PARK OHIO HOLDINGS CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
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, and it spread throughoutthe United States and other countries around the world. The pandemic has negatively impacted several of the markets we serve, as well as contributed to a global semiconductor micro-chip shortage, raw material price inflation, higher labor costs and various supply chain constraints, including supplier delays that caused extended lead times and increasing freight costs. In response to the ongoing COVID-19 pandemic, we continue to manage our operating costs, including through actions to reduce costs, including plant closure and consolidation, severance, and discretionary spending cuts, and we are taking aggressive actions to improve results in response to these macroeconomic conditions. We also continue to manage both working capital and capital spending. Although there continues to be uncertainty related to the anticipated impact and duration of the COVID-19 pandemic on our future results, we believe our diversified portfolio of global businesses, our liquidity position of$202.6 million as ofDecember 31, 2021 , and the steps we have taken in both 2020 and 2021 to reduce costs leave us well-positioned to manage our business through this crisis as it continues to unfold.
Subsequent event
OnJanuary 28, 2022 , the Company's Board of Directors declared a quarterly dividend of$0.125 per common share. The dividend was paid onFebruary 25, 2022 , to shareholders of record as of the close of business onFebruary 11, 2022 and resulted in cash payments of$1.6 million .
RESULTS OF OPERATIONS
This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-over-year comparisons between 2020 and 2019 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, 2020 . 21
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2021 Compared to 2020 and 2020 Compared to 2019
2021 vs. 2020 2020 vs. 2019
2021 2020 2019 $ Change % Change $ Change % Change
(Dollars in millions, except per share data)
Net sales $ 1,438.0 $ 1,295.2 $ 1,618.3 $ 142.8 11 % $ (323.1) (20) %
Cost of sales 1,281.9 1,126.6 1,358.0 155.3 14 % (231.4) (17) %
Gross profit 156.1 168.6 260.3 (12.5) (7) % (91.7) (35) %
Gross profit as a percentage of
net sales 10.9 % 13.0 % 16.1 %
Selling, general and
administrative ("SG&A")
expenses 178.3 152.9 177.2 25.4 17 % (24.3) (14) %
SG&A expenses as a percentage
of net sales 12.4 % 11.8 % 10.9 %
Gain on sale of assets (14.7) - - (14.7) * - *
Goodwill impairment 4.6 - - 4.6 * - *
Operating (loss) income (12.1) 15.7 83.1 (27.8) (177) % (67.4) (81) %
Other components of pension
income and other postretirement
benefits expense, net 9.7 7.3 5.6 2.4 33 % 1.7 30 %
Interest expense, net (30.1) (30.3) (33.8) 0.2 (1) % 3.5 (10) %
(Loss) income before income
taxes (32.5) (7.3) 54.9 (25.2) 345 % (62.2) (113) %
Income tax benefit (expense) 6.5 2.5 (15.2) 4.0 160 % 17.7 (116) %
Net (loss) income (26.0) (4.8) 39.7 (21.2) 442 % (44.5) (112) %
Net loss (income) attributable
to noncontrolling interest 1.2 0.3 (1.1) 0.9 300 % 1.4 (127) %
Net income (loss) attributable to common stockholders of ParkOhio
451 %$ (43.1) (112) % (Loss) earnings per common share attributable to ParkOhio common shareholders Basic$ (2.07) $ (0.37) $ 3.16 $ (1.70) 459 %$ (3.53) (112) % Diluted$ (2.07) $ (0.37) $ 3.12 $ (1.70) 459 %$ (3.49) (112) % * Calculation not meaningful 2021 Compared with 2020 Net Sales Net sales increased 11% to$1,438.0 million in 2021 compared to$1,295.2 million in 2020. This increase was primarily due to higher customer demand in our Supply Technologies and Assembly Components business segments, partially offset by lower demand in our Engineered Products segment.
The factors explaining the evolution of the segment’s turnover for the financial year ended
Cost of sales and gross profit
Cost of sales increased 14% to$1,281.9 million in 2021 compared to$1,126.6 million in 2020. Gross margin decreased to 10.9% in 2021 compared to 13.0% in 2020. The increase in cost of sales and decrease in gross margin were due to the increase in net sales described above and to expenses of$15.7 million in 2021 related to plant closure and consolidation, 22 -------------------------------------------------------------------------------- Table of Contents severance and other actions to reduce costs. 2020 included expenses of$5.1 million related to plant closure and consolidation, severance and other actions to reduce costs. SG&A Expenses SG&A expenses increased to$178.3 million , or 12.4% of net sales, in 2020 from$152.9 million , or 11.8% of net sales, in 2020. In response to significantly lower demand levels caused by the COVID-19 pandemic in 2020, the Company took immediate actions in many of its operations to reduce costs, including workforce furloughs, permanent headcount reductions, salary and incentive compensation reductions, and cuts in discretionary spending. As demand levels increased in 2021, a portion of the SG&A expense reduction from 2020 was restored to meet the increasing demand. SG&A expenses in 2021 included$5.8 million of expenses related to plant closure and consolidation, severance and other costs,$1.9 million of legal settlement expense and$1.0 million of acquisition-related expenses.
Gain on sale of assets
During 2021, in connection with the plant closure and consolidation initiatives, the Company sold real estate within the Engineered Products segment for cash proceeds of$19.6 million , resulting in a gain of$14.2 million . In addition, in 2021, the Company sold real estate within the Assembly Components segment for cash proceeds of$0.7 million , resulting in a gain of$0.5 million .
The Company recognized an impairment loss of
Other components of retirement income and other post-employment benefit expenses (“AAPE”), net
Other components of pension income and OPEB expense, net was$9.7 million in 2021 compared to$7.3 million in 2020. The increase in 2021 was driven by higher returns on plan assets in 2021 compared to 2020.
Interest expense, net
Net interest expense decreased to
Tax benefit (expense)
The provision for income taxes was a benefit of$6.5 million in 2021 (an effective rate of 20%) compared to$2.5 million in 2020 (an effective rate of 34%). The 2020 rate is higher due toU.S. tax loss planning and related net operating loss carrybacks to prior years under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which was enacted onMarch 27, 2020 .
SECTOR 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.
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Supply Technologies Segment
Year Ended December 31,
2021 2020 2019
(Dollars in millions)
Net sales $ 619.5 $ 510.1 $ 611.5
Segment operating income $ 42.8 $ 30.2 $ 42.0
Segment operating margin 6.9% 5.9% 6.9%
2021 Compared to 2020
Net sales increased 21% in 2021 compared to 2020 due primarily to higher customer demand in most of the Company's end markets, with the biggest increases in heavy-duty truck, powersports, semiconductor, and agricultural and industrial equipment. As a result of the COVID-19 pandemic, customer demand in 2020 was down significantly in most of our key end markets. Segment operating income increased by$12.6 million and segment operating income margin was up 100 basis points in 2021 compared to a year ago. These net increases were driven by the profit flow-through on higher sales, the impact of pricing initiatives and the impact of cost reduction actions. These positive factors were partially offset by higher freight costs in 2021 as a result of global supply chain constraints and a labor strike at a major truck assembly plant. Assembly Components Segment Year Ended December 31, 2021 2020 2019 (Dollars in millions) Net sales$ 482.5 $ 441.5 $ 539.5 Segment operating (loss) income$ (26.4) $ 8.1 $ 36.2 Segment operating (loss) income margin (5.5) % 1.8 % 6.7 % 2021 Compared to 2020
Net sales increased 9% in 2021 compared to 2020, mainly due to the North American automotive production shutdown in the second quarter of 2020 due to the COVID-19 pandemic, which partially offset the impact of the global shortage of semiconductor microchips, which negatively impacted net sales in 2021.
Segment operating income in 2021 period decreased by$34.5 million , and segment operating income margin decreased 730 basis points compared to 2020. The loss in 2021 was driven by the negative impacts of the global semiconductor micro-chip shortage; raw material price inflation; higher labor costs; production inefficiencies; and various supply chain constraints, including supplier delays that caused extended lead times and increasing freight costs. In 2021, expenses incurred in connection with plant closure and consolidation, severance, a legal settlement and other costs were$9.7 million . The 2020 income included expenses related to plant closure and consolidation of$4.1 million . Engineered Products Segment Year Ended December 31, 2021 2020 2019 (Dollars in millions) Net sales$ 336.0 $ 343.6 $ 467.3 Segment operating (loss) income$ (12.2) $ 3.5 $ 37.7 Segment operating (loss) income margin (3.6) % 1.0 % 8.1 % 24
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2021 Compared to 2020
Net sales were 2% lower in 2021 compared to 2020. The decrease was due to lower demand in certain end markets in our forged and machined products business which continue to be slow to recover from the COVID-19 pandemic, partially offset by stronger demand in 2021 for our capital equipment products Segment operating loss was$12.2 million in 2021 compared to segment operating income of$3.5 million in 2020. This decrease in profitability was due to expenses of$12.7 million related to plant closure and consolidation activities in 2021, lower sales levels, and manufacturing under-absorption of fixed costs at certain plants. Expenses related to plant closure and consolidation in 2020 were$2.2 million .
Cash and capital resources
The following table summarizes the main components of cash flows:
2021
2020 2019
Cash (used) provided by: (In millions)
Operating activities $ (43.3) $ 69.3 $ 63.7
Investing activities (16.2) (24.9) (48.2)
Financing activities 59.9 (47.3) (15.3)
Effect of exchange rate on cash (1.3)
1.9 0.1
(Decrease) increase in cash and cash equivalents
Operating Activities Cash generated by operating activities in 2021 was lower than in the prior year driven by higher working capital levels in the year endedDecember 31, 2021 compared to 2020. In 2021, working capital usage was$34.0 million , compared to working capital reduction in 2020 of$27.1 million . Higher inventories were the main driver of our higher working capital in 2021. In 2021, inventories increased by$71.2 million ; this increase was driven by higher raw material prices, increased inventory levels in certain businesses and locations in response to global supply chain constraints, and inventory builds in connection with various facility consolidations.
Investing activities
Capital expenditures were$31.1 million in 2021 and$26.3 million in 2020. 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 year, as we curtailed non-critical capital spending in response to the COVID-19 pandemic. In 2021, we sold assets and received aggregate proceeds of$20.3 million . See Note 4 to the consolidated financial statements included elsewhere herein for additional information. Additionally, we spent$5.4 million on the acquisition ofNYK Component Solutions Limited . See Note 5 to the consolidated financial statements included elsewhere herein for additional information.
Fundraising activities
Cash flow from financing activities in 2021 included borrowings from
25 -------------------------------------------------------------------------------- Table of Contents 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.
Liquidity
Overall, we utilized our revolving credit facility to fund our higher working capital levels, our capital expenditures and our other financing activities described above. See Note 8 to the consolidated financial statements included elsewhere herein for further discussion of our financing arrangements.
The following table summarizes our liquidity indicators:
2021 2020
(Dollars in millions)
Cash and cash equivalents $ 54.1 $ 55.0
Gross debt (excluding unamortized debt issuance costs) $ 606.1 $ 534.7
Working capital (excluding cash) $ 372.4
Net debt as a % of capitalization 60 %
54%
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 and for the foreseeable future thereafter, 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, 2021 , we had$221.1 million outstanding under the revolving credit facility, and total liquidity of$202.6 million , which included cash and cash equivalents of$54.1 million and$148.5 million of unused borrowing availability and excluded$10.9 million of suppressed availability. The Company had cash and cash equivalents held by foreign subsidiaries of$44.2 million atDecember 31, 2021 and$44.7 million atDecember 31, 2020 . 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
Park-Ohio's Seventh Amended and Restated Credit Agreement (as amended, the "Credit Agreement") provides for a revolving credit facility in the amount of$375.0 million , including a$40.0 million Canadian revolving subcommitment and a European revolving subcommitment in the amount of$30.0 million . Pursuant to the Credit Agreement, the Company has the option to increase the availability under the revolving credit facility by an aggregate incremental amount up to$100.0 million . The Credit Agreement matures onNovember 16, 2024 .
Finance leases
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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$17.5 million were borrowed under the Lease Agreement to acquire machinery and equipment as ofDecember 31, 2021 . 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, 2021 , our calculated availability under the Credit Agreement was$138.8 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. As our calculated availability under the Credit Agreement was above$46.875 million , we were also in compliance with the other covenants contained in the revolving credit facility as ofDecember 31, 2021 . While we expect to remain in compliance throughout 2022, declines in sales volumes in the future, including any 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$6.3 million during 2021. OnJanuary 28, 2022 , the Company's Board of Directors declared a quarterly dividend of$0.125 per common share. The dividend was paid onFebruary 25, 2022 , to shareholders of record as of the close of business onFebruary 11, 2022 and resulted in cash payments 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.
Contractual obligations and commitments
Our material cash commitments from known contractual and other obligations primarily consist of obligations for long-term debt and related interest, leases for properties and equipment and purchase obligations as part of normal operations. See Note 8 - Financing Arrangements, in Part II, Item 8 of this Annual Report, for more information regarding scheduled maturities of our long-term debt. See Note 12 - Lease Arrangements, in Part II, Item 8 of this Annual Report for additional information on leases. See Note 13 - Pension and Postretirement Benefits for additional information of future pension and postretirement benefit obligations.
Interest payable on our 6.625% Senior Notes due 2027 has been
subsequently due.
From
27 -------------------------------------------------------------------------------- Table of Contents enforceable, legally binding agreements to purchase goods or services that specify all significant terms, regardless of the duration of the agreement, and exclude agreements with variable terms for which we are unable to estimate the minimum amounts.
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.
Significant Accounting Policies and Estimates
Preparation of financial statements in conformity withU.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 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. 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 ofOctober 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 2021, 2020 and 2019, we performed quantitative testing for each reporting unit with a goodwill balance. 28
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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 ofOctober 1, 2021 , 2020 and 2019 for all reporting units confirmed that the estimated fair values exceeded carrying values, and no impairment existed as of those dates, except for our Aluminum Products reporting unit as described below. Based on our 2021 annual impairment test, we determined that the fair value of our Aluminum Products reporting unit, which is included in our Assembly Components segment, did not exceed its carrying value as of theOctober 1, 2021 testing date. As such, we concluded that the full amount of goodwill of this reporting unit of$4.6 million was impaired as of that date. The Company's other reporting units with goodwill balances had fair values in excess of their carrying amounts by at least 15%. Additionally, we test all indefinite-lived intangible assets for impairment at least annually, as ofOctober 1 of each year, or more frequently if impairment indicators arise. In 2021, 2020 and 2019, 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 ofOctober 1, 2021 , 2020 and 2019 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 to the consolidated financial statements included elsewhere in this document for additional information on goodwill and indefinite life intangible assets.
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
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tax rates and related tax liabilities may differ materially from our estimated interim effective tax rates and related tax liabilities. The resulting differences are recorded in the period in which 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 2.80% for 2021, compared with 2.40% in 2020. For the other postretirement benefit plan, the rate is 2.49% for 2021 and 1.95% for 2020. This rate represents the interest rates generally available inthe 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 2021. In determining the expected return on plan assets, we consider both historical performance and an estimate of future long-term rates of return on assets similar to those in our plan. We consult with and consider opinions of financial and actuarial experts in developing appropriate return assumptions. Legal Contingencies: We are involved in a variety of claims, suits, investigations and administrative proceedings with respect to commercial, premises liability, product liability, employment, personal injury and environmental matters arising from the ordinary course of business. We accrue reserves for legal contingencies, on an undiscounted basis, when it is probable that we have incurred a liability and we can reasonably estimate an amount. When a single amount cannot be reasonably estimated, but the cost can be estimated within a range and no amount within the range is a better estimate than any other amount, we accrue the minimum amount in the range. Based upon facts and information currently available, we believe the amounts reserved are adequate for such pending matters. We monitor the development of legal proceedings on a regular basis and will adjust our reserves when, and to the extent, additional information becomes available.
Environment
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, including, without limitation, supply chain issues such as the global semiconductor micro-chip shortage and logistic issues; our substantial indebtedness; the uncertainty of the global economic environment; general business conditions and competitive factors, including pricing pressures and product innovation; demand for our products and services; the impact of labor disturbances affecting our customers; raw material availability and pricing; fluctuations in energy costs; component part availability and pricing; changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate recent and future acquisitions into existing operations; the amounts and timing, if any, of purchases of our common stock; changes in general economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations, including those related to the current global uncertainties and crises, such as tariffs and surcharges; adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities, including the evolving situation withRussia andUkraine ; 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 theEuropean 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. 31
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