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Item 7. Management’s Discussion and Analysis

2024-03-06 compared with 2023-03-16 · 91 added, 160 removed, 259 unchanged (49% of the section changed)

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Business for descriptions of our business segments.

During the fourth quarter of 2022, we determined that our Aluminum Products business met the held-for-sale and discontinued operations accounting criteria.

Accordingly, the Company has reported the held-for-sale assets and liabilities, the operating results and the cash flows of Aluminum Products in discontinued operations for all periods presented throughout this Annual Report on Form 10-K.

Unless otherwise indicated, amounts and activity in this Annual Report are presented on a continuing operations basis.

See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for further information.

On December 30, 2022, we entered into a memorandum of understanding (the “MOU”) with a third party pursuant to which the third party would purchase our Aluminum Products business.

The sale of the Aluminum Products business is subject to the entry into a definitive purchase agreement and other customary conditions.

Subsequent Event

Sale of Aluminum Products

On December 29, 2023, the Company completed the sale of its Aluminum Products business to Angstrom Automotive Group (“Angstrom”) for up to $50.5 million in cash and promissory notes, plus the assumption of approximately $3 million of finance lease obligations.

The total purchase price consisted of a cash down payment of $20.0 million paid to the Company in December 2022;

cash of $15.5 million paid to the Company at closing;

and promissory notes totaling $15.0 million payable to the Company on December 31, 2024, of which $10.0 million is contingent on the Aluminum Products business attaining certain purchase commitments during 2024.

Subsequent Events

On January 26, 2024, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share.

The dividend was paid on February 23, 2024, to shareholders of record as of the close of business on February 9, 2024 and resulted in cash payments of $1.6 million.

Effective February 29, 2024, the Company acquired all of the outstanding shares of EMA Indutec GmbH (“EMA”), headquartered in Meckesheim, Germany, from the Aichelin Group, headquartered in Modling, Austria.

EMA, a leading manufacturer of induction heating equipment and converters, operates through its two locations in Meckesheim, Germany and Beijing, China.

The acquisition strengthens our global induction heating expertise throughout Europe and expands our portfolio of induction equipment brands and our aftermarket service capabilities.

The cash purchase price for the acquisition was approximately $14 million.

RESULTS FROM CONTINUING OPERATIONS

During the fourth quarter of 2022, we determined that our Aluminum Products business met the held-for-sale and discontinued operations accounting criteria.

Unless otherwise indicated, amounts and activity in this Annual Report are presented on a continuing operations basis.

See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for further information.

This section of this Annual Report on Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

Discussions of 2021 items and year-over-year comparisons between 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

The amounts below exclude discontinued operations.

2023 Compared with 2022 and 2022 Compared with 2021

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Cost of sales 1,388.3 1,282.4 1,099.1 105.9 8 % 183.3 17 %

Gross margin 16.4 % 14.1 % 13.9 %

Selling, general and administrative ("SG&A") expenses 181.5 162.2 155.9 19.3 12 % 6.3 4 %

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Operating income 84.1 33.4 16.3 50.7 152 % 17.1 105 %

Other components of pension income and other postretirement benefits expense, net

Other components of pension and other postretirement benefits income, net

2.5 11.1 9.7 (8.6) (77) % 1.4 14 %

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Income (loss) from continuing operations before income taxes 41.5 10.7 (1.1) 30.8 288 % 11.8 *

Income tax benefit 0.7 1.0 1.3 (0.3) * (0.3) *

Income tax (expense) benefit (8.5) 0.7 1.0 (9.2) * (0.3) 30 %

Income (loss) from continuing operations 33.0 11.4 (0.1) 21.6 189 % 11.5 *

(Income) loss attributable to noncontrolling interest (1.3) 1.2 0.3 (2.5) * 0.9 300 %

Income (loss) from continuing operations attributable to ParkOhio common shareholders $ 10.1 $ 1.1 $ (0.2) $ 9.0 * $ 1.3 650 %

Loss (income) attributable to noncontrolling interest 1.0 (1.3) 1.2 2.3 (177) % (2.5) 208 %

Income from continuing operations attributable to ParkOhio common shareholders $ 34.0 $ 10.1 $ 1.1 $ 23.9 237 % $ 9.0 *

Earnings (loss) from continuing operations per common share attributable to ParkOhio common shareholders:

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Net sales increased 11% to $1,659.7 million in 2023 compared to $1,492.9 million in 2022.

This increase was primarily due to higher customer demand and increased net price realization in all three of our business segments.

This increase was primarily due to higher customer demand in all three of our business segments and increased product pricing.

The factors explaining the changes in segment net sales for the year ended December 31, 2023 compared to the year ended December 31, 2022 are contained in the “Segment Results” section below.

Cost of Sales

Cost of Sales and Gross Margin

Cost of sales increased 8% to $1,388.3 million in 2023 compared to $1,282.4 million in 2022.

The increase in cost of sales and decrease in gross margin were due to the increase in net sales described above.

The increase in cost of sales was due to the increase in net sales described above.

Gross margin was 16.4% in 2023 compared to 14.1% in 2022, driven by profit flow-through from the higher sales levels and the impact of our profit-enhancement initiatives, including increased product pricing.

SG&A Expenses

SG&A expenses increased to $181.5 million, or 10.9% of net sales, in 2023 from $162.2 million, or 10.9% of net sales, in 2022.

The increase in SG&A expenses was primarily attributable to foreign exchange impacts of a weaker Euro and British Pound and higher personnel costs in 2022 compared to 2021.

The improvement in SG&A expenses as a percentage of net sales was driven by the impact of fixed SG&A expenses over the higher revenue base in 2022 compared to 2021.

The SG&A expense increase was driven by higher selling expenses as a result of higher sales levels;

higher costs due to ongoing inflation;

and higher employee costs.

As a percentage of net sales, SG&A expenses were comparable year-over-year.

Restructuring and other special charges

During 2023, the Company recorded restructuring and other special charges of $6.6 million compared to $17.3 million in 2022.

The charges in both 2022 and 2021 related primarily to plant closure and consolidation in the Company's Assembly Components and Engineered Products segments;

other cost reduction initiatives in all three business segments;

and costs related to acquisitions.

The charges in both periods relate primarily to plant closure and consolidation activities, including severance, and other initiatives in the Company’s Assembly Components and Engineered Products segments.

Gains on Sales of Assets, net

During 2023, in connection with the plant closure and consolidation initiatives, the Company sold real estate within its Engineered Products segment for cash proceeds of $1.4 million, resulting in a gain of $0.8 million.

The Company also sold other real estate for cash proceeds of $0.6 million.

The total net gain of $0.8 million was recorded on a separate line in the Consolidated Statements of Operations and excluded from segment income.

During 2022, in connection with its plant closure and consolidation initiatives, the Company sold assets within its Supply Technologies segment for cash proceeds of $1.5 million, resulting in a loss of $3.4 million;

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and within its Engineered Products segment for cash proceeds of $3.6 million, resulting in a gain of $2.5 million.

The total net gain of $2.4 million was recorded on a separate line in the Consolidated Statements of Operations and was excluded from segment income.

During 2021, in connection with its plant closure and consolidation initiatives, the Company sold real estate within its Engineered Products segment for cash proceeds of $19.6 million, resulting in a gain of $14.2 million.

In addition, the Company sold real estate within the Assembly Components segment for cash proceeds of $0.7 million, resulting in a gain of $0.5 million.

The total net gain of $14.7 million was recorded on a separate line in the Consolidated Statements of Operations and was excluded from segment income.

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

Other components of pension income and OPEB expense, net was $11.1 million in 2022 compared to $9.7 million in 2021.

The increase in 2022 was driven by higher returns on plan assets impacting 2022 compared to 2021.

The total net gain of $2.4 million was recorded on a separate line in the Consolidated Statements of Operations and excluded from segment income.

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

Other components of pension and OPEB income, net was $2.5 million in 2023 compared to $11.1 million in 2022.

The decrease in 2023 was due to lower returns on plan assets impacting 2023 compared to 2022.

Interest Expense, Net

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The increase was due to higher average interest rates and higher average outstanding borrowings in 2023 compared to 2022.

The higher borrowings were used to fund higher working capital levels.

Our average effective borrowing rate was 6.6% in 2023 compared to 5.1% in 2022.

Income Tax Benefit

Income Tax Expense/Benefit

Income tax expense in 2023 was $8.5 million on pre-tax income of $41.5 million, for an effective tax rate of 20.5%, which approximated the U.S.

statutory rate.

The tax benefits of the foreign tax credit and research and development tax credit were offset by the tax expense of foreign earnings, global intangible low-taxed income and non-deductible expenses.

Income tax benefit in 2022 was $0.7 million on pre-tax income of $10.7 million, driven by changes in estimates related to prior year federal research and development credits.

Income tax benefit in 2021 was $1.0 million on pre-tax loss of $1.1 million, driven by the additional benefit recorded as a result of the net operating loss claimed under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

2021 Compared with 2020

Net sales increased 11% to $1,277.0 million in 2021 compared to $1,152.1 million in 2020.

This increase was primarily due to higher customer demand in our Supply Technologies and Assembly Components business segments, partially offset by lower demand in our Engineered Products segment.

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

Cost of Sales

Cost of sales increased 11% to $1,099.1 million in 2021 compared to $986.8 million in 2020.

The increase in cost of sales was due to the increase in net sales described above.

SG&A Expenses

SG&A expenses increased to $155.9 million, or 12.2% of net sales, in 2021 from $140.2 million, or 12.2% of net sales, in 2020.

In response to significantly lower demand levels caused by the COVID-19 pandemic in 2020, the Company took immediate actions in many of its operations to reduce costs, including workforce furloughs, permanent headcount reductions, salary and incentive compensation reductions, and cuts in discretionary spending.

As demand levels increased in 2021, a portion of the SG&A expense reduction from 2020 was restored to meet the increasing demand.

Restructuring and other special charges

During 2021, the Company recorded restructuring and other special charges of $20.4 million compared to $6.6 million in 2020.

The charges in 2021 related primarily to plant closure and consolidation in the Company's Assembly Components and Engineered Products segments;

other cost reduction initiatives in all three business segments;

and costs related to acquisitions.

The charges in 2020 related to initiatives the Company took in response to the COVID-19 pandemic and primarily consisted of plant consolidation and closure actions.

Gains on Sales of Assets, net

During 2021, in connection with the plant closure and consolidation initiatives, the Company sold real estate within the Engineered Products segment for cash proceeds of $19.6 million, resulting in a gain of $14.2 million.

In addition, the Company sold real estate within the Assembly Components segment for cash proceeds of $0.7 million, resulting in a gain of $0.5 million.

The total net gain of $14.7 million was recorded on a separate line in the Consolidated Statements of Operations and was excluded from segment income.

Other Components of Pension Income and OPEB Expense, Net

Other components of pension income and OPEB expense, net was $9.7 million in 2021 compared to $7.3 million in 2020.

The increase in 2021 was driven by higher returns on plan assets impacting 2021 compared to 2020.

Interest Expense, Net

Interest expense, net decreased to $27.1 million in 2021 compared to $27.6 million in 2020.

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

Our average effective borrowing rate was 4.8% in 2021 compared to 5.0% in 2020.

Income Tax Benefit

Income tax benefit in 2021 was $1.0 million on pre-tax loss of $1.1 million (effective rate of 91%).

Income tax benefit in 2020 was $1.3 million on pre-tax loss of $1.8 million (effective rate of 72%).

These effective rates are higher in both periods due to U.S tax loss planning and related net operating loss carrybacks to prior years under the CARES Act.

SEGMENT RESULTS

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certain non-cash and/or non-operating items;

Other components of pension income and OPEB expense, net;

other components of pension and OPEB income, net;

and interest expense, net.

During the fourth quarter of 2022, we determined that our Aluminum Products business met the held-for-sale and discontinued operations accounting criteria.

Unless otherwise indicated, amounts and activity in this Annual Report are presented on a continuing operations basis.

See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for further information.

Supply Technologies Segment

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2023 Compared to 2022

Net sales increased 15% in 2022 compared to 2021 due primarily to higher customer demand in most of the Company's end markets, with the biggest increases in heavy-duty truck, power sports, industrial and agricultural equipment, semiconductor, and civilian aerospace markets, as well as the sales from our acquisitions in 2022.

Segment operating income increased by $2.9 million and segment operating income margin was down 50 basis points in 2022 compared to the prior year.

The decrease in margin was driven primarily by higher supply chain costs, primarily freight-related, and sales mix.

2021 Compared to 2020

Net sales 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, power sports, 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 the prior year.

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.

Net sales increased 7.3% in 2023 compared to the 2022 period due primarily to higher customer demand in many of the Company's key end markets, with the largest increases in the power sports, heavy-duty truck, and commercial aerospace, and increased demand for our proprietary fastener products.

Segment operating income increased $13.3 million to $59.0 million in 2023 compared to 2022, and segment operating income margin increased 130 basis points in 2023 compared to a year ago.

These increases were driven by the higher sales levels and the impact of profit-enhancement actions, including increased product pricing.

Assembly Components Segment

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Net sales $ 427.8 $ 388.8 $ 321.5

Segment operating (loss) income $ 1.1 $ (2.6) $ 10.9

Segment operating (loss) income margin 0.3 % (0.8) % 3.7 %

Segment operating income (loss) $ 33.4 $ 1.1 $ (2.6)

Segment operating income (loss) margin 7.8 % 0.3 % (0.8) %

2023 Compared to 2022

Net sales increased 10.0% in 2023 compared to 2022.

The sales increase was driven by higher customer demand driven by several products launched in 2021, increased net price realization and the pass-through of higher rubber compound prices in 2022.

In addition, 2021 sales were negatively impacted by the global micro-chip shortage and supply chain disruptions in the auto industry.

Segment operating income in 2022 increased by $3.7 million, and segment operating income margin increased 110 basis points compared to 2021.

The improvement in segment operating results in 2022 compared to the prior year was driven by profit flow-through from the higher sales levels, higher product pricing and the benefit of profit improvement initiatives, all of which more than offset the impacts of inflation and higher operating costs in 2022.

In 2022, expenses incurred in connection with plant closure and consolidation, severance and other costs were $5.6 million.

In 2021, expenses incurred in connection with plant closure and consolidation, severance, a legal settlement and other costs were $5.7 million.

2021 Compared to 2020

Net sales increased 8% in 2021 compared to 2020 due primarily to the shut-down of North American automotive production in the second quarter of 2020 as a result of the COVID-19 pandemic, partially offset the impact of the global micro-chip shortage, which negatively impacted net sales in 2021.

Segment operating loss in the 2021 period decreased by $13.5 million, and segment operating income margin decreased 450 basis points compared to 2020.

The loss in 2021 was driven by the negative impacts of the global semiconductor micro-chip shortage;

higher labor costs;

production inefficiencies;

and various supply chain constraints, including supplier delays that caused extended lead times and increasing freight costs.

These factors were partially offset by the positive impact of higher sales in 2021.

In 2021, expenses incurred in connection with plant closure and consolidation, severance, a legal settlement and other costs were $5.7 million.

The 2020 income included expenses related to plant closure and consolidation of $4.1 million.

The sales increase was driven by increased product pricing and new programs implemented during the year.

Segment operating income was $33.4 million in 2023 compared to $1.1 million in 2022.

The improvement in segment operating results in 2023 compared to 2022 was driven by the benefit of profit-improvement initiatives implemented over the

past two years, including increased product pricing, and the higher sales levels.

Restructuring and other special charges were $1.5 million in 2023 compared to $5.6 million in 2022.

Engineered Products Segment

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Net sales $ 468.5 $ 392.6 $ 336.0

Segment operating (loss) income $ 14.8 $ (12.2) $ 3.5

Segment operating (loss) income margin 3.8 % (3.6) % 1.0 %

Segment operating income (loss) $ 19.1 $ 14.8 $ (12.2)

Segment operating income (loss) margin 4.1 % 3.8 % (3.6) %

2023 Compared to 2022

Net sales were 19.3% higher in 2023 compared to 2022.

The increase was driven by strong demand in both our capital equipment business and our forged and machined products business as key end markets continue to recover from COVID-19 pandemic lows.

Segment operating income was $14.8 million in 2022 compared to segment operating loss of $12.2 million in 2021.

The profitability improvement in 2022 was driven by the higher sales levels, implemented operational improvements, and benefits of profit-improvement initiatives, including plant closure and consolidation.

In 2022, expenses incurred in connection with plant closure and consolidation, severance, and other costs were $8.4 million, compared to $12.7 million in 2021.

2021 Compared to 2020

Net sales were 2% lower in 2021 compared to 2020.

The decrease was due 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 and other actions 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.

The increase was driven by strong backlogs at the start of the year and higher customer demand in both our capital equipment business and our forged and machined products business.

Segment operating income in 2023 increased $4.3 million, as profit flow-through from higher sales levels and implemented operational improvement initiatives contributed to higher profit and margins in this business.

These factors partially offset by lower margins in our forged and machined products business.

In addition, restructuring and other special charges were $4.9 million in 2023 and $8.4 million in 2022.

Liquidity and Capital Resources

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2023 2022 2021

Cash (used) provided by:

Cash provided (used) by:

(In millions)

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Effect of exchange rate on cash 0.9 (4.0) (1.3)

Increase (decrease) in cash and cash equivalents $ 4.1 $ (0.9) $ (1.0)

(Decrease) increase in cash and cash equivalents $ (3.4) $ 4.1 $ (0.9)

Operating Activities

The use of cash in 2022 was driven by increased working capital of $57.2 million, driven by higher inventory levels resulting from supply chain constraints and an increase in accounts receivable of $23.2 million resulting from higher sales.

These factors were partially offset by higher income in 2022 compared to 2021.

The use of cash in 2021 was driven by increased working capital of $20.7 million, primarily resulting from higher inventory driven by higher raw material prices, increased inventory levels in certain locations in response to global supply chain constraints, and inventory builds in connection with various facility consolidations.

Positive operating cash flow in 2020 was driven by lower working capital levels.

In 2023, we generated positive operating cash flow of $53.4 million compared to a cash outflow of $26.6 million in 2022.

The positive cash flow in 2023 was driven by higher income from continuing operations in 2023 and improvement in working capital in 2023.

Investing Activities

Capital expenditures were $26.9 million in 2022, $22.3 million in 2021 and $20.3 million in 2020.

Capital expenditures were $28.2 million in 2023 and $26.9 million in 2022.

These capital expenditures were primarily for growth initiatives, with the majority in our Assembly Components and Engineered Products segments;

Capital expenditures were lower in 2020, as we curtailed non-critical capital spending in response to the COVID-19 pandemic.

for facility consolidation in Engineered Products segment;

and to maintain existing operations.

In 2023 and 2022, we sold assets and received aggregate proceeds of $2.0 million and $9.5 million, respectively.

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

Additionally, we spent

$22.7 million in the aggregate in 2022 for the acquisitions of Charter Automotive (Changzhou) Co.

(“Charter”) and Southern Fasteners & Supply, Inc., (“Southern Fasteners”) and $0.6 million for a contingent consideration payment related to our 2021 acquisition of NYK Component Solutions Limited (“NYK”).

In 2021, we paid $5.4 million for the NYK acquisition.

See Note 6 to the consolidated financial statements included elsewhere herein for additional information.

Additionally, we received $15.5

million in relation to the sale of our Aluminum Products business, and we spent $1.2 million in the aggregate in 2023 for acquisitions, of which $0.5 million related to the 2022 acquisition of Southern Fasteners & Supply, Inc.

Financing Activities

Cash provided by financing activities in 2022 included debt borrowings of $73.2 million, proceeds from a third-party financing arrangement of $20.0 million in connection with the entry into the MOU, dividends of $7.0 million, and payments of withholding taxes on share awards of $1.6 million.

Cash used by financing activities in 2023 included debt repayments of $24.3 million, payments related to prior acquisitions of $2.9 million, dividends of $7.4 million, and payments of withholding taxes on share awards of $2.0 million.

Cash provided by financing activities in 2022 included debt borrowings of $73.2 million, proceeds from a third-party financing arrangement of $20.0 million in connection with the entry into the memorandum of understanding in connection with the sale of our Aluminum Products business, dividends of $7.0 million, and payments of withholding taxes on share awards of $1.6 million.

The borrowings in 2022 were primarily used to fund higher working capital levels and the 2022 acquisitions.

Cash provided by financing activities in 2021 included debt borrowings of $73.3 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 $32.9 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 quarters 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.

Overall, we utilized our revolving credit facility in 2022 to fund our higher working capital levels, our capital expenditures, our acquisitions and our other financing activities described above.

Overall, we were able to pay down debt and fund capital expenditures in 2023 using cash flows from operations and proceeds from the sale of our discontinued operation.

See Note 9 to the consolidated financial statements included elsewhere herein for further discussion of our financing arrangements.

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Our existing financial resources, including working capital, 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, 2022, we had $285.3 million outstanding under the revolving credit facility, and total liquidity of $167.9 million, which included cash and cash equivalents of $58.2 million and $109.7 million of unused borrowing availability and excluded $12.4 million of suppressed availability.

As of December 31, 2023, we had $263.5 million outstanding under the revolving credit facility, and total liquidity of $166.0 million, which included cash and cash equivalents of $54.8 million and $111.2 million of unused borrowing availability.

The Company had cash and cash equivalents held by foreign subsidiaries of $44.6 million at December 31, 2023 and $47.8 million at December 31, 2022.

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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 $405.0 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 $70.0 million.

The Credit Agreement matures on November 16, 2024.

Financing Arrangement with Third Party

On December 30, 2022, the Company entered into the MOU with a third party pursuant to which the third party would purchase our Aluminum Products business.

The sale of the Aluminum Products business is subject to the successful completion of a definitive purchase agreement and other customary conditions.

In connection with the entry into the MOU, the Company also entered into a financing arrangement with the third party pursuant to which the Company received a portion of the estimated purchase price of the Aluminum Products business, including $20.0 million of cash and a promissory note in the principal amount of $25.0 million, and recorded a financing arrangement liability of $45.0 million.

The Company used the $20.0 million from this financing arrangement to repay indebtedness under its revolving credit facility.

If a definitive purchase agreement between the parties is not entered into or the sale is not successfully consummated, the promissory note will be cancelled and the Company will repay the third party $20.0 million, less a $0.8 million break-up fee.

On September 13, 2023, Park-Ohio amended its Eighth Amended and Restated Credit Agreement (the “Credit Agreement”).

The Credit Agreement provides for a revolving credit facility in the amount of $405.0 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, Park-Ohio has the option to increase the availability under the revolving credit facility by an aggregate incremental amount up to $70.0 million.

The Credit Agreement matures on January 14, 2027.

Finance Leases

On August 13, 2015, the Company entered into a Finance Lease Agreement (the “Lease Agreement”).

The Lease Agreement provides the Company up to $50.0 million for finance leases.

Finance lease obligations of $5.1 million were borrowed under the Lease Agreement to acquire machinery and equipment as of December 31, 2022.

As of December 31, 2022, the Company had additional finance leases totaling $13.4 million.

As of December 31, 2023, the Company had finance leases totaling $16.3 million.

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 $50.625 million, our ability to meet a debt service ratio covenant.

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While we expect to remain in compliance throughout 2024, declines in sales volumes in the future 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, 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.

Additionally, to the extent our customers are adversely affected by declines in the economy in general, 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 $6.4 million during 2023.

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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 9 - Financing Arrangements, in Part II, Item 8 of this Annual Report, for more information regarding scheduled maturities of our long-term debt.

See Note 13 - Lease Arrangements, in Part II, Item 8 of this Annual Report for additional information on leases.

See Note 14 - Pension and Postretirement Benefits for additional information of future pension and postretirement benefit obligations.

See Note 9 to the consolidated financial statements included elsewhere herein for additional information regarding scheduled maturities of our long-term debt.

See Note 13 to the consolidated financial statements included elsewhere herein for additional information on leases.

See Note 14 to the consolidated financial statements included elsewhere herein for additional information of future pension and postretirement benefit obligations.

Interest payable associated with our 6.625% Senior Notes due 2027 is $23.2 million due in the twelve months following December 31, 2023 and $53.1 million due thereafter.

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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 9 to the consolidated financial statements, included elsewhere herein.

We do not have off-balance sheet arrangements, financing or other relationships with unconsolidated entities or other persons, other than the letters of credit disclosed in Note 9 to the consolidated financial statements, included elsewhere herein.

Critical Accounting Policies and Estimates

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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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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.

Business combinations are accounted for using the purchase method of accounting under Accounting Standards Codification (“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.

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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.

In applying the quantitative approach, we use an income approach and market multiple 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.

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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, 2022, 2021 and 2020 for all reporting units confirmed that the estimated fair values exceeded carrying values, and no impairment related to continuing operations existed as of those dates.

The Company's reporting units with goodwill balances had fair values in excess of their carrying amounts by at least 14%.

The results of testing as of October 1, 2023, 2022 and 2021 for all reporting units confirmed that the estimated fair values exceeded carrying values, and no impairment existed as of those dates.

Based on our 2023 annual impairment test, we determined that the fair value of our Forged and Machined Products Group reporting unit, which is included in our Engineered Products segment, exceeded its carrying value by approximately 10% using the income approach as of the 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 equipment downtime and labor challenges, 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.

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The Company’s pension plans are funded.

The weighted-average expected long-term rate of return on assets assumption is 7.75% for 2022.

The weighted-average expected long-term rate of return on assets assumption is 7.75% for 2023 and 2022.

In determining the expected return on plan assets, we consider both historical performance and an estimate of future long-term rates of return on assets similar to those in our plan.

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These factors that could cause actual results to differ materially from expectations include, but are not limited to, the following:

our ability to consummate the sale of our Aluminum Products business for any reason, including the inability to enter into a definitive purchase agreement;

the ultimate impact the COVID-19 pandemic has on our business, results of operations, financial position and liquidity, including, without limitation, supply chain issues such as the global semiconductor micro-chip shortage and logistic issues;

our ability to realize any contingent consideration from the sale of the Aluminum Products business;

the impact supply chain and logistic issues have on our business, results of operations, financial position and liquidity;

our substantial indebtedness;

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the financial condition of our customers, including the impact of any bankruptcies;

our ability to successfully integrate recent and future acquisitions into existing operations;

our ability to successfully integrate recent and future acquisitions into existing operations, including the EMA acquisition;

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 conflict between Russia and Ukraine, or political unrest, including the rising tension between China and the United States;

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

adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities, including the conflicts between Russia and Ukraine and in the Middle East, or political unrest, including the rising tension between China and the United States;

public health issues, including the outbreak of infectious diseases and any 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;

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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