PARK OHIO HOLDINGS CORP (PKOH)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our consolidated financial statements include the accounts of Park-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.

On December 29, 2023, the Company completed the sale to Angstrom Automotive Group (“Angstrom”) of its Aluminum Products business, which has been classified as a discontinued operation for all periods presented.

Subsequent Events

On January 24, 2025, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend was paid on February 21, 2025, to shareholders of record as of the close of business on February 7, 2025 and resulted in cash payments of $1.8 million.

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RESULTS FROM CONTINUING OPERATIONS

This section of this Annual Report on Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-over-year comparisons between 2023 and 2022 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, 2023. The amounts below exclude discontinued operations.

2024 Compared with 2023 and 2023 Compared with 2022

* Calculation not meaningful

2024 Compared with 2023

Net Sales

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Net sales were $1,656.2 million in 2024 compared to $1,659.7 million in 2023, a decrease of 0.2%. The decrease was primarily due to lower sales in the Assembly Components segment, partially offset by higher sales in our Supply Technologies segment and in the capital equipment business in our Engineered Products segment.

The factors explaining the changes in segment net sales for the year ended December 31, 2024 compared to the year ended December 31, 2023 are contained in the “Segment Results” section below.

Cost of Sales and Gross Margin

Cost of sales decreased 1% to $1,374.8 million in 2024 compared to $1,388.3 million in 2023. The decrease was driven by ongoing profit improvement initiatives and the decrease in net sales described above. Gross margin was 17.0% in 2024 compared to 16.4% in 2023. The gross margin improvement was driven by improved operating profit in our Supply Technologies segment; higher sales and improved margins in our capital equipment business; and ongoing profit improvement initiatives.

SG&A Expenses

SG&A expenses increased to $187.4 million, or 11.3% of net sales, in 2024 from $181.5 million, or 10.9% of net sales, in 2023. The SG&A expense increase was driven by SG&A expenses in our acquired EMA Indutec GmbH (“EMA”) business, ongoing inflation and higher employee costs.

Restructuring and other special charges

During 2024, the Company recorded restructuring and other special charges of $4.9 million compared to $6.6 million in 2023. The charges in both years relate primarily to plant closure and consolidation activities and other initiatives in the Company’s Assembly Components and Engineered Products segments.

Gains on Sales of Assets, net

During 2024, the Company sold real estate and other assets within its Engineered Products segment for cash proceeds of $9.3 million, resulting in a net gain of $0.8 million. The Company also sold real estate within its Assembly Components segment for cash proceeds of $2.2 million, resulting in a net gain of $1.7 million. The total net gain of $2.5 million is recorded on a separate line in the Consolidated Statements of Operations and is excluded from segment income.

During 2023, in connection with its 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 net 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 is recorded on a separate line in the Consolidated Statements of Operations and is excluded from segment income.

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

Other components of pension and OPEB income, net was $5.2 million in 2024 compared to $2.5 million in 2023. The increase in 2024 was due to lower net actuarial losses impacting 2024 compared to 2023.

Interest Expense, Net

Interest expense, net increased to $47.4 million in 2024 compared to $45.1 million in 2023. The increase was due to higher average interest rates partially offset by lower average outstanding borrowings in 2024 compared to 2023. Our average effective borrowing rate was 7.0% in 2024 compared to 6.6% in 2023.

Income Tax Expense

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Income tax expense in 2024 was $4.9 million on pre-tax income of $44.4 million, for an effective tax rate of 11.0%, which was less than the U.S. statutory rate of 21%, primarily as a result of the tax benefit of the research and development tax credit and the release of certain valuation allowances.

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 of 21%, as the tax benefits of the foreign tax credit and research and development tax credit were offset by the tax expense of foreign earnings, GILTI and non-deductible expenses.

SEGMENT RESULTS

For purposes of measuring business segment performance, the chief operating decision maker utilizes segment operating income, which is defined as revenues less expenses identifiable to the product lines within each segment. The Company does not allocate items that are non-operating; unusual in nature; or corporate costs, which include but are not limited to executive compensation and corporate office costs. Segment operating income reconciles to consolidated income before income taxes by adjusting for corporate costs; gains on sales of assets; other expenses; other components of pension and other postretirement benefits income, net; and interest expense, net.

Supply Technologies Segment

2024 Compared to 2023

Net sales increased 1.6% in 2024 compared to 2023 due to continued strong demand in many of the Company's key end markets, with the largest increases in the aerospace and defense, heavy-duty truck, electrical distribution and consumer electronics end markets, partially offset by decreases in the power sports and industrial and agricultural equipment end markets. In addition, net sales benefited from higher customer demand for our proprietary products throughout North America and Europe in our fastener manufacturing business.

Segment operating income increased $16.0 million to $75.0 million in 2024 compared to 2023, and segment operating income margin increased 200 basis points in 2024 compared to a year ago. These increases were due primarily to the increase in sales, profit improvement initiatives and higher profit flow-through from strong demand in our fastener manufacturing business.

Assembly Components Segment

2024 Compared to 2023

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Net sales decreased 6.8% in 2024 compared to 2023 due primarily to lower product pricing on certain legacy programs and lower unit volumes primarily on end-of-life programs, partially offset by higher product pricing on certain other programs.

Segment operating income was $25.4 million in 2024 compared to $33.4 million in 2023 and segment operating income margin decreased 140 basis points in 2024 compared to a year ago. The decreases were due to the lower product pricing and unit volumes, which were partially offset by profit enhancement initiatives in 2024. During 2024 and 2023, we incurred $1.1 million and $1.5 million, respectively, of charges related to restructuring activities.

Engineered Products Segment

2024 Compared to 2023

Net sales were 2.8% higher in 2024 compared to 2023 driven by higher new capital equipment and aftermarket sales in our capital equipment business.

Segment operating income in 2024 decreased $1.4 million compared to 2023, and segment operating margin decreased 40 basis points in 2024 compared to 2023, as a result of higher operating costs in our forged and machined products business, partially offset by the higher sales and improved margins in our capital equipment business. In addition, restructuring and other special charges were $3.6 million in 2024 and $4.9 million in 2023.

Liquidity and Capital Resources

The following table summarizes the major components of cash flows:

Operating Activities

In 2024, we generated positive operating cash flow of $35.0 million compared to $53.4 million in 2023. Cash flow from operating activities was lower in 2024 due to higher working capital needs, which more than offset higher profitability in 2024.

Investing Activities

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Capital expenditures were $31.4 million in 2024 and $28.2 million in 2023. These capital expenditures were primarily for growth initiatives, including information technology investments, across all three of our segments, and to maintain existing operations.

In 2024 and 2023, we sold assets and received aggregate proceeds of $11.5 million and $2.0 million, respectively. See Note 5 to the consolidated financial statements included elsewhere herein for additional information. We spent $11.0 million for the acquisition of EMA. Additionally, in 2023, we received $15.5 million in connection with the sale of our Aluminum Products business.

Financing Activities

Cash provided by financing activities in 2024 included debt repayments of $16.0 million, payments related to prior acquisitions of $3.0 million, dividends to shareholders and noncontrolling interest partners totaling $7.2 million, and payments of withholding taxes on share awards of $2.6 million. On June 3, 2024, the Company entered into an agreement providing for an at-the-market (“ATM”) program authorizing the sale of up to $50.0 million of the Company's common stock. During the year ended December 31, 2024, the Company sold 550,981 shares of common stock for aggregate net proceeds of $15.9 million under the ATM program. The Company has $34.1 million remaining under the ATM program. In addition, in the third quarter of 2024, the Company sold 341,997 shares of common stock in a public offering to its pension plan for $10.0 million; and 148,612 shares of common stock, for proceeds of $4.5 million, in a private offering to Matthew V. Crawford, our Chairman of the Board, Chief Executive Officer and President, and to Crawford Capital Enterprises, LLC, an entity controlled by Edward F. Crawford, one of our Board members.

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

Liquidity

Overall, we were able to pay down debt and fund capital expenditures in 2024 using cash flows from operations, cash proceeds from asset sales and proceeds from common stock issuances. See Note 9 to the consolidated financial statements included elsewhere herein for further discussion of our financing arrangements.

The following table summarizes our indicators of liquidity:

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, 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, 2024, we had $248.6 million outstanding under the revolving credit facility, and total liquidity of $198.2 million, which included cash and cash equivalents of $53.1 million and $145.1 million of unused borrowing availability under our credit arrangements.

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The Company had cash and cash equivalents held by foreign subsidiaries of $43.4 million at December 31, 2024 and $44.6 million at December 31, 2023. We do not expect restrictions on repatriation of cash held outside the U.S. to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.

Senior Notes

In April 2017, Park-Ohio Industries, Inc. (“Park-Ohio”), the operating subsidiary of Park-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

In September 2023, Park-Ohio amended its Seventh 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

As of December 31, 2024, the Company had finance leases totaling $17.0 million.

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 $50.625 million, our ability to meet a debt service ratio covenant. If our calculated availability is less than $50.625 million, our debt service coverage ratio must be greater than 1.0. At December 31, 2024, our calculated availability under the Credit Agreement was $133.5 million; therefore, the debt service ratio covenant did not apply.

Failure to maintain calculated availability of at least $50.625 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 inflation and supply chain disruptions. 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 $50.625 million, and a defined debt service coverage ratio of 1.15.

As our calculated availability under the Credit Agreement was above $50.625 million, we were also in compliance with the other covenants contained in the revolving credit facility as of December 31, 2024. While we expect to remain in compliance throughout 2025, 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.

Dividends

The Company paid dividends to shareholders of $6.7 million during 2024. On January 24, 2025, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend was paid on February 21, 2025, to shareholders of record as of the close of business on February 7, 2025 and resulted in cash payments of $1.8 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,

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capital requirements, contractual restrictions, business prospects and other factors that our Board of Directors may deem relevant.

Contractual and Other 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 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, 2024 and $29.9 million due thereafter.

As of December 31, 2024, our undiscounted purchase obligations were $205.5 million due in the next twelve months and $3.2 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

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

Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the Board of Directors.

Revenue Recognition: We recognize revenue, other than from long-term contracts, when our obligations under the contact terms are satisfied and control transfers to the customer, typically upon shipment. Revenue from certain long-term contracts is accounted for over time, when products are manufactured or services are performed, as control transfers under these arrangements. We follow the input method since reasonably reliable estimates of revenue and costs of a contract can be made. See Note 2 of the consolidated financial statements included elsewhere herein for additional disclosures on revenue.

Allowance for Obsolete and Slow-Moving Inventory: Inventories are valued using first-in, first-out 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

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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 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. The Company uses valuation specialists to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions including discount rates, rates of return on assets, long-term sales growth rates, and royalty rates.

Goodwill and Indefinite-Lived Intangible Assets: As required by ASC 350, “Intangibles - Goodwill and Other” (“ASC 350”), management performs impairment testing of goodwill at least annually, as of October 1 of each year, or more frequently if impairment indicators arise. Management tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment pursuant to ASC 280, “Segment Reporting”, or one level below the operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management. Our reporting units have been identified at the component level. For 2024, 2023 and 2022, we performed quantitative testing for each reporting unit with a goodwill balance.

Our annual goodwill impairment analysis utilizes a quantitative approach comparing the 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 the discounted cash flow method, a form of income approach, and the guideline public company method, a form of the market 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 the weighted average cost of capital (“WACC”); revenue growth rates; and operating margins used to project future cash flows for a reporting unit. The WACCs utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate ample sensitivity ranges into our analysis of goodwill impairment testing for a reporting unit, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected. We validate our estimates of fair value under the income approach by considering the implied control premium and conclude whether that premium is reasonable based on recent market transactions.

The results of testing as of October 1, 2024, 2023 and 2022 for all reporting units confirmed that the estimated fair values exceeded carrying values, and no impairment existed as of those dates. Based on our 2024 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% as of the testing date. As such, we concluded that the goodwill of this reporting unit of $8.7 million as of that date was not impaired. 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. In 2024, 2023 and 2022, we utilized a quantitative approach using the royalty relief method. The significant assumptions employed under this method include discount rates, revenue growth rates, including assumed terminal growth rates, and royalty rates. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate ample sensitivity ranges into our analysis of intangible impairment testing, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.

The results of testing as of October 1, 2024, 2023 and 2022 for all reporting units confirmed that the estimated fair value exceeded carrying values, and no impairment existed as of those dates.

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See Notes 7 and 8 of the consolidated financial statements included elsewhere herein for additional disclosure on goodwill and indefinite-lived intangibles.

Income Taxes: In accordance with ASC 740, “Income Taxes” (“ASC 740”), we account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. Specifically, we measure gross deferred tax assets for deductible temporary differences and carryforwards, such as operating losses and tax credits, using the applicable enacted tax rates and apply the more likely than not measurement criterion.

In determining if it is more likely than not that all or some portion of a deferred tax asset will be realized, we consider the following factors: future reversals of existing taxable temporary differences; taxable income in prior years if carryback is permitted under the tax law; tax planning strategies that could accelerate taxable income; and future taxable income. Based on these factors, when we have determined that the realizability of certain domestic and foreign deferred tax assets is more likely than not to not be realized, a valuation allowance has been established.

Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual annual effective income tax rates and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.

Pension Plans: We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution 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 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 5.55% for 2024, compared with 5.14% in 2023. For the other postretirement benefit plan, the rate is 5.43% for 2024 and 5.06% for 2023. This rate represents the interest rates generally available in the United States, which is the Company’s only country with other postretirement benefit liabilities. Another assumption that affects the Company’s pension expense is the expected long-term rate of return on assets. The Company’s pension plans are funded. The weighted-average expected long-term rate of return on assets assumption is 7.50% and 7.75% for 2024 and 2023, respectively. 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.

Environmental

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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 impact supply chain and logistic issues have on our business, results of operations, financial position and liquidity; our substantial indebtedness; the uncertainty of the global economic environment; general business conditions and competitive factors, including pricing pressures and product innovation; demand for our products and services; the impact of labor disturbances affecting our customers; raw material availability and pricing; fluctuations in energy costs; component part availability and pricing; changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate recent and future acquisitions into existing operations; the amounts and timing, if any, of purchases of our common stock; changes in general economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations, including those related to the current global uncertainties and crises, such as tariffs and surcharges; adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities, 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; disruptions, uncertainties or volatility in the credit markets that may limit our access to capital; potential disruption due to a partial or complete reconfiguration of the European Union; increasingly stringent domestic and foreign governmental regulations, including those affecting the environment or import and export controls and other trade barriers; inherent uncertainties involved in assessing our potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims and disputes with customers; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending; our ability to negotiate contracts with labor unions; our dependence on key management; our dependence on information systems; our ability to continue to pay cash dividends, and the timing and amount of any such dividends; and the other factors we describe under “Item 1A. Risk Factors” included in this Annual Report on Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our consolidated financial statements include the accounts of Park-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.

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.

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RESULTS FROM CONTINUING OPERATIONS

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

* Calculation not meaningful

2023 Compared with 2022

Net Sales

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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 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 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 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 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 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; within its Assembly Components segment for cash proceeds of $4.4 million, resulting in a gain of $3.3 million; 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 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

Interest expense, net increased to $45.1 million in 2023 compared to $33.8 million in 2022. The increase was due to higher average interest rates and higher average outstanding borrowings in 2023 compared to 2022. Our average effective borrowing rate was 6.6% in 2023 compared to 5.1% in 2022.

Income Tax Expense/Benefit

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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.

SEGMENT RESULTS

For purposes of measuring business segment performance, the Company utilizes segment operating income, which is defined as revenues less expenses identifiable to the product lines within each segment. The Company does not allocate items that are non-operating or unusual in nature or are corporate costs, which include but are not limited to executive and share-based compensation and corporate office costs. Segment operating income reconciles to consolidated income before income taxes by deducting corporate costs; certain non-cash and/or non-operating items; other components of pension and OPEB income, net; and interest expense, net.

Supply Technologies Segment

2023 Compared to 2022

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

2023 Compared to 2022

Net sales increased 10.0% in 2023 compared to 2022. 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

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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

2023 Compared to 2022

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

The following table summarizes the major components of cash flows:

Operating Activities

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 $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; 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 received $15.5

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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 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.

Liquidity

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.

The following table summarizes our indicators of liquidity:

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, 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, 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. We do not expect restrictions on repatriation of cash held outside the U.S. to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.

Senior Notes

In April 2017, Park-Ohio Industries, Inc. (“Park-Ohio”), the operating subsidiary of Park-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

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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

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

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 $50.625 million, our ability to meet a debt service ratio covenant. If our calculated availability is less than $50.625 million, our debt service coverage ratio must be greater than 1.0. At December 31, 2023, our calculated availability under the Credit Agreement was $103.3 million; therefore, the debt service ratio covenant did not apply.

Failure to maintain calculated availability of at least $50.625 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 inflation and supply chain disruptions. 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 $50.625 million, and a defined debt service coverage ratio of 1.15.

As our calculated availability under the Credit Agreement was above $50.625 million, we were also in compliance with the other covenants contained in the revolving credit facility as of December 31, 2023. 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.

Dividends

The Company paid dividends to shareholders of $6.4 million during 2023. 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. 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 and Other 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 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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As of December 31, 2023, our undiscounted purchase obligations were $229.0 million due in the next twelve months and $4.2 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

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

Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the Board of Directors.

Revenue Recognition: We recognize revenue, other than from long-term contracts, when our obligations under the contact terms are satisfied and control transfers to the customer, typically upon shipment. Revenue from certain long-term contracts is accounted for over time, when products are manufactured or services are performed, as control transfers under these arrangements. We follow the input method since reasonably reliable estimates of revenue and costs of a contract can be made. See Note 2 of the consolidated financial statements included elsewhere herein for additional disclosures on revenue.

Allowance for Obsolete and Slow-Moving Inventory: Inventories are valued using first-in, first-out 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 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. The Company uses valuation specialists to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions including discount rates, rates of return on assets, long-term sales growth rates, and royalty rates.

Goodwill and Indefinite-Lived Intangible Assets: As required by ASC 350, “Intangibles - Goodwill and Other” (“ASC 350”), management performs impairment testing of goodwill at least annually, as of October 1 of each year, or more frequently if impairment indicators arise. Management tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment pursuant to ASC 280, “Segment Reporting”, or one level below the operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management.

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Our reporting units have been identified at the component level. For 2023, 2022 and 2021, we performed quantitative testing for each reporting unit with a goodwill balance.

Our annual goodwill impairment analysis utilizes a quantitative approach comparing the 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 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. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; and operating margins used to project future cash flows for a reporting unit. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate ample sensitivity ranges into our analysis of goodwill impairment testing for a reporting unit, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected. We validate our estimates of fair value under the income approach by considering the implied control premium and conclude whether that premium is reasonable based on recent market transactions.

The results of testing as of October 1, 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. In 2023, 2022 and 2021, we utilized a quantitative approach using the royalty relief method. The significant assumptions employed under this method include discount rates, revenue growth rates, including assumed terminal growth rates, and royalty rates. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate ample sensitivity ranges into our analysis of intangible impairment testing, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.

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

See Notes 7 and 8 of the consolidated financial statements included elsewhere herein for additional disclosure on goodwill and indefinite-lived intangibles.

Income Taxes: In accordance with ASC 740, “Income Taxes” (“ASC 740”), we account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. Specifically, we measure gross deferred tax assets for deductible temporary differences and carryforwards, such as operating losses and tax credits, using the applicable enacted tax rates and apply the more likely than not measurement criterion.

In determining if it is more likely than not that all or some portion of a deferred tax asset will be realized, we consider the following factors: future reversals of existing taxable temporary differences; taxable income in prior years if carryback is permitted under the tax law; tax planning strategies that could accelerate taxable income; and future taxable income. Based on these factors, when we have determined that the realizability of certain domestic and foreign deferred tax assets is more likely than not to not be realized, a valuation allowance has been established.

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Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual annual effective income tax rates and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.

Pension Plans: We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution 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 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 5.14% for 2023, compared with 5.48% in 2022. For the other postretirement benefit plan, the rate is 5.06% for 2023 and 5.41% for 2022. This rate represents the interest rates generally available in the United States, which is the Company’s only country with other postretirement benefit liabilities. Another assumption that affects the Company’s pension expense is the expected long-term rate of return on assets. The Company’s pension plans are funded. The weighted-average expected long-term rate of return on assets assumption is 7.75% for 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. 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.

Environmental

We have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certain clean-up efforts at several of these sites. However, our share of such costs has not been material and based on available information, management does not expect our exposure at any of these locations to have a material adverse effect on our results of operations, liquidity or financial condition.

We have been named as one of many defendants in a number of asbestos-related personal injury lawsuits. Our cost of defending such lawsuits has not been material to date and, based upon available information, management does not expect our future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial condition. We caution, however, that inherent in management’s estimates of our exposure are expected trends in claims severity, frequency and other factors that may materially vary as claims are filed and settled or otherwise resolved.

Seasonality; Variability of Operating Results

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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: 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; 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, 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 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; disruptions, uncertainties or volatility in the credit markets that may limit our access to capital; potential disruption due to a partial or complete reconfiguration of the European Union; increasingly stringent domestic and foreign governmental regulations, including those affecting the environment or import and export controls and other trade barriers; inherent uncertainties involved in assessing our potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims and disputes with customers; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending; our ability to negotiate contracts with labor unions; our dependence on key management; our dependence on information systems; our ability to continue to pay cash dividends, and the timing and amount of any such dividends; and the other factors we describe under “Item 1A. Risk Factors” included in this Annual Report on Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved. The Company assumes no obligation to update the information in this Annual Report on Form 10-K, except to the extent required by law.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our consolidated financial statements include the accounts of Park-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.

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

On January 27, 2023, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend was paid on February 24, 2023, to shareholders of record as of the close of business on February 10, 2023 and resulted in cash payments of $1.6 million.

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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. 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.

2022 Compared with 2021 and 2021 Compared with 2020

* Calculation not meaningful

2022 Compared with 2021

Net Sales

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Net sales increased 17% to $1,492.9 million in 2022 compared to $1,277.0 million in 2021. This increase was primarily due to higher customer demand and increased net price realization in all three of our business segments.

The factors explaining the changes in segment net sales for the year ended December 31, 2022 compared to the year ended December 31, 2021 are contained in the “Segment Results” section below.

Cost of Sales

Cost of sales increased 17% to $1,282.4 million in 2022 compared to $1,099.1 million in 2021. The increase in cost of sales and decrease in gross margin were due to the increase in net sales described above.

SG&A Expenses

SG&A expenses increased to $162.2 million, or 10.9% of net sales, in 2022 from $155.9 million, or 12.2% of net sales, in 2021. 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.

Restructuring and other special charges

During 2022, the Company recorded restructuring and other special charges of $17.3 million compared to $20.4 million in 2021. 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.

Gains on Sales of Assets, net

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; within its Assembly Components segment for cash proceeds of $4.4 million, resulting in a gain of $3.3 million; 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.

Interest Expense, Net

Interest expense, net increased to $33.8 million in 2022 compared to $27.1 million in 2021. The increase was due to higher average interest rates and higher average outstanding borrowings in 2022 compared to 2021. The higher borrowings were used to fund higher working capital levels. Our average effective borrowing rate was 5.1% in 2022 compared to 4.8% in 2021.

Income Tax Benefit

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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

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.

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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

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.

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.

Supply Technologies Segment

2022 Compared to 2021

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.

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Assembly Components Segment

2022 Compared to 2021

Net sales increased 21% in 2022 compared to 2021. 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.

Engineered Products Segment

2022 Compared to 2021

Net sales were 17% higher in 2022 compared to 2021. 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.

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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.

Liquidity and Capital Resources

The following table summarizes the major components of cash flows:

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.

Investing Activities

Capital expenditures were $26.9 million in 2022, $22.3 million in 2021 and $20.3 million in 2020. These capital expenditures were primarily for growth initiatives, with the majority in our Assembly Components and Engineered Products segments. Capital expenditures were lower in 2020, as we curtailed non-critical capital spending in response to the COVID-19 pandemic.

In 2022 and 2021, we sold assets and received aggregate proceeds of $9.5 million and $20.3 million, respectively. See Note 5 to the consolidated financial statements included elsewhere herein for additional information. Additionally, we spent

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

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. 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.

Liquidity

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

The following table summarizes our indicators of liquidity:

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, 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.

The Company had cash and cash equivalents held by foreign subsidiaries of $47.8 million at December 31, 2022 and $44.2 million at December 31, 2021. We do not expect restrictions on repatriation of cash held outside the U.S. to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.

Senior Notes

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In April 2017, Park-Ohio Industries, Inc. (“Park-Ohio”), the operating subsidiary of Park-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 $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.

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.

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 $50.625 million, our ability to meet a debt service ratio covenant. If our calculated availability is less than $50.625 million, our debt service coverage ratio must be greater than 1.0. At December 31, 2022, our calculated availability under the Credit Agreement was $102.3 million; therefore, the debt service ratio covenant did not apply.

Failure to maintain calculated availability of at least $50.625 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 inflation and supply chain disruptions. 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 $50.625 million, and a defined debt service coverage ratio of 1.15.

As our calculated availability under the Credit Agreement was above $50.625 million, we were also in compliance with the other covenants contained in the revolving credit facility as of December 31, 2022. While we expect to remain in compliance throughout 2023, 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

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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 $6.4 million during 2022. On January 27, 2023, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend was paid on February 24, 2023, to shareholders of record as of the close of business on February 10, 2023 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 and Other 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 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.

Interest payable associated with our 6.625% Senior Notes due 2027 is $23.2 million due in the twelve months following December 31, 2022 and $76.3 million due thereafter.

As of December 31, 2022, our undiscounted purchase obligations were $282.2 million due in the next twelve months and $1.6 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

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.

Critical Accounting Policies and Estimates

Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the Board of Directors.

Revenue Recognition: We recognize revenue, other than from long-term contracts, when our obligations under the contact terms are satisfied and control transfers to the customer, typically upon shipment. Revenue from certain long-term contracts is

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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 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 of October 1 of each year, or more frequently if impairment indicators arise. Management tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment pursuant to ASC 280, “Segment Reporting”, or one level below the operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management. Our reporting units have been identified at the component level. For 2022, 2021 and 2020, we performed quantitative testing for each reporting unit with a goodwill balance.

Our annual goodwill impairment analysis utilizes a quantitative approach comparing the carrying amount of the reporting unit to its estimated fair value. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, an impairment charge is recorded. In applying the quantitative approach, we use an income approach to estimate the fair value of the reporting unit. The income approach uses a number of factors, including future business plans, actual and forecasted operating results, and market data. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; and operating margins used to project future cash flows for a reporting unit. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate ample sensitivity ranges into our analysis of goodwill impairment testing for a reporting unit, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected. We validate our estimates of fair value under the income approach by considering the implied control premium and conclude whether that premium is reasonable based on recent market transactions.

The results of testing as of October 1, 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%.

Additionally, we test all indefinite-lived intangible assets for impairment at least annually, as of October 1 of each year, or more frequently if impairment indicators arise. In 2022, 2021 and 2020, 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.

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The results of testing as of October 1, 2022, 2021 and 2020 for all reporting units confirmed that the estimated fair value exceeded carrying values, and no impairment existed as of those dates.

See Notes 7 and 8 of the consolidated financial statements included elsewhere herein for additional disclosure on goodwill and indefinite-lived intangibles.

Income Taxes: In accordance with ASC 740, “Income Taxes” (“ASC 740”), we account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. Specifically, we measure gross deferred tax assets for deductible temporary differences and carryforwards, such as operating losses and tax credits, using the applicable enacted tax rates and apply the more likely than not measurement criterion.

In determining if it is more likely than not that all or some portion of a deferred tax asset will be realized, we consider the following factors: future reversals of existing taxable temporary differences; taxable income in prior years if carryback is permitted under the tax law; tax planning strategies that could accelerate taxable income; and future taxable income. Based on these factors, when we have determined that the realizability of certain domestic and foreign deferred tax assets is more likely than not to not be realized, a valuation allowance has been established.

Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual annual effective income tax rates and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.

Pension Plans: We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution 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 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 5.48% for 2022, compared with 2.80% in 2021. For the other postretirement benefit plan, the rate is 5.41% for 2022 and 2.49% for 2021. This rate represents the interest rates generally available in the United States, which is the Company’s only country with other postretirement benefit liabilities. Another assumption that affects the Company’s pension expense is the expected long-term rate of return on assets. The Company’s pension plans are funded. The weighted-average expected long-term rate of return on assets assumption is 7.75% for 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. 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.

Environmental

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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: 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 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 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; our ability to meet various covenants, including financial covenants, contained in the agreements governing our indebtedness; disruptions, uncertainties or volatility in the credit markets that may limit our access to capital; potential disruption due to a partial or complete reconfiguration of the European Union; increasingly stringent domestic and foreign governmental regulations, including those affecting the environment or import and export controls and other trade barriers; inherent uncertainties involved in assessing our potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims and disputes with customers; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending; our ability to negotiate contracts with labor unions; our dependence on key management; our dependence on information systems; our ability to continue to pay cash dividends, and the timing and amount of any such dividends; and the other factors we describe under “Item 1A. Risk Factors” included in this Annual Report on Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved. The Company assumes no obligation to update the information in this Annual Report on Form 10-K, except to the extent required by law.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our consolidated financial statements include the accounts of Park-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

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 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

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 ended December 31, 2020.

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2021 Compared with 2020 and 2020 Compared with 2019

* 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 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 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,

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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.

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

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

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 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 $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

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

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

2021 Compared to 2020

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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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.

Liquidity and Capital Resources

The following table summarizes the major components of cash flows:

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 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 $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 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.

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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 indicators of liquidity:

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 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. We do not expect restrictions on repatriation of cash held outside the U.S. to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.

Senior Notes

In April 2017, Park-Ohio Industries, Inc. (“Park-Ohio”), the operating subsidiary of Park-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 on November 16, 2024.

Finance Leases

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On August 13, 2015, the Company entered into a Finance Lease Agreement (the “Lease Agreement”). The Lease Agreement provides the Company up to $50.0 million for finance leases. Finance lease obligations of $17.5 million were borrowed under the Lease Agreement to acquire machinery and equipment as of December 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. At December 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 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.

Dividends

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

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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.

Critical Accounting Policies and Estimates

Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the Board of Directors.

Revenue Recognition: We recognize revenue, other than from long-term contracts, when our obligations under the contact terms are satisfied and control transfers to the customer, typically upon shipment. Revenue from certain long-term contracts is accounted for over time, when products are manufactured or services are performed, as control transfers under these arrangements. We follow the input method since reasonably reliable estimates of revenue and costs of a contract can be made. See Note 2 of the consolidated financial statements included elsewhere herein for additional disclosures on revenue.

Allowance for Obsolete and Slow-Moving Inventory: Inventories are 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 of October 1 of each year, or more frequently if impairment indicators arise. Management tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment pursuant to ASC 280, “Segment Reporting”, or one level below the operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management. Our reporting units have been identified at the component level. For 2021, 2020 and 2019, we performed quantitative testing for each reporting unit with a goodwill balance.

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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 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. 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 of October 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 of the consolidated financial statements included elsewhere herein for additional disclosure on goodwill and indefinite-lived intangibles.

Income Taxes: In accordance with ASC 740, “Income Taxes” (“ASC 740”), we account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. Specifically, we measure gross deferred tax assets for deductible temporary differences and carryforwards, such as operating losses and tax credits, using the applicable enacted tax rates and apply the more likely than not measurement criterion.

In determining if it is more likely than not that all or some portion of a deferred tax asset will be realized, we consider the following factors: future reversals of existing taxable temporary differences; taxable income in prior years if carryback is permitted under the tax law; tax planning strategies that could accelerate taxable income; and future taxable income. Based on these factors, when we have determined that the realizability of certain domestic and foreign deferred tax assets is more likely than not to not be realized, a valuation allowance has been established.

Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual annual effective income

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tax rates and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.

Pension and Other Postretirement Benefit Plans: We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans and postretirement benefit plans covering substantially all employees. The measurement of liabilities related to these plans is based on management’s assumptions related to future events, including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trends. Pension plan asset performance in the future will directly impact our net income. We have evaluated our pension and other postretirement benefit assumptions, considering current trends in interest rates and market conditions and believe our assumptions are appropriate.

We consult with our actuaries at least annually when reviewing and selecting the discount rates to be used. The discount rates used by the Company are based on yields of various corporate and governmental bond indices with actual maturity dates that approximate the estimated benefit payment streams of the related pension plans. The discount rates are also reviewed in comparison with current benchmark indices, economic market conditions and the movement in the benchmark yield since the previous fiscal year. The liability weighted-average discount rate for the defined benefit pension plan is 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 in the United States, which is the Company’s only country with other postretirement benefit liabilities. Another assumption that affects the Company’s pension expense is the expected long-term rate of return on assets. The Company’s pension plans are funded. The weighted-average expected long-term rate of return on assets assumption is 7.75% for 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.

Environmental

We have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certain clean-up efforts at several of these sites. However, our share of such costs has not been material and based on available information, management does not expect our exposure at any of these locations to have a material adverse effect on our results of operations, liquidity or financial condition.

We have been named as one of many defendants in a number of asbestos-related personal injury lawsuits. Our cost of defending such lawsuits has not been material to date and, based upon available information, management does not expect our future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial condition. We caution, however, that inherent in management’s estimates of our exposure are expected trends in claims severity, frequency and other factors that may materially vary as claims are filed and settled or otherwise resolved.

Seasonality; Variability of Operating Results

The timing of orders placed by our customers has varied with, among other factors, orders for customers’ finished goods, customer production schedules, competitive conditions and general economic conditions. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations in the operations of our business units. Such variability is particularly evident in the industrial equipment business unit included in the Engineered Products segment, which typically ships a few large systems per year.

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Forward-Looking Statements

This Annual Report on Form 10-K contains certain statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and similar expressions are intended to identify forward-looking statements.

These forward-looking statements, including statements regarding future performance of the Company, that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors that could cause actual results to differ materially from expectations include, but are not limited to, the following: the ultimate impact the COVID-19 pandemic has on our business, results of operations, financial position and liquidity, 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 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; our ability to meet various covenants, including financial covenants, contained in the agreements governing our indebtedness; disruptions, uncertainties or volatility in the credit markets that may limit our access to capital; potential disruption due to a partial or complete reconfiguration of the European Union; increasingly stringent domestic and foreign governmental regulations, including those affecting the environment or import and export controls and other trade barriers; inherent uncertainties involved in assessing our potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims and disputes with customers; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending; our ability to negotiate contracts with labor unions; our dependence on key management; our dependence on information systems; our ability to continue to pay cash dividends, and the timing and amount of any such dividends; and the other factors we describe under “Item 1A. Risk Factors” included in this Annual Report on Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved. The Company assumes no obligation to update the information in this Annual Report on Form 10-K, except to the extent required by law.

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