Washington, D.C. 20549
PARK-OHIO INDUSTRIES, INC.
Pursuant to a corporate reorganization effective June 15, 1998, Park-Ohio Industries, Inc. became a wholly-owned subsidiary of Park-Ohio Holdings Corp. The registrant meets the conditions set forth in general instruction (I)(1)(a) and (b) of Form 10-K and is filing this form in reduced disclosure format.
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.
All of the outstanding stock of the registrant is held by Park-Ohio Holdings Corp. As of February 28, 2020, 2023, 100 shares of the registrant’s common stock, $1 par value, were outstanding.
Park-Ohio Industries, Inc.
Part I
Item 1. Business
Overview
Park-Ohio Industries, Inc. (“Park-Ohio” or “Industries” or “ParkOhio”), a wholly-owned subsidiary of Park-Ohio Holdings Corp. (“Holdings”), was incorporated as an Ohio corporation in 1984. Holdings, primarily through its subsidiaries owned by its direct subsidiary, Industries, 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, Park-Ohio and its direct and indirect subsidiaries.
During the fourth quarter of 2022, we determined that our Aluminum Products business met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the held-for-sale assets and liabilities, the operating results and the cash flows of Aluminum Products in discontinued operations for all periods presented throughout this Annual Report on Form 10-K. Unless otherwise indicated, amounts and activity in this Annual Report are presented on a continuing operations basis. See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for further information. On December 30, 2022, we entered into a memorandum of understanding (the “MOU”) with a third party pursuant to which the third party would purchase our Aluminum Products business. The sale of the Aluminum Products business is subject to the entry into a definitive purchase agreement and other customary conditions.
The Company operates through three reportable segments: Supply Technologies, Assembly Components (which previously included the Aluminum Products business) and Engineered Products. As of December 31, 2019,2022, we employed approximately 7,100 people.people, including employees in our Aluminum Products business.
The following table summarizes the key attributes of each of our business segments:
|
| | | | | | | | | | | | | | | | |
| Supply Technologies | | Assembly Components | | Engineered Products |
| | | |
NET SALES FOR 20192022 | $611.5711.5 million
| | $539.5388.8 million
| | $467.3392.6 million
|
| SELECTED PRODUCTS | Sourcing, planning and procurement of over 245,000280,000 production components, including:
• Fasteners
• Pins
• Valves
• Hoses
• Wire harnesses
• Clamps and fittings
• Rubber and plastic components
• Other Class C and MRO products
| | • Fuel filler assemblies
• Gasoline direct injection systems
• Extruded and molded rubber and thermoplastic products
• Control arms
Fuel filler assemblies
• Knuckles
• Engine cradles and brackets
• Oil pans
Gasoline direct injection systems
| | • Induction heating and melting systems
• Pipe threading systems
• Industrial oven systems
• Forging presses
• Forged steel and machined products
|
| SELECTED INDUSTRIES SERVED | • Heavy-duty truck
• Power sports and recreational equipment
• Aerospace and defense
• 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 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 more than 6080 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 asincluding production sourcing and support centers in the United States and Asia. Through our supply chain management programs, we supply more than 245,000280,000 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. Supply Technologies also provides spare parts and aftermarket products to end users of its customers’ products.
Total Supply Management™ is typically provided to customers pursuant to sole-source arrangements. We believe our approach 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 also supplies wholesale industrial products to other manufacturers and distributors pursuant to master or authorized distributor relationships.
The Supply Technologies segment also engineers and manufactures precision cold-formed and cold-extruded 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.
Markets and Customers. For the year ended December 31, 2019,2022, approximately 66%61% of Supply Technologies’ net sales were to domestic customers. Remaining sales were primarily to manufacturing facilities of large, multinational customers located in Europe, Mexico, Asia and Canada. Total Supply Management™ 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 approach 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 32%35% and 30%33% of the sales of Supply Technologies in 20192022 and 2018,2021, 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™ 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 (which excludes the discontinued Aluminum Products business) manufactures products oriented towards fuel efficiency, and reduced emission standards.standards and vehicle electrification. Assembly Components designs, develops and manufactures: aluminum products; highly efficient, high pressure direct 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.
Assembly Components operates more than 2512 manufacturing facilities and twofour technical offices in the United States, Mexico, China, Englandthe United Kingdom 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, 2019,2022, approximately 72%73% of Assembly Components’ net sales were to domestic customers. The five largest customers of Assembly Components accounted for approximately 47%55% and 51%54% of segment sales for 20192022 and 2018,2021, respectively. These sales, across multiple operating divisions, are through sole-source contracts. The loss of any one of these customers could have a material adverse effect on the results of operations and financial condition of this segment.
Competition. Assembly Components competes principally on the basis of its ability to: (1) engineer and manufacture high-quality, cost-effective assemblies utilizing multiple technologies in large volumes; (2) provide timely delivery; and (3) retain the manufacturing flexibility necessary to quickly adjust to the needs of its customers. There are few domestic companies with 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 more than 10 15domestic facilities throughout the United States and more than 2018 international facilities in Canada, Mexico, the United Kingdom, Belgium, Germany, China, Italy, India, Japan, Spain, France 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 44%46% 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.
In May 2019, the Company acquired EFCO, Inc. d/b/a Erie Press Systems (“EP”) for a total purchase price of $9.1 million, including potential contingent consideration. EP is an industry-recognized leader in the manufacturing of advanced forging presses, hydraulic and mechanical presses, and metal stretch-forming and carbon extrusion machines for several end markets, including aerospace and defense, primary metals and high-speed rail. EP is included in our Engineered Products segment results from the date of acquisition.
Markets and Customers. For the year ended December 31, 2019,2022, approximately 58%56% 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, 2019 was $220.5 million, comparedCompliance with $226.1 million as of December 31, 2018. Nearly all of Engineered Products’ backlog as of December 31, 2019 is scheduled to be shipped in 2020.
Environmental, Health and SafetyGovernment 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.
In addition to environmental laws and regulations, 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, 2022, we employed approximately 7,100 employees, including our Aluminum Products business, in our operations around the world.Approximately 3,400 of these employees are in the United States, while the remaining 3,700 are employed in other countries. Approximately 28% of our employees are covered by a collective bargaining agreement.
The attraction, retention and development of employees is critical to the successful execution of the Company’s strategy. The Company works diligently to attract the best talent from a diverse range of resources to meet current and future demands of our businesses. Hiring the right people for the long-term and developing 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.
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 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.
Item 1A. Risk Factors
The following are certain risk factors thatset forth below and elsewhere in this Form 10-K could materially and adversely affect our business, results of operations and financial condition. These risks are not the only ones we may face. Although the risks are organized by headings, and each risk is discussed separately, many are interrelated. You should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. If any of the following risks occur, our business, results of operations or financial condition could be adversely affected.
Risks Relating to the 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.trade, which have been adversely affected by the COVID-19 pandemic as well as inflation. A downturn in any of the industries we serve could have a material adverse effect on our financial condition, liquidity and results of operations.
Our business, results of operations and cash flows have been and may continue to be adversely affected by COVID-19.
To date, the COVID-19 pandemic has had an adverse impact on our business, including how it has impacted our customers, employees, supply chain and distribution network. The impact of the COVID-19 pandemic and uncertainty with respect to the economic effects of the pandemic introduced significant volatility in the financial markets and has had a widespread adverse effect on the industries in which we operate.The COVID-19 pandemic could continue to negatively impact our business, results of operations, financial position or cash flows in a number of ways, including but not limited to:
•disruptions in our supply chain due to the global semiconductor micro-chip shortage, logistics issues, labor disruptions and our ability to obtain raw materials, among other factors;
•increases in raw material and freight costs;
•labor shortages;
•disruptions to our facilities, including shutdowns or slowdowns as a result of facility closures, reductions in operating hours and labor shortages;
•the inability of a significant portion of our workforce to work as a result of illness or government restrictions;
•exposure to cybersecurity threats and other risks associated with a large number of our employees working remotely; and
•the need to reduce our workforce as a result of declines in our business caused by the COVID-19 pandemic, which has caused us, and may continue to cause us, to incur significant expenses.
The extent to which our business, results of operations, financial position or cash flows may ultimately be adversely impacted by the COVID-19 pandemic are highly uncertain and cannot be accurately predicted. The impact of the COVID-19 pandemic may also exacerbate other risks discussed herein, any of which could have a material effect on us.
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, including as a result of a recession, 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 conditionsInflation may continue to have a significant effect on labor and raw material costs, which could continue to result in material adverse effects on our customers that would resultbusiness and operating results.
Given recent inflationary trends and forecasts for rising inflation rates in our inability to borrow or to meet our debt service coverage ratio in our revolving credit facility.
As of December 31, 2019, we were in compliance with our debt service coverage ratio covenant and other covenants contained in our revolving credit facility. Whilethe future, we expect further raw material price increases and higher labor costs, which may continue to remain in compliance throughout 2020, declines in demandadversely affect our business and operating results, particularly in the automotive industryAssembly Components segment.
Risks Relating to Our Business 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 global semiconductor micro-chip shortage, in particular, could continue to adversely affect a significant portion of our sales to our automotive and heavy-duty truck customers. The domestic automotive and heavy-duty truck industries are also 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 35%32% and 8%6% of our net sales during the year ended December 31, 20192022 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 continue to 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 number 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, 2019,2022, our ten largest customers accounted for approximately 31%27% 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.
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 continue to 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 continue to be interrupted for a variety of reasons, including supply chain constraints and price increases, raw material price inflation, supplier delays that increase lead times and higher freight costs, among other factors, may continue to have an adverse effect on 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 continue to 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 (including that caused by climate change), 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, 2022, we had goodwill of $108.9 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. For additional information, see Note 7, 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 and other conditions, including those that may be caused by climate change, 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, 2022, we were a party to seven collective bargaining agreements with various labor unions that covered approximately 2,000 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.
Labor shortages could continue to adversely affect our business, results of operations and financial condition.
Labor shortages leading to higher labor costs, production inefficiencies and plant downtime have had and could continue to have an adverse effect on our business, results of operations and financial condition. In addition, we have seen a decline in the skilled labor applicant pool since the start of the COVID-19 pandemic and increased competition for skilled labor. In addition, labor disturbances affecting our customers could continue to impact our sales to certain key customers, particularly in the automotive and heavy-duty truck industries, which could continue to have an adverse effect on our business, results of operations and financial condition.
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.
We may encounter difficulty in expanding our business through targeted acquisitions.
We have pursued,Risks Relating to Legal, Compliance 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.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, 2019, we were a party to seven collective bargaining agreements with various labor unions that covered approximately 670 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;disruptions, including the conflict between Russia and Ukraine and the rising tension between China and the United States;
•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 (“Brexit”) the European Union (“EU”). The long-term effectstransition period post-Brexit expired on December 31, 2020, and the UK and the EU entered into a free trade agreement that now governs the UK’s relationship with the EU. While the UK and the EU can generally continue to trade with each other without the imposition of tariffs for imports and exports, there are new customs requirements that require additional documentation and data, and there are also new controls on the movement and reporting of goods. Although we have not experienced any material disruption in our business as a result of Brexit, we do not know the extent to which Brexit and the free trade agreement will depend on any agreementsultimately impact the business and regulatory environment in the UK, makes to retain access tothe rest of the EU markets. Given the lack of comparable precedent,or other countries, although it is unclear what financial, tradepossible there will be tighter controls and legal implications the withdrawal of the UK from the EU will haveadministrative requirements for imports 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 tradeexports between the UK and the EU through potential restrictions on the free movementor other countries, as well as increased regulatory complexities. Any of goodsthese factors could adversely impact customer demand, our relationships with customers and labor between the UKsuppliers 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.results of operations.
We are also exposed to risks relating to U.S. policy with respect to companies doing business in foreign 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.
Our international sales and operations are also sensitive to changes in foreign national priorities, as well as to political and economic instability. For example, our business in the European Union or elsewhere may be impacted by the conflict between Russia and Ukraine and any economic or trade sanctions enacted to condemn or counteract any Russian aggression towards or invasion of Ukraine. Any such conflict may also impact our ability to secure raw materials and exacerbate the supply chain disruption we have experienced and further limit our ability to secure certain raw materials or services. Further military action or cyberattacks by Russia to counteract any sanctions may have an impact on demand for our goods and services and adversely impact our results of operation. Our success as a global business will depend, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions by developing, implementing and maintaining policies and strategies that are effective in each location where we do business.
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.
U.S. federal income tax reform could adversely affect us.
On December 22, 2017, U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”), was signed into law, significantly reforming the U.S. Internal Revenue Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, creates a new minimum tax on certain foreign-sourced earnings and modifies or repeals many business deductions and credits. The TCJA contains many provisions which continue to be clarified through new regulations and we continue to examine the impact the TCJA may have on our business.
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.
We may experience breachesbe exposed to certain regulatory and financial risks related to climate change.
Growing concerns about climate change may result in the imposition of additional regulations or disruptionsrestrictions to which we may become subject. A number of governments or governmental bodies have introduced or are contemplating regulatory changes in response to climate change, including regulating greenhouse gas emissions. The outcome of new legislation or regulation in the U.S. and other jurisdictions in which we operate may result in new or additional requirements, additional charges to fund energy efficiency activities, and fees or restrictions on certain activities. Compliance with these climate change initiatives may also result in additional costs to us, including, among other things, increased production costs, additional taxes, reduced emission allowances or additional restrictions on production or operations. Any adopted future climate change regulations could also negatively impact our information technology systems,ability to compete with companies situated in areas not subject to such limitations. Even without such regulation, increased public awareness and adverse publicity about potential impacts on climate change emanating from us or other compromisesour industry could harm us. We may not be able to recover the cost of our data, including the improper disclosure of personalcompliance with new or confidential data,more stringent laws and regulations, which maycould adversely affect our results of operations, financial position or cash flows.
Risks Relating to Our Debt
Adverse global economic conditions may have significant effects on our customers that would result in our inability to borrow or to meet our debt service coverage ratio in our revolving credit facility.
As of December 31, 2022, we were in compliance with our debt service coverage ratio covenant and reputation.other covenants contained in our revolving credit facility. While we expect to remain in compliance throughout 2023, 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.
Risks Relating to the Execution of our Strategy
We utilize information technology systemsmay 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 businessacquisitions, including the possible inability to integrate an acquired 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, systemsservices and products into our business; diversion of management’s attention; the assumption of unknown liabilities; increases in our indebtedness; the failure to maintain confidential, proprietary and personal information relating to our current, former and prospective employees, customersachieve the strategic objectives of those acquisitions; and other third partiesunanticipated 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, these systems and in systems of third-party providers who we engageour activities. Any delays or difficulties encountered in connection with any acquisition and the processing and storage of certain information. Our information technology systems and thoseintegration 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, compromisebusiness, results of operations, financial condition or breach to our systems or thoseprospects of our vendors, could result in a violation of privacy and other laws, and expose usbusiness.
We may be unable to significant legal and financial liability.
Operating problems insell our business may materially adversely affect our financial condition and results of operations.Aluminum Products business.
We are pursuing a sale of our Aluminum Products business. On December 30, 2022, the Company entered into the MOU with a third party pursuant to which the third party would purchase our Aluminum Products business. The sale of the
Aluminum Products business is 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, 2019, we had goodwill of $108.4 million. The future occurrencesuccessful completion of a potential indicatordefinitive purchase agreement and other customary conditions. Accordingly, there can be no assurance that the sale of impairment, such as a significant adverse change in legal factors orthe Aluminum Products 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 5, Goodwill,completed.
Risks Relating to the consolidated financial statements included elsewhere herein.Our Common Stock
Our Chairman of the Board, Chief Executive Officer and President and former President collectively beneficially own a significant portion of Holdings’ outstanding common stock and their interests may conflict with yours.
As of December 31, 2019,2022, Matthew Crawford, our Chairman of the Board, Chief Executive Officer and President, and Edward Crawford, our former President, collectively beneficially owned approximately 28%29% of Holdings’ outstanding common stock. Mr. M. Crawford is Mr. E. Crawford’s son. Their interests could conflict with your interests.
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, including the outbreak of COVID-19, 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.
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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2019,2022, our operations included numerous manufacturing and supply chain logistics services facilities located in 2528 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, 2019.
| | | | | | | | | | | | | | | | | | | |
Segment(1) | Location | | Owned or Leased | | | | Use |
| SUPPLY | Brampton, Ontario, Canada | | Leased | | | | Manufacturing |
| TECHNOLOGIES | Minneapolis, MN | | Leased | | | | Logistics |
| Changzhou, China | | Leased | | | | Manufacturing |
| Cleveland, OH | | Leased | | | | Supply Technologies Corporate Office |
| Dayton, OH | | Leased | | | | Logistics |
| Memphis, TN | | Leased | | | | Logistics |
| Suwanee, GA | | Leased | | | | Logistics |
| Streetsboro, OH | | Leased | | | | Manufacturing |
| Allentown, PA | | Leased | | | | Logistics |
| Carol Stream, IL | | Leased | | | | Logistics |
| Solon, OH | | Leased | | | | Logistics |
| Dublin, VA | | Leased | | | | Logistics |
| Tulsa, OK | | Leased | | | | Logistics |
| Winston-Salem, NC | | Leased | | | | Logistics and Office |
| ASSEMBLY | Ocala, FL | | Owned | | | | Manufacturing |
| COMPONENTS | Acuna, Mexico | | Leased | | | | Manufacturing |
| Lexington, TN | | Owned | | | | Manufacturing |
| Angola, IN | | Owned | | | | Manufacturing |
| ENGINEERED | Cuyahoga Heights, OH | | Owned | | | | Manufacturing |
| PRODUCTS | Canton, OH (2) | | Owned/Leased | | | | Manufacturing |
| Newport, AR | | Leased | | | | Manufacturing |
| Warren, OH | | Owned | | | | Manufacturing |
| Erie, PA | | Owned | | | | Manufacturing |
| La Roeulx, Belgium | | Owned | | | | Manufacturing |
| Brookfield, WI | | Leased | | | | Manufacturing |
| Madison Heights, MI | | Leased | | | | Manufacturing |
| Leini, Italy | | Owned | | | | Manufacturing |
| Pune, India | | Owned | | | | Manufacturing |
| Chennai, India | | Owned | | | | Manufacturing |
| Cortland, OH | | Owned | | | | Office and Manufacturing |
| Valencia, Spain | | Owned | | | | Manufacturing |
| | | | | | | |
| | | | | |
Related Industry Segment(1)
| Location | | Owned or Leased | | Use |
SUPPLY | Brampton, Ontario, Canada | | Leased | | Manufacturing |
TECHNOLOGIES | Minneapolis, MN | | Leased | | Logistics |
| Carnegie, PA | | Leased | | Manufacturing |
| Cleveland, OH | | Leased | | Supply Technologies Corporate Office |
| Dayton, OH | | Leased | | Logistics |
| Carol Stream, IL | | Leased | | Logistics |
| Memphis, TN | | Leased | | Logistics |
| Solon, OH | | Leased | | Logistics |
| Streetsboro, OH | | Leased | | Manufacturing |
| Allentown, PA | | Leased | | Logistics |
| Suwanee, GA | | Leased | | Logistics |
| Dublin, VA | | Leased | | Logistics |
| Tulsa, OK | | Leased | | Logistics |
ASSEMBLY | Ocala, FL | | Owned | | Manufacturing |
COMPONENTS | Conneaut, OH | | Leased/Owned | | Manufacturing |
| Lexington, TN | | Owned | | Manufacturing |
| Lobelville, TN | | Owned | | Manufacturing |
| Rootstown, OH | | Owned | | Manufacturing |
| Cleveland, OH | | Leased/Owned | | Manufacturing |
| Wapakoneta, OH | | Owned | | Manufacturing |
| Angola, IN | | Owned | | Manufacturing |
| Huntington, IN | | Leased | | Manufacturing |
| Fremont, IN | | Owned | | Manufacturing |
| Big Rapids, MI | | Owned | | Manufacturing |
| Acuna, Mexico | | Owned | | Manufacturing |
ENGINEERED | Cicero, IL | | Owned | | Manufacturing |
PRODUCTS | Cuyahoga Heights, OH | | Owned | | Manufacturing |
| Pune, India | | Owned | | Manufacturing |
| Canton, OH | | Owned | | Manufacturing |
| Newport, AR | | Leased | | Manufacturing |
| Warren, OH | | Owned | | Manufacturing |
| Leini, Italy | | Owned | | Manufacturing |
| Erie, PA | | Owned | | Manufacturing |
| Madison Heights, MI | | Leased | | Manufacturing |
| Canton, OH | | Leased | | Manufacturing |
| La Roeulx, Belgium | | Owned | | Manufacturing |
| Brookfield, WI | | Leased | | Manufacturing |
| Wickliffe, OH | | Owned | | Manufacturing |
| Valencia, Spain | | Owned | | Manufacturing |
| Euclid, OH | | Leased | | Manufacturing |
| Albertville, AL | | Leased | | Office |
| Chennai, India | | Owned | | Manufacturing |
| |
(1) | Each segment has other 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 subjectinvolved in a variety of claims, suits, investigations and administrative proceedings with respect to various pendingcommercial, premises liability, product liability, employment, personal injury and threatened lawsuits in which claims for monetary damages are asserted inenvironmental matters arising from the ordinary course of business. While any litigation involvessuch claims, suits, investigations and proceedings involve an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigationclaims, suits, investigations and proceedings are not expected to have a material adverse effect on our financial condition, liquidity or results of operations.
In addition to the routine lawsuitsclaims, suits, investigations and asserted claimsproceedings noted above, we were a party to the lawsuits and legal proceedings described below as of December 31, 2019:
2022:
We were a co-defendant in approximately 11499 cases asserting claims on behalf of approximately 215162 plaintiffs alleging personal injury as a result of exposure to asbestos. These asbestos cases generally relate to production and sale of asbestos-containing products and allege various theories of liability, including negligence, gross negligence and strict liability, and seek compensatory and, in some cases, punitive damages.
In every asbestos case in which we are named as a party, the complaints are filed against multiple named defendants. In substantially all of the asbestos cases, the plaintiffs either claim damages in excess of a specified amount, typically a minimum amount sufficient to establish jurisdiction of the court in which the case was filed (jurisdictional minimums generally range from $25,000 to $75,000), or do not specify the monetary damages sought. To the extent that any specific amount of damages is sought, the amount applies to claims against all named defendants.
There are threefour asbestos cases, involving 1920 plaintiffs, that plead specified damages against named defendants. In each of the threefour cases, the plaintiff is seeking compensatory and punitive damages based on a variety of potentially alternative causes of action. In two cases, the plaintiff has alleged three counts at $3 million compensatory and punitive damages each; one count at $3 million compensatory and $1 million punitive damages; one count at $1 million. In the third 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.
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
The registrant is a wholly-owned subsidiary of Park-Ohio Holdings Corp. and has no equity securities that trade.
Item 6. Selected Financial Data[Reserved]
Information required by this item has been omitted pursuant to general instruction I of Form 10-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our consolidated financial statements include the accounts of Park-Ohio and its subsidiaries. All 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.
2019 Acquisition
In May 2019,During the fourth quarter of 2022, we determined that our Aluminum Products business met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company acquired EFCO, Inc. d/b/a Erie Press Systems (“EP”)has reported the held-for-sale assets and liabilities, the operating results and the cash flows of Aluminum Products in discontinued operations for a total purchase price of $9.1 million, including potential contingent consideration. EP is an industry-recognized leader in the manufacturing of advanced forging presses, hydraulic and mechanical presses, and metal stretch-forming and carbon extrusion machines for several end markets, including aerospace and defense, primary metals and high-speed rail. EP is included in our Engineered Products segment.
RESULTS OF OPERATIONS
This section ofall periods presented throughout this Annual Report on Form 10-K generally discusses 201910-K. Unless otherwise indicated, amounts and 2018 itemsactivity in this Annual Report are presented on a continuing operations basis. See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for further information. On December 30, 2022, we entered into a memorandum of understanding (the “MOU”) with a third party pursuant to which the third party would purchase our Aluminum Products business. The sale of the Aluminum Products business is subject to the entry into a definitive purchase agreement and year-to-year comparisons between 2019other customary conditions.
RESULTS FROM CONTINUING OPERATIONS
During the fourth quarter of 2022, we determined that our Aluminum Products business met the held-for-sale and 2018. Discussionsdiscontinued operations accounting criteria. Accordingly, the Company has reported the held-for-sale assets and liabilities, the operating results and the cash flows of 2017 items and year-over-year comparisons between 2018 and 2017 that are not includedAluminum Products in discontinued operations for all periods presented throughout this Annual Report on Form 10-K can be found10-K. Unless otherwise indicated, amounts and activity in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company'sthis Annual Report are presented on Form 10-Ka continuing operations basis. See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for further information.
2022 Compared with 2021 and 2021 Compared with 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2022 vs. 2021 | | 2021 vs. 2020 |
| 2022 | | 2021 | | 2020 | | $ Change | | % Change | | $ Change | | % Change |
| (Dollars in millions, except per share data) |
| Net sales | $ | 1,492.9 | | | $ | 1,277.0 | | | $ | 1,152.1 | | | $ | 215.9 | | | 17 | % | | $ | 124.9 | | | 11 | % |
| Cost of sales | 1,282.4 | | | 1,099.1 | | | 986.8 | | | 183.3 | | | 17 | % | | 112.3 | | | 11 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Selling, general and administrative ("SG&A") expenses | 161.5 | | | 154.8 | | | 139.6 | | | 6.7 | | | 4 | % | | 15.2 | | | 11 | % |
| SG&A expenses as a percentage of net sales | 10.8 | % | | 12.1 | % | | 12.1 | % | | | | | | | | |
| Restructuring and other special charges | 17.3 | | | 20.4 | | | 6.6 | | | (3.1) | | | (15) | % | | 13.8 | | | 209 | % |
| Gains on sales of assets, net | (2.4) | | | (14.7) | | | — | | | 12.3 | | | * | | (14.7) | | | * |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Operating income | 34.1 | | | 17.4 | | | 19.1 | | | 16.7 | | | 96 | % | | (1.7) | | | (9) | % |
| | | | | | | | | | | | | |
| Other components of pension income and other postretirement benefits expense, net | 11.1 | | | 9.7 | | | 7.3 | | | 1.4 | | | 14 | % | | 2.4 | | | 33 | % |
| Interest expense, net | (33.8) | | | (27.1) | | | (27.7) | | | (6.7) | | | 25 | % | | 0.6 | | | (2) | % |
| | | | | | | | | | | | | |
| Income (loss) from continuing operations before income taxes | 11.4 | | | — | | | (1.3) | | | 11.4 | | | * | | 1.3 | | | * |
| Income tax benefit | 0.7 | | | 1.5 | | | 1.3 | | | (0.8) | | | * | | 0.2 | | | * |
| Income from continuing operations | 12.1 | | | 1.5 | | | — | | | 10.6 | | | * | | 1.5 | | | * |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| (Income) loss attributable to noncontrolling interest | (1.3) | | | 1.2 | | | 0.3 | | | (2.5) | | | * | | 0.9 | | | 300 | % |
| Income from continuing operations attributable to ParkOhio common shareholder | $ | 10.8 | | | $ | 2.7 | | | $ | 0.3 | | | $ | 8.1 | | | * | | $ | 2.4 | | | 800 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
* Calculation not meaningful
2022 Compared with 2021
Net Sales
Net sales increased 17% to $1,492.9 million in 2022 compared to $1,277.0 million in 2021. This increase was primarily due to higher customer demand and increased net price realization in all three of our business segments.
The factors explaining the changes in segment net sales for the year ended December 31, 2018.
2019 Compared with 2018 and 2018 Compared with 2017 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2019 vs. 2018 | | 2018 vs. 2017 |
| | 2019 | | 2018 | | 2017 | | $ Change | | % Change | | $ Change | | % Change |
| | (Dollars in millions, except per share data) |
| Net sales | $ | 1,618.3 |
| | $ | 1,658.1 |
| | $ | 1,412.9 |
| | $ | (39.8 | ) | | (2 | )% | | $ | 245.2 |
| | 17 | % |
| Cost of sales | 1,358.0 |
| | 1,386.6 |
| | 1,180.1 |
| | (28.6 | ) | | (2 | )% | | 206.5 |
| | 17 | % |
| Gross profit | 260.3 |
| | 271.5 |
| | 232.8 |
| | (11.2 | ) | | (4 | )% | | 38.7 |
| | 17 | % |
| Gross profit as a percentage of net sales | 16.1 | % | | 16.4 | % | | 16.5 | % | | | | | | | | |
| Selling, general and administrative ("SG&A") expenses | 176.5 |
| | 175.1 |
| | 151.5 |
| | 1.4 |
| | 1 | % | | 23.6 |
| | 16 | % |
| SG&A expenses as a percentage of net sales | 10.9 | % | | 10.6 | % | | 10.7 | % | | | | | | | | |
| Gain on sale of assets | — |
| | (1.9 | ) | | — |
| | 1.9 |
| | * |
| | (1.9 | ) | | * |
|
| Litigation settlement gain | — |
| | — |
| | (3.3 | ) | | — |
| | * |
| | 3.3 |
| | * |
|
| Operating income | 83.8 |
| | 98.3 |
| | 84.6 |
| | (14.5 | ) | | (15 | )% | | 13.7 |
| | 16 | % |
| Other components of pension income and other postretirement benefits expense, net | 5.6 |
| | 8.8 |
| | 6.4 |
| | (3.2 | ) | | (36 | )% | | 2.4 |
| | 38 | % |
| Interest expense, net | (33.9 | ) | | (34.4 | ) | | (31.5 | ) | | 0.5 |
| | (1 | )% | | (2.9 | ) | | 9 | % |
| Loss on extinguishment of debt | — |
| | — |
| | (11.0 | ) | | — |
| | * |
| | 11.0 |
| | * |
|
| Income before income taxes | 55.5 |
| | 72.7 |
| | 48.5 |
| | (17.2 | ) | | (24 | )% | | 24.2 |
| | 50 | % |
| Income tax expense | (15.4 | ) | | (16.8 | ) | | (17.7 | ) | | 1.4 |
| | (8 | )% | | 0.9 |
| | (5 | )% |
| Net income | 40.1 |
| | 55.9 |
| | 30.8 |
| | (15.8 | ) | | (28 | )% | | 25.1 |
| | 81 | % |
| Net income attributable to noncontrolling interest | (1.1 | ) | | (1.6 | ) | | (1.0 | ) | | 0.5 |
| | * |
| | (0.6 | ) | | * |
|
| Net income attributable to ParkOhio common shareholder | $ | 39.0 |
| | $ | 54.3 |
| | $ | 29.8 |
| | $ | (15.3 | ) | | (28 | )% | | $ | 24.5 |
| | 82 | % |
* Calculation not meaningful
2019Compared with2018
Net Sales
Net sales decreased 2% to $1,618.3 million in 20192022 compared to $1,658.1 millionthe year ended December 31, 2021 are contained in 2018. The decrease in net sales was due to lower customer demand for our products in our Supply Technologies and Assembly Components segments, driven by softening demand in certain key end markets of Supply Technologies, the impact of the United Auto Workers (“UAW”) labor strike at General Motors (“GM”), lower levels of demand at our Assembly Components factories in China, and the pass-through of lower aluminum prices. Overall, these sales decreases were partially offset by increased sales in our Engineered Products segment driven by our May 2019 acquisition of EP and increasing demand for our capital equipment, aftermarket sales and services and our aerospace forgings.
“Segment Results” section below.
Cost of Sales & Gross Profit
Cost of sales decreased 2%increased 17% to $1,358.0$1,282.4 million in 20192022 compared to $1,386.6$1,099.1 million in 2018.2021. The decreaseincrease in cost of sales was in-line withand decrease in gross margin were due to the decreaseincrease in net sales described above.
Our gross margin percentage decreased
SG&A Expenses
SG&A expenses increased to 16.1%$161.5 million, or 10.8% of net sales, in 20192022 from $154.8 million, or 12.1% of net sales, in 2021. The increase in SG&A expenses was primarily attributable to foreign exchange impacts of a weaker Euro and British Pound and higher personnel costs in 2022 compared to 16.4%2021. The improvement in 2018, dueSG&A expenses as a percentage of net sales was driven by the impact of fixed SG&A expenses over the higher revenue base in 2022 compared to 2021.
Restructuring and other special charges
During 2022, the Company recorded restructuring and other special charges of $17.3 million compared to $20.4 million in 2021. The charges in both 2022 and 2021 related primarily to $3.5 million of non-recurring costs related to plant closure and consolidation in ourthe Company's Assembly Components and Supply Technologies segments.
SG&A Expenses
SG&A expenses increased to $176.5 million, or 10.9% of net sales,Engineered Products segments; other cost reduction initiatives in 2019 from $175.1 million, or 10.6% of net sales, in 2018. This increase in SG&A expenses is due primarily to $4.3 million of one-time net expenseall three business segments; and costs related to an executive departureacquisitions.
Gains on Sales of Assets, net
During 2022, in June 2019, as discussed further in Note 3 to the consolidated financial statements. This increase was partially offset by lower stock compensation expense, incentive compensation expenseconnection with its plant closure and professional fees.
Gain on Sale of Assets
During 2018,consolidation initiatives, the Company sold land to a third party, resulting inassets within its Supply Technologies segment for cash proceeds of $2.8$1.5 million, resulting in a loss of $3.4 million; within its Assembly Components segment for cash proceeds of $4.4 million, resulting in a gain of $3.3 million; and within its Engineered Products segment for cash proceeds of $3.6 million, resulting in a pre-tax gain of $2.5 million.The total net gain of $2.4 million was recorded on salea separate line in the Consolidated Statements of $1.9Operations and was excluded from segment income.
During 2021, in connection with its plant closure and consolidation initiatives, the Company sold real estate within its Engineered Products segment for cash proceeds of $19.6 million, resulting in a gain of $14.2 million. In addition, the Company sold real estate within the Assembly Components segment for cash proceeds of $0.7 million, resulting in a gain of $0.5 million. The total net gain of $14.7 million was recorded on a separate line in the Consolidated Statements of Operations and was excluded from segment income.
Other Components of Pension Income and Other Postretirement Benefits (“OPEB”)Expense, Net
Other components of pension income and OPEBexpense, net was $5.6$11.1 million in 20192022 compared to $8.8$9.7 million in 2018.2021. The decreaseincrease in 2019 relates to the recognition of higher net actuarial losses in 2019 compared to the prior year,2022 was driven by lowerhigher returns on plan assets in 2018impacting 2022 compared to be amortized over future periods starting in 2019.2021.
Interest Expense, Net
Interest expense, net increased to $33.8 million in 2022 compared to $27.1 million in 2021. The increase was due to higher average interest rates and higher average outstanding borrowings in 2022 compared to 2021. The higher borrowings were used to fund higher working capital levels. Our average effective borrowing rate was 5.1% in 2022 compared to 4.8% in 2021.
Income Tax Benefit
Income tax benefit in 2022 was $0.7 million on pre-tax income of $11.4 million, driven by changes in estimates related to prior year federal research and development credits. Income tax benefit in 2021 was $1.5 million on pre-tax income of $0.0 million, driven by the additional benefit recorded as a result of the net operating loss claimed under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
2021 Compared with 2020
Net Sales
Net sales increased 11% to $1,277.0 million in 2021 compared to $1,152.1 million in 2020. This increase was primarily due to higher customer demand in our Supply Technologies and Assembly Components business segments, partially offset by lower demand in our Engineered Products segment.
The factors explaining the changes in segment net sales for the year ended December 31, 2021 compared to the year ended December 31, 2020 are contained in the “Segment Results” section below.
Cost of Sales
Cost of sales increased 11% to $1,099.1 million in 2021 compared to $986.8 million in 2020. The increase in cost of sales was due to the increase in net sales described above.
SG&A Expenses
SG&A expenses increased to $154.8 million, or 12.1% of net sales, in 2021 from $139.6 million, or 12.1% of net sales, in 2020. In response to significantly lower demand levels caused by the COVID-19 pandemic in 2020, the Company took immediate actions in many of its operations to reduce costs, including workforce furloughs, permanent headcount reductions, salary and incentive compensation reductions, and cuts in discretionary spending.As demand levels increased in 2021, a portion of the SG&A expense reduction from 2020 was restored to meet the increasing demand.
Restructuring and other special charges
During 2021, the Company recorded restructuring and other special charges of $20.4 million compared to $6.6 million in 2020. The charges in 2021 related primarily to plant closure and consolidation in the Company's Assembly Components and Engineered Products segments; other cost reduction initiatives in all three business segments; and costs related to acquisitions. The charges in 2020 related to initiatives the Company took in response to the COVID-19 pandemic and primarily consisted of plant consolidation and closure actions.
Gains on Sales of Assets, net
During 2021, in connection with the plant closure and consolidation initiatives, the Company sold real estate within the Engineered Products segment for cash proceeds of $19.6 million, resulting in a gain of $14.2 million. In addition, the Company sold real estate within the Assembly Components segment for cash proceeds of $0.7 million, resulting in a gain of $0.5 million. The total net gain of $14.7 million was recorded on a separate line in the Consolidated Statements of Operations and was excluded from segment income.
Other Components of Pension Income and OPEBExpense, Net
Other components of pension income and OPEB expense, net was $9.7 million in 2021 compared to $7.3 million in 2020. The increase in 2021 was driven by higher returns on plan assets impacting 2021 compared to 2020.
Interest Expense, Net
Interest expense, net decreased to $33.9$27.1 million in 20192021 compared to $34.4$27.7 million in 2018.2020. The decrease was due to lower average interest rates partially offset by higher average outstanding borrowings as a result of net debt repayments of $4.5 million during 2019.in 2021 compared to 2020. Our average effective borrowing rate was approximately 5.8%4.8% in both years.2021 compared to 5.0% in 2020.
Income Tax ExpenseBenefit
The provision for income taxes was $15.4 million in 2019 (an effective rate of 27.7%) compared to a provision of $16.8 million in 2018 (an effective rate of 23.1%). The 2019 rate is higher due to the impact of the $6.0 million one-time, non-deductible payment in 2019 to a former executive, and a
Income tax benefit in 20182021 was $1.5 million on pre-tax income of approximately $3.0$0.0 million. Income tax benefit in 2020 was $1.3 million on pre-tax loss of $1.3 million. The benefits in both periods were due primarily to U.S tax loss planning and related net operating loss carrybacks to reversals of previously-recorded valuation allowances in certain foreign tax jurisdictions.prior years under the CARES Act.
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; certain non-cash and/or non-operating items; Other components of pension income and OPEB expense, net; and interest expense, net.
During the fourth quarter of 2022, we determined that our Aluminum Products business met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the held-for-sale assets and liabilities, the operating results and the cash flows of Aluminum Products in discontinued operations for all periods presented throughout this Annual Report on Form 10-K. Unless otherwise indicated, amounts and activity in this Annual Report are presented on a continuing operations basis. See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for further information.
Supply Technologies Segment
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | |
| (Dollars in millions) |
| Net sales | $ | 711.5 | | | $ | 619.5 | | | $ | 510.1 | | | | | | | | | |
| Segment operating income | $ | 45.7 | | | $ | 42.8 | | | $ | 30.2 | | | | | | | | | |
| Segment operating income margin | 6.4 | % | | 6.9 | % | | 5.9 | % | | | | | | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (Dollars in millions) |
| Net sales | $ | 611.5 |
| | $ | 636.8 |
| | $ | 561.8 |
|
| Segment operating income | $ | 42.0 |
| | $ | 49.0 |
| | $ | 43.3 |
|
| Segment operating income margin | 6.9 | % | | 7.7 | % | | 7.7 | % |
20192022 Compared to 20182021
Net sales increased 15% in 2022 compared to 2021 due primarily to higher customer demand in most of the Company's end markets, with the biggest increases in heavy-duty truck, power sports, industrial and agricultural equipment, semiconductor, and civilian aerospace markets, as well as the sales from our acquisitions in 2022.
Segment operating income increased by $2.9 million and segment operating income margin was down 50 basis points in 2022 compared to the prior year. The decrease in margin was driven primarily by higher supply chain costs, primarily freight-related, and sales mix.
2021 Compared to 2020
Net sales were down 4%increased 21% in 20192021 compared to 20182020 due primarily to lowerhigher customer demand in certainmost of the Company's end markets, includingwith the Company'sbiggest increases in heavy-duty truck, power sports, semiconductor, market, which was down 13%; the Company'sand agricultural and industrial equipment market, whichequipment. As a result of the COVID-19 pandemic, customer demand in 2020 was down 15%;significantly in most of our key end markets.
Segment operating income increased by $12.6 million and segment operating income margin was up 100 basis points in 2021 compared to the prior year. These net increases were driven by the profit flow-through on higher sales, the impact of pricing initiatives and the Company's consumer products market, whichimpact of cost reduction actions. These positive factors were partially offset by higher freight costs in 2021 as a result of global supply chain constraints and a labor strike at a major truck assembly plant.
Assembly Components Segment
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | |
| (Dollars in millions) |
| Net sales | $ | 388.8 | | | $ | 321.5 | | | $ | 298.4 | | | | | | | | | |
| Segment operating (loss) income | $ | 1.1 | | | $ | (2.6) | | | $ | 10.9 | | | | | | | | | |
| Segment operating (loss) income margin | 0.3 | % | | (0.8) | % | | 3.7 | % | | | | | | | | |
2022 Compared to 2021
Net sales increased 21% in 2022 compared to 2021. The sales increase was down 19%. These decreases were offsetdriven by higher customer demand driven by several products launched in 2021, increased net price realization and the pass-through of higher rubber compound prices in 2022. In addition, 2021 sales were negatively impacted by the global micro-chip shortage and supply chain disruptions in the Company’s truck and truck-related market, which was up 9%; and the Company’s aerospace and defense market, which was up 7%.auto industry.
Segment operating income in 2022 increased by $3.7 million, and segment operating income margin were down $7.0 million and 80increased 110 basis points respectively, in 2019 compared to 2018. These decreases were due primarily2021. The improvement in segment operating results in 2022 compared to lowerthe prior year was driven by profit flow-through from the lowerhigher sales volumes; unfavorable sales mix; an increase inlevels, higher product costs from both generalpricing and the benefit of profit improvement initiatives, all of which more than offset the impacts of inflation and tariffs;higher operating costs in 2022. In 2022, expenses incurred in connection with plant closure and $0.6consolidation, severance and other costs were $5.6 million. In 2021, expenses incurred in connection with plant closure and consolidation, severance, a legal settlement and other costs were $5.7 million.
2021 Compared to 2020
Net sales increased 8% in 2021 compared to 2020 due primarily to the shut-down of North American automotive production in the second quarter of 2020 as a result of the COVID-19 pandemic, partially offset the impact of the global micro-chip shortage, which negatively impacted net sales in 2021.
Segment operating loss in the 2021 period decreased by $13.5 million, and segment operating income margin decreased 450 basis points compared to 2020. The loss in 2021 was driven by the negative impacts of non-recurringthe global semiconductor micro-chip shortage; higher labor costs; production inefficiencies; and various supply chain constraints, including supplier delays that caused extended lead times and increasing freight costs. These factors were partially offset by the positive impact of higher sales in 2021. In 2021, expenses incurred in connection with plant closure and consolidation, severance, a legal settlement and other costs were $5.7 million. The 2020 income included expenses related to plant closure and consolidation.consolidation of $4.1 million.
Assembly Components Segment
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (Dollars in millions) |
| Net sales | $ | 539.5 |
| | $ | 578.3 |
| | $ | 524.5 |
|
| Segment operating income | $ | 36.2 |
| | $ | 42.9 |
| | $ | 47.8 |
|
| Segment operating income margin | 6.7 | % | | 7.4 | % | | 9.1 | % |
2019 Compared to 2018
Net sales were down 7% in 2019 compared to 2018 due primarily to the impact of the UAW labor strike at GM in 2019, lower levels of demand in China, anticipated end-of-life programs, and the pass-through of lower aluminum prices.
Segment operating income and operating income margin were down $6.7 million and 70 basis points, respectively, in 2019 compared to 2018. These decreases were driven by $3.3 million of non-recurring costs related to plant closure and consolidation; the impact of the UAW labor strike at GM; lower profit flow-through from the lower sales volumes noted above; and unfavorable sales mix.
Engineered Products Segment
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | |
| (Dollars in millions) |
| Net sales | $ | 392.6 | | | $ | 336.0 | | | $ | 343.6 | | | | | | | | | |
| Segment operating (loss) income | $ | 14.8 | | | $ | (12.2) | | | $ | 3.5 | | | | | | | | | |
| Segment operating (loss) income margin | 3.8 | % | | (3.6) | % | | 1.0 | % | | | | | | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (Dollars in millions) |
| Net sales | $ | 467.3 |
| | $ | 443.0 |
| | $ | 326.6 |
|
| Segment operating income | $ | 37.7 |
| | $ | 38.4 |
| | $ | 19.5 |
|
| Segment operating income margin | 8.1 | % | | 8.7 | % | | 6.0 | % |
20192022 Compared to 20182021
Net sales were up 5%17% higher in 20192022 compared to 20182021. The increase was driven by strong demand in both our capital equipment business and our forged and machined products business as key end markets continue to recover from COVID-19 pandemic lows.
Segment operating income was $14.8 million in 2022 compared to segment operating loss of $12.2 million in 2021. The profitability improvement in 2022 was driven by the higher sales levels, implemented operational improvements, and benefits of profit-improvement initiatives, including plant closure and consolidation. In 2022, expenses incurred in connection with plant closure and consolidation, severance, and other costs were $8.4 million, compared to $12.7 million in 2021.
2021 Compared to 2020
Net sales were 2% lower in 2021 compared to 2020. The decrease was due primarily to the acquisitions of EPlower demand in May 2019 and Canton Drop Forge (“CDF”)in February 2018; increased customer demand for our induction and pipe threading equipment and aftermarket parts and services in our industrial equipment group; and increased demand for aerospace productscertain end markets in our forged and machined products group. These increases werebusiness which continue to be slow to recover from the COVID-19 pandemic, partially offset by lower customerstronger demand in 2021 for our oil and gas forgedcapital equipment products.
Segment operating income andloss was $12.2 million in 2021 compared to segment operating income margin were down $0.7of $3.5 million in 2020. This decrease in profitability was due to expenses of $12.7 million related to plant closure and 60 basis points, respectively,consolidation activities and other actions in 2019 compared to 2018. These decreases were due primarily to unfavorable product mix2021, lower sales levels, and manufacturing inefficiencies, including an unplanned temporary shut-downunder-absorption of fixed costs at certain plants. Expenses related to plant closure and consolidation in 2020 were $2.2 million.
Information about our Guarantors and the Issuer of our Guaranteed Securities
The accompanying summarized financial information has been prepared and presented pursuant to Rule 3-10 of Regulation S-X, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered,” and Rule 13-01 of Regulation S-X, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralized a Registrant’s Securities.” Each of the material domestic direct and indirect wholly-owned subsidiaries (the “Guarantor subsidiaries”) of the Company have fully and unconditionally, and jointly and severally, guaranteed the obligations under the $350.0 million aggregate principal amount of 6.625% Senior Notes due 2027 issued by the Company (the “Notes”).
The following presents the summarized financial information on a combined basis for Park-Ohio Industries, Inc. (parent company and issuer of the guaranteed obligations) and the Guarantor subsidiaries, which are collectively referred to as the “obligated group.” Transactions between the obligated group have been eliminated. Information for the non-Guarantor subsidiaries has been excluded from the combined summarized financial information of the obligated group.
Each Guarantor subsidiary is consolidated by Park-Ohio Industries, Inc. as of December 31, 2022. Refer to Exhibit 22.1 to this Form 10-K for the detailed list of entities included within the obligated group as of December 31, 2022, 2021 and 2020.
The guarantee of a productionGuarantor subsidiary with respect to the Notes will be automatically and unconditionally released and discharged, and such Guarantor subsidiary’s obligations under the guarantee and the indenture pursuant to which the Notes were issued (the “Indenture”), will be automatically and unconditionally released and discharged, upon the occurrence of any of the following:
(a) any sale or other disposition of all or substantially all of the assets or all of the capital stock of such Guarantor subsidiary, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of such Guarantor subsidiary, in each case to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary of the Company; provided that the net proceeds of such sale or other disposition are applied in accordance with the terms of the Indenture;
(b) the designation of any Guarantor subsidiary as an Unrestricted Subsidiary” (as defined in the Indenture);
(c) defeasance or satisfaction and discharge of the Indenture; or
(d) the release of such Guarantor subsidiary’s guarantee under all credit facilities of the Company (other than a release as a result of payment under or a discharge of such guarantee).
Each entity in the summarized combined financial information follows the same accounting policies as described in the consolidated financial statements. The accompanying summarized combined financial information does not reflect investments of the obligated group in non-Guarantor subsidiaries. The financial information of the obligated group is presented on a combined basis; intercompany balances and transactions within the obligated group have been eliminated. The obligated group’s amounts due from, amounts due to, and transactions with, non-Guarantor subsidiaries and related parties have been presented in separate line at oneitems.
Summarized Combined Financial Information of the Issuer and Guarantor Subsidiaries:
The following table contains summarized combined financial information from the Statements of Unaudited Condensed Consolidated Financial Position of the obligated group, which includes our forging plants.discontinued Aluminum Products business (See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for further information):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In millions) |
| Total current assets (excluding amounts due from subsidiaries that are non-Guarantors) | $ | 620.3 | | | $ | 490.2 | |
| Total noncurrent assets | 321.6 | | | 386.9 | |
| Amounts due from subsidiaries that are non-Guarantors | 31.2 | | | 29.2 | |
| | | |
| Total current liabilities | 312.5 | | | 233.0 | |
| Total noncurrent liabilities | 680.0 | | | 646.0 | |
The following table contains summarized combined financial information from the Statements of Unaudited Condensed Consolidated Operations of the obligated group, which includes our discontinued Aluminum Products business (See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for further information):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | (In millions) |
| Net sales | $ | 1,209.2 | | | $ | 993.0 | | | $ | 905.9 | |
| Cost of sales | 1,052.5 | | | 894.8 | | | 793.5 | |
| SG&A expenses | 169.6 | | | 132.6 | | | 118.2 | |
| Loss before income taxes | (17.5) | | | (45.4) | | | (22.1) | |
| Net loss | (0.8) | | | (28.5) | | | (10.9) | |
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 9 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 our 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 these
arrangements. We follow the input method since reasonably reliable estimates of revenue and costs of a contract can be made. See Note 2 of the consolidated financial statements included elsewhere herein for additional disclosures on revenue.
Allowance for Obsolete and Slow-Moving Inventory: Inventories are generally valued using first-in, first-out (“FIFO”) or the weighted-average inventory method; stated at the lower of cost or net realizable value; and have been reduced by an allowance for obsolete and slow-moving inventories. The estimated allowance is based on management’s review of inventories on hand with minimal sales activity, which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for based on estimated selling prices less disposal costs. Though we consider these allowances adequate and proper, changes in economic conditions in specific markets in which we operate could have a material effect on 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, assets 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 the 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. If the carrying value of the asset
group exceeds the expected undiscounted cash flows, we estimate the fair value of the 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.
Business Combinations: Business combinations are accounted for using the purchase method of 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 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 2019, 20182022, 2021 and 2017,2020, we performed quantitative testing for each reporting unit with a goodwill balance.
Our annual goodwill impairment analysis utilizes a quantitative approach comparing the carrying amount of the reporting unit to its estimated fair value. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, an impairment charge is recorded. In applying the quantitative approach, we use 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; 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, 2019, 20182022, 2021 and 20172020 for all reporting units confirmed that the estimated fair valuevalues exceeded carrying values, and no impairment related to continuing operations existed as of those dates. The Company's reporting units with goodwill balances had fair values in excess of their carrying amounts by at least 14%.
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 2019, 20182022, 2021 and 2017,2020, we utilized a quantitative approach using the royalty relief method. The significant assumptions employed under this method include discount rates, 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, 2019, 20182022, 2021 and 20172020 for all reporting units confirmed that the estimated fair value exceeded carrying values, and no impairment existed as of those dates.
See Notes 57 and 68 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 if it is more likely than not that all or some portion of a deferred tax asset will be realized, we consider the 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 future taxable income. Based on these factors, when we have determined that the realizability of certain domestic and foreign deferred tax assets is more likely than not to not be realized, a valuation 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.
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 3.22%5.48% for 2019,2022, compared with 4.24%2.80% in 2018.2021. For the other postretirement benefit plan, the rate is 2.94%5.41% for 20192022 and 4.06%2.49% for 2018.2021. 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 2019.2022. 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.
Legal Contingencies: We are involved in a variety of claims, suits, investigations and administrative proceedings with respect to commercial, premises liability, product liability, employment, personal injury 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.
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: our ability to consummate the sale of our Aluminum Products business for any reason, including the inability to enter into a definitive purchase agreement; the ultimate impact the COVID-19 pandemic has on our business, results of operations, financial position and liquidity, including, without limitation, supply chain issues such as the global semiconductor micro-chip shortage and logistic issues; 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 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, such as tariffs and surcharges; adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities;hostilities, including the conflict between Russia and Ukraine, or political unrest, including the rising tension between China and the United States; 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; 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 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, 2019,2022, 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 $173.2$285.3 million at December 31, 2019.2022. A 100 basis100-basis point increase in the interest rate would have resulted in an increase in interest expense on these borrowings of approximately $1.7$2.9 million for the year ended December 31, 2019.2022.
We are exposed to changes in foreign currency exchange rates. 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'Shareholder's 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. During 2022, we entered into an agreement to hedge foreign currency exchange rates. The agreement did not have a material impact on the results of the Company.
Our largest exposures to commodity prices relate to steelmetal and natural gas prices, which have fluctuated widely in recent years. We do not have anyno commodity swap agreements or 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
Tothe Shareholder and the Board of Directors and Shareholder of Park-Ohio Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Park-Ohio Industries, Inc. and subsidiaries(the (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of income,operations, comprehensive (loss) income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 2019,2022, and the related notes andfinancial 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, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 ,2022, in conformity with U.S. generally accepted accounting principles.
Adoption of ASU No. 2016-02
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for leases in 2019 due to the adoption of ASU 2016-02, Leases (Topic 842).
Basis for Opinion
These financial statements are the responsibility of the Company'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 Public Company Accounting Oversight Board (United States) (PCAOB)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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
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 account or disclosure to which it relates.
| | | | | |
Quantitative Impairment Assessment of Goodwill
|
Description of the matter
How we addressed the matter in our audit
| At December 31, 2022, the Company’s goodwill was $108.9 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 16, 20202023
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| (In millions, except per share data) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 49.3 | | | $ | 44.9 | |
| Accounts receivable, net | 246.3 | | | 223.6 | |
| Inventories, net | 406.5 | | | 352.4 | |
| | | |
| | | |
| Receivables from affiliates | 31.1 | | | 29.2 | |
| Unbilled contract revenue | 56.7 | | | 55.0 | |
| Promissory note related to financing arrangement | 25.0 | | | — | |
| Other current assets | 32.2 | | | 25.0 | |
Current assets held-for-sale - discontinued operations1 | 107.2 | | | 65.2 | |
| Total current assets | 954.3 | | | 795.3 | |
| Property, plant and equipment, net | 180.7 | | | 178.9 | |
| Operating lease right-of-use assets | 54.7 | | | 56.4 | |
| Goodwill | 108.9 | | | 106.0 | |
| Intangible assets, net | 78.7 | | | 81.7 | |
| Pension assets | 63.9 | | | 86.2 | |
| Other long-term assets | 16.4 | | | 17.6 | |
Long-term assets held-for-sale - discontinued operations1 | — | | | 56.9 | |
| Total assets | $ | 1,457.6 | | | $ | 1,379.0 | |
| LIABILITIES AND SHAREHOLDER’S EQUITY |
| Current liabilities: | | | |
| Trade accounts payable | $ | 221.0 | | | $ | 178.3 | |
| Payables to affiliates | 7.2 | | | 7.2 | |
| Current portion of long-term debt and short-term debt | 10.9 | | | 6.3 | |
| Current portion of operating lease liabilities | 11.2 | | | 10.6 | |
| Accrued employee compensation | 22.3 | | | 26.4 | |
| Deferred revenue | 52.6 | | | 51.7 | |
| Financing arrangement liability | 45.0 | | | — | |
| Other accrued expenses | 42.2 | | | 43.3 | |
Current liabilities held-for-sale - discontinued operations1 | 43.8 | | | 32.9 | |
| Total current liabilities | 456.2 | | | 356.7 | |
| Long-term liabilities, less current portion: | | | |
| Long-term debt | 655.1 | | | 586.9 | |
| Long-term operating lease liabilities | 43.7 | | | 45.9 | |
| Deferred income taxes | 10.6 | | | 31.8 | |
| Other long-term liabilities | 10.7 | | | 12.3 | |
Long-term liabilities held-for-sale - discontinued operations1 | — | | | 9.4 | |
| Total long-term liabilities | 720.1 | | | 686.3 | |
| Park-Ohio Industries, Inc. and Subsidiaries shareholder's equity: | | | |
| Common stock, par value $1 per share | — | | | — | |
| Additional paid-in capital | 144.9 | | | 137.7 | |
| Retained earnings | 186.7 | | | 206.7 | |
|
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 |
| | (In millions, except per share data) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 46.7 |
| | $ | 46.6 |
|
| Accounts receivable, net | 261.3 |
| | 264.4 |
|
| Inventories, net | 327.2 |
| | 317.8 |
|
| Receivables from affiliates | 24.1 |
| | 22.3 |
|
| Unbilled contract revenue | 61.7 |
| | 66.3 |
|
| Other current assets | 19.1 |
| | 15.9 |
|
| Total current assets | 740.1 |
| | 733.3 |
|
| Property, plant and equipment, net | 240.1 |
| | 221.9 |
|
| Operating lease right-of-use assets | 64.3 |
| | — |
|
| Goodwill | 108.4 |
| | 103.4 |
|
| Intangible assets, net | 90.6 |
| | 95.3 |
|
| Pension assets | 65.0 |
| | 57.0 |
|
| Other long-term assets | 18.8 |
| | 12.8 |
|
| Total assets | $ | 1,327.3 |
| | $ | 1,223.7 |
|
| LIABILITIES AND SHAREHOLDER’S EQUITY |
| Current liabilities: | | | |
| Trade accounts payable | $ | 175.0 |
| | $ | 177.8 |
|
| Payables to affiliates | 7.1 |
| | 7.1 |
|
| Current portion of long-term debt and short-term debt | 16.8 |
| | 17.9 |
|
| Current portion of operating lease liabilities | 11.9 |
| | — |
|
| Accrued employee compensation | 25.7 |
| | 27.5 |
|
| Deferred revenue | 35.7 |
| | 39.5 |
|
| Other accrued expenses | 40.1 |
| | 37.4 |
|
| Total current liabilities | 312.3 |
| | 307.2 |
|
| Long-term liabilities, less current portion: | | | |
| Long-term debt | 545.2 |
| | 547.5 |
|
| Long-term operating lease liabilities | 53.6 |
| | — |
|
| Deferred income taxes | 29.9 |
| | 24.8 |
|
| Other long-term liabilities | 28.5 |
| | 26.3 |
|
| Total long-term liabilities | 657.2 |
| | 598.6 |
|
| Park-Ohio Industries, Inc. and Subsidiaries shareholder's equity: | | | |
| Common stock, par value $1 per share | — |
| | — |
|
| Additional paid-in capital | 127.3 |
| | 123.2 |
|
| Retained earnings | 253.4 |
| | 221.9 |
|
| Accumulated other comprehensive loss | (37.0 | ) | | (40.9 | ) |
| Total Park-Ohio Industries, Inc. and Subsidiaries shareholder's equity | 343.7 |
| | 304.2 |
|
| Noncontrolling interests | 14.1 |
| | 13.7 |
|
| Total equity | 357.8 |
| | 317.9 |
|
| Total liabilities and shareholder's equity | $ | 1,327.3 |
| | $ | 1,223.7 |
|
| | | | | | | | | | | |
| Accumulated other comprehensive loss | (61.8) | | | (19.2) | |
| Total Park-Ohio Industries, Inc. and Subsidiaries shareholder's equity | 269.8 | | | 325.2 | |
| Noncontrolling interests | 11.5 | | | 10.8 | |
| Total equity | 281.3 | | | 336.0 | |
| Total liabilities and shareholder's equity | $ | 1,457.6 | | | $ | 1,379.0 | |
(1) - Our continuing operations exclude the results of our Aluminum Products business unit, which is held-for-sale as of December 31, 2022 and presented in discontinued operations for all periods presented.
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of IncomeOperations
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (In millions) |
| Net sales | $ | 1,492.9 | | | $ | 1,277.0 | | | $ | 1,152.1 | |
| Cost of sales | 1,282.4 | | | 1,099.1 | | | 986.8 | |
| | | | | |
| Selling, general and administrative expenses | 161.5 | | | 154.8 | | | 139.6 | |
| Restructuring and other special charges | 17.3 | | | 20.4 | | | 6.6 | |
| Gains on sales of assets, net | (2.4) | | | (14.7) | | | — | |
| | | | | |
| | | | | |
| Operating income | 34.1 | | | 17.4 | | | 19.1 | |
| | | | | |
| Other components of pension income and other postretirement benefits expense, net | 11.1 | | | 9.7 | | | 7.3 | |
| Interest expense, net | (33.8) | | | (27.1) | | | (27.7) | |
| | | | | |
| Income from continuing operations before income taxes | 11.4 | | | — | | | (1.3) | |
| Income tax benefit | 0.7 | | | 1.5 | | | 1.3 | |
| | | | | |
| | | | | |
| Income from continuing operations | 12.1 | | | 1.5 | | | — | |
| (Income) loss attributable to noncontrolling interest | (1.3) | | | 1.2 | | | 0.3 | |
| Income from continuing operations attributable to ParkOhio common shareholder | 10.8 | | | 2.7 | | | 0.3 | |
| Loss from discontinued operations attributable to ParkOhio common shareholder | (24.3) | | | (25.9) | | | (4.3) | |
| Net loss attributable to ParkOhio common shareholder | $ | (13.5) | | | $ | (23.2) | | | $ | (4.0) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (In millions) |
| Net sales | $ | 1,618.3 |
| | $ | 1,658.1 |
| | $ | 1,412.9 |
|
| Cost of sales | 1,358.0 |
| | 1,386.6 |
| | 1,180.1 |
|
| Gross profit | 260.3 |
| | 271.5 |
| | 232.8 |
|
| Selling, general and administrative expenses | 176.5 |
| | 175.1 |
| | 151.5 |
|
| Gain on sale of assets | — |
| | (1.9 | ) | | — |
|
| Litigation settlement gain | — |
| | — |
| | (3.3 | ) |
| Operating income | 83.8 |
| | 98.3 |
| | 84.6 |
|
| Other components of pension income and other postretirement benefits expense, net | 5.6 |
| | 8.8 |
| | 6.4 |
|
| Interest expense, net | (33.9 | ) | | (34.4 | ) | | (31.5 | ) |
| Loss on extinguishment of debt | — |
| | — |
| | (11.0 | ) |
| Income before income taxes | 55.5 |
| | 72.7 |
| | 48.5 |
|
| Income tax expense | (15.4 | ) | | (16.8 | ) | | (17.7 | ) |
| Net income | 40.1 |
| | 55.9 |
| | 30.8 |
|
| Net income attributable to noncontrolling interest | (1.1 | ) | | (1.6 | ) | | (1.0 | ) |
| Net income attributable to ParkOhio common shareholder | $ | 39.0 |
| | $ | 54.3 |
| | $ | 29.8 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (In millions) |
| Net loss attributable to ParkOhio common shareholder before noncontrolling interest | $ | (12.2) | | | $ | (24.4) | | | $ | (4.3) | |
| Other comprehensive (loss) income: | | | | | |
| Currency translation | (19.9) | | | (10.0) | | | 14.1 | |
| Pensions and other postretirement benefits, net of tax | (22.7) | | | 8.9 | | | 4.8 | |
| Total other comprehensive (loss) income | (42.6) | | | (1.1) | | | 18.9 | |
| Total comprehensive (loss) income, net of tax | (54.8) | | | (25.5) | | | 14.6 | |
| Comprehensive (income) loss attributable to noncontrolling interest | (1.3) | | | 1.2 | | | 0.3 | |
| Comprehensive (loss) income attributable to ParkOhio common shareholder | $ | (56.1) | | | $ | (24.3) | | | $ | 14.9 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | (In millions) |
| Net income | $ | 40.1 |
| | $ | 55.9 |
| | $ | 30.8 |
|
| Other comprehensive income (loss): | | | | | |
| Currency translation | (1.1 | ) | | (9.7 | ) | | 19.2 |
|
| Pensions and other postretirement benefits, net of tax | 5.0 |
| | (13.3 | ) | | 5.6 |
|
| Total other comprehensive income (loss) | 3.9 |
| | (23.0 | ) | | 24.8 |
|
| Total comprehensive income, net of tax | 44.0 |
| | 32.9 |
| | 55.6 |
|
| Comprehensive income attributable to noncontrolling interest | (1.1 | ) | | (1.6 | ) | | (1.0 | ) |
| Comprehensive income attributable to ParkOhio common shareholder | $ | 42.9 |
| | $ | 31.3 |
| | $ | 54.6 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholder's Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Additional
Paid-In
Capital | | Retained
Earnings (Deficit) | | Accumulated
Other
Comprehensive
(Loss) Income | | Noncontrolling Interest | | Total |
| | (In millions) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance at January 1, 2020 | — | | | $ | 127.3 | | | $ | 253.4 | | | $ | (37.0) | | | $ | 14.1 | | | $ | 357.8 | |
| Other comprehensive (loss) income | — | | | — | | | (4.0) | | | 18.9 | | | (0.3) | | | 14.6 | |
| Stock-based compensation | — | | | 6.1 | | | — | | | — | | | — | | | 6.1 | |
| Dividend paid to parent | — | | | — | | | (11.5) | | | — | | | — | | | (11.5) | |
| Balance at December 31, 2020 | — | | | 133.4 | | | 237.9 | | | (18.1) | | | 13.8 | | | 367.0 | |
| Other comprehensive loss | — | | | — | | | (23.2) | | | (1.1) | | | (1.2) | | | (25.5) | |
| Stock-based compensation | — | | | 6.5 | | | — | | | — | | | — | | | 6.5 | |
| Dividend paid to parent | — | | | — | | | (8.0) | | | — | | | — | | | (8.0) | |
| Dividends | — | | | — | | | — | | | — | | | (0.7) | | | (0.7) | |
| Increase in Park-Ohio ownership interest | — | | | 1.1 | | | — | | | — | | | (1.1) | | | — | |
| Other | — | | | (3.3) | | | — | | | — | | | — | | | (3.3) | |
| Balance at December 31, 2021 | — | | | 137.7 | | | 206.7 | | | (19.2) | | | 10.8 | | | 336.0 | |
| Other comprehensive (loss) income | — | | | — | | | (13.5) | | | (42.6) | | | 1.3 | | | (54.8) | |
| Stock-based compensation | — | | | 7.2 | | | — | | | — | | | — | | | 7.2 | |
| Dividend paid to parent | — | | | — | | | (6.5) | | | — | | | — | | | (6.5) | |
| Dividends | — | | | — | | | — | | | — | | | (0.6) | | | (0.6) | |
| | | | | | | | | | | |
| Balance at December 31, 2022 | $ | — | | | $ | 144.9 | | | $ | 186.7 | | | $ | (61.8) | | | $ | 11.5 | | | $ | 281.3 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interest | | Total |
| | (In millions) |
| Balance at January 1, 2017 | — |
| | 106.3 |
| | 158.1 |
| | (42.7 | ) | | 10.0 |
| | 231.7 |
|
| Other comprehensive income | — |
| | — |
| | 29.8 |
| | 24.8 |
| | 1.0 |
| 1.0 |
| 55.6 |
|
| Stock-based compensation | — |
| | 8.6 |
| | — |
| | — |
| | — |
| | 8.6 |
|
| Dividend paid to parent | — |
| | — |
| | (5.0 | ) | | — |
| | — |
| | (5.0 | ) |
| Dividends | — |
| | — |
| | — |
| | — |
| | (0.6 | ) | | (0.6 | ) |
| Acquisition | — |
| | — |
| | — |
| | — |
| | 1.7 |
| | 1.7 |
|
| Balance at December 31, 2017 | — |
| | 114.9 |
| | 182.9 |
| | (17.9 | ) | | 12.1 |
| | 292.0 |
|
| Other comprehensive income | — |
| | — |
| | 54.3 |
| | (23.0 | ) | | 1.6 |
| | 32.9 |
|
| Stock-based compensation | — |
| | 8.3 |
| | — |
| | — |
| | — |
| | 8.3 |
|
| Dividend paid to parent | — |
| | — |
| | (18.0 | ) | | — |
| | — |
| | (18.0 | ) |
| Adoption of ASU 2014-09 | — |
| | — |
| | 2.6 |
| | — |
| | — |
| | 2.6 |
|
| Balance at December 31, 2018 | — |
| | 123.2 |
| | 221.9 |
| | (40.9 | ) | | 13.7 |
| | 317.9 |
|
| Other comprehensive income | — |
| | — |
| | 39.0 |
| | 3.9 |
| | 1.1 |
| | 44.0 |
|
| Stock-based compensation expense | — |
| | 4.1 |
| | — |
| | — |
| | — |
| | 4.1 |
|
| Dividend paid to parent | — |
| | — |
| | (7.5 | ) | | — |
| | — |
| | (7.5 | ) |
| Dividends | — |
| | — |
| | — |
| | — |
| | (0.7 | ) | | (0.7 | ) |
| Balance at December 31, 2019 | — |
| | $ | 127.3 |
| | $ | 253.4 |
| | $ | (37.0 | ) | | $ | 14.1 |
| | $ | 357.8 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| OPERATING ACTIVITIES FROM CONTINUED OPERATIONS | (In millions) |
| Income from continuing operations | $ | 12.1 | | | $ | 1.5 | | | $ | — | |
| Adjustments to reconcile income from continuing operations to net cash (used) provided by operating activities from continued operations: | | | | | |
| Depreciation and amortization | 30.1 | | | 30.4 | | | 28.2 | |
| Stock-based compensation | 7.2 | | | 6.5 | | | 6.1 | |
| Gains on sales of assets, net | (2.4) | | | (14.7) | | | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Deferred income taxes | (8.3) | | | (6.5) | | | 6.9 | |
| | | | | |
| | | | | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (23.2) | | | (3.4) | | | 14.0 | |
| Inventories | (56.0) | | | (55.1) | | | 14.7 | |
| Prepaid and other current assets | (11.0) | | | 1.1 | | | (6.8) | |
| Accounts payable and accrued expenses | 33.1 | | | 37.4 | | | (3.8) | |
| | | | | |
| | | | | |
| Other | (9.4) | | | (12.2) | | | (2.0) | |
| Net cash (used) provided by operating activities from continued operations | (27.8) | | | (15.0) | | | 57.3 | |
| INVESTING ACTIVITIES FROM CONTINUED OPERATIONS | | | | | |
| Purchases of property, plant and equipment | (26.9) | | | (22.3) | | | (20.3) | |
| | | | | |
| Proceeds from sales of assets | 9.5 | | | 20.3 | | | 1.4 | |
| Business acquisitions, net of cash acquired | (23.3) | | | (5.4) | | | — | |
| Net cash used by investing activities from continued operations | (40.7) | | | (7.4) | | | (18.9) | |
| FINANCING ACTIVITIES FROM CONTINUED OPERATIONS | | | | | |
| Proceeds from (payments on) revolving credit facility, net | 64.8 | | | 77.6 | | | (29.3) | |
| Payments on term loans and other debt | (3.6) | | | (6.3) | | | (13.0) | |
| Proceeds from other long-term debt | 3.5 | | | 2.3 | | | 5.5 | |
| Proceeds from (payments on) finance lease facilities, net | 8.5 | | | (0.3) | | | 3.9 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Proceeds from third-party financing arrangement | 20.0 | | | — | | | — | |
| Dividend paid to parent | (6.5) | | | (8.0) | | | (11.5) | |
| | | | | |
| | | | | |
| Dividends | (0.6) | | | (0.7) | | | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided (used) by financing activities from continued operations | 86.1 | | | 64.6 | | | (44.4) | |
DISCONTINUED OPERATIONS1: | | | | | |
| Total (used) provided by operating activities | (1.0) | | | (31.1) | | | 10.7 | |
| Total used by investing activities | (4.8) | | | (8.8) | | | (6.0) | |
| Total used by financing activities | (3.4) | | | (0.9) | | | (2.5) | |
| (Decrease) increase in cash and cash equivalents from discontinued operations | (9.2) | | | (40.8) | | | 2.2 | |
| Effect of exchange rate changes on cash | (4.0) | | | (1.3) | | | 1.9 | |
| Increase (decrease) in cash and cash equivalents | 4.4 | | | 0.1 | | | (1.9) | |
| Cash and cash equivalents at beginning of year | 44.9 | | | 44.8 | | | 46.7 | |
| Cash and cash equivalents at end of year | $ | 49.3 | | | $ | 44.9 | | | $ | 44.8 | |
| Income taxes paid (received), net | $ | 10.7 | | | $ | (1.0) | | | $ | 5.5 | |
| Interest paid | $ | 34.5 | | | $ | 28.8 | | | $ | 28.3 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| OPERATING ACTIVITIES | (In millions) |
| Net income | $ | 40.1 |
| | $ | 55.9 |
| | $ | 30.8 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 34.1 |
| | 36.2 |
| | 31.5 |
|
| Stock-based compensation | 4.1 |
| | 8.3 |
| | 8.6 |
|
| Gain on sale of assets | — |
| | (1.9 | ) | | — |
|
| Loss on extinguishment of debt | — |
| | — |
| | 11.0 |
|
| Litigation settlement gain | — |
| | — |
| | (3.3 | ) |
| Deferred income taxes | 1.4 |
| | 0.6 |
| | 6.4 |
|
| Net impact of Tax Cuts and Jobs Act | — |
| | 0.3 |
| | 3.3 |
|
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | 6.5 |
| | (11.9 | ) | | (25.1 | ) |
| Inventories | (7.2 | ) | | (29.4 | ) | | (19.0 | ) |
| Prepaid and other current assets | 3.8 |
| | (9.8 | ) | | (4.2 | ) |
| Accounts payable and accrued expenses | (15.2 | ) | | 15.7 |
| | 26.0 |
|
| Other noncurrent liabilities | 0.1 |
| | (2.0 | ) | | (6.6 | ) |
| Litigation settlement payment | — |
| | — |
| | (4.0 | ) |
| Other | (6.8 | ) | | (10.3 | ) | | (13.4 | ) |
| Net cash provided by operating activities | 60.9 |
| | 51.7 |
| | 42.0 |
|
| INVESTING ACTIVITIES | | | | | |
| Purchases of property, plant and equipment | (40.1 | ) | | (45.0 | ) | | (27.8 | ) |
| Proceeds from sale of assets | — |
| | 2.8 |
| | — |
|
| Business acquisitions, net of cash acquired | (8.1 | ) | | (46.9 | ) | | (39.7 | ) |
| Net cash used by investing activities | (48.2 | ) | | (89.1 | ) | | (67.5 | ) |
| FINANCING ACTIVITIES | | | | | |
| Proceeds from (payments on) revolving credit facility, net | 7.8 |
| | 40.3 |
| | (8.1 | ) |
| Payments on term loans and other debt | (10.3 | ) | | (15.5 | ) | | (31.3 | ) |
| Proceeds from other long-term debt | 1.4 |
| | 4.0 |
| | — |
|
| (Payments on) proceeds from capital lease facilities, net | (3.4 | ) | | (0.9 | ) | | 1.5 |
|
| Issuance of 6.625% senior notes due 2027 | — |
| | — |
| | 350.0 |
|
| Deferred financing costs | — |
| | — |
| | (7.6 | ) |
| Repurchase of 8.125% senior notes due 2021 | — |
| | — |
| | (250.0 | ) |
| Premium on early extinguishment of debt | — |
| | — |
| | (8.0 | ) |
| Dividend paid to parent | (7.5 | ) | | (18.0 | ) | | (5.0 | ) |
| Dividends | (0.7 | ) | | — |
| | (0.6 | ) |
| Other | — |
| | — |
| | 0.7 |
|
| Net cash (used) provided by financing activities | (12.7 | ) | | 9.9 |
| | 41.6 |
|
| Effect of exchange rate changes on cash | 0.1 |
| | (2.1 | ) | | 5.7 |
|
| Increase (decrease) in cash and cash equivalents | 0.1 |
| | (29.6 | ) | | 21.8 |
|
| Cash and cash equivalents at beginning of year | 46.6 |
| | 76.2 |
| | 54.4 |
|
| Cash and cash equivalents at end of year | $ | 46.7 |
| | $ | 46.6 |
| | $ | 76.2 |
|
| Income taxes paid | $ | 12.3 |
| | $ | 21.0 |
| | $ | 11.3 |
|
| Interest paid | $ | 31.5 |
| | $ | 33.0 |
| | $ | 29.9 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
NOTE 1 — Summary of Significant Accounting Policies
Consolidation and Basis of Presentation: Park-Ohio Industries, Inc. (“ParkOhio,” “we” or the “Company”) is a diversified international company providing world-class customers with a supply chain management outsourcing service, capital equipment used on their production lines, and manufactured components used to assemble their products. The Company operates through three reportable segments: Supply Technologies, Assembly Components and Engineered Products. The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons.persons, other than the letters of credits disclosed in Note 9. The Company leases certain real properties owned by related parties as described in Note 11.13. Transactions with related parties are not material to the Company’s financial position, results of operations or cash flows.
Discontinued Operations: During the fourth quarter of 2022, we determined that our Aluminum Products business met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the held-for-sale assets and liabilities, the operating results and the cash flows of Aluminum Products in discontinued operations for all periods presented throughout this Annual Report on Form 10-K. Unless otherwise indicated, amounts and activity in this Annual Report are presented on a continuing operations basis. See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for further information.
Accounting Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable are recorded at net realizable value. Accounts receivable are reduced by an allowance for amounts that may become uncollectableuncollectible in the future. The allowance for doubtful accounts was $4.9$3.8 million and $6.2$5.2 million at December 31, 20192022 and 2018,2021, respectively. The Company’s policy is to identify and reserve for specific collectability concerns basedmeasure expected credit losses on customers’ financial condition and payment history, as well as a general reserveaccounts receivable based on historical trendsexperience, current conditions and other information.reasonable forecasts. During 20192022 and 2018,2021, we sold, without recourse, $112.7$131.3 million and $106.8$102.3 million, respectively, of accounts receivable to mitigate accounts receivable concentration risk and to increase working capital efficiency. Sales of accounts receivable are reflected as a reduction of accounts receivable in the Consolidated Balance Sheets, and the proceeds are included in cash flows from operating activities in the Consolidated Statements of Cash Flows. Expense in the amount of $1.1$1.0 million and $1.0$0.4 million in 20192022 and 2018,2021, respectively, related to the discount on sale of accounts receivable is recorded in the Consolidated Statements of Income.Operations.
Inventories: Inventories are valued using first-in, first-out (“FIFO”) or the weighted-average inventory method and stated at the lower of cost or net realizable value, except for the inventories at Canton Drop Forge (“CDF”), which was acquired on February 1, 2018. CDF inventories are stated using the last-in, first-out (“LIFO”) method.value.
|
| | | | | | | |
| Major Classes of Inventories | December 31, 2019 | | December 31, 2018 |
| Raw materials and supplies | $ | 92.6 |
| | $ | 85.0 |
|
| Work in process | 51.3 |
| | 48.9 |
|
| Finished goods | 181.3 |
| | 182.0 |
|
| LIFO reserve | 2.0 |
| | 1.9 |
|
| Inventories, net | $ | 327.2 |
| | $ | 317.8 |
|
| | | | |
| Other Inventory Items | | | |
| Inventory reserves | $ | (34.2 | ) | | $ | (34.9 | ) |
| Consigned inventory | $ | 8.2 |
| | $ | 10.3 |
|
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | |
| Major Classes of Inventories | December 31, 2022 | | December 31, 2021 |
| |
| Raw materials and supplies | $ | 105.0 | | | $ | 100.8 | |
| Work in process | 42.9 | | | 41.0 | |
| Finished goods | 258.6 | | | 210.6 | |
| | | |
| Inventories, net | $ | 406.5 | | | $ | 352.4 | |
| | | |
| Other Inventory Items | | | |
| Inventory reserves | $ | (38.5) | | | $ | (37.5) | |
| Consigned inventory | $ | 11.5 | | | $ | 10.6 | |
Property, Plant and Equipment: Property, plant and equipment is carried at cost. Additions and improvements that extend the lives of assets are capitalized, and expenditures for repairs and maintenance are charged to operations as incurred. Depreciation of fixed assets, including amounts capitalized under finance leases, is computed principally by the straight-line method based on the estimated useful lives of the assets ranging from five to 40 years for buildings, and one to 20 years for machinery and equipment (with the majority in the range of three to ten years).
The following table summarizes property, plant and equipment: | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| |
| | | |
| Land and land improvements | $ | 9.0 | | | $ | 9.4 | |
| Buildings | 59.8 | | | 61.8 | |
| Machinery and equipment | 338.8 | | | 341.7 | |
| Leased property under finance leases | 28.3 | | | 15.2 | |
| Total property, plant and equipment | 435.9 | | | 428.1 | |
| Less: Accumulated depreciation | 255.2 | | | 249.2 | |
| Property, plant and equipment, net | $ | 180.7 | | | $ | 178.9 | |
|
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 |
| Land and land improvements | $ | 12.0 |
| | $ | 11.8 |
|
| Buildings | 86.9 |
| | 84.4 |
|
| Machinery and equipment | 424.0 |
| | 392.6 |
|
| Leased property under capital leases | 39.2 |
| | 35.8 |
|
| Total property, plant and equipment | 562.1 |
| | 524.6 |
|
| Less: Accumulated depreciation | 322.0 |
| | 302.7 |
|
| Property, plant and equipment, net | $ | 240.1 |
| | $ | 221.9 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| |
| Depreciation expense | $ | 23.5 | | | $ | 23.5 | | | $ | 23.9 | |
Goodwill and Indefinite-Lived Assets: In accordance with Accounting Standards Codification (“ASC”) 350,
“Intangibles — Goodwill and Other”Other” (“ASC 350”), goodwill and indefinite life intangible assets are not amortized but rather
are tested annually for impairment as of October 1, or whenever events or changes in circumstances indicate there may be an
indicator of impairment in accordance with ASC 350. Goodwill is tested for impairment at the reporting unit level and is based on the net assets of each reporting unit, including goodwill and intangible assets, compared to its fair value. Our reporting units have been identified one level below the operating segment level. The Company completed its annual goodwill and indefinite-lived intangibles impairment testing as of October 1 of each year, noting no impairment.impairment related to continuing operations. To determine fair value for goodwill testing purposes, the Company uses an income approach, utilizing a discounted cash flow model based on forecasted cash flows and weighted average cost of capitalcapital. To determine fair value for its goodwill testing, and a relief of royalty method for its indefinite-lived intangibles testing.testing, the Company uses a relief-of-royalty method.
See Notes 57 and 68 for additional disclosures about goodwill and indefinite-lived intangibles.
Impairment of Other Long-Lived Assets: Other long-lived assets, including operating lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired whenif the
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. Impairment losses are measured by comparing the estimated fair value of the asset group to its carrying value.
Fair Values of Financial Instruments: Certain financial instruments are required to be recorded at fair value. The Company measures financial assets and liabilities at fair value in three levels of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
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
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
and cash equivalents, accounts receivable, accounts payable and borrowings under the Credit Agreement (as defined in Note 7)9) approximate fair value at December 31, 20192022 and December 31, 20182021 because of the short-term nature of these instruments. The fair values of long-term debt and pension plan assets are disclosed in Note 79 and Note 12,14, respectively.
The Company has not changed its valuation techniques for measuring fair value during 2019,2022, and there were no transfers between levels during the periods presented.
Pension and Other Postretirement Benefits:Pensions: We account for our pensions and other post-retirement benefits in accordance with ASC Topic 715, "Compensation -— Retirement Benefits." Net actuarial gains and losses are amortized to expense when they exceed the 10% accounting corridor, based on the greater of the plan assets or benefit obligations, over an average employee future service period. Refer to Note 1214 for more information.
Income Taxes: The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the current enacted tax rates. In determining these amounts, management determined the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, cumulative earnings and losses, expectations of future earnings, taxable income and the extended period of time over which the postretirement benefits will be paid. As required by ASC 740, “Income“Income Taxes” (“ASC 740”), the Company records valuation allowances if, based on the weight of available evidence, it is more likely than not that all or some portion of our deferred tax assets will not be realized.
We have elected to account for global intangible low-taxed income (“GILTI”) as a current period expense. The impact of GILTI at December 31, 2022 and 2021 was tax expense of $1.8 million and $1.4 million, respectively.
Revenue Recognition: The Company recognizes revenue, other than from long-term contracts within the Engineered Products segment, when its obligations under the contract terms are satisfied and control transfers to the customer, typically upon shipment. Revenue from certain long-term contracts is accounted for over time, whenas products are manufactured or services are performed, as control transfers over time under these arrangements. We follow this method since reasonably reliable estimates of revenue and costs of a contract can be made. See Note 2 for additional disclosure on revenue.
Cost of Sales: Cost of sales is primarily comprised of direct materials and supplies consumed in the manufacture of product; manufacturing labor, depreciation expense and direct overhead expense; and shipping and handling costs.
Concentration of Credit Risk: The Company sells its products to customers in diversified industries. The Company performs ongoing credit evaluations of its customers’ financial condition but does not require collateral to support customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
specific customers, historical trends, current conditions and other information.reasonable forecasts. As of December 31, 2019,2022, the Company had uncollateralized receivables with sixfive customers in the automotive industry, each with several locations, aggregating $44.8$28.1 million, which represented approximately 17%11% of the Company’s trade accounts receivable. During 2019,2022, sales to these customers amounted to approximately $280.6$218.5 million, which represented approximately 17%15% of the Company’s net sales.
Environmental: The Company expenses environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Costs that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company records a liability when environmental assessments and/or remedial efforts are probable and can be reasonably estimated. The estimated liability of the Company is not reduced for possible recoveries from insurance carriers and is undiscounted.
Foreign Currency Translation: The functional currency of the Company's subsidiaries outside the United States is the local currency. Financial statements are translated into U.S. dollars at year-end exchange rates for assets and liabilities and weighted-average exchange rates during the period for revenues and expenses. The resulting translation adjustments are recorded in Accumulated other comprehensive income (loss)loss in shareholders’ equity.the Consolidated Balance Sheets. Gains and losses resulting from foreign currency transactions, including intercompany transactions that are not considered long-term investments, are included in the Consolidated Statements of Income.Operations.
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Warranties: The Company estimates the amount of warranty claims on sold products that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. The following table presents the changes in the Company’s product warranty liability:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| |
| Balance at January 1 | $ | 7.2 | | | $ | 6.4 | | | $ | 6.4 | |
| Claims paid during the year | (2.3) | | | (1.9) | | | (2.5) | |
| Warranty expense | 1.0 | | | 3.1 | | | 2.1 | |
| Foreign currency translation | (0.7) | | | (0.4) | | | 0.4 | |
| | | | | |
| Balance at December 31 | $ | 5.2 | | | $ | 7.2 | | | $ | 6.4 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Balance at January 1, | $ | 6.2 |
| | $ | 7.9 |
| | $ | 7.1 |
|
| Claims paid during the year | (4.1 | ) | | (5.3 | ) | | (4.0 | ) |
| Warranty expense | 4.3 |
| | 3.6 |
| | 4.7 |
|
| Acquired warranty liabilities | — |
| | — |
| | 0.1 |
|
| Balance at December 31, | $ | 6.4 |
| | $ | 6.2 |
| | $ | 7.9 |
|
Accounting Standards Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” This accounting standard requires that a lessee recognize a right-of-use asset and a lease liability on its balance sheet for all leases, including operating leases, with a term greater than 12 months. In July 2018, the FASB issued updated guidance, which allows an additional transition method to adopt the new leases standard at the adoption date, rather than as of the beginning of the earliest period presented. The Company elected to transition to the new standard on its effective date of January 1, 2019 and therefore did not adjust its prior period financial information. On the transition date, we recognized operating right-of-use assets and related lease liabilities of $69.7 million. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company also made an accounting policy election not to record a right-of-use asset or lease liability related to leases with an initial term of 12 months or less, and elected to not separate lease and non-lease components for all leases. See Note 10, "Leases" for additional disclosure.
In February 2018,March 2020, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income2020-04, “Reference Rate Reform (Topic 220)848): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The ASU affects any entity that is required to apply the provisions of Topic 220, “Income Statement-Reporting Comprehensive Income,” and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The Company has evaluated ASU 2018-02 and has decided not to make the election to reclassify the income tax effectsFacilitation of the TCJA from accumulated other comprehensive income to retained earnings.
Recent Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): MeasurementEffects of Credit Losses ofReference Rate Reform on Financial Instruments,Reporting,” which replaceswas issued in response to concerns about structural risks of interbank offered rates, and, particularly, the current incurred loss impairment model with a methodology that reflects expected credit losses. Underrisk of cessation of the new methodology, entities will be required to measure expected credit losses on financial instruments held at amortized cost, including trade receivables, based on historical experience, current conditions and reasonable forecasts. Adoption of thisLondon Interbank Offered Rate (“LIBOR”). The guidance is required for interimeffective upon issuance and annual periods beginningmay be adopted on any date on or after March 12, 2020. However, the relief is temporary and generally cannot be applied to contract modifications that occur after December 15, 2019. We plan to adopt this standard as31, 2022 or hedging relationships entered into or evaluated after that date. As of January 1, 2020. TheDecember 31, 2022, the Company is inutilizes ongoing reference rates, including the process of evaluatingEuro Interbank Offered Rate; the change from LIBOR had no impact on the financial statements of the new standard but does not expect adoptionCompany. All loan agreements that previously utilized LIBOR have been updated to have a material impact.utilize an ongoing reference rate.
No other recently issued ASUs are expected to have a material impact on our results of operations, financial condition or liquidity.
NOTE 2 — Revenue
Substantially all of the Company’s contracts have a single performance obligation to transfer products to or, in limited cases, perform services for the customer. Accordingly, the Company recognizes revenue when its obligations under the contract
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
terms are satisfied and control transfers to the customer. Revenue is recognized at an amount that reflects the consideration the Company expects to receive in exchange for the good or service, including estimated provisions for rebates,
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
discounts, returns and allowances. The Company sells its products both directly to customers, and in limited cases, through distributors, generally under agreements with payment terms between 30-90 days; the Company has no financing components.
The majority of the Company’s revenue is derived from contracts (i) with an original contract length of one year or less, or (ii) for which it recognizes revenue at the amount at which it has the right to invoice as products or services are delivered. The Company has elected the practical expedient not to disclose the value of remaining performance obligations associated with these types of contacts.
The Company also has certain contracts which contain performance obligations that are immaterial in the context of the contract with the customer. The Company has elected the practical expedient not to assess whether these promised goods or services are performance obligations.
Supply Technologies 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. Within this segment, contracts routinely consist of a long-term agreement or master service agreement with quantity and pricing specified through individual purchase orders. Revenue is recognized at a point in time, which is the shipping point, as that is when control transfers to the customer.
Assembly Components designs, develops and manufactures: aluminum products; highly efficient, high pressure direct 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. Within this segment, contracts routinely consist of a long-term agreement or master service agreement with quantity and pricing specified through individual purchase orders. Revenue is recognized at a point in time, which is at the shipping point, as that is when control transfers to the customer.
Engineered Products 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. Engineered Products also produces and provides services and spare parts for the 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 18%16% of the Company's total consolidated sales for the year ended December 31, 2019.2022. 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.
For over time arrangements, contract liabilities primarily relate to advances or deposits received from the Company’s customers before revenue is recognized. These amounts, which totaled $35.7$52.6 million and $39.5$51.7 million at December 31, 20192022 and December 31, 2018,2021, respectively, are recorded as Deferred revenue in the Consolidated Balance Sheets.
For over time arrangements, contract assets primarily relate to revenue recognized in advance of billings to customers under long-term contracts accounted for under percentage of completion. These amounts, which totaled $61.7$56.7 million and $66.3$55.0 million at December 31, 20192022 and December 31, 2018,2021, respectively, are recorded as Unbilled contract revenue in the Consolidated Balance Sheets.
The Company has elected to account for shipping and handling as activities to fulfill the promise to transfer its products. As such, shipping and handling fees billed to customers in a sales transaction are recorded in Net sales, and shipping and handling costs incurred are recorded in Cost of sales. The Company has elected to exclude from Net sales any value-added, sales or other taxes which it collects concurrent with revenue-producing activities.
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
We disaggregate our revenue by product line and geographic region of our customer, as we believe these criteria best depict how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. See details in the tables below.
| | | | | | | | | Year Ended December 31, |
| | Year Ended December 31, | | | 2022 | | 2021 | | 2020 |
| | 2019 | | 2018 | |
| PRODUCT LINE | | | | PRODUCT LINE | | | | | | |
| Supply Technologies | $ | 532.9 |
| | $ | 555.3 |
| Supply Technologies | | $ | 615.6 | | | $ | 539.5 | | | $ | 444.8 | |
| Engineered specialty fasteners and other products | 78.6 |
| | 81.5 |
| Engineered specialty fasteners and other products | | 95.9 | | | 80.0 | | | 65.3 | |
| Supply Technologies Segment | 611.5 |
| | 636.8 |
| Supply Technologies Segment | | 711.5 | | | 619.5 | | | 510.1 | |
| | | | | | | |
| Fuel, rubber and plastic products | 353.8 |
| | 382.5 |
| Fuel, rubber and plastic products | | 388.8 | | | 321.5 | | | 298.4 | |
| Aluminum products | 185.7 |
| | 195.8 |
| |
| Assembly Components Segment | 539.5 |
| | 578.3 |
| |
| Assembly Components Segment1 | | Assembly Components Segment1 | | 388.8 | | | 321.5 | | | 298.4 | |
| | | | | | | |
| Industrial equipment | 323.8 |
| | 312.1 |
| Industrial equipment | | 277.3 | | | 247.0 | | | 238.2 | |
| Forged and machined products | 143.5 |
| | 130.9 |
| Forged and machined products | | 115.3 | | | 89.0 | | | 105.4 | |
| Engineered Products Segment | 467.3 |
| | 443.0 |
| Engineered Products Segment | | 392.6 | | | 336.0 | | | 343.6 | |
| | | | | | | |
| Total revenues | $ | 1,618.3 |
| | $ | 1,658.1 |
| Total revenues | | $ | 1,492.9 | | | $ | 1,277.0 | | | $ | 1,152.1 | |
(1) - Our continuing operations exclude the results of our Aluminum Products business unit, which is held-for-sale as of December 31, 2022 and presented in discontinued operations for all periods presented. The Aluminum Products business unit was previously included in our Assembly Components segment.
|
| | | | | | | | | | | | | | | |
| | Supply Technologies Segment | | Assembly Components Segment | | Engineered Products Segment | | Total Revenues |
| Year Ended December 31, 2019 | | | | | | | |
| GEOGRAPHIC REGION | | | | | | | |
| United States | $ | 404.5 |
| | $ | 388.1 |
| | $ | 271.3 |
| | $ | 1,063.9 |
|
| Europe | 98.0 |
| | 14.6 |
| | 80.2 |
| | 192.8 |
|
| Asia | 40.3 |
| | 21.4 |
| | 66.2 |
| | 127.9 |
|
| Mexico | 54.7 |
| | 37.3 |
| | 13.8 |
| | 105.8 |
|
| Canada | 12.2 |
| | 76.7 |
| | 23.9 |
| | 112.8 |
|
| Other | 1.8 |
| | 1.4 |
| | 11.9 |
| | 15.1 |
|
| Total | $ | 611.5 |
| | $ | 539.5 |
| | $ | 467.3 |
| | $ | 1,618.3 |
|
| | | | | | | | |
| Year Ended December 31, 2018 | | | | | | | |
| GEOGRAPHIC REGION | | | | | | | |
| United States | $ | 421.8 |
| | $ | 410.2 |
| | $ | 254.3 |
| | $ | 1,086.3 |
|
| Europe | 98.2 |
| | 7.8 |
| | 77.3 |
| | 183.3 |
|
| Asia | 49.2 |
| | 30.0 |
| | 61.2 |
| | 140.4 |
|
| Mexico | 53.3 |
| | 34.0 |
| | 16.2 |
| | 103.5 |
|
| Canada | 13.3 |
| | 94.9 |
| | 22.5 |
| | 130.7 |
|
| Other | 1.0 |
| | 1.4 |
| | 11.5 |
| | 13.9 |
|
| Total | $ | 636.8 |
| | $ | 578.3 |
| | $ | 443.0 |
| | $ | 1,658.1 |
|
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Supply Technologies Segment | | Assembly Components Segment | | Engineered Products Segment | | Total Revenues |
| |
| Year Ended December 31, 2022 | | | | | | | |
| GEOGRAPHIC REGION | | | | | | | |
| United States | $ | 432.8 | | | $ | 282.1 | | | $ | 222.2 | | | $ | 937.1 | |
| Europe | 126.1 | | | 16.4 | | | 64.9 | | | 207.4 | |
| Asia | 67.1 | | | 21.9 | | | 60.2 | | | 149.2 | |
| Mexico | 69.4 | | | 37.7 | | | 15.7 | | | 122.8 | |
| Canada | 12.4 | | | 27.5 | | | 21.4 | | | 61.3 | |
| Other | 3.7 | | | 3.2 | | | 8.2 | | | 15.1 | |
| Total | $ | 711.5 | | | $ | 388.8 | | | $ | 392.6 | | | $ | 1,492.9 | |
| | | | | | | |
| Year Ended December 31, 2021 | | | | | | | |
| GEOGRAPHIC REGION | | | | | | | |
| United States | $ | 370.3 | | | $ | 207.9 | | | $ | 173.3 | | | $ | 751.5 | |
| Europe | 114.0 | | | 13.8 | | | 64.5 | | | 192.3 | |
| Asia | 58.1 | | | 26.2 | | | 51.8 | | | 136.1 | |
| Mexico | 62.4 | | | 48.0 | | | 17.6 | | | 128.0 | |
| Canada | 11.5 | | | 24.1 | | | 18.7 | | | 54.3 | |
| Other | 3.2 | | | 1.5 | | | 10.1 | | | 14.8 | |
| Total | $ | 619.5 | | | $ | 321.5 | | | $ | 336.0 | | | $ | 1,277.0 | |
| | | | | | | |
| Year Ended December 31, 2020 | | | | | | | |
| GEOGRAPHIC REGION | | | | | | | |
| United States | $ | 314.0 | | | $ | 198.5 | | | $ | 179.1 | | | $ | 691.6 | |
| Europe | 83.8 | | | 12.7 | | | 64.5 | | | 161.0 | |
| Asia | 43.3 | | | 29.6 | | | 59.3 | | | 132.2 | |
| Mexico | 55.4 | | | 27.3 | | | 9.8 | | | 92.5 | |
| Canada | 9.8 | | | 28.9 | | | 19.2 | | | 57.9 | |
| Other | 3.8 | | | 1.4 | | | 11.7 | | | 16.9 | |
| Total | $ | 510.1 | | | $ | 298.4 | | | $ | 343.6 | | | $ | 1,152.1 | |
NOTE 3 — Segments
The Company operates through three reportable segments: Supply Technologies, Assembly Components and Engineered Products. Supply Technologies provides our customers with Total Supply Management™ services for a broad rangeDuring the fourth quarter of high-volume, specialty production components.2022, we determined that the Aluminum Products business met the held-for-sale and discontinued operations accounting criteria. The Aluminum Products business was previously reported in the Company’s Assembly Components manufactures cast aluminum components, automotivesegment and industrial rubber and thermoplastic products, gasoline direct injection systems, fuel filler and hydraulic assembliesnow is shown as discontinued operations for automotive, agricultural equipment, construction equipment, heavy-duty truck and marine equipment industries, and also provides value-added services such as design and engineering, machining and assembly. Engineered Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of high quality products engineered for specific customer applications.
all periods presented.
For purposes of measuring business segment performance, the chief operating decision maker utilizes segment operating (loss) 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; 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 (loss) income reconciles to consolidated (loss) income before income taxes by deducting corporate costs, certain non-cash and/or non-operating items; Other components of pension income and other postretirement benefits (“OPEB”) expense, net; and interest expense, net.
Results by business segment were as follows: |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net sales: | | | | | |
| Supply Technologies | $ | 611.5 |
| | $ | 636.8 |
| | $ | 561.8 |
|
| Assembly Components | 539.5 |
| | 578.3 |
| | 524.5 |
|
| Engineered Products | 467.3 |
| | 443.0 |
| | 326.6 |
|
| | $ | 1,618.3 |
| | $ | 1,658.1 |
| | $ | 1,412.9 |
|
| Segment operating income: | | | | | |
| Supply Technologies | $ | 42.0 |
| | $ | 49.0 |
| | $ | 43.3 |
|
| Assembly Components | 36.2 |
| | 42.9 |
| | 47.8 |
|
| Engineered Products | 37.7 |
| | 38.4 |
| | 19.5 |
|
| Total segment operating income | 115.9 |
| | 130.3 |
| | 110.6 |
|
| Corporate costs | (27.8 | ) | | (33.9 | ) | | (29.3 | ) |
| One-time net expense related to former President | (4.3 | ) | | — |
| | — |
|
| Gain on sale of assets | — |
| | 1.9 |
| | — |
|
| Litigation settlement gain | — |
| | — |
| | 3.3 |
|
| Operating income | 83.8 |
| | 98.3 |
| | 84.6 |
|
| Other components of pension income and other postretirement benefits expense, net | 5.6 |
| | 8.8 |
| | 6.4 |
|
| Interest expense, net | (33.9 | ) | | (34.4 | ) | | (31.5 | ) |
| Loss on extinguishment of debt | — |
| | — |
| | (11.0 | ) |
| Income before income taxes | $ | 55.5 |
| | $ | 72.7 |
| | $ | 48.5 |
|
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Results by business segment were as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| |
| Net sales: | | | | | |
| Supply Technologies | $ | 711.5 | | | $ | 619.5 | | | $ | 510.1 | |
| Assembly Components | 388.8 | | | 321.5 | | | 298.4 | |
| Engineered Products | 392.6 | | | 336.0 | | | 343.6 | |
| $ | 1,492.9 | | | $ | 1,277.0 | | | $ | 1,152.1 | |
| Segment operating (loss) income: | | | | | |
| Supply Technologies | $ | 45.7 | | | $ | 42.8 | | | $ | 30.2 | |
| Assembly Components | 1.1 | | | (2.6) | | | 10.9 | |
| Engineered Products | 14.8 | | | (12.2) | | | 3.5 | |
| Total segment operating income | 61.6 | | | 28.0 | | | 44.6 | |
| Corporate costs | (29.9) | | | (25.3) | | | (25.5) | |
| Gains on sales of assets, net | 2.4 | | | 14.7 | | | — | |
| | | | | |
| | | | | |
| | | | | |
| Operating income | 34.1 | | | 17.4 | | | 19.1 | |
| Other components of pension income and other postretirement benefits expense, net | 11.1 | | | 9.7 | | | 7.3 | |
| Interest expense, net | (33.8) | | | (27.1) | | | (27.7) | |
| | | | | |
| Income (loss) from continuing operations before income taxes | $ | 11.4 | | | $ | — | | | $ | (1.3) | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| |
| Capital expenditures: | | | | | |
| Supply Technologies | $ | 3.4 | | | $ | 4.1 | | | $ | 6.5 | |
| Assembly Components | 8.2 | | | 7.6 | | | 7.1 | |
| Engineered Products | 15.2 | | | 10.4 | | | 6.5 | |
| Corporate | 0.1 | | | 0.2 | | | 0.2 | |
| $ | 26.9 | | | $ | 22.3 | | | $ | 20.3 | |
| Depreciation and amortization expense: | | | | | |
| Supply Technologies | $ | 6.0 | | | $ | 5.5 | | | $ | 5.1 | |
| Assembly Components | 13.7 | | | 14.7 | | | 13.1 | |
| Engineered Products | 10.1 | | | 10.2 | | | 9.6 | |
| Corporate | 0.3 | | | — | | | 0.4 | |
| $ | 30.1 | | | $ | 30.4 | | | $ | 28.2 | |
| Identifiable assets: | | | | | |
| Supply Technologies | $ | 465.7 | | | $ | 398.5 | | | $ | 347.6 | |
| Assembly Components | 306.1 | | | 310.6 | | | 297.5 | |
| Engineered Products | 436.9 | | | 414.9 | | | 439.7 | |
| Corporate | 141.7 | | | 132.9 | | | 128.9 | |
| Assets held-for-sale by discontinued operations | 107.2 | | | 122.1 | | | 103.6 | |
| $ | 1,457.6 | | | $ | 1,379.0 | | | $ | 1,317.3 | |
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Capital expenditures: | | | | | |
| Supply Technologies | $ | 6.1 |
| | $ | 5.2 |
| | $ | 3.3 |
|
| Assembly Components | 19.5 |
| | 24.3 |
| | 18.6 |
|
| Engineered Products | 14.3 |
| | 15.4 |
| | 5.7 |
|
| Corporate | $ | 0.2 |
| | $ | 0.1 |
| | $ | 0.2 |
|
| | $ | 40.1 |
| | $ | 45.0 |
| | $ | 27.8 |
|
| Depreciation and amortization expense: | | | | | |
| Supply Technologies | $ | 4.8 |
| | $ | 5.3 |
| | $ | 4.7 |
|
| Assembly Components | 20.1 |
| | 22.2 |
| | 20.7 |
|
| Engineered Products | 8.8 |
| | 8.4 |
| | 5.6 |
|
| Corporate | 0.4 |
| | 0.3 |
| | 0.5 |
|
| | $ | 34.1 |
| | $ | 36.2 |
| | $ | 31.5 |
|
| Identifiable assets: | | | | | |
| Supply Technologies | $ | 355.9 |
| | $ | 330.1 |
| | $ | 344.4 |
|
| Assembly Components | 413.4 |
| | 378.3 |
| | 351.4 |
|
| Engineered Products | 455.1 |
| | 433.1 |
| | 353.6 |
|
| Corporate | 102.9 |
| | 82.2 |
| | 96.9 |
|
| | $ | 1,327.3 |
| | $ | 1,223.7 |
| | $ | 1,146.3 |
|
At December 31, 2019, 20182022, 2021 and 2017,2020, approximately 71%, 68%71% and 65%70%, respectively, of the Company’s assets (including assets held-for-sale) were located in the United States.
NOTE 4 — Discontinued Operations
A business is classified as held-for-sale when management having the authority to approve the action commits to a plan to sell the business, the sale is probable to occur during the next 12 months at a price that is reasonable in relation to its current fair value, and certain other criteria of ASC 360 are met. A business classified as held-for-sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. When the carrying amount of the business exceeds its estimated fair value less costs to sell, a loss is recognized and updated each reporting period as appropriate. A business held-for-sale is classified as discontinued operations if the disposal group is a component of an entity; the component of an entity meets the held-for-sale criteria of ASC 360; and disposal of the component of an entity represents a strategic shift that will have a major effect on the entity's operations and financial results.
During the fourth quarter of 2022, the Company determined that the Aluminum Products business met the held-for-sale and discontinued operations accounting criteria.Accordingly, the Company has reported the held-for-sale assets and liabilities and the operating results of Aluminum Products in discontinued operations for all periods presented in this Annual Report.The Aluminum Products business was previously reported in the Company’s Assembly Components segment until meeting the discontinued operations criteria. See Note 9 for discussion of the entry into a memorandum of understanding (the “MOU”) related to the potential sale of this business.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| |
| Net sales | $ | 210.4 | | | $ | 161.0 | | | $ | 143.1 | |
| Cost of sales | 220.0 | | | 169.3 | | | 135.7 | |
| | | | | |
| Selling, general and administrative | 14.2 | | | 11.5 | | | 10.2 | |
| Restructuring and other special charges | 3.9 | | | 4.0 | | | — | |
| Goodwill impairment | — | | | 4.6 | | | — | |
| Operating loss | (27.7) | | | (28.4) | | | (2.8) | |
Interest expense1 | (2.8) | | | (3.0) | | | (2.7) | |
| | | | | |
| | | | | |
| | | | | |
| Loss from operation of discontinued operations | (30.5) | | | (31.4) | | | (5.5) | |
| Loss on classification as held-for-sale | (1.8) | | | — | | | — | |
| Income tax benefit | 8.0 | | | 5.5 | | | 1.2 | |
| Loss from discontinued operations, net of tax | $ | (24.3) | | | $ | (25.9) | | | $ | (4.3) | |
| | | | | |
(1) - Interest expense includes an allocation of interest that is not directly attributable to our Aluminum Products business, totaling $2.5 million, $2.6 million and $2.3 million in 2022, 2021 and 2020, respectively.
The following represents the details of assets and liabilities held-for-sale in each period:
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (In millions, except share data) |
| ASSETS |
| Current assets: | | | |
| Accounts receivable, net | $ | 24.9 | | | $ | 31.7 | |
| Inventories, net | 30.2 | | | 30.5 | |
| | | |
| Other current assets | 1.2 | | | 3.0 | |
Current assets held-for-sale1 | 56.3 | | | 65.2 | |
| | | |
| Property, plant and equipment, net | 46.1 | | | 49.9 | |
| Operating lease right-of-use assets | 4.8 | | | 7.0 | |
Long-term assets held-for-sale1 | 50.9 | | | 56.9 | |
| | | |
| Total assets held-for-sale | $ | 107.2 | | | $ | 122.1 | |
| LIABILITIES |
| Current liabilities: | | | |
| Trade accounts payable | $ | 22.8 | | | $ | 15.7 | |
| Current portion of finance lease liabilities | 2.4 | | | 4.4 | |
| Current portion of operating lease liabilities | 2.3 | | | 2.2 | |
| Other accrued expenses | 10.7 | | | 10.6 | |
Current liabilities held-for-sale1 | $ | 38.2 | | | $ | 32.9 | |
| | | |
| Long-term liabilities, less current portion: | | | |
| Long-term finance lease liabilities | 3.1 | | | 4.6 | |
| Long-term operating lease liabilities | 2.5 | | | 4.8 | |
Long-term liabilities held-for-sale1 | 5.6 | | | 9.4 | |
| | | |
| Total liabilities held-for-sale | $ | 43.8 | | | $ | 42.3 | |
(1) - We reasonably expect to finalize the sale of the Aluminum Products business within one year from the December 31, 2022 balance sheet date, and therefore we have presented all assets and liabilities held-for-sale as current as of that date.
NOTE 5 — Plant Closure and Consolidation
During 2022, 2021 and 2020, the Company incurred the following expenses related to plant closure and consolidation in connection with its profit-improvement actions across the businesses.
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | |
| | Facility Related Costs | | Severance and Other | | Total |
| |
| 2022: | | | | | |
| Assembly Components | $ | 5.6 | | | $ | — | | | $ | 5.6 | |
| Engineered Products | 8.2 | | | 0.2 | | | 8.4 | |
| Total | $ | 13.8 | | | $ | 0.2 | | | $ | 14.0 | |
| | | | | |
| 2021: | | | | | |
| Assembly Components | $ | 3.8 | | | $ | — | | | $ | 3.8 | |
| Engineered Products | 10.8 | | | 0.9 | | | 11.7 | |
| Total | $ | 14.6 | | | $ | 0.9 | | | $ | 15.5 | |
| | | | | |
| 2020: | | | | | |
| Assembly Components | $ | 3.2 | | | $ | 0.9 | | | $ | 4.1 | |
| Engineered Products | 1.2 | | | 1.0 | | | 2.2 | |
| Total | $ | 4.4 | | | $ | 1.9 | | | $ | 6.3 | |
| | | | | |
The actions in the Assembly Components segment were primarily in connection with actions taken to close and consolidate its extrusion operations in Tennessee and its fuel operations in Michigan, to relocate certain production to lower-cost facilities with open capacity, and to complete other cost-reduction actions.
The actions in the Engineered Product segment were primarily in connection with plant closure and consolidation of multiple locations, and to complete other cost-reduction actions in this segment.
The Company expects to incur expenses of approximately $2.0 million to $3.0 million in 2023 in connection with its plant closure and consolidation activities.
In connection with the above actions, the Company sold certain real estate for cash proceeds and gains on sales as follows. Gains are recorded on a separate line in the Consolidated Statements of Operations and are excluded from segment operating income.
| | | | | | | | | | | | | | | | | |
| | Cash Proceeds from Sales of Assets | | Net Book Value | | Gains on Sales of Assets |
| |
| 2022 | $ | 9.5 | | | $ | 7.1 | | | $ | 2.4 | |
| 2021 | $ | 20.3 | | | $ | 5.6 | | | $ | 14.7 | |
| 2020 | $ | 1.4 | | | $ | 1.4 | | | $ | — | |
| | | | | |
NOTE 6 — Acquisitions
On May 31, 2019,In July 2022, the Company acquired EFCO, Inc. d/b/a Erie Press SystemsCharter Automotive (Changzhou) Co. Ltd. (“EP”Charter”) for $9.1$9.3 million, including potential contingent consideration. EP,net of cash acquired. Charter, which had revenue of approximately $12 million since the date of the acquisition, is an industry-recognized leader in the manufacturing of advanced forging presses, hydraulic and mechanical presses, and metal stretch-forming and carbon extrusion machines for several end markets, including aerospace and defense, primary metals and high-speed rail. EP is included in our Supply Technologies segment, is headquartered in Changzhou, China and is strategic to our existing fastener manufacturing business, will accelerate the global growth of the Company's Engineered Products segment.proprietary products to electric vehicle and other auto-related platforms.
During 2019,The allocation of the purchase price of Charter was finalized in 2022 and is summarized as follows:
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | |
| (In millions) |
| Accounts receivable | $ | 2.6 | |
| Inventories | 3.0 | |
| Property, plant and equipment | 4.3 | |
| Other current assets | 0.9 | |
| Accounts payable and accrued expenses | (1.5) | |
| |
| Total purchase price | $ | 9.3 | |
The Company paid $6.0 million for Charter in 2022 and is scheduled to pay the remaining balance throughout 2023 and 2024.
In August 2022, the Company acquired Southern Fasteners & Supply, Inc. (“Southern Fasteners”) for $18.7 million, net of cash acquired. The purchase price included cash of $16.7 million paid at closing plus a $2.0 million note that will be paid to the seller over the next two years. Southern Fasteners, which is included in our Supply Technologies segment, is headquartered in Winston-Salem, North Carolina. Southern Fasteners provides commercial fasteners and industrial supplies to a diverse base of Maintenance, Repair and Operations (“MRO”) and Original Equipment Manufacturing (“OEM”) customers throughout the United States and specializes in the design of customized inventory programs for its customers. Southern Fasteners complements Supply Technologies’ continued efforts to grow the initiatives centered around industrial supply and MRO products to our global OEM customer base.
The allocation of the purchase price of Southern Fasteners was finalized in 2022 and is summarized as follows (including the $2.0 million of notes payable to the seller):
| | | | | |
| (In millions) |
| Accounts receivable | $ | 3.3 | |
| Inventories | 5.0 | |
| Property, plant and equipment | 0.4 | |
| |
| Other current assets | 0.3 | |
| Intangible assets | 6.0 | |
| Goodwill | 6.2 | |
| Accounts payable and accrued expenses | (2.5) | |
| Total purchase price (including notes payable to seller of $2.0 million) | $ | 18.7 | |
In 2021, the Company acquired NYK Component Solutions Limited (“NYK”). NYK, which is included in our Supply Technologies segment, is headquartered in Southampton, United Kingdom and is a leading distributor of circular connectors and accessories for use in aerospace, defense, and other industrial applications. NYK provides complementary products to our existing products in Supply Technologies.
At closing, the Company paid $8.1$5.4 million in cash, (net of $10.4 millionnet of cash and cash equivalents acquired).acquired. In addition, the purchase agreement stipulates potential contingent consideration of up to an additional $1.0$1.8 million based on two-year cumulative earnings before interest, taxes, depreciation and taxes.amortization during the two years following the acquisition date. The estimated fair valueCompany paid $0.6 million during 2022, which is included in Business Acquisitions in the Consolidated Statements of Cash Flows. As of December 31, 2022, the Company expects to pay an additional $1.2 million of the contingent consideration valued using level 3 inputs, was approximately $1.0 million as of December 31, 2019, resulting in total consideration of $9.1 million.
The allocation of the purchase price for EP was finalized in 2019. Below is the purchase price allocation as of December 31, 2019 related to the acquisition of EP:seller in 2023.
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
|
| | | |
| Current assets | $ | 6.4 |
|
| Current liabilities | (6.4 | ) |
| Property, plant and equipment | 2.9 |
|
| Intangible assets | 1.8 |
|
| Goodwill | 5.2 |
|
| Deferred income tax liabilities | (0.8 | ) |
| Total purchase price (including potential contingent consideration) | $ | 9.1 |
|
Goodwill associated with the EP acquisition is not deductible for income tax purposes.
On February 1, 2018, the Company acquired CDF for $35.6 million in cash for its Engineered Products segment. CDF manufactures forgings for high-performance applications in the global aerospace, oil and gas, and other markets.
On October 1, 2018, the Company acquired Hydrapower Dynamics Limited (“Hydrapower”) for $7.8 million in cash for its Assembly Components segment. Headquartered in Birmingham, England, Hydrapower is a manufacturer of fluid handling systems incorporating hoses, manipulated tubes and fabricated assemblies for the bus and truck, automotive, agricultural and construction end markets.
During 2018, the Company made two other acquisitions in its Supply Technologies segment totaling a cash purchase price of $3.5 million. Both acquired companies distribute products into the aerospace and defense end markets.
NOTE 57 — Goodwill
The changes in the carrying amount of goodwill by reportable segment are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Supply Technologies | | Assembly Components | | Engineered Products | | Total |
| |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance at January 1, 2021 | $ | 15.1 | | | $ | 51.5 | | | $ | 39.7 | | | $ | 106.3 | |
| Acquisition | 1.5 | | | — | | | — | | | 1.5 | |
| Foreign currency translation | (0.3) | | | — | | | (1.5) | | | (1.8) | |
| Balance at December 31, 2021 | 16.3 | | | 51.5 | | | 38.2 | | | 106.0 | |
| Acquisitions | 6.2 | | | — | | | — | | | 6.2 | |
| Foreign currency translation | (1.4) | | | (0.2) | | | (1.7) | | | (3.3) | |
| Balance at December 31, 2022 | $ | 21.1 | | | $ | 51.3 | | | $ | 36.5 | | | $ | 108.9 | |
NOTE 8 — Other Intangible Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | December 31, 2021 |
| | Weighted Average Remaining Useful Life (Years) | | Gross Value | | Accumulated
Amortization | | Net Value | | Gross Value | | Accumulated
Amortization | | Net Value |
| | | |
| Customer relationships | 8.6 | | $ | 93.8 | | | $ | 55.2 | | | $ | 38.6 | | | $ | 90.4 | | | $ | 50.0 | | | $ | 40.4 | |
| Indefinite-lived tradenames | * | | 25.7 | | | * | | 25.7 | | | 24.7 | | | * | | 24.7 | |
| Technology | 12.5 | | 22.4 | | | 8.8 | | | 13.6 | | | 23.1 | | | 7.6 | | | 15.5 | |
| Other | 4.9 | | 4.8 | | | 4.0 | | | 0.8 | | | 4.9 | | | 3.8 | | | 1.1 | |
| Total | | | $ | 146.7 | | | $ | 68.0 | | | $ | 78.7 | | | $ | 143.1 | | | $ | 61.4 | | | $ | 81.7 | |
| | | | | | | | | | | | | |
| * Not applicable, as these tradenames have an indefinite life. |
Amortization expense of other intangible assets as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| |
| Amortization expense | $ | 6.6 | | | $ | 6.9 | | | $ | 6.2 | |
We estimate amortization expense for the five years subsequent to 2022 as follows: | | | | | |
| |
| 2023 | $ | 6.7 | |
| 2024 | $ | 6.5 | |
| 2025 | $ | 6.5 | |
| 2026 | $ | 6.1 | |
| 2027 | $ | 6.1 | |
|
| | | | | | | | | | | | | | | |
| | Supply Technologies | | Assembly Components | | Engineered Products | | Total |
| Balance at January 1, 2018 | $ | 15.4 |
| | $ | 54.1 |
| | $ | 30.7 |
| | $ | 100.2 |
|
| Acquisitions and adjustments | (0.5 | ) | | 1.9 |
| | 3.6 |
| | 5.0 |
|
| Foreign currency translation | (0.7 | ) | | — |
| | (1.1 | ) | | (1.8 | ) |
| Balance at December 31, 2018 | 14.2 |
| | 56.0 |
| | 33.2 |
| | 103.4 |
|
| Acquisitions and adjustments | — |
| | — |
| | 5.0 |
| | 5.0 |
|
| Foreign currency translation | 0.4 |
| | — |
| | (0.4 | ) | | — |
|
| Balance at December 31, 2019 | $ | 14.6 |
| | $ | 56.0 |
| | $ | 37.8 |
| | $ | 108.4 |
|
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
NOTE 6 — Other Intangible Assets
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2019 | | December 31, 2018 |
| | Weighted Average Remaining Useful Life (Years) | | Gross Value | | Accumulated
Amortization | | Net Value | | Gross Value | | Accumulated
Amortization | | Net Value |
| Customer relationships | 10.0 | | $ | 86.6 |
| | $ | 39.6 |
| | $ | 47.0 |
| | $ | 86.0 |
| | $ | 34.5 |
| | $ | 51.5 |
|
| Indefinite-lived tradenames | * | | 24.6 |
| | * |
| | 24.6 |
| | 24.1 |
| | * |
| | 24.1 |
|
| Technology | 15.5 | | 22.9 |
| | 5.3 |
| | 17.6 |
| | 22.9 |
| | 4.1 |
| | 18.8 |
|
| Other | 7.5 | | 4.8 |
| | 3.4 |
| | 1.4 |
| | 4.1 |
| | 3.2 |
| | 0.9 |
|
| Total | | | $ | 138.9 |
| | $ | 48.3 |
| | $ | 90.6 |
| | $ | 137.1 |
| | $ | 41.8 |
| | $ | 95.3 |
|
| | | | | | | | | | | | | | |
| * Not applicable, as these tradenames have an indefinite life. |
Amortization expense of other intangible assets as follows: |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Amortization expense | $ | 6.5 |
| | $ | 6.9 |
| | $ | 6.6 |
|
We estimate amortization expense for the five years subsequent to December 31, 2019 as follows: |
| | | |
| 2020 | $ | 6.5 |
|
| 2021 | $ | 6.5 |
|
| 2022 | $ | 6.4 |
|
| 2023 | $ | 6.3 |
|
| 2024 | $ | 6.1 |
|
NOTE 79 — Financing Arrangements
Debt consists of the following: |
| | | | | | | | | | | | |
| | | | | | Carrying Value at |
| | Maturity Date | | Interest Rate at December 31, 2019 | | December 31, 2019 | | December 31, 2018 |
| Senior Notes due 2027 | April 15, 2027 | | 6.625 | % | | $ | 350.0 |
| | $ | 350.0 |
|
| Revolving credit facility | November 26, 2024 | | 2.85 | % | | 173.2 |
| | 165.1 |
|
| Industrial Equipment Group European Facilities | December 21, 2021 | | 3.25 | % | | 4.6 |
| | 12.6 |
|
| Finance leases | Various | | Various |
| | 17.2 |
| | 20.7 |
|
| Other | Various | | Various |
| | 23.5 |
| | 24.7 |
|
| Total debt | | | | | 568.5 |
| | 573.1 |
|
| Less: Current portion of long-term debt and short-term debt | | | | | (16.8 | ) | | (17.9 | ) |
| Less: Unamortized debt issuance costs | | | | | (6.5 | ) | | (7.7 | ) |
| Total long-term debt, net | | | | | $ | 545.2 |
| | $ | 547.5 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Carrying Value at |
| | | Maturity Date | | Interest Rate at December 31, 2022 | | December 31, 2022 | | December 31, 2021 |
| | | | | | | |
| Senior Notes due 2027 | | | April 15, 2027 | | 6.625 | % | | $ | 350.0 | | | $ | 350.0 | |
| | | | | | | | | |
| Revolving credit facility | | | November 26, 2024 | | 5.40 | % | | 285.3 | | | 221.1 | |
| | | | | | | | | |
| | | | | | | | | |
| Finance leases | | | Various | | Various | | 18.5 | | | 8.5 | |
| Other | | | Various | | Various | | 15.3 | | | 17.5 | |
| Total debt | | | | | | | 669.1 | | | 597.1 | |
| Less: Current portion of long-term debt and short-term debt | | | | | | | (10.9) | | | (6.3) | |
| | | | | | | | | |
| Less: Unamortized debt issuance costs | | | | | | | (3.1) | | | (3.9) | |
| Total long-term debt, net | | | | | | | $ | 655.1 | | | $ | 586.9 | |
In June 2018, ParkOhioaddition to debt listed above, on December 30, 2022, the Company entered into Amendment No. 1the MOU with a third party pursuant to which the third party would purchase our Aluminum Products business. The sale of the Aluminum Products business is subject to the successful completion of a definitive purchase agreement and other customary conditions. In connection with the MOU, the Company also entered into a financing arrangement with the third party pursuant to which the Company received a portion of the estimated purchase price of the Aluminum Products business, including $20.0 million of cash and a promissory note in the principal amount of $25.0 million, and recorded a financing arrangement liability of $45.0 million. The Company used the $20.0 million from this financing arrangement to repay indebtedness under its revolving credit facility. If a definitive purchase agreement between the parties is not entered into or the sale is not successfully consummated, the promissory note will be cancelled and the Company will repay the third party $20.0 million, less a $0.8 million break-up fee.
ParkOhio's Seventh Amended and Restated Credit Agreement (the(as amended, the “Credit Agreement”) withprovides for a group of banks to increase the revolving credit facility from $350.0in the amount of $405.0 million, to $375.0including a $40.0 million the Canadian
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
revolving subcommitment from $35.0 million to $40.0 million and thea European revolving subcommitment from $25.0 million toin the amount of $30.0 million. Furthermore,Pursuant to the Credit Agreement, ParkOhio has the option pursuant to the Amended Credit Agreement, to increase the availability under the revolving credit facility by an aggregate incremental amount up to $100.0$70.0 million. InThe Credit Agreement matures on November 2019, Park-Ohio entered into Amendment No. 4 to16, 2024. As of December 31, 2022, we had borrowing availability of $102.3 million under the Credit Agreement extending the maturity of the Credit Agreement to November 26, 2024.
In April 2017, ParkOhio completed the issuance, in a private placement, of $350.0 million aggregate principal amount of 6.625% Senior Notes due 2027 (the “Notes”). Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year, and the Notes mature on April 15, 2027. The Notes are unsecured senior obligations of ParkOhio and are guaranteed on an unsecured senior basis by the 100% owned material domestic subsidiaries of ParkOhio.
On December 21, 2016, the Company, through its subsidiary, IEGE Industrial Equipment Holding Company Limited, entered into a financing agreement with Banco Bilbao Vizcaya Argentaria, S.A. The financing agreement provides the Company a loan up to $28.1 million as of December 31, 2019, as well as a revolving credit facility for up to $11.2 million to fund working capital and general corporate needs. The Company had $4.6 million outstanding on the loan as of December 31, 2019. No amounts have been drawn on the revolving credit facility as of December 31, 2019.
On August 13, 2015, the Company entered into a finance lease agreement (the “Lease Agreement”). The Lease Agreement provides the Company up to $50.0 million for finance leases. Finance lease obligations of $17.2$5.1 million were borrowed under the Lease Agreement as of December 31, 20192022 to acquire machinery and equipment. See Note 1113 for additional disclosure.disclosures about finance leases. As of December 31, 2022, the Company had additional finance leases totaling $13.4 million.
On October 21, 2015, the Company, through its subsidiary, Southwest Steel Processing LLC, entered into a financing agreement with the Arkansas Development Finance Authority. The agreement provides the Company the ability to borrow up to $11.0 million for expansion of its manufacturing facility in Arkansas. The loan matures in September 2025. The Company has borrowed $8.4$4.3 million under this agreement as of December 31, 2019.2022.
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table represents fair value information of the Notes, classified as Level 1, at December 31, 20192022 and 2018.2021. The fair value was estimated using quoted market prices.
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| |
| Carrying amount | $ | 350.0 | | | $ | 350.0 | |
| Fair value | $ | 227.5 | | | $ | 337.6 | |
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Carrying amount | $ | 350.0 |
| | $ | 350.0 |
|
| Fair value | $ | 358.3 |
| | $ | 345.8 |
|
Maturities of short-term and long-term debt, excluding finance leases, during each of the five years subsequent to December 31, 20192022 are as follows: | | | | | |
| |
| 2023 | $ | 6.6 | |
| 2024 | $ | 288.5 | |
| 2025 | $ | 3.0 | |
| 2026 | $ | 1.0 | |
| 2027 | $ | 350.4 | |
|
| | | |
| 2020 | $ | 9.8 |
|
| 2021 | $ | 3.5 |
|
| 2022 | $ | 3.0 |
|
| 2023 | $ | 2.9 |
|
| 2024 | $ | 175.8 |
|
Foreign subsidiaries of the Company had $16.2$10.9 million of borrowings at December 31, 20192022 and $26.1$9.8 million at December 31, 2018.2021.
We had outstanding bank guarantees and letters of credit under our credit arrangements of approximately $33.8$41.0 million at December 31, 20192022 and $27.5$39.7 million at December 31, 2018 under our credit arrangements.2021.
The weighted average interest rate on all debt was approximately 5.8%5.1% in 20192022, 4.8% in 2021 and 2018 and 6.1%5.0% in 2017.2020.
NOTE 10 — Income Taxes
(Loss) income from continuing operations before income taxes consists of the following: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| |
| United States | $ | (20.6) | | | $ | (25.7) | | | $ | (21.7) | |
| Outside the United States | 32.0 | | | 25.7 | | | 20.4 | |
| $ | 11.4 | | | $ | — | | | $ | (1.3) | |
Income taxes consists of the following:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| |
| Current (benefit) expense: | | | | | |
| Federal | $ | (1.6) | | | $ | (4.7) | | | $ | (16.0) | |
| State | (0.2) | | | 0.3 | | | 0.4 | |
| Foreign | 9.4 | | | 9.4 | | | 7.4 | |
| 7.6 | | | 5.0 | | | (8.2) | |
| Deferred expense (benefit): | | | | | |
| Federal | (8.0) | | | (6.6) | | | 7.3 | |
| State | 0.8 | | | (0.6) | | | (0.1) | |
| Foreign | (1.1) | | | 0.7 | | | (0.3) | |
| (8.3) | | | (6.5) | | | 6.9 | |
| Income tax benefit | $ | (0.7) | | | $ | (1.5) | | | $ | (1.3) | |
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
NOTE 8 — Income Taxes
Income before income taxes consists of the following: |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| United States | $ | 26.8 |
| | $ | 36.0 |
| | $ | 22.2 |
|
| Outside the United States | 28.7 |
| | 36.7 |
| | 26.3 |
|
| | $ | 55.5 |
| | $ | 72.7 |
| | $ | 48.5 |
|
Income taxes consists of the following:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Current expense: | | | | | |
| Federal | $ | 6.1 |
| | $ | 6.6 |
| | $ | 14.0 |
|
| State | 0.7 |
| | 0.6 |
| | 0.6 |
|
| Foreign | 7.2 |
| | 9.0 |
| | 7.6 |
|
| | 14.0 |
| | 16.2 |
| | 22.2 |
|
| Deferred expense (benefit): | | | | | |
| Federal | 1.8 |
| | 1.3 |
| | (5.5 | ) |
| State | (0.2 | ) | | 0.1 |
| | 0.3 |
|
| Foreign | (0.2 | ) | | (0.8 | ) | | 0.7 |
|
| | 1.4 |
| | 0.6 |
| | (4.5 | ) |
| Income tax expense | $ | 15.4 |
| | $ | 16.8 |
| | $ | 17.7 |
|
The Tax CutsCoronavirus Aid, Relief, and JobsEconomic Security (“CARES”) Act (the “TCJA”) was enacted on December 22, 2017.March 27, 2020. The TCJA reducedCARES Act was a substantial tax-and-spending package intended to provide additional economic stimulus to address the US federal corporateimpact of the COVID-19 pandemic. Significant impacts of the CARES Act include the ability to carry back a net operating loss five years and an increase of the Internal Revenue Code Section 163(j) interest expense disallowance limitations from 30% to 50% of adjusted taxable income. The Company has recorded a significant benefit for the impact of the net operating loss carryback, which provides for refunds related to tax years in which the U.S. tax rate fromwas 35% toversus the current U.S. tax rate of 21%, required companies to pay a one-time transition. This additional tax on earningsbenefit of certain foreign subsidiaries that were previously14% increased the 2020 tax deferred, created new taxes on its global intangible low-taxed income (“GILTI”), and provided a foreign-derived intangible income deduction (“FDII”). benefit.
In 2017, we recorded provisional amounts for certain enactment date effects of the TCJA by applying the guidance in Staff Accounting Bulletin (“SAB”) 118 because we had not yet completed our enactment-date accounting for these effects. During 2018,2022, the Company finalized its accountingcompleted a research and development tax credit study for the 2017 enactment of the TCJAcurrent year as well as US tax years open under statute.The completed study resulted in additional research and recorded net expense of $0.3 million related to the remeasurement of taxes and the one-time transition tax.
The TCJA subjects a U.S. shareholder todevelopment tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTIcredit benefits being recorded in the year the tax is incurred as a period expense. We have elected to account for GILTI as a current period expense. The impact of GILTI at December 31, 2019 and 2018 was an increase in tax expense of $1.9 million and $3.1 million, respectively. The impact of FDII at December 31, 2019 and 2018 was a decrease in tax expense of $0.8 million and $0.6 million, respectively.year.
A reconciliation of income tax expense (benefit) computed by applying the statutory federal income tax rate to income tax expensebenefit as recorded is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| |
| Income tax expense (benefit) at U.S. statutory rate | $ | 2.3 | | | $ | (0.1) | | | $ | (0.3) | |
| Effect of state income taxes, net | 0.3 | | | (0.3) | | | (0.3) | |
| Effect of foreign operations | 3.0 | | | 1.9 | | | 1.5 | |
| Valuation allowance | 0.8 | | | (0.1) | | | 0.6 | |
| Uncertain tax positions | 0.4 | | | (0.3) | | | (1.0) | |
| Non-deductible items | (0.2) | | | 0.9 | | | 1.5 | |
| Equity compensation | 1.4 | | | 0.6 | | | 0.6 | |
| CARES Act NOL carryback | — | | | (3.1) | | | (5.3) | |
| Foreign tax credit | (4.1) | | | (1.4) | | | (0.8) | |
| Other tax credits | (5.6) | | | (0.4) | | | (0.3) | |
| GILTI | 1.8 | | | 1.4 | | | 1.8 | |
| FDII | (0.2) | | | — | | | — | |
| Other, net | (0.6) | | | (0.6) | | | 0.7 | |
| Income tax benefit as recorded | $ | (0.7) | | | $ | (1.5) | | | $ | (1.3) | |
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Income tax at U.S. statutory rate | $ | 11.7 |
| | $ | 15.3 |
| | $ | 16.9 |
|
| Effect of state income taxes, net | 0.3 |
| | 0.6 |
| | 0.7 |
|
| Effect of foreign operations | 1.9 |
| | 3.5 |
| | (5.2 | ) |
| Valuation allowance | 0.6 |
| | (3.0 | ) | | 5.3 |
|
| Uncertain tax positions | 0.1 |
| | (0.3 | ) | | (2.0 | ) |
| Non-deductible items | 0.3 |
| | 0.5 |
| | 0.5 |
|
| Non-deductible compensation | 2.2 |
| | 0.8 |
| | 0.4 |
|
| Manufacturer's deduction | — |
| | — |
| | (0.8 | ) |
| Foreign tax credit | (1.7 | ) | | (2.2 | ) | | — |
|
| Other tax credits | (0.8 | ) | | — |
| | — |
|
| GILTI | 1.9 |
| | 3.1 |
| | — |
|
| FDII | (0.8 | ) | | (0.6 | ) | | — |
|
| Net impact of TCJA | — |
| | 0.3 |
| | 3.3 |
|
| Other, net | (0.3 | ) | | (1.2 | ) | | (1.4 | ) |
| Income tax as recorded | $ | 15.4 |
| | $ | 16.8 |
| | $ | 17.7 |
|
Significant components of the Company’s net deferred income tax assets and liabilities are as follows:
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 |
| |
| Deferred income tax assets: | | | |
| Postretirement benefit obligation | $ | 0.4 | | | $ | 0.5 | |
| Inventory | 12.8 | | | 8.4 | |
| Net operating loss and credit carryforwards | 17.8 | | | 15.4 | |
| | | |
| Operating lease liabilities | 13.3 | | | 14.1 | |
| Compensation | 2.3 | | | 3.4 | |
| Capitalized research and development expenditures | 10.8 | | | — | |
| Disallowed interest | 7.9 | | | 4.9 | |
| Other | 3.6 | | | 4.5 | |
| Total deferred income tax assets | 68.9 | | | 51.2 | |
| Deferred income tax liabilities: | | | |
| Depreciation | 19.3 | | | 20.6 | |
| Pension | 14.1 | | | 18.8 | |
| Intangible assets | 16.2 | | | 17.3 | |
| Lease right-of-use assets | 13.3 | | | 14.0 | |
| Other | 3.1 | | | 2.0 | |
| Total deferred income tax liabilities | 66.0 | | | 72.7 | |
| Net deferred income tax assets (liabilities) prior to valuation allowances | 2.9 | | | (21.5) | |
| Valuation allowances | (8.6) | | | (6.1) | |
| Net deferred income tax liability | $ | (5.7) | | | $ | (27.6) | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Deferred income tax assets: | | | |
| Postretirement benefit obligation | $ | 1.7 |
| | $ | 1.8 |
|
| Inventory | 8.7 |
| | 8.5 |
|
| Net operating loss and credit carryforwards | 11.6 |
| | 11.4 |
|
| Operating lease liabilities | 13.8 |
| | — |
|
| Accrued litigation | — |
| | 0.1 |
|
| Compensation | 2.9 |
| | 4.7 |
|
| Disallowed interest | 4.6 |
| | 2.7 |
|
| Other | 4.2 |
| | 3.5 |
|
| Total deferred income tax assets | 47.5 |
| | 32.7 |
|
| Deferred income tax liabilities: | | | |
| Depreciation and amortization | 21.7 |
| | 18.3 |
|
| Pension | 13.9 |
| | 12.3 |
|
| Intangible assets | 16.8 |
| | 16.1 |
|
| Right-of-use assets | 13.5 |
| | — |
|
| Other | 3.0 |
| | 3.2 |
|
| Total deferred income tax liabilities | 68.9 |
| | 49.9 |
|
| Net deferred income tax liabilities prior to valuation allowances | (21.4 | ) | | (17.2 | ) |
| Valuation allowances | (4.8 | ) | | (5.3 | ) |
| Net deferred income tax liability | $ | (26.2 | ) | | $ | (22.5 | ) |
At December 31, 2019,2022, the Company has U.S., state and foreign net operating loss carryforwards andas well as U.S. foreign tax credit carryforwards and research and development tax credit carryforwards for income tax purposes. The foreign net operating loss carryforward is $26.5$32.5 million, of which $12.4
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
$14.7 million expires between 20202023 and 20392042 and the remainder has no expiration date. The Company has a tax benefit from a state net operating loss carryforward of $2.3$3.3 million, thatof which, $2.9 million expires between 20202023 and 2039.2042 and the remainder has no expiration date. The Company also has a non-consolidated U.S. net operating loss carryforward of $1.5$0.5 million that expires between 20362034 and 2037. The Company has recorded a valuation allowance of $6.2 million against these net operating loss carryforwards in jurisdictions where those losses are not expected to be realized. The foreign tax credit carryforward is $0.1$1.8 million and expires in 2029.between 2030 and 2032. The foreign tax credit carryforward has a full valuation allowance as the Company is not expected to generate sufficient foreign source income to utilize the credit before expiration. The U.S. research and development tax credit carryforward is $2.5 million and expires between 2041 and 2042.
As of December 31, 20192022 and 2018,2021, the Company was not in a cumulative three-year loss position and it wasposition. The Company has determined that it was more likely than not that its U.S. deferred tax assets will be realized. Forrealized, except for the year ended December 31, 2018, the Company recorded aforeign tax benefit of $6.3 million related to the reversal of valuation allowance, of which $3.0 million was recorded in income tax expense with the remainder reflected in deferred taxes. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities).credit as noted above. The Company reviews all valuation allowances related to deferred tax assets and will reverse these valuation allowances, partially or totally, when appropriate under ASC 740.
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | 2022 | | 2021 | | 2020 |
| | 2019 | | 2018 | | 2017 | |
| Unrecognized Tax Benefit — January 1, | $ | 0.9 |
| | $ | 1.2 |
| | $ | 2.9 |
| |
| Gross Increases to Tax Positions Related to Current Year | 0.5 |
| | 0.1 |
| | 0.1 |
| |
| Unrecognized Tax Benefit — January 1 | | Unrecognized Tax Benefit — January 1 | $ | 1.0 | | | $ | 2.1 | | | $ | 3.7 | |
| | Gross Increases to Tax Positions Related to Prior Years | 2.6 |
| | — |
| | 0.6 |
| Gross Increases to Tax Positions Related to Prior Years | 0.3 | | | — | | | 0.1 | |
| Gross Decreases to Tax Positions Related to Prior Years | — |
| | (0.1 | ) | | — |
| Gross Decreases to Tax Positions Related to Prior Years | — | | | — | | | (0.5) | |
| Gross Decreases related to settlements with taxing authorities | — |
| | (0.1 | ) | | (0.4 | ) | Gross Decreases related to settlements with taxing authorities | — | | | (0.1) | | | — | |
| Expiration of Statute of Limitations | (0.3 | ) | | (0.2 | ) | | (1.9 | ) | Expiration of Statute of Limitations | (0.5) | | | (1.0) | | | (1.2) | |
| Other | — |
| | — |
| | (0.1 | ) | |
| Unrecognized Tax Benefit — December 31, | $ | 3.7 |
| | $ | 0.9 |
| | $ | 1.2 |
| |
| Unrecognized Tax Benefit — December 31 | | Unrecognized Tax Benefit — December 31 | $ | 0.8 | | | $ | 1.0 | | | $ | 2.1 | |
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.0$0.1 million at both December 31, 20192022 and $0.8 million at December 31, 2018.2021. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 20192022 and 2018,2021, the Company recognized a tax expensebenefit of approximately $0.1 million and a tax benefit of $0.1 million, respectively,in both years in net interest and penalties due to the expiration of various uncertain tax positions. The Company had approximately $0.2 million and $0.1 million for the payment of interest and penalties accrued at both December 31, 20192022 and 2018, respectively.2021. It is reasonably possible that, within the next twelve months the amount of gross unrecognized tax benefits could be reduced by approximately $0.1$0.4 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 20162014 through 20192022 remain open for examination by the Internal Revenue Service and 20142007 through 20192022 remain open for examination by various state and foreign taxing authorities.
As of December 31, 2019,2022, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $194.9$252.1 million. Because $146.8$135.9 million of such earnings have previously been subject to the one-time transition taxes required by the TCJA,U.S. Tax Cuts and Jobs Act (the “TCJA”), any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign withholding and state income taxes. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.
NOTE 911 — Stock-Based Compensation
The Company follows the provisions of ASC 718, “Compensation“Compensation — Stock Compensation” (“(“ASC 718”), which requires all share-based payments to employees to be recognized in the income statement based on their grant date fair values. Compensation expense for awards with service conditions only that are subject to graded vesting is recognized on a straight-line basis over the term of the vesting period.
A summary of Holdings' time-based and performance-based activity for the year ended December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| Time-Based | | Performance-Based |
| | Number of
Shares | | Weighted
Average
Grant Date
Fair Value | | Number of
Shares | | Weighted
Average
Grant Date
Fair Value |
| (in whole shares) | | | | (in whole shares) | | |
| Outstanding — beginning of year | 655,093 | | | $ | 24.62 | | | 50,000 | | | $ | 32.55 | |
Granted(a) | 342,622 | | | 15.97 | | | 1,333 | | | 13.88 | |
| Vested | (264,224) | | | 24.66 | | | (1,333) | | | 13.88 | |
| | | | | | | |
| Cancelled or expired | (17,249) | | | 22.08 | | | — | | | — | |
| Outstanding — end of year | 716,242 | | | $ | 20.53 | | | 50,000 | | | $ | 32.55 | |
(a) Included in the granted amount are 12,500 restricted share units
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
A summary of Holdings' restricted share and performance share activity for the year ended December 31, 2019 is as follows:
|
| | | | | | | | | | | | | |
| | Time-Based | | Performance-Based |
| | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
| | (in whole shares) | | | | (in whole shares) | | |
| Outstanding — beginning of year | 529,947 |
| | $ | 35.98 |
| | — |
| | $ | — |
|
Granted(a) | 268,948 |
| | 32.01 |
| | 50,000 |
| | 32.55 |
|
| Vested | (212,261 | ) | | 37.68 |
| | — |
| | — |
|
| Canceled or expired | (115,000 | ) | | 39.35 |
| | — |
| | — |
|
| Outstanding — end of year | 471,634 |
| | $ | 32.06 |
| | 50,000 |
| | $ | 32.55 |
|
(a) Included in the granted amount are 2,825 restricted share units
The Company recognized compensation expense of $4.1$7.2 million, $8.3$6.5 million and $8.6$6.1 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively, relating to time-based awards and performance-based awards. The amount in 2019 is net of $1.7 million of forfeitures related to the departure of our former President.
The 50,000 share performance-based award in 2019 relates to a five-year cumulative profit target through 2023. Through December 31, 2019,2022, no compensation expense was recognized as achievement of the performance target is deemed not probable.
The total fair value of restricted shares and share units that vested during the years ended December 31, 2019, 20182022, 2021 and 20172020 was $8.0$6.5 million, $8.3$6.7 million and $7.0$6.4 million, respectively.
As of December 31, 2019,2022, the Company had unrecognized compensation expense of $8.6$8.1 million related to restricted shares. The unrecognized compensation expense is expected to be recognized over a total weighted average period of 2.31.8 years.
NOTE 1012 — Commitments and Contingencies
The Company is subject to various pendinga variety of claims, suits, investigations and threatened legaladministrative proceedings with respect to commercial, premises liability, product liability, employment, personal injury and environmental matters arising infrom the ordinary course of business. The Company records a liability for loss contingencies in the consolidated financial statements when a loss is known or considered probable and the amount can be reasonably estimated. Our provisions are based on historical experience, current information and legal advice, and they may be adjusted in the future based on new developments. Estimating probable losses requires the analysis of multiple forecasted factors that often depend on judgments and potential actions by third parties. Although it is not possible to predict with certainty the ultimate outcome or cost of these matters, the Company believes they will not have a material adverse effect on our consolidated financial statements.
Our subsidiaries are involved in a number of contractual and warranty-related disputes. We believe that appropriate liabilities for these contingencies have been recorded; however, actual results may differ materially from our estimates.
In addition to the routine lawsuitsclaims, suits, investigations and proceedings and asserted claims noted above, we are also a co-defendant in approximately 114112 cases asserting claims on behalf of approximately 215162 plaintiffs alleging personal injury as a result of exposure to asbestos. These asbestos cases generally relate to production and sale of asbestos-containing products and allege various theories of liability, including negligence, gross negligence and strict liability, and seek compensatory and, in some cases, punitive damages. In every asbestos case in which we are named as a party, the complaints are filed against multiple named defendants. To the extent that any specific amount of damages is sought, the amount applies to claims against all named defendants.
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
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
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.
Park-Ohio Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued)
NOTE 1113 - Lease Arrangements
We lease manufacturing facilities, warehouse space, office space, machinery and equipment, information technology equipment and vehicles under operating leases. We also lease one building and machinery and numerous equipment under finance leases. For operating leases with terms greater than 12 months, we record the operating right-of-use asset and related lease liability at the present value of lease payments over the lease term. In certain real estate leases, we have options to renew lease terms, generally at our sole discretion. We evaluate renewal options at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors.
The discount rate implicit in our operating leases is generally not determinable, and therefore the Company determines the discount rate for each lease based on its incremental borrowing rate. The incremental borrowing rate is calculated based on lease term, currency and collateral adjustments.
During 2019,2022, the Company obtained right-of-use assets in exchange for new operating lease liabilities of $13.0$12.2 million.
Balance Sheet as of December 31, 20192022 and 2021
| | | | | | | | | | | | | | |
| Classification on the Balance Sheet | December 31, 2022 | | December 31, 2021 |
| Assets | | | | |
| Operating lease assets | Operating lease right-of-use assets | $ | 54.7 | | | $ | 56.4 | |
| Finance lease assets | Property, plant and equipment, net | 23.3 | | | 9.4 | |
| Total lease assets | | $ | 78.0 | | | $ | 65.8 | |
| | | | |
| Liabilities | | | | |
| Current | | | | |
| Operating | Current portion of operating lease liabilities | $ | 11.2 | | | $ | 10.6 | |
| Finance | Current portion of long-term debt and short-term debt | 4.3 | | | 2.5 | |
| Noncurrent | | | | |
| Operating | Long-term operating lease liabilities | 43.7 | | | 45.9 | |
| Finance | Long-term debt | 14.2 | | | 6.0 | |
| Total lease liabilities | | $ | 73.4 | | | $ | 65.0 | |
| | | | |
| Weighted-average remaining lease term (in years) | | | |
| Operating leases | | 6.2 | | 6.7 |
| Finance leases | | 5.6 | | 2.1 |
| Weighted-average discount rate | | | |
| Operating leases | | 5.8 | % | | 6.0 | % |
| Finance leases | | 5.6 | % | | 2.1 | % |
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
|
| | | | |
| | Classification on the Balance Sheet | December 31, 2019 |
| Assets | | |
| Operating lease assets | Operating lease right-of-use assets | $ | 64.3 |
|
| Finance lease assets | Property, plant and equipment, net | 27.1 |
|
| Total lease assets | | $ | 91.4 |
|
| | | |
| Liabilities | | |
| Current | | |
| Operating | Current portion of operating lease liabilities | $ | 11.9 |
|
| Finance | Current portion of long-term debt and short-term debt | 7.0 |
|
| Noncurrent | | |
| Operating | Long-term operating lease liabilities | 53.6 |
|
| Finance | Long-term debt | 10.2 |
|
| Total lease liabilities | | $ | 82.7 |
|
| | | |
| Weighted-average remaining lease term (in years) | |
| Operating leases | | 7.1 |
|
| Finance leases | | 3.9 |
|
| Weighted-average discount rate | |
| Operating leases | | 5.4 | % |
| Finance leases | | 3.7 | % |
Lease Expense for 20192022, 2021 and 2020
Operating lease expense is recognized on a straight-line basis over the lease term, with variable payments recognized in the period those payments are incurred.
|
| | | |
| | 2019 |
| Finance lease expense | |
| Amortization of right-of-use assets | $ | 3.7 |
|
| Interest on lease liabilities | 0.7 |
|
| Operating lease expense | 17.4 |
|
Other lease expense(1) | 6.6 |
|
| Total lease expense | $ | 28.4 |
|
| | |
| (1) - Other lease expense includes variable lease costs and short-term lease costs. |
Total lease expense for 2018 and 2017 was $27.7 million and $22.6 million, respectively.
Cash Flow Information for 2019
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Finance lease expense | | | | | |
| Amortization of right-of-use assets | $ | 3.2 | | | $ | 1.4 | | | $ | 1.7 | |
| Interest on lease liabilities | 0.3 | | | 0.3 | | | 0.1 | |
| Operating lease expense | 15.2 | | | 14.7 | | | 14.4 | |
Other lease expense(1) | 6.9 | | | 7.6 | | | 6.7 | |
| Total lease expense | $ | 25.6 | | | $ | 24.0 | | | $ | 22.9 | |
| | | | | |
| (1) - Other lease expense includes variable lease costs and short-term lease costs. |
|
| | | |
| | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | |
| Operating cash flows for operating leases | $ | 17.2 |
|
| Operating cash flows for finance leases | $ | 0.7 |
|
| Financing cash flows for finance leases | $ | 3.4 |
|
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Amounts included in the Consolidated Statements of Cash Flows: | | | | | |
| Operating cash outflows for operating leases | $ | (14.5) | | | $ | (14.6) | | | $ | (14.5) | |
| Operating cash outflows for finance leases | $ | (0.3) | | | $ | (0.3) | | | $ | (0.1) | |
| Financing cash inflows (outflows) for finance leases | $ | 8.5 | | | $ | (0.3) | | | $ | 3.9 | |
Maturities of Lease Liabilities as of December 31, 2019,2022, were as follows:
| | | | | | | | | | | |
| |
| |
| Operating Leases | | Finance Leases |
| 2023 | $ | 13.6 | | | $ | 4.6 | |
| 2024 | 12.3 | | | 3.9 | |
| 2025 | 9.5 | | | 2.6 | |
| 2026 | 7.3 | | | 2.1 | |
| 2027 | 6.2 | | | 2.0 | |
| Thereafter | 15.0 | | | 5.9 | |
| Total lease payments | 63.9 | | | 21.1 | |
| Less: amount of lease payments representing interest | (9.0) | | | (2.6) | |
| Total present value of future lease payments | $ | 54.9 | | | $ | 18.5 | |
|
| | | | | | | |
| | Operating Leases | | Finance Leases |
| 2020 | $ | 14.9 |
| | $ | 7.4 |
|
| 2021 | 12.5 |
| | 4.3 |
|
| 2022 | 10.7 |
| | 3.1 |
|
| 2023 | 9.1 |
| | 2.0 |
|
| 2024 | 8.4 |
| | 0.9 |
|
| Thereafter | 23.2 |
| | 0.9 |
|
| Total lease payments | 78.8 |
| | 18.6 |
|
| Less: amount of lease payments representing interest | (13.3 | ) | | (1.4 | ) |
| Total present value of future lease payments | $ | 65.5 |
| | $ | 17.2 |
|
The future minimum lease payments as of December 31, 2018, as reported in the Annual Report on Form 10-K for year ended December 31, 2018 under ASC 840 "Leases," are as follows: |
| | | | | | | |
| | Operating leases | | Finance Leases |
| 2019 | $ | 18.5 |
| | $ | 7.3 |
|
| 2020 | 14.0 |
| | 6.5 |
|
| 2021 | 10.5 |
| | 3.3 |
|
| 2022 | 9.1 |
| | 2.2 |
|
| 2023 | 7.2 |
| | 1.4 |
|
| Thereafter | 23.2 |
| | 1.6 |
|
| Total minimum lease payments | $ | 82.5 |
| | 22.3 |
|
| Amounts representing interest | | | (1.6 | ) |
| Present value of minimum lease payments | | | 20.7 |
|
| Current maturities | | | (6.6 | ) |
| Long-term finance lease obligation | | | $ | 14.1 |
|
Certain of the Company’s leases are with related parties at an annual rental expense of approximately $2.2$3.3 million. Transactions with related parties are not material to the Company’s financial position, results of operations or cash flows.
NOTE 1214 — Pensions and Postretirement Benefits
The Company and its subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans, covering substantially all employees. In addition, the Company has an unfunded postretirement benefit plan. One of its defined benefit plans, covering most U.S. employees not covered by collective bargaining agreements, utilizes a cash balance formula. Under a cash balance formula, a plan participant accumulates a retirement benefit consisting of pay credits that are based upon a percentage of current eligible earnings and current interest credits. For the remaining defined
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
benefit plans, benefits are based on the employee’s years of service. For the defined contribution plans, the costs charged to operations and the amount funded are based upon a percentage of the covered employees’ compensation.
The Company's objectives for the pension plan are to monitor the funded ratio; create general investment goals with regard to acceptable risk and liquidity needs ensuring the long-term interests of participants and beneficiaries are consideredconsidered; and manage risk by minimizing the short-term and long-term risk of actual expenses and contribution requirements.
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following tables set forth the changes in benefit obligation, plan assets, funded status and amounts recognized in the consolidated balance sheet for the defined benefit pension and postretirement benefit plans as of December 31, 20192022 and 2018:2021:
| | | | | | | | | | | | Pension Benefits | | Postretirement Benefits |
| | Pension Benefits | | Postretirement Benefits | | 2022 | | 2021 | | 2022 | | 2021 |
| | 2019 | | 2018 | | 2019 | | 2018 | |
| Change in benefit obligation | | | | | | | | Change in benefit obligation | | | | | | | |
| Benefit obligation at beginning of year | $ | 71.2 |
| | $ | 60.5 |
| | $ | 8.5 |
| | $ | 9.3 |
| Benefit obligation at beginning of year | $ | 83.7 | | | $ | 86.5 | | | $ | 6.9 | | | $ | 7.9 | |
| Service cost | 3.8 |
| | 3.7 |
| | — |
| | — |
| Service cost | 4.3 | | | 4.2 | | | — | | | — | |
| Interest cost | 2.6 |
| | 2.2 |
| | 0.3 |
| | 0.3 |
| Interest cost | 1.8 | | | 1.4 | | | 0.1 | | | 0.1 | |
| Actuarial losses (gains) | 7.4 |
| | (5.3 | ) | | 0.5 |
| | 0.4 |
| |
| Acquisition of CDF | — |
| | 14.9 |
| | — |
| | — |
| |
| Actuarial gains | | Actuarial gains | (15.8) | | | (2.5) | | | (0.8) | | | (0.5) | |
| | Benefits and expenses paid | (5.6 | ) | | (4.8 | ) | | (1.3 | ) | | (1.5 | ) | Benefits and expenses paid | (6.4) | | | (5.9) | | | (1.0) | | | (0.6) | |
| Benefit obligation at end of year | $ | 79.4 |
| | $ | 71.2 |
| | $ | 8.0 |
| | $ | 8.5 |
| Benefit obligation at end of year | $ | 67.6 | | | $ | 83.7 | | | $ | 5.2 | | | $ | 6.9 | |
| Change in plan assets | | | | | | | | Change in plan assets | | | | | | | |
| Fair value of plan assets at beginning of year | $ | 128.2 |
| | $ | 134.8 |
| | $ | — |
| | $ | — |
| Fair value of plan assets at beginning of year | $ | 169.9 | | | $ | 161.3 | | | $ | 4.5 | | | $ | — | |
| Actual return on plan assets | 22.7 |
| | (12.1 | ) | | — |
| | — |
| Actual return on plan assets | (32.0) | | | 19.6 | | | 0.1 | | | — | |
| Company contributions | — |
| | — |
| | 1.3 |
| | 1.5 |
| Company contributions | — | | | — | | | — | | | 5.1 | |
| Cash transfer to fund postretirement benefit payments | (0.9 | ) | | (1.0 | ) | | — |
| | — |
| Cash transfer to fund postretirement benefit payments | — | | | (5.1) | | | — | | | — | |
| Acquisition of CDF | — |
| | 11.3 |
| | — |
| | — |
| |
| Benefits and expenses paid | (5.6 | ) | | (4.8 | ) | | (1.3 | ) | | (1.5 | ) | Benefits and expenses paid | (6.4) | | | (5.9) | | | (1.0) | | | (0.6) | |
| Fair value of plan assets at end of year | $ | 144.4 |
| | $ | 128.2 |
| | $ | — |
| | $ | — |
| Fair value of plan assets at end of year | $ | 131.5 | | | $ | 169.9 | | | $ | 3.6 | | | $ | 4.5 | |
| Funded (underfunded) status of the plans | $ | 65.0 |
| | $ | 57.0 |
| | $ | (8.0 | ) | | $ | (8.5 | ) | Funded (underfunded) status of the plans | $ | 63.9 | | | $ | 86.2 | | | $ | (1.6) | | | $ | (2.4) | |
Amounts recognized in the consolidated balance sheets consist of:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Postretirement Benefits |
| | 2022 | | 2021 | | 2022 | | 2021 |
| |
| Pension assets | $ | 63.9 | | | $ | 86.2 | | | $ | — | | | $ | — | |
| Other current liabilities | — | | | — | | | — | | | 0.1 | |
| Other long-term liabilities | — | | | — | | | 1.6 | | | 2.3 | |
| $ | 63.9 | | | $ | 86.2 | | | $ | 1.6 | | | $ | 2.4 | |
| Amounts recognized in Accumulated other comprehensive loss | | | | | | | |
| Net actuarial loss | $ | 39.9 | | | $ | 10.8 | | | $ | 2.4 | | | $ | 2.2 | |
| Net prior service cost | 0.1 | | | 0.2 | | | — | | | — | |
| Accumulated other comprehensive loss | $ | 40.0 | | | $ | 11.0 | | | $ | 2.4 | | | $ | 2.2 | |
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Postretirement Benefits |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Pension assets | $ | 65.0 |
| | $ | 57.0 |
| | $ | — |
| | $ | — |
|
| Other current liabilities | — |
| | — |
| | 0.9 |
| | 0.9 |
|
| Other long-term liabilities | — |
| | — |
| | 7.1 |
| | 7.6 |
|
| | $ | 65.0 |
| | $ | 57.0 |
| | $ | 8.0 |
| | $ | 8.5 |
|
| Amounts recognized in Accumulated other comprehensive loss | | | | | | | |
| Net actuarial loss | $ | 28.1 |
| | $ | 34.7 |
| | $ | 2.6 |
| | $ | 2.4 |
|
| Net prior service cost (credit) | 0.2 |
| | 0.3 |
| | — |
| | (0.1 | ) |
| Accumulated other comprehensive loss | $ | 28.3 |
| | $ | 35.0 |
| | $ | 2.6 |
| | $ | 2.3 |
|
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The pension plan weighted-average asset allocation at December 31, 20192022 and 20182021 and target allocation for 20202023 are as follows:
| | | | | | | | | | | | | | | | | |
| | | | Plan Assets |
| | Target 2023 | | 2022 | | 2021 |
| Asset Category | | | | | |
| Equity securities | 45-75% | | 56.0 | % | | 61.0 | % |
| Debt securities | 15-35% | | 16.0 | % | | 17.0 | % |
| Other | 0-25% | | 28.0 | % | | 22.0 | % |
| 100% | | 100 | % | | 100 | % |
|
| | | | | | | |
| | | | Plan Assets |
| | Target 2020 | | 2019 | | 2018 |
| Asset Category | | | | | |
| Equity securities | 45-75% | | 59.2 | % | | 57.6 | % |
| Debt securities | 20-40% | | 25.5 | % | | 26.5 | % |
| Other | 0-20% | | 15.3 | % | | 15.9 | % |
| | 100% | | 100 | % | | 100 | % |
The following table sets forth, by level within the fair value hierarchy, the pension plans assets:
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | 2022 | | 2021 |
| | 2019 | | 2018 | | Level 1 | | | Total | | Level 1 | | | | Total |
| | Level 1 | | Total | | Level 1 | | Total | |
| Common stock | $ | 40.0 |
| | $ | 40.0 |
| | $ | 34.2 |
| | $ | 34.2 |
| Common stock | $ | 24.3 | | | | $ | 24.3 | | | $ | 32.4 | | | | | $ | 32.4 | |
| Equity securities | 43.9 |
| | 43.9 |
| | 37.9 |
| | 37.9 |
| Equity securities | 47.1 | | | | 47.1 | | | 65.3 | | | | | 65.3 | |
| Foreign stock | 7.0 |
| | 7.0 |
| | 5.7 |
| | 5.7 |
| Foreign stock | 4.9 | | | | 4.9 | | | 7.8 | | | | | 7.8 | |
| U.S. Government obligations | 8.6 |
| | 8.6 |
| | 4.8 |
| | 4.8 |
| U.S. Government obligations | 6.9 | | | | 6.9 | | | 8.9 | | | | | 8.9 | |
| Fixed income securities | 11.5 |
| | 11.5 |
| | 13.1 |
| | 13.1 |
| Fixed income securities | 4.0 | | | | 4.0 | | | 6.4 | | | | | 6.4 | |
| | Corporate bonds | 14.2 |
| | 14.2 |
| | 12.0 |
| | 12.0 |
| Corporate bonds | 10.5 | | | | 10.5 | | | 14.9 | | | | | 14.9 | |
| Cash and cash equivalents | 2.7 |
| | 2.7 |
| | 6.3 |
| | 6.3 |
| Cash and cash equivalents | 7.7 | | | | 7.7 | | | 6.8 | | | | | 6.8 | |
| | Total | $ | 127.9 |
| | | | $ | 114.0 |
| | | Total | $ | 105.4 | | | | | $ | 142.5 | | | | |
| Investments measured at net asset value: | | | | | | | | Investments measured at net asset value: | | | | | | | | |
| Common collective trusts | | | — |
| | | | 0.1 |
| Common collective trusts | | | 7.1 | | | | | 5.8 | |
| Hedge funds | | | 16.5 |
| | | | 14.1 |
| Hedge funds | | | 22.6 | | | | | 26.1 | |
| Postretirement benefit assets | | Postretirement benefit assets | | | (3.6) | | | | | (4.5) | |
| Total assets at fair value | | | $ | 144.4 |
| | | | $ | 128.2 |
| Total assets at fair value | | | $ | 131.5 | | | | | $ | 169.9 | |
Valuation Methodologies: Following is a description of the valuation methodologies used for pension plan assets measured at fair value. There have been no changes in the methodologies used at December 31, 20192022 and 2018.2021.
Common stock, equity securities and foreign stock - These securities consist of direct investments in the stock of publicly-traded companies. Such investments are valued based on the closing price reported in an active market on which the individual securities are traded. As such, the direct investments are classified as Level 1.
U.S. Government obligations, fixed income securities and corporate bonds - Valued at the closing price of each security.
Cash equivalents - Consists of primarily money market funds and certificates of deposit, for which book value equals fair value.
Common collective trusts - Valued at the net unit value of units held by the trust at year end. The unit value is determined by the total value of fund assets divided by the total number of units of the fund owned. The equity investments in collective trusts are predominantly in index funds for which the underlying securities are actively traded in public markets based upon readily measurable prices. Common collective trusts are measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.
Hedge funds - Consists of direct investments in hedge funds through limited partnership interests. Net asset values are based on the estimated fair value of the ownership interest in the investment as determined by the general partner. The majority of the holdings of the hedge funds are in equity securities traded on public exchanges. The investment terms of the hedge funds
allow capital to be redeemed quarterly given prior notice with certain limitations. Hedge funds measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.
For additional information regarding fair value measurements, see Note 1.
The following tables summarize the assumptions used in the valuation of pension and postretirement benefit obligations at December 31 and the measurement of the net periodic benefit cost in the following year. The Company used a spot rate approach by applying the specific spot rates along the yield curve to the relevant projected cash flows in the estimation of the service and interest components of benefit cost.