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.
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.
The Company operates through three reportable segments: Supply Technologies, Assembly Components and Engineered Products. As of December 31, 2019,2020, we employed approximately 7,1006,500 people.
The following table summarizes the key attributes of each of our business segments:
|
| | | | | | | | | | | | | | | | |
| Supply Technologies | | Assembly Components | | Engineered Products |
| | | |
NET SALES FOR 20192020 | $611.5510.1 million
| | $539.5441.5 million
| | $467.3343.6 million
|
| SELECTED PRODUCTS | Sourcing, planning and procurement of over 245,000240,000 production components, including:
• Fasteners
• Pins
• Valves
• Hoses
• Wire harnesses
• Clamps and fittings
• Rubber and plastic components
• Other Class C and MRO products
| | • Fuel filler assemblies
• Gasoline direct injection systems
• Extruded and molded rubber and thermoplastic products
• Fuel filler assemblies
• Gasoline direct injection systems
• Control arms
• Knuckles
• Engine cradles and brackets
• Oil pans
| | • Induction heating and melting systems
• Pipe threading systems
• Industrial oven systems
• Forging presses
• Forged steel and machined products
|
| SELECTED INDUSTRIES SERVED | • Heavy-duty truck
• Power sports and recreational equipment
• Aerospace and defense
• Semiconductor equipment
• Electrical distribution and controls
• Consumer electronics
• Bus and coaches
• Automotive
• Agricultural and construction equipment
• HVAC
• Lawn and garden
• Plumbing
• Medical
devices | | • Automotive and light vehicle
• Agricultural equipment
• Construction equipment
• Heavy-duty truck
• Marine equipment
• Bus
| | • Ferrous and non-ferrous metals
• Coatings
• Forging
• Foundry
• Heavy-duty truck
• Construction equipment
• Automotive
• Oil and gas
• Rail
• Aerospace and defense
• Power generation
|
The Company consists of the following segments:
Supply Technologies
Our Supply Technologies business provides our customers with Total Supply Management™, a proactive solutions approach that manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation. Total Supply Management™ includes 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 60 logistics service centers in the United States, Mexico, Canada, Czech Republic, Puerto Rico, Scotland, Hungary, China, Taiwan, Singapore, India, England, France, Spain, Poland, Malaysia, Northern Ireland and Ireland, as well as production sourcing and support centers in the United States and Asia. Through our supply chain management programs, we supply more than 245,000240,000 globally-sourced production components, many of which are specialized and customized to meet individual customers’ needs.
Total Supply Management™ provides our customers with an expert partner in strategic planning, global sourcing, technical services, parts and materials, logistics, distribution and inventory management of production components. Some
production components are characterized by low per unit supplier prices relative to the indirect costs of supplier management, quality assurance, inventory management and delivery to the production line. In addition, Supply Technologies delivers an increasingly broad range of higher-value production components including valves, fuel hose assemblies, electro-mechanical hardware, labels, fittings, steering components and many others. Applications engineering specialists and the direct sales force work closely with the engineering staff of OEM customers to recommend the appropriate production components for a new product or to suggest alternative components that reduce overall production costs, streamline assembly or enhance the appearance or performance of the end product. 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, 2019,2020, approximately 66%62% 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%31% and 30%32% of the sales of Supply Technologies in 20192020 and 2018,2019, respectively. The loss of any two or more of its top five customers could have a material adverse effect on the results of operations and financial condition of this segment.
Competition. A limited number of companies compete with Supply Technologies to provide supply management services for production parts and materials. Supply Technologies competes primarily on the basis of its Total Supply Management™ approach, including engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support, and its geographic reach, extensive product selection, price and reputation for high service levels. Numerous U.S. and foreign companies compete with Supply Technologies in manufacturing cold-formed and cold-extruded products.
Assembly Components
Assembly Components manufactures products oriented towards fuel efficiency, and reduced emission standards.standards and vehicle electrification. Assembly Components designs, develops and 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 2519 manufacturing facilities and twofour technical offices in the United States, Mexico, China, England and the Czech Republic. In addition, we also provide value-added services such as design engineering, machining and parts assembly.
Markets and Customers. For the year ended December 31, 2019,2020, approximately 72%68% of Assembly Components’ net sales were to domestic customers. The five largest customers of Assembly Components accounted for approximately 47%45% and 51%47% of segment sales for 20192020 and 2018,2019, 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 1016 domestic facilities throughout the United States and more than 20 international facilities in Canada, Mexico, the United Kingdom, Belgium, Germany, China, Italy, India, Japan, Spain and Brazil.
Our induction heating and melting business utilizes proprietary technology and specializes in the engineering, construction, service and repair of induction heating and melting systems, primarily for the ferrous and non-ferrous metals, silicon, coatings, forging, foundry, automotive and construction equipment industries. Our induction heating and melting systems are engineered and built to customer specifications and are used primarily for melting, heating, and surface hardening of metals and curing of coatings. Approximately 44% of our induction heating and melting systems’ revenues are derived from the sale of replacement parts and provision of field service, primarily for the installed base of our own products. Our pipe threading business serves the oil and gas industry. We also engineer and install mechanical forging presses, sell spare parts and provide field service for the large existing base of mechanical forging presses and hammers in North America. We machine, induction harden and surface finish crankshafts and camshafts, used primarily in locomotives. We forge aerospace and defense structural components such as landing gears and struts, as well as rail products such as railcar center plates and draft lugs.
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, 2019,2020, approximately 58%52% of Engineered Products’ net sales were to domestic customers. We sell induction heating and other capital equipment to component manufacturers and OEMs in the ferrous and non-ferrous metals, silicon, coatings, forging, foundry, automotive, truck, construction equipment and oil and gas industries. We sell forged and machined products to locomotive manufacturers, machining companies and sub-assemblers who finish aerospace and defense products for OEMs, and railcar builders and maintenance providers.
Competition. We compete with small-to medium-sized domestic and international equipment manufacturers on the basis of service capability, ability to meet customer specifications, delivery performance and engineering expertise. We compete domestically and internationally with small-to medium-sized forging and machining businesses on the basis of product quality and precision.
Sales and Marketing
Supply Technologies markets its products and services in the United States, Mexico, Canada, Europe and Asia primarily through its direct sales force, which is assisted by applications engineers who provide the technical expertise necessary to assist the engineering staff of OEM customers in designing new products and improving existing products. Assembly Components primarily markets and sells its products in North America through internal sales personnel and independent sales representatives. Engineered Products primarily markets and sells its products in North America through both internal sales personnel and independent sales representatives. Induction heating and pipe threading equipment is also marketed and sold in Europe, Asia, Latin America and Africa through both internal sales personnel and independent sales representatives. In some instances, the internal engineering staff assists in the sales and marketing effort through joint design and applications-engineering efforts with major customers.
Raw Materials and Suppliers
Supply Technologies purchases substantially all of its production components from third-party suppliers. Supply Technologies has multiple sources of supply for its components. An increasing portion of Supply Technologies’ production components are purchased from suppliers in foreign countries, primarily Canada, Taiwan, China, South Korea, Singapore, India and multiple European countries. Supply Technologies is dependent upon the ability of such suppliers to meet stringent quality and performance standards and to conform to delivery schedules. Assembly Components and Engineered Products purchase substantially all of their raw materials, principally metals and certain component parts incorporated into their products, from third-party suppliers and manufacturers. Most raw materials required by Assembly Components and Engineered Products are commodity products available from several domestic suppliers. Management believes that raw materials and component parts other than certain specialty products are available from alternative sources.
Our suppliers of raw materials and component parts may significantly and quickly increase their prices in response to increases in costs of the raw materials, such as steel, that they use to manufacture our raw materials and component parts. While we generally attempt to pass along increased raw material prices to our customers in the form of price increases, there may be a time delay between the increased raw material prices and our ability to increase the price of our products, or we may be unable to increase the prices of our products due to various factors. See the discussion of risks associated with raw material supply and costs in Item 1A "Risk Factors".
Backlog
Management believes that backlog is not a meaningful measure for Supply Technologies, as a majority of Supply Technologies’ customers require just-in-time delivery of production components. Management believes that Assembly Components’ backlog is not a meaningful measure, as a significant portion of sales are on a release or firm order basis. The backlog of Engineered Products’ orders believed to be firm as of December 31, 20192020 was $220.5$135.9 million, compared with $226.1$220.5 million as of December 31, 2018.2019. Nearly all of Engineered Products’ backlog as of December 31, 20192020 is scheduled to be shipped in 2020.2021.
Environmental, Health and SafetyCompliance with Government Regulations
We are subject to numerous federal, state and local laws and regulations designed to protect public health and the environment, particularly with regard to discharges and emissions, as well as handling, storage, treatment and disposal, of various substances and wastes. Failure to comply with applicable environmental laws and regulations and permit requirements could result in civil and criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures. Pursuant to certain environmental laws, owners or operators of facilities may be liable for the costs of response or other corrective actions for contamination identified at or emanating from current or former locations, without regard to whether the owner or operator knew of, or was responsible for, the presence of any such contamination, and for related damages to natural resources. Additionally, persons who arrange for the disposal or treatment of hazardous substances or materials may be liable for costs of response at sites where they are located, whether or not the site is owned or operated by such person.
From time to time, we have incurred, and are presently incurring, costs and obligations for correcting environmental noncompliance and remediating environmental conditions at certain of our properties. In general, we have not experienced difficulty in complying with environmental laws in the past, and compliance with environmental laws has not had a material adverse effect on our financial condition, liquidity and results of operations. Our capital expenditures on environmental control facilities were not material during the past five years and such expenditures are not expected to be material to us in the foreseeable future.
We are currently, and may in the future be, required to incur costs relating to the investigation or remediation of property, including property where we have disposed of our waste, and for addressing environmental conditions. For instance, we have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certain clean-up efforts at several of these sites. The availability of third-party payments or insurance for environmental remediation activities is subject to risks associated with the willingness and ability of the third party to make payments. However, our share of such costs has not been material and, based on available information, we do not expect our exposure at any of these locations to have a material adverse effect on our results of operations, liquidity or financial condition.
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, 2020, we employed approximately 6,500 employees in our operations around the world.Approximately 3,800 of these employees are in the United States, while the remaining 2,700 are employed in other countries. Approximately 10% of our employees are covered by a collective bargaining agreement.
The 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.Our safety focus is evident in our response to the COVID-19 Pandemic, which included some of the initiatives listed below:
•Increasing cleaning protocols across all locations
•Communicating regularly regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures
•Implementing temperature screening of employees at our facilities
•Establishing new physical distancing procedures
•Providing personal protective equipment
•Modifying workspaces with plexiglass dividers
•Establishing protocols to address actual and suspected COVID-19 cases and potential contact exposure
•Prohibiting non-essential travel for all employees
•Requiring mask wearing in locations
Most of our businesses manufacture products deemed essential to the critical infrastructure, and as a result, most of our production sites have continued to operate during the COVID-19 pandemic.
Ethics & Compliance: Our Company is committed to values of honesty, integrity, respect and responsibility that foster high ethical standards in our relationships with each other, our customers and suppliers, and all those we do business with.Our Code of Business Conduct and Ethics (the “Code”), along with the policies and procedures referenced in the Code, provide guidance for all employees on topics such as anti-corruption and bribery, anti-trust and competition law, discrimination including our policy on harassment and retaliation, privacy, appropriate use of company assets, protection of confidential information and reporting concerns and violations. Should potential violations of the Code, our policies and procedures, or the law occur, employees are encouraged to notify our Chief Compliance Officer through our Ethics Hotline. We do not tolerate retaliation against anyone who reports a potential violation in good faith.The Chief Compliance Officer reports matters related to the Code to the Audit Committee of the Board of Directors on a quarterly basis.
Compensation & Benefits: Our policy is to competitively compensate our employees.The compensation philosophy is to align both short-term and long-term incentives with our strategic objectives and to consider market forces and the performance of our Company and the employee.We offer comprehensive employee benefits that vary by country and are competitive in the marketplace.Examples of benefits offered in the U.S. include a 401(k) plan, defined benefit - cash balance plan, comprehensive health benefits, employee assistance programs, business travel, life/disability insurance and supplemental voluntary insurance.
Training & Talent Development: The Company is committed to continued development of our workforce. Training is provided in several formats to accommodate workforce diversity and business focus.In addition, various internship programs and informal mentoring demonstrate the Company’s ongoing commitment and initiatives toward accelerating our future leaders.
Available Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and other information with the Securities and Exchange Commission (“SEC”). The public can obtain copies of these materials by 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 that could affect our business, results of operations and financial condition. These risks are not the only ones we face. If any of the following risks occur, our business, results of operations or financial condition could be adversely affected.
Risks Relating to the COVID-19 Pandemic
Our business, results of operations and cash flows have been and are expected to continue to be adversely affected by COVID-19.
The novel strain of the coronavirus identified in China in late 2019 and now affecting the global community has impacted and is expected to continue to impact our operations, and the full nature and extent of the impact is highly uncertain and may be beyond our control. Among other things, uncertainties relating to the COVID-19 pandemic include the duration of the outbreak, the severity of the virus, and the actions, or perception of actions that may be taken, to contain or treat its impact, by governments and others, including declarations of states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/or other similar restrictions and limitations.
As a result of COVID-19 and the measures implemented that are designed to contain its spread, our customers have been and could continue to be negatively impacted as a result of disruption in demand, which has negatively impacted our sales and
had a material adverse effect on our business, results of operations and financial condition. Similarly, as a result of COVID-19 and measures implemented that are designed to contain its spread, our suppliers may not have the materials, capacity, or capability to enable the manufacture of our products according to our schedule and specifications. Because of impacts to suppliers' operations, we may need to seek alternate suppliers, which may be more expensive, may not be available or may result in delays in shipments to us and subsequently to our customers, each of which would affect our results of operations.
The COVID-19 pandemic has also disrupted our internal operations, including by heightening the risk that a significant portion of our workforce will suffer illness or otherwise not be permitted or be unable to work and exposing us to cyber and other risks associated with a large number of our employees working remotely. Certain of our facilities have experienced temporary work disruptions as a result of the COVID-19 pandemic, and we cannot predict whether these will continue or our facilities will experience more significant or frequent disruptions in the future. Furthermore, we may need to reduce our workforce as a result of declines in our business caused by the COVID-19 pandemic, and any such reduction would cause us to incur costs. Moreover, there can be no assurance that we would be able to rehire our workforce in the event our business experiences a subsequent recovery.
The impact of the COVID-19 pandemic continues to evolve and its duration and ultimate disruption to our customers and to our supply chain, and related financial impact to us, cannot be estimated at this time. Should such disruption continue for an extended period of time, the impact could have a more severe adverse effect on our business, results of operations and financial condition. Additionally, weaker economic conditions generally could result in impairment in value of our tangible or intangible assets, or our ability to raise additional capital, if needed.
Risks Relating to Economic Conditions
The industries in which we operate are cyclical and are affected by the economy in general.
We sell products to customers in industries that experience cyclicality (expectancy of recurring periods of economic growth and slowdown) in demand for products and may experience substantial increases and decreases in business volume throughout economic cycles. Industries we serve, including the automotive and vehicle parts, heavy-duty truck, industrial equipment, steel, rail, oil and gas, electrical distribution and controls, aerospace and defense, recreational equipment, HVAC, electrical components, appliance and semiconductor equipment industries, are affected by consumer spending, general economic conditions and the impact of international trade. A downturn in any of the industries we serve could have a material adverse effect on our financial condition, liquidity and results of operations.
Adverse credit market conditions may significantly affect our access to capital, cost of capital and ability to meet liquidity needs.
Disruptions, uncertainty or volatility in the credit markets may adversely impact our ability to access credit already arranged and the availability and cost of credit to us in the future. These market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to grow and maintain our business. Accordingly, we may be forced to delay raising capital or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility. Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures and reducing or eliminating future share repurchases or other discretionary uses of cash. Overall, our results of operations, financial condition and cash flows could be materially adversely affected by disruptions in the credit markets.
Adverse global economic conditions may have significant effects on our customers and suppliers that could result in material adverse effects on our business and operating results.
Significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and fluctuations in equity and currency values worldwide, volatility in commodity prices for such items as crude oil, and concerns that the worldwide economy may enter into a prolonged recessionary period, may materially adversely affect our
customers’ access to capital or willingness to spend capital on our products or their ability to pay for products that they will order or have already ordered from us. In addition, unfavorable global economic conditions may materially adversely affect our suppliers’ access to capital and liquidity with which they maintain their inventories, production levels and product quality, which could cause them to raise prices or lower production levels.
These potential effects of adverse global economic conditions are difficult to forecast and mitigate. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing effects could have a material adverse effect on our business, results of operations and financial condition.
Adverse global economic conditions may have significant effects on our customers that would result in our inabilityRisks Relating to borrow or to meet our debt service coverage ratio in our revolving credit facility.
As of December 31, 2019, we were in compliance with our debt service coverage ratio covenantOur Business and other covenants contained in our revolving credit facility. While we expect to remain in compliance throughout 2020, declines in demand in the automotive industry and in sales volumes could adversely impact our ability to remain in compliance with certain of these financial covenants. Additionally, to the extent our customers are adversely affected by a decline in the economy in general,
they may not be able to pay their accounts payable to us on a timely basis or at all, which would make the accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our ability to borrow.Operations
Because a significant portion of our sales is to the automotive and heavy-duty truck industries, a decrease in the demand of these industries or the loss of any of our major customers in these industries could adversely affect our financial health.
Demand for certain of our products is affected by, among other things, the relative strength or weakness of the automotive and heavy-duty truck industries. The domestic automotive and heavy-duty truck industries are highly cyclical and may be adversely affected by international competition. In addition, the automotive and heavy-duty truck industries are significantly unionized and subject to work slowdowns and stoppages resulting from labor disputes. We derived 35%30% and 8%6% of our net sales during the year ended December 31, 20192020 from the automotive and heavy-duty truck industries, respectively.
The loss of a portion of business to any of our major automotive or heavy-duty truck customers could have a material adverse effect on our financial condition, cash flow and results of operations. We cannot assure you that we will maintain or improve our relationships in these industries or that we will continue to supply these customers at current levels.
Our Supply Technologies customers are generally not contractually obligated to purchase products and services from us.
We supply products and services to our Supply Technologies customers generally under purchase orders as opposed to long-term contracts. When we do enter into long-term contracts with our Supply Technologies customers, many of them only establish pricing terms and do not obligate our customers to buy required minimum amounts from us or to buy from us exclusively. Accordingly, many of our Supply Technologies customers may decrease the 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, 2019,2020, our ten largest customers accounted for approximately 31%30% of our net sales. Many of our customers place orders for products on an as-needed basis and operate in cyclical industries and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future. Due to competitive issues, we have lost key customers in the past and may again in the future. Customer orders are dependent upon their markets and may be subject to delays or cancellations. As a result of dependence on our key customers, we could experience a material adverse effect on our business and results of operations if any of the following were to occur:
•the loss of any key customer, in whole or in part;
•the insolvency or bankruptcy of any key customer;
•a declining market in which customers reduce orders or demand reduced prices; or
•a strike or work stoppage at a key customer facility, which could affect both their suppliers and customers.
If any of our key customers become insolvent or file for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payments we received in the preference period prior to a bankruptcy filing may be potentially forfeitable, which could adversely impact our results of operations.
We operate in highly competitive industries.
The markets in which all three of our segments sell their products are highly competitive. Some of our competitors are large companies that have greater financial resources than we have. We believe that the principal competitive factors for our Supply Technologies segment are an approach reflecting long-term business partnership and reliability, sourced product quality and conformity to customer specifications, timeliness of delivery, price and design and engineering capabilities. We believe that the principal competitive factors for our Assembly Components and Engineered Products segments are product quality and conformity to customer specifications, design and engineering capabilities, product development, timeliness of delivery and price. The rapidly evolving nature of the markets in which we compete may attract new entrants as they perceive opportunities, and our competitors may foresee the course of market development more accurately than we do. In addition, our competitors may develop products that are superior to our products or may adapt more quickly than we do to new technologies or evolving customer requirements.
We expect competitive pressures in our markets to remain strong. These pressures arise from existing competitors, other companies that may enter our existing or future markets and, in some cases, our customers, which may decide to internally produce items we sell. We cannot assure you that we will be able to compete successfully with our competitors. Failure to compete successfully could have a material adverse effect on our financial condition, liquidity and results of operations.
The loss of key executives could adversely impact us.
Our success depends upon the efforts, abilities and expertise of our executive officers and other senior managers, including 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, and may continue to pursue, targeted acquisition opportunities that we believe would complement our business. We cannot assure you that we will be successful in consummating any acquisitions.
Any targeted acquisitions will be accompanied by the risks commonly encountered in acquisitions of businesses. We may not successfully overcome these risks or any other problems encountered in connection with any of our acquisitions, including the possible inability to integrate an acquired business’ operations, information technology, services and products into our business; diversion of management’s attention; the assumption of unknown liabilities; increases in our indebtedness; the failure to achieve the strategic objectives of those acquisitions; and other unanticipated problems, some or all of which could materially and adversely affect us. The process of integrating operations could cause an interruption of, or loss of momentum in, our activities. Any delays or difficulties encountered in connection with any acquisition and the integration of our operations could have a material adverse effect on our business, results of operations, financial condition or prospects of our business.
Our Supply Technologies business depends upon third parties for substantially all of our component parts.
Our Supply Technologies business purchases substantially all of its component parts from third-party suppliers and manufacturers. As such, it is subject to the risk of price fluctuations and periodic delays in the delivery of component parts. Failure by suppliers to continue to supply us with these component parts on commercially reasonable terms, or at all, could have a material adverse effect on us. We depend upon the ability of these suppliers, among other things, to meet stringent performance and quality specifications and to conform to delivery schedules. Failure by third-party suppliers to comply with these and other requirements could have a material adverse effect on our financial condition, liquidity and results of operations.
The raw materials used in our production processes and by our suppliers of component parts are subject to price and supply fluctuations that could increase our costs of production and adversely affect our results of operations.
Our supply of raw materials for our Assembly Components and Engineered Products businesses could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect our results of operations and profit margins. While we generally attempt to pass along increased raw materials prices to our customers in the form of price increases, there may be a time delay between the increased raw materials prices and our ability to increase the price of our products, or we may be unable to increase the prices of our products due various factors.
Our suppliers of component parts, particularly in our Supply Technologies business, may significantly and quickly increase their prices in response to increases in costs of the raw materials, such as steel, that they use to manufacture our component parts. We may not be able to increase our prices commensurate with our increased costs. Consequently, our results of operations and financial condition may be materially adversely affected.
The energy costs involved in our production processes and transportation are subject to fluctuations that are beyond our control and could significantly increase our costs of production.
Our manufacturing process and the transportation of raw materials, components and finished goods are energy intensive. Our manufacturing processes are dependent on adequate supplies of electricity and natural gas. A substantial increase in the cost of transportation fuel, natural gas or electricity could have a material adverse effect on our margins. We may experience higher than anticipated gas costs in the future, which could adversely affect our results of operations. In addition, a disruption or curtailment in supply could have a material adverse effect on our production and sales levels.
We may experience breaches of, or disruptions to, our information technology systems, or other compromises of our data, including the improper disclosure of personal or confidential data, which may adversely affect our operations and reputation.
We utilize information technology systems in connection with our business operations, including processing orders, managing inventory and accounts receivable collections, purchasing products, maintaining cost-effective operations, routing and re-routing orders. We also depend on our information technology systems to maintain confidential, proprietary and personal
information relating to our current, former and prospective employees, customers and other third parties in these systems and in systems of third-party providers who we engage in connection with the processing and storage of certain information. Our information technology systems and those of our third-party providers are subject to disruptions or damage, which may be caused by a wide array of causes, including telecommunications failures, computer failures, power outages, computer viruses, cybersecurity breaches and other intrusions, which could result in the disruption of our operations, or information misappropriation, such as theft of intellectual property or inappropriate disclosure of personal and confidential information. In addition, we could also experience data or cybersecurity breaches stemming from the intentional or negligent acts of our employees or other third parties. To the extent our information technology systems are disabled for a long period of time, key business processes could be interrupted. Any such operational disruptions and/or misappropriation of information, whether in systems we maintain or are maintained by others, could have a material adverse effect on our business. In addition, any such damage, compromise or breach to our systems or those of our vendors, could result in a violation of privacy and other laws, and expose us to significant legal and financial liability.
Operating problems in our business may materially adversely affect our financial condition and results of operations.
We are subject to the usual hazards associated with manufacturing and the related storage and transportation of raw materials, products and waste, including explosions, fires, leaks, discharges, inclement weather, natural disasters, mechanical failure, unscheduled downtime and transportation interruption or calamities. The occurrence of material operating problems at our facilities may have a material adverse effect on our operations as a whole, both during and after the period of operational difficulties.
We have a significant amount of goodwill, and any future goodwill impairment charges could adversely impact our results of operations.
As of December 31, 2020, we had goodwill of $110.9 million. The future occurrence of a potential indicator of impairment, such as a significant adverse change in legal factors or business climate, unanticipated competition, a material negative change in relationships with significant customers, strategic decisions made in response to economic or competitive conditions, loss of key personnel or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of, could result in goodwill impairment charges, which could adversely impact our results of operations. We have recorded goodwill impairment charges in the past, and such charges materially impacted our historical results of operations. Based on our 2020 annual impairment test, we determined that the fair value of our Forged and Machined Products Group (“FMPG”) reporting unit, which is included in our Engineered Products segment, exceeded its carrying value by 10% as of the October 1, 2020 testing date. As such, we concluded that the goodwill of this reporting unit of $8.7 million was not impaired as of that date. This reporting unit was negatively impacted by the COVID-19 pandemic throughout 2020, and while we believe that the current assumptions and estimates used in our goodwill testing are reasonable, supportable and appropriate, there can be no assurance that such assumptions and estimates will prove to be accurate predictions of future performance. For additional information, see Note 6, Goodwill, to the consolidated financial statements included elsewhere herein.
Our business and operating results may be adversely affected by natural disasters, other catastrophic events or public health issues, all of which are beyond our control.
While we have taken precautions to prevent production and service interruptions at our global facilities, severe weather conditions such as hurricanes, tornadoes, and earthquakes; other natural disasters; or public health issues in areas in which we have manufacturing facilities or from which we obtain products may cause physical damage to our properties, closure of one or more of our business facilities, lack of adequate work force in a market, temporary disruption in the supply of inventory, disruption in the transport of products and utilities, or delays in the delivery of products to our customers. Any of these factors may disrupt our operations and adversely affect our financial condition and results of operations.
The insurance that we maintain may not fully cover all potential expenses.
We maintain property, business interruption and casualty insurance, but such insurance may not cover all risks associated with the hazards of our business and is subject to limitation, including deductible and maximum liabilities covered. We are
potentially at risk if one or more of our insurance carriers fail. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.
Risks Relating to Human Capital
Some of our employees belong to labor unions, and strikes or work stoppages could adversely affect our operations.
As of December 31, 2020, we were a party to seven collective bargaining agreements with various labor unions that covered approximately 750 full-time employees. Our inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. If the unionized workers were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized, we could experience a significant disruption of our operations and higher ongoing labor costs, which could have a material adverse effect on our business, financial condition and results of operations.
The loss of key executives could adversely impact us.
Our success depends upon the efforts, abilities and expertise of our executive officers and other senior managers, including Matthew Crawford, our Chairman, Chief Executive Officer and President, as well as the president of each of our operating units. Additionally, an event of default occurs under our revolving credit facility if Messrs. M. Crawford and Edward Crawford, our former President, or certain of their related parties own in the aggregate less than 15% of Holdings’ outstanding common stock and, if at such time, neither Mr. M. Crawford nor Mr. E. Crawford holds the office of chairman, chief executive officer or president. The loss of the services of Mr. M. Crawford, senior and executive officers, and/or other key individuals could have a material adverse effect on our financial condition, liquidity and results of operations.
Risks Relating to Legal, Compliance and Regulatory Matters
Potential product liability risks exist from the products that we sell.
Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and sale of our products and products of third-party vendors that we use or resell. While we currently maintain what we believe to be suitable and adequate product liability insurance, we cannot assure you that we will be able to maintain our insurance on acceptable terms or that our insurance will provide adequate protection against potential liabilities. In the event of a claim against us, a lack of sufficient insurance coverage could have a material adverse effect on our financial condition, liquidity and results of operations. Moreover, even if we maintain adequate insurance, any successful claim could have a material adverse effect on our financial condition, liquidity and results of operations.
Some of our employees belong to labor unions, and strikes or work stoppages could adversely affect our operations.
As of December 31, 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;
•potential disruption that could be caused by the partial or complete reconfiguration of the European Union;
•government embargoes or foreign trade restrictions;
•the imposition of duties and tariffs and other trade barriers;
•import and export controls;
•labor unrest and current and changing regulatory environments;
•the potential for nationalization of enterprises;
•disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”);
•increasingly complex laws and regulations concerning privacy and data security, including the European Union's General Data Protection Regulation;
•difficulties in staffing and managing multinational operations;
•limitations on our ability to enforce legal rights and remedies; and
•potentially adverse tax consequences.
On January 31, 2020, the United Kingdom (“UK”) exited the European Union (“EU”). The long-term effects of Brexit will depend on any agreements the UK makes to retain access to EU markets. Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the withdrawal of the UK from the EU will have and how such withdrawal will affect us. It is possible that the withdrawal could, among other things, affect the legal and regulatory environments to which our businesses are subject, impact trade between the UK and the EU through potential restrictions on the free movement of goods and labor between the UK and the EU, create economic and political uncertainty in the region, and create other impediments to our ability to transact within and between the UK and EU.
We are also exposed to risks relating to U.S. policy with respect to companies doing business in foreign jurisdictions. Changes in tax policy, trade regulations or trade agreements, such as the disallowance of tax deductions on imported merchandise or the imposition of new tariffs on imported products, could have a material adverse effect on our business and results of operations.
In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal controls and procedures always will protect us from the reckless or criminal acts committed by our employees or agents. For example, in connection with responding to a subpoena from the staff of the SEC, regarding a third party, we disclosed to the staff that the third party participated in a payment on our behalf to a foreign tax official that implicates the FCPA. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
Any of the events enumerated above could have an adverse effect on our operations in the future by reducing the demand for our products and services, decreasing the prices at which we can sell our products or otherwise having an adverse effect on our business, financial condition or results of operations. We cannot assure you that we will continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject. We also cannot assure you that these laws will not be modified.
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.
Risks Relating to Our Debt
WeAdverse global economic conditions 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 dependhave significant effects 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 couldthat would result in the disruption of our operations,inability to borrow 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 ofto meet 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 problemsdebt service coverage ratio in our business may materially adversely affect our financial condition and results of operations.
We are subject to the usual hazards associated with manufacturing and the related storage and transportation of raw materials, products and waste, including explosions, fires, leaks, discharges, inclement weather, natural disasters, mechanical failure, unscheduled downtime and transportation interruption or calamities. The occurrence of material operating problems at our facilities may have a material adverse effect on our operations as a whole, both during and after the period of operational difficulties.
We have a significant amount of goodwill, and any future goodwill impairment charges could adversely impact our results of operations.revolving credit facility.
As of December 31, 2019,2020, we had goodwill of $108.4 million. The future occurrence of a potential indicator of impairment, such as a significant adverse changewere in legal factors or business climate, unanticipated competition, a material negative changecompliance with our debt service coverage ratio covenant and other covenants contained in relationships with significant customers, strategic decisions madeour revolving credit facility. While we expect to remain 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 resultcompliance throughout 2021, declines in goodwill impairment charges, whichdemand in the automotive industry and in sales volumes could adversely impact our resultsability to remain in compliance with certain 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,these financial covenants. Additionally, to the consolidated financial statements included elsewhere herein.
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, Matthew Crawford,extent our Chairman of the Board, Chief Executive Officer and President, and Edward Crawford, our former President, collectively beneficially owned approximately 28% 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 becustomers are 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 disruptiondecline in the supply of inventory, disruptioneconomy 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, wegeneral, they may not be able to obtain coveragepay their accounts payable to us on a timely basis or at current levels,all, which would make the accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our premiums may increase significantly on coverage that we maintain.ability to borrow.
Uncertainty relating to the calculation of London Interbank Offered Rate (“LIBOR”) and other reference rates and their potential discontinuance may adversely affect interest expense related to our outstanding debt, including amounts borrowed under our revolving credit facility.
National and international regulators and law enforcement agencies have conducted investigations into a number of rates or indices, which are deemed to be “reference rates.” Actions by such regulators and law enforcement agencies may result in changes to the manner in which certain reference rates are determined, their discontinuance, or the establishment of alternative reference rates. In particular, on July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. As such, it appears highly likely that LIBOR will be discontinued or modified by the end of 2021.
At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates, may have on LIBOR or other benchmarks, including LIBOR-based borrowings under our revolving credit facility. Furthermore, the use of alternative reference rates or other reforms could cause the market value of, the applicable interest rate on and the amount of interest paid on our benchmark-based borrowings to be materially different than expected and could materially adversely impact our ability to refinance such borrowings or raise future indebtedness on a cost effective basis.
Risks Relating to the Execution of our Strategy
We may encounter difficulty in expanding our business through targeted acquisitions.
We have pursued, and may continue to pursue, targeted acquisition opportunities that we believe would complement our business. We cannot assure you that we will be successful in consummating any acquisitions.
Any targeted acquisitions will be accompanied by the risks commonly encountered in acquisitions of businesses. We may not successfully overcome these risks or any other problems encountered in connection with any of our acquisitions, including the possible inability to integrate an acquired business’ operations, information technology, services and products into our
business; diversion of management’s attention; the assumption of unknown liabilities; increases in our indebtedness; the failure to achieve the strategic objectives of those acquisitions; and other unanticipated problems, some or all of which could materially and adversely affect us. The process of integrating operations could cause an interruption of, or loss of momentum in, our activities. Any delays or difficulties encountered in connection with any acquisition and the integration of our operations could have a material adverse effect on our business, results of operations, financial condition or prospects of our business.
Risks Relating to 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, 2020, Matthew Crawford, our Chairman of the Board, Chief Executive Officer and President, and Edward Crawford, our former President, collectively beneficially owned approximately 30% of Holdings’ outstanding common stock. Mr. M. Crawford is Mr. E. Crawford’s son. Their interests could conflict with your interests.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2019,2020, our operations included numerous manufacturing and supply chain logistics services facilities located in 2524 states in the United States and in Puerto Rico, as well as in Asia, Canada, Europe, Mexico and Brazil. We lease our world headquarters located in Cleveland, Ohio, which also includes the world headquarters for certain of our businesses. We believe our manufacturing, logistics and corporate office facilities are well-maintained and are suitable and adequate, and they have sufficient productive capacity to meet our current needs.
The following table provides information relative to our principal facilities as of December 31, 2019.
| | | | | | | | | | | | | | | | | | | |
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 |
| 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 |
| ASSEMBLY | Ocala, FL | | Owned | | | | Manufacturing |
| COMPONENTS | Conneaut, OH | | Leased/Owned | | | | Manufacturing |
| Acuna, Mexico | | Leased | | | | Manufacturing |
| Lexington, TN | | Owned | | | | Manufacturing |
| Rootstown, OH | | Owned | | | | Manufacturing |
| Wapakoneta, OH | | Owned | | | | Manufacturing |
| Cleveland, OH | | Leased | | | | Manufacturing |
| Angola, IN | | Owned | | | | Manufacturing |
| Huntington, IN | | Leased | | | | Manufacturing |
| Fremont, IN | | Owned | | | | Manufacturing |
| Big Rapids, MI | | Owned | | | | Manufacturing |
| ENGINEERED | Cicero, IL | | Owned | | | | Manufacturing |
| PRODUCTS | Cuyahoga Heights, OH | | Owned | | | | Manufacturing |
| 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 |
| Wickliffe, OH | | Owned | | | | Manufacturing |
| Madison Heights, MI | | Leased | | | | Manufacturing |
| Leini, Italy | | Owned | | | | Manufacturing |
| Pune, India | | Owned | | | | Manufacturing |
| Chennai, India | | Owned | | | | Manufacturing |
| Cortland, OH | | Owned | | | | Office and 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 subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation are not expected to have a material adverse effect on our financial condition, liquidity or results of operations.
In addition to the routine lawsuits and asserted claims noted above, we were a party to the lawsuits and legal proceedings described below as of December 31, 2019:
2020:
We were a co-defendant in approximately 114118 cases asserting claims on behalf of approximately 215219 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
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.
COVID-19 Pandemic
2019 Acquisition
In May 2019,March 2020, the Company acquired EFCO, Inc. d/b/World Health Organization categorized the novel coronavirus (“COVID-19”) as a Erie Press Systems (“EP”) for a total purchase pricepandemic. This has negatively impacted several of $9.1 million,the markets we serve. In response to the COVID-19 pandemic, we have taken actions to reduce our operating costs, including potential contingent consideration. EP is an industry-recognized leader inplant consolidation; headcount reductions; salary reductions; and discretionary spending cuts. We have also aggressively managed both working capital and capital spending. Although there continues to be uncertainty related to the manufacturinganticipated impact of advanced forging presses, hydraulicthe COVID-19 pandemic outbreak on our future results, we believe our diversified portfolio of global businesses 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 inthe steps we have taken to reduce costs leave us well-positioned to manage our Engineered Products segment.business through this crisis as it continues to unfold.
RESULTS OF OPERATIONS
This section of this Annual Report on Form 10-K generally discusses 20192020 and 20182019 items and year-to-year comparisons between 2019 and 2018. Discussions of 20172018 items and year-over-year comparisons between 20182019 and 20172018 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019.
2020 Compared with 2019 and 2019 Compared with 2018 and 2018 Compared with 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2020 vs. 2019 | | 2019 vs. 2018 |
| 2020 | | 2019 | | 2018 | | $ Change | | % Change | | $ Change | | % Change |
| (Dollars in millions, except per share data) |
| Net sales | $ | 1,295.2 | | | $ | 1,618.3 | | | $ | 1,658.1 | | | $ | (323.1) | | | (20) | % | | $ | (39.8) | | | (2) | % |
| Cost of sales | 1,126.6 | | | 1,358.0 | | | 1,386.6 | | | (231.4) | | | (17) | % | | (28.6) | | | (2) | % |
| Gross profit | 168.6 | | | 260.3 | | | 271.5 | | | (91.7) | | | (35) | % | | (11.2) | | | (4) | % |
| Gross profit as a percentage of net sales | 13.0 | % | | 16.1 | % | | 16.4 | % | | | | | | | | |
| Selling, general and administrative ("SG&A") expenses | 152.3 | | | 176.5 | | | 175.1 | | | (24.2) | | | (14) | % | | 1.4 | | | 1 | % |
| SG&A expenses as a percentage of net sales | 11.8 | % | | 10.9 | % | | 10.6 | % | | | | | | | | |
| Gain on sale of assets | — | | | — | | | (1.9) | | | — | | | * | | 1.9 | | | * |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Operating income | 16.3 | | | 83.8 | | | 98.3 | | | (67.5) | | | (81) | % | | (14.5) | | | (15) | % |
| | | | | | | | | | | | | |
| Other components of pension income and other postretirement benefits expense, net | 7.3 | | | 5.6 | | | 8.8 | | | 1.7 | | | 30 | % | | (3.2) | | | (36) | % |
| Interest expense, net | (30.4) | | | (33.9) | | | (34.4) | | | 3.5 | | | (10) | % | | 0.5 | | | (1) | % |
| | | | | | | | | | | | | |
| (Loss) income before income taxes | (6.8) | | | 55.5 | | | 72.7 | | | (62.3) | | | (112) | % | | (17.2) | | | (24) | % |
| Income tax benefit (expense) | 2.5 | | | (15.4) | | | (16.8) | | | 17.9 | | | (116) | % | | 1.4 | | | (8) | % |
| Net (loss) income | (4.3) | | | 40.1 | | | 55.9 | | | (44.4) | | | (111) | % | | (15.8) | | | (28) | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net loss (income) attributable to noncontrolling interest | 0.3 | | | (1.1) | | | (1.6) | | | 1.4 | | | * | | 0.5 | | | * |
| Net (loss) income attributable to ParkOhio common shareholder | $ | (4.0) | | | $ | 39.0 | | | $ | 54.3 | | | $ | (43.0) | | | (110) | % | | $ | (15.3) | | | (28) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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
20192020 Compared with2018 2019
Net Sales
Net sales decreased 2%20% to $1,295.2 million in 2020 compared to $1,618.3 million in 2019 compared to $1,658.1 million in 2018.2019. The decrease in net sales was due to lower customer demand for our products in many end markets across all three of our Supply Technologies and Assembly Components segments, primarily driven by softening demand in certain key end markets of Supply Technologies, the impactCOVID-19 pandemic. See the “Segment Results” section below for a more detailed discussion of the United Auto Workers (“UAW”) labor strike at General Motors (“GM”), lower levels of demand at our Assembly Components factoriesdecrease 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.
each business segment.
Cost of Sales & Gross Profit
Cost of sales decreased 2%17% to $1,126.6 million in 2020 compared to $1,358.0 million in 2019 compared to $1,386.6 million in 2018.2019. The decrease in cost of sales was in-line with the decrease in net sales described above.
Our gross margin percentage decreased to 13.0% in 2020 compared to 16.1% in 2019, compared to 16.4% in 2018, due primarily to $3.5the lower profit flow-through from lower sales in 2020 compared to a year ago. In addition, cost of sales in 2020 included $5.1 million of non-recurring costs related to plant closure and consolidation, compared to $3.5 million of such costs in our Assembly Components and Supply Technologies segments.2019. These negative factors were partially offset by the benefits of cost reduction efforts taken in response to challenging market conditions in much of 2020 as a result of the pandemic.
SG&A Expenses
SG&A expenses increaseddecreased to $152.3 million, or 11.8% of net sales, in 2019 from $176.5 million, or 10.9% of net sales, in 2019. This decrease in SG&A expenses in 2020 was due primarily to the favorable impact of cost-reduction actions implemented across the Company in response to the COVID-19 pandemic. In addition, SG&A expenses in 2019 from $175.1included one-time expense of $4.3 million or 10.6% of net sales, in 2018. Thisrelated to an executive departure. The increase in SG&A expenses isas a percentage of net sales was due primarily to $4.3 million of one-time net expense related to an executive departure 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 expense and professional fees.
Gain on Sale of Assets
During 2018, the Company sold land to a third party, resulting in cash proceedsfixed portion of $2.8 million andSG&A expenses over a pre-tax gain on sale of $1.9 million.lower revenue base.
Other Components of Pension Income and Other Postretirement Benefits (“OPEB”)Expense, Net
Other components of pension income and OPEBexpense, net was $7.3 million in 2020 compared to $5.6 million in 2019 compared to $8.8 million2019.The increase in 2018. The decrease in 2019 relates to the recognition of higher net actuarial losses in 2019 compared to the prior year,2020 was driven by lowerhigher returns on plan assets in 20182020 compared to be amortized over future periods starting in 2019.
Interest Expense, Net
Interest expense, net decreased to $30.4 million in 2020 compared to $33.9 million in 2019 compared to $34.4 million in 2018.2019. The decrease was due to lower average interest rates and lower outstanding borrowings as a result of netin 2020 compared to 2019. The lower outstanding borrowings were driven by debt repayments of $4.5$35.4 million during 2019.2020. Our average effective borrowing rate was approximately5.4% in 2020 compared to 5.8% in both years.2019.
Income Tax ExpenseBenefit (Expense)
The provision for income taxes was a benefit of $2.5 million in 2020 (an effective rate of 36.8%) compared to expense of $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 20192020 rate is higher due to US tax loss planning and related net operating loss carrybacks to prior years under the impact of the $6.0 million one-time, non-deductible payment in 2019 to a former executive,Coronavirus Aid, Relief, and a benefit in 2018 of approximately $3.0 million related to reversals of previously-recorded valuation allowances in certain foreign tax jurisdictions.Economic Security (“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.
Supply Technologies Segment
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2020 | | 2019 | | 2018 | | | | | | | | |
| (Dollars in millions) |
| Net sales | $ | 510.1 | | | $ | 611.5 | | | $ | 636.8 | | | | | | | | | |
| Segment operating income | $ | 30.2 | | | $ | 42.0 | | | $ | 49.0 | | | | | | | | | |
| Segment operating income margin | 5.9 | % | | 6.9 | % | | 7.7 | % | | | | | | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 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 | % |
20192020 Compared to 20182019
Net sales were down 4%17% in 20192020 compared to 20182019 due primarily to lower customer demand in certain end markets, includingdue primarily to the impact of the global COVID-19 pandemic in 2020. The primary decreases were in the Company's semiconductortruck and
truck-related market, which was down 13%38%; the Company'sCompany’s aerospace and defense market, which was down 41%; the Company’s automotive market, which was down 14%; the Company’s consumer products market, which was down 14%; and the Company’s agricultural and industrial equipment market, which was down 15%; and the Company's consumer products market, which was down 19%12%. These decreases were partially offset by higher customer demand in the Company’s truck and truck-relatedmedical device market, which was up 9%109%; and the Company’s aerospace and defensesemiconductor market, which was up 7%35%.
Segment operating income and operating income margin were down $7.0$11.8 million and 80100 basis points, respectively, in 20192020 compared to 2018. These2019.These decreases were due primarily to lower profit flow-through from the lower sales volumes;volumes and unfavorable sales mix; an increasemix, partially offset by the benefit of cost reduction actions taken in product costs from both general inflation and tariffs; and $0.6 million of non-recurring costs relatedresponse to plant closure and consolidation.challenging market conditions.
Assembly Components Segment
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2020 | | 2019 | | 2018 | | | | | | | | |
| (Dollars in millions) |
| Net sales | $ | 441.5 | | | $ | 539.5 | | | $ | 578.3 | | | | | | | | | |
| Segment operating income | $ | 8.1 | | | $ | 36.2 | | | $ | 42.9 | | | | | | | | | |
| Segment operating income margin | 1.8 | % | | 6.7 | % | | 7.4 | % | | | | | | | | |
|
| | | | | | | | | | | |
| | 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 | % |
20192020 Compared to 20182019
Net sales were down 7%18% in 20192020 compared to 20182019 due primarily to the impact of the UAW labor strikeglobal COVID-19 pandemic on the U.S. automotive industry. Our customers closed their facilities and reduced vehicle production in mid-March in compliance with federal and state guidelines, resulting in the closure of our facilities. Beginning in late May and early June 2020, the industry began the slow process of re-opening manufacturing facilities and restarting production, albeit at GM in 2019, lower levels of demand in China, anticipated end-of-life programs,than before the COVID-19 pandemic, and the pass-through of lower aluminum prices.our facilities began to ramp-up production.
Segment operating income and operating income margin were down $6.7$28.1 million and 70490 basis points, respectively, in 20192020 compared to 2018.2019. These decreases were driven by $3.3the production shut-downs described above, as well as by charges of $4.1 million of non-recurring costs related to plant closure and consolidation;consolidation actions in 2020. In 2019, this segment incurred similar charges of $3.3 million. The actions in both years resulted in cost reductions which partially offset the negative impact on profitability of the UAW labor strike at GM; lower profit flow-through from the lower sales volumes noted above; and unfavorable sales mix.sales.
Engineered Products Segment
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2020 | | 2019 | | 2018 | | | | | | | | |
| (Dollars in millions) |
| Net sales | $ | 343.6 | | | $ | 467.3 | | | $ | 443.0 | | | | | | | | | |
| Segment operating income | $ | 3.5 | | | $ | 37.7 | | | $ | 38.4 | | | | | | | | | |
| Segment operating income margin | 1.0 | % | | 8.1 | % | | 8.7 | % | | | | | | | | |
|
| | | | | | | | | | | |
| | 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 | % |
20192020 Compared to 20182019
Net sales were up 5%down 26% in 20192020 compared to 20182019 due primarily to the acquisitions of EP in May 2019 and Canton Drop Forge (“CDF”)in February 2018; increasedlower 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 key end markets in our forged and machined products group. These increases were partially offset by lower customer demand forbusiness, including our oil and gas, forged products.aerospace, rail and agriculture markets; as well as lower demand for our capital equipment products, as many customers delayed buying decisions in response to the COVID-19 pandemic.
Segment operating income and operating income margin were down $0.7$34.2 million and 60710 basis points, respectively, in 20192020 compared to 2018.2019. These decreases were due primarily to the lower sales levels, unfavorable product mix, and manufacturing inefficiencies including an unplanned temporary shut-downin certain facilities, and cost overruns on certain jobs in this segment, primarily as a result of the COVID-19 pandemic. In addition, in 2020 this segment incurred charges of $2.2 million related to plant closure and consolidation.
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, 2020. 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, 2020 and December 31, 2019.
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 our forging plants.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:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| (In millions) |
| Total current assets | $ | 441.4 | | | $ | 459.3 | |
| Total noncurrent assets | 394.1 | | | 387.4 | |
| Amounts due from subsidiaries that are non-Guarantors | 25.8 | | | 24.1 | |
| | | |
| Total current liabilities | 209.1 | | | 200.5 | |
| Total noncurrent liabilities | 590.8 | | | 601.1 | |
The following table contains summarized combined financial information from the Statements of Unaudited Condensed Consolidated Operations of the obligated group:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| (In millions) |
| Net sales | $ | 905.9 | | | $ | 1,177.5 | |
| Gross profit | 112.4 | | | 183.0 | |
| SG&A expenses | 118.2 | | | 132.7 | |
| (Loss) income before income taxes | (22.1) | | | 28.4 | |
| Net (loss) income | (10.9) | | | 20.0 | |
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financing or other relationships with unconsolidated entities or other persons, or derivative instruments.other than the letters of credits disclosed in Note 8 to the consolidated financial statements, included elsewhere herein.
Critical Accounting Policies and Estimates
Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the Board of Directors.
Revenue Recognition: We recognize revenue, other than from long-term contracts, when 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 2020, 2019 2018 and 2017,2018, we performed quantitative testing for each reporting unit with a goodwill balance.
Our annual goodwill impairment analysis utilizes a quantitative approach comparing carrying amount of the reporting unit to its estimated fair value. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, an impairment charge is recorded. In applying the quantitative approach, we 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, 2020, 2019 2018 and 20172018 for all reporting units confirmed that the estimated fair value exceeded carrying values, and no impairment existed as of those dates. Based on our 2020 annual impairment test, we determined that the fair value of our FMPG reporting unit, which is included in our Engineered Products segment, exceeded its carrying value by 10% as of the October 1, 2020 testing date. As such, we concluded that the goodwill of this reporting unit of $8.7 million was not impaired as of that date. This reporting unit was negatively impacted by the COVID-19 pandemic throughout 2020, and while we believe that the current assumptions and estimates used in our goodwill testing are reasonable, supportable and appropriate, there can be no assurance that such assumptions and estimates will prove to be accurate predictions of future performance.
Additionally, we test all indefinite-lived intangible assets for impairment at least annually, as of October 1 of each year, or more frequently if impairment indicators arise. In 2020, 2019 2018 and 2017,2018, 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, 2020, 2019 2018 and 20172018 for all reporting units confirmed that the estimated fair value exceeded carrying values, and no impairment existed as of those dates.
See Notes 56 and 67 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%2.40% for 2019,2020, compared with 4.24%3.22% in 2018.2019. For the other postretirement benefit plan, the rate is 1.95% for 2020 and 2.94% for 2019 and 4.06% for 2018.2019. This rate represents the interest rates generally available in the United States, which is the Company’s only country with other postretirement benefit liabilities. Another assumption that affects the Company’s pension expense is the expected long-term rate of return on assets. The Company’s pension plans are funded. The weighted-average expected long-term rate of return on assets assumption is 8.25%7.75% for 2019.2020. In determining the expected return on plan assets, we consider both historical performance and an estimate of future long-term rates of return on assets similar to those in our plan. We consult with and consider opinions of financial and actuarial experts in developing appropriate return assumptions.
Legal Contingencies: We are involved in a variety of claims, suits, investigations and administrative proceedings with respect to commercial, premises liability, product liability, employment and environmental matters arising from the ordinary course of business. We accrue reserves for legal contingencies, on an undiscounted basis, when it is probable that we have incurred a liability and we can reasonably estimate an amount. When a single amount cannot be reasonably estimated, but the cost can be estimated within a range and no amount within the range is a better estimate than any other amount, we accrue the minimum amount in the range. Based upon facts and information currently available, we believe the amounts reserved are adequate for such pending matters. We monitor the development of legal proceedings on a regular basis and will adjust our reserves when, and to the extent, additional information becomes available.
Environmental
We have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certain clean-up efforts at several of these sites. However, our share of such costs has not been material and based on available information, management does not expect
our exposure at any of these locations to have a material adverse effect on our results of operations, liquidity or financial condition.
We have been named as one of many defendants in a number of asbestos-related personal injury lawsuits. Our cost of defending such lawsuits has not been material to date and, based upon available information, management does not expect our future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial condition. We caution, however, that inherent in management’s estimates of our exposure are expected trends in claims severity, frequency and other factors that may materially vary as claims are filed and settled or otherwise resolved.
Seasonality; Variability of Operating Results
The timing of orders placed by our customers has varied with, among other factors, orders for customers’ finished goods, customer production schedules, competitive conditions and general economic conditions. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations in the operations of our business units. Such variability is particularly evident in the industrial equipment business unit included in the Engineered Products segment, which typically ships a few large systems per year.
Forward-Looking Statements
This Annual Report on Form 10-K contains certain statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and similar expressions are intended to identify forward-looking statements.
These forward-looking statements, including statements regarding future performance of the Company, that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors that could cause actual results to differ materially from expectations include, but are not limited to, the following: the ultimate impact the COVID-19 pandemic has on our business, results of operations, financial position and liquidity; our substantial indebtedness; the uncertainty of the global economic environment; general business
conditions and competitive factors, including pricing pressures and product innovation; demand for our products and services; the impact of labor disturbances affecting our customers; raw material availability and pricing; fluctuations in energy costs; component part availability and pricing; changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate recent and future acquisitions into existing operations; the amounts and timing, if any, of purchases of our common stock; changes in general 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; 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, 2019,2020, we are subject to interest rate risk on borrowings under the floating rate revolving credit facility provided by our Credit Agreement, which consisted of borrowings of $173.2$143.7 million at December 31, 2019.2020. A 100 basis100-basis point increase in the interest rate would have resulted in an increase in interest expense on these borrowings of approximately $1.7$1.4 million for the year ended December 31, 2019.2020.
Our foreign subsidiaries generally conduct business in local currencies. We face translation risks related to the changes in foreign currency exchange rates. Amounts invested in our foreign operations are translated in U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as a component of Accumulated other comprehensive loss in the Shareholders'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.
Our largest exposures to commodity prices relate to steel and natural gas prices, which have fluctuated widely in recent years. We do not have any commodity swap agreements, forward purchase or hedge contracts.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Financial Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder and 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 Company) as of December 31, 20192020 and 2018,2019, the related consolidated statements of income,operations, comprehensive income, shareholder'sshareholder’s equity and cash flows for each of the three years in the period ended December 31, 2019,2020, 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, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020 , 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
Thesefinancial 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) 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 controlcontrols 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'sCompany’s internal controlcontrols 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 accounts or disclosures to which it relates.
| | | | | |
Quantitative Impairment Assessment of Goodwill
|
Description of the matter
How we addressed the matter in our audit
| At December 31, 2020, the Company’s goodwill was $110.9 million. As discussed in Note 1 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level or more frequently if impairment indicators arise. Goodwill is tested at the reporting unit level for impairment utilizing the income approach, which uses a discounted cash flow methodology to estimate the fair value of each reporting unit.
Auditing management’s quantitative goodwill impairment assessment for certain of its reporting units was complex and highly judgmental due to the significant estimation required to determine the fair value of the reporting units. In particular, the fair value estimate was sensitive to significant assumptions, such as revenue growth rates, operating margins and weighted average cost of capital (WACC), which are impacted by expectations of future market or economic conditions.
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment process.This included controls over management’s review of the significant assumptions underlying the fair value determination described above.
To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions described above and the underlying data used by the Company in its analysis. For example, we compared the significant assumptions used by management to current industry and economic trends and to historical results. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We also involved our specialists to review the methodology, and certain assumptions such as the WACC. In addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the Company. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1967.
Cleveland, Ohio
March 16, 202015, 2021
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | December 31,
2019 | | December 31,
2018 | | December 31,
2020 | | December 31,
2019 |
| | (In millions, except per share data) | | (In millions, except per share data) |
| ASSETS | ASSETS | ASSETS |
| Current assets: | | | | Current assets: | |
| Cash and cash equivalents | $ | 46.7 |
| | $ | 46.6 |
| Cash and cash equivalents | $ | 44.8 | | | $ | 46.7 | |
| Accounts receivable, net | 261.3 |
| | 264.4 |
| Accounts receivable, net | 248.1 | | | 261.3 | |
| Inventories, net | 327.2 |
| | 317.8 |
| Inventories, net | 310.9 | | | 327.2 | |
| | Receivables from affiliates | 24.1 |
| | 22.3 |
| Receivables from affiliates | 25.8 | | | 24.1 | |
| Unbilled contract revenue | 61.7 |
| | 66.3 |
| Unbilled contract revenue | 56.9 | | | 61.7 | |
| Other current assets | 19.1 |
| | 15.9 |
| Other current assets | 35.3 | | | 19.1 | |
| Total current assets | 740.1 |
| | 733.3 |
| Total current assets | 721.8 | | | 740.1 | |
| Property, plant and equipment, net | 240.1 |
| | 221.9 |
| Property, plant and equipment, net | 239.1 | | | 240.1 | |
| Operating lease right-of-use assets | 64.3 |
| | — |
| Operating lease right-of-use assets | 68.6 | | | 64.3 | |
| Goodwill | 108.4 |
| | 103.4 |
| Goodwill | 110.9 | | | 108.4 | |
| Intangible assets, net | 90.6 |
| | 95.3 |
| Intangible assets, net | 86.8 | | | 90.6 | |
| Pension assets | 65.0 |
| | 57.0 |
| Pension assets | 74.8 | | | 65.0 | |
| Other long-term assets | 18.8 |
| | 12.8 |
| Other long-term assets | 15.3 | | | 18.8 | |
| Total assets | $ | 1,327.3 |
| | $ | 1,223.7 |
| Total assets | $ | 1,317.3 | | | $ | 1,327.3 | |
| LIABILITIES AND SHAREHOLDER’S EQUITY | LIABILITIES AND SHAREHOLDER’S EQUITY | LIABILITIES AND SHAREHOLDER’S EQUITY |
| Current liabilities: | | | | Current liabilities: | |
| Trade accounts payable | $ | 175.0 |
| | $ | 177.8 |
| Trade accounts payable | $ | 166.7 | | | $ | 175.0 | |
| Payables to affiliates | 7.1 |
| | 7.1 |
| Payables to affiliates | 7.2 | | | 7.1 | |
| Current portion of long-term debt and short-term debt | 16.8 |
| | 17.9 |
| Current portion of long-term debt and short-term debt | 11.6 | | | 16.8 | |
| Current portion of operating lease liabilities | 11.9 |
| | — |
| Current portion of operating lease liabilities | 12.9 | | | 11.9 | |
| Accrued employee compensation | 25.7 |
| | 27.5 |
| Accrued employee compensation | 28.1 | | | 25.7 | |
| Deferred revenue | 35.7 |
| | 39.5 |
| Deferred revenue | 37.4 | | | 35.7 | |
| Other accrued expenses | 40.1 |
| | 37.4 |
| Other accrued expenses | 50.7 | | | 40.1 | |
| Total current liabilities | 312.3 |
| | 307.2 |
| Total current liabilities | 314.6 | | | 312.3 | |
| Long-term liabilities, less current portion: | | | | Long-term liabilities, less current portion: | |
| Long-term debt | 545.2 |
| | 547.5 |
| Long-term debt | 517.8 | | | 545.2 | |
| Long-term operating lease liabilities | 53.6 |
| | — |
| Long-term operating lease liabilities | 56.7 | | | 53.6 | |
| Deferred income taxes | 29.9 |
| | 24.8 |
| Deferred income taxes | 36.8 | | | 29.9 | |
| Other long-term liabilities | 28.5 |
| | 26.3 |
| Other long-term liabilities | 24.4 | | | 28.5 | |
| Total long-term liabilities | 657.2 |
| | 598.6 |
| Total long-term liabilities | 635.7 | | | 657.2 | |
| Park-Ohio Industries, Inc. and Subsidiaries shareholder's equity: | | | | Park-Ohio Industries, Inc. and Subsidiaries shareholder's equity: | |
| Common stock, par value $1 per share | — |
| | — |
| Common stock, par value $1 per share | 0 | | | 0 | |
| Additional paid-in capital | 127.3 |
| | 123.2 |
| Additional paid-in capital | 133.4 | | | 127.3 | |
| Retained earnings | 253.4 |
| | 221.9 |
| Retained earnings | 237.9 | | | 253.4 | |
| Accumulated other comprehensive loss | (37.0 | ) | | (40.9 | ) | Accumulated other comprehensive loss | (18.1) | | | (37.0) | |
| Total Park-Ohio Industries, Inc. and Subsidiaries shareholder's equity | 343.7 |
| | 304.2 |
| Total Park-Ohio Industries, Inc. and Subsidiaries shareholder's equity | 353.2 | | | 343.7 | |
| Noncontrolling interests | 14.1 |
| | 13.7 |
| Noncontrolling interests | 13.8 | | | 14.1 | |
| Total equity | 357.8 |
| | 317.9 |
| Total equity | 367.0 | | | 357.8 | |
| Total liabilities and shareholder's equity | $ | 1,327.3 |
| | $ | 1,223.7 |
| Total liabilities and shareholder's equity | $ | 1,317.3 | | | $ | 1,327.3 | |
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Industries, Inc. and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Industries, Inc. and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Industries, Inc. and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Industries, Inc. and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
Park-Ohio Industries, Inc. and Subsidiaries
|
| | | | | | | |
| 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)
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,
2020 | | December 31,
2019 |
| |
| | | |
| Land and land improvements | $ | 12.6 | | | $ | 12.0 | |
| Buildings | 89.8 | | | 86.9 | |
| Machinery and equipment | 440.2 | | | 424.0 | |
| Leased property under finance leases | 44.8 | | | 39.2 | |
| Total property, plant and equipment | 587.4 | | | 562.1 | |
| Less: Accumulated depreciation | 348.3 | | | 322.0 | |
| Property, plant and equipment, net | $ | 239.1 | | | $ | 240.1 | |
|
| | | | | | | |
| | 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, |
| 2020 | | 2019 | | 2018 |
| |
| Depreciation expense | $ | 29.6 | | | $ | 27.6 | | | $ | 29.3 | |
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 no0 impairment. 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 56 and 67 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 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.
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Level 3 — Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
Changes in assumptions or estimation methods could affect the fair value estimates; however, we do not believe any such changes would have a material impact on our financial condition, results of operations or cash flows. The carrying value of cash
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)8) approximate fair value at December 31, 20192020 and December 31, 20182019 because of the short-term nature of these instruments. The fair values of long-term debt and pension plan assets are disclosed in Note 78 and Note 12,13, respectively.
The Company has not changed its valuation techniques for measuring fair value during 2019,2020, and there were no transfers between levels during the periods presented.
Pension and Other Postretirement Benefits: 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 1213 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, 2020 and 2019 was an increase in tax expense of $1.8 million and $1.9 million, respectively. The impact of FDII at December 31, 2020 and 2019 was a decrease in tax expense of $0.0 million and $0.8 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 specific customers, historical trends, current conditions and other information.reasonable forecasts. As of December 31, 2019,2020, the Company had uncollateralized receivables with six6 customers in the automotive industry, each with several locations, aggregating $44.8$40.6 million, which represented approximately 17%16% of the Company’s trade accounts receivable. During 2019,2020, sales to these customers amounted to approximately $280.6$228.2 million, which represented approximately 17%18% 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.
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
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, |
| 2020 | | 2019 | | 2018 |
| |
| Balance at January 1 | $ | 6.4 | | | $ | 6.2 | | | $ | 7.9 | |
| Claims paid during the year | (2.5) | | | (4.1) | | | (5.3) | |
| Warranty expense | 2.5 | | | 4.3 | | | 3.6 | |
| | | | | |
| | | | | |
| Balance at December 31 | $ | 6.4 | | | $ | 6.4 | | | $ | 6.2 | |
|
| | | | | | | | | | | |
| | 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, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): 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 effects 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): Measurement of Credit Losses of Financial Instruments,” which replacesreplaced the current incurred loss impairment model with a methodology that reflectsreflected expected credit losses. Under 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 this guidance is required for interim and annual periods beginning after December 15, 2019. We plan to adoptThe Company adopted this standard as of January 1, 2020. The adoption of the standard had an immaterial impact on the Company. For the year ended December 31, 2020, the provision and write-offs was not material, and the allowance approximated $5.5 million as of December 31, 2020.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (ASC 740) - Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. The Company adopted this standard as of April 1, 2020. The adoption of the standard had an immaterial impact on the Company's tax provision.
Recent Accounting Standards Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which was issued in response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of the London Interbank Offered Rate. The guidance is effective upon issuance and may 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 31, 2022 or hedging relationships entered into or evaluated after that date. The Company is in the process ofcurrently evaluating the expected impact of the new standard but does not expect adoption to have a material impact.this standard.
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
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
consideration the Company expects to receive in exchange for the good or service, including estimated provisions for rebates, 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%22% of the Company's total consolidated sales for the year ended December 31, 2019.2020. The Company uses the input method to calculate the contract revenues to be recognized, which utilizes costs incurred to date in relation to total expected costs to satisfy the Company’s performance obligation under the contract. Incurred costs represent work performed and therefore best depict the transfer of control to the customer.
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$37.4 million and $39.5$35.7 million at December 31, 20192020 and December 31, 2018,2019, 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$56.9 million and $66.3$61.7 million at December 31, 20192020 and December 31, 2018,2019, 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, |
| | | | | 2020 | | 2019 |
| | | |
| PRODUCT LINE | | | | | | | |
| Supply Technologies | | | | | $ | 444.8 | | | $ | 532.9 | |
| Engineered specialty fasteners and other products | | | | | 65.3 | | | 78.6 | |
| Supply Technologies Segment | | | | | 510.1 | | | 611.5 | |
| | | | | | | |
| Fuel, rubber and plastic products | | | | | 298.4 | | | 353.8 | |
| Aluminum products | | | | | 143.1 | | | 185.7 | |
| Assembly Components Segment | | | | | 441.5 | | | 539.5 | |
| | | | | | | |
| Industrial equipment | | | | | 238.2 | | | 323.8 | |
| Forged and machined products | | | | | 105.4 | | | 143.5 | |
| Engineered Products Segment | | | | | 343.6 | | | 467.3 | |
| | | | | | | |
| Total revenues | | | | | $ | 1,295.2 | | | $ | 1,618.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Supply Technologies Segment | | Assembly Components Segment | | Engineered Products Segment | | Total Revenues |
| |
| Year Ended December 31, 2020 | | | | | | | |
| GEOGRAPHIC REGION | | | | | | | |
| United States | $ | 314.0 | | | $ | 302.3 | | | $ | 179.1 | | | $ | 795.4 | |
| Europe | 83.8 | | | 13.2 | | | 64.5 | | | 161.5 | |
| Asia | 43.3 | | | 29.6 | | | 59.3 | | | 132.2 | |
| Mexico | 55.4 | | | 35.9 | | | 9.8 | | | 101.1 | |
| Canada | 9.8 | | | 59.1 | | | 19.2 | | | 88.1 | |
| Other | 3.8 | | | 1.4 | | | 11.7 | | | 16.9 | |
| Total | $ | 510.1 | | | $ | 441.5 | | | $ | 343.6 | | | $ | 1,295.2 | |
| | | | | | | |
| 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, |
| | 2019 | | 2018 |
| PRODUCT LINE | | | |
| Supply Technologies | $ | 532.9 |
| | $ | 555.3 |
|
| Engineered specialty fasteners and other products | 78.6 |
| | 81.5 |
|
| Supply Technologies Segment | 611.5 |
| | 636.8 |
|
| | | | |
| Fuel, rubber and plastic products | 353.8 |
| | 382.5 |
|
| Aluminum products | 185.7 |
| | 195.8 |
|
| Assembly Components Segment | 539.5 |
| | 578.3 |
|
| | | | |
| Industrial equipment | 323.8 |
| | 312.1 |
|
| Forged and machined products | 143.5 |
| | 130.9 |
|
| Engineered Products Segment | 467.3 |
| | 443.0 |
|
| | | | |
| Total revenues | $ | 1,618.3 |
| | $ | 1,658.1 |
|
|
| | | | | | | | | | | | | | | |
| | 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)
NOTE 3 — Segments
The Company operates through three3 reportable segments: Supply Technologies, Assembly Components and Engineered Products. Supply Technologies provides our customers with Total Supply Management™ services for a broad range of high-volume, specialty production components. Assembly Components manufactures cast aluminum components, automotive and industrial rubber and thermoplastic products, gasoline direct injection systems, fuel filler and hydraulic assemblies for automotive, agricultural equipment, construction equipment, heavy-duty truck and marine equipment industries, 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.
For purposes of measuring business segment performance, the chief operating decision maker 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; unusual in nature; or are corporate costs, which include but are not limited to executive 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 other postretirement benefits (“OPEB”) expense, net; and interest expense, net.
Results by business segment were as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| |
| Net sales: | | | | | |
| Supply Technologies | $ | 510.1 | | | $ | 611.5 | | | $ | 636.8 | |
| Assembly Components | 441.5 | | | 539.5 | | | 578.3 | |
| Engineered Products | 343.6 | | | 467.3 | | | 443.0 | |
| $ | 1,295.2 | | | $ | 1,618.3 | | | $ | 1,658.1 | |
| Segment operating income: | | | | | |
| Supply Technologies | $ | 30.2 | | | $ | 42.0 | | | $ | 49.0 | |
| Assembly Components | 8.1 | | | 36.2 | | | 42.9 | |
| Engineered Products | 3.5 | | | 37.7 | | | 38.4 | |
| Total segment operating income | 41.8 | | | 115.9 | | | 130.3 | |
| Corporate costs | (25.5) | | | (27.8) | | | (33.9) | |
| One-time net expense related to former President | 0 | | | (4.3) | | | 0 | |
| Gain on sale of assets | 0 | | | 0 | | | 1.9 | |
| | | | | |
| | | | | |
| Operating income | 16.3 | | | 83.8 | | | 98.3 | |
| Other components of pension income and other postretirement benefits expense, net | 7.3 | | | 5.6 | | | 8.8 | |
| Interest expense, net | (30.4) | | | (33.9) | | | (34.4) | |
| | | | | |
| (Loss) income before income taxes | $ | (6.8) | | | $ | 55.5 | | | $ | 72.7 | |
|
| | | | | | | | | | | |
| | 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)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| |
| Capital expenditures: | | | | | |
| Supply Technologies | $ | 6.5 | | | $ | 6.1 | | | $ | 5.2 | |
| Assembly Components | 13.1 | | | 19.5 | | | 24.3 | |
| Engineered Products | 6.5 | | | 14.3 | | | 15.4 | |
| Corporate | 0.2 | | | 0.2 | | | 0.1 | |
| $ | 26.3 | | | $ | 40.1 | | | $ | 45.0 | |
| Depreciation and amortization expense: | | | | | |
| Supply Technologies | $ | 5.1 | | | $ | 4.8 | | | $ | 5.3 | |
| Assembly Components | 20.7 | | | 20.1 | | | 22.2 | |
| Engineered Products | 9.6 | | | 8.8 | | | 8.4 | |
| Corporate | 0.4 | | | 0.4 | | | 0.3 | |
| $ | 35.8 | | | $ | 34.1 | | | $ | 36.2 | |
| Identifiable assets: | | | | | |
| Supply Technologies | $ | 347.6 | | | $ | 355.9 | | | $ | 330.1 | |
| Assembly Components | 401.1 | | | 413.4 | | | 378.3 | |
| Engineered Products | 439.7 | | | 455.1 | | | 433.1 | |
| Corporate | 128.9 | | | 102.9 | | | 82.2 | |
| $ | 1,317.3 | | | $ | 1,327.3 | | | $ | 1,223.7 | |
|
| | | | | | | | | | | |
| | 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, 2020, 2019 and 2018, approximately 70%, 71% and 2017, approximately 71%, 68% and 65%, respectively, of the Company’s assets were located in the United States.
NOTE 4 — Plant Closure and Consolidation
During 2020, the Company recorded charges totaling $4.1 million in its Assembly Components segment in connection with commencement of actions to close and consolidate its extrusion operations in Tennessee and its fuel operations in Shanghai, China, and to complete other cost-reduction actions in this segment. The charges, which are included in Cost of sales in the Consolidated Statements of Operations, are comprised of severance and related employee costs of $1.4 million, asset impairment of $0.5 million, and other facility costs of $2.2 million.
In the Engineered Products segment, the Company recorded charges in 2020 related to plant closure and consolidation, of which $1.0 million are included in Cost of sales in the Consolidated Statements of Operations and $1.2 million are included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
NOTE 5 — Acquisitions
On May 31, 2019, the Company acquired EFCO, Inc. d/b/a Erie Press Systems (“EP”) for $9.1 million, including potential contingent consideration.. EP, which had revenue of approximately $12 million sinceis included in the date of the acquisition,Company's Engineered Products segment, 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 the Company's Engineered Products segment.
During 2019, the Company paid $8.1 million in cash (net of $10.4 million of cash and cash equivalents acquired). for EP. In addition, the purchase agreement stipulates potential contingent consideration of up to an additional $1.0 million based on two-year cumulative earnings before interest and taxes. The estimated fair value of the contingent consideration, valued using level 3 inputs, was approximately $1.0$0.0 million as of December 31, 2019, resulting in total consideration2020. The Consolidated Statement of $9.1 million.
The allocation ofOperations for 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:
year ended
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
December 31, 2020 includes a credit of $1.0 million in Selling, general and administrative expenses representing the reversal of a previously-recorded liability related to this contingent consideration.
|
| | | |
| 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 two2 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 56 — 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, 2019 | $ | 14.2 | | | $ | 56.0 | | | $ | 33.2 | | | $ | 103.4 | |
| Acquisitions and adjustments | 0 | | | 0 | | | 5.0 | | | 5.0 | |
| Foreign currency translation | 0.4 | | | 0 | | | (0.4) | | | 0 | |
| Balance at December 31, 2019 | 14.6 | | | 56.0 | | | 37.8 | | | 108.4 | |
| Foreign currency translation | 0.5 | | | 0.1 | | | 1.9 | | | 2.5 | |
| Balance at December 31, 2020 | $ | 15.1 | | | $ | 56.1 | | | $ | 39.7 | | | $ | 110.9 | |
|
| | | | | | | | | | | | | | | |
| | 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 67 — Other Intangible Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2020 | | December 31, 2019 |
| | Weighted Average Remaining Useful Life (Years) | | Gross Value | | Accumulated
Amortization | | Net Value | | Gross Value | | Accumulated
Amortization | | Net Value |
| | | |
| Customer relationships | 9.2 | | $ | 87.5 | | | $ | 44.5 | | | $ | 43.0 | | | $ | 86.6 | | | $ | 39.6 | | | $ | 47.0 | |
| Indefinite-lived tradenames | * | | 25.2 | | | * | | 25.2 | | | 24.6 | | | * | | 24.6 | |
| Technology | 14.5 | | 23.7 | | | 6.4 | | | 17.3 | | | 22.9 | | | 5.3 | | | 17.6 | |
| Other | 6.7 | | 4.9 | | | 3.6 | | | 1.3 | | | 4.8 | | | 3.4 | | | 1.4 | |
| Total | | | $ | 141.3 | | | $ | 54.5 | | | $ | 86.8 | | | $ | 138.9 | | | $ | 48.3 | | | $ | 90.6 | |
| | | | | | | | | | | | | |
| * Not applicable, as these tradenames have an indefinite life. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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, |
| 2020 | | 2019 | | 2018 |
| |
| Amortization expense | $ | 6.2 | | | $ | 6.5 | | | $ | 6.9 | |
|
| | | | | | | | | | | |
| | 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, 20192020 as follows: | | | | | |
| |
| 2021 | $ | 6.5 | |
| 2022 | $ | 6.4 | |
| 2023 | $ | 6.2 | |
| 2024 | $ | 6.1 | |
| 2025 | $ | 6.1 | |
|
| | | |
| 2020 | $ | 6.5 |
|
| 2021 | $ | 6.5 |
|
| 2022 | $ | 6.4 |
|
| 2023 | $ | 6.3 |
|
| 2024 | $ | 6.1 |
|
NOTE 78 — Financing Arrangements
Debt consists of the following: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Carrying Value at |
| | | Maturity Date | | Interest Rate at December 31, 2020 | | December 31, 2020 | | December 31, 2019 |
| | | | | | | |
| Senior Notes due 2027 | | | April 15, 2027 | | 6.625 | % | | $ | 350.0 | | | $ | 350.0 | |
| | | | | | | | | |
| Revolving credit facility | | | November 26, 2024 | | 1.35 | % | | 143.7 | | | 173.2 | |
| | | | | | | | | |
| Industrial Equipment Group European Facilities | | | December 21, 2021 | | 3.25 | % | | 0 | | | 4.6 | |
| Finance leases | | | Various | | Various | | 18.7 | | | 17.2 | |
| Other | | | Various | | Various | | 22.3 | | | 23.5 | |
| Total debt | | | | | | | 534.7 | | | 568.5 | |
| Less: Current portion of long-term debt and short-term debt | | | | | | | (11.6) | | | (16.8) | |
| | | | | | | | | |
| Less: Unamortized debt issuance costs | | | | | | | (5.3) | | | (6.5) | |
| Total long-term debt, net | | | | | | | $ | 517.8 | | | $ | 545.2 | |
|
| | | | | | | | | | | | |
| | | | | | 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 |
|
Park-Ohio Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
In June 2018, ParkOhio entered into Amendment No. 1 to Seventh Amended and Restated Credit Agreement (the “Credit Agreement”) with a group of banks to increase the revolving credit facility from $350.0 million to $375.0 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 the European revolving subcommitment from $25.0 million to $30.0 million. Furthermore, 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 million. In November 2019, Park-Ohio entered into Amendment No. 4 to 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$30.7 million as of December 31, 2019,2020, as well as a revolving credit facility for up to $11.2$12.3 million to fund working capital and general corporate needs. The Company had $4.6$0.0 million outstanding on the loan as of December 31, 2019. No2020. NaN amounts have been drawn on the revolving credit facility as of December 31, 2019.2020.
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$18.7 million were borrowed under the Lease Agreement as of December 31, 20192020 to acquire machinery and equipment. See Note 1112 for additional disclosure.disclosures about finance leases.
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$6.9 million under this agreement as of December 31, 2019.2020.
The following table represents fair value information of the Notes, classified as Level 1, at December 31, 20192020 and 2018.2019. The fair value was estimated using quoted market prices.
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| |
| Carrying amount | $ | 350.0 | | | $ | 350.0 | |
| Fair value | $ | 361.8 | | | $ | 358.3 | |
|
| | | | | | | |
| | 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, 20192020 are as follows: | | | | | |
| |
| 2021 | $ | 4.5 | |
| 2022 | $ | 4.2 | |
| 2023 | $ | 3.9 | |
| 2024 | $ | 147.1 | |
| 2025 | $ | 2.6 | |
|
| | | |
| 2020 | $ | 9.8 |
|
| 2021 | $ | 3.5 |
|
| 2022 | $ | 3.0 |
|
| 2023 | $ | 2.9 |
|
| 2024 | $ | 175.8 |
|
Foreign subsidiaries of the Company had $16.2$13.0 million of borrowings at December 31, 20192020 and $26.1$16.2 million at December 31, 2018.2019.
We had outstanding bank guarantees and letters of credit of approximately $34.9 million at December 31, 2020 and $33.8 million at December 31, 2019 and $27.5 million at December 31, 2018 under our credit arrangements.
The weighted average interest rate on all debt was approximately 5.8% in 2019 and 2018 and 6.1% in 2017.