — | — | (0.6 | ) | ||||||||||||||||||
| Deferred income taxes | 2.9 | 0.5 | (2.3 | ) | 2.8 | 2.9 | 0.5 | |||||||||||||||
| Other | — | 1.0 | — | — | — | (0.9 | ) | |||||||||||||||
| Changes in operating assets and liabilities, excluding business acquisitions: | ||||||||||||||||||||||
| Accounts receivable | 3.8 | (27.9 | ) | 8.5 | 13.7 | 3.8 | (27.9 | ) | ||||||||||||||
| Inventories and other current assets | (6.7 | ) | (23.3 | ) | (4.9 | ) | ||||||||||||||||
| Inventories | 8.6 | (15.4 | ) | (8.7 | ) | |||||||||||||||||
| Prepaid and other current assets | (5.5 | ) | 8.7 | (14.6 | ) | |||||||||||||||||
| Accounts payable and accrued expenses | (36.9 | ) | 27.9 | (7.5 | ) | (8.8 | ) | (36.9 | ) | 27.9 | ||||||||||||
| Other noncurrent liabilities | (8.1 | ) | 1.6 | (7.3 | ) | |||||||||||||||||
| Other | (3.1 | ) | 1.4 | 5.3 | (6.1 | ) | (4.7 | ) | 8.7 | |||||||||||||
| Net cash provided by operating activities | 44.7 | 53.6 | 60.3 | 72.9 | 44.7 | 53.6 | ||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||||
| Purchases of property, plant and equipment | (36.5 | ) | (25.8 | ) | (30.1 | ) | (28.5 | ) | (36.5 | ) | (25.8 | ) | ||||||||||
| Proceeds from sale and leaseback transactions | — | — | 7.4 | |||||||||||||||||||
| Proceeds from sale of assets | — | 2.1 | 14.2 | — | — | 2.1 | ||||||||||||||||
| Business acquisitions, net of cash acquired | — | (72.7 | ) | (45.8 | ) | (23.4 | ) | — | (72.7 | ) | ||||||||||||
| Net cash used by investing activities | (36.5 | ) | (96.4 | ) | (54.3 | ) | (51.9 | ) | (36.5 | ) | (96.4 | ) | ||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||||
| Proceeds from term loans and other debt | 2.3 | 14.2 | — | |||||||||||||||||||
| (Payments) proceeds from revolving credit facility, net | (36.2 | ) | 7.9 | 50.3 | ||||||||||||||||||
| Payments on term loans and other debt | (3.6 | ) | (6.6 | ) | (4.2 | ) | (4.5 | ) | (3.6 | ) | (6.6 | ) | ||||||||||
| Proceeds from revolving credit facility, net | 7.9 | 50.3 | 9.1 | |||||||||||||||||||
| Proceeds from capital lease credit facility, net | 13.8 | — | — | |||||||||||||||||||
| Proceeds from other long-term debt | 34.9 | 2.3 | 14.2 | |||||||||||||||||||
| (Payments) proceeds from capital lease facilities, net | (1.2 | ) | 13.8 | — | ||||||||||||||||||
| Dividends | (6.2 | ) | (6.3 | ) | (4.7 | ) | ||||||||||||||||
| Purchases of treasury stock | (1.9 | ) | (15.5 | ) | (4.4 | ) | ||||||||||||||||
| Income tax effect of share-based compensation exercises and vesting | (0.6 | ) | 0.9 | 1.1 | ||||||||||||||||||
| Payment of acquisition earn-out | (2.0 | ) | — | — | ||||||||||||||||||
| Other | 1.2 | (1.3 | ) | 0.8 | 0.5 | 1.2 | (1.3 | ) | ||||||||||||||
| Income tax effect of share-based compensation exercises and vesting | 0.9 | 1.1 | 0.4 | |||||||||||||||||||
| Dividend | (6.3 | ) | (4.7 | ) | — | |||||||||||||||||
| Purchase of treasury stock | (15.5 | ) | (4.4 | ) | (2.2 | ) | ||||||||||||||||
| Net cash provided by financing activities | 0.7 | 48.6 | 3.9 | |||||||||||||||||||
| Net cash (used) provided by financing activities | (17.2 | ) | 0.7 | 48.6 | ||||||||||||||||||
| Effect of exchange rate changes on cash | (4.9 | ) | (3.0 | ) | 0.9 | (1.5 | ) | (4.9 | ) | (3.0 | ) | |||||||||||
| Increase in cash and cash equivalents | 4.0 | 2.8 | 10.8 | 2.3 | 4.0 | 2.8 | ||||||||||||||||
| Cash and cash equivalents at beginning of period | 58.0 | 55.2 | 44.4 | |||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 62.0 | $ | 58.0 | $ | 55.2 | ||||||||||||||||
| Cash and cash equivalents at beginning of year | 62.0 | 58.0 | 55.2 | |||||||||||||||||||
| Cash and cash equivalents at end of year | $ | 64.3 | $ | 62.0 | $ | 58.0 | ||||||||||||||||
| Income taxes paid | $ | 19.0 | $ | 25.8 | $ | 25.0 | $ | 8.7 | $ | 19.0 | $ | 25.8 | ||||||||||
| Interest paid | $ | 25.7 | $ | 24.0 | $ | 24.8 | $ | 25.9 | $ | 25.7 | $ | 24.0 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
NOTE 1 — Summary of Significant Accounting Policies
Consolidation and Basis of Presentation: Park-Ohio Holdings Corp. (“ParkOhio” “we” or the “Company”) is a diversified international company providing world-class customers with a supply chain management outsourcing service, capital equipment used on their production lines, and manufactured components used to assemble their products. The Company operates through three reportable segments: Supply Technologies, Assembly Components and Engineered Products. The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated uponin consolidation. The Company does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. The Company leases certain real properties owned by related parties as described in Note 12.10. Transactions with related parties are not material to the Company’s financial position, results of operations or cash flows.
Accounting Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atin the date of theconsolidated financial statements and the reported amounts of revenues and expenses during the reporting period.statements. Actual results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are stated at the lower of first-in, first-out (“FIFO”) cost or market value.
| Major Classes of Inventories | December 31, 2015 | December 31, 2014 | December 31, 2016 | December 31, 2015 | ||||||||||
| (In millions) | (In millions) | |||||||||||||
| Finished goods | $ | 147.5 | $ | 146.0 | $ | 131.4 | $ | 147.5 | ||||||
| Work in process | 37.4 | 19.8 | 43.4 | 37.4 | ||||||||||
| Raw materials and supplies | 64.1 | 72.6 | 65.8 | 64.1 | ||||||||||
| Inventories, net | $ | 249.0 | $ | 238.4 | $ | 240.6 | $ | 249.0 | ||||||
| Other inventory items | ||||||||||||||
| Inventory reserves | $ | 29.0 | $ | 29.9 | $ | (30.2 | ) | $ | (29.0 | ) | ||||
| Consigned Inventory | $ | 10.3 | $ | 7.8 | $ | 12.2 | $ | 10.3 | ||||||
Property, Plant and Equipment: Property, plant and equipment areis carried at cost. Additions and improvements that extend the lives of assets are capitalized, and expenditures for repairs and maintenance are charged to operations as incurred. Depreciation and amortization of fixed assets, including capital leases, is computed principally by the straight-line method based on the estimated useful lives of the assets ranging from five to 40 years for buildings, and one to 20 years for machinery and equipment.equipment (with the majority in the range of three to ten years).
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes property, plant and equipment at December 31, 2015 and December 31, 2014:equipment:
| December 31, 2015 | December 31, 2014 | December 31, 2016 | December 31, 2015 | |||||||||||
| Property, plant and equipment: | ||||||||||||||
| Land and land improvements | $ | 8.5 | $ | 7.1 | $ | 11.3 | $ | 8.5 | ||||||
| Buildings | 65.3 | 68.4 | 74.9 | 65.3 | ||||||||||
| Machinery and equipment | 304.6 | 292.6 | 316.1 | 304.6 | ||||||||||
| Leased property under capital leases | 16.2 | 0.9 | 20.4 | 16.2 | ||||||||||
| Total property, plant and equipment | 394.6 | 369.0 | 422.7 | 394.6 | ||||||||||
| Less accumulated depreciation | 243.3 | 227.9 | 255.6 | 243.3 | ||||||||||
| Net property, plant and equipment | $ | 151.3 | $ | 141.1 | ||||||||||
| Property, plant and equipment, net | $ | 167.1 | $ | 151.3 | ||||||||||
Information regarding depreciation expense of property, plant and equipment follows:
| Year Ended December 31, | ||||||||
| 2015 | 2014 | 2013 | ||||||
| (In millions) | ||||||||
| Depreciation expense | 22.3 | 18.4 | 15.7 | |||||
| Year Ended December 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (In millions) | |||||||||||
| Depreciation expense | $ | 23.4 | $ | 22.3 | $ | 18.4 | |||||
Impairment of Long-Lived Assets: We assess the recoverability of long-lived assets (excluding goodwill) and identifiable acquired intangible assets with finite useful lives whenever impairment indicators exists.exist. When impairment indicators exist, we measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset to the expected net future undiscounted cash flows to be generated by that asset. The amount of impairment of identifiable
intangible assets with finite useful lives, if any, to be recognized is measured based on projected discounted future cash flows.
We measure the amount of impairment of other long-lived assets (excluding goodwill) as the amount by which the carrying
value of the asset exceeds the fair value of the asset, which is generally determined, based on projected discounted future cash
flows or appraised values. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed.
Goodwill and Indefinite-Lived Assets:In accordance with Accounting Standards Codification (“ASC”) 350,
“Intangibles — Goodwill and Other” (“ASC 350”), the Company does not amortize goodwill or indefinite-lived intangible assets recorded in connection with business acquisitions.
are tested annually for impairment as of October 1, or whenever events or changes in circumstances indicate there may be an
indicator of impairment in accordance with ASC 350.
Goodwill is tested for impairment at the reporting unit level and is based on the net assets for each reporting unit, including goodwill and intangible assets, compared to the fair value. Our reporting units have been identified at the component level. In accordance with Accounting Standard Update (“ASU”) 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step quantitative impairment test is unnecessary.
The Company completed its annual goodwill and indefinite-lived intangibles impairment test using quantitative or qualitative assessments for each year presented and confirmed no reporting unit was at risk of failing the impairment test for any periods presented herein.
See Notes 4 and 5 of the consolidated financial statements for additional disclosure on goodwill and indefinite-lived intangible is less than its carrying value. The Company completed its annual indefinite-lived intangible impairment assessment. As a result of this analysis, we concluded that no impairment existed.intangibles.
Fair Values of Financial Instruments: Certain financial instruments are required to be recorded at fair value. The Company measures financial assets and liabilities at fair value in three levels of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:
Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
45
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Level 3 — Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
Changes in assumptions or estimation methods could affect the fair value estimates; however, we do not believe any such changes would have a material impact on our financial condition, results of operations or cash flows. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and borrowings under the Credit Agreement (as defined in Note 9)6) approximate fair value at December 31, 2016 and December 31, 2015 and December 31, 2014 because of the short-term nature of these instruments. The fair values of long-term debt and pension plan assets are disclosed in Note 96 and Note 13,11, respectively.
The Company has not changed its valuation techniques for measuring fair value during 2015,2016, and there were no transfers between levels during the periods presented.
Income Taxes: The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the current enacted tax rates. In determining these amounts, management determined the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, cumulative earnings and losses, expectations of future earnings, taxable income and the extended period of time over which the postretirement benefits will be paid and accordingly records valuation allowances if, based on the weight of available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized as required by ASC 740, “Income Taxes” (“ASC 740”).
Share-Based Compensation: The Company follows the provisions of ASC 718, “Compensation — Stock Compensation” (“ASC 718”), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their grant date fair values. Compensation expense for awards with service conditions only that are subject to graded vesting is recognized on a straight-line basis over the term of the vesting period. Compensation expense of performance-based awards is recognized as an expense over the vesting periods of the awards using the accelerated attribution method once performance is deemed probable.
Under the provisions of the Company’s 2015 Equity and Incentive Compensation Plan (“2015 Plan”), which is administered by the Compensation Committee of the Company’s Board of Directors, incentive stock options, non-statutory stock options, stock appreciation rights (“SARs”), restricted share units, performance shares or stock awards may be awarded to directors and all employees of the Company and its subsidiaries. The 2015 Plan replaces in its entirety the 1998 Long-Term Incentive Plan, as amended (“1998 Plan”), but shares that remained available under the 1998 Plan were added to the aggregate share limit under that 2015 Plan. Stock options will be exercisable in whole or in installments as may be determined provided that no options will be exercisable more than ten years from date of grant. The exercise price will be the fair value at the date of grant. The aggregate number of shares of the Company’s common stock that may be awarded under the 2015 Plan is 650,000, plus the 106,806 shares that remained available for award under the 1998 Plan, all of which may be incentive stock options. No more than 400,000 shares shall be the subject of awards to any individual participant in any one calendar year.367,977.
Revenue Recognition: The Company recognizes revenue, other than from long-term contracts, when title is transferred to the customer, typically upon shipment. Revenue from long-term contracts (approximately 4% of consolidated revenue) is accounted for under the percentage of completion method, and recognized on the basis of the percentage each contract’s cost to date bears to the total estimated contract cost. We follow this method since reasonably dependable estimates of revenue and costs of a contract can be made. Revenue earned on contracts in process that are in excess of billings is classified inas unbilled contract revenues in Other current assets in the accompanying consolidated balance sheets.Consolidated Balance Sheet. Billings that are in excess of revenues earned on contracts in process are classified in Other accrued expenses in the accompanying balance sheets. Our revenue recognition policies are in accordance with the SEC's Staff Accounting Bulletin No. 104, “Revenue Recognition.”Consolidated Balance Sheet and totaled $22.7 million and $16.8 million at December 31, 2016 and 2015, respectively.
Cost of Sales: Cost of sales is primarily comprised of direct materials and supplies consumed in the manufacture of product, as well asproduct; manufacturing labor, depreciation expense and direct overhead expense necessary to acquireexpense; and convert the purchased materials and supplies into finished product. Cost of sales also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable are recorded at net realizable value. Accounts receivable are reduced by an allowance for amounts that may become uncollectable in the future. The Company’s policy is to identify and reserve for specific collectability concerns based on customers’ financial condition and payment history as well as a general reserve based on historical trends and other information. During 20152016 and 20142015, we sold approximately $118.5$81.6 million and $95.0$118.5 million, respectively, of accounts receivable to mitigate accounts receivable concentration risk and to provide additional financing capacity. In compliance with ASC 860, “Transfers and Servicing”, sales of accounts receivable are
46
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reflected as a reduction of accounts receivable in the Consolidated Balance Sheets and the proceeds are included in the cash flows from operating activities in the Consolidated Statements of Cash flows. In 20152016 and 20142015, an expense in the amount of $0.6$0.5 million and $0.5$0.6 million, respectively, related to the discount on sale of accounts receivable is recorded in the Consolidated Statements of Income.
Concentration of Credit Risk: The Company sells its products to customers in diversified industries. The Company performs ongoing credit evaluations of its customers’ financial condition but does not require collateral to support customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. As of December 31, 2015,2016, the Company had uncollateralized receivables with six customers in the automotive industry, each with several locations, aggregating $36.7$37.8 million, which represented approximately 18%19% of the Company’s trade accounts receivable. During 2015,2016, sales to these customers amounted to approximately $315.7$276.9 million, which represented approximately 22% of the Company’s net sales.
Environmental: The Company accruesexpenses environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Costs that extend the life of the related property or
mitigate or prevent future environmental contamination are capitalized. The Company records a liability when environmental assessments and/or remedial efforts are probable and can be reasonably estimated. The estimated liability of the Company is not reduced for possible recoveries from insurance carriers and is undiscounted.
Foreign Currency Translation: The functional currency for a majority of subsidiaries outside the United States is the local currency. Financial statements for these subsidiaries are translated into U.S. dollars at year-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. The resulting translation adjustments are recorded in accumulatedAccumulated other comprehensive income (loss) in shareholders’ equity. Gains and losses resulting from foreign currency translations, including intercompany transactions that are not considered permanent investments, are included in the Consolidated Statements of Income.
Warranties: Warranty liabilities are primarily associated with the Company’s industrial equipment business unit and the fluid routing solutions business. The Company estimates the amount of warranty claims on sold products that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. The following table presents the changes in the Company’s product warranty liability:
| Year Ended December 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (In millions) | |||||||||||
| Balance at January 1, | $ | 6.1 | $ | 6.9 | $ | 5.4 | |||||
| Claims paid during the year | (3.7 | ) | (4.7 | ) | (2.9 | ) | |||||
| Warranty expense | 2.0 | 4.0 | 4.0 | ||||||||
| Acquired warranty liabilities | 2.8 | — | — | ||||||||
| Other | (0.1 | ) | (0.1 | ) | 0.4 | ||||||
| Balance at December 31, | $ | 7.1 | $ | 6.1 | $ | 6.9 | |||||
Weighted-Average Number of Shares Used in Computing Earnings Per Share: The following table sets forth the weighted-average number of shares used in the computation of earnings per share:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||
| (In whole shares) | (In whole shares) | |||||||||||||||
| Weighted average basic shares outstanding | 12,215,425 | 12,097,018 | 11,936,772 | 12,126,264 | 12,215,425 | 12,097,018 | ||||||||||
| Plus dilutive impact of employee stock awards | 167,526 | 279,058 | 295,393 | 148,188 | 167,526 | 279,058 | ||||||||||
| Weighted average diluted shares outstanding | 12,382,951 | 12,376,076 | 12,232,165 | 12,274,452 | 12,382,951 | 12,376,076 | ||||||||||
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Outstanding stock options with exercise prices greater than the average price of the common shares are anti-dilutive and are not included in the computation of diluted earnings per share. For the year ended December 31, 20152016 and 20142015, the anti-dilutive shares were insignificant.
Accounting Pronouncements Adopted
In NovemberApril 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification2015-03, “Interest-Imputation of Deferred Taxes,Interest: Simplifying the Presentation of Debt Issuance Costs.” the adoption of which is reflectedThe ASU requires an entity to present debt issuance costs in the accompanying Consolidated Balance Sheets.balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the debt issuance costs will continue to be reported as interest expense. The provisions wereCompany adopted this ASU during the first quarter of 2016 and applied this standard retrospectively to 2015. The new guidance impacted only the presentation of the Company's financial position and did not affect the Company's results of operations or cash flows. Refer to Note 6 for the impact on a prospective basis. Based onour consolidated balance sheet at December 31, 2015.
In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent).” Under the new accounting guidance, all deferred tax amountsinvestments measured at net asset value (“NAV”), as a practical expedient for fair value, are classifiedexcluded from the fair value hierarchy. Removing investments measured using the practical expedient from the fair value hierarchy is intended to eliminate the diversity in practice that currently exists with respect to the categorization of these investments. The new guidance was effective for the Company on January 1, 2016. The guidance impacted the presentation of certain pension related assets that use NAV as long-term in 2015.a practical expedient. See Note 11 for additional information.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which was the result of a joint project by the FASB and International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. generally accepted accounting principles and International Financial Reporting Standards. The issuance of a comprehensive and converged standard on revenue recognition is expected to enable financial statement users to better understand and consistently analyze an entity’s revenue across industries, transactions, and geographies. The ASU will require additional disclosures to help financial statement users better understand the nature, amount, timing, and potential uncertainty of the revenue that is recognized. The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The ASU will require either retrospective application to each prior reporting period presented or retrospective application with the cumulative effect of initially applying the standard recognized at the date of adoption. The Company is currentlyin the process of analyzing the impact of ASU 2014-09, and the related ASUs, across all its businesses. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. The Company expects to adopt the new standard using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings upon adoption effective January 1, 2018. We are still evaluating the impact of adopting this guidance.
In April 2015, the FASB issued ASU 2015-03, "Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs." The amendment requiresand an entity to present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortizationestimation of the debt issuance costs will continue toimpact cannot be reported as interest expense. In August 2015, the FASB issued an amendment tomade at this standard to address line of credit arrangements, which would allow an entity to present debt issuance costs as an asset and subsequently amortize the debt issuance costs ratably over the term of the line of credit arrangement. This ASU is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The new guidance will be applied retrospectively to each prior period presented. The new guidance will only impact the presentation of the Company's financial position and is not expected to materially affect the Company's results of operations or other financial statement disclosures.time.
In January 2016, the FASB issued ASU 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Board also is addressing measurement of credit losses on financial assets in a separate project. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is not permitted. The new guidance will be applied prospectively. The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The amendment establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. This ASU is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest
comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. The Company is currently evaluating the impact of adopting this guidance.
48
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The ASU simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The ASU is effective for fiscal years beginning with the first quarter of 2017, with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The objective of the ASU is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to uses of the financial statements. The ASU is effective for fiscal years beginning with the first quarter of 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance.
No other recently issued ASUs are expected to have a material impact on our results of operations, financial condition or liquidity.
NOTE 2 — Segments
The Company operates through three reportable segments: Supply Technologies, Assembly Components and Engineered Products. Supply Technologies provides our customers with Total Supply Management™ services for a broad range of high-volume, specialty production components. Total Supply Management™ manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation, and includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support. Assembly Components manufactures cast aluminum components, automotive and industrial rubber and thermoplastic products, gasoline direct injection systems, fuel filler and hydraulic assemblies for automotive, agricultural equipment, construction equipment, heavy-duty truck and marine equipment industries. Assembly Componentsindustries, and also provides value-added services such as design and engineering, machining and assembly. Engineered Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of high quality products engineered for specific customer applications.
| Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| (In millions) | |||||||||||
| Net sales: | |||||||||||
| Supply Technologies | $ | 578.7 | $ | 559.6 | $ | 471.9 | |||||
| Assembly Components | 569.2 | 490.5 | 412.8 | ||||||||
| Engineered Products | 315.9 | 328.6 | 318.5 | ||||||||
| $ | 1,463.8 | $ | 1,378.7 | $ | 1,203.2 | ||||||
| Segment operating income: | |||||||||||
| Supply Technologies | $ | 50.3 | $ | 42.5 | $ | 35.0 | |||||
| Assembly Components | 57.9 | 42.0 | 31.8 | ||||||||
| Engineered Products | 20.9 | 42.7 | 47.1 | ||||||||
| Total segment operating income | 129.1 | 127.2 | 113.9 | ||||||||
| Corporate costs | (29.0 | ) | (29.3 | ) | (23.1 | ) | |||||
| Litigation judgment and settlement costs | (2.2 | ) | — | (5.2 | ) | ||||||
| Gain on acquisition of business | — | — | 0.6 | ||||||||
| Interest expense | (27.9 | ) | (26.1 | ) | (25.9 | ) | |||||
| Income from continuing operations before income taxes | $ | 70.0 | $ | 71.8 | $ | 60.3 | |||||
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| (In millions) | |||||||||||
| Identifiable assets: | |||||||||||
| Supply Technologies | $ | 276.3 | $ | 277.6 | $ | 241.7 | |||||
| Assembly Components | 344.8 | 340.5 | 276.7 | ||||||||
| Engineered Products | 243.1 | 246.9 | 183.1 | ||||||||
| General corporate | 82.4 | 109.2 | 117.2 | ||||||||
| $ | 946.6 | $ | 974.2 | $ | 818.7 | ||||||
| Depreciation and amortization expense: | |||||||||||
| Supply Technologies | $ | 4.7 | $ | 4.5 | $ | 3.0 | |||||
| Assembly Components | 18.6 | 14.2 | 11.6 | ||||||||
| Engineered Products | 4.2 | 3.3 | 3.4 | ||||||||
| General corporate | 1.2 | 1.2 | 1.2 | ||||||||
| $ | 28.7 | $ | 23.2 | $ | 19.2 | ||||||
| Capital expenditures: | |||||||||||
| Supply Technologies | $ | 3.7 | $ | 5.8 | $ | 3.8 | |||||
| Assembly Components | 27.3 | 14.0 | 21.5 | ||||||||
| Engineered Products | 5.5 | 2.4 | 3.6 | ||||||||
| General corporate | — | 1.5 | 1.2 | ||||||||
| $ | 36.5 | $ | 23.7 | $ | 30.1 | ||||||
| Year Ended December 31, | ||||||||
| 2015 | 2014 | 2013 | ||||||
| Supply Technologies: | ||||||||
| Supply Technologies | 87 | % | 88 | % | 87 | % | ||
| Engineered specialty products | 13 | % | 12 | % | 13 | % | ||
| 100 | % | 100 | % | 100 | % | |||
| Assembly Components: | ||||||||
| Fluid routing | 50 | % | 49 | % | 54 | % | ||
| Aluminum products | 41 | % | 43 | % | 37 | % | ||
| Rubber and plastics | 7 | % | 6 | % | 7 | % | ||
| Screw products | 2 | % | 2 | % | 2 | % | ||
| 100 | % | 100 | % | 100 | % | |||
| Engineered Products: | ||||||||
| Industrial equipment business | 81 | % | 78 | % | 77 | % | ||
| Forged and machined products | 19 | % | 22 | % | 23 | % | ||
| 100 | % | 100 | % | 100 | % | |||
| Year Ended December 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (In millions) | |||||||||||
| Net sales: | |||||||||||
| Supply Technologies | $ | 502.1 | $ | 578.7 | $ | 559.6 | |||||
| Assembly Components | 529.4 | 569.2 | 490.5 | ||||||||
| Engineered Products | 245.4 | 315.9 | 328.6 | ||||||||
| $ | 1,276.9 | $ | 1,463.8 | $ | 1,378.7 | ||||||
| Segment operating income: | |||||||||||
| Supply Technologies | $ | 40.0 | $ | 50.3 | $ | 42.5 | |||||
| Assembly Components | 50.5 | 57.9 | 42.0 | ||||||||
| Engineered Products | 10.6 | 20.9 | 42.7 | ||||||||
| Total segment operating income | 101.1 | 129.1 | 127.2 | ||||||||
| Corporate costs | (27.9 | ) | (29.0 | ) | (29.3 | ) | |||||
| Asset impairment charge | (4.0 | ) | — | — | |||||||
| Litigation judgment costs | — | (2.2 | ) | — | |||||||
| Interest expense | (28.2 | ) | (27.9 | ) | (26.1 | ) | |||||
| Income before income taxes | $ | 41.0 | $ | 70.0 | $ | 71.8 | |||||
| Year Ended December 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (In millions) | |||||||||||
| Capital expenditures: | |||||||||||
| Supply Technologies | $ | 6.1 | $ | 3.7 | $ | 5.8 | |||||
| Assembly Components | 16.9 | 27.3 | 14.0 | ||||||||
| Engineered Products | 5.5 | 5.5 | 2.4 | ||||||||
| Corporate | — | — | 1.5 | ||||||||
| $ | 28.5 | $ | 36.5 | $ | 23.7 | ||||||
| Depreciation and amortization expense: | |||||||||||
| Supply Technologies | $ | 4.7 | $ | 4.7 | $ | 4.5 | |||||
| Assembly Components | 20.1 | 18.6 | 14.2 | ||||||||
| Engineered Products | 4.1 | 4.2 | 3.3 | ||||||||
| Corporate | 0.6 | 1.2 | 1.2 | ||||||||
| $ | 29.5 | $ | 28.7 | $ | 23.2 | ||||||
| Identifiable assets: | |||||||||||
| Supply Technologies | $ | 262.0 | $ | 276.3 | $ | 277.6 | |||||
| Assembly Components | 332.9 | 344.8 | 340.5 | ||||||||
| Engineered Products | 304.9 | 243.1 | 246.9 | ||||||||
| Corporate | 74.5 | 77.9 | 104.1 | ||||||||
| $ | 974.3 | $ | 942.1 | $ | 969.1 | ||||||
50
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The percentage of net sales by product line included in each segment was as follows:
| Year Ended December 31, | ||||||||
| 2016 | 2015 | 2014 | ||||||
| Supply Technologies: | ||||||||
| Supply Technologies | 85 | % | 87 | % | 88 | % | ||
| Engineered specialty products | 15 | % | 13 | % | 12 | % | ||
| 100 | % | 100 | % | 100 | % | |||
| Assembly Components: | ||||||||
| Fuel, rubber and plastic products | 67 | % | 59 | % | 57 | % | ||
| Aluminum products | 33 | % | 41 | % | 43 | % | ||
| 100 | % | 100 | % | 100 | % | |||
| Engineered Products: | ||||||||
| Industrial equipment business | 79 | % | 81 | % | 78 | % | ||
| Forged and machined products | 21 | % | 19 | % | 22 | % | ||
| 100 | % | 100 | % | 100 | % | |||
The Company’s approximate percentage of net sales by geographic region was as follows:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||
| United States | 72 | % | 74 | % | 74 | % | 71 | % | 72 | % | 74 | % | ||||
| Asia | 8 | % | 6 | % | 6 | % | 8 | % | 8 | % | 6 | % | ||||
| Europe | 7 | % | 6 | % | 5 | % | 8 | % | 7 | % | 6 | % | ||||
| Canada | 6 | % | 7 | % | 8 | % | 6 | % | 6 | % | 7 | % | ||||
| Mexico | 6 | % | 5 | % | 5 | % | 6 | % | 6 | % | 5 | % | ||||
| Other | 1 | % | 2 | % | 2 | % | 1 | % | 1 | % | 2 | % | ||||
| 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
The basis for attributing revenue to individual geographic regions is final shipping destination.customer location.
At December 31, 2016, 2015 and 2014, approximately 68%, 71% and 2013, approximately 71%, 72% and 77%, respectively, of the Company’s assets were maintainedlocated in the United States.
NOTE 3 — Acquisitions
In December 2016, the Company acquired all the outstanding capital stock of GH Electrotermia S.A. (“GH”), headquartered in Valencia, Spain, for $23.4 million in cash (net of $6.3 million cash acquired), plus the assumption of $13.9 million in debt. GH, which had 2016 revenues of approximately $55 million, is a global leader in the design, manufacturing and testing of induction heating equipment and heat treat solutions; operates through its locations in Spain, India, Germany, China and the United States; and strengthens our position as the global leader of induction products and adds key technologies to our already diverse portfolio of induction hardening capabilities. The purchase agreement provides payment of contingent consideration of up to $2.1 million based on achievement of certain EBITDA targets over 2016 and 2017. The estimated fair value of the earn-out, valued using level 3 inputs, was approximately $1.1 million at the date of the acquisition.
The allocation of the purchase price is subject to finalization of the Company's determination of the fair value of assets acquired and liabilities assumed as of the acquisition date and could materially differ from those presented above. The Company has not yet finalized its analysis of the fair value of property, plant and equipment; intangible assets; noncontrolling interest, deferred taxes and certain other assets and liabilities. The final allocation is expected to be completed as soon as practicable but no later than twelve months after the acquisition date. Below is the estimated purchase price allocation related to the acquisition of GH:
51
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| (In millions) | |||
| Net assets acquired | $ | 24.7 | |
| Goodwill | 6.1 | ||
| Total consideration | 30.8 | ||
| Less: | |||
| Cash acquired | (6.3 | ) | |
| Contingent consideration | (1.1 | ) | |
| Cash paid for acquisition, net of cash acquired | $ | 23.4 | |
In December 2014, the Company acquired all the outstanding capital stock of Saet S.p.A. (“Saet”) for $22.1 million in cash. Saet is a leader in the design, manufacturing and testing of induction heating equipment and heat treat solutions through its locations in Italy, China, India and Tennessee. The financial results of Saet are included in the Company's Engineered Products segment from the date of acquisition. Saet's sales for the year ended December 31, 2013 were approximately $35.9 million.
In October 2014, the Company acquired all the outstanding capital stock of Autoform Tool and Manufacturing (“Autoform”) for a total purchase consideration of $48.9 million in cash. The acquisition was funded from borrowings under the revolving credit facility provided by the Credit Agreement. Autoform is a supplier of high pressure fuel lines and fuel rails used in Gasoline Direct Injection systems across a large number of engine platforms. Autoform's production facilities are located in Indiana. The financial results of Autoform are included in the Company's Assembly Components segment from the date of acquisition.
In June 2014, the Company acquired all the outstanding capital stock of Apollo Aerospace Group (“Apollo”) for $6.5 million, net of cash acquired. Apollo is a supply chain management services company providing Class C production components and supply chain solutions to aerospace customers worldwide. The financial results of Apollo are included in the Company's Supply Technologies segment from the date of acquisition.
The acquisitions of Autoform and Apollo were accounted for under the acquisition method of accounting. The purchase price allocations were preliminary as of December 31, 2014. The Apollo purchase agreement providesprovided for potential payment of contingent consideration of up to $2.4 million based on achievement of certain EBITDA targets over two years. The fair value of the earn-out, valued using level 3 inputs, was approximately $1.1 million at the date of the acquisition for a total purchase consideration of $6.5 million and as of December 31, 2015, the fair value of the earn-out was approximately $2.1 million. The contingent consideration, if earned, would be paid inIn the third quarter of 2016. Based on2016, the purchase price allocationCompany paid $2.0 million for these acquisitions,this earn-out.
NOTE 4 — Goodwill
The changes in the carrying amount of goodwill of $5.7 million and was recorded. Intangible assets of $3.0 million were recorded forby reportable segment:
| Supply Technologies | Assembly Components | Engineered Products | Total | ||||||||||||
| (In millions) | |||||||||||||||
| Balance at January 1, 2014 | $ | 6.4 | $ | 49.0 | $ | 5.0 | $ | 60.4 | |||||||
| Acquisitions | 0.7 | 5.0 | 23.2 | 28.9 | |||||||||||
| Foreign currency translation | 0.5 | — | (0.3 | ) | 0.2 | ||||||||||
| Balance at December 31, 2014 | 7.6 | 54.0 | 27.9 | 89.5 | |||||||||||
| Acquisition adjustments | — | 0.1 | (6.3 | ) | (6.2 | ) | |||||||||
| Foreign currency translation | (0.4 | ) | — | (0.9 | ) | (1.3 | ) | ||||||||
| Balance at December 31, 2015 | 7.2 | 54.1 | 20.7 | 82.0 | |||||||||||
| GH acquisition | — | — | 6.1 | 6.1 | |||||||||||
| Foreign currency translation | (1.1 | ) | — | (0.4 | ) | (1.5 | ) | ||||||||
| Balance at December 31, 2016 | $ | 6.1 | $ | 54.1 | $ | 26.4 | $ | 86.6 | |||||||
Goodwill associated with the GH, Apollo and $25.5 million were recordedSaet acquisitions is not deductible for Autoform.income tax purposes.
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, | |||
| 2013 | |||
| Net sales | $ | 5.2 | |
| Loss from discontinued operations before tax | $ | (1.3 | ) |
| Income tax benefit from operations | 0.5 | ||
| Net loss from discontinued operations | (0.8 | ) | |
| Gain on sale of business before tax | 5.3 | ||
| Income tax expense from gain on sale of business | (1.5 | ) | |
| Net gain on sale of business | 3.8 | ||
| Income from discontinued operations, net of taxes | $ | 3.0 | |
| Supply Technologies | Assembly Components | Engineered Products | Total | ||||||||||||
| (In millions) | |||||||||||||||
| Balance at January 1, 2013 | $ | — | $ | 44.8 | $ | 4.9 | $ | 49.7 | |||||||
| Acquisitions | 6.2 | 4.2 | — | 10.4 | |||||||||||
| Foreign currency translation | 0.2 | — | 0.1 | 0.3 | |||||||||||
| Balance at December 31, 2013 | 6.4 | 49.0 | 5.0 | 60.4 | |||||||||||
| Acquisitions | 0.7 | 5.0 | 23.2 | 28.9 | |||||||||||
| Foreign currency translation | 0.5 | — | (0.3 | ) | 0.2 | ||||||||||
| Balance at December 31, 2014 | 7.6 | 54.0 | 27.9 | 89.5 | |||||||||||
| Acquisitions | — | 0.1 | (6.3 | ) | (6.2 | ) | |||||||||
| Foreign currency translation | (0.4 | ) | — | (0.9 | ) | (1.3 | ) | ||||||||
| Balance at December 31, 2015 | $ | 7.2 | $ | 54.1 | $ | 20.7 | $ | 82.0 | |||||||
The 2014 increase in goodwill from December 31, 2013 is duerelates to the acquisitions of Apollo, in the second quarter of 2014 and Autoform and Saet in the fourth quarter of 2014. Apollo is included in the Supply Technologies reportable segment, Autoform is included in the Assembly Components reportable segment and Saet is included in the Engineered Products reportable segment. The goodwill associated with the Autoform transaction is deductible for income tax purposes. The goodwill associated with the Apollo and Saet transactions is not deductible for income tax purposes.Saet.
NOTE 65 — Other Intangible Assets
Information regarding other intangible assets as of December 31, 2015 and December 31, 2014 follows:
| December 31, 2015 | December 31, 2014 | December 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||
| Weighted Average Useful Life (Years) | Acquisition Costs | Accumulated Amortization | Net | Acquisition Costs | Accumulated Amortization | Net | Weighted Average Useful Life (Years) | Gross Value | Accumulated Amortization | Net Value | Gross Value | Accumulated Amortization | Net Value | |||||||||||||||||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Non-contractual customer relationships | 12.0 | $ | 76.0 | $ | 18.5 | $ | 57.5 | $ | 77.3 | $ | 13.2 | $ | 64.1 | |||||||||||||||||||||||||||||||||||||
| Customer relationships | 11.1 | $ | 75.5 | $ | 23.7 | $ | 51.8 | $ | 76.0 | $ | 18.5 | $ | 57.5 | |||||||||||||||||||||||||||||||||||||
| Indefinite-lived tradenames | * | 18.7 | * | 18.7 | 14.0 | * | 14.0 | * | 22.4 | * | 22.4 | 18.7 | * | 18.7 | ||||||||||||||||||||||||||||||||||||
| Technology | 18.9 | 15.9 | 0.9 | 15.0 | 8.2 | 0.1 | 8.1 | 18.6 | 23.0 | 1.8 | 21.2 | 15.9 | 0.9 | 15.0 | ||||||||||||||||||||||||||||||||||||
| Other | 8.7 | 4.1 | 2.5 | 1.6 | 4.1 | 2.2 | 1.9 | 8.2 | 4.0 | 2.8 | 1.2 | 4.1 | 2.5 | 1.6 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 114.7 | $ | 21.9 | $ | 92.8 | $ | 103.6 | $ | 15.5 | $ | 88.1 | $ | 124.9 | $ | 28.3 | $ | 96.6 | $ | 114.7 | $ | 21.9 | $ | 92.8 | ||||||||||||||||||||||||||
| * Not meaningful, tradenames have an indefinite life. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| * Not applicable. Tradenames have an indefinite life. | * Not applicable. Tradenames have an indefinite life. | |||||||||||||||||||||||||||||||||||||||||||||||||
As part of the GH acquisition, we acquired an estimated $7.5 million of technology and $4.4 million of indefinite-lived tradename assets. As described in Note 3, the fair value of these intangible assets is subject to the finalization of the fair value analysis, expected to be completed no later than twelve months after the acquisition date.
Amortization expense of other intangible assets follows:
| Year Ended December 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (In millions) | |||||||||||
| Amortization expense | $ | 6.1 | $ | 6.4 | $ | 4.8 | |||||
We estimate amortization expense for the five years subsequent to December 31, 2016 as follows:
| (In millions) | |||
| 2017 | $ | 6.6 | |
| 2018 | $ | 6.4 | |
| 2019 | $ | 6.0 | |
| 2020 | $ | 5.8 | |
| 2021 | $ | 5.8 | |
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 6 — Financing Arrangements
Long-term debt consists of the following:
(1) Prior to the adoption of ASU 2015-03 in the first quarter of 2016, debt issuance costs of $4.5 million at December 31, 2015 were reflected in the consolidated balance sheet in Other long-term assets. Such amount was reclassified to Long-term debt for comparative purposes.
| Carrying Value at | ||||||||||||
| Maturity Date | Interest Rate at December 31, 2016 | December 31, 2016 | December 31, 2015 | |||||||||
| (In millions) | ||||||||||||
| Senior Notes | April 1, 2021 | 8.125 | % | $ | 250.0 | $ | 250.0 | |||||
| Revolving credit facility | July 31, 2019 | 2.80 | % | 132.8 | 169.0 | |||||||
| Term loan | July 31, 2019 | 2.88 | % | 23.4 | 27.9 | |||||||
| Industrial Equipment Group European Facilities | December 21, 2021 | 3.25 | % | 26.4 | — | |||||||
| Capital leases | Various | Various | 18.8 | 17.7 | ||||||||
| Other | Various | Various | 23.6 | 3.5 | ||||||||
| Gross debt | 475.0 | 468.1 | ||||||||||
| Less current portion of long-term debt | (25.8 | ) | (17.8 | ) | ||||||||
| Less short-term debt | (5.0 | ) | — | |||||||||
Less unamortized debt issuance costs(1) | (5.2 | ) | (4.5 | ) | ||||||||
| Total long-term debt, net | $ | 439.0 | $ | 445.8 | ||||||||
On December 21, 2016, the Company, through its subsidiary, Industrial Equipment Group European Holding Company Limited subsidiary, entered into a financing agreement with Banco Bolbao Vizcaya Argentaria, S.A. The financing agreement provides the Company the ability to borrow up to $36.9 million, including a loan for $26.4 million for the acquisition of GH as well as a revolving credit facility for up to $10.5 million to fund working capital and general corporate needs. The full amount of the loan is outstanding as of December 31, 2016; no amounts have been drawn on the revolving credit facility as of December 31, 2016.
In addition to the Agreement, the Company also assumed long-term debt of $8.9 million and short-term debt of $5.0 million as part of the GH acquisition.
On April 22, 2016, the Company further amended its credit facility (the “Amended Credit Agreement”) to:
increase the revolving credit facility to $300.0 million;
increases the inventory advance rate from 50% to 60%, reducing back to 50% on a pro-rata quarterly basis over 36 months commencing July 1, 2016;
reload the term loan up to $35.0 million, of which $23.4 million has been borrowed and is outstanding as of December 31, 2016;
increases the Canadian sub-limit up to $35.0 million;
increases the European sub-limit up to $25.0 million; and
provide minor pricing adjustments including pricing the first $35.0 million drawn on the revolver at LIBOR + 3.50%, reducing automatically on a pro-rata quarterly basis over 36 months commencing July 1, 2016.
Under the Amended Credit Agreement, a detailed borrowing base formula provides borrowing availability to the Company based on percentages of eligible accounts receivable and inventory.
At the Company’s election, domestic amounts borrowed under the revolving credit facility may be borrowed at either LIBOR plus 1.5% to 2.5%; or the bank’s prime lending rate minus 0.25% to 1.25%. The LIBOR-based interest rate is dependent on the Company’s debt service coverage ratio, as defined in the Amended Credit Agreement.
54
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| (In millions) | |||||||||||
| Amortization expense | $ | 6.4 | $ | 4.8 | $ | 3.5 | |||||
| (In millions) | |||
| 2016 | $ | 6.3 | |
| 2017 | $ | 6.2 | |
| 2018 | $ | 6.1 | |
| 2019 | $ | 5.6 | |
| 2020 | $ | 5.5 | |
| December 31, | |||||||
| 2015 | 2014 | ||||||
| (In millions) | |||||||
| Pension assets | $ | 58.9 | $ | 64.6 | |||
| Deferred financing costs, net | 4.5 | 5.1 | |||||
| Other | 7.5 | 3.6 | |||||
| Total | $ | 70.9 | $ | 73.3 | |||
| December 31, | |||||||
| 2015 | 2014 | ||||||
| (In millions) | |||||||
| Accrued salaries, wages and benefits | $ | 26.1 | $ | 25.4 | |||
| Advance billings | 16.8 | 28.4 | |||||
| Current portion of long-term debt | 17.8 | 9.4 | |||||
| Warranty accrual | 6.1 | 6.9 | |||||
| Interest payable | 5.7 | 5.2 | |||||
| Current portion of other post-retirement liabilities | 1.4 | 1.6 | |||||
| Other | 21.6 | 26.7 | |||||
| Total | $ | 95.5 | $ | 103.6 | |||
Company the ability to borrow up to $11.0 million for expansion of its manufacturing facility in Arkansas. The loan matures in September 2025. The Company estimates the amounthas borrowed $6.2 million under this agreement as of warranty claims on sold products that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. The following table presents the changes in the Company’s product warranty liability for the years ended December 31, 2015, 2014 and 2013:
| Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| (In millions) | |||||||||||
| Balance at January 1, | $ | 6.9 | $ | 5.4 | $ | 6.9 | |||||
| Claims paid during the year | (4.7 | ) | (2.9 | ) | (6.4 | ) | |||||
| Warranty expense | 4.0 | 4.0 | 4.9 | ||||||||
| Acquired warranty liabilities | (0.1 | ) | 0.4 | — | |||||||
| Balance at December 31, | $ | 6.1 | $ | 6.9 | $ | 5.4 | |||||
| Carrying Value at | |||||||||||||||
| Issuance Date | Maturity Date | Interest Rate at December 31, 2015 | December 31, 2015 | December 31, 2014 | |||||||||||
| (In millions) | |||||||||||||||
| Senior Notes | April 1, 2011 | April 1, 2021 | 8.125 | % | $ | 250.0 | $ | 250.0 | |||||||
| Revolving credit | — | July 31, 2019 | 2.09 | % | 169.0 | 162.0 | |||||||||
| Term loan | — | July 31, 2019 | 2.38 | % | 27.9 | 28.8 | |||||||||
| Other, including capital leases | Various | Various | Various | 21.2 | 3.0 | ||||||||||
| Total debt | 468.1 | 443.8 | |||||||||||||
| Less current maturities | 17.8 | 9.4 | |||||||||||||
| Total long-term debt, net of current portion | $ | 450.3 | $ | 434.4 | |||||||||||
2016.
On August 13, 2015, the Company entered into a capital lease agreement (the “Lease Agreement”). The Lease Agreement provides the Company up to $50.0 million for capital leases. See Note 1210 for additional disclosure.
At December 31, 2015, in addition to amounts borrowed under the revolving credit facility, there was $21.4 million outstanding for standby letters of credit.
The following table represents fair value information of the Notes,Company's senior notes due 2021 (the “Senior Notes”), classified as Level 1, at December 31, 20152016 and December 31, 2014.2015. The fair value was estimated using quoted market prices.
| December 31, 2015 | December 31, 2014 | December 31, 2016 | December 31, 2015 | |||||||||||
| (In millions) | (In millions) | |||||||||||||
| Carrying amount | $ | 250.0 | $ | 250.0 | $ | 250.0 | $ | 250.0 | ||||||
| Fair value | $ | 263.4 | $ | 266.3 | $ | 257.5 | $ | 263.4 | ||||||
Maturities of short-term and long-term debt, excluding capital leases, during each of the five years subsequent to December 31, 20152016 are as follows:
| (In millions) | (In millions) | |||||
| 2016 | $ | 13.4 | ||||
| 2017 | $ | 12.7 | $ | 24.7 | ||
| 2018 | $ | 7.0 | $ | 20.8 | ||
| 2019 | $ | 167.2 | $ | 138.4 | ||
| 2020 | $ | — | $ | 8.1 | ||
| 2021 | $ | 263.1 | ||||
Foreign subsidiaries of the Company had $0.8$42.4 million of borrowings at December 31, 20152016 and zero$0.8 million at December 31, 20142015 and outstanding bank guarantees of approximately $3.9$9.9 million and $5.2$3.9 million at December 31, 20152016 and 2014,2015, respectively, under their credit arrangements.
The Senior Notes are general unsecured senior obligations of the Company and are fully and unconditionally guaranteed on a joint and several basis by all material 100% owned domestic subsidiaries of the Company. Provisions of the indenture governing the Senior Notes and the Credit Agreement contain restrictions on the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments, investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets or to merge or consolidate with an unaffiliated entity. At December 31, 2015,2016, the Company was in compliance with all financial covenants of the Credit Agreement.
The weighted average interest rate on all debt was 5.73% at December 31, 2016 and 5.47% at December 31, 2015 and 5.62% at December 31, 2014.2015.
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 107 — Income Taxes
Income from continuing operations before income tax expensetaxes consists of the following:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
| 2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||
| United States | $ | 44.0 | $ | 53.1 | $ | 48.4 | $ | 15.4 | $ | 44.0 | $ | 53.1 | ||||||||||
| Outside the United States | 26.0 | 18.7 | 11.9 | 25.6 | 26.0 | 18.7 | ||||||||||||||||
| $ | 70.0 | $ | 71.8 | $ | 60.3 | $ | 41.0 | $ | 70.0 | $ | 71.8 | |||||||||||
Income taxes consistedconsists of the following:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
| 2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||
| Current expense: | ||||||||||||||||||||||
| Current expense (benefit): | ||||||||||||||||||||||
| Federal | $ | 11.7 | $ | 17.4 | $ | 16.0 | $ | (0.8 | ) | $ | 11.7 | $ | 17.4 | |||||||||
| State | 0.7 | 0.8 | 1.5 | 0.2 | 0.7 | 0.8 | ||||||||||||||||
| Foreign | 6.0 | 6.2 | 4.2 | 6.6 | 6.0 | 6.2 | ||||||||||||||||
| 18.4 | 24.4 | 21.7 | 6.0 | 18.4 | 24.4 | |||||||||||||||||
| Deferred expense (benefit): | ||||||||||||||||||||||
| Federal | 2.7 | 1.0 | 1.2 | 1.6 | 2.7 | 1.0 | ||||||||||||||||
| State | 0.6 | (0.8 | ) | (2.6 | ) | 0.5 | 0.6 | (0.8 | ) | |||||||||||||
| Foreign | (0.4 | ) | 0.3 | (0.9 | ) | 0.7 | (0.4 | ) | 0.3 | |||||||||||||
| 2.9 | 0.5 | (2.3 | ) | 2.8 | 2.9 | 0.5 | ||||||||||||||||
| Income tax expense | $ | 21.3 | $ | 24.9 | $ | 19.4 | $ | 8.8 | $ | 21.3 | $ | 24.9 | ||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
| Rate Reconciliation | 2015 | 2014 | 2013 | |||||||||||||||||||
| (In millions) | 2016 | 2015 | 2014 | |||||||||||||||||||
| Tax at statutory rate | $ | 24.5 | $ | 25.1 | $ | 21.1 | ||||||||||||||||
| (In millions) | ||||||||||||||||||||||
| Tax at U.S. statutory rate | $ | 14.3 | $ | 24.5 | $ | 25.1 | ||||||||||||||||
| Effect of state income taxes, net | 0.6 | 1.4 | 1.1 | 0.2 | 0.6 | 1.4 | ||||||||||||||||
| Effect of foreign operations | (1.6 | ) | (0.9 | ) | (0.2 | ) | (2.1 | ) | (1.6 | ) | (0.9 | ) | ||||||||||
| Valuation allowance | (0.7 | ) | (1.1 | ) | (1.6 | ) | 0.5 | (0.7 | ) | (1.1 | ) | |||||||||||
| Uncertain tax positions | (4.0 | ) | 0.1 | 0.3 | ||||||||||||||||||
| Non-deductible items | 1.7 | 1.8 | 0.7 | 0.6 | 0.5 | 1.0 | ||||||||||||||||
| Non-deductible compensation | 0.8 | 1.2 | 0.8 | |||||||||||||||||||
| Manufacturer's deduction | (1.1 | ) | (1.4 | ) | (1.4 | ) | (0.5 | ) | (1.1 | ) | (1.4 | ) | ||||||||||
| Other, net | (2.1 | ) | — | (0.3 | ) | (1.0 | ) | (2.2 | ) | (0.3 | ) | |||||||||||
| Total | $ | 21.3 | $ | 24.9 | $ | 19.4 | $ | 8.8 | $ | 21.3 | $ | 24.9 | ||||||||||