Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant: Approximately $319,540,000$227,923,175 based on the closing price of $38.10$16.59 per share of the registrant’s Common Stock on June 30, 2017.2020.
Portions of the registrant’s definitive proxy statement for the Annual Meeting of Shareholders to be held on or about May 10, 201827, 2021 are incorporated by reference into Part III of this Form 10-K.
PARK-OHIO HOLDINGS CORP.
Part I
Item 1. Business
Overview
Park-Ohio Holdings Corp. (“Holdings” or “ParkOhio”), incorporated in Ohio since 1998, 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.
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. As of December 31, 2017,2020, we employed approximately 6,1006,500 people. Further discussion of and financial information for these segments, including net sales, operating income, assets, capital expenditures and depreciation and amortization, is contained in Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
The following table summarizes the key attributes of each of our business segments:
|
| | | | | | | | | | | | | | | | |
| Supply Technologies | | Assembly Components | | Engineered Products |
| | | |
NET SALES FOR 20172020 | $561.8510.1 million
| | $524.5441.5 million
| | $326.6343.6 million
|
| SELECTED PRODUCTS | Sourcing, planning and procurement of over 245,000240,000 production components, including: • Fasteners • Pins • Valves • Hoses • Wire harnesses • Clamps and fittings • Rubber and plastic components • Other Class C and MRO products
| | • Control arms • Knuckles
• InjectionExtruded and compression molded rubber products
• Turbo charging hose
• Turbo coolant hose
• Rubber and thermoplastic hose
• Oil pans
• Flywheel spacersproducts
• Fuel filler assemblies • Gasoline direct injection systems
• Control arms
• Knuckles • Engine cradles and brackets • Oil pans
| | • 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 • Semiconductor equipment • Electrical distribution and controls • Consumer electronics • Bus and coaches • Automotive • Agricultural and construction equipment • HVAC • Lawn and garden • Plumbing • Medical devices
| | • Automotive and light vehicle • Agricultural equipment • Construction equipment • Heavy-duty truck • Marine equipment • Bus
| | • Ferrous and non-ferrous metals • Coatings • Forging • Foundry • Heavy-duty truck • Construction equipment • Automotive • Oil and gas • Rail • Aerospace and defense • Power generation
|
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 64more than 60 logistics service centers in the United States, Mexico, Canada, Czech Republic, Puerto Rico, Scotland, Hungary, China, Taiwan, Singapore, India, England, France, Spain, Poland, Malaysia, Northern Ireland and Ireland, as well as production sourcing and support centers in the United States and Asia. Through our supply chain management programs, we supply more than 245,000240,000 globally-sourced production components, many of which are specialized and customized to meet individual customers’ needs.
Total Supply Management™ provides our customers with an expert partner in strategic planning, global sourcing, technical services, parts and materials, logistics, distribution and inventory management of production components. Some production components are characterized by low per unit supplier prices relative to the indirect costs of supplier management,
quality assurance, inventory management and delivery to the production line. In addition, Supply Technologies delivers an increasingly broad range of higher-value 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 is typically provided to customers pursuant to sole-source arrangements. We believe our services distinguishapproach distinguishes us from traditional buy/sell distributors, as well as manufacturers who supply products directly to customers, because we provide the supply chain management of our customers’ high-volume production components. We administer the processes customized to each customer’s needs by replacing numerous current suppliers with a sole-source relationship with Supply Technologies. 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, 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 ten years. Supply Technologies’ remaining sales are generated through theTechnologies also supplies 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 formedcold-formed and cold extrudedcold-extruded fasteners and other products, including locknuts, SPAC® nuts, SPAC® bolts 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.
In 2017, Supply Technologies completed the strategic acquisitions of Heads and All Threads (“HAT”) and Aero-Missile Components Inc. (“AMC”). These acquisitions strengthen our market position for supply chain management services in key end markets worldwide, including aerospace and construction.
Markets and Customers. For the year ended December 31, 2017,2020, approximately 70%62% of Supply Technologies’ net sales were to domestic customers. Remaining sales were primarily to manufacturing facilities of large, multinational customers located in Canada,Europe, Mexico, EuropeAsia and Asia.Canada. Total Supply Management™ services and production components are is 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 servicesapproach to over 8,7007,500 customers domestically and internationally. The five largest customers, to which Supply Technologies sells through sole-source contracts to multiple operating divisions or
locations, accounted for approximately 35%31% and 32% of the sales of Supply Technologies in 20172020 and 2016.2019, respectively. 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. Supply Technologies competes primarily on the basis of its Total Supply Management™ services, approach, 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 U.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.standards and vehicle electrification. Assembly Components designs, develops and manufacturesmanufactures: aluminum products andproducts; highly efficient, high pressure Direct Fuel Injectiondirect fuel injection fuel rails and pipes; fuel filler pipes that route fuel from the gas cap to the gas tank; and flexible multi-layer plastic and rubber assemblies used to transport fuel from 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 or 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. We also provide machining to our aluminum products customers.
At the end of December 2017, the Company completed the acquisition of an injection molding business. The acquisition, which is included in our Assembly Components segment, is a manufacturer of precision-molded rubber components for several industrial markets.customers.
Assembly Components operates 2519 manufacturing facilities and twofour technical offices in the United States, Mexico, China, England and the Czech Republic. In addition, we also provide value-added services such as design engineering, machining and parts assembly.
Markets and Customers. For the year ended December 31, 2020, approximately 68% of Assembly Components’ net sales were to domestic customers. The five largest customers of Assembly Components accounted for approximately 45% and 47% of segment sales for 20172020 and 2016.2019, respectively. These sales, across multiple operating divisions, are through sole sourcesole-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 the capabilities to meet 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.
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 1316 domestic facilities throughout the United States and 2220 international facilities in Canada, Mexico, the United Kingdom, Belgium, Germany, China, Italy, India, Japan, Spain and Brazil.
Our induction heating and melting business utilizes proprietary technology and specializes in the engineering, construction, service and repair of induction heating and melting systems, primarily for the ferrous and non-ferrous metals, silicon, coatings, forging, foundry, automotive and construction equipment industries. Our induction heating and melting
systems are engineered and built to customer specifications and are used primarily for melting, heating, and surface hardening of metals and curing of coatings. Approximately 43%44% of our induction heating and melting systems’ revenues are derived from the sale of replacement parts and provision of field service, primarily for the installed base of our own products. Our pipe threading business serves the oil and gas industry. We also engineer and install mechanical forging presses, sell spare parts and provide field service for the large existing base of mechanical forging presses and hammers in North America. We machine, induction harden and surface finish crankshafts and camshafts, used primarily in locomotives. We forge aerospace and defense structural components such as landing gears and struts, as well as rail products such as railcar center plates and draft lugs.
Markets and Customers. For the year ended December 31, 2020, approximately 52% of Engineered Products’ net sales were to domestic 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, Europe and 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. While we generally attempt to pass along increased raw material prices to our customers in the form of price increases, there may be a time delay between the increased raw material 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 various 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 is not a meaningful measure, 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, 20172020 was $173.2$135.9 million, compared with $137.6$220.5 million as of December 31, 2016. All2019. Nearly all of Engineered Products’ backlog as of December 31, 20172020 is scheduled to be shipped in 2018.2021.
Environmental, Health and SafetyCompliance with Government 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. Failure 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 asIn addition to Segment Reportingenvironmental laws and Geographic Areasregulations, our operations are governed by a variety of laws and regulations, including those relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations thereunder. We believe that we are in material compliance with these laws and regulations and do not believe that future compliance with such laws and regulations will have a material adverse effect on our business, financial condition, results of operations and cash flows.
Human Capital Resources
As of December 31, 2020, we employed approximately 6,500 employees in our operations around the world.Approximately 3,800 of these employees are in the United States, while the remaining 2,700 are employed in other countries. Approximately 10% of our employees are covered by a collective bargaining agreement.
The information contained in Note 2attraction, retention and development of employees is critical to the consolidated financial statements included elsewhere herein relatingsuccessful execution of the Company’s strategy. The Company works diligently to (1) net sales, operating income, identifiable assetsattract the best talent from a diverse range of resources to meet current and other information by segment, and (2) net sales and assets by geographic regionfuture demands of our businesses. Hiring the right people for the years ended December 31, 2017, 2016long-term and 2015developing them for future roles is an important process across the overall organization. To support these objectives, the Company’s human resource programs are designed to develop, reward and support employees through competitive compensation, internal advancement, comprehensive flexible benefit programs and a safe and healthy work environment.
Key areas of focus include:
Health & Safety: The success of our business is fundamentally connected to the well-being of our employees; accordingly, we are committed to their health, safety, and wellness.Our global health and safety programs are designed around dedicated environmental, health and safety standards and procedures specifically tailored at the facility level to address different jurisdiction and regulations, specific operating hazards, and unique working environments.The Company’s objectives include a focus on regulatory compliance and protection of people and the environment.Our safety focus is evident in our response to the COVID-19 Pandemic, which included elsewhere herein.some of the initiatives listed below:
•Increasing cleaning protocols across all locations
•Communicating regularly regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures
•Implementing temperature screening of employees at our facilities
•Establishing new physical distancing procedures
•Providing personal protective equipment
•Modifying workspaces with plexiglass dividers
•Establishing protocols to address actual and suspected COVID-19 cases and potential contact exposure
•Prohibiting non-essential travel for all employees
•Requiring mask wearing in locations
Most of our businesses manufacture products deemed essential to the critical infrastructure, and as a result, most of our production sites have continued to operate during the COVID-19 pandemic.
Ethics & Compliance: Our Company is committed to values of honesty, integrity, respect and responsibility that foster high ethical standards in our relationships with each other, our customers and suppliers, and all those we do business with.Our Code of Business Conduct and Ethics (the “Code”), along with the policies and procedures referenced in the Code, provide guidance for all employees on topics such as anti-corruption and bribery, anti-trust and competition law, discrimination including our policy on harassment and retaliation, privacy, appropriate use of company assets, protection of confidential information and reporting concerns and violations. Should potential violations of the Code, our policies and procedures, or the law occur, employees are encouraged to notify our Chief Compliance Officer through our Ethics Hotline. We do not tolerate retaliation against anyone who reports a potential violation in good faith.The Chief Compliance Officer reports matters related to the Code to the Audit Committee of the Board of Directors on a quarterly basis.
Compensation & Benefits: Our policy is to competitively compensate our employees.The compensation philosophy is to align both short-term and long-term incentives with our strategic objectives and to consider market forces and the performance of our Company and the employee.We offer comprehensive employee benefits that vary by country and are competitive in the marketplace.Examples of benefits offered in the U.S. include a 401(k) plan, defined benefit - cash balance plan, comprehensive health benefits, employee assistance programs, business travel, life/disability insurance and supplemental voluntary insurance.
Training & Talent Development: The Company is committed to continued development of our workforce. Training is provided in several formats to accommodate workforce diversity and business focus.In addition, various internship programs and informal mentoring demonstrate the Company’s ongoing commitment and initiatives toward accelerating our future leaders.
Available Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and other information 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 Report on Form 10-K.
Information About our Executive Officers of the Registrant
Information with respect to our executive officers as of March 8, 2018,5, 2021, is as follows:
|
| | | | | | | | | | | | | |
| Name | Age | Position |
Edward F.Matthew V. Crawford | | 7851 |
| | Chairman of the Board, Chief Executive Officer and DirectorPresident |
Matthew V. Crawford | | 48 |
| | President and Chief Operating Officer and Director |
| Patrick W. Fogarty | | 5659 |
| | Vice President and Chief Financial Officer |
| Robert D. Vilsack | | 5760 |
| | Secretary and General CounselChief Legal Officer |
Mr. E. Crawford has been a director was elected President in 2019 and our Chairman of the Board and Chief Executive Officer since 1992. He has alsoin 2018. Prior to that, he 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. 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.
Mr. Vilsack has been Secretary and General CounselChief Legal Officer since joining us in 2002.
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.
Risks Relating to the COVID-19 Pandemic
Our business, results of operations and cash flows have been and are expected to continue to be adversely affected by COVID-19.
The novel strain of the coronavirus identified in China in late 2019 and now affecting the global community has impacted and is expected to continue to impact our operations, and the full nature and extent of the impact is highly uncertain and may be beyond our control. Among other things, uncertainties relating to the COVID-19 pandemic include the duration of the outbreak, the severity of the virus, and the actions, or perception of actions that may be taken, to contain or treat its impact, by governments and others, including declarations of states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/or other similar restrictions and limitations.
As a result of COVID-19 and the measures implemented that are designed to contain its spread, our customers have been and could continue to be negatively impacted as a result of disruption in demand, which has negatively impacted our sales and had a material adverse effect on our business, results of operations and financial condition. Similarly, as a result of COVID-19 and measures implemented that are designed to contain its spread, our suppliers may not have the materials, capacity, or capability to enable the manufacture of our products according to our schedule and specifications. Because of impacts to suppliers' operations, we may need to seek alternate suppliers, which may be more expensive, may not be available or may result in delays in shipments to us and subsequently to our customers, each of which would affect our results of operations.
The COVID-19 pandemic has also disrupted our internal operations, including by heightening the risk that a significant portion of our workforce will suffer illness or otherwise not be permitted or be unable to work and exposing us to cyber and other risks associated with a large number of our employees working remotely. Certain of our facilities have experienced temporary work disruptions as a result of the COVID-19 pandemic, and we cannot predict whether these will continue or our facilities will experience more significant or frequent disruptions in the future. Furthermore, we may need to reduce our workforce as a result of declines in our business caused by the COVID-19 pandemic, and any such reduction would cause us to incur costs. Moreover, there can be no assurance that we would be able to rehire our workforce in the event our business experiences a subsequent recovery.
The impact of the COVID-19 pandemic continues to evolve and its duration and ultimate disruption to our customers and to our supply chain, and related financial impact to us, cannot be estimated at this time. Should such disruption continue for an extended period of time, the impact could have a more severe adverse effect on our business, results of operations and financial
condition. Additionally, weaker economic conditions generally could result in impairment in value of our tangible or intangible assets, or our ability to raise additional capital, if needed.
Risks Relating to Economic Conditions
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 inabilityRisks Relating to borrow or to meet our debt service coverage ratio in our revolving credit facility.
As of December 31, 2017, we were in compliance with our debt service coverage ratio covenantOur Business and other covenants contained in our revolving credit facility. While we expect to remain in compliance throughout 2018, 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.Operations
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 42%30% and 7%6% of our net sales during the year ended December 31, 20172020 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 supply products and services to our Supply Technologies customers generally under purchase orders as opposed to long-term contracts. When we do enter into long-term contracts with our Supply Technologies customers, many of them only establish pricing terms and do not obligate our customers to buy required minimum amounts from us or to buy from us exclusively. Accordingly, many of our Supply Technologies customers may decrease the amountnumber of products and services that they purchase from us or even stop purchasing from us altogether, either of which could have a material adverse effect on our net sales and profitability.
We are dependent on key customers.
We rely on several key customers. For the year ended December 31, 2017,2020, our ten largest customers accounted for approximately 32%30% 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 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; diversion of management’s attention; the assumption of unknown liabilities; increases in our indebtedness; the failure to achieve the strategic objectives of those acquisitions; 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 various 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.
We may experience breaches of, or disruptions to, our information technology systems, or other compromises of our data, including the improper disclosure of personal or confidential data, which may adversely affect our operations and reputation.
We utilize information technology systems in connection with our business operations, including processing orders, managing inventory and accounts receivable collections, purchasing products, maintaining cost-effective operations, routing and re-routing orders. We also depend on our information technology systems to maintain confidential, proprietary and personal information relating to our current, former and prospective employees, customers and other third parties in these systems and in systems of third-party providers who we engage in connection with the processing and storage of certain information. Our information technology systems and those of our third-party providers are subject to disruptions or damage, which may be caused by a wide array of causes, including telecommunications failures, computer failures, power outages, computer viruses, cybersecurity breaches and other intrusions, which could result in the disruption of our operations, or information misappropriation, such as theft of intellectual property or inappropriate disclosure of personal and confidential information. In addition, we could also experience data or cybersecurity breaches stemming from the intentional or negligent acts of our employees or other third parties. To the extent our information technology systems are disabled for a long period of time, key business processes could be interrupted. Any such operational disruptions and/or misappropriation of information, whether in systems we maintain or are maintained by others, could have a material adverse effect on our business. In addition, any such damage, compromise or breach to our systems or those of our vendors, could result in a violation of privacy and other laws, and expose us to significant legal and financial liability.
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, 2020, we had goodwill of $110.9 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. Based on our 2020 annual impairment test, we determined that the fair value of our Forged and Machined Products Group (“FMPG”) reporting unit, which is included in our Engineered Products segment, exceeded its carrying value by 10% as of the October 1, 2020 testing date. As such, we concluded that the goodwill of this reporting unit of $8.7 million was not impaired as of that date. This reporting unit was negatively impacted by the COVID-19 pandemic throughout 2020, and while we believe that the current assumptions and estimates used in our goodwill testing are reasonable, supportable and appropriate, there can be no assurance that such assumptions and estimates will prove to be accurate predictions of future performance. For additional information, see Note 6, Goodwill, to the consolidated financial statements included elsewhere herein.
Our business and operating results may be adversely affected by natural disasters, other catastrophic events or public health issues, all of which are beyond our control.
While we have taken precautions to prevent production and service interruptions at our global facilities, severe weather conditions such as hurricanes, tornadoes, and earthquakes; other natural disasters; or public health issues 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, or 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 carriers 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.
Risks Relating to Human Capital
Some of our employees belong to labor unions, and strikes or work stoppages could adversely affect our operations.
As of December 31, 2020, we were a party to seven collective bargaining agreements with various labor unions that covered approximately 750 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.
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 Matthew Crawford, our Chairman, Chief Executive Officer and President, as well as the president of each of our operating units. Additionally, an event of default occurs under our revolving credit facility if Messrs. M. Crawford and Edward Crawford, our former President, 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. M. Crawford nor Mr. E. Crawford holds the office of chairman, chief executive officer or president. The loss of the services of Mr. 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.
Risks Relating to Legal, Compliance and Regulatory Matters
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, 2017, we were a party to seven collective bargaining agreements with various labor unions that covered approximately 560 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 by 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”);
•increasingly complex laws and regulations concerning privacy and data security, including the European Union's General Data Protection Regulation;
•difficulties in staffing and managing multinational operations;
•limitations on our ability to enforce legal rights and remedies; and
•potentially adverse tax consequences.
On January 31, 2020, the United Kingdom (“UK”) exited the European Union (“EU”). The long-term effects of Brexit will depend on any agreements the UK makes to retain access to EU markets. Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the withdrawal of the UK from the EU will have and how such withdrawal will affect us. It is possible that the withdrawal could, among other things, affect the legal and regulatory environments to which our businesses are subject, impact trade between the UK and the EU through potential restrictions on the free movement of goods and labor between the UK and the EU, create economic and political uncertainty in the region, and create other impediments to our ability to transact within and between the UK and EU.
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 current 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. In addition, the current U.S. presidential administration has introduced greater uncertainty with respect to future tax, trade regulations and trade agreements.jurisdictions. 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.
Risks Relating to Our Debt
IfAdverse global economic conditions may have significant effects on our information systems fail,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, 2020, 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 2021, 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.
Uncertainty relating to the calculation of London Interbank Offered Rate (“LIBOR”) and other reference rates and their potential discontinuance may adversely affect interest expense related to our outstanding debt, including amounts borrowed under our revolving credit facility.
National and international regulators and law enforcement agencies have conducted investigations into a number of rates or indices, which are deemed to be “reference rates.” Actions by such regulators and law enforcement agencies may result in changes to the manner in which certain reference rates are determined, their discontinuance, or the establishment of alternative reference rates. In particular, on July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. As such, it appears highly likely that LIBOR will be discontinued or modified by the end of 2021.
At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates, may have on LIBOR or other benchmarks, including LIBOR-based borrowings under our revolving credit facility. Furthermore, the use of alternative reference rates or other reforms could cause the market value of, the applicable interest rate on and the amount of interest paid on our benchmark-based borrowings to be materially different than expected and could materially adversely impact our ability to refinance such borrowings or raise future indebtedness on a cost effective basis.
Risks Relating to the Execution of our Strategy
We may encounter difficulty in expanding our business could be materially affected.through targeted acquisitions.
We have pursued, and may continue to pursue, targeted acquisition opportunities that we believe thatwould complement 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.business. We cannot assure you that awe 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; diversion of management’s attention; the assumption of unknown liabilities; increases in our indebtedness; the failure to achieve the strategic objectives of those acquisitions; 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 a disruptionloss of momentum in, our activities. Any delays or difficulties encountered in connection with any acquisition and the operationintegration 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 disruptionoperations could damage our relation with our customer in our industries or otherwise have a material adverse effect on our business, results of operations, financial condition liquidity and resultsor prospects of operations.our business.
Operating problems in our business may materially adversely affect our financial condition and results of operations.
We are subjectRisks Relating 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, 2017, we had goodwill of $100.2 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 4, Goodwill, to the consolidated financial statements included elsewhere herein.Our Common Stock
Our Chairman of the Board, and Chief Executive Officer and our President and Chief Operating Officerformer President collectively beneficially own a significant portion of Holdings’ outstanding common stock and their interests may conflict with yours.
As of December 31, 2017, Edward2020, Matthew Crawford, our Chairman of the Board, and Chief Executive Officer and MatthewPresident, and Edward Crawford, our former President, and Chief Operating Officer, collectively beneficially owned approximately 29%30% of Holdings’ outstanding common stock. Mr. E.M. Crawford is Mr. M.E. Crawford’s father.son. 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, or 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 carriers 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, 2017,2020, our operations included numerous manufacturing and supply chain logistics services facilities located in 2524 states in the United States and in Puerto Rico, as well as in Asia, Canada, Europe, Mexico and Brazil. We lease our world headquarters located in Cleveland, Ohio, which also 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 they have sufficient productive capacity to meet our current needs.
The following table provides information relative to our principal facilities as of December 31, 2017.2020.
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Related Industry
Segment(1) | Location | | Owned or Leased | | Approximate
Square Footage
| | Use |
| SUPPLY | Brampton, Ontario, Canada | | Leased | | 217,000 |
| | Manufacturing |
TECHNOLOGIES (1) | Minneapolis, MN | | Leased | | 87,100 |
| | Logistics |
| Carnegie, PA | | Leased | | 63,000 |
| | Manufacturing |
| Cleveland, OH (2) | | Leased | | 60,450 |
| | Supply Technologies Corporate Office |
| Dayton, OH | | Leased | | 56,000 |
| | Logistics |
| Memphis, TN | | Leased | | | | Logistics |
| Suwanee, GA | | Leased | | | | Logistics |
| Streetsboro, OH | | Leased | | | | Manufacturing |
| Allentown, PA | | Leased | | | | Logistics |
| Carol Stream, IL | | Leased | | 51,000 |
| | Logistics |
| Memphis, TNSolon, OH | | Leased | | 48,750 |
| | Logistics |
| Solon, OHDublin, VA | | Leased | | 47,100 |
| | Logistics |
| Streetsboro, OHTulsa, OK | | Leased | | 45,000 |
| | ManufacturingLogistics |
| ASSEMBLY | Allentown, PAOcala, FL | | LeasedOwned | | 43,800 |
| | LogisticsManufacturing |
| COMPONENTS | Suwanee, GAConneaut, OH | | LeasedLeased/Owned | | 42,500 |
| | LogisticsManufacturing |
| Dublin, VAAcuna, Mexico | | Leased | | 40,000 |
| | LogisticsManufacturing |
| Tulsa, OKLexington, TN | | LeasedOwned | | 40,000 |
| | LogisticsManufacturing |
ASSEMBLY | Ocala, FLRootstown, OH | | Owned | | 433,000 |
| | Manufacturing |
COMPONENTS (3) | Conneaut,Wapakoneta, OH (4) | | Leased/Owned | | 283,800 |
| | Manufacturing |
| Lexington, TNCleveland, OH | | OwnedLeased | | 240,000 |
| | Manufacturing |
| Lobelville, TN (5)Angola, IN | | Owned | | 208,700 |
| | Manufacturing |
| Rootstown, OHHuntington, IN | | OwnedLeased | | 208,000 |
| | Manufacturing |
| Cleveland, OH (6)Fremont, IN | | 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 |
| ENGINEERED | Acuna, MexicoCicero, IL | | Owned | | 79,000 |
| | Manufacturing |
ENGINEEREDPRODUCTS | Cicero, IL | | Owned | | 450,000 |
| | Manufacturing |
PRODUCTS (7) | Cuyahoga Heights, OH | | Owned | | 427,000 |
| | Manufacturing |
| Pune, IndiaCanton, OH (2) | | OwnedOwned/Leased | | 275,000 |
| | Manufacturing |
| Newport, AR | | Owned | | 200,000 |
| | Manufacturing |
| Warren, OH | | Owned | | 195,000 |
| | Manufacturing |
| Leini, ItalyErie, PA | | Owned | | 161,500 |
| | Manufacturing |
| La Roeulx, Belgium | | Owned | | | | Manufacturing |
| Brookfield, WI | | Leased | | | | Manufacturing |
| Wickliffe, OH | | Owned | | | | Manufacturing |
| Madison Heights, MI | | Leased | | 128,000 |
| | Manufacturing |
| Canton, OHLeini, Italy | | LeasedOwned | | 124,000 |
| | Manufacturing |
| La Roeulx, BelgiumPune, India | | Owned | | 120,000 |
| | Manufacturing |
| Brookfield, WIChennai, India | | LeasedOwned | | 116,000 |
| | Manufacturing |
| Wickliffe, OH | | Owned | | 110,000 |
| | Manufacturing |
| Valencia, Spain | | Owned | | 81,000 |
| | Manufacturing |
| Euclid, OH | | Owned | | 75,000 |
| | Manufacturing |
| Albertville, AL | | Leased | | 56,000 |
| | Office |
| Chennai, India | | Owned | | 54,000 |
| | Manufacturing |
| Leini, Italy | | Leased | | 53,800 |
| | 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’ corporate office. |
| |
(3) | Assembly Components has other facilities, none of which is deemed to be a principal facility. |
| |
(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) | Includes one leased property with 150,000 square feet and one owned property with 40,000 square feet. |
| |
(7) | Engineered Products has other owned and leased facilities, none of which is deemed to be a principal facility. |
(1)Each segment has other 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, 2017:2020:
We were a co-defendant in approximately 96118 cases asserting claims on behalf of approximately 203219 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 eachevery 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 four asbestos cases, involving 2120 plaintiffs, that plead specified damages against named defendants. In each of the four cases, the plaintiff is seeking compensatory and punitive damages based on a variety of potentially alternative causes of action. In threetwo cases, the plaintiff has alleged three counts at $3.0$3 million compensatory and punitive damages each; one count at $3.0$3 million compensatory and $1.0$1 million punitive damages; and one count at $1.0$1 million. In the fourththird case, the plaintiff has alleged compensatory and punitive damages, each in the amount of $20.0 million, for three separate causes of action, and $5.0 million compensatory damages for the fifth cause of action. In the fourth case, the plaintiff has alleged compensatory and punitive damages, each in the amount of $10.0 million, for ten 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.
In August 2013, the Company received a subpoena from the staff of the Securities and Exchange Commission (“SEC”) in connection with the staff’s investigation of a third party. At that time, the Company also learned that the U.S. Department of Justice (“DOJ”) is conducting a criminal investigation of the third party. In connection with its initial response to the staff’s subpoena, the Company disclosed to the staff of the SEC that, in November 2007, the third party participated in a payment on behalf of the Company to a foreign tax official that implicates the Foreign Corrupt Practices Act. The Board of Directors of the Company formed a special committee to review the Company’s 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 the Company’s disclosure. The 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 its 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 2018. Additionally, the terms of the credit agreement governing our revolving credit facility and the indenture governing the 6.625% senior notes due 2027 provide some restrictions on the amounts of dividends.
|
| | | | | | | | | | | | | | | | |
| Quarterly Common Stock Price Ranges |
| | | | | |
| | | 2017 | | 2016 |
| Quarter | | High | | Low | | High | | Low |
| 1st | | $ | 47.00 |
| | $ | 34.25 |
| | $ | 43.47 |
| | $ | 23.55 |
|
| 2nd | | $ | 41.05 |
| | $ | 34.33 |
| | $ | 42.94 |
| | $ | 23.21 |
|
| 3rd | | $ | 46.05 |
| | $ | 37.00 |
| | $ | 38.79 |
| | $ | 27.37 |
|
| 4th | | $ | 47.80 |
| | $ | 40.25 |
| | $ | 44.65 |
| | $ | 30.01 |
|
The number of shareholders of record of our common stock as of February 28, 201826, 2021 was 378.402.
Issuer Purchases of Equity Securities
Set forth below is information regarding repurchases of our common stock during the fourth quarter of the year ended December 31, 2017.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | 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 (2) |
| October 1 — October 31, 2020 | | 95 | | | $ | 15.96 | | | — | | | 549,966 | |
| November 1 — November 30, 2020 | | 9,638 | | | 23.51 | | | 8,881 | | | 541,085 | |
| December 1 — December 31, 2020 | | 17,243 | | | 30.06 | | | — | | | 541,085 | |
| Total | | 26,976 | | | $ | 28.70 | | | 8,881 | | | 541,085 | |
(1)Consists of an aggregate total of 18,095 shares of common stock we acquired from recipients of restricted stock awards at the time of vesting of such awards in order to settle recipient minimum withholding tax liabilities.
(2)On March 11, 2020, we announced a share repurchase program whereby we may repurchase up to 1.0 million shares of our outstanding common stock. The repurchase program has no expiration date.
|
| | | | | | | | | | | | | | | |
| 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, 2017 | | 411 |
| | | | $ | 45.60 |
| | — |
| | 624,120 |
|
| November 1 — November 30, 2017 | | — |
| | | | — |
| | — |
| | 624,120 |
|
| December 1 — December 31, 2017 | | — |
| | | | — |
| | 16,014 |
| | 608,106 |
|
| Total | | 411 |
| | (2) | | $ | 45.60 |
| | 16,014 |
| | 608,106 |
|
| |
(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 411 shares of common stock we acquired from recipients of restricted stock awards at the time of vesting of such awards in order to settle recipient minimum withholding tax liabilities. |
Item 6. Selected Financial Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| (In millions, except per share data) |
| Income Statement Data: | | | | | | | | | |
| Net sales | $ | 1,295.2 | | | $ | 1,618.3 | | | $ | 1,658.1 | | | $ | 1,412.9 | | | $ | 1,276.9 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Operating income | 15.7 | | | 83.1 | | | 97.3 | | | 83.8 | | | 63.0 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net income attributable to ParkOhio common shareholders | (4.5) | | | 38.6 | | | 53.6 | | | 28.6 | | | 31.7 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Earnings per common share attributable to ParkOhio shareholders: | | | | | | | | | |
| Basic | $ | (0.37) | | | $ | 3.16 | | | $ | 4.37 | | | $ | 2.34 | | | $ | 2.62 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Diluted | $ | (0.37) | | | $ | 3.12 | | | $ | 4.28 | | | $ | 2.30 | | | $ | 2.58 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Cash dividends per common share | $ | 0.25 | | | $ | 0.50 | | | $ | 0.50 | | | $ | 0.50 | | | $ | 0.50 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (In millions, except per share data) |
| Income Statement Data: | | | | | | | | | |
| Net sales | $ | 1,412.9 |
| | $ | 1,276.9 |
| | $ | 1,463.8 |
| | $ | 1,378.7 |
| | $ | 1,203.2 |
|
| Operating income | 90.2 |
| | 69.2 |
| | 97.9 |
| | 97.9 |
| | 85.6 |
|
| Net income attributable to ParkOhio common shareholders | 28.6 |
| | 31.7 |
| | 48.1 |
| | 45.6 |
| | 43.4 |
|
| Earnings per common share attributable to ParkOhio shareholders: | | | | | | | | | |
| Basic | $ | 2.34 |
| | $ | 2.62 |
| | $ | 3.94 |
| | $ | 3.77 |
| | $ | 3.40 |
|
| Diluted | $ | 2.30 |
| | $ | 2.58 |
| | $ | 3.88 |
| | $ | 3.68 |
| | $ | 3.31 |
|
| Cash dividend per common share | $ | 0.50 |
| | $ | 0.50 |
| | $ | 0.50 |
| | $ | 0.375 |
| | — |
|
Results for 2019 include net expense of $4.3 million due to the retirement and resignation of our former President and $4.2 million of plant closure and relocation, severance and other costs.
Results for 2018 include a gain on the sale of assets of $1.9 million.
Results for 2017 include income of $3.3 million from the reversal of a litigation reserve, a loss on extinguishment of debt of $11.0 million and a one-time net tax expense of $4.2 million related to the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Act”“TCJA”).
Results for 2016 include an asset impairment charge of $4.0 million.
Results for 2015 and 2013 include litigation judgment costs of $2.2 million and $5.2 million, respectively. Net income attributable to ParkOhio common shareholders in 2013 includes $3.0 million from discontinued operations.
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (In millions) | | (In millions) |
| Other Financial Data: | | | | | | | | | | Other Financial Data: | |
| Net cash flows provided by operating activities | $ | 46.7 |
| | $ | 72.9 |
| | $ | 44.7 |
| | $ | 53.6 |
| | $ | 60.3 |
| Net cash flows provided by operating activities | $ | 69.3 | | | $ | 63.7 | | | $ | 54.8 | | | $ | 46.7 | | | $ | 72.9 | |
| Capital expenditures, net | (27.9 | ) | | (28.5 | ) | | (36.5 | ) | | (25.8 | ) | | (30.1 | ) | |
| | Capital expenditures | | Capital expenditures | (26.3) | | | (40.1) | | | (45.1) | | | (27.9) | | | (28.5) | |
| | Selected Balance Sheet Data (as of period end): | | | | | | | | | | Selected Balance Sheet Data (as of period end): | |
| Cash and cash equivalents | 82.8 |
| | 64.3 |
| | 62.0 |
| | 58.0 |
| | 55.2 |
| Cash and cash equivalents | 55.0 | | | 56.0 | | | 55.7 | | | 82.8 | | | 64.3 | |
| | Total assets | 1,132.5 |
| | 974.3 |
| | 942.1 |
| | 969.1 |
| | 813.0 |
| Total assets | 1,300.5 | | | 1,310.4 | | | 1,208.5 | | | 1,132.5 | | | 974.3 | |
Long-term debt(1) | 515.5 |
| | 439.0 |
| | 445.8 |
| | 429.3 |
| | 373.5 |
| Long-term debt(1) | 517.8 | | | 545.2 | | | 547.5 | | | 515.5 | | | 439.0 | |
|
(1) Excluding current portion.
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.
EXECUTIVE OVERVIEW
General
We are 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. 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.
COVID-19 Pandemic
2017 Acquisitions
On April 28, 2017,In March 2020, the Company acquired AMC. AMC, which is included in our Supply Technologies segment, isWorld Health Organization categorized the novel coronavirus (“COVID-19”) as a supply chain management business providing high-quality specialty fasteners and other componentspandemic. This has negatively impacted several of the markets we serve. In response to the defenseCOVID-19 pandemic, we have taken actions to reduce our operating costs, including plant consolidation; headcount reductions; salary reductions; and aerospace markets indiscretionary spending cuts. We have also aggressively managed both working capital and capital spending. Although there continues to be uncertainty related to the United States.
On October 4, 2017,anticipated impact of the Company completed the acquisitionCOVID-19 pandemic outbreak on our future results, we believe our diversified portfolio of HAT. HAT, which is included inglobal businesses, our Supply Technologies segment, is a leading European supplier of supply chain management services specializing in developing vendor-managed inventory programs of fasteners, machined parts and other class C components to various industrial end markets.
At the endliquidity position was $252.4 million as of December 2017,31, 2020, and the Company completed the acquisition of an injection molding business. The acquisition, which is included insteps we have taken to reduce costs leave us well-positioned to manage our Assembly Components segment, is a manufacturer of precision-molded rubber components for several industrial markets.business through this crisis as it continues to unfold.
The results of operations of the 2017 acquisitions are included in our consolidated results from their respective acquisition dates. Collectively, the 2017 acquisitions contributed $18.5 million of sales for the year ended December 31, 2017.
U.S. Tax Reform
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the “Tax Cut and Jobs Act (the “Tax Act”) which includes a number of provisions, including lowering of the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, and a Transition Tax on unremitted foreign earnings and profits. As a result of the Tax Act, in the fourth quarter of 2017, the Company recorded a one-time net tax expense of $4.2 million, which consisted of an expense from the Transition Tax of $14.2 million and a tax benefit of $10.0 million resulting from the adjustment of deferred tax assets and liabilities to reflect the decrease in the corporate income tax rate.
Subsequent Event
On January 31, 2018,29, 2021, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend will bewas paid on March 1, 2018,February 26, 2021, to shareholders of record as of the close of business on February 15, 2018,12, 2021 and resulted in a cash outlay of approximately $1.6 million.
On February 1, 2018, the Company completed the acquisition of Canton Drop Forge, Inc. ("CDF"). CDF is headquartered in Canton, Ohio and will be part of our Forged and Machined Products group within the Engineered Products segment. CDF manufactures forgings for high-performance applications in the global aerospace and other markets.
RESULTS OF OPERATIONS
2017This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2019 and 2018. Discussions of 2018 items and year-over-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
2020 Compared with 20162019 and 20162019 Compared with 2015 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | 2017 | | 2016 | | 2015 | | $ Change | | % Change | | $ Change | | % Change |
| | (Dollars in millions, except per share data) |
| Net sales | $ | 1,412.9 |
| | $ | 1,276.9 |
| | $ | 1,463.8 |
| | $ | 136.0 |
| | 11 | % | | $ | (186.9 | ) | | (13 | )% |
| Cost of sales | 1,178.3 |
| | 1,073.9 |
| | 1,228.6 |
| | 104.4 |
| | 10 | % | | (154.7 | ) | | (13 | )% |
| Gross profit | 234.6 |
| | 203.0 |
| | 235.2 |
| | 31.6 |
| | 16 | % | | (32.2 | ) | | (14 | )% |
| Gross profit as a percentage of net sales | 16.6 | % | | 15.9 | % | | 16.1 | % | | | | | | | | |
| Selling, general and administrative ("SG&A") expenses | 147.7 |
| | 129.8 |
| | 135.1 |
| | 17.9 |
| | 14 | % | | (5.3 | ) | | (4 | )% |
| SG&A expenses as a percentage of net sales | 10.5 | % | | 10.2 | % | | 9.2 | % | | | | | | | | |
| Asset impairment charge | — |
| | 4.0 |
| | — |
| | (4.0 | ) | | * |
| | 4.0 |
| | * |
|
| Litigation (settlement gains) judgment costs | (3.3 | ) | | — |
| | 2.2 |
| | (3.3 | ) | | * |
| | (2.2 | ) | | * |
|
| Operating income | 90.2 |
| | 69.2 |
| | 97.9 |
| | 21.0 |
| | 30 | % | | (28.7 | ) | | (29 | )% |
| Interest expense | 31.5 |
| | 28.2 |
| | 27.9 |
| | 3.3 |
| | 12 | % | | 0.3 |
| | 1 | % |
| Loss on extinguishment of debt | 11.0 |
| | — |
| | — |
| | 11.0 |
| | * |
| | — |
| | * |
|
| Income before income taxes | 47.7 |
| | 41.0 |
| | 70.0 |
| | 6.7 |
| | 16 | % | | (29.0 | ) | | (41 | )% |
| Income tax expense | 18.2 |
| | 8.8 |
| | 21.3 |
| | 9.4 |
| | 107 | % | | (12.5 | ) | | (59 | )% |
| Net income | 29.5 |
| | 32.2 |
| | 48.7 |
| | (2.7 | ) | | (8 | )% | | (16.5 | ) | | (34 | )% |
| Net income attributable to noncontrolling interest | (0.9 | ) | | (0.5 | ) | | (0.6 | ) | | (0.4 | ) | | * |
| | 0.1 |
| | * |
|
| Net income attributable to ParkOhio common shareholders: | $ | 28.6 |
| | $ | 31.7 |
| | $ | 48.1 |
| | $ | (3.1 | ) | | (10 | )% | | $ | (16.4 | ) | | (34 | )% |
| Earnings per common share attributable to ParkOhio common shareholders: | | | | | | | | | | | | | |
| Basic | $ | 2.34 |
| | $ | 2.62 |
| | $ | 3.94 |
| | $ | (0.28 | ) | | (11 | )% | | $ | (1.32 | ) | | (34 | )% |
| Diluted | $ | 2.30 |
| | $ | 2.58 |
| | $ | 3.88 |
| | $ | (0.28 | ) | | (11 | )% | | $ | (1.30 | ) | | (34 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2020 vs. 2019 | | 2019 vs. 2018 |
| 2020 | | 2019 | | 2018 | | $ Change | | % Change | | $ Change | | % Change |
| (Dollars in millions, except per share data) |
| Net sales | $ | 1,295.2 | | | $ | 1,618.3 | | | $ | 1,658.1 | | | $ | (323.1) | | | (20) | % | | $ | (39.8) | | | (2) | % |
| Cost of sales | 1,126.6 | | | 1,358.0 | | | 1,386.6 | | | (231.4) | | | (17) | % | | (28.6) | | | (2) | % |
| Gross profit | 168.6 | | | 260.3 | | | 271.5 | | | (91.7) | | | (35) | % | | (11.2) | | | (4) | % |
| Gross profit as a percentage of net sales | 13.0 | % | | 16.1 | % | | 16.4 | % | | | | | | | | |
| Selling, general and administrative ("SG&A") expenses | 152.9 | | | 177.2 | | | 176.1 | | | (24.3) | | | (14) | % | | 1.1 | | | 1 | % |
| SG&A expenses as a percentage of net sales | 11.8 | % | | 10.9 | % | | 10.6 | % | | | | | | | | |
| Gain on sale of assets | — | | | — | | | (1.9) | | | — | | | * | | 1.9 | | | * |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Operating income | 15.7 | | | 83.1 | | | 97.3 | | | (67.4) | | | (81) | % | | (14.2) | | | (15) | % |
| | | | | | | | | | | | | |
Other components of pension income and other postretirement benefits expense, net
| 7.3 | | | 5.6 | | | 8.8 | | | 1.7 | | | 30 | % | | (3.2) | | | (36) | % |
| Interest expense, net | (30.3) | | | (33.8) | | | (34.3) | | | 3.5 | | | (10) | % | | 0.5 | | | (1) | % |
| | | | | | | | | | | | | |
| (Loss) income before income taxes | (7.3) | | | 54.9 | | | 71.8 | | | (62.2) | | | (113) | % | | (16.9) | | | (24) | % |
| Income tax benefit (expense) | 2.5 | | | (15.2) | | | (16.6) | | | 17.7 | | | (116) | % | | 1.4 | | | (8) | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net (loss) income | (4.8) | | | 39.7 | | | 55.2 | | | (44.5) | | | (112) | % | | (15.5) | | | (28) | % |
| Net loss (income) attributable to noncontrolling interest | 0.3 | | | (1.1) | | | (1.6) | | | 1.4 | | | (127) | % | | 0.5 | | | (31) | % |
| Net (loss) income attributable to ParkOhio common shareholders | $ | (4.5) | | | $ | 38.6 | | | $ | 53.6 | | | $ | (43.1) | | | (112) | % | | $ | (15.0) | | | (28) | % |
| (Loss) earnings per common share attributable to ParkOhio common shareholders | | | | | | | | | | | | | |
| Basic | $ | (0.37) | | | $ | 3.16 | | | $ | 4.37 | | | $ | (3.53) | | | (112) | % | | $ | (1.21) | | | (28) | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Diluted | $ | (0.37) | | | $ | 3.12 | | | $ | 4.28 | | | $ | (3.49) | | | (112) | % | | $ | (1.16) | | | (27) | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
* Calculation not meaningful
20172020 Compared with 20162019
Net Sales
Net sales increased 11%decreased 20% to $1,412.9$1,295.2 million in 20172020 compared to $1,276.9$1,618.3 million in 2016.2019. The increasedecrease in net sales was primarily due to higher end marketlower customer demand for our products in many end markets across all three of our Supply Technologies and Engineered Products segments, andprimarily driven by the 2017COVID-19 pandemic.See the “Segment Results” section below for a more detailed discussion of the decrease in sales contributions from both our GH Electrotermia S.A. (“GH”) acquisition completed at the end of 2016 and the 2017 acquisitions of AMC and HAT. Excluding the impact of acquisitions, net sales grew by 5% in 2017 compared to 2016.each business segment.
Cost of Sales & Gross Profit
Cost of sales increased 10%decreased 17% to $1,178.3$1,126.6 million in 20172020 compared to $1,073.9$1,358.0 million in 2016.2019. The increasedecrease in cost of sales was primarily due toin-line with the increasedecrease in net sales of 11%, described above.
Our gross margin percentage was 16.6%decreased to 13.0% in 20172020 compared to 15.9%16.1% in 2016. This 70 basis point improvement was2019, due primarily due to the lower profit flow-through from higherlower sales in 2017,2020 compared to a year ago. In addition, cost of sales in 2020 included $5.1 million of costs related to plant closure and consolidation, compared to $3.5 million of such costs in 2019. These negative factors were partially
offset by the benefitbenefits of cost reduction actionsefforts taken in 2016, and favorable product mix.
response to challenging market conditions in much of 2020 as a result of the pandemic.
SG&A Expenses
SG&A expenses increaseddecreased to $147.7$152.9 million, or 11.8% of net sales, in 20172019 from $129.8$177.2 million, or 10.9% of net sales, in 2016, driven by2019. This decrease in SG&A expenses fromin 2020 was due primarily to the acquisitions, as well asfavorable impact of cost-reduction actions implemented across the higher sales levelsCompany in 2017.response to the COVID-19 pandemic. In addition, SG&A expenses in 2019 included one-time expense of $4.3 million related to an executive departure. The increase in SG&A expenses as a percentage of net sales was relatively consistent year-over-year, at 10.5%due to a fixed portion of SG&A expenses over a lower revenue base.
Other Components of Pension Income and Other Postretirement Benefits (“OPEB”)Expense, Net
Other components of pension income and OPEB expense, net was $7.3 million in 20172020 compared to 10.2%$5.6 million in 2016.2019. The increase in 2020 was driven by higher returns on plan assets in 2020 compared to 2019.
Litigation Settlement Gain
During 2017, the Company paid $4.0 million to settle the IPSCO litigation. In connection with the settlement, the Company recognized $3.3 million of income related to the reversal of its excess litigation liability.
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 in our aluminum products business.
Interest Expense, Net
Interest expense, increasednet decreased to $31.5$30.3 million in 2017 from $28.22020 compared to $33.8 million in 2016,2019. The decrease was due primarily to higherlower average interest rates and lower outstanding borrowings.borrowings in 2020 compared to 2019. The lower outstanding borrowings were driven by debt repayments of $35.4 million during 2020. Our average effective borrowing rate was relatively consistent year-over-year.
|
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (Dollars in millions) |
| Interest expense | $ | 31.5 |
| | $ | 28.2 |
|
| Average outstanding borrowings | $ | 515.6 |
| | $ | 462.1 |
|
| Average borrowing rate | 6.11 | % | | 6.10 | % |
As described more fully below,5.4% in April 2017, we refinanced our outstanding senior notes, increasing the principal amount from $250 million2020 compared to $350 million and reducing the interest rate from 8.125% to 6.625%. The net impact of the higher senior notes balance at a lower rate was an increase5.8% in interest expense of approximately $2.1 million in 2017.
Loss on Extinguishment of Debt
During 2017, we incurred $11.0 million of expenses related to our debt refinancing activities. Such expenses included tender premiums, bank and other fees and accelerated amortization of certain debt issuance costs related to our former borrowings that were previously capitalized.2019.
Income Tax ExpenseBenefit (Expense)
The provision for income taxes was $18.2a benefit of $2.5 million in 20172020 (an effective rate of 38.0%34.2%) and $8.8compared to expense of $15.2 million in 20162019 (an effective rate of 21.5%27.7%). Income taxes in 2017 include a net $4.2 million of expense related to the U.S. Tax Act, as discussed more fully above. Excluding the impact of the U.S. Tax Act, the effective taxThe 2020 rate would have been 29.2%. In 2017 and 2016, the Company reversed various income tax accruals of approximately $1.6 million and $4.0 million, respectively, relating to previous uncertain tax positions for which the statutes of limitations expired.
Excluding the one-time impact of the U.S. Tax Act, the effective rates in both years are lower than the U.S. statutory rate of 35% due primarily to the income tax accrual reversals mentioned above, as well as earnings in jurisdictions in which the income tax rates are lower than the U.S. statutory income tax rate.
2016Compared with2015
Net Sales
Net sales decreased 13% to $1,276.9 million in 2016 compared to $1,463.8 million in 2015. The decrease in net sales was mainlyis higher due to lower end-market demand for our products in each of our segments, primarily in our aluminum products, heavy-duty truckUS tax loss planning and power sport end markets.related net operating loss carrybacks to prior years under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
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
Consolidated 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.
SEGMENT RESULTS
For purposes of measuring business segment performance, the Company utilizes segment operating income, which is defined as revenues less expenses identifiable to the product lines within each segment. The Company does not allocate items that are non-operating or unusual in nature or are corporate costs, which include but are not limited to executive and share-based compensation and corporate office costs. Segment operating income reconciles to consolidated income before income taxes by deducting corporate costs,costs; certain non-cash chargesand/or non-operating items; Other components of pension income and OPEB expense, net; and interest expense.expense, net.
Supply Technologies Segment | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2020 | | 2019 | | 2018 | | | | | | | | |
| (Dollars in millions) |
| Net sales | $ | 510.1 | | | $ | 611.5 | | | $ | 636.8 | | | | | | | | | |
| Segment operating income | $ | 30.2 | | | $ | 42.0 | | | $ | 49.0 | | | | | | | | | |
| Segment operating income margin | 5.9 | % | | 6.9 | % | | 7.7 | % | | | | | | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in millions) |
| Net sales | $ | 561.8 |
| | $ | 502.1 |
| | $ | 578.7 |
|
| Segment operating income | $ | 45.9 |
| | $ | 40.0 |
| | $ | 50.3 |
|
| Segment operating income margin | 8.2 | % | | 8.0 | % | | 8.7 | % |
20172020 Compared to 20162019
Net Sales: Net sales were up 12%down 17% in 20172020 compared to 2016,2019 due primarily to organic growth of 8% and the sales from the 2017 acquisitions. The organic growth waslower customer demand in certain end markets, due primarily to higher customer demandthe impact of the global COVID-19 pandemic in the Company's power sport and recreational equipment market, which was up 16%;2020.The primary decreases were in the Company's truck and truck-related market, which was up 5%down 38%; the Company'sCompany’s aerospace and defense market, which was down 41%; the Company’s automotive market, which was down 14%; the Company’s consumer products market, which was down 14%; and the Company’s agricultural and industrial equipment market, which was down 12%.These decreases were partially offset by
higher customer demand in the Company’s medical device market, which was up 109%; and the Company’s semiconductor market, which was up 37%; and the Company's commercial aerospace market, which was up 25% compared to 2016.35%.
Segment Operating Income: Segment operating income increased by $5.9 million in 2017 compared to 2016, and segment operating income margin increased by 20 basis points, due primarily to the higher sales volumes noted above.
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.
Assembly Components Segment
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in millions) |
| Net sales | $ | 524.5 |
| | $ | 529.4 |
| | $ | 569.2 |
|
| Segment operating income | $ | 50.4 |
| | $ | 50.5 |
| | $ | 57.9 |
|
| Segment operating income margin | 9.6 | % | | 9.5 | % | | 10.2 | % |
2017 Compared to 2016
Net Sales: Net sales were down 1% in 2017 compared to 2016 due primarily to lower sales volumes in our extruded rubber and plastic product lines and our aluminum product line, which more than offset higher sales in our fuel filler pipe and
fuel rail product lines. The lower sales volumes in rubber and plastic were due primarily to the end of life in certain programs, and the lower sales volumes in aluminum were due to the end of production in certain programs during 2016. The higher sales volumes in our fuel products businesses were driven by new product launches and higher foreign sales, particularly in China and Mexico.
Segment Operating Income: Segment operating income and operating income margin was relatively consistent year over year. The favorable impact of higher sales in our fuel products businesses offset the impact of lower sales in rubber, plastics and aluminum, as well as start-up costs of approximately $1.4 million incurred by the segment during 2017 related to our new facilities in China.
2016 Compared to 2015
Net Sales: Net sales were down 7%$11.8 million and 100 basis points, respectively, in 20162020 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. 2019.These decreases were due primarily to lower profit flow-through from the lower sales in our aluminum business as described above,volumes and 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.
Engineered Products Segment
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (Dollars in millions) |
| Net sales | $ | 326.6 |
| | $ | 245.4 |
| | $ | 315.9 |
|
| Segment operating income | $ | 20.7 |
| | $ | 10.6 |
| | $ | 20.9 |
|
| Segment operating income margin | 6.3 | % | | 4.3 | % | | 6.6 | % |
2017 Compared to 2016
Net Sales: Net sales were up 33% in 2017 compared to 2016 due primarily to $55 million of sales at GH, which was acquired at the end of 2016, and increased customer demand for our induction heating and pipe threading products in our legacy businesses.
Segment Operating Income: Segment operating income increased by $10.1 million, and segment operating income margin increased by 200 basis points, due primarily to the higher sales in 2017 and the benefit of cost reduction actions taken in 2016 in response to lower sales levels a year ago.challenging market conditions.
2016
Assembly Components Segment
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2020 | | 2019 | | 2018 | | | | | | | | |
| (Dollars in millions) |
| Net sales | $ | 441.5 | | | $ | 539.5 | | | $ | 578.3 | | | | | | | | | |
| Segment operating income | $ | 8.1 | | | $ | 36.2 | | | $ | 42.9 | | | | | | | | | |
| Segment operating income margin | 1.8 | % | | 6.7 | % | | 7.4 | % | | | | | | | | |
2020 Compared to 20152019
Net Sales: Net sales were down 22%18% in 20162020 compared to 20152019 due primarily to the impact of the global COVID-19 pandemic on the U.S. automotive industry. Our customers closed their facilities and reduced vehicle production in mid-March in compliance with federal and state guidelines, resulting in the closure of our facilities. Beginning in late May and early June 2020, the industry began the slow process of re-opening manufacturing facilities and restarting production, albeit at lower levels than before the COVID-19 pandemic, and our facilities began to ramp-up production.
Segment operating income and operating income margin were down $28.1 million and 490 basis points, respectively, in 2020 compared to 2019. These decreases were driven by the production shut-downs described above, as well as by charges of $4.1 million related to plant closure and consolidation actions in 2020. In 2019, this segment incurred similar charges of $3.3 million. The actions in both years resulted in cost reductions which partially offset the negative impact on profitability of the lower sales.
Engineered Products Segment
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2020 | | 2019 | | 2018 | | | | | | | | |
| (Dollars in millions) |
| Net sales | $ | 343.6 | | | $ | 467.3 | | | $ | 443.0 | | | | | | | | | |
| Segment operating income | $ | 3.5 | | | $ | 37.7 | | | $ | 38.4 | | | | | | | | | |
| Segment operating income margin | 1.0 | % | | 8.1 | % | | 8.7 | % | | | | | | | | |
2020 Compared to 2019
Net sales were down 26% in 2020 compared to 2019 due primarily to lower customer demand in thecertain key end markets in our forged and machined products business, including our oil and gas, aerospace, rail steel, commercial aerospace and military end markets.agriculture markets; as well as lower demand for our capital equipment products, as many customers delayed buying decisions in response to the COVID-19 pandemic.
Segment Operating Income: Segment operating income decreased by $10.3 million, and segment operating income margin declined by 230were down $34.2 million and 710 basis points, respectively, in 2020 compared to 2019. These decreases were due primarily to volume declinesthe lower sales levels, unfavorable product mix, manufacturing inefficiencies in our induction heating, pipe threadingcertain facilities, and forging businessescost overruns on certain jobs in this segment, primarily as a result of the COVID-19 pandemic. In addition, in 2020 this segment incurred charges of $2.2 million related to the weak market demand noted above. These factors were partially offset by the benefits of cost reduction actions.
plant closure and consolidation.
Liquidity and Capital Resources
The following table summarizes the major components of cash flows:
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Cash provided (used) by: | (In millions) |
| Operating activities | $ | 69.3 | | | $ | 63.7 | | | $ | 54.8 | |
| Investing activities | (24.9) | | | (48.2) | | | (89.2) | |
| Financing activities | (47.3) | | | (15.3) | | | 9.4 | |
| Effect of exchange rate on cash | 1.9 | | | 0.1 | | | (2.1) | |
| Increase (decrease) in cash and cash equivalents | $ | (1.0) | | | $ | 0.3 | | | $ | (27.1) | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Cash provided (used) by: | (In millions) |
| Operating activities | $ | 46.7 |
| | $ | 72.9 |
| | $ | 44.7 |
|
| Investing activities | (67.6 | ) | | (51.9 | ) | | (36.5 | ) |
| Financing activities | 33.7 |
| | (17.2 | ) | | 0.7 |
|
| Effect of exchange rate on cash | 5.7 |
| | (1.5 | ) | | (4.9 | ) |
| Increase in cash and cash equivalents | $ | 18.5 |
| | $ | 2.3 |
| | $ | 4.0 |
|
Operating Activities
Cash provided by operating activities decreased by $26.2 million in 2017 compared to 2016, driven by higher sales levels in 2017, which resulted in higher accounts receivable balances in 2017 compared to 2016.
Cash provided by operating activities increased by $28.2$5.6 million in 20162020 compared to 2015, driven by
lower working capital needs (accounts receivable, inventories and accounts payable and other accrued expenses) in 2016
compared2019, as the Company’s initiatives to 2015. Lower sales levels in 2016 resulted in lower inventory and accounts receivable balances, and, in
2015, higher inventories and lower accounts payable balances combined to use cash of $52.3 million. The lower
reduce working capital in 2016 was partially2020 in response to market conditions resulted in positive cash flow of $33.3 million, compared to a usage of cash for working capital of $11.3 million in 2019 and $35.5 million in 2018. The favorable reduction in working capital in 2020 more than offset bythe impact of lower net income of $16.5 million.profitability in 2020 compared to 2019 and 2018.
Investing Activities
Capital expenditures were $27.9$26.3 million in 2017, $28.52020, $40.1 million in 20162019 and $36.5$45.1 million in 2015.2018. These capital expenditures were primarily for growth initiatives, with the majority in our Assembly Component segmentComponents and Engineered Products segments. Capital expenditures in 2020 were lower than in the prior years, as we launch new businesscurtailed non-critical capital spending in our fuel product lines.response to the COVID-19 pandemic.
In 2017,2019, we spent a combined $39.7$8.1 million on acquisitionsacquisition of businesses.EFCO, Inc. d/b/a Erie Press Systems. See Note 35 to the consolidated financial statements included elsewhere hereinfor additional information.
In 2016,2018, we spent $23.4$46.9 million on the acquisitionacquisitions of GH.businesses, primarily Canton Drop Forge and Hydrapower Dynamics Limited (“Hydrapower”). See Note 35 to the consolidated financial statements included elsewhere hereinfor additional information.
Financing Activities
Cash used by financing activities in 2020 included debt repayments of $35.4 million, treasury share repurchases of $7.5 million, dividends of $3.2 million and payments of withholding taxes on share awards of $1.2 million. In the second and third quarter of 2020, we temporarily suspended our quarterly cash dividend to preserve capital in response to challenging market conditions and uncertainty caused by the COVID-19 pandemic. Our Board of Directors once again declared a dividend in the fourth quarter of 2020.
Cash used by financing activities in 2019 included net debt repayments of $4.5 million, dividend payments of $7.0 million, treasury share repurchases of $0.9 million, and payments made of withholding taxes on share awards of $2.9 million.
Cash provided by financing activities in 2017 reflected the proceeds from2018 included net borrowings of $40.3 million on our issuance of senior notes in April 2017, net of the premium on the early extinguishment of our former senior notes and bank financing fees, repayments under our amended and restated revolving credit facility to fund our 2018 acquisitions, and the payoffrepayments of our previously-outstanding term loan and senior notes.other debt of $12.4 million. During 2017,2018, we also paid dividends of $6.9 million and$6.4 million; repurchased treasury shares for $4.2$9.0 million; and made payments of withholding taxes on share awards of $3.1 million.
Cash used by financing activities in 2016 consisted primarily
During September 2018, we repatriated cash of $24.4 million from a foreign subsidiary to the U.S. and utilized the cash to pay down a portion 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. Duringamount outstanding under our revolving credit facility in 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.U.S.
Cash provided by financing activities in 2015 consisted primarily of net borrowings on debt instruments of $20.4 million, offset by payment of cash dividends of $6.3 million and repurchased treasury shares of $15.5 million.
Liquidity
Overall, our net borrowings and cash provided by operating activities werein 2020 was used to fund higher workingour capital needs, the litigation settlement payment,expenditures, repay debt and fund our quarterly cash dividend payments, share repurchases, and debt refinancing costs. In addition, our cash balances increased by $18.5 million at December 31, 2017 compared to the beginning of 2017.other financing activities described above. See Note 67 to the consolidated financial statements included elsewhere hereinfor further discussion.discussion of our financing arrangements.
The following table summarizes our indicators of liquidity: | | | | | | | | | | | |
| 2020 | | 2019 |
| (Dollars in millions) |
| Cash and cash equivalents | $ | 55.0 | | | $ | 56.0 | |
| Gross debt (excluding unamortized debt issuance costs) | $ | 534.7 | | | $ | 568.5 | |
| Working capital (excluding cash) | $ | 344.3 | | | $ | 364.7 | |
| | | |
| | | |
| Net debt as a % of capitalization | 54 | % | | 56 | % |
|
| | | | | | | |
| | 2017 | | 2016 |
| | (Dollars in millions) |
| Cash and cash equivalents | $ | 82.8 |
| | $ | 64.3 |
|
| Gross debt (excluding unamortized debt issuance costs) | $ | 541.9 |
| | $ | 475.0 |
|
| Working capital (excluding cash) | $ | 310.7 |
| | $ | 246.5 |
|
| Net debt as a % of capitalization | 56 | % | | 58 | % |
As of December 31, 2017, we had $124.7 million outstanding under the revolving credit facility, approximately $194.2 million of unused borrowing availability and cash and cash equivalents of $82.8 million.
Our liquidity needs are primarily for working capital and capital expenditures. Our primary sources of liquidity have been fundscash provided by operations, funds available from existing bank credit arrangements and the sale of our debt securities. Our existing financial resources, (workingincluding working capital and available bank borrowing arrangements)arrangements, and anticipated fundscash from operations are expected to be adequate to meet anticipated cash requirements for at least the next twelve months, including but not limited to our ability to maintain current operations and fund capital expenditure requirements, service our debt and pay dividends.
As of December 31, 2020, we had $143.7 million outstanding under the revolving credit facility, and total liquidity of $252.4 million, which included cash and cash equivalents of $55.0 million and $197.4 million of unused borrowing availability.
The Company had cash and cash equivalents held by foreign subsidiaries of $76.0$44.7 million at December 31, 20172020 and $54.4$45.4 million at December 31, 2016.2019. We do not expect restrictions on repatriation of cash held outside the U.S. to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.
Senior Notes
OnIn April 17, 2017, wePark-Ohio Industries, Inc. (“Park-Ohio”), the operating subsidiary of Park-Ohio Holdings Corp., completed the sale, in a private placement, of $350.0 million aggregate principal amount of 6.625% Senior Notes due 2027 (the “Notes”). The net proceeds from the issuance of the Notes were used to repay in full our previously outstanding 8.125% Senior Notes due 2021 and our outstanding term loan, and to repay a portion of the borrowings then outstanding under our revolving credit facility.
Credit Agreement
On April 17, 2017, the CompanyIn June 2018, Park-Ohio entered into Amendment No. 1 to its Seventh Amended and Restated Credit Agreement (the “Credit Agreement”). The Amendment to the Credit Agreement, among other things, provides an increasedprovided increases in the revolving credit facility of up tofrom $350.0 million to $375.0 million, the Canadian revolving subcommitment from $35.0 million to $40.0 million, and extends the maturity date of borrowings under the facilityEuropean revolving subcommitment from $25.0 million to April 17, 2022.$30.0 million. Furthermore, the Company has the option, pursuant to the Credit Agreement, to increase the availability under the revolving credit facility by an aggregate incremental amount up to $100.0 million.
As of December 31, 2017, we had $124.7 million outstanding and $194.2 million of unused borrowing availability under the revolving credit facility provided by In November 2019, Park-Ohio entered into Amendment No. 4 to the Credit Agreement, extending the maturity of the Credit Agreement to November 16, 2024.
CapitalFinance Leases
On August 13, 2015, the Company entered into a CapitalFinance Lease Agreement (the “Lease Agreement”). The Lease Agreement provides the Company up to $50.0 million for capitalfinance leases. CapitalFinance lease obligations of $20.3$18.7 million were borrowed under the Lease Agreement to acquire machinery and equipment as of December 31, 2017.2020.
Covenants
The future availability of bank borrowings under the revolving credit facility provided by the Credit Agreement is based on (1) our calculated availability under the Credit Agreement and (2) if such calculated availability decreases below $46.875 million, our ability to meet a debt service ratio covenant. If our calculated availability is less than $46.875 million, our debt service coverage ratio must be greater than 1.0. At December 31, 2020, our calculated availability under the Credit Agreement was $174.6 million; therefore, the debt service ratio covenant which could be materially impacted by negative economic trends. did not apply.
Failure to maintain calculated availability of at least $46.875 million and meet the debt service ratio covenant could materially impact the availability and interest rate of future borrowings.
At December 31, 2017, our Our debt service coverage ratio was 2.2,could be materially impacted by negative economic trends, including the negative trends caused by the COVID-19 pandemic. To make certain permitted payments as defined under the Credit Agreement, including but not limited to acquisitions and therefore,dividends, we were in compliance with themust meet defined availability thresholds ranging from $37.5 million to $46.875 million, and a defined debt service coverage ratio covenant in the revolving credit facility provided by the Credit Agreement. The debt service coverage ratio is calculated at the end of each fiscal quarter based on the following ratio: (1) the most recently ended four fiscal quarters of consolidated EBITDA, as defined in the Credit Agreement, minus cash taxes paid, minus unfunded capital expenditures, plus cash tax refunds; to (2) consolidated debt charges, which are 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 1.15 for any two consecutive fiscal quarters. 1.15.
We were also in compliance with the other covenants contained in the revolving credit facility as of December 31, 2017.2020. While we expect to remain in compliance throughout 2018,2021, declines in sales volumes in 2018the future, including further declines caused by the COVID-19 pandemic, 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, including the decline caused by the COVID-19 pandemic, they may be unable to pay their accounts payable to us on a timely basis or at all, which could make our accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our ability to borrow under such facility.
Dividends
The companyCompany paid dividends to shareholders of $6.9$3.2 million during 2017.2020. In the second and third quarter of 2020, we temporarily suspended our quarterly cash dividend to preserve capital in response to challenging market conditions and uncertainty caused by the pandemic. Our Board of Directors once again declared a dividend in the fourth quarter of 2020. In January 2018,2021, our Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend will bewas paid on March 1, 2018February 26, 2021 to shareholders of record as of the close of business on February 15, 201812, 2021 and resulted in a cash outlay of approximately $1.6 million. Although we currently intend to pay a quarterly dividend on an ongoing basis, all future dividend declarations will be at the discretion of our Board of Directors and dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects and other factors that our Board of Directors may deem relevant.
Contractual Obligations
The following table summarizes our principal contractual obligations and other commercial commitments over various future periods as of December 31, 2017:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due or Commitment Expiration Per Period |
| (In millions) | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
| Short-term and long-term debt obligations | | $ | 516.0 | | | $ | 4.5 | | | $ | 8.1 | | | $ | 149.7 | | | $ | 353.7 | |
Interest obligations (1) | | 146.9 | | | 23.2 | | | 46.4 | | | 46.4 | | | 30.9 | |
| Operating lease obligations | | 69.6 | | | 12.9 | | | 22.6 | | | 15.7 | | | 18.4 | |
| Finance lease obligations | | 18.7 | | | 7.1 | | | 8.0 | | | 2.8 | | | 0.8 | |
Purchase obligations (2) | | 179.0 | | | 177.7 | | | 1.2 | | | 0.1 | | | — | |
Pension obligations (3) | | 62.2 | | | 5.9 | | | 12.3 | | | 12.6 | | | 31.4 | |
Postretirement obligations (3) | | 6.8 | | | 0.9 | | | 1.6 | | | 1.5 | | | 2.8 | |
| Transition tax | | 7.8 | | | — | | | 2.5 | | | 5.3 | | | — | |
| Standby letters of credit and bank guarantees | | 34.9 | | | 32.8 | | | 1.5 | | | — | | | 0.6 | |
| Total | | $ | 1,041.9 | | | $ | 265.0 | | | $ | 104.2 | | | $ | 234.1 | | | $ | 438.6 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Payments Due or Commitment Expiration Per Period |
| (In millions) | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
| Short-term and long-term debt obligations | | $ | 521.6 |
| | $ | 8.6 |
| | $ | 19.3 |
| | $ | 141.2 |
| | $ | 352.5 |
|
Interest obligations (1) | | 225.8 |
| | 23.2 |
| | 46.4 |
| | 46.4 |
| | 109.8 |
|
| Operating lease obligations | | 64.1 |
| | 17.8 |
| | 22.4 |
| | 10.6 |
| | 13.3 |
|
| Capital lease obligations | | 20.3 |
| | 9.1 |
| | 9.9 |
| | 1.3 |
| | — |
|
Purchase obligations (2) | | 212.3 |
| | 212.2 |
| | 0.1 |
| | — |
| | — |
|
Pension obligations (3) | | 45.8 |
| | 5.1 |
| | 8.9 |
| | 9.0 |
| | 22.8 |
|
Postretirement obligations (3) | | 8.7 |
| | 1.2 |
| | 2.1 |
| | 1.8 |
| | 3.6 |
|
| Standby letters of credit and bank guarantees | | 28.6 |
| | 21.6 |
| | 5.1 |
| | 1.9 |
| | — |
|
| Total | | $ | 1,127.2 |
| | $ | 298.8 |
| | $ | 114.2 |
| | $ | 212.2 |
| | $ | 502.0 |
|
| |
(1) | Interest obligations are included on the Notes only and assume the Notes are paid at maturity. The calculation of interest on debt outstanding under our revolving credit facility and other variable rate debt ($4.1 million based on 3.30% average |
(1)Interest obligations are included on the Notes only and assume the Notes are paid at maturity. The calculation of interest on debt outstanding under our revolving credit facility and other variable rate debt ($1.9 million based on 1.35% average interest rate and outstanding borrowings of $124.7$143.7 million at December 31, 2017)2020, respectively) is not included above due to the estimation required.
| |
(2) | Purchase obligations include contractual obligations for raw materials and services. |
| |
(3) | Pension and postretirement obligations include projected benefit payments to participants only through 2027. |
(2)Purchase obligations include contractual obligations for raw materials and services.
(3)Pension and postretirement obligations include projected benefit payments to participants only through 2029.
The table above excludes the liability for unrecognized income tax benefits disclosed in Note 79 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 will 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.
other than the letters of credits disclosed in Note 8 to the consolidated financial statements, included elsewhere herein.
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 transferredour obligations under the contact terms are satisfied and control transfers to the customer, typically upon shipment. Revenue from certain long-term contracts is accounted for over time, when products are manufactured or services are performed, as control transfers under the percentagethese
arrangements. We follow thisthe input method since reasonably reliable estimates of revenue and costs of a contract can be made. Revenue earnedSee Note 2 of the consolidated financial statements included elsewhere herein for additional disclosures on contracts in process that are in excess of billings is classified in Other current assets in the accompanying Consolidated Balance Sheet. Billings in excess of revenues earned on contracts in process are classified in Other accrued expenses in the accompanying Consolidated Balance Sheet and totaled $23.0 million and $22.7 million at December 31, 2017 and 2016, respectively.revenue.
Allowance for Obsolete and Slow-Moving Inventory: Inventories are generally valued using First-In, First-Outfirst-in, first-out (“FIFO”) andor the weighted-average inventory method; stated at the lower of cost or net realizable valuevalue; 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 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 and operating lease right-of-use assets, 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, weassets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other group of assets (for example, plant location or asset level). We determine whether the carrying amount of our long-lived assetsthe asset group 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 assetsasset group exceeds the expected undiscounted cash flows, we estimate the fair value of these assetsthe asset group by using appraisals or recent selling experience in selling similar assets, or for certain assets with reasonably predictable cash flows by performing a discounted cash flow analysis utilizing the income approach 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:Combinations: Business combinations are accounted for using the purchase method of accounting.accounting under ASC 805, "Business Combinations." 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.assumptions including discount rates, rates of return on assets, long-term sales growth rates, and royalty rates.
Goodwill and Indefinite-Lived Intangible Assets: 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, managementManagement 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. For 20172020, 2019 and 2016,2018, we performed quantitative testing for each reporting unit with a goodwill balance. In 2015, we performed our testing using both qualitative and
Our annual goodwill impairment analysis utilizes a quantitative methods.
Goodwill testing compares theapproach comparing 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, an impairment charge is recorded. In applying the quantitative approach, we rely onuse an income approach to estimate the fair value of the reporting unit. The income approach uses 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. We validate our estimates of fair value under the income approach by considering the implied control premium and conclude whether that premium is reasonable based on recent market transactions.
The results of testing as of October 1, 2017, 20162020, 2019 and 20152018 for all reporting units confirmed that the estimated fair value exceeded carrying values, and no impairment existed as of those dates. Based on our 2020 annual impairment test, we determined that the fair value of our FMPG reporting unit, which is included in our Engineered Products segment, exceeded its carrying value by 10% as of the October 1, 2020 testing date. As such, we concluded that the goodwill of this reporting unit of $8.7 million was not impaired as of that date. This reporting unit was negatively impacted by the COVID-19 pandemic throughout 2020, and while we believe that the current assumptions and estimates used in our goodwill testing are reasonable, supportable and appropriate, there can be no assurance that such assumptions and estimates will prove to be accurate predictions of future performance.
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. In 20172020, 2019 and 2016,2018, we utilized a quantitative approach. In 2015, we utilized a combination of qualitative and quantitative assessments. Our fiscal 2017, 2016 and 2015 annual impairment tests of each of our indefinite-lived intangible assets did not result in any impairment loss.approach using the royalty relief method. The significant assumptions employed under this method include discount rates, and revenue growth rates, including assumed terminal growth rates, and royalty 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.
The results of testing as of October 1, 2020, 2019 and 2018 for all reporting units confirmed that the estimated fair value exceeded carrying values, and no impairment existed as of those dates.
See Notes 46 and 57 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 adequacyif it is more likely than not that all or some portion of valuation allowances,a deferred tax asset will be realized, we consider cumulativethe following factors: future reversals of existing taxable temporary differences; taxable income in prior years if carryback is permitted under the tax law; tax planning strategies that could accelerate taxable income; and anticipated amountsfuture taxable income. Based on these factors, when we have determined that the realizability of certain domestic and international earnings or losses, anticipated amounts of foreign source income, and the anticipated taxable income resulting from the reversal of future taxable temporary differences. We intenddeferred tax assets is more likely than not to maintain any recordednot be realized, a valuation allowances until sufficient positive evidence, such as cumulative positive foreign earnings or additional foreign source income, exists to support reversal of the tax valuation allowances.allowance has been established.
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 2017 and 2016, the Company reversed various income tax accruals totaling approximately $1.6 million and $4.0 million, respectively, 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.
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 3.52%2.40% for 2017,2020, compared with 3.91%3.22% in 2016.2019. For the other postretirement benefit plan, the rate is 3.32%1.95% for 20172020 and 3.63%2.94% for 2016.2019. 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%7.75% for 2017.2020. 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, 2017:
|
| | | | | | | | | | | | |
| Change in Assumption | | Impact on 2017 Benefit Expense | | Impact on 2017 Projected Benefit Obligation for Pension Benefits | | Impact on 2017 Projected Benefit Obligation for Postretirement Benefits |
| | | (Dollars in millions) |
| 50 basis point decrease in discount rate | | $ | — |
| | $ | 3.1 |
| | $ | 0.3 |
|
| 50 basis point increase in discount rate | | $ | — |
| | $ | (2.8 | ) | | $ | (0.3 | ) |
| 50 basis point decrease in expected return on assets | | $ | 0.7 |
| | $ | — |
| | $ | — |
|
See Note 11 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 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 Standards
See Note 1 to the consolidated financial statements included elsewhere herein.
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, 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, 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 in 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, including 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: the ultimate impact the COVID-19 pandemic has on our business, results of operations, financial position and liquidity; 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; the impact of labor disturbances affecting our customers; 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;crises, such as tariffs and surcharges; adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities; public health issues, including the outbreak of COVID-19 and its impact on our facilities and operations and our customers and suppliers; 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 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 board of 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, and the timing and amount of any such dividends; and the other factors we describe under “Item 1A. Risk Factors” included in this
Annual 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. As of December 31, 2017,2020, we are subject to interest rate risk on borrowings under the floating rate revolving credit facility provided by our Credit Agreement, which consisted of borrowings of $124.7$143.7 million at December 31, 2017.2020. A 100 basis100-basis point increase in the interest rate would have resulted in an increase in interest expense on these borrowings of approximately $1.2$1.4 million for the year ended December 31, 2017.2020.
Our foreign subsidiaries generally conduct business in local currencies. We face translation risks related to the changes in foreign currency exchange rates. Amounts invested in our foreign operations are translated 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 comprehensive loss in the Shareholders' equity section of the accompanying Consolidated Balance Sheets. Sales and expenses at our foreign operations are translated into U.S. dollars at the applicable monthly average exchange rates. Therefore, changes in exchange rates may either positively or negatively affect our net sales and expenses from foreign operations as expressed in U.S. dollars.
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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Park-Ohio Holdings Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Park-Ohio Holdings Corp. and subsidiaries (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of income,operations, comprehensive income, (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2017,2020, 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 8, 20185, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | |
Quantitative Impairment Assessment of Goodwill
|
Description of the matter
How we addressed the matter in our audit
| At December 31, 2020, the Company’s goodwill was $110.9 million. As discussed in Note 1 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level or more frequently if impairment indicators arise. Goodwill is tested at the reporting unit level for impairment utilizing the income approach, which uses a discounted cash flow methodology to estimate the fair value of each reporting unit.
Auditing management’s quantitative goodwill impairment assessment for certain of its reporting units was complex and highly judgmental due to the significant estimation required to determine the fair value of the reporting units. In particular, the fair value estimate was sensitive to significant assumptions, such as revenue growth rates, operating margins and weighted average cost of capital (WACC), which are impacted by expectations of future market or economic conditions.
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment process.This included controls over management’s review of the significant assumptions underlying the fair value determination described above.
To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions described above and the underlying data used by the Company in its analysis. For example, we compared the significant assumptions used by management to current industry and economic trends and to historical results. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We also involved our specialists to review the methodology, and certain assumptions such as the WACC. In addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the Company. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1967.
Cleveland, Ohio
March 8, 20185, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Park-Ohio Holdings Corp.
Opinion on Internal Control over Financial Reporting
We have audited Park-Ohio Holdings Corp. and subsidiaries’ internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control- Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Park-Ohio Holdings Corp. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172020 and 2016,2019, the related consolidated statements of income,operations, comprehensive income, (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated March 8, 20185, 2021 expressed an unqualified opinion thereon.
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 Aero-Missile Components, Inc., Head & All Threads, Ltd., and an injection molding business, which is included in the 2017 consolidated financial statements of the Company and constituted approximately 5% of the Company's total assets as of December 31, 2017, and approximately 1% of the Company's total revenues, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Aero-Missile Components, Inc., Heads & All Threads, Ltd., and the injection molding business.
Basis for Opinion
The Company’s 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 8, 20185, 2021
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Balance Sheets |
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| | (In millions, except share
data) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 82.8 |
| | $ | 64.3 |
|
| Accounts receivable, net | 242.6 |
| | 194.4 |
|
| Inventories, net | 282.8 |
| | 240.6 |
|
| Other current assets | 61.4 |
| | 53.4 |
|
| Total current assets | 669.6 |
| | 552.7 |
|
| Property, plant and equipment, net | 177.0 |
| | 167.1 |
|
| Goodwill | 100.2 |
| | 86.6 |
|
| Intangible assets, net | 99.5 |
| | 96.6 |
|
| Pension assets | 74.3 |
| | 61.7 |
|
| Other long-term assets | 11.9 |
| | 9.6 |
|
| Total assets | $ | 1,132.5 |
| | $ | 974.3 |
|
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| Current liabilities: | | | |
| Trade accounts payable | $ | 173.7 |
| | $ | 133.6 |
|
| Current portion of long-term debt and short-term debt | 17.7 |
| | 30.8 |
|
| Accrued employee compensation | 23.0 |
| | 18.8 |
|
| Other accrued expenses | 61.7 |
| | 58.7 |
|
| Total current liabilities | 276.1 |
| | 241.9 |
|
| Long-term liabilities, less current portion: | | | |
| Debt | 515.5 |
| | 439.0 |
|
| Deferred income taxes | 22.3 |
| | 27.7 |
|
| Other long-term liabilities | 30.6 |
| | 29.7 |
|
| Total long-term liabilities | 568.4 |
| | 496.4 |
|
| 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 - 15,153,009 shares in 2017 and 14,846,035 in 2016 | 15.2 |
| | 14.9 |
|
| Additional paid-in capital | 117.8 |
| | 108.8 |
|
| Retained earnings | 216.1 |
| | 193.6 |
|
| Treasury stock, at cost, 2,624,354 shares in 2017 and 2,446,111 shares in 2016 | (55.2 | ) | | (48.6 | ) |
| Accumulated other comprehensive loss | (17.9 | ) | | (42.7 | ) |
| Total Park-Ohio Holdings Corp. and Subsidiaries shareholders' equity | 276.0 |
| | 226.0 |
|
| Noncontrolling interests | 12.0 |
| | 10.0 |
|
| Total equity | 288.0 |
| | 236.0 |
|
| Total liabilities and shareholders' equity | $ | 1,132.5 |
| | $ | 974.3 |
|
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| (In millions, except share
data) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 55.0 | | | $ | 56.0 | |
| Accounts receivable, net | 248.1 | | | 261.3 | |
| Inventories, net | 310.9 | | | 327.2 | |
| | | |
| Unbilled contract revenue | 56.9 | | | 61.7 | |
| Other current assets | 35.5 | | | 19.5 | |
| Total current assets | 706.4 | | | 725.7 | |
| Property, plant and equipment, net | 236.6 | | | 237.6 | |
| Operating lease right-of-use assets | 68.6 | | | 64.3 | |
| Goodwill | 110.9 | | | 108.4 | |
| Intangible assets, net | 86.8 | | | 90.6 | |
| Pension assets | 74.8 | | | 65.0 | |
| Other long-term assets | 16.4 | | | 18.8 | |
| Total assets | $ | 1,300.5 | | | $ | 1,310.4 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| Current liabilities: | | | |
| Trade accounts payable | $ | 166.7 | | | $ | 175.0 | |
| Current portion of long-term debt and short-term debt | 11.6 | | | 16.8 | |
| Current portion of operating lease liabilities | 12.9 | | | 11.9 | |
| Accrued employee compensation | 28.1 | | | 25.7 | |
| Deferred revenue | 37.4 | | | 35.7 | |
| Other accrued expenses | 50.4 | | | 39.9 | |
| Total current liabilities | 307.1 | | | 305.0 | |
| Long-term liabilities, less current portion: | | | |
| Long-term debt | 517.8 | | | 545.2 | |
| Long-term operating lease liabilities | 56.7 | | | 53.6 | |
| Deferred income taxes | 36.8 | | | 28.5 | |
| Other long-term liabilities | 24.2 | | | 28.5 | |
| Total long-term liabilities | 635.5 | | | 655.8 | |
| 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 -- NaN | 0 | | | 0 | |
| Common stock: Authorized - 40,000,000 shares; Issued - 16,148,791 shares in 2020 and 15,706,398 in 2019 | 16.1 | | | 15.7 | |
| Additional paid-in capital | 135.5 | | | 129.8 | |
| Retained earnings | 290.5 | | | 298.2 | |
| Treasury stock, at cost, 3,560,010 shares in 2020 and 3,040,623 shares in 2019 | (79.8) | | | (71.1) | |
| Accumulated other comprehensive loss | (18.1) | | | (37.0) | |
| Total Park-Ohio Holdings Corp. and Subsidiaries shareholders' equity | 344.2 | | | 335.6 | |
| Noncontrolling interests | 13.7 | | | 14.0 | |
| Total equity | 357.9 | | | 349.6 | |
| Total liabilities and shareholders' equity | $ | 1,300.5 | | | $ | 1,310.4 | |
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of IncomeOperations
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions, except per share data) |
| Net sales | $ | 1,412.9 |
| | $ | 1,276.9 |
| | $ | 1,463.8 |
|
| Cost of sales | 1,178.3 |
| | 1,073.9 |
| | 1,228.6 |
|
| Gross profit | 234.6 |
| | 203.0 |
| | 235.2 |
|
| Selling, general and administrative expenses | 147.7 |
| | 129.8 |
| | 135.1 |
|
| Litigation (settlement gains) judgment costs | (3.3 | ) | | — |
| | 2.2 |
|
| Asset impairment charge | — |
| | 4.0 |
| | — |
|
| Operating income | 90.2 |
| | 69.2 |
| | 97.9 |
|
| Interest expense | 31.5 |
| | 28.2 |
| | 27.9 |
|
| Loss on extinguishment of debt | 11.0 |
| | — |
| | — |
|
| Income before income taxes | 47.7 |
| | 41.0 |
| | 70.0 |
|
| Income tax expense | 18.2 |
| | 8.8 |
| | 21.3 |
|
| Net income | 29.5 |
| | 32.2 |
| | 48.7 |
|
| Net income attributable to noncontrolling interest | (0.9 | ) | | (0.5 | ) | | (0.6 | ) |
| Net income attributable to ParkOhio common shareholders | $ | 28.6 |
| | $ | 31.7 |
| | $ | 48.1 |
|
| | | | | | |
| Earnings per common share attributable to ParkOhio common shareholders: | | | | | |
| Basic | $ | 2.34 |
| | $ | 2.62 |
| | $ | 3.94 |
|
| Diluted | $ | 2.30 |
| | $ | 2.58 |
| | $ | 3.88 |
|
| Weighted-average shares used to compute earnings per share: | | | | | |
| Basic | 12.2 |
| | 12.1 |
| | 12.2 |
|
| Diluted | 12.5 |
| | 12.3 |
| | 12.4 |
|
| | | | | | |
| Cash dividend per common share | $ | 0.50 |
| | $ | 0.50 |
| | $ | 0.50 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (In millions, except per share data) |
| Net sales | $ | 1,295.2 | | | $ | 1,618.3 | | | $ | 1,658.1 | |
| Cost of sales | 1,126.6 | | | 1,358.0 | | | 1,386.6 | |
| Gross profit | 168.6 | | | 260.3 | | | 271.5 | |
| Selling, general and administrative expenses | 152.9 | | | 177.2 | | | 176.1 | |
| Gain on sale of assets | 0 | | | 0 | | | (1.9) | |
| | | | | |
| | | | | |
| Operating income | 15.7 | | | 83.1 | | | 97.3 | |
| | | | | |
Other components of pension income and other postretirement benefits expense, net
| 7.3 | | | 5.6 | | | 8.8 | |
| Interest expense, net | (30.3) | | | (33.8) | | | (34.3) | |
| | | | | |
| (Loss) income before income taxes | (7.3) | | | 54.9 | | | 71.8 | |
| Income tax benefit (expense) | 2.5 | | | (15.2) | | | (16.6) | |
| | | | | |
| | | | | |
| Net (loss) income | (4.8) | | | 39.7 | | | 55.2 | |
| Net loss (income) attributable to noncontrolling interest | 0.3 | | | (1.1) | | | (1.6) | |
| Net (loss) income attributable to ParkOhio common shareholders | $ | (4.5) | | | $ | 38.6 | | | $ | 53.6 | |
| | | | | |
| (Loss) earnings per common share attributable to ParkOhio common shareholders: | | | | | |
| | | | | |
| | | | | |
| Basic | $ | (0.37) | | | $ | 3.16 | | | $ | 4.37 | |
| | | | | |
| | | | | |
| | | | | |
| Diluted | $ | (0.37) | | | $ | 3.12 | | | $ | 4.28 | |
| Weighted-average shares used to compute (loss) earnings per share: | | | | | |
| Basic | 12.1 | | | 12.2 | | | 12.3 | |
| Diluted | 12.1 | | | 12.4 | | | 12.5 | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
| | | | | | | | | | Year Ended December 31, |
| | Year Ended December 31, | | 2020 | | 2019 | | 2018 |
| | 2017 | | 2016 | | 2015 | | (In millions) |
| | (In millions) | |
| Net income | $ | 29.5 |
| | $ | 32.2 |
| | $ | 48.7 |
| |
| Net (loss) income | | Net (loss) income | $ | (4.8) | | | $ | 39.7 | | | $ | 55.2 | |
| Other comprehensive income (loss): | | | | | | Other comprehensive income (loss): | |
| Foreign currency translation adjustments | 19.2 |
| | (13.9 | ) | | (11.8 | ) | |
| Pension and postretirement benefit adjustments, net of tax | 5.6 |
| | 1.2 |
| | (4.2 | ) | |
| Currency translation | | Currency translation | 14.1 | | | (1.1) | | | (9.7) | |
| Pensions and other postretirement benefits, net of tax | | Pensions and other postretirement benefits, net of tax | 4.8 | | | 5.0 | | | (13.3) | |
| Total other comprehensive income (loss) | 24.8 |
| | (12.7 | ) | | (16.0 | ) | Total other comprehensive income (loss) | 18.9 | | | 3.9 | | | (23.0) | |
| Total comprehensive income, net of tax | 54.3 |
| | 19.5 |
| | 32.7 |
| Total comprehensive income, net of tax | 14.1 | | | 43.6 | | | 32.2 | |
| Comprehensive income attributable to noncontrolling interest | (0.9 | ) | | (0.5 | ) | | (0.6 | ) | |
| Comprehensive loss (income) attributable to noncontrolling interest | | Comprehensive loss (income) attributable to noncontrolling interest | 0.3 | | | (1.1) | | | (1.6) | |
| Comprehensive income attributable to ParkOhio common shareholders | $ | 53.4 |
| | $ | 19.0 |
| | $ | 32.1 |
| Comprehensive income attributable to ParkOhio common shareholders | $ | 14.4 | | | $ | 42.5 | | | $ | 30.6 | |
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Holdings Corp. and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Holdings Corp. and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
are tested annually for impairment as of October 1, or whenever events or changes in circumstances indicate there may be an
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.
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 6)8) approximate fair value at December 31, 20172020 and December 31, 20162019 because of the short-term nature of these instruments. The fair values of long-term debt and pension plan assets are disclosed in Note 68 and Note 11,13, respectively.
The Company has not changed its valuation techniques for measuring fair value during 2017,2020, and there were no transfers between levels during the periods presented.
No other recently issued ASUs are expected to have a material impact on our results of operations, financial condition or liquidity.
Engineered Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of high qualityhighly-engineered products, engineeredincluding induction heating and melting systems, pipe threading systems and forged and machined products. Engineered Products also produces and provides services and spare parts for specificthe equipment it manufactures. In this segment, revenue is recognized for certain revenue streams at a point in time, and over time for other revenue streams. For point in time arrangements, revenue is recognized at the shipping point, as that is when control transfers to the customer. For over time arrangements, revenue is recognized over the time during which products are manufactured or services are performed, as control transfers under these arrangements over a period of time. Over time arrangements represent 22% of the Company's total consolidated sales for the year ended December 31, 2020. The Company uses the input method to calculate the contract revenues to be recognized, which utilizes costs incurred to date in relation to total expected costs to satisfy the Company’s performance obligation under the contract. Incurred costs represent work performed and therefore best depict the transfer of control to the customer.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $0.9$0.2 million at December 31, 20172020 and $2.4$1.0 million at December 31, 2016.2019. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the yearyears ended December 31, 20172020 and 2016,2019, the Company recognized a tax benefit of approximately $(0.3)$0.1 million and $(1.4)a tax expense of $0.1 million, respectively, in net interest and penalties.penalties due to the expiration of various uncertain tax positions. The Company had approximately $0.2 million and $0.4 million for the payment of interest and penalties accrued at both December 31, 20172020 and 2016, respectively.2019. It is reasonably possible that, within the next twelve months, the amount of gross unrecognized tax benefits could be reduced by approximately $0.1$0.2 million as a result of the closure of tax statutes related to existing uncertain tax positions.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 20142017 through 20172020 remain open for examination by the Internal Revenue Service and 20132014 through 20172020 remain open for examination by various state and foreign taxing authorities.