What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-16 compared with 2021-03-05 · 95 added, 129 removed, 254 unchanged (47% of the section changed)

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COVID-19 Pandemic

In March 2020, the World 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 of December 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.

In March 2020, the World Health Organization categorized the novel coronavirus (“COVID-19”) as a pandemic, and it spread throughout the 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 of December 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

On January 28, 2022, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share.

The dividend was paid on February 26, 2021, to shareholders of record as of the close of business on February 12, 2021 and resulted in a cash outlay of $1.6 million.

The dividend was paid on February 25, 2022, to shareholders of record as of the close of business on February 11, 2022 and resulted in cash payments of $1.6 million.

RESULTS OF OPERATIONS

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Gain on sale of assets (14.7) — — (14.7) * — *

Operating income 15.7 83.1 97.3 (67.4) (81) % (14.2) (15) %

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

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2021 Compared with 2020

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.

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 changes in segment net sales for the year ended December 31, 2021 compared to the year ended December 31, 2020 are contained in the “Segment Results” section below.

Cost of Sales & 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

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.

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,

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 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.

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.

Goodwill impairment

The Company recorded an impairment charge of $4.6 million in the fourth quarter of 2021 to write-off the full amount of goodwill of the Aluminum Products reporting unit, which is in the Assembly Components segment.

Other Components of Pension Income and Other Postretirement Benefits (“OPEB”) Expense, Net

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Interest expense, net decreased to $30.1 million in 2021 compared to $30.3 million in 2020.

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.

The decrease was due to lower average interest rates offset by higher average outstanding borrowings in 2021 compared to 2020.

Our average effective borrowing rate was 5.2% in 2021 compared to 5.4% in 2020.

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.

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 to U.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 on March 27, 2020.

SEGMENT RESULTS

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2021 Compared to 2020

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

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.

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

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Net sales $ 482.5 $ 441.5 $ 539.5

Segment operating income $ 8.1 $ 36.2 $ 42.9

Segment operating income margin 1.8 % 6.7 % 7.4 %

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 were down 18% in 2020 compared to 2019 due primarily to the impact of the global COVID-19 pandemic on the U.S.

automotive industry.

Our customers closed their facilities and reduced vehicle production in mid-March in compliance with federal and state guidelines, resulting in the closure of our facilities.

Beginning in late May and early June 2020, the industry began the slow process of re-opening manufacturing facilities and restarting production, albeit at lower levels than before the COVID-19 pandemic, and our facilities began to ramp-up production.

Segment operating income and operating income margin were down $28.1 million and 490 basis points, respectively, in 2020 compared to 2019.

These decreases were driven by the production shut-downs described above, as well as by charges of $4.1 million related to plant closure and consolidation actions in 2020.

In 2019, this segment incurred similar charges of $3.3 million.

The actions in both years resulted in cost reductions which partially offset the negative impact on profitability of the lower sales.

Net sales increased 9% in 2021 compared to 2020 due primarily to the shut-down of North American automotive production in the second quarter of 2020 as a result of the COVID-19 pandemic, partially offset the impact of the global semiconductor micro-chip shortage, 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

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Net sales $ 336.0 $ 343.6 $ 467.3

Segment operating income $ 3.5 $ 37.7 $ 38.4

Segment operating income margin 1.0 % 8.1 % 8.7 %

Segment operating (loss) income $ (12.2) $ 3.5 $ 37.7

Segment operating (loss) income margin (3.6) % 1.0 % 8.1 %

2021 Compared to 2020

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.

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.

Liquidity and Capital Resources

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2021 2020 2019

Cash provided (used) by:

Cash (used) provided by:

(In millions)

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Effect of exchange rate on cash (1.3) 1.9 0.1

Increase (decrease) in cash and cash equivalents $ (1.0) $ 0.3 $ (27.1)

(Decrease) increase in cash and cash equivalents $ (0.9) $ (1.0) $ 0.3

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.

Cash generated by operating activities in 2021 was lower than in the prior year driven by higher working capital levels in the year ended December 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 $26.3 million in 2020, $40.1 million in 2019 and $45.1 million in 2018.

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 years, as we curtailed non-critical capital spending in response to the COVID-19 pandemic.

In 2019, we spent $8.1 million on acquisition of EFCO, Inc.

d/b/a Erie Press Systems.

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.

In 2018, we spent $46.9 million on acquisitions of businesses, primarily Canton Drop Forge and Hydrapower Dynamics Limited (“Hydrapower”).

Additionally, we spent $5.4 million on the acquisition of NYK Component Solutions Limited.

See Note 5 to the consolidated financial statements included elsewhere herein for additional information.

Financing Activities

Cash provided by financing activities in 2021 included debt borrowings of $72.4 million, dividends of $7.0 million, payments of withholding taxes on share awards of $3.0 million and treasury share repurchases of $2.5 million.

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.

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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.

During September 2018, we repatriated cash of $24.4 million from a foreign subsidiary to the U.S.

and utilized the cash to pay down a portion of the amount outstanding under our revolving credit facility in the U.S.

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.

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.

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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 of December 31, 2020, we had $143.7 million outstanding under the revolving credit facility, and total liquidity of $252.4 million, which included cash and cash equivalents of $55.0 million and $197.4 million of unused borrowing availability.

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 of December 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 at December 31, 2021 and $44.7 million at December 31, 2020.

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Credit Agreement

In June 2018, Park-Ohio entered into Amendment No.

1 to its Seventh Amended and Restated Credit Agreement (the “Credit Agreement”).

The Amendment to the Credit Agreement, among other things, 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.

In November 2019, Park-Ohio entered into Amendment No.

4 to the Credit Agreement, extending the maturity of the Credit Agreement to November 16, 2024.

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 on November 16, 2024.

Finance Leases

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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 of December 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.

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 of December 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.

The Company paid dividends to shareholders of $6.3 million during 2021.

In the second and third quarter of 2020, we temporarily suspended our quarterly cash dividend to preserve capital in response to challenging market conditions and uncertainty caused by the pandemic.

Our Board of Directors once again declared a dividend in the fourth quarter of 2020.

In January 2021, our Board of Directors declared a quarterly dividend of $0.125 per common share.

The dividend was paid on February 26, 2021 to shareholders of record as of the close of business on February 12, 2021 and resulted in a cash outlay of $1.6 million.

On January 28, 2022, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share.

The dividend was paid on February 25, 2022, to shareholders of record as of the close of business on February 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

The following table summarizes our principal contractual obligations and other commercial commitments over various future periods as of December 31, 2020:

Payments Due or Commitment Expiration Per Period

(In millions) Total Less Than 1 Year

1-3 Years 3-5 Years More than 5 Years

Short-term and long-term debt obligations $ 516.0 $ 4.5 $ 8.1 $ 149.7 $ 353.7

Interest obligations (1)

146.9 23.2 46.4 46.4 30.9

Operating lease obligations 69.6 12.9 22.6 15.7 18.4

Finance lease obligations 18.7 7.1 8.0 2.8 0.8

Purchase obligations (2)

179.0 177.7 1.2 0.1 —

Pension obligations (3)

62.2 5.9 12.3 12.6 31.4

Postretirement obligations (3)

6.8 0.9 1.6 1.5 2.8

Transition tax 7.8 — 2.5 5.3 —

Standby letters of credit and bank guarantees 34.9 32.8 1.5 — 0.6

Total $ 1,041.9 $ 265.0 $ 104.2 $ 234.1 $ 438.6

(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.

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 associated with our 6.625% Senior Notes due 2027 was $23.2 million due in the twelve months following December 31, 2021 and $99.5 million due thereafter.

As of December 31, 2021, our undiscounted purchase obligations were $234.3 million due in the next twelve months and $5.9 million due thereafter under purchase orders and "take or pay" arrangements.

These purchase obligations include all

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

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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.

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.

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Allowance for Obsolete and Slow-Moving Inventory:

Inventories are generally valued using first-in, first-out (“FIFO”) or the weighted-average inventory method;

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;

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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:

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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 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.

The results of testing as of October 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 the October 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 of October 1 of each year, or more frequently if impairment indicators arise.

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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.

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.

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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 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.

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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;

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;

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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;

adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities, including the evolving situation with Russia and Ukraine;

public health issues, including the outbreak of COVID-19 and its impact on our facilities and operations and our customers and suppliers;

17 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis