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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. This has negatively impacted several of the markets we serve. In response to the COVID-19 pandemic, we have taken actions to reduce our operating costs, including plant consolidation; headcount reductions; salary reductions; and discretionary spending cuts. We have also aggressively managed both working capital and capital spending. Although there continues to be uncertainty related to the anticipated impact of the COVID-19 pandemic outbreak on our future results, we believe our diversified portfolio of global businesses, our liquidity position was $252.4 million as of December 31, 2020, and the steps we have taken to reduce costs leave us well-positioned to manage our business through this crisis as it continues to unfold.

Subsequent Event

On January 29, 2021, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend was paid on February 26, 2021, to shareholders of record as of the close of business on February 12, 2021 and resulted in a cash outlay of $1.6 million.

RESULTS OF OPERATIONS

This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2019 and 2018. Discussions of 2018 items and year-over-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

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2020 Compared with 2019 and 2019 Compared with 2018

(Dollars in millions, except per share data)

Gross profit as a percentage of net sales 13.0 % 16.1 % 16.4 %

SG&A expenses as a percentage of net sales 11.8 % 10.9 % 10.6 %

Gain on sale of assets — — (1.9) — * 1.9 *

(Loss) earnings per common share attributable to ParkOhio common shareholders

* Calculation not meaningful

2020 Compared with 2019

Net Sales

Net sales decreased 20% to $1,295.2 million in 2020 compared to $1,618.3 million in 2019. The decrease in net sales was due to lower customer demand for our products in many end markets across all three of our segments, primarily driven by the COVID-19 pandemic.See the “Segment Results” section below for a more detailed discussion of the decrease in sales in each business segment.

Cost of Sales & Gross Profit

Cost of sales decreased 17% to $1,126.6 million in 2020 compared to $1,358.0 million in 2019. The decrease in cost of sales was in-line with the decrease in net sales described above.

Our gross margin percentage decreased to 13.0% in 2020 compared to 16.1% in 2019, due primarily to the lower profit flow-through from lower sales in 2020 compared to a year ago. In addition, cost of sales in 2020 included $5.1 million of costs related to plant closure and consolidation, compared to $3.5 million of such costs in 2019. These negative factors were partially

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offset by the benefits of cost reduction efforts taken in response to challenging market conditions in much of 2020 as a result of the pandemic.

SG&A Expenses

SG&A expenses decreased to $152.9 million, or 11.8% of net sales, in 2019 from $177.2 million, or 10.9% of net sales, in 2019. This decrease in SG&A expenses in 2020 was due primarily to the favorable impact of cost-reduction actions implemented across the Company in response to the COVID-19 pandemic. In addition, SG&A expenses in 2019 included one-time expense of $4.3 million related to an executive departure. The increase in SG&A expenses as a percentage of net sales was due to a fixed portion of SG&A expenses over a lower revenue base.

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

Other components of pension income and OPEB expense, net was $7.3 million in 2020 compared to $5.6 million in 2019. The increase in 2020 was driven by higher returns on plan assets in 2020 compared to 2019.

Interest Expense, Net

Interest expense, net decreased to $30.3 million in 2020 compared to $33.8 million in 2019. The decrease was due to lower average interest rates and lower outstanding borrowings in 2020 compared to 2019. The lower outstanding borrowings were driven by debt repayments of $35.4 million during 2020. Our average effective borrowing rate was 5.4% in 2020 compared to 5.8% in 2019.

Income Tax Benefit (Expense)

The provision for income taxes was a benefit of $2.5 million in 2020 (an effective rate of 34.2%) compared to expense of $15.2 million in 2019 (an effective rate of 27.7%). The 2020 rate is higher due to US tax loss planning and related net operating loss carrybacks to prior years under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

SEGMENT RESULTS

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

Supply Technologies Segment

Year Ended December 31,

(Dollars in millions)

Segment operating income margin 5.9 % 6.9 % 7.7 %

2020 Compared to 2019

Net sales were down 17% in 2020 compared to 2019 due primarily to lower customer demand in certain end markets, due primarily to the impact of the global COVID-19 pandemic in 2020.The primary decreases were in the Company's truck and truck-related market, which was down 38%; the Company’s aerospace and defense market, which was down 41%; the Company’s automotive market, which was down 14%; the Company’s consumer products market, which was down 14%; and the Company’s agricultural and industrial equipment market, which was down 12%.These decreases were partially offset by

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higher customer demand in the Company’s medical device market, which was up 109%; and the Company’s semiconductor market, which was up 35%.

Segment operating income and operating income margin were down $11.8 million and 100 basis points, respectively, in 2020 compared to 2019.These decreases were due primarily to lower profit flow-through from the lower sales volumes and unfavorable sales mix, partially offset by the benefit of cost reduction actions taken in response to challenging market conditions.

Assembly Components Segment

Year Ended December 31,

(Dollars in millions)

Segment operating income $ 8.1 $ 36.2 $ 42.9

Segment operating income margin 1.8 % 6.7 % 7.4 %

2020 Compared to 2019

Net sales were down 18% in 2020 compared to 2019 due primarily to the impact of the global COVID-19 pandemic on the U.S. automotive industry. Our customers closed their facilities and reduced vehicle production in mid-March in compliance with federal and state guidelines, resulting in the closure of our facilities. Beginning in late May and early June 2020, the industry began the slow process of re-opening manufacturing facilities and restarting production, albeit at lower levels than before the COVID-19 pandemic, and our facilities began to ramp-up production.

Segment operating income and operating income margin were down $28.1 million and 490 basis points, respectively, in 2020 compared to 2019. These decreases were driven by the production shut-downs described above, as well as by charges of $4.1 million related to plant closure and consolidation actions in 2020. In 2019, this segment incurred similar charges of $3.3 million. The actions in both years resulted in cost reductions which partially offset the negative impact on profitability of the lower sales.

Engineered Products Segment

Year Ended December 31,

(Dollars in millions)

Segment operating income $ 3.5 $ 37.7 $ 38.4

Segment operating income margin 1.0 % 8.1 % 8.7 %

2020 Compared to 2019

Net sales were down 26% in 2020 compared to 2019 due primarily to lower customer demand in certain key end markets in our forged and machined products business, including our oil and gas, aerospace, rail and agriculture markets; as well as lower demand for our capital equipment products, as many customers delayed buying decisions in response to the COVID-19 pandemic.

Segment operating income and operating income margin were down $34.2 million and 710 basis points, respectively, in 2020 compared to 2019. These decreases were due primarily to the lower sales levels, unfavorable product mix, manufacturing inefficiencies in certain facilities, and cost overruns on certain jobs in this segment, primarily as a result of the COVID-19 pandemic. In addition, in 2020 this segment incurred charges of $2.2 million related to plant closure and consolidation.

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Liquidity and Capital Resources

The following table summarizes the major components of cash flows:

Cash provided (used) by: (In millions)

Effect of exchange rate on cash 1.9 0.1 (2.1)

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

Operating Activities

Cash provided by operating activities increased by $5.6 million in 2020 compared to 2019, as the Company’s initiatives to reduce working capital in 2020 in response to market conditions resulted in positive cash flow of $33.3 million, compared to a usage of cash for working capital of $11.3 million in 2019 and $35.5 million in 2018. The favorable reduction in working capital in 2020 more than offset the impact of lower profitability in 2020 compared to 2019 and 2018.

Investing Activities

Capital expenditures were $26.3 million in 2020, $40.1 million in 2019 and $45.1 million in 2018. These capital expenditures were primarily for growth initiatives, with the majority in our Assembly Components and Engineered Products segments. Capital expenditures in 2020 were lower than in the prior years, as we curtailed non-critical capital spending in response to the COVID-19 pandemic.

In 2019, we spent $8.1 million on acquisition of EFCO, Inc. d/b/a Erie Press Systems. See Note 5 to the consolidated financial statements included elsewhere herein for additional information.

In 2018, we spent $46.9 million on acquisitions of businesses, primarily Canton Drop Forge and Hydrapower Dynamics Limited (“Hydrapower”). See Note 5 to the consolidated financial statements included elsewhere herein for additional information.

Financing Activities

Cash used by financing activities in 2020 included debt repayments of $35.4 million, treasury share repurchases of $7.5 million, dividends of $3.2 million and payments of withholding taxes on share awards of $1.2 million. In the second and third quarter of 2020, we temporarily suspended our quarterly cash dividend to preserve capital in response to challenging market conditions and uncertainty caused by the COVID-19 pandemic. Our Board of Directors once again declared a dividend in the fourth quarter of 2020.

Cash used by financing activities in 2019 included net debt repayments of $4.5 million, dividend payments of $7.0 million, treasury share repurchases of $0.9 million, and payments made of withholding taxes on share awards of $2.9 million.

Cash provided by financing activities in 2018 included net borrowings of $40.3 million on our revolving credit facility to fund our 2018 acquisitions, and repayments of other debt of $12.4 million. During 2018, we also paid dividends of $6.4 million; repurchased treasury shares for $9.0 million; and made payments of withholding taxes on share awards of $3.1 million.

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During September 2018, we repatriated cash of $24.4 million from a foreign subsidiary to the U.S. and utilized the cash to pay down a portion of the amount outstanding under our revolving credit facility in the U.S.

Liquidity

Overall, our cash provided by operating activities in 2020 was used to fund our capital expenditures, repay debt and fund our other financing activities described above. See Note 7 to the consolidated financial statements included elsewhere herein for further discussion of our financing arrangements.

The following table summarizes our indicators of liquidity:

(Dollars in millions)

Cash and cash equivalents $ 55.0 $ 56.0

Gross debt (excluding unamortized debt issuance costs) $ 534.7 $ 568.5

Working capital (excluding cash) $ 344.3 $ 364.7

Net debt as a % of capitalization 54 % 56 %

Our liquidity needs are primarily for working capital and capital expenditures. Our primary sources of liquidity have been cash provided by operations, funds available from existing bank credit arrangements and the sale of our debt securities. Our existing financial resources, including working capital and available bank borrowing arrangements, and anticipated cash from operations are expected to be adequate to meet anticipated cash requirements for at least the next twelve months, including but not limited to our ability to maintain current operations and fund capital expenditure requirements, service our debt and pay dividends.

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

The Company had cash and cash equivalents held by foreign subsidiaries of $44.7 million at December 31, 2020 and $45.4 million at December 31, 2019. 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 June 2018, Park-Ohio entered into Amendment No. 1 to its Seventh Amended and Restated Credit Agreement (the “Credit Agreement”). The Amendment to the Credit Agreement, among other things, provided increases in the revolving credit facility from $350.0 million to $375.0 million, the Canadian revolving subcommitment from $35.0 million to $40.0 million, and the European revolving subcommitment from $25.0 million to $30.0 million. Furthermore, the Company has the option, pursuant to the Credit Agreement, to increase the availability under the revolving credit facility by an aggregate incremental amount up to $100.0 million. In November 2019, Park-Ohio entered into Amendment No. 4 to the Credit Agreement, extending the maturity of the Credit Agreement to November 16, 2024.

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 $18.7 million were borrowed under the Lease Agreement to acquire machinery and equipment as of December 31, 2020.

Covenants

The future availability of bank borrowings under the revolving credit facility provided by the Credit Agreement is based on (1) our calculated availability under the Credit Agreement and (2) if such calculated availability decreases below $46.875 million, our ability to meet a debt service ratio covenant. If our calculated availability is less than $46.875 million, our debt service coverage ratio must be greater than 1.0. At December 31, 2020, our calculated availability under the Credit Agreement was $174.6 million; therefore, the debt service ratio covenant did not apply.

Failure to maintain calculated availability of at least $46.875 million and meet the debt service ratio covenant could materially impact the availability and interest rate of future borrowings. Our debt service coverage ratio could be materially impacted by negative economic trends, including the negative trends caused by the COVID-19 pandemic. To make certain permitted payments as defined under the Credit Agreement, including but not limited to acquisitions and dividends, we must meet defined availability thresholds ranging from $37.5 million to $46.875 million, and a defined debt service coverage ratio of 1.15.

We were also in compliance with the other covenants contained in the revolving credit facility as of December 31, 2020. While we expect to remain in compliance throughout 2021, declines in sales volumes in the future, including further declines caused by the COVID-19 pandemic, could adversely impact our ability to remain in compliance with certain of these financial covenants. Additionally, to the extent our customers are adversely affected by declines in the economy in general, including the decline caused by the COVID-19 pandemic, they may be unable to pay their accounts payable to us on a timely basis or at all, which could make our accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our ability to borrow under such facility.

Dividends

The Company paid dividends to shareholders of $3.2 million during 2020. In the second and third quarter of 2020, we temporarily suspended our quarterly cash dividend to preserve capital in response to challenging market conditions and uncertainty caused by the pandemic. Our Board of Directors once again declared a dividend in the fourth quarter of 2020. In January 2021, our Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend was paid on February 26, 2021 to shareholders of record as of the close of business on February 12, 2021 and resulted in a cash outlay of $1.6 million. 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.

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Contractual Obligations

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

Payments Due or Commitment Expiration Per Period

(In millions) Total Less Than 1 Year 1-3 Years 3-5 Years More than 5 Years

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

(1)Interest obligations are included on the Notes only and assume the Notes are paid at maturity. The calculation of interest on debt outstanding under our revolving credit facility and other variable rate debt ($1.9 million based on 1.35% average interest rate and outstanding borrowings of $143.7 million at December 31, 2020, respectively) is not included above due to the estimation required.

(2)Purchase obligations include contractual obligations for raw materials and services.

(3)Pension and postretirement obligations include projected benefit payments to participants only through 2029.

The table above excludes the liability for unrecognized income tax benefits disclosed in Note 9 to the consolidated financial statements included elsewhere herein, since we cannot predict, with reasonable reliability, the timing of potential cash settlements with the respective taxing authorities.

Off-Balance Sheet Arrangements

We do not have off-balance sheet arrangements, financing or other relationships with unconsolidated entities or other persons, other than the letters of credits disclosed in Note 8 to the consolidated financial statements, included elsewhere herein.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition: We recognize revenue, other than from long-term contracts, when our obligations under the contact terms are satisfied and control transfers to the customer, typically upon shipment. Revenue from certain long-term contracts is accounted for over time, when products are manufactured or services are performed, as control transfers under these

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arrangements. We follow the input method since reasonably reliable estimates of revenue and costs of a contract can be made. See Note 2 of the consolidated financial statements included elsewhere herein for additional disclosures on revenue.

Allowance for Obsolete and Slow-Moving Inventory: Inventories are generally valued using first-in, first-out (“FIFO”) or the weighted-average inventory method; stated at the lower of cost or net realizable value; and have been reduced by an allowance for obsolete and slow-moving inventories. The estimated allowance is based on management’s review of inventories on hand with minimal sales activity, which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for based on estimated selling prices less disposal costs. Though we consider these allowances adequate and proper, changes in economic conditions in specific markets in which we operate could have a material effect on allowances required.

Impairment of Long-Lived Assets: In accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment,” management performs impairment tests of long-lived assets, including property and equipment and operating lease right-of-use assets, whenever an event occurs or circumstances change that indicate that the carrying value may not be recoverable or the useful life of the asset has changed. We review our long-lived assets for indicators of impairment such as a decision to idle certain facilities and consolidate certain operations, a current-period operating or cash flow loss or a forecast that demonstrates continuing losses associated with the use of a long-lived asset and the expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

When we identify impairment indicators, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other group of assets (for example, plant location or asset level). We determine whether the carrying amount of the asset group is recoverable by comparing the carrying value to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. If the carrying value of the asset group exceeds the expected undiscounted cash flows, we estimate the fair value of the asset group by using appraisals or recent selling experience in selling similar assets, or for certain assets with reasonably predictable cash flows by performing a discounted cash flow analysis utilizing the income approach to estimate fair value when market information is not available to determine whether an impairment existed.

Business Combinations: Business combinations are accounted for using the purchase method of accounting under ASC 805, "Business Combinations." This method requires the Company to record assets and liabilities of the business acquired at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The Company uses valuation specialists to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions including discount rates, rates of return on assets, long-term sales growth rates, and royalty rates.

Goodwill and Indefinite-Lived Intangible Assets: As required by ASC 350, “Intangibles - Goodwill and Other” (“ASC 350”), management performs impairment testing of goodwill at least annually, as of October 1 of each year, or more frequently if impairment indicators arise. Management tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment pursuant to ASC 280, “Segment Reporting”, or one level below the operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management. Our reporting units have been identified at the component level. For 2020, 2019 and 2018, we performed quantitative testing for each reporting unit with a goodwill balance.

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

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impairment to remain undetected. We validate our estimates of fair value under the income approach by considering the implied control premium and conclude whether that premium is reasonable based on recent market transactions.

The results of testing as of October 1, 2020, 2019 and 2018 for all reporting units confirmed that the estimated fair value exceeded carrying values, and no impairment existed as of those dates. Based on our 2020 annual impairment test, we determined that the fair value of our FMPG reporting unit, which is included in our Engineered Products segment, exceeded its carrying value by 10% as of the October 1, 2020 testing date. As such, we concluded that the goodwill of this reporting unit of $8.7 million was not impaired as of that date. This reporting unit was negatively impacted by the COVID-19 pandemic throughout 2020, and while we believe that the current assumptions and estimates used in our goodwill testing are reasonable, supportable and appropriate, there can be no assurance that such assumptions and estimates will prove to be accurate predictions of future performance.

Additionally, we test all indefinite-lived intangible assets for impairment at least annually, as of October 1 of each year, or more frequently if impairment indicators arise. In 2020, 2019 and 2018, we utilized a quantitative approach using the royalty relief method. The significant assumptions employed under this method include discount rates, revenue growth rates, including assumed terminal growth rates, and royalty rates. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate ample sensitivity ranges into our analysis of intangible impairment testing, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.

The results of testing as of October 1, 2020, 2019 and 2018 for all reporting units confirmed that the estimated fair value exceeded carrying values, and no impairment existed as of those dates.

See Notes 6 and 7 of the consolidated financial statements included elsewhere herein for additional disclosure on goodwill and indefinite-lived intangibles.

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

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

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

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

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We consult with our actuaries at least annually when reviewing and selecting the discount rates to be used. The discount rates used by the Company are based on yields of various corporate and governmental bond indices with actual maturity dates that approximate the estimated benefit payment streams of the related pension plans. The discount rates are also reviewed in comparison with current benchmark indices, economic market conditions and the movement in the benchmark yield since the previous fiscal year. The liability weighted-average discount rate for the defined benefit pension plan is 2.40% for 2020, compared with 3.22% in 2019. For the other postretirement benefit plan, the rate is 1.95% for 2020 and 2.94% for 2019. This rate represents the interest rates generally available in the United States, which is the Company’s only country with other postretirement benefit liabilities. Another assumption that affects the Company’s pension expense is the expected long-term rate of return on assets. The Company’s pension plans are funded. The weighted-average expected long-term rate of return on assets assumption is 7.75% for 2020. In determining the expected return on plan assets, we consider both historical performance and an estimate of future long-term rates of return on assets similar to those in our plan. We consult with and consider opinions of financial and actuarial experts in developing appropriate return assumptions.

Legal Contingencies: We are involved in a variety of claims, suits, investigations and administrative proceedings with respect to commercial, premises liability, product liability, employment and environmental matters arising from the ordinary course of business. We accrue reserves for legal contingencies, on an undiscounted basis, when it is probable that we have incurred a liability and we can reasonably estimate an amount. When a single amount cannot be reasonably estimated, but the cost can be estimated within a range and no amount within the range is a better estimate than any other amount, we accrue the minimum amount in the range. Based upon facts and information currently available, we believe the amounts reserved are adequate for such pending matters. We monitor the development of legal proceedings on a regular basis and will adjust our reserves when, and to the extent, additional information becomes available.

Environmental

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

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

Seasonality; Variability of Operating Results

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

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Forward-Looking Statements

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

These forward-looking statements, including statements regarding future performance of the Company, that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors that could cause actual results to differ materially from expectations include, but are not limited to, the following: the ultimate impact the COVID-19 pandemic has on our business, results of operations, financial position and liquidity; our substantial indebtedness; the uncertainty of the global economic environment; general business conditions and competitive factors, including pricing pressures and product innovation; demand for our products and services; the impact of labor disturbances affecting our customers; raw material availability and pricing; fluctuations in energy costs; component part availability and pricing; changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate recent and future acquisitions into existing operations; the amounts and timing, if any, of purchases of our common stock; changes in general economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations, including those related to the current global uncertainties and crises, such as tariffs and surcharges; adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities; public health issues, including the outbreak of COVID-19 and its impact on our facilities and operations and our customers and suppliers; our ability to meet various covenants, including financial covenants, contained in the agreements governing our indebtedness; disruptions, uncertainties or volatility in the credit markets that may limit our access to capital; potential disruption due to a partial or complete reconfiguration of the European Union; increasingly stringent domestic and foreign governmental regulations, including those affecting the environment or import and export controls and other trade barriers; inherent uncertainties involved in assessing our potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims and disputes with customers; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending; our ability to negotiate contracts with labor unions; our dependence on key management; our dependence on information systems; our ability to continue to pay cash dividends, and the timing and amount of any such dividends; and the other factors we describe under “Item 1A. Risk Factors” included in this Annual Report on Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved. The Company assumes no obligation to update the information in this Annual Report on Form 10-K, except to the extent required by law.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk, including changes in interest rates. As of December 31, 2020, we are subject to interest rate risk on borrowings under the floating rate revolving credit facility provided by our Credit Agreement, which consisted of borrowings of $143.7 million at December 31, 2020. A 100-basis point increase in the interest rate would have resulted in an increase in interest expense on these borrowings of approximately $1.4 million for the year ended December 31, 2020.

Our foreign subsidiaries generally conduct business in local currencies. We face translation risks related to the changes in foreign currency exchange rates. Amounts invested in our foreign operations are translated in U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as a component of Accumulated other comprehensive loss in the Shareholders' equity section of the accompanying Consolidated Balance Sheets. Sales and expenses at our foreign operations are translated into U.S. dollars at the applicable monthly average exchange rates. Therefore, changes in exchange rates may either positively or negatively affect our net sales and expenses from foreign operations as expressed in U.S. dollars.

Our largest exposures to commodity prices relate to steel and natural gas prices, which have fluctuated widely in recent years. We do not have any commodity swap agreements, forward purchase or hedge contracts.

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements and Supplementary Financial Data

Page

Report of Independent Registered Public Accounting Firm 36

Report of Independent Registered Public Accounting Firm 38

Notes to Consolidated Financial Statements 44

Supplementary Financial Data 67

Schedule II — Valuation and Qualifying accounts 67

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Park-Ohio Holdings Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Park-Ohio Holdings Corp. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 5, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Quantitative Impairment Assessment of Goodwill

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1967.

Cleveland, Ohio

March 5, 2021

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Park-Ohio Holdings Corp.

Opinion on Internal Control over Financial Reporting

We have audited Park-Ohio Holdings Corp. and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Park-Ohio Holdings Corp. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated March 5, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Cleveland, Ohio

March 5, 2021

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Park-Ohio Holdings Corp. and Subsidiaries

Consolidated Balance Sheets

(In millions, except share data)

ASSETS

Current assets:

Cash and cash equivalents $ 55.0 $ 56.0

Unbilled contract revenue 56.9 61.7

Property, plant and equipment, net 236.6 237.6

Operating lease right-of-use assets 68.6 64.3

Intangible assets, net 86.8 90.6

Other long-term assets 16.4 18.8

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Current portion of long-term debt and short-term debt 11.6 16.8

Current portion of operating lease liabilities 12.9 11.9

Accrued employee compensation 28.1 25.7

Other accrued expenses 50.4 39.9

Long-term liabilities, less current portion:

Long-term operating lease liabilities 56.7 53.6

Deferred income taxes 36.8 28.5

Other long-term liabilities 24.2 28.5

Park-Ohio Holdings Corp. and Subsidiaries shareholders' equity:

Capital stock, par value $1 a share

Accumulated other comprehensive loss (18.1) (37.0)

Total Park-Ohio Holdings Corp. and Subsidiaries shareholders' equity 344.2 335.6

Noncontrolling interests 13.7 14.0

Total liabilities and shareholders' equity $ 1,300.5 $ 1,310.4

The accompanying notes are an integral part of these consolidated financial statements.

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Park-Ohio Holdings Corp. and Subsidiaries

Consolidated Statements of Operations

Year Ended December 31,

(In millions, except per share data)

Selling, general and administrative expenses 152.9 177.2 176.1

Gain on sale of assets — — (1.9)

(Loss) income before income taxes (7.3) 54.9 71.8

Income tax benefit (expense) 2.5 (15.2) (16.6)

Net loss (income) attributable to noncontrolling interest 0.3 (1.1) (1.6)

(Loss) earnings per common share attributable to ParkOhio common shareholders:

Weighted-average shares used to compute (loss) earnings per share:

The accompanying notes are an integral part of these consolidated financial statements.

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Park-Ohio Holdings Corp. and Subsidiaries

Consolidated Statements of Comprehensive Income

Year Ended December 31,

(In millions)

Other comprehensive income (loss):

Currency translation 14.1 (1.1) (9.7)

Pensions and other postretirement benefits, net of tax 4.8 5.0 (13.3)

Total other comprehensive income (loss) 18.9 3.9 (23.0)

Total comprehensive income, net of tax 14.1 43.6 32.2

The accompanying notes are an integral part of these consolidated financial statements.

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Park-Ohio Holdings Corp. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

Common Stock

(In whole shares) (In millions)

Comprehensive income (loss) — — — 53.6 — (23.0) 1.6 32.2

Stock-based compensation — — 8.3 — — — — 8.3

Restricted stock awards issued 410,100 0.4 (0.4) — — — — —

Restricted stock cancelled (7,834) — — — — — — —

Dividends — — — (6.4) — — — (6.4)

Purchase of treasury stock (304,512 shares) — — — — (12.1) — — (12.1)

Stock-based compensation — — 4.1 — — — — 4.1

Restricted stock cancelled (115,000) (0.1) 0.1 — — — — —

Dividends — — — (6.3) — — (0.7) (7.0)

Purchase of treasury stock (111,754 shares) — — — — (3.8) — — (3.8)

Comprehensive (loss) income — — — (4.5) — 18.9 (0.3) 14.1

Stock-based compensation — — 6.1 — — — — 6.1

Restricted stock awards issued 447,393 0.4 (0.4) — — — — —

Restricted stock cancelled (5,000) — — — — — — —

Dividends — — — (3.2) — — — (3.2)

Purchase of treasury stock (519,387 shares) — — — — (8.7) — — (8.7)

(1) - Includes 52,173 restricted share units converted to common stock.

Year Ended December 31,

Cash dividends per common share $ 0.25 $ 0.50 $ 0.50

The accompanying notes are an integral part of these consolidated financial statements.

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Park-Ohio Holdings Corp. and Subsidiaries

Consolidated Statements of Cash Flows

Year Ended December 31,

OPERATING ACTIVITIES (In millions)

Stock-based compensation 6.1 4.1 8.3

Gain on sale of assets — — (1.9)

Deferred income taxes 6.2 1.4 0.6

Net impact of Tax Cuts and Jobs Act — — 0.3

Changes in operating assets and liabilities:

Prepaid and other current assets (8.2) 3.5 (9.7)

Accounts payable and accrued expenses 0.1 (14.1) 15.5

Net cash provided by operating activities 69.3 63.7 54.8

INVESTING ACTIVITIES

Purchases of property, plant and equipment (26.3) (40.1) (45.1)

Proceeds from sale of assets 1.4 — 2.8

Business acquisitions, net of cash acquired — (8.1) (46.9)

Net cash used by investing activities (24.9) (48.2) (89.2)

FINANCING ACTIVITIES

(Payments on) proceeds from revolving credit facility, net (29.3) 7.8 40.3

Payments on term loans and other debt (13.0) (10.3) (15.5)

Proceeds from other long-term debt 5.5 1.4 4.0

Proceeds from (payments on) finance lease facilities, net 1.4 (3.4) (0.9)

Purchases of treasury stock (7.5) (0.9) (9.0)

Payments of withholding taxes on stock awards (1.2) (2.9) (3.1)

Net cash (used) provided by financing activities (47.3) (15.3) 9.4

Effect of exchange rate changes on cash 1.9 0.1 (2.1)

(Decrease) increase in cash and cash equivalents (1.0) 0.3 (27.1)

Cash and cash equivalents at beginning of year 56.0 55.7 82.8

Cash and cash equivalents at end of year $ 55.0 $ 56.0 $ 55.7

The accompanying notes are an integral part of these consolidated financial statements.

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share data.)

NOTE 1 — Summary of Significant Accounting Policies

Consolidation and Basis of Presentation: Park-Ohio Holdings Corp. (“ParkOhio,” “we” or the “Company”) is 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. The Company operates three reportable segments: Supply Technologies, Assembly Components and Engineered Products. The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons, other than the letters of credits disclosed in Note 8. The Company leases certain real properties owned by related parties as described in Note 12. Transactions with related parties are not material to the Company’s financial position, results of operations or cash flows.

Accounting Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ from those estimates.

Cash Equivalents: The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable are recorded at net realizable value. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The allowance for doubtful accounts was $5.5 million and $4.9 million at December 31, 2020 and 2019, respectively. The Company’s policy is to measure expected credit losses on accounts receivable based on historical experience, current conditions and reasonable forecasts. During 2020 and 2019, we sold, without recourse, $74.1 million and $112.7 million, respectively, of accounts receivable to mitigate accounts receivable concentration risk and to increase working capital efficiency. Sales of accounts receivable are reflected as a reduction of accounts receivable in the Consolidated Balance Sheets, and the proceeds are included in cash flows from operating activities in the Consolidated Statements of Cash Flows. Expense in the amount of $0.4 million and $1.1 million in 2020 and 2019, respectively, related to the discount on sale of accounts receivable is recorded in the Consolidated Statements of Operations.

Inventories: Inventories are valued using first-in, first-out (“FIFO”) or the weighted-average inventory method and stated at the lower of cost or net realizable value, except for the inventories at Canton Drop Forge (“CDF”). CDF inventories are stated using the last-in, first-out (“LIFO”) method.

Major Classes of Inventories December 31, 2020 December 31, 2019

Raw materials and supplies $ 93.8 $ 92.6

Other Inventory Items

Inventory reserves $ (39.3) $ (34.2)

Consigned inventory $ 13.4 $ 8.2

Property, Plant and Equipment: Property, plant and equipment is carried at cost. Additions and improvements that extend the lives of assets are capitalized, and expenditures for repairs and maintenance are charged to operations as incurred.

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Depreciation of fixed assets, including amounts capitalized under finance leases, is computed by the straight-line method based on the estimated useful lives of the assets ranging from five to 40 years for buildings, and one to 20 years for machinery and equipment (with the majority in the range of three to ten years).

The following table summarizes property, plant and equipment:

Land and land improvements $ 12.7 $ 12.1

Leased property under finance leases 44.8 39.2

Total property, plant and equipment 585.4 560.1

Less: Accumulated depreciation 348.8 322.5

Property, plant and equipment, net $ 236.6 $ 237.6

Year Ended December 31,

Goodwill and Indefinite-Lived Assets: In accordance with Accounting Standards Codification (“ASC”) 350,

“Intangibles — Goodwill and Other” (“ASC 350”), goodwill and indefinite life intangible assets are not amortized but rather

are tested annually for impairment as of October 1, or whenever events or changes in circumstances indicate there may be an

indicator of impairment in accordance with ASC 350. Goodwill is tested for impairment at the reporting unit level and is based on the net assets of each reporting unit, including goodwill and intangible assets, compared to its fair value. Our reporting units have been identified one level below the operating segment level. The Company completed its annual goodwill and indefinite-lived intangibles impairment testing as of October 1 of each year, noting no impairment. To determine fair value for goodwill testing purposes, the Company uses an income approach, utilizing a discounted cash flow model based on forecasted cash flows and weighted average cost of capital. To determine fair value for indefinite-lived intangibles testing, the Company uses a relief-of-royalty method.

See Notes 6 and 7 for additional disclosures about goodwill and indefinite-lived intangibles.

Impairment of Other Long-Lived Assets: Other long-lived assets, including operating lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired if the estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. Impairment losses are measured by comparing the estimated fair value of the asset group to its carrying value.

Fair Values of Financial Instruments: Certain financial instruments are required to be recorded at fair value. The Company measures financial assets and liabilities at fair value in three levels of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Changes in assumptions or estimation methods could affect the fair value estimates; however, we do not believe any such changes would have a material impact on our financial condition, results of operations or cash flows. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and borrowings under the Credit Agreement (as defined in Note 8) approximate fair value at December 31, 2020 and December 31, 2019 because of the short-term nature of these instruments. The fair values of long-term debt and pension plan assets are disclosed in Note 8 and Note 13, respectively.

The Company has not changed its valuation techniques for measuring fair value during 2020, and there were no transfers between levels during the periods presented.

Pension and Other Postretirement Benefits: We account for our pensions and other post-retirement benefits in accordance with ASC Topic 715, "Compensation — Retirement Benefits." Net actuarial gains and losses are amortized to expense when they exceed the 10% accounting corridor, based on the greater of the plan assets or benefit obligations, over an average employee future service period. Refer to Note 13 for more information.

Income Taxes: The Company accounts 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 current enacted tax rates. In determining these amounts, management determined the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, cumulative earnings and losses, expectations of future earnings, taxable income and the extended period of time over which the postretirement benefits will be paid. As required by ASC 740, “Income Taxes” (“ASC 740”), the Company records valuation allowances if, based on the weight of available evidence, it is more likely than not that all or some portion of our deferred tax assets will not be realized.

We have elected to account for global intangible low-taxed income (“GILTI”) as a current period expense. The impact of GILTI at December 31, 2020 and 2019 was an increase in tax expense of $1.8 million and $1.9 million, respectively. The impact of FDII at December 31, 2020 and 2019 was a decrease in tax expense of $0.0 million and $0.8 million, respectively.

Revenue Recognition: The Company recognizes revenue, other than from long-term contracts within the Engineered Products segment, when its obligations under the contract terms are satisfied and control transfers to the customer, typically upon shipment. Revenue from certain long-term contracts is accounted for over time, as products are manufactured or services are performed, as control transfers over time under these arrangements. We follow this method since reasonably reliable estimates of revenue and costs of a contract can be made. See Note 2 for additional disclosure on revenue.

Cost of Sales: Cost of sales is primarily comprised of direct materials and supplies consumed in the manufacture of product; manufacturing labor, depreciation expense and direct overhead expense; and shipping and handling costs.

Concentration of Credit Risk: The Company sells its products to customers in diversified industries. The Company performs ongoing credit evaluations of its customers’ financial condition but does not require collateral to support customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, current conditions and reasonable forecasts. As of December 31, 2020, the Company had uncollateralized receivables with six customers in the automotive industry, each with several locations, aggregating $40.6 million, which represented approximately 16% of the Company’s trade accounts receivable. During 2020, sales to these customers amounted to approximately $228.2 million, which represented approximately 18% of the Company’s net sales.

Environmental: The Company expenses environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Costs that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company records a liability when environmental assessments and/or remedial efforts are probable and can be reasonably estimated. The estimated liability of the Company is not reduced for possible recoveries from insurance carriers and is undiscounted.

Foreign Currency Translation: The functional currency of the Company's subsidiaries outside the United States is the local currency. Financial statements are translated into U.S. dollars at year-end exchange rates for assets and liabilities and weighted-average exchange rates during the period for revenues and expenses. The resulting translation adjustments are recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets. Gains and losses resulting from foreign

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

currency transactions, including intercompany transactions that are not considered long-term investments, are included in the Consolidated Statements of Operations.

Warranties: The Company estimates the amount of warranty claims on sold products that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance.The following table presents the changes in the Company’s product warranty liability:

Year Ended December 31,

Balance at January 1 $ 6.4 $ 6.2 $ 7.9

Claims paid during the year (2.5) (4.1) (5.3)

Weighted-Average Number of Shares Used in Computing (Loss) Earnings Per Share: The following table sets forth the weighted-average number of shares used in the computation of (loss) earnings per share:

Year Ended December 31,

(In whole shares)

Outstanding stock awards with exercise prices greater than the average price of the common shares are anti-dilutive and are not included in the computation of diluted earnings per share. Because the Company was in a loss position for the year ended December 31, 2020, all common shares outstanding would have been anti-dilutive. For the years ended December 31, 2019 and 2018, the anti-dilutive shares were insignificant.

Accounting Standards Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” which replaced the current incurred loss impairment model with a methodology that reflected expected credit losses. Under the new methodology, entities will measure expected credit losses on financial instruments held at amortized cost, including trade receivables, based on historical experience, current conditions and reasonable forecasts. The Company adopted this standard as of January 1, 2020. The adoption of the standard had an immaterial impact on the Company. For the year ended December 31, 2020, the provision and write-offs was not material, and the allowance approximated $5.5 million as of December 31, 2020.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (ASC 740) - Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. The Company adopted this standard as of April 1, 2020. The adoption of the standard had an immaterial impact on the Company's tax provision.

Recent Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which was issued in response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of the London Interbank Offered Rate. The guidance is effective upon issuance and may be adopted on any date on or after March 12, 2020. However, the relief is temporary and generally cannot be

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

applied to contract modifications that occur after December 31, 2022 or hedging relationships entered into or evaluated after that date. The Company is currently evaluating the expected impact of this standard.

No other recently issued ASUs are expected to have a material impact on our results of operations, financial condition or liquidity.

NOTE 2 — Revenue

Substantially all of the Company’s contracts have a single performance obligation to transfer products to or, in limited cases, perform services for the customer. Accordingly, the Company recognizes revenue when its obligations under the contract terms are satisfied and control transfers to the customer. Revenue is recognized at an amount that reflects the consideration the Company expects to receive in exchange for the good or service, including estimated provisions for rebates, discounts, returns and allowances. The Company sells its products both directly to customers, and in limited cases, through distributors, generally under agreements with payment terms between 30-90 days; the Company has no financing components.

The majority of the Company’s revenue is derived from contracts (i) with an original contract length of one year or less, or (ii) for which it recognizes revenue at the amount at which it has the right to invoice as products or services are delivered. The Company has elected the practical expedient not to disclose the value of remaining performance obligations associated with these types of contacts.

The Company also has certain contracts which contain performance obligations that are immaterial in the context of the contract with the customer. The Company has elected the practical expedient not to assess whether these promised goods or services are performance obligations.

Supply Technologies provides our customers with Total Supply ManagementTM, a proactive solutions approach that manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation. Within this segment, contracts routinely consist of a long-term agreement or master service agreement with quantity and pricing specified through individual purchase orders. Revenue is recognized at a point in time, which is the shipping point, as that is when control transfers to the customer.

Assembly Components designs, develops and manufactures: aluminum products; highly efficient, high pressure direct fuel injection fuel rails and pipes; fuel filler pipes that route fuel from the gas cap to the gas tank; and flexible multi-layer plastic and rubber assemblies used to transport fuel from the vehicle's gas tank and then, at extreme high pressure, to the engine's fuel injector nozzles. Within this segment, contracts routinely consist of a long-term agreement or master service agreement with quantity and pricing specified through individual purchase orders. Revenue is recognized at a point in time, which is at the shipping point, as that is when control transfers to the customer.

Engineered Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of highly-engineered products, including induction heating and melting systems, pipe threading systems and forged and machined products. Engineered Products also produces and provides services and spare parts for the equipment it manufactures. In this segment, revenue is recognized for certain revenue streams at a point in time, and over time for other revenue streams. For point in time arrangements, revenue is recognized at the shipping point, as that is when control transfers to the customer. For over time arrangements, revenue is recognized over the time during which products are manufactured or services are performed, as control transfers under these arrangements over a period of time. Over time arrangements represent 22% of the Company's total consolidated sales for the year ended December 31, 2020. The Company uses the input method to calculate the contract revenues to be recognized, which utilizes costs incurred to date in relation to total expected costs to satisfy the Company’s performance obligation under the contract. Incurred costs represent work performed and therefore best depict the transfer of control to the customer.

For over time arrangements, contract liabilities relate to advances or deposits received from the Company’s customers before revenue is recognized. These amounts, which totaled $37.4 million and $35.7 million at December 31, 2020 and December 31, 2019, respectively, are recorded as Deferred revenue in the Consolidated Balance Sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For over time arrangements, contract assets relate to revenue recognized in advance of billings to customers under long-term contracts accounted for under percentage of completion. These amounts, which totaled $56.9 million and $61.7 million at December 31, 2020 and December 31, 2019, respectively, are recorded as Unbilled contract revenue in the Consolidated Balance Sheets.

The Company has elected to account for shipping and handling as activities to fulfill the promise to transfer its products. As such, shipping and handling fees billed to customers in a sales transaction are recorded in Net sales, and shipping and handling costs incurred are recorded in Cost of sales. The Company has elected to exclude from Net sales any value-added, sales or other taxes which it collects concurrent with revenue-producing activities.

We disaggregate our revenue by product line and geographic region of our customer, as we believe these criteria best depict how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. See details in the tables below.

Year Ended December 31,

PRODUCT LINE

Engineered specialty fasteners and other products 65.3 78.6

Fuel, rubber and plastic products 298.4 353.8

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

GEOGRAPHIC REGION

NOTE 3 — Segments

The Company operates three reportable segments: Supply Technologies, Assembly Components and Engineered Products. 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 are 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 deducting corporate costs, certain non-cash and/or non-operating items; Other components of pension income and other postretirement benefits (“OPEB”) expense, net; and interest expense, net.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Results by business segment were as follows:

Year Ended December 31,

Net sales:

Segment operating income:

One-time net expense related to former President — (4.3) —

Gain on sale of assets — — 1.9

(Loss) income before income taxes $ (7.3) $ 54.9 $ 71.8

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Year Ended December 31,

Capital expenditures:

Supply Technologies $ 6.5 $ 6.1 $ 5.2

Depreciation and amortization expense:

Supply Technologies $ 5.1 $ 4.8 $ 5.3

Engineered Products 9.6 8.8 8.4

Identifiable assets:

At December 31, 2020, 2019 and 2018, approximately 70%, 71% and 68%, respectively, of the Company’s assets were located in the United States.

NOTE 4 — Plant Closure and Consolidation

During 2020, the Company recorded charges totaling $4.1 million in its Assembly Components segment in connection with commencement of actions to close and consolidate its extrusion operations in Tennessee and its fuel operations in Shanghai, China, and to complete other cost-reduction actions in this segment. The charges, which are included in Cost of sales in the Consolidated Statements of Operations, are comprised of severance and related employee costs of $1.4 million, asset impairment of $0.5 million, and other facility costs of $2.2 million.

In the Engineered Products segment, the Company recorded charges in 2020 related to plant closure and consolidation, of which $1.0 million are included in Cost of sales in the Consolidated Statements of Operations and $1.2 million are included in Selling, general and administrative expenses in the Consolidated Statements of Operations.

NOTE 5 — Acquisitions

On May 31, 2019, the Company acquired EFCO, Inc. d/b/a Erie Press Systems (“EP”). EP, which is included in the Company's Engineered Products segment, is an industry-recognized leader in the manufacturing of advanced forging presses, hydraulic and mechanical presses, and metal stretch-forming and carbon extrusion machines for several end markets, including aerospace and defense, primary metals and high-speed rail.

During 2019, the Company paid $8.1 million in cash (net of $10.4 million of cash and cash equivalents acquired) for EP. In addition, the purchase agreement stipulates potential contingent consideration of up to an additional $1.0 million based on two-year cumulative earnings before interest and taxes. The estimated fair value of the contingent consideration, valued using level 3 inputs, was $0.0 million as of December 31, 2020. The Consolidated Statement of Operations for the year ended

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2020 includes a credit of $1.0 million in Selling, general and administrative expenses representing the reversal of a previously-recorded liability related to this contingent consideration.

On February 1, 2018, the Company acquired CDF for $35.6 million in cash for its Engineered Products segment. CDF manufactures forgings for high-performance applications in the global aerospace, oil and gas, and other markets.

On October 1, 2018, the Company acquired Hydrapower Dynamics Limited (“Hydrapower”) for $7.8 million in cash for its Assembly Components segment. Headquartered in Birmingham, England, Hydrapower is a manufacturer of fluid handling systems incorporating hoses, manipulated tubes and fabricated assemblies for the bus and truck, automotive, agricultural and construction end markets.

During 2018, the Company made two other acquisitions in its Supply Technologies segment totaling a cash purchase price of $3.5 million. Both acquired companies distribute products into the aerospace and defense end markets.

NOTE 6 — Goodwill

The changes in the carrying amount of goodwill by reportable segment are as follows:

Supply Technologies Assembly Components Engineered Products Total

Acquisitions and adjustments — — 5.0 5.0

Foreign currency translation 0.4 — (0.4) —

Foreign currency translation 0.5 0.1 1.9 2.5

NOTE 7 — Other Intangible Assets

* Not applicable, as these tradenames have an indefinite life.

Amortization expense of other intangible assets as follows:

Year Ended December 31,

Amortization expense $ 6.2 $ 6.5 $ 6.9

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We estimate amortization expense for the five years subsequent to 2020 as follows:

NOTE 8 — Financing Arrangements

Debt consists of the following:

Carrying Value at

Industrial Equipment Group European Facilities December 21, 2021 3.25 % — 4.6

Finance leases Various Various 18.7 17.2

Other Various Various 22.3 23.5

Less: Current portion of long-term debt and short-term debt (11.6) (16.8)

Less: Unamortized debt issuance costs (5.3) (6.5)

Total long-term debt, net $ 517.8 $ 545.2

In 2018, Park-Ohio Industries, Inc. (“Park-Ohio”), the operating subsidiary of Park-Ohio Holdings Corp., entered into Amendment No. 1 to Seventh Amended and Restated Credit Agreement (the “Credit Agreement”) with a group of banks to increase the revolving credit facility from $350.0 million to $375.0 million, the Canadian revolving subcommitment from $35.0 million to $40.0 million and the European revolving subcommitment from $25.0 million to $30.0 million. Furthermore, Park-Ohio has the option, pursuant to the Amended Credit Agreement, to increase the availability under the revolving credit facility by an aggregate incremental amount up to $100.0 million. In November 2019, Park-Ohio entered into Amendment No. 4 to the Credit Agreement, extending the maturity of the Credit Agreement to November 26, 2024.

In April 2017, Park-Ohio completed the issuance, in a private placement, of $350.0 million aggregate principal amount of 6.625% Senior Notes due 2027 (the “Notes”). Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year, and the Notes mature on April 15, 2027. The Notes are unsecured senior obligations of Park-Ohio and are guaranteed on an unsecured senior basis by the 100% owned material domestic subsidiaries of Park-Ohio.

On December 21, 2016, the Company, through its subsidiary, IEGE Industrial Equipment Holding Company Limited, entered into a financing agreement with Banco Bilbao Vizcaya Argentaria, S.A. The financing agreement provides the Company a loan up to $30.7 million as of December 31, 2020, as well as a revolving credit facility for up to $12.3 million to fund working capital and general corporate needs. The Company had $0.0 million outstanding on the loan as of December 31, 2020. No amounts have been drawn on the revolving credit facility as of December 31, 2020.

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 $18.7 million were borrowed under the Lease Agreement as of December 31, 2020 to acquire machinery and equipment. See Note 12 for additional disclosures about finance leases.

On October 21, 2015, the Company, through its subsidiary, Southwest Steel Processing LLC, entered into a financing agreement with the Arkansas Development Finance Authority. The agreement provides the Company the ability to borrow up to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$11.0 million for expansion of its manufacturing facility in Arkansas. The loan matures in September 2025. The Company has borrowed $6.9 million under this agreement as of December 31, 2020.

The following table represents fair value information of the Notes, classified as Level 1, at December 31, 2020 and 2019. The fair value was estimated using quoted market prices.

Maturities of short-term and long-term debt, excluding finance leases, during each of the five years subsequent to December 31, 2020 are as follows:

Foreign subsidiaries of the Company had $13.0 million of borrowings at December 31, 2020 and $16.2 million at December 31, 2019.

We had outstanding bank guarantees and letters of credit of approximately $34.9 million at December 31, 2020 and $33.8 million at December 31, 2019 under our credit arrangements.

The weighted average interest rate on all debt was approximately 5.4% in 2020 and 5.8% in 2019 and 2018.

NOTE 9 — Income Taxes

(Loss) income before income taxes consists of the following:

Year Ended December 31,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income taxes consists of the following:

Year Ended December 31,

Current (benefit) expense:

Deferred expense (benefit):

Income tax (benefit) expense $ (2.5) $ 15.2 $ 16.6

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted on March 27, 2020. The CARES Act was a substantial tax-and-spending package intended to provide additional economic stimulus to address the impact of the COVID-19 pandemic. Significant impacts of the CARES Act include the ability to carry back a net operating loss five years and an increase of the Internal Revenue Code Section 163(j) interest expense disallowance limitations from 30% to 50% of adjusted taxable income. The Company has recorded a significant benefit for the impact of the net operating loss carryback, which provides for refunds related to tax years in which the U.S. tax rate was 35% versus the current U.S. tax rate of 21%. This additional tax benefit of 14% increased the 2020 tax benefit.

A reconciliation of income tax (benefit) expense computed by applying the statutory federal income tax rate to income tax expense as recorded is as follows:

Year Ended December 31,

Income tax (benefit) expense at U.S. statutory rate $ (1.5) $ 11.5 $ 15.1

Effect of state income taxes, net (0.3) 0.3 0.6

Effect of foreign operations 1.5 1.9 3.5

Valuation allowance 0.6 0.6 (3.0)

Uncertain tax positions (1.0) 0.1 (0.3)

Non-deductible items 1.5 2.5 1.3

Equity compensation 0.6 — —

CARES Act NOL carryback (5.3) — —

Foreign tax credit (0.8) (1.7) (2.2)

Other tax credits (0.3) (0.8) —

Income tax (benefit) expense as recorded $ (2.5) $ 15.2 $ 16.6

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant components of the Company’s net deferred income tax assets and liabilities are as follows:

Year Ended December 31,

Deferred income tax assets:

Postretirement benefit obligation $ 1.7 $ 1.7

Net operating loss and credit carryforwards 16.4 11.6

Operating lease liabilities 15.4 13.8

Disallowed interest — 4.6

Total deferred income tax assets 44.6 48.1

Deferred income tax liabilities:

Depreciation and amortization 20.1 21.0

Lease right-of-use assets 15.2 13.5

Total deferred income tax liabilities 71.4 68.2

Net deferred income tax liabilities prior to valuation allowances (26.8) (20.1)

Valuation allowances (6.2) (4.8)

Net deferred income tax liability $ (33.0) $ (24.9)

At December 31, 2020, the Company has U.S., state and foreign net operating loss carryforwards and U.S. foreign tax credit carryforwards for income tax purposes. The foreign net operating loss carryforward is $34.7 million, of which $15.0 million expires between 2021 and 2040 and the remainder has no expiration date. The Company has a tax benefit from a state net operating loss carryforward of $3.2 million that expires between 2021 and 2040. The Company also has a non-consolidated U.S. net operating loss carryforward of $2.2 million that expires between 2036 and 2037. The foreign tax credit carryforward is $0.5 million and expires in 2029.

As of December 31, 2020 and 2019, the Company was not in a cumulative three-year loss position and it was determined that it was more likely than not that its U.S. deferred tax assets will be realized. The Company reviews all valuation allowances related to deferred tax assets and will reverse these valuation allowances, partially or totally, when appropriate under ASC 740.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Unrecognized Tax Benefit — January 1 $ 3.7 $ 0.9 $ 1.2

Gross Increases to Tax Positions Related to Current Year — 0.5 0.1

Gross Increases to Tax Positions Related to Prior Years 0.1 2.6 —

Gross Decreases to Tax Positions Related to Prior Years (0.5) — (0.1)

Gross Decreases related to settlements with taxing authorities — — (0.1)

Expiration of Statute of Limitations (1.2) (0.3) (0.2)

Unrecognized Tax Benefit — December 31 $ 2.1 $ 3.7 $ 0.9

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $0.2 million at December 31, 2020 and $1.0 million at December 31, 2019. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2020 and 2019, the Company recognized a tax benefit of approximately $0.1 million and a tax expense of $0.1 million, respectively, in net interest and penalties due to the expiration of various uncertain tax positions. The Company had approximately $0.2 million for the payment of interest and penalties accrued at both December 31, 2020 and 2019. It is reasonably possible that, within the next twelve months, the amount of gross unrecognized tax benefits could be reduced by approximately $0.2 million as a result of the closure of tax statutes related to existing uncertain tax positions.

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 2017 through 2020 remain open for examination by the Internal Revenue Service and 2014 through 2020 remain open for examination by various state and foreign taxing authorities.

As of December 31, 2020, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $201.8 million. Because $135.9 million of such earnings have previously been subject to the one-time transition taxes required by the U.S. Tax Cuts and Jobs Act (the “TCJA”), any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign withholding and state income taxes. We intend, however, to indefinitely reinvest these earnings and expect future U.S. cash generation to be sufficient to meet future U.S. cash needs.

NOTE 10 — Stock-Based Compensation

The Company follows the provisions of ASC 718, “Compensation — Stock Compensation” (“ASC 718”), which requires all share-based payments to employees to be recognized in the income statement based on their grant date fair values. Compensation expense for awards with service conditions only that are subject to graded vesting is recognized on a straight-line basis over the term of the vesting period.

A summary of time-based and performance-based activity for the year ended December 31, 2020 is as follows:

Time-Based Performance-Based

(in whole shares) (in whole shares)

(a) Included in the granted amount are 6,100 restricted share units.

The Company recognized compensation expense of $6.1 million, $4.1 million and $8.3 million for the years ended December 31, 2020, 2019 and 2018, respectively, relating to time-based awards and performance-based awards. The amount in 2019 is net of $1.7 million of forfeitures related to the departure of the Company’s former President, Chairman and Chief Executive Officer (“Former CEO”).

The 50,000 share performance-based award in 2019 relates to a five-year cumulative profit target through 2023. Through December 31, 2020, no compensation expense was recognized as achievement of the performance target is deemed not probable.

The total fair value of restricted shares and share units that vested during the years ended December 31, 2020, 2019 and 2018 was $6.4 million, $8.0 million and $8.3 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2020, the Company had unrecognized compensation expense of $10.1 million related to restricted shares. The unrecognized compensation expense is expected to be recognized over a total weighted average period of 2.1 years.

NOTE 11 — Commitments and Contingencies

The Company is subject to various pending and threatened legal proceedings arising in the ordinary course of business. The Company records a liability for loss contingencies in the consolidated financial statements when a loss is known or considered probable and the amount can be reasonably estimated. Our provisions are based on historical experience, current information and legal advice, and they may be adjusted in the future based on new developments. Estimating probable losses requires the analysis of multiple forecasted factors that often depend on judgments and potential actions by third parties. Although it is not possible to predict with certainty the ultimate outcome or cost of these matters, the Company believes they will not have a material adverse effect on our consolidated financial statements.

Our subsidiaries are involved in a number of contractual and warranty-related disputes. We believe that appropriate liabilities for these contingencies have been recorded; however, actual results may differ materially from our estimates.

In addition to the routine lawsuits and asserted claims noted above, we are also a co-defendant in approximately 118 cases asserting claims on behalf of approximately 219 plaintiffs alleging personal injury as a result of exposure to asbestos. These asbestos cases generally relate to production and sale of asbestos-containing products and allege various theories of liability, including negligence, gross negligence and strict liability, and seek compensatory and, in some cases, punitive damages. In every asbestos case in which we are named as a party, the complaints are filed against multiple named defendants. To the extent that any specific amount of damages is sought, the amount applies to claims against all named defendants.

Historically, we have been dismissed from asbestos cases on the basis that the plaintiff incorrectly sued one of our subsidiaries or because the plaintiff failed to identify any asbestos-containing product manufactured or sold by us or our subsidiaries. We intend to vigorously defend these asbestos cases and believe we will continue to be successful in being dismissed from such cases. However, it is not possible to predict the ultimate outcome of asbestos-related lawsuits, claims and proceedings due to the unpredictable nature of personal injury litigation.

Despite this uncertainty, and although our results of operations and cash flows for a particular period could be adversely affected by asbestos-related lawsuits, claims and proceedings, management believes that the ultimate resolution of these matters will not have a material adverse effect on our financial condition, liquidity or results of operations. Among the factors management considered in reaching this conclusion were: (a) our historical success in being dismissed from these types of lawsuits on the bases mentioned above; (b) many cases have been improperly filed against one of our subsidiaries; (c) in many cases the plaintiffs have been unable to establish any causal relationship to us or our products or premises; (d) in many cases, the plaintiffs have been unable to demonstrate that they have suffered any identifiable injury or compensable loss at all or that any injuries that they have incurred did in fact result from alleged exposure to asbestos; and (e) the complaints assert claims against multiple defendants and, in most cases, the damages alleged are not attributed to individual defendants. Additionally, we do not believe that the amounts claimed in any of the asbestos cases are meaningful indicators of our potential exposure because the amounts claimed typically bear no relation to the extent of the plaintiff's injury, if any.

NOTE 12 - Lease Arrangements

We lease manufacturing facilities, warehouse space, office space, machinery and equipment, information technology equipment and vehicles under operating leases. We also lease one building and machinery and numerous equipment under finance leases. For operating leases with terms greater than 12 months, we record the operating right-of-use asset and related lease liability at the present value of lease payments over the lease term. In certain real estate leases, we have options to renew lease terms, generally at our sole discretion. We evaluate renewal options at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The discount rate implicit in our operating leases is generally not determinable, and therefore the Company determines the discount rate for each lease based on its incremental borrowing rate. The incremental borrowing rate is calculated based on lease term, currency and collateral adjustments.

During 2020, the Company obtained right-of-use assets in exchange for new operating lease liabilities of $18.0 million.

Balance Sheet as of December 31, 2020 and 2019

Classification on the Balance Sheet December 31, 2020 December 31, 2019

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PKOH · 10-K · period ended 2020-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

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PKOH · 10-K · period ended 2020-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

PKOH US Equity