PARK-OHIO HOLDINGS CORP. Our consolidated financial statements include the accounts ofPark-Ohio Holdings Corp. 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 InMarch 2020 , theWorld Health Organization categorized the novel coronavirus ("COVID-19") as a pandemic. This has negatively impacted several of the markets we serve. In response to the COVID-19 pandemic, we have taken actions to reduce our operating costs, including plant 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 anticipated impact of the COVID-19 pandemic outbreak on our future results, we believe our diversified portfolio of global businesses, our liquidity position was$252.4 million as ofDecember 31, 2020 , and the steps we have taken to reduce costs leave us well-positioned to manage our business through this crisis as it continues to unfold. Subsequent Event OnJanuary 29, 2021 , the Company's Board of Directors declared a quarterly dividend of$0.125 per common share. The dividend was paid onFebruary 26, 2021 , to shareholders of record as of the close of business onFebruary 12, 2021 and resulted in a cash outlay of$1.6 million . RESULTS OF OPERATIONS This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2019 and 2018. Discussions of 2018 items and year-over-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . 22 -------------------------------------------------------------------------------- Table of Contents 2020 Compared with 2019 and 2019 Compared with 2018 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change (Dollars in millions, except per share data) Net sales$ 1,295.2 $ 1,618.3 $ 1,658.1 $ (323.1) (20) %$ (39.8) (2) % Cost of sales 1,126.6 1,358.0 1,386.6 (231.4) (17) % (28.6) (2) % Gross profit 168.6 260.3 271.5 (91.7) (35) % (11.2) (4) % Gross profit as a percentage of net sales 13.0 % 16.1 % 16.4 % Selling, general and administrative ("SG&A") expenses 152.9 177.2 176.1 (24.3) (14) % 1.1 1 % SG&A expenses as a percentage of net sales 11.8 % 10.9 % 10.6 % Gain on sale of assets - - (1.9) - * 1.9 * Operating income 15.7 83.1 97.3 (67.4) (81) % (14.2) (15) % Other components of pension income and other postretirement benefits expense, net 7.3 5.6 8.8 1.7 30 % (3.2) (36) % Interest expense, net (30.3) (33.8) (34.3) 3.5 (10) % 0.5 (1) % (Loss) income before income taxes (7.3) 54.9 71.8 (62.2) (113) % (16.9) (24) % Income tax benefit (expense) 2.5 (15.2) (16.6) 17.7 (116) % 1.4 (8) % Net (loss) income (4.8) 39.7 55.2 (44.5) (112) % (15.5) (28) % Net loss (income) attributable to noncontrolling interest 0.3 (1.1) (1.6) 1.4 (127) % 0.5 (31) %
Net (loss) income attributable
to ParkOhio common shareholders
(112) % $ (15.0) (28) %
(Loss) earnings per common
share attributable to ParkOhio
common shareholders
Basic $ (0.37) $ 3.16 $ 4.37 $ (3.53) (112) % $ (1.21) (28) %
Diluted $ (0.37) $ 3.12 $ 4.28 $ (3.49) (112) % $ (1.16) (27) %
* Calculation not meaningful
2020 Compared with 2019
Net Sales
Net sales decreased 20% to $1,295.2 million in 2020 compared to $1,618.3 million
in 2019. The decrease in net sales was due to lower customer demand for our
products in many end markets across all three of our segments, primarily driven
by the COVID-19 pandemic. See the "Segment Results" section below for a more
detailed discussion of the decrease in sales in each business segment.
Cost of Sales & Gross Profit
Cost of sales decreased 17% to $1,126.6 million in 2020 compared to $1,358.0
million in 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, due primarily to the 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 costs related to plant closure and consolidation, compared to $3.5 million of
such costs in 2019. These negative factors were partially
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Table of Contents 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 decreased to$152.9 million , or 11.8% of net sales, in 2019 from$177.2 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 included one-time expense of$4.3 million related to an executive departure. The increase in SG&A expenses as a percentage of net sales was due to a fixed portion of SG&A expenses over a lower revenue base. Other Components of Pension Income and Other Postretirement Benefits ("OPEB") Expense, Net Other components of pension income and OPEB expense, net was$7.3 million in 2020 compared to$5.6 million in 2019. The increase in 2020 was driven by higher returns on plan assets in 2020 compared to 2019.
Interest Expense, Net
Interest expense, net decreased to$30.3 million in 2020 compared to$33.8 million in 2019. The decrease was due to lower average interest rates and lower outstanding borrowings in 2020 compared to 2019. The lower outstanding borrowings were driven by debt repayments of$35.4 million during 2020. Our average effective borrowing rate was 5.4% in 2020 compared to 5.8% in 2019. Income Tax Benefit (Expense) The provision for income taxes was a benefit of$2.5 million in 2020 (an effective rate of 34.2%) compared to expense of$15.2 million in 2019 (an effective rate of 27.7%). The 2020 rate is higher due to US tax loss planning and related net operating loss carrybacks to prior years under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. SEGMENT RESULTS For purposes of measuring business segment performance, the Company utilizes segment operating income, which is defined as revenues less expenses identifiable to the product lines within each segment. The Company does not allocate items that are non-operating or unusual in nature or are corporate costs, which include but are not limited to executive and share-based compensation and corporate office costs. Segment operating income reconciles to consolidated income before income taxes by deducting corporate costs; certain non-cash and/or non-operating items; Other components of pension income and OPEB expense, net; and interest expense, net. Supply Technologies Segment Year Ended December 31, 2020 2019 2018 (Dollars in millions) Net sales$ 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 %
2020 Compared to 2019
Net sales were down 17% in 2020 compared to 2019 due primarily to lower customer
demand in certain end markets, due primarily to the impact of the global
COVID-19 pandemic in 2020. The primary decreases were in the Company's truck and
truck-related market, which was down 38%; the Company's aerospace and defense
market, which was down 41%; the Company's automotive market, which was down 14%;
the Company's consumer products market, which was down 14%; and the Company's
agricultural and industrial equipment market, which was down 12%. These
decreases were partially offset by
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Table of Contents higher customer demand in the Company's medical device market, which was up 109%; and the Company's semiconductor market, which was up 35%.
Segment operating income and operating income margin were down$11.8 million and 100 basis points, respectively, in 2020 compared to 2019. These decreases were due primarily to lower profit flow-through from the lower sales volumes and unfavorable sales mix, partially offset by the benefit of cost reduction actions taken in response to challenging market conditions. Assembly Components Segment Year Ended December 31, 2020 2019 2018 (Dollars in millions) Net sales$ 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 % 2020 Compared to 2019 Net sales were down 18% in 2020 compared to 2019 due primarily to the impact of the global COVID-19 pandemic on theU.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 earlyJune 2020 , the industry began the slow process of re-opening manufacturing facilities and restarting production, albeit at lower levels than before the COVID-19 pandemic, and our facilities began to ramp-up production. Segment operating income and operating income margin were down$28.1 million and 490 basis points, respectively, in 2020 compared to 2019. These decreases were driven by the production shut-downs described above, as well as by charges of$4.1 million related to plant closure and consolidation actions in 2020. In 2019, this segment incurred similar charges of$3.3 million . The actions in both years resulted in cost reductions which partially offset the negative impact on profitability of the lower sales. Engineered Products Segment Year Ended December 31, 2020 2019 2018 (Dollars in millions) Net sales$ 343.6 $ 467.3 $ 443.0 Segment operating income$ 3.5 $ 37.7
Segment operating income margin 1.0 % 8.1 % 8.7 %
2020 Compared to 2019
Net sales were down 26% in 2020 compared to 2019 due primarily to lower customer
demand in certain key end markets in our forged and machined products business,
including our oil and gas, 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 $34.2 million and
710 basis points, respectively, in 2020 compared to 2019. These decreases were
due primarily to the lower sales levels, unfavorable product mix, manufacturing
inefficiencies in 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.
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Liquidity and Capital Resources
The following table summarizes the major components of cash flows:
2020 2019 2018
Cash provided (used) by: (In millions)
Operating activities $ 69.3 $ 63.7 $ 54.8
Investing activities (24.9) (48.2) (89.2)
Financing activities (47.3) (15.3) 9.4
Effect of exchange rate on cash 1.9 0.1 (2.1)
Increase (decrease) in cash and cash equivalents $ (1.0) $ 0.3 $ (27.1)
Operating Activities
Cash provided by operating activities increased by $5.6 million in 2020 compared
to 2019, as the Company's initiatives to reduce working capital in 2020 in
response to market conditions resulted in positive cash flow of $33.3 million ,
compared to a usage of cash for working capital of $11.3 million in 2019 and
$35.5 million in 2018. The favorable reduction in working capital in 2020 more
than offset the impact of lower profitability in 2020 compared to 2019 and 2018.
Investing Activities
Capital expenditures were$26.3 million in 2020,$40.1 million in 2019 and$45.1 million in 2018. These capital expenditures were primarily for growth initiatives, with the majority in our Assembly Components and Engineered Products segments. Capital expenditures in 2020 were lower than in the prior years, as we curtailed non-critical capital spending in response to the COVID-19 pandemic. In 2019, we spent$8.1 million on acquisition ofEFCO, Inc. d/b/aErie Press Systems. See Note 5 to the consolidated financial statements included elsewhere herein for additional information. In 2018, we spent$46.9 million on acquisitions of businesses, primarilyCanton Drop Forge andHydrapower Dynamics Limited ("Hydrapower"). See Note 5 to the consolidated financial statements included elsewhere herein for additional information. Financing Activities Cash used by financing activities in 2020 included debt repayments of$35.4 million , treasury share repurchases of$7.5 million , dividends of$3.2 million and payments of withholding taxes on share awards of$1.2 million . In the second and third quarter of 2020, we temporarily suspended our quarterly cash dividend to preserve capital in response to challenging market conditions and uncertainty caused by the COVID-19 pandemic. Our Board of Directors once again declared a dividend in the fourth quarter of 2020. Cash used by financing activities in 2019 included net debt repayments of$4.5 million , dividend payments of$7.0 million , treasury share repurchases of$0.9 million , and payments made of withholding taxes on share awards of$2.9 million . Cash provided by financing activities in 2018 included net borrowings of$40.3 million on our revolving credit facility to fund our 2018 acquisitions, and repayments of other debt of$12.4 million . During 2018, we also paid dividends of$6.4 million ; repurchased treasury shares for$9.0 million ; and made payments of withholding taxes on share awards of$3.1 million . 26 -------------------------------------------------------------------------------- Table of Contents DuringSeptember 2018 , we repatriated cash of$24.4 million from a foreign subsidiary to theU.S. and utilized the cash to pay down a portion of the amount outstanding under our revolving credit facility in theU.S.
Liquidity
Overall, our cash provided by operating activities in 2020 was used to fund our
capital expenditures, repay debt and fund our other financing activities
described above. See Note 7 to the consolidated financial statements included
elsewhere herein for further discussion of our financing arrangements.
The following table summarizes our indicators of liquidity:
2020 2019
(Dollars in millions)
Cash and cash equivalents $ 55.0 $ 56.0
Gross debt (excluding unamortized debt issuance costs) $ 534.7 $ 568.5
Working capital (excluding cash) $ 344.3 Net debt as a % of capitalization 54 %
56 %
Our liquidity needs are primarily for working capital and capital expenditures. Our primary sources of liquidity have been cash provided by operations, funds available from existing bank credit arrangements and the sale of our debt securities. Our existing financial resources, including working capital and available bank borrowing arrangements, and anticipated cash from operations are expected to be adequate to meet anticipated cash requirements for at least the next twelve months, including but not limited to our ability to maintain current operations and fund capital expenditure requirements, service our debt and pay dividends. As ofDecember 31, 2020 , we had$143.7 million outstanding under the revolving credit facility, and total liquidity of$252.4 million , which included cash and cash equivalents of$55.0 million and$197.4 million of unused borrowing availability. The Company had cash and cash equivalents held by foreign subsidiaries of$44.7 million atDecember 31, 2020 and$45.4 million atDecember 31, 2019 . We do not expect restrictions on repatriation of cash held outside theU.S. to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.
Senior Notes
InApril 2017 ,Park-Ohio Industries, Inc. ("Park-Ohio "), the operating subsidiary ofPark-Ohio Holdings Corp. , completed the sale, in a private placement, of$350.0 million aggregate principal amount of 6.625% Senior Notes due 2027 (the "Notes"). The net proceeds from the issuance of the Notes were used to repay in full our previously outstanding 8.125% Senior Notes due 2021 and our outstanding term loan, and to repay a portion of the borrowings then outstanding under our revolving credit facility.
Credit Agreement
InJune 2018 ,Park-Ohio entered into Amendment No. 1 to its Seventh Amended and Restated Credit Agreement (the "Credit Agreement"). The Amendment to the Credit Agreement, among other things, provided increases in the revolving credit facility from$350.0 million to$375.0 million , the Canadian revolving subcommitment from$35.0 million to$40.0 million , and the European revolving subcommitment from$25.0 million to$30.0 million . Furthermore, the Company has the option, pursuant to the Credit Agreement, to increase the availability under the revolving credit facility by an aggregate incremental amount up to$100.0 million . InNovember 2019 ,Park-Ohio entered into Amendment No. 4 to the Credit Agreement, extending the maturity of the Credit Agreement toNovember 16, 2024 . Finance Leases 27
-------------------------------------------------------------------------------- Table of Contents OnAugust 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$18.7 million were borrowed under the Lease Agreement to acquire machinery and equipment as ofDecember 31, 2020 . Covenants The future availability of bank borrowings under the revolving credit facility provided by the Credit Agreement is based on (1) our calculated availability under the Credit Agreement and (2) if such calculated availability decreases below$46.875 million , our ability to meet a debt service ratio covenant. If our calculated availability is less than$46.875 million , our debt service coverage ratio must be greater than 1.0. AtDecember 31, 2020 , our calculated availability under the Credit Agreement was$174.6 million ; therefore, the debt service ratio covenant did not apply. Failure to maintain calculated availability of at least$46.875 million and meet the debt service ratio covenant could materially impact the availability and interest rate of future borrowings. Our debt service coverage ratio could be materially impacted by negative economic trends, including the negative trends caused by the COVID-19 pandemic. To make certain permitted payments as defined under the Credit Agreement, including but not limited to acquisitions and dividends, we must meet defined availability thresholds ranging from$37.5 million to$46.875 million , and a defined debt service coverage ratio of 1.15. We were also in compliance with the other covenants contained in the revolving credit facility as ofDecember 31, 2020 . While we expect to remain in compliance throughout 2021, declines in sales volumes in the future, including further declines caused by the COVID-19 pandemic, could adversely impact our ability to remain in compliance with certain of these financial covenants. Additionally, to the extent our customers are adversely affected by declines in the economy in general, including the decline caused by the COVID-19 pandemic, they may be unable to pay their accounts payable to us on a timely basis or at all, which could make our accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our ability to borrow under such facility. Dividends The Company paid dividends to shareholders of$3.2 million during 2020. In the second and third quarter of 2020, we temporarily suspended our quarterly cash dividend to preserve capital in response to challenging market conditions and uncertainty caused by the pandemic. Our Board of Directors once again declared a dividend in the fourth quarter of 2020. InJanuary 2021 , our Board of Directors declared a quarterly dividend of$0.125 per common share. The dividend was paid onFebruary 26, 2021 to shareholders of record as of the close of business onFebruary 12, 2021 and resulted in a cash outlay of$1.6 million . Although we currently intend to pay a quarterly dividend on an ongoing basis, all future dividend declarations will be at the discretion of our Board of Directors and dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects and other factors that our Board of Directors may deem relevant. 28 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations
The following table summarizes our principal contractual obligations and other
commercial commitments over various future periods as of
Payments Due or Commitment Expiration Per Period
More than 5
(In millions) Total Less Than 1 Year 1-3 Years 3-5 Years Years
Short-term and long-term debt
obligations $ 516.0 $ 4.5 $ 8.1 $ 149.7 $ 353.7
Interest obligations (1) 146.9 23.2 46.4 46.4 30.9
Operating lease obligations 69.6 12.9 22.6 15.7 18.4
Finance lease obligations 18.7 7.1 8.0 2.8 0.8
Purchase obligations (2) 179.0 177.7 1.2 0.1 -
Pension obligations (3) 62.2 5.9 12.3 12.6 31.4
Postretirement obligations (3) 6.8 0.9 1.6 1.5 2.8
Transition tax 7.8 - 2.5 5.3 -
Standby letters of credit and bank
guarantees 34.9 32.8 1.5 - 0.6
Total $ 1,041.9 $ 265.0 $ 104.2 $ 234.1 $ 438.6
(1)Interest obligations are included on the Notes only and assume the Notes are
paid at maturity. The calculation of interest on debt outstanding under our
revolving credit facility and other variable rate debt ($1.9 million based on
1.35% average interest rate and outstanding borrowings of $143.7 million at
December 31, 2020 , respectively) is not included above due to the estimation
required.
(2)Purchase obligations include contractual obligations for raw materials and
services.
(3)Pension and postretirement obligations include projected benefit payments to
participants only through 2029.
The table above excludes the liability for unrecognized income tax benefits
disclosed in Note 9 to the consolidated financial statements included elsewhere
herein, since we cannot predict, with reasonable reliability, the timing of
potential cash settlements with the respective taxing authorities.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financing or other relationships
with unconsolidated entities or other persons, 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
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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. Management tests goodwill for
impairment at the reporting unit level. A reporting unit is an operating segment
pursuant to ASC 280, "Segment Reporting", or one level below the operating
segment (component level) as determined by the availability of discrete
financial information that is regularly reviewed by operating segment
management. Our reporting units have been identified at the component level. For
2020, 2019 and 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
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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 and 2018 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 and 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 and 2018 for all reporting
units confirmed that the estimated fair value exceeded carrying values, and no
impairment existed as of those dates.
See Notes 6 and 7 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.
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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 2.40% for 2020, compared with 3.22%
in 2019. For the other postretirement benefit plan, the rate is 1.95% for 2020
and 2.94% for 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 7.75% for 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.
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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 timing and amount of any such dividends; and the other
factors we describe under "Item 1A. Risk Factors" included in this Annual Report
on Form 10-K. Any forward-looking statement speaks only as of the date on which
such statement is made, and we undertake no obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise, except as required by law. In light of these and other
uncertainties, the inclusion of a forward-looking statement herein should not be
regarded as a representation by us that our plans and objectives will be
achieved. The Company assumes no obligation to update the information in this
Annual Report on Form 10-K, except to the extent required by law.
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