historical financial data contained throughout this annual report onForm 10-K exclude the results of operations of the Amcast Components Group other than for the period from August 23, 2004 through December 31, 2006.
Markets and Customers. The five largest customers, ofwithin which Aluminum Products sells to multiple operating divisions through sole source
3
sole-source contracts, accounted for approximately 79%46% of Aluminum Products sales in 2003.for 2006 and 53% for 2005. The loss of any one of these customers could have a material adverse effect on the results of operations and financial condition of this segment.
Competition. The domestic aluminum castings industry is highly competitive. Aluminum Products competes principally on the basis of its ability to: (i)(1) engineer and manufacture high quality, cost effective,high-quality, cost-effective, machined castings utilizing multiple casting technologies in large volumes; (ii)(2) provide timely delivery; and (iii)(3) retain the manufacturing flexibility necessary to quickly adjust to the needs of its customers. Although there are a number of smaller domestic companies with aluminum casting capabilities, the customers’ stringent quality and service standards and lean manufacturing techniques enable only large suppliers with the requisite quality certifications to compete effectively. As one of these suppliers, Aluminum Products is structuredwell-positioned to benefit as customers continue to consolidate their supplier base.
Manufactured Products
The
Our Manufactured Products segment includesoperates a diverse group of niche manufacturing businesses involved in the manufacturingthat design and manufacture a broad range of highly-engineered products, including induction heating and melting systems, and other capital equipment,pipe threading systems, rubber products and forged and machined products. Manufactured Products generated net salesWe manufacture these products in eleven domestic facilities and nine international facilities in Canada, Mexico, the United Kingdom, Belgium, Germany, Poland, China and Japan. In January 2006, the Company completed the acquisition of $156.6 million, or 25%all of the Company’s net sales,capital stock of Foundry Service GmbH (“Foundry Service”). In December 2005, we acquired substantially all of the assets of Lectrotherm, Inc. (“Lectrotherm”), which is primarily a provider of field service and spare parts for the year ended December 31, 2003. The five largest customers, within which Manufactured induction heating and melting systems, located in Canton, Ohio.
Products sells primarily through sole-source contracts to multiple operating divisions, accounted for approximately 17% of Manufactured Products sales in 2003. The loss of business from any one of these customers would not have a material adverse effect on this segment.
The Company’sand Services. Our induction heating and melting business Ajax Tocco Magnethermic (“Ajax Tocco”),utilizes proprietary technology and specializes in the engineering, construction, service and repair of induction heating and melting systems, primarily for the steel, coatings, forging, foundry, automotive and construction equipment industries. Ajax Tocco’sOur induction heating and melting systems are engineered and built to customer specifications and are used primarily for melting, heating, and surface hardening of metals and curing of coatings. Approximately half40% to 45% of Ajax Tocco’s revenueour induction heating and melting systems’ revenues is derived from the sale of replacement parts and provision of field service, primarily for the installed base of itsour own products. The Company also produces other capital equipment includingOur pipe threading equipment and related parts forbusiness serves the oil drillingand gas industry, and complete oven systems that combine heat processingwhile our industrial ovens provide heating and curing technologies with material handlingfor bottling and conveying methods. The Companyother applications. We also engineersengineer and installsinstall mechanical forging presses, for the automotive and truck manufacturing industries, and sellssell spare parts and providesprovide field service for the large existing base of mechanical forging presses and hammers in North America. TheseWe machine, induction harden and surface finish crankshafts and camshafts, used primarily in locomotives. We forge aerospace and defense structural components such as landing gears and struts, as well as rail products such as railcar center plates and draft lugs. We injection mold rubber and silicone products, including wire harnesses, shock and vibration mounts, spark plug boots and nipples and general sealing gaskets.
Markets and Customers. We sell induction heating and other capital equipment unitsto component manufacturers and OEMs in the steel, coatings, forging, foundry, automotive, truck, construction equipment and oil and gas industries. We sell forged and machined products to locomotive manufacturers, machining companies andsub-assemblers who finish aerospace and defense products for OEMs, and railcar builders and maintenance providers. We sell rubber products primarily tosub-assemblers in the automotive, food processing and consumer appliance industries.
Competition. We compete with small to medium-sized domestic and international equipment manufacturers on the basis of service capability, ability to meet customer specifications, delivery performance and engineering expertise. We compete domestically and internationally with small to medium-
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The Company manufactures injection molded rubber
sized forging and silicone products for use in automotive and industrial applications. The rubber products facilities manufacture products for customers in the automotive, food processing and consumer appliance industries. Their products include wire harnesses, shock and vibration mounts, spark plug boots and nipples and general sealing gaskets. During 2002, the Company reduced rubber products’ costs and discontinued underperforming products by selling one business unit and closing one other manufacturing plant. The rubber products operating units compete primarilymachining businesses on the basis of priceproduct quality and product qualityprecision. We compete with other domestic small- to medium-sized manufacturers of injection molded rubber and silicone products.
domestic and international OEMs and other manufacturers, primarily in the transportation industries. The Company’s forged and machined products business competes domestically and internationally with other small- to medium-sized businesses on the basis of price and product quality and precision.quality.
The Company manufactures forged and machined products produced from closed-die metal forgings of up to 6,000 pounds. These products include crankshafts, aircraft structural components such as landing gears and rail products such as railcar center plates. Aerospace forgings are sold primarily to machining companies, and sub-assemblers who finish the products for sale to OEMs. The Company also machines, induction hardens and surface finishes crankshafts and camshafts used primarily in locomotives. In fourth quarter 2003, the Company decided to shut down its locomotive crankshaft forging plant, and entered into a long-term supply contract to purchase these forgings at a more favorable price from a third-party supplier. The 2003 restructuring is expected to increase both profitability and cash flow by approximately $15.0 million over the next five years. Forged rail products are sold primarily to railcar builders and maintenance providers. Forged and machined products are sold to a wide variety of
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Sales and Marketing
ILS markets its products and services in the United States, Mexico, Canada, Western and Eastern Europe and East and South Asia primarily through its direct sales force, which is assisted by applications engineers who provide the technical expertise necessary to assist the engineering staff of OEM customers in designing new products and improving existing products. Aluminum Products primarily markets and sells its products in North America through internal sales personnel. Manufactured Products primarily markets and sells its products in North America through both internal sales personnel and independent sales representatives. Induction heating and pipe threading equipment is also marketed and sold in Europe, Asia, Latin America and North Africa through both internal sales personnel and independent sales representatives. In some instances, the internal engineering staff assists in the sales and marketing effort through joint design and applications-engineering efforts with major customers.
Raw Materials and Suppliers
ILS purchases substantially all of its production components from third-party suppliers. Aluminum Products and Manufactured Products purchase substantially all of their raw materials, principally metals and certain component parts incorporated into their products, from third-party suppliers and manufacturers. Management believes that raw materials and component parts other than certain specialty products are available from alternative sources. ILS has multiple sources of supply for its products. Approximately 25%An increasing portion of ILS’ILS’s delivered components are purchased from suppliers in foreign countries, primarily Canada, Taiwan, China, South Korea, Singapore, India and China. The Company ismultiple European countries. We are dependent upon the ability of such suppliers to meet stringent quality and performance standards and to conform to delivery schedules. Most raw materials required by Aluminum Products and Manufactured Products are commodity products available from several domestic suppliers.
Customer Dependence
The Company has
We have thousands of customers who demand quality, delivery and service. Numerous customers have recognized our performance by awarding the Companyus with supplier quality awards. Navistar is theThe only customer accountingwhich accounted for more than 10% of our consolidated sales withinin any of the past three years (onlywas International Truck in the year 2003).
all three years. In September 2005, we entered into an exclusive, multi-year agreement with International Truck to supply a wide range of production components, expiring on December 31, 2008.
Backlog
Management believes that backlog is not a meaningful measure for ILS, as a majority of ILS’ILS’s customers requirejust-in-time delivery of production components. Management believes that Aluminum Products’ and Manufactured Products’ backlog as of any particular date is not a meaningful measure of sales for any future period as a significant portion of sales are on a release or firm order basis.
Environmental, Health and Safety Regulations
The Company is
We are subject to numerous federal, state and local laws and regulations designed to protect public health and the environment, (“Environmental Laws”), particularly with regard to discharges and emissions, as well as handling, storage, treatment and disposal, of various substances and wastes. Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil and criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures. Pursuant to certain Environmental Laws,environmental laws, owners or operators of facilities may be liable for the costs of response or other corrective actions for contamination identified at or emanating from current or former locations, without regard to whether the owner or operator knew of, or
5
was responsible for, the presence of any such contamination, and for related damages to natural resources. Additionally, persons who arrange for the disposal or treatment of hazardous substances or materials may be liable
5
for costs of response at sites where they are located, whether or not the site is owned or operated by such person.
From time to time, we have incurred and are presently incurring costs and obligations for correcting environmental noncompliance and remediating environmental conditions at certain of our properties. In general, the Company haswe have not experienced difficulty in complying with Environmental Lawsenvironmental laws in the past, and compliance with Environmental Lawsenvironmental laws has not had a material adverse effect on the Company’sour financial condition, liquidity and results of operations. The Company’sOur capital expenditures on environmental control facilities were not material during the past five years and such expenditures are not expected to be material to the Companyus in the foreseeable future.
The Company has
We are currently, and may in the future, be required to incur costs relating to the investigation or remediation of property, including property where we have disposed of our waste, and for addressing environmental conditions. For instance, 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. The Company isWe are participating in the cost of certainclean-up efforts at several of these sites. The availability of third-party payments or insurance for environmental remediation activities is subject to risks associated with the willingness and ability of the third party to make payments. However, the Company’sour share of such costs has not been material and, based on available information, the Company doeswe do not expect itsour exposure at any of these locations to have a material adverse effect on itsour results of operations, liquidity or financial condition.
Information as to Industry Segment Reporting and Geographic Areas
The information contained under the heading of “Note L—B—Industry Segments” of the notes to the consolidated financial statements included herein relating to (i)(1) net sales, income (loss) before income taxes, and change in accounting principles, identifiable assets and other information by industry segment and (ii)(2) net sales and assets by geographic region for the years ended December 31, 2003, 2002,2006, 2005 and 20012004 is incorporated herein by reference.
Recent Developments
The information contained under the heading of “Note D—Acquisitions and Dispositions” and “Note N—Restructuring and Unusual Charges”C—Acquisitions” of the notes to the consolidated financial statements included herein is incorporated herein by reference.
Available Information
The Company files
We file annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K and other information, including amendments to these reports, with the Securities and Exchange Commission (“SEC”). The public can obtain copies of these materials by visiting the SEC’s Public Reference Room at 450 Fifth100 F Street, NW,NE, Washington, D.C. 20549, by calling the SEC at1-800-SEC-0330, or by accessing the SEC’s website at http://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, we make such materials available on our website at http://www.pkoh.com. The information on our website is not a part of this annual report onForm 10-K.
| Item 1A. | Risk Factors |
The following are certain risk factors that could affect our business, results of operations and financial condition. These risks are not the Company makes copies availableonly ones we face. If any of the following risks occur, our business, results of operations or financial condition could be adversely affected.
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The industries in which we operate are cyclical and are affected by the economy in general.
We sell products to customers in industries that experience cyclicality (expectancy of recurring periods of economic growth and slowdown) in demand for products, and may experience substantial increases and decreases in business volume throughout economic cycles. Industries we serve, including the automotive and vehicle parts, heavy-duty truck, industrial equipment, steel, rail, electrical distribution and controls, aerospace and defense, power sports/fitness equipment, HVAC, electrical components, appliance and semiconductor equipment industries, are affected by consumer spending, general economic conditions and the impact of international trade. A downturn in any of the industries we serve, particularly the domestic automotive or heavy-duty truck industry, could have a material adverse effect on our financial condition, liquidity and results of operations.
Because a significant portion of our sales is to the public, freeautomotive and heavy-duty truck industries, a decrease in the demand of charge.these industries or the loss of any of our major customers in these industries could adversely affect our financial health.
Demand for certain of our products is affected by, among other things, the relative strength or weakness of the automotive and heavy-duty truck industries. The domestic automotive and heavy-duty truck industries are highly cyclical and may be adversely affected by international competition. In addition, the automotive and heavy-duty truck industries are significantly unionized and subject to work slowdowns and stoppages resulting from labor disputes. We derived 19% and 30% of our net sales during the year ended December 31, 2006 from the automobile and heavy-duty truck industries, respectively. International Truck, our largest customer, accounted for approximately 14% of our net sales for the year ended December 31, 2006. The loss of a portion of business to International Truck or any of our other major automotive or heavy-duty truck customers could have a material adverse effect on our financial condition, cash flow and results of operations. We cannot assure you that we will maintain or improve our relationships in these industries or that we will continue to supply this customer at current levels.
Our ILS customers are generally not contractually obligated to purchase products and services from us.
Most of the products and services are provided to our ILS customers under purchase orders as opposed to long-term contracts. When we do enter into long-term contracts with our customers, many of them only establish pricing terms and do not obligate our customers to buy required minimum amounts from us or to buy from us exclusively. Accordingly, many of our ILS customers may decrease the amount of products and services that they purchase from us or even stop purchasing from us altogether, either of which could have a material adverse effect on our net sales and profitability.
We are dependent on key customers.
We rely on several key customers. For the year ended December 31, 2006, our top seven customers accounted for approximately 31% of our net sales and our top customer, International Truck, accounted for approximately 14% of our net sales. Many of our customers place orders for products on an as-needed basis and operate in cyclical industries and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future. Due to competitive issues, we have lost key customers in the past and may again in the future. Customer orders are dependent upon their markets and may be subject to delays or cancellations. As a result of dependence on our key customers, we could experience a material adverse effect on our business and results of operations if any of the following were to occur:
| • | the loss of any key customer, in whole or in part; | |
| • | the insolvency or bankruptcy of any key customer; |
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| • | a declining market in which customers reduce orders or demand reduced prices; or | |
| • | a strike or work stoppage at a key customer facility, which could affect both their suppliers and customers. |
If any of our key customers become insolvent or file for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payments we received in the preference period prior to a bankruptcy filing may be potentially recoverable, which could adversely impact our results of operations.
Three of our substantial customers filed voluntary petitions for reorganization under Chapter 11 of the bankruptcy code during 2005 and 2006. Delphi Corp. and Dana Corporation, which are primarily customers of our Manufactured Products and Aluminum Products segments, filed in 2005, while Werner Ladder, which is primarily a customer of the ILS segment, filed in 2006. Collectively, these bankruptcies reduced our operating income in the aggregate by $1.8 million during 2005 and 2006.
We operate in highly competitive industries.
The markets in which all three of our segments sell their products are highly competitive. Some of our competitors are large companies that have greater financial resources than we have. We believe that the principal competitive factors for our ILS segment are an approach reflecting long-term business partnership and reliability, sourced product quality and conformity to customer specifications, timeliness of delivery, price and design and engineering capabilities. We believe that the principal competitive factors for our Aluminum Products and Manufactured Products segments are product quality and conformity to customer specifications, design and engineering capabilities, product development, timeliness of delivery and price. The rapidly evolving nature of the markets in which we compete may attract new entrants as they perceive opportunities, and our competitors may foresee the course of market development more accurately than we do. In addition, our competitors may develop products that are superior to our products or may adapt more quickly than we do to new technologies or evolving customer requirements.
We expect competitive pressures in our markets to remain strong. These pressures arise from existing competitors, other companies that may enter our existing or future markets and, in some cases, our customers, which may decide to internally produce items we sell. We cannot assure you that we will be able to compete successfully with our competitors. Failure to compete successfully could have a material adverse effect on our financial condition, liquidity and results of operations.
The loss of key executives could adversely impact us.
Our success depends upon the efforts, abilities and expertise of our executive officers and other senior managers, including Edward Crawford, our Chairman and Chief Executive Officer, and Matthew Crawford, our President and Chief Operating Officer, as well as the president of each of our operating units. An event of default occurs under our revolving credit facility if Messrs. E. Crawford and M. Crawford or certain of their related parties own less than 15% of Holdings’ outstanding common stock, or if they own less than 15% of such stock, then if either Mr. E. Crawford or Mr. M. Crawford ceases to hold the office of chairman, chief executive officer or president. The loss of the services of Messrs. E. Crawford and M. Crawford, senior and executive officers,and/or other key individuals could have a material adverse effect on our financial condition, liquidity and results of operations.
We may encounter difficulty in expanding our business through targeted acquisitions.
We have pursued, and may continue to pursue, targeted acquisition opportunities that we believe would complement our business, such as the acquisitions of NABS in 2006 and PPG in 2005. We cannot assure you that we will be successful in consummating any acquisitions.
Any targeted acquisitions will be accompanied by the risks commonly encountered in acquisitions of businesses. We may not successfully overcome these risks or any other problems encountered in connection with any of our acquisitions, including the possible inability to integrate an acquired business’
8
operations, IT technologies, services and products into our business, diversion of management’s attention, the assumption of unknown liabilities, increases in our indebtedness, the failure to achieve the strategic objectives of those acquisitions and other unanticipated problems, some or all of which could materially and adversely affect us. The process of integrating operations could cause an interruption of, or loss of momentum in, our activities. Any delays or difficulties encountered in connection with any acquisition and the integration of our operations could have a material adverse effect on our business, results of operations, financial condition or prospects of our business.
Our ILS business depends upon third parties for substantially all of our component parts.
ILS purchases substantially all of its component parts from third-party suppliers and manufacturers. Our business is subject to the risk of price fluctuations and periodic delays in the delivery of component parts. Failure by suppliers to continue to supply us with these component parts on commercially reasonable terms, or at all, would have a material adverse effect on us. We depend upon the ability of these suppliers, among other things, to meet stringent performance and quality specifications and to conform to delivery schedules. Failure by third-party suppliers to comply with these and other requirements could have a material adverse effect on our financial condition, liquidity and results of operations.
The raw materials used in our production processes and by our suppliers of component parts are subject to price and supply fluctuations that could increase our costs of production and adversely affect our results of operations.
Our supply of raw materials for our Aluminum Products and Manufactured Products businesses could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect our results of operations and profit margins. While we generally attempt to pass along increased raw materials prices to our customers in the form of price increases, there may be a time delay between the increased raw materials prices and our ability to increase the price of our products, or we may be unable to increase the prices of our products due to pricing pressure or other factors.
Our suppliers of component parts, particularly in our ILS business, may significantly and quickly increase their prices in response to increases in costs of the raw materials, such as steel, that they use to manufacture our component parts. We may not be able to increase our prices commensurate with our increased costs. Consequently, our results of operations and financial condition may be materially adversely affected.
The energy costs involved in our production processes and transportation are subject to fluctuations that are beyond our control and could significantly increase our costs of production.
Our manufacturing process and the transportation of raw materials, components and finished goods are energy intensive. Our manufacturing processes are dependent on adequate supplies of electricity and natural gas. A substantial increase in the cost of transportation fuel, natural gas or electricity could have a material adverse effect on our margins. We experienced widely fluctuating natural gas costs in 2005 and in 2006. We may experience higher than anticipated gas costs in the future, which could adversely affect our results of operations. In addition, a disruption or curtailment in supply could have a material adverse effect on our production and sales levels.
Potential product liability risks exist from the products which we sell.
Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and sale of our products and products of third-party vendors that we use or resell. While we currently maintain what we believe to be suitable and adequate product liability insurance, we cannot assure you that we will be able to maintain our insurance on acceptable terms or that our insurance will
9
provide adequate protection against potential liabilities. In the event of a claim against us, a lack of sufficient insurance coverage could have a material adverse effect on our financial condition, liquidity and results of operations. Moreover, even if we maintain adequate insurance, any successful claim could have a material adverse effect on our financial condition, liquidity and results of operations.
Some of our employees belong to labor unions, and strikes or work stoppages could adversely affect our operations.
As of December 31, 2006, we were a party to eight collective bargaining agreements with various labor unions that covered approximately 690 full-time employees. Our inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. If the unionized workers were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized, we could experience a significant disruption of our operations and higher ongoing labor costs, which could have a material adverse effect on our business, financial condition and results of operations.
We operate and source internationally, which exposes us to the risks of doing business abroad.
Our operations are subject to the risks of doing business abroad, including the following:
| • | fluctuations in currency exchange rates; | |
| • | limitations on ownership and on repatriation of earnings; | |
| • | transportation delays and interruptions; | |
| • | political, social and economic instability and disruptions; | |
| • | government embargoes or foreign trade restrictions; | |
| • | the imposition of duties and tariffs and other trade barriers; | |
| • | import and export controls; | |
| • | labor unrest and current and changing regulatory environments; | |
| • | the potential for nationalization of enterprises; | |
| • | difficulties in staffing and managing multinational operations; | |
| • | limitations on our ability to enforce legal rights and remedies; and | |
| • | potentially adverse tax consequences. |
Any of these events could have an adverse effect on our operations in the future by reducing the demand for our products and services, decreasing the prices at which we can sell our products or otherwise having an adverse effect on our business, financial condition or results of operations. We cannot assure you that we will continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject. We also cannot assure you that these laws will not be modified.
We are subject to significant environmental, health and safety laws and regulations and related compliance expenditures and liabilities.
Our businesses are subject to many foreign, federal, state and local environmental, health and safety laws and regulations, particularly with respect to the use, handling, treatment, storage, discharge and disposal of substances and hazardous wastes used or generated in our manufacturing processes. Compliance with these laws and regulations is a significant factor in our business. We have incurred and expect to continue to incur significant expenditures to comply with applicable environmental laws and regulations. Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial
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orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions.
We are currently, and may in the future be, required to incur costs relating to the investigation or remediation of property, including property where we have disposed of our waste, and for addressing environmental conditions. Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities. Consequently, we cannot assure you that existing or future circumstances, the development of new facts or the failure of third parties to address contamination at current or former facilities or properties will not require significant expenditures by us.
We expect to continue to be subject to increasingly stringent environmental and health and safety laws and regulations. It is difficult to predict the future interpretation and development of environmental and health and safety laws and regulations or their impact on our future earnings and operations. We anticipate that compliance will continue to require increased capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities arising for example out of discovery of previously unknown conditions or more aggressive enforcement actions, could adversely affect our results of operations, and there is no assurance that they will not exceed our reserves or have a material adverse effect on our financial condition.
If our information systems fail, our business will be materially affected.
We believe that our information systems are an integral part of the ILS segment and, to a lesser extent, the Aluminum Products and Manufactured Products segments. We depend on our information systems to process orders, manage inventory and accounts receivable collections, purchase products, maintain cost-effective operations, route and re-route orders and provide superior service to our customers. We cannot assure you that a disruption in the operation of our information systems used by ILS, including the failure of the supply chain management software to function properly, or those used by Aluminum Products and Manufactured Products will not occur. Any such disruption could have a material adverse effect on our financial condition, liquidity and results of operations.
Operating problems in our business may materially adversely affect our financial condition and results of operations.
The occurrence of material operating problems at our facilities may have a material adverse effect on our operations as a whole, both during and after the period of operational difficulties. We are subject to the usual hazards associated with manufacturing and the related storage and transportation of raw materials, products and waste, including explosions, fires, leaks, discharges, inclement weather, natural disasters, mechanical failure, unscheduled downtime and transportation interruption or calamities.
Our Chairman of the Board and Chief Executive Officer and our President and Chief Operating Officer collectively beneficially own a significant portion of our parent company’s outstanding common stock and their interests may conflict with yours.
As of February 28, 2007, Edward Crawford, our Chairman of the Board and Chief Executive Officer, and Matthew Crawford, our President and Chief Operating Officer, collectively beneficially owned approximately 28% of Holdings’ common stock. Mr. E. Crawford is Mr. M. Crawford’s father. Their interests could conflict with your interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of Messrs. E. Crawford and M. Crawford may conflict with your interests.
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| Item 1B. | Unresolved Staff Comments |
None.
Item 2. Properties
The Company’s
| Item 2. | Properties |
As of December 31, 2006, our operations includeincluded numerous manufacturing and supply chain logistics services facilities located in twenty-three23 states in the United States and in Puerto Rico, as well as in Asia, Canada, Europe and Mexico. Approximately 91%89% of the available square footage iswas located in the United States. Approximately 49%46% of the available square footage iswas owned. In 2003,2006, approximately 32%35% of the available domestic square footage was used by the ILS segment, 51%45% was used by the Manufactured Products segment and 17%20% by the Aluminum Products segment. Approximately 33%46% of the available foreign square footage was used by the ILS segment and 67%54% was used by the Manufactured Products segment. In the opinion of management, Park-Ohio’sour facilities are generally well maintained and are suitable and adequate for their intended uses.
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The following table provides information relative to theour principal facilities as of Park-Ohio and its subsidiaries.December 31, 2006.
| Related Industry | Owned or | Approximate | ||||||||
Segment | Location | Leased | Square Footage | Use | ||||||
| ILS(1) | Cleveland, OH | Leased | 60,350 | (2) | ILS Corporate Office | |||||
| Dayton, OH | Leased | 112,960 | Logistics | |||||||
| Lawrence, PA | Leased | 116,000 | Logistics and Manufacturing | |||||||
| St. Paul, MN | Leased | 104,425 | Logistics | |||||||
| Allentown, PA | Leased | 69,755 | Logistics | |||||||
| Atlanta, GA | Leased | 56,000 | Logistics | |||||||
| Dallas, TX | Leased | 49,985 | Logistics | |||||||
| Memphis, TN | Leased | 48,750 | Logistics | |||||||
| Louisville, KY | Leased | 46,230 | Logistics | |||||||
| Nashville, TN | Leased | 44,900 | Logistics | |||||||
| Tulsa, OK | Leased | 40,000 | Logistics | |||||||
| Austin, TX | Leased | 30,000 | Logistics | |||||||
| Kent, OH | Leased | 225,000 | Manufacturing | |||||||
| Mississauga, | Leased | 117,000 | Manufacturing | |||||||
| Ontario, Canada | ||||||||||
| Solon, OH | Leased | 42,600 | Logistics | |||||||
| Dublin, VA | Leased | 40,000 | Logistics | |||||||
| Delaware, OH | Owned | 45,000 | Manufacturing | |||||||
| ALUMINUM | Conneaut, OH(3) | Leased/Owned | 304,000 | Manufacturing | ||||||
| PRODUCTS | Huntington, IN | Leased | 132,000 | Manufacturing | ||||||
| Fremont, IN | Owned | 108,000 | Manufacturing | |||||||
| Wapakoneta, OH | Owned | 188,000 | Manufacturing | |||||||
| Richmond, IN | Leased/Owned | 97,300 | Manufacturing | |||||||
| MANUFACTURED | Cuyahoga Hts., OH | Owned | 427,000 | Manufacturing | ||||||
| PRODUCTS(4) | Le Roeulx, Belgium | Owned | 120,000 | Manufacturing | ||||||
| Euclid, OH | Leased | 154,000 | Manufacturing | |||||||
| Wickliffe, OH | Owned | 110,000 | Manufacturing | |||||||
| Boaz, AL | Owned | 100,000 | Manufacturing | |||||||
| Warren, OH | Owned | 195,000 | Manufacturing | |||||||
| Canton, OH | Leased | 125,000 | Manufacturing | |||||||
| Madison Heights, MI | Leased | 128,000 | Manufacturing | |||||||
| Newport, AR | Leased | 111,300 | Manufacturing | |||||||
| Cicero, IL | Owned | 45,000 | Manufacturing | |||||||
| Cleveland, OH | Leased | 150,000 | Manufacturing | |||||||
| Shanghai, China | Leased | 20,500 | Manufacturing | |||||||
| ILS | ||||||||||||
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Item 3. Legal Proceedings
The Company is
| Item 3. | Legal Proceedings |
We are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation are not expected to have a material adverse effect on our financial condition, liquidity or results of operations.
At December 31, 2006, we were a co-defendant in approximately 365 cases asserting claims on behalf of approximately 8,500 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. In substantially all of the asbestos cases, the plaintiffs either claim damages in excess of a specified amount, typically a minimum amount sufficient to establish jurisdiction of the court in which the case was filed (jurisdictional minimums generally range from $25,000 to $75,000), or do not specify the monetary damages sought. To the extent that any specific amount of damages is sought, the amount applies to claims against all named defendants.
There are only four asbestos cases, involving 21 plaintiffs, that plead specified damages. In each of the four cases, the plaintiff is seeking compensatory and punitive damages based on a variety of potentially alternative causes of action. In three cases, the plaintiff has alleged compensatory damages in the amount of $3.0 million for four separate causes of action and $1.0 million for another cause of action and punitive damages in the amount of $10.0 million. In another case, the plaintiff has alleged compensatory damages in the amount of $20.0 million for three separate causes of action and $5.0 million for another cause of action and punitive damages in the amount of $20.0 million.
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 the Company’sour financial condition, liquidity or results of operations. The Company hasAmong 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 named asimproperly 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, 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 asbestos-related personalmost 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, lawsuits. The Company’sif any.
Our cost of defending suchthese lawsuits has not been material to date and, based upon available information, our management of the Company does not expect the Company’sits future costs for asbestos-related lawsuits to have a material adverse effect on itsour results of operations, liquidity or financial condition.position.
Item 4. Submission of Matters to a Vote of Security Holders
| Item 4. | Submission of Matters to a Vote of Security Holders |
Information required by this item has been omitted pursuant to General Instruction I of Form10-K.
13
7
Part II
| Item 5. | Market for the Registrant’s Common |
The registrant is a wholly-owned subsidiary of Park-Ohio Holdings Corp. and has no equity securities that trade.
| Item 6. | Selected |
Information required by this item has been omitted pursuant to General Instruction I of Form10-K.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The
Our consolidated financial statements of the Company include the accounts of Park-Ohio Industries, Inc. and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The historical financial information is not directly comparable on ayear-to-year basis, primarily due to the reversal of a tax valuation allowance in 2006 and 2005, restructuring and unusual charges in all2006 and 2005, and debt extinguishment costs and writeoff of deferred financing costs associated with the tender and early redemption during 2004 of our 9.25% senior subordinated notes, acquisitions and divestitures during the three years a goodwill impairment chargeended December 31, 2006.
Executive Overview
We are an industrial supply chain logistics and diversified manufacturing business, operating in 2002 to reflect the cumulative effect of an accounting change, the elimination of goodwill amortization starting in 2002, divestitures and acquisitions.
Executive Overview
The Company operates through three segments,segments: ILS, Aluminum Products and Manufactured Products. ILS is a leading supply chain logistics provider of production components to large, multinational manufacturers. In connectionprovides customers with the supply of such production components, ILS provides a variety of value-added, cost-effectiveintegrated supply chain management services.services for a broad range of high-volume, specialty production components. ILS customers receive various value-added services, such as engineering and design services, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking,just-in-time and point-of use delivery, electronic billing and ongoing technical support. The principal customers of ILS are in the heavy-duty truck, semiconductorautomotive and vehicle parts, electrical distribution and controls, power sports/fitness equipment, industrial equipment,HVAC, aerospace and defense, electrical controls, HVAC, vehicle partscomponents, appliance and accessories, appliances, and lawn and gardensemiconductor equipment industries. Aluminum Products manufactures castcasts and machines aluminum engine, transmission, brake, suspension and other components primarilysuch as pump housings, clutch retainers/pistons, control arms, knuckles, master cylinders, pinion housings, brake calipers, oil pans and flywheel spacers for automotive, manufactures,agricultural equipment, construction equipment, heavy-duty truck and marine equipment OEMs, primarily on a sole-source basis. Aluminum Products also provides value-added services such as design and engineering machining and assembly. Manufactured Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of high qualityhighly-engineered products engineeredincluding induction heating and melting systems, pipe threading systems, industrial oven systems, injection molded rubber components, and forged and machined products. Manufactured Products also produces and provides services and spare parts for specific customer applications.the equipment it manufactures. The principal customers of Manufactured Products are OEMs,sub-assemblers and end-usersend users in the steel, coatings, forging, foundry, heavy-duty truck, construction equipment, bottling, automotive, oil and gas, rail and locomotive manufacturing and aerospace automotive, steel, forging, railroad, truck, oil, food processing and consumer appliancedefense industries. Sales, earnings and other relevant financial data for these three segments are provided in Note LB to the consolidated financial statements.
The Company is positioned for increased sales
Sales and profitability continued to grow substantially in 2004 and beyond,2006, continuing the trend of the prior year, as the domestic and international manufacturing economy stabilizes and returnseconomies continued to growth, particularlygrow. Net sales increased 13% in two2006 compared to 2005, while operating income increased 11%. Net income declined in 2006 because the reversal of the Company’s tax valuation allowance was larger in 2005 than in 2006 ($7.3 million and $5.0 million, respectively) and because of higher interest expense in 2006. The tax valuation allowance has now been substantially eliminated, so no further significant customer segments, heavy-duty truckreversals are expected to affect income in future years. During 2005, net sales increased 15%, and semiconductor equipment. The Company grew strongly from 1993 throughoperating income increased 10% as compared to 2004. 2005 operating income was reduced by $1.8 million of restructuring charges ($.8 million reflected in Cost of products sold and $1.0 million in Restructuring and impairment charges).
During 2004, we reinforced our long-term availability and attractive pricing of funds by refinancing both of our major sources of borrowed funds: senior subordinated notes and our revolving credit facility. In November 2004, we sold $210.0 million of 8.375% senior subordinated notes due 2014. We used the first halfnet proceeds to fund the tender and early redemption of 2000 (see table below), through both internal growth$199.9 million of our 9.25% senior subordinated notes due 2007. We incurred debt extinguishment costs primarily related to premiums and acquisition. Startingother transaction costs associated with the tender offer and early redemption and wrote off deferred financing costs totaling $6.0 million associated with the repurchased 9.25% senior subordinated notes.
In December 2004 and subsequently in 2005 and 2006 we amended our revolving credit facility, extending its maturity so that it now expires in December 2010, increasing the second half of 2000, both sales and profitability declined due to overall weakness in the manufacturing economy, and particularly to contraction in the heavy-duty truck and automotive industries. Despite these sales declines, the Company retained or gained market share in most major markets served. The Company’s sales stabilized in 2002 and declined only slightly in 2003, and pretax income began to recover.
| 1993 | 1999 | 2000 | 2001 | 2002 | 2003 | |||||||||||||||||||
| Net sales | $ | 94.5 | $ | 717.2 | $ | 754.7 | $ | 636.4 | $ | 634.5 | $ | 624.3 | ||||||||||||
| Restructuring and impairment charges | 28.5 | 19.2 | 19.4 | |||||||||||||||||||||
| Non-recurring gains / losses (pretax) | 10.1 | 1.8 | ||||||||||||||||||||||
| Income (loss) before income taxes and cumulative effect of accounting change | $ | 3.9 | $ | 28.4 | $ | 7.7 | $ | (37.4 | ) | $ | (11.5 | ) | $ | (10.9 | ) | |||||||||
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8
The Company responded to the economic downturn by reducing costs, increasing prices on targeted products, restructuring many of its businesses and selling non-core manufacturing assets. During 2001 through 2003, the Company consolidated 28 supply chain logistics facilities, and closed or sold 11 manufacturing plants. With regard to these actions, the Company recorded restructuring and impairment charges in 2001, 2002 and 2003 (see table above and Note N to the consolidated financial statements). Management’s actions aimed to increase operational earnings during the economic downturn and position the Company for increased profitability when the manufacturing economy stabilizes and returns to growth. These actions resulted in increased income (as adjusted) in 2002 and 2003 despite flat to declining sales.
The Company’s 2003 non-cash restructuring and impairment charges totaled $19.4 million, of which 90% related to restructuring of the Forge Group, primarily impairment of property and equipment idled when the Company began purchasing crankshaft forgings instead of manufacturing them internally. Charges outside the Forge Group, totaling $1.9 million, consisted primarily of pension withdrawal charges for manufacturing units executing previously announced restructuring. The 2003 restructuring is expected to increase both profitability and cash flow by approximately $15.0 million over the next five years.
In July 2003, the Company entered into a four-year bank revolving credit agreement under which it may
borrow up to $165.0$230.0 million subject to an asset based formula. Theasset-based formula, and providing lower interest rate levels. Borrowings under the revolving credit agreement isfacility are secured by substantially all the assetsour assets. We had approximately $40.0 million of the Company. The Company has paid down its revolving bank borrowings by $53.0 million, or 34%, from $154.0 million at June 30, 2001 to $101.0 millionunused borrowing availability at December 31, 2003, when it had approximately $47.0 million of excess borrowing availability. The Company’s $199.9 million of outstanding Senior Subordinated Notes mature in November, 2007.2006. Funds provided by operations plus available borrowings under the bankrevolving credit facility are expected to be adequate to meet our cash requirements.
In October 2006, we acquired all of the Company’scapital stock of NABS, Inc. for $21.2 million in cash. NABS is a premier international supply chain manager of production components, providing services to high technology companies in the computer, electronics, and consumer products industries. NABS has 14 international operations in China, India, Taiwan, Singapore, Ireland, Hungary, Scotland and Mexico plus five locations in the United States.
In January 2006, we completed the acquisition of all of the capital stock of Foundry Service GmbH for approximately $3.2 million in cash, requirements until 2007, by which time management expects to have entered into replacement financing agreements.
resulted in additional goodwill of $2.3 million. The Company soldacquisition was funded with borrowings from foreign subsidiaries of the Company.
In December 2005, we acquired substantially all of the assets of Lectrotherm, which is primarily a provider of field service and spare parts for induction heating and melting systems, located in Canton, Ohio, for $5.1 million cash funded with borrowings under our revolving credit facility. This acquisition augments our existing, high-margin aftermarket induction business. Lectrotherm had no significant affect on 2005 earnings.
In July 2005, we acquired substantially all the assets of St. Louis ScrewPPG, a provider of supply chain management services for a broad range of production components for $7.0 million cash funded with borrowings from our revolving credit facility, $.5 million in a short-term note payable and Green Bearing in first quarter 2003, for cash totaling approximately $7.3 million, and Castle Rubber Company in second quarter 2002, for cashthe assumption of approximately $2.5 million. The Company purchased$13.3 million of trade liabilities. This acquisition added significantly to the customer and supplier bases, and expanded our geographic presence of our ILS segment. ILS has already eliminated substantial overhead cost and begun the process of consolidating redundant service centers.
In August 2004, we acquired substantially all of the assets of the Amcast Components Group (“Amcast”), a producer of aluminum automotive products, for $10.0 million cash and the assumption of approximately $9.0 million of operating liabilities. This acquisition significantly increased the sales and production capacity of our Aluminum Products business and added attractive new customers, product lines and production technologies.
In April 2004, we acquired the remaining 66% of the common stock of Japan Ajax Magnethermic Corp. in third quarter 2002,Company (“Jamco”), now a Japanese-located subsidiary of our induction heating and melting equipment business, for cash existing on the balance sheet of approximately $5.5 million. The Company sold substantially all the assets of Cleveland City Forge in fourth quarter 2001, for cash of approximately $6.1 million. During 2001, the Company expensed $1.9 million of non-recurring business interruption costs, caused by the June 2000 fireJamco at that destroyed the Cicero Flexible Products plant, which were not covered by insurance.
Accounting Changes and date.
Goodwill
On January 1, 2002, the Company adopted
In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). Under FAS 142, the Company reviewed its, we review goodwill and other intangible assets and recorded a non-cash goodwill impairment charge of $48.8 million, which was recorded as the cumulative effect of a change in accounting principle effective January 1, 2002. Circumstances which led to this goodwill impairment included reduced sales, profitability and growth rates of the units with goodwill (see Note C to the consolidated financial statements), and reduced transaction prices for comparable businesses, which were themselves results of the downturn in the manufacturing economy. The effects of these circumstances on the Company’s operations, financial condition and liquidity are reflected in 2002 and 2003 results. The goodwill impairment itself did not have any effect on operations. Under FAS 142, goodwill was not amortized in 2003 or 2002, compared to $3.7 million in 2001.
In accordance with FAS 142, goodwill is now reviewed annually for potential impairment. This review was performed as of October 1, 20032006, 2005 and 2002,2004, using forecasted discounted cash flows, and it was determined that no further impairment is required. At December 31, 2003, the2006, our balance sheet reflected $82.3$98.2 million of goodwill in the ILS and Aluminum Products segments.goodwill. In 2003,2006, discount rates
9
used ranged from 11%11.5% to 13%12.5%, and 4% long-term revenue growth rates used ranged from 3.5% to 4.0%. In the ILS segment, over the next five years, higher sales growth rates were forecasted and operating profit margins were forecasted to improve to historical levels, as the manufacturing economy rebounds and reduced fixed overheads are absorbed over higher sales volumes.used.
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The Company changed its method of accounting for the 15% of its inventories utilizing the LIFO method to the FIFO method. As required by accounting principles generally accepted in the United States, the Company has restated its balance sheet as of December 31, 2002 to increase inventories by the recorded LIFO reserve ($4.4 million), increase deferred tax liabilities ($1.7 million), and increase shareholders’ equity ($2.7 million). Previously reported results of operations have not been restated because the impact of utilizing the LIFO method had an insignificant impact on the Company’s reported amounts for consolidated net income (loss). See also Note B to the consolidated financial statements.
Results of Operations
| Percent | ||||||||||||||||
| 2003 | 2002 | Change | Change | |||||||||||||
| ILS | $ | 377.6 | $ | 398.1 | $ | (20.5 | ) | -5 | % | |||||||
| Aluminum products | 90.1 | 106.1 | (16.0 | ) | -15 | % | ||||||||||
| Manufactured products | 156.6 | 130.2 | 26.4 | 20 | % | |||||||||||
| Consolidated Net Sales | $ | 624.3 | $ | 634.4 | $ | (10.1 | ) | -2 | % | |||||||
Net Sales by Segment:
| Year Ended | Acquired/ | |||||||||||||||||||
| December 31, | Percent | (Divested) | ||||||||||||||||||
| 2006 | 2005 | Change | Change | Sales | ||||||||||||||||
| ILS | $ | 598.2 | $ | 532.6 | $ | 65.6 | 12 | % | $ | 38.7 | ||||||||||
| Aluminum products | 154.6 | 159.1 | (4.5 | ) | (3 | )% | 0.0 | |||||||||||||
| Manufactured products | 303.4 | 241.2 | 62.2 | 26 | % | 22.9 | ||||||||||||||
| Consolidated Net Sales | $ | 1,056.2 | $ | 932.9 | $ | 123.3 | 13 | % | $ | 61.6 | ||||||||||
Net sales declinedincreased by 2%13% in 2003. $10.4 million of the2006 compared to 2005. ILS sales decline related to the sale of Green Bearing and the termination of the pharmaceutical contract, while the remainder reflected general economic weakness. Aluminum Products net sales were lowerincreased primarily due to the endingOctober 2006 acquisition of $10.0 millionNABS, 2006’s full-year’s sales of PPG (acquired in July 2005), general economic growth, particularly as a result of significant growth in the heavy-duty truck industry, the addition of new customers and increases in product range to existing customers. Aluminum Products sales contracts, the majoritydecreased in 2006 primarily due to contraction of which relate to the closure of the Tupeloautomobile and Hudson plants.light truck production in North America. Manufactured Products net sales increased $26.4 millionin 2006 primarily in the induction business. The acquisitionequipment, pipe threading equipment and forging businesses. Of this increase, $22.9 million was due to the acquisitions of Ajax Magnethermic increased 2003 net salesLectrotherm and Foundry Service by $29.6 millionthe induction business in December 2005 and the divestiture of Castle Rubber and St. Louis Screw decreased 2003 net sales by $6.8 million.
January 2006, respectively.
Cost of Products Sold & Gross Profit:
| 2003 | 2002 | |||||||||||||||||||||||
| Percent | Gross | Gross | ||||||||||||||||||||||
| 2003 | 2002 | Change | Change | Margin | Margin | |||||||||||||||||||
| Consolidated cost of products sold | $ | 527.6 | $ | 546.9 | $ | (19.3 | ) | -4 | % | |||||||||||||||
| Inventory writedowns from restructuring included in Cost of Products Sold | 0.6 | 5.6 | (5.0 | ) | ||||||||||||||||||||
| Net gross profit impact of acquisition & divestitures | (4.4 | ) | (4.4 | ) | ||||||||||||||||||||
| Consolidated gross profit | $ | 96.7 | $ | 87.6 | $ | 9.1 | 10 | % | 15.5 | % | 13.8 | % | ||||||||||||
Note: 25% of increase in Induction gross profit attributed to non-acquisition actions.
| Year Ended | ||||||||||||||||
| December 31, | Percent | |||||||||||||||
| 2006 | 2005 | Change | Change | |||||||||||||
| Consolidated cost of products sold | $ | 908.1 | $ | 796.3 | $ | 111.8 | 14 | % | ||||||||
| Consolidated gross profit | $ | 148.1 | $ | 136.6 | $ | 11.5 | 8 | % | ||||||||
| Gross Margin | 14.0 | % | 14.6 | % | ||||||||||||
Cost of products sold declined 4%increased 14% in 2003, and gross profit increased 10%,2006 compared to 2005, while gross margin increaseddecreased to 15.5%14.0% from 14.6% in 2003, from 13.8% in 2002.2005. ILS gross margin decreased primarily due to reduced absorption of fixed overhead over a smaller sales base and the positive effect on 2002 of the early termination of a high margin pharmaceutical sales contract, partially offset by lower inventory costs, facility costs and other cost reductions.PPG restructuring costs. Aluminum Products gross margin increased significantly,decreased due to volume reductions, product mix and pricing changes, plus the cost of preparations for new contracts due to start production in early 2007. Gross margin in the Manufactured Products segment decreased slightly, primarily as a result of restructuringoperational and pricing issues in the Company’s rubber products business.
Selling, General & Administrative (“SG&A”) Expenses:
| Year Ended | ||||||||||||||||
| December 31, | Percent | |||||||||||||||
| 2006 | 2005 | Change | Change | |||||||||||||
| Consolidated SG&A expenses | $ | 88.9 | $ | 81.4 | $ | 7.5 | 9 | % | ||||||||
| SG&A percent | 8.4 | % | 8.7 | % | ||||||||||||
Consolidated SG&A expenses increased by 9%, or $7.5 million, in 2006 compared to 2005, representing a .3% reduction in SG&A expenses as a percent of sales. Approximately $5.7 million of the SG&A increase was due to acquisitions, primarily NABS, Foundry Service, Lectrotherm and PPG. SG&A expenses increased in 2006 compared to 2005 by a $.8 million decrease in net pension credits reflecting reduced returns on pension plan assets. These increases in SG&A expenses from acquisitions and reduced pension credits were partially offset by cost reductionsreductions.
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Interest Expense:
| Year Ended | ||||||||||||||
| December 31, | Percent | |||||||||||||
| 2006 | 2005 | Change | Change | |||||||||||
| Interest expense | $ | 31.3 | $ | 27.1 | $ | 4.2 | 15% | |||||||
| Average outstanding borrowings | $ | 376.5 | $ | 357.1 | $ | 19.4 | 5% | |||||||
| Average borrowing rate | 8.31 | % | 7.59 | % | 72 | basis points | ||||||||
Interest expense increased in 2006 compared to 2005, due to both higher average outstanding borrowings and higher marginsaverage interest rates during 2006. The increase in average borrowings in 2006 resulted primarily from growth-driven higher working capital requirements and the purchase of NABS, Foundry Service, Lectrotherm and PPG in October and January 2006, and December and July 2005, respectively. The higher average borrowing rate in 2006 was due primarily to increased interest rates under our revolving credit facility compared to 2005, which increased as a result of actions by the Federal Reserve.
Income Taxes:
| Year Ended December 31, | ||||||||
| 2006 | 2005 | |||||||
| Income before income taxes | $ | 28.8 | $ | 27.3 | ||||
| Income taxes (benefit) | $ | 3.2 | $ | (4.3 | ) | |||
| Reversal of tax valuation allowance included in income | (5.0 | ) | (7.3 | ) | ||||
| Income taxes, excluding reversal of tax valuation allowance — (non GAAP) | $ | 8.2 | $ | 3.0 | ||||
| Effective income tax (benefit) rate | 11 | % | (16 | )% | ||||
| Effective income tax rate excluding reversal of tax valuation allowance — (non GAAP) | 28 | % | 11 | % | ||||
In the fourth quarters of 2006 and 2005, the Company reversed $5.0 million and $7.3 million, respectively, of its deferred tax asset valuation allowance, substantially eliminating this reserve. Based on strong recent and projected earnings, the Company has determined that it is more likely than not that its deferred tax asset will be realized. The tax valuation allowance reversals resulted in increases to net income for both of these quarters. In 2006, the Company began recording a quarterly provision for federal income taxes, resulting in a total effective income tax rate of approximately 28%. The Company’s net operating loss carryforward precluded the payment of cash federal income taxes in 2006, and should significantly reduce cash payments in 2007.
The provision for income taxes was $3.2 million in 2006 while income tax benefits were $4.3 million in 2005, including the reversals of our deferred tax asset valuation allowance. The effective income tax rate was 11% in 2006 compared to an effective tax benefit rate of (16%) in 2005. Excluding reversals of the tax valuation allowance, in 2006, the Company provided $8.2 million of income taxes, a 28% effective income tax rate, compared to providing $3.0 million of income taxes in 2005, an 11% effective income tax rate. In 2006, these taxes consisted of federal, state and foreign income taxes, while federal income tax was not provided in 2005. At December 31, 2006, our subsidiaries had $34.9 million of net operating loss carryforwards for federal tax purposes. We are presenting taxes and tax rates without the tax benefit of the tax valuation allowance reversal to facilitate comparison between the periods.
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Results of Operations
2005 versus 2004
Net Sales by Segment:
| Acquired/ | ||||||||||||||||||||
| Year Ended December 31, | Percent | (Divested) | ||||||||||||||||||
| 2005 | 2004 | Change | Change | Sales | ||||||||||||||||
| ILS | $ | 532.6 | $ | 453.2 | $ | 79.4 | 18 | % | $ | 31.4 | ||||||||||
| Aluminum Products | 159.1 | 135.4 | 23.7 | 18 | % | 34.5 | ||||||||||||||
| Manufactured Products | 241.2 | 220.1 | 21.1 | 10 | % | 3.5 | ||||||||||||||
| Consolidated net sales | $ | 932.9 | $ | 808.7 | $ | 124.2 | 15 | % | $ | 69.4 | ||||||||||
Net sales increased by 15% in 2005 compared to 2004. ILS sales increased primarily due to the July 20, 2005 acquisition of PPG, general economic growth, particularly as a result of significant growth in the heavy-duty truck industry, the addition of new contracts.customers and increases in product range to existing customers. Aluminum Products sales increased in 2005 primarily due to sales from manufacturing plants acquired in August 2004 from the Amcast, partially offset by volume decreases in the automotive industry. Manufactured Products sales increased in 2005 primarily in the induction equipment, pipe threading equipment and forging businesses. Of this increase, $3.5 million was due to the April 2004 acquisition of the remaining 66% of the common stock of Jamco.
Cost of Products Sold & Gross Profit:
| Year Ended December 31, | Percent | |||||||||||||||
| 2005 | 2004 | Change | Change | |||||||||||||
| Consolidated cost of products sold | $ | 796.3 | $ | 682.6 | $ | 113.7 | 17 | % | ||||||||
| Consolidated gross profit | $ | 136.6 | $ | 126.1 | $ | 10.5 | 8 | % | ||||||||
| Gross margin | 14.6 | % | 15.6 | % | ||||||||||||
Cost of products sold increased 17% in 2005 compared to 2004, while gross margin decreased to 14.6% from 15.6% in 2004. ILS gross margin decreased primarily due to steel price increases and mix changes partially offset by the absence of the negative impact of $1.1 million in 2004 of the bankruptcy of a customer, Murray, Inc. Aluminum Products gross margin decreased due to the addition of the lower-margin Amcast business, product mix and pricing changes and the increased cost of natural gas. Gross margin in the Manufactured Products segment increased, primarily as a result of increased sales and overhead efficiencies achieved in the induction business.
10
equipment, pipe threading equipment and forging businesses, and also due to $.8 million writeoff of inventory associated with discontinued product lines.
| 2003 | 2002 | |||||||||||||||||||||||
| Percent | SG&A | SG&A | ||||||||||||||||||||||
| 2003 | 2002 | Change | Change | Percent | Percent | |||||||||||||||||||
| Consolidated SG&A expenses | $ | 62.4 | $ | 57.4 | $ | 5.0 | 9 | % | 10.0 | % | 9.1 | % | ||||||||||||
| Net SG&A expense impact of acquisition & divestitures | (3.9 | ) | (3.9 | ) | ||||||||||||||||||||
| Year Ended December 31, | Percent | |||||||||||||||
| 2005 | 2004 | Change | Change | |||||||||||||
| Consolidated SG&A expenses | $ | 81.4 | $ | 76.7 | $ | 4.7 | 6 | % | ||||||||
| SG&A percent | 8.7 | % | 9.5 | % | ||||||||||||
Consolidated SG&A expenses increased by 9%6% in 2003,2005 compared to 2004. Approximately $3.6 million of the SG&A increase was due to acquisitions, primarily PPG, Amcast and Jamco, while bonus expenses of $1.4 million and charges relating to the Delphi and Dana bankruptcies totaling $1.2 million also contributed to the increase in SG&A expenses. SG&A expenses were reduced in 2005 compared to 2004 by a $.4 million
19
increase in net pension credits reflecting improved returns on pension plan assets. Other than these changes, SG&A expenses remained essentially flat, despite increased sales and production volumes. SG&A expenses as a percent of sales decreased by .8 of a percentage of net sales increased to 10.0% for 2003 compared to 9.1% for 2002. This increase was due primarily to the net impact of acquisitions and divestitures, and the $2.6 million reduction of net pension credits reflecting less favorable returns on pension plan assets, partially offset by reductions in other SG&A costs in all three segments.
point.
Interest Expense:
| 2003 | 2002 | Change | Percent | |||||||||||||
| Interest expense | $ | 26.2 | $ | 27.6 | $ (1.4 | ) | -5% | |||||||||
| Average outstanding borrowings | $ | 320.8 | $ | 333.6 | $(12.8 | ) | -4% | |||||||||
| Average borrowing rate | 8.15 | % | 8.28 | % | (13) basis points | |||||||||||
| Year Ended December 31, | Percent | |||||||||||||
| 2005 | 2004 | Change | Change | |||||||||||
| Interest expense | $ | 27.1 | $ | 31.4 | $(4.3) | (14 | )% | |||||||
| Debt extinguishment costs included in interest expense | -0- | $ | 6.0 | $(6.0) | ||||||||||
| Average outstanding borrowings | $ | 357.1 | $ | 328.9 | $28.2 | 9 | % | |||||||
| Average borrowing rate | 7.59 | % | 7.72 | % | (13) basis points | |||||||||
Interest expense decreased by 5%in 2005 compared to 2004, primarily due to lowerthe fourth quarter 2004 debt extinguishment costs. These costs primarily related to premiums and other transaction costs associated with the tender offer and early redemption and writeoff of deferred financing costs associated with the 9.25% senior subordinated notes. Excluding these 2004 costs, interest increased in 2005 due to higher average debt outstanding andborrowings, partially offset by lower average interest rates during 2003.2005. The decreaseincrease in average borrowings in 2005 resulted primarily from the sale of two manufacturing units and lowerhigher working capital requirements.requirements and the purchase of Amcast Components Group and PPG in August 2004 and July 2005, respectively. The lower average borrowing rate in 20032005 was due primarily to decreased ratesthe lower interest rate of 8.375% on our senior subordinated notes sold in November 2004 compared to the 9.25% interest rate on the Company’s newsenior subordinated notes outstanding during the first eleven months of 2004. The lower average borrowing rate in 2005 included increased interest rates under our revolving credit facility beginning in August, 2003.
compared to 2004, which increased primarily as a result of actions by the Federal Reserve.
Income Taxes:
| Year Ended December 31, | ||||||||
| 2005 | 2004 | |||||||
| Income before income taxes | $ | 27.3 | $ | 17.9 | ||||
| Income taxes (benefit) | $ | (4.3 | ) | $ | 3.4 | |||
| Reversal of tax valuation allowance included in 2005 income tax benefit | (7.3 | ) | ||||||
| 2005 Income taxes excluding reversal of tax valuation allowance — (non GAAP) | $ | 3.0 | ||||||
| Effective income tax (benefit) rate | (16 | )% | 19 | % | ||||
| Effective income tax rate excluding reversal of tax valuation allowance — (non GAAP) | 11 | % | ||||||
In accordance with the provision of Statement of Financial Accounting Standards No. 109 (“FAS 109”), “Accounting for Income Taxes,”fourth quarter 2005, the Company recorded noreversed $7.3 million of its $12.3 million year-end 2005 domestic deferred tax valuation allowance. Based on strong recent and projected earnings, the Company has determined that it is more likely than not that this portion of the deferred tax asset will be realized. The tax valuation allowance reversal resulted in an increase to net income for the quarter. In 2006, the Company began recording a quarterly provision for federal income taxes. The Company’s significant net operating loss carryforward should preclude the payment of cash federal income taxes in 2006 and 2007, and possibly beyond.
We had income tax benefits of $4.3 million in 2005, including a $7.3 million reversal of our deferred tax asset valuation allowance. This was an effective income tax benefit rate of (16%). The provision for income taxes was $3.4 million in 2004, an effective income tax rate of 19%. Excluding the 2003 or 2002 net losses, becausereversal of the $7.3 million tax valuation allowance, in 2005 we provided $3.0 million of income taxes, an 11% effective income tax
20
rate. In both years, it had incurred three yearsthese taxes consisted primarily of cumulative losses. Income taxes of $.9 million were provided in 2003 and 2002, primarily for state and foreign taxes on profitable operations. In neither year did the income tax provision include federal income taxes. At December 31, 2003,2005, our subsidiaries of the Company had $35.7$41.0 million of net operating loss carryforwards for federal tax purposes. The Company has not recognized anyWe are presenting taxes and tax rates without the tax benefit for these loss carryforwards.
2002 versus 2001
Net Sales by Segment:
| Percent | ||||||||||||||||
| 2002 | 2001 | Change | Change | |||||||||||||
| ILS | $ | 398.1 | $ | 416.9 | $ | (18.8 | ) | -5 | % | |||||||
| Aluminum products | 106.1 | 84.9 | 21.2 | 25 | % | |||||||||||
| Manufactured products | 130.2 | 134.6 | (4.4 | ) | -3 | % | ||||||||||
| Consolidated Net Sales | $ | 634.4 | $ | 636.4 | $ | (2.0 | ) | 0 | % | |||||||
Net sales declined less than 1% in 2002. The ILS net sales decline of 5% was due primarily to the sales volume reductions in heavy truck and other customer industries. The Aluminum Products net sales increase of 25% was due primarily to the initiation or ramp-up of new production contracts. The Manufactured Products net sales decline of 3% or $4.4 million was due primarily to divestitures. The divestitures of Castle Rubber and Cleveland City Forge decreased 2002 net sales by $13.0 million and the acquisition of Ajax Magnethermic increased 2002 net sales by $6.1 million.
11
Cost of Products Sold & Gross Profit:
| 2002 | 2001 | |||||||||||||||||||||||
| Percent | Gross | Gross | ||||||||||||||||||||||
| 2002 | 2001 | Change | Change | Margin | Margin | |||||||||||||||||||
| Consolidated cost of products sold | $ | 546.9 | $ | 552.3 | $ | (5.4 | ) | -1 | % | |||||||||||||||
| Inventory writedowns from restructuring included in Cost of Products Sold | 5.6 | 10.3 | (4.7 | ) | ||||||||||||||||||||
| Net gross profit impact of acquisition & divestitures | 1.7 | 1.7 | ||||||||||||||||||||||
| Consolidated gross profit | $ | 87.6 | $ | 84.1 | $ | 3.5 | 4 | % | 13.8 | % | 13.2 | % | ||||||||||||
Cost of products sold declined 1% in 2002. Inventory write-downs included in cost of products sold primarily related to discontinued product lines. Gross profit increased 4% in 2002, while gross margin increased to 13.8% in 2002, from 13.2% in 2001. This increase reflected increased margins in Aluminum Products, partially offset by decreased margins in the ILS and Manufactured Products segments. Declines in ILS and Manufactured Products gross margins related primarily to reduced volumes resulting in the absorption of fixed operational overheads over a smaller sales or production base. The increase in Aluminum Products gross margin related to new, higher-margin contracts, discontinuation of low margin contracts, cost reductions, plant closures and the absorption of fixed manufacturing overheads over a larger production base.
Selling, General & Administrative (“SG&A”) Expenses:
| 2002 | 2001 | |||||||||||||||||||||||
| Percent | SG&A | SG&A | ||||||||||||||||||||||
| 2002 | 2001 | Change | Change | Percent | Percent | |||||||||||||||||||
| Consolidated SG&A expenses | $ | 57.4 | $ | 66.1 | $ | (8.7 | ) | -13 | % | 9.1 | % | 10.4 | % | |||||||||||
Consolidated SG&A expenses decreased by 13% in 2002, while SG&A expenses as a percentage of net sales decreased to 9.1% during 2002 as compared to 10.4% for 2001. This decrease was primarily due to cost reductions in all three segments resulting from business restructuring initiatives implemented by the Company. During 2003, SG&A expenses were negatively affected by a decrease in net pension credits of $.8 million, reflecting less favorable investment returns on pension plan assets.
Interest Expense:
| 2002 | 2001 | Change | Percent | |||||||||||||
| Interest expense | $ | 27.6 | $ | 31.1 | $ (3.5 | ) | -11 | % | ||||||||
| Average outstanding borrowings | $ | 333.6 | $ | 353.4 | $(19.8 | ) | -6 | % | ||||||||
| Average borrowing rate | 8.28 | % | 8.80 | % | (52) basis points | |||||||||||
Interest expense decreased by 11% in 2002 due to lower average debt outstanding and lower average interest rates. The decrease in borrowings related primarily to working capital reductions in the course of 2001, which were retained in 2002. The lower average borrowing rate in 2002 was due primarily to decreased rates on the Company’s revolving credit facility.
In accordance with the provision of Statement of Financial Accounting Standards No. 109 (“FAS 109”), “Accounting for Income Taxes,” the Company recorded no tax benefit for the 2003 net loss, because it had incurred three years of cumulative losses. Income taxes of $.9 million were provided in 2003, primarily for state and foreign taxes on profitable operations. The effective tax rate for 2001 was 30.5%, which was less than the statutory rate due to the amortization of non-deductible goodwill and other non-deductible items. At December 31, 2003, subsidiaries of the Company had $25.6 million of net operating loss carryforwards for federal tax purposes. The Company has not recognized any tax benefit for these loss carryforwards.
12
valuation allowance reversal to facilitate comparison between the periods.
Critical Accounting Policies
Preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”)GAAP requires management to make certain estimates and assumptions which affect amounts reported in the Company’sour consolidated financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company doesWe 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.
Revenue Recognition:The Company recognizes We recognize more than 95%90% of itsour revenue when title is transferred to unaffiliated customers, typically upon shipment. The Company’sOur remaining revenue, from long-term contracts, is recognized using the percentage of completion method of accounting. Selling prices are fixed based on purchase orders or contractual arrangements. The Company’sOur revenue recognition policies are in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 101,104, “Revenue Recognition.”
Allowance for Uncollectible Accounts Receivable:Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. Allowances are developed by the individual operating units based on historical losses, adjusting for economic conditions. The Company’sOur policy is to identify and reserve for specific collectibility concerns based on customers’ financial condition and payment history. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Writeoffs of accounts receivable have historically been low.
Allowance for Obsolete and Slow Moving Inventory:Inventories are stated at the lower of cost or market 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, over the past twelve months, 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 the Company considerswe consider these allowances adequate and proper, changes in economic conditions in specific markets in which the Company operateswe operate could have a material effect on reserve allowances required.
Impairment of Long-Lived Assets:Long-lived assets are reviewed by management for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. During 2005, 2003, 2002 and 2001,2002, the Company decided to exit certain under-performing product lines and to close or consolidate certain operating facilities and, accordingly, recorded restructuring and impairment charges as discussed above and in Note NM to the consolidated financial statements.
statements included elsewhere herein.
Restructuring:The Company recognizes We recognize costs in accordance with Emerging Issues Task Force IssueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring)” (“(“EITF 94-3”) and the SEC Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges”Charges,” for charges prior to 2003. Detailed contemporaneous documentation is maintained and updated on a quarterly basis to ensure that accruals are properly supported. If management determines that there is a change in the estimate, the accruals are adjusted to reflect the changes.
21
In 2003, the
The Company adopted Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”), which nullifiedEITF 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at the fair value only when the liability is incurred. FAS 146 has no effect on charges recorded for exit activities begun prior to 2002.
13
Goodwill:Through December 31, 2001, the Company amortized goodwill primarily over forty years using the straight-line method. The Company We adopted Financial Accounting Standard (“FAS”) No.FAS 142 “Goodwill and Other Intangible Assets” as of January 1, 2002. Under FAS 142, the Company no longer amortizes goodwill, but iswe are required to review goodwill for impairment annually or more frequently if impairment indicators arise.
The Company, with assistance of an outside consultant, completed the transitional impairment review of goodwill during the fourth quarter of 2002 and recorded a non-cash charge of $48.8 million. The charge has been reported as a cumulative effect of a change in accounting principle. The Company has also We have completed the annual impairment test as of October 1, 20032006, 2005 and 2002,2004 and hashave determined that no additional goodwill impairment existed as of those dates.
Deferred Income Tax Assets and Liabilities:The Company accounts We account for income taxes under the 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. In determining these amounts, management determined the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, expectations of future earnings and taxable income and the extended period of time over which the postretirement benefits will be paid.
paid and accordingly records a tax valuation allowance if, based on the weight of available evidence it is more likely than not that some portion or all of our deferred tax assets will not be realized as required by FAS 109.
At December 31, 2003,2006, the Company hashad net operating loss carryforwards for federal income tax purposes of approximately $35.7$34.9 million, which will expire inbetween 2021 or 2023 In accordance with the provisions of FAS 109 “Accounting for Income Taxes”, the tax benefits related to these carryforwards have been fully reserved as of December 31, 2003 since the Company is in a three year cumulative loss position.
and 2024.
Pension and Other Postretirement Benefit Plans:The Company We and itsour 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 of the Company. The Company hasincome. We have evaluated itsour pension and other postretirement benefit assumptions, considering current trends in interest rates and market conditions and believes itsbelieve our assumptions are appropriate.
Accounting Changes: In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” The statement changes the requirements for the accounting and reporting of a change in accounting principle and is applicable to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement if that pronouncement does not include specific transition provisions. The statement requires retrospective application to prior periods’ financial statements of changes in accounting principle unless it is impractical to determine the period specific effects or the cumulative effect of the change. The correction of an error by the restatement of previously issued financial statements is also addressed by the statement. The Company adopted this statement effective January 1, 2006 as prescribed and its adoption did not have any impact on the Company’s results of operations or financial condition.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that these items be recognized as current-period charges and requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the associated production facilities. The Company adopted SFAS No. 151 effective January 1, 2006. The adoption of SFAS No. 151 did not have a material impact on the Company’s financial position or results of operations.
22
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement that do not include explicit transition provisions. SFAS No. 154 requires that changes in accounting principle be applied retroactively, instead of including the cumulative effect in the income statement. The correction of an error will continue to require financial statement restatement. A change in accounting estimate will continue to be accounted for in the period of change and in subsequent periods, if necessary. The Company adopted SFAS No. 154 as of January 1, 2006. The adoption of SFAS No. 154 did not have a material impact on the Company’s financial position or results of operations.
In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes,” that prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN No. 48, a tax benefit will only be recognized if it is more likely than not that the tax position ultimately will be sustained. After this threshold is met, a tax position is reported at the largest amount of benefit that is more likely than not to be realized. FIN No. 48 is effective for the Company in 2007. FIN No. 48 requires the cumulative effect of applying the provisions to be reported separately as an adjustment to the opening balance of retained earnings in the year of adoption. We are currently evaluating the impact of this Interpretation and do not believe at this time that its implementation will result in a significant impact to the financial statements.
In September of 2006, the FASB issued FASB Staff Position (FSP)AUG AIR-1, “Accounting for Planned Major Maintenance Activities,”(“FSP AUG AIR-1”).FSP AUG AIR-1 prohibits the use of theaccrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods and is effective for the Company in 2007. The adoption ofFSP AUG AIR-1 is not expected to have a material impact on the Company’s financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value in GAAP, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements and is effective for the Company in 2008. The Company is currently evaluating the impact of adopting this Statement.
On December 31, 2006, the Company adopted SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires an employer that is a business entity and sponsors one or more single employer benefit plans to (1) recognize the funded status of the benefit in its statement of financial position, (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year end statement of financial position and (4) disclose additional information in the notes to financial statements about certain effects on net periodic benefit costs for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits, and transition assets or obligations. See Note J to the consolidated financial statements included elsewhere herein for the impact of the adoption of SFAS No. 158 on the Company’s financial statements.
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 certainclean-up efforts at several of these sites. However, our share of such costs has not been material and based on available information, our management does not expect our exposure at any of these locations to have a material adverse effect on its 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
23
information, our 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 Company’s
Our results of operations are typically stronger in the first six months rather than the last six months of each calendar year due to scheduled plant maintenance in the third quarter to coincide with customer plant shutdowns and due to holidays in the fourth quarter.
The timing of orders placed by the Company’sour 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 the Company’sour business units. Such variability is particularly evident at the capital equipment businesses, included in the Manufactured Products segment, which typically ship a few large systems per year.
Forward-Looking Statements
This Annual Reportannual report onForm 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. Certain statements in this Management’s DiscussionThe words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and Analysis of Financial Condition and Results of Operations containsimilar expressions are intended to identify forward-looking statements. These forward-looking statements including without limitation, discussion regarding the Company’s anticipated amounts of restructuring chargesinvolve known and its expected impact on profitability and cash flow, credit availability, levels and funding of capital expenditures and trends for 2004. Forward-looking statements are necessarily subject tounknown risks, uncertainties and other factors many of which are
outsidethat may cause our control, which could cause actual results, performance and achievements, or industry results, to differbe materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These uncertainties and other factors include, such things as:but are not limited to the following: our substantial indebtedness; general business conditions and competitive factors, including pricing pressures and product innovation; dependence on the automotive and heavy-duty truck industries, which are highly cyclical; demand for our products and services; raw material availability and pricing; component part availability and pricing; adverse changes in the 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; changes in general domestic economic conditions such as inflation rates, interest rates, tax rates and adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities; our ability to meet various covenants, including financial covenants, contained in our revolving credit agreementfacility and the indenture governing the Senior Subordinated Notes;8.375% senior subordinated notes due 2014; increasingly stringent domestic and foreign governmental regulations, including those affecting the environment; inherent uncertainties involved in assessing our potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims, including, without limitation asbestos claims; dependence on the automotive and heavy truck industries;our ability to negotiate acceptable contracts with labor unions; dependence on key management; and dependence on information systems.systems; and the other factors we describe under the “Item 1A. Risk Factors”. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. 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.
14
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risk including changes in interest rates. We are subject to interest rate risk on our floating rate revolving credit facility, which consisted of borrowings of $156.7 million at December 31, 2006. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $1.6 million for the year ended December 31, 2006.
24
15
Our foreign subsidiaries generally conduct business in local currencies. During 2006, we recorded a favorable foreign currency translation adjustment of $2.1 million related to net assets located outside the United States. This foreign currency translation adjustment resulted primarily from the weakening of the U.S. dollar in relation to the Canadian dollar. Our foreign operations are also subject to other customary risks of operating in a global environment, such as unstable political situations, the effect of local laws and taxes, tariff increases and regulations and requirements for export licenses, the potential imposition of trade or foreign exchange restrictions and transportation delays.
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 for steel but have entered into forward purchase contracts for our anticipated natural gas usage through April 2007.
25
| Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements and Supplementary Financial Data
| Page | ||||||||
| 27 | ||||||||
| 28 | ||||||||
| 29 | ||||||||
| EX-24.1 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
26
16
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRule 13a-15(f) under the Exchange Act. As required byRule 13a-15(c) under the Exchange Act, the Company’s management carried out an evaluation, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of the end of the last fiscal year. The framework on which such evaluation was based is contained in the report entitled “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Report”). Based upon the evaluation described above under the framework contained in the COSO Report, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006. Management has identified no material weakness in internal control over financial reporting.
Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. This attestation report is included at page 28 of this annual report onForm 10-K.
Park-Ohio Industries, Inc.
March 12, 2007
27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder
Park-Ohio Industries, Inc.
We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that Park-Ohio Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Park-Ohio Industries, Inc.’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. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
In our opinion, management’s assessment that Park-Ohio Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Park-Ohio Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Park-Ohio Industries, Inc. and subsidiaries (a wholly-owned subsidiary of Park-Ohio Holdings Corp.) as of December 31, 20032006 and 2002,2005, and the related consolidated statements of operations,income, shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2003.2006 and our report dated March 12, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 12, 2007
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholder
Park-Ohio Industries, Inc.
We have audited the accompanying consolidated balance sheets of Park-Ohio Industries, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted inof the United States.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Park-Ohio Industries, Inc. and subsidiaries at December 31, 20032006 and 20022005 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 20032006 in conformity with accounting principlesU.S. generally accepted in the United States.
accounting principles.
As discussed in Note BJ to the consolidated financial statements, effective June 30, 2003, the Company changed its methodadopted Statement of accountingFinancial Accounting Standards No. 158, “Employers’ Accounting for inventories at certain subsidiaries. As discussedDefined Benefit Pension and Other Post Retirement Plans,” effective December 31, 2006.
We also have audited, in Note C toaccordance with the consolidatedstandards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Park-Ohio Industries, Inc. and subsidiaries internal control over financial statements,reporting as of December 31, 2006, based on criteria established in 2002 the Company changed its methodInternal Control — Integrated Framework issued by the Committee of accounting for goodwill.
 |
Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 9, 200412, 2007
29
17
Park-Ohio Industries, Inc. and Subsidiaries
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| (Dollars in thousands) | ||||||||
ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 20,872 | $ | 17,868 | ||||
| Accounts receivable, less allowances for doubtful accounts of $4,305 in 2006 and $5,120 in 2005 | 181,893 | 153,502 | ||||||
| Inventories | 223,936 | 190,553 | ||||||
| Deferred tax assets | 34,142 | 8,627 | ||||||
| Other current assets | 29,715 | 27,753 | ||||||
| Total Current Assets | 490,558 | 398,303 | ||||||
| Property, Plant and Equipment: | ||||||||
| Land and land improvements | 3,188 | 6,964 | ||||||
| Buildings | 36,197 | 38,384 | ||||||
| Machinery and equipment | 209,445 | 198,019 | ||||||
| 248,830 | 243,367 | |||||||
| Less accumulated depreciation | 146,352 | 130,265 | ||||||
| 102,478 | 113,102 | |||||||
| Other Assets: | ||||||||
| Goodwill | 98,180 | 82,703 | ||||||
| Net assets held for sale | 4,967 | -0- | ||||||
| Other | 87,877 | 70,617 | ||||||
| $ | 784,060 | $ | 664,725 | |||||
LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||
| Current Liabilities | ||||||||
| Trade accounts payable | $ | 132,859 | $ | 115,396 | ||||
| Accrued expenses | 78,225 | 65,184 | ||||||
| Current portion of long-term liabilities | 5,873 | 4,161 | ||||||
| Total Current Liabilities | 216,957 | 184,741 | ||||||
| Long-Term Liabilities, less current portion | ||||||||
| 8.375% senior subordinated notes due 2014 | 210,000 | 210,000 | ||||||
| Revolving credit | 156,700 | 128,300 | ||||||
| Other long-term debt | 4,790 | 6,705 | ||||||
| Deferred tax liability | 32,089 | 3,176 | ||||||
| Other postretirement benefits and other long-term liabilities | 24,434 | 26,174 | ||||||
| 428,013 | 374,355 | |||||||
| Shareholder’s Equity | ||||||||
| Common stock, par value $1 per share | -0- | -0- | ||||||
| Additional paid-in capital | 64,844 | 64,844 | ||||||
| Retained earnings | 68,422 | 42,887 | ||||||
| Accumulated other comprehensive income (loss) | 5,824 | (2,102 | ) | |||||
| 139,090 | 105,629 | |||||||
| $ | 784,060 | $ | 664,725 | |||||
See notes to consolidated financial statements.
30
18
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of OperationsIncome
| Year Ended December 31 | ||||||||||||||
| 2003 | 2002 | 2001 | ||||||||||||
| (Dollars in thousands) | ||||||||||||||
| Net sales | $ | 624,295 | $ | 634,455 | $ | 636,417 | ||||||||
| Cost of products sold | 527,586 | 546,857 | 552,293 | |||||||||||
| Gross profit | 96,709 | 87,598 | 84,124 | |||||||||||
| Selling, general and administrative expenses | 62,369 | 57,418 | 66,114 | |||||||||||
| Amortization of goodwill | -0- | -0- | 3,733 | |||||||||||
| Restructuring and impairment charges | 18,808 | 13,601 | 18,163 | |||||||||||
| Operating income (loss) | 15,532 | 16,579 | (3,886 | ) | ||||||||||
| Non-operating items, net | -0- | -0- | 1,850 | |||||||||||
| Interest expense | 26,151 | 27,623 | 31,108 | |||||||||||
| Loss before income taxes and cumulative effect of accounting change | (10,619 | ) | (11,044 | ) | (36,844 | ) | ||||||||
| Income taxes (benefit) | 904 | 897 | (11,400 | ) | ||||||||||
| Loss before cumulative effect of accounting change | (11,523 | ) | (11,941 | ) | (25,444 | ) | ||||||||
| Cumulative effect of accounting change | -0- | (48,799 | ) | -0- | ||||||||||
| Net loss | $ | (11,523 | ) | $ | (60,740 | ) | $ | (25,444 | ) | |||||
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Net sales | $ | 1,056,246 | $ | 932,900 | $ | 808,718 | ||||||
| Cost of products sold | 908,095 | 796,283 | 682,658 | |||||||||
| Gross profit | 148,151 | 136,617 | 126,060 | |||||||||
| Selling, general and administrative expenses | 88,940 | 81,368 | 76,714 | |||||||||
| Restructuring and impairment charges (credits) | (809 | ) | 943 | -0- | ||||||||
| Operating income | 60,020 | 54,306 | 49,346 | |||||||||
| Interest expense | 31,267 | 27,056 | 31,413 | |||||||||
| Income before income taxes | 28,753 | 27,250 | 17,933 | |||||||||
| Income taxes (benefit) | 3,218 | (4,323 | ) | 3,400 | ||||||||
| Net income | $ | 25,535 | $ | 31,573 | $ | 14,533 | ||||||
See notes to consolidated financial statements.
31
19
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholder’s Equity
| Accumulated | |||||||||||||||||||||
| Additional | Other | ||||||||||||||||||||
| Common | Paid-In | Retained | Comprehensive | ||||||||||||||||||
| Stock | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Balance at January 1, 2001, as previously stated | $ | -0- | $ | 64,844 | $ | 91,747 | $ | (2,858 | ) | $ | 153,733 | ||||||||||
| Adjustment for the cumulative effect on the prior years of applying retroactively the change in the method of accounting for inventories (see Note B) | 2,741 | 2,741 | |||||||||||||||||||
| Balance January 1, 2001, as restated | -0- | 64,844 | 94,488 | (2,858 | ) | 156,474 | |||||||||||||||
| Comprehensive (loss): | |||||||||||||||||||||
| Net loss | (25,444 | ) | (25,444 | ) | |||||||||||||||||
| Foreign currency translation adjustment | (1,394 | ) | (1,394 | ) | |||||||||||||||||
| Comprehensive (loss) | (26,838 | ) | |||||||||||||||||||
| Balance at December 31, 2001 | -0- | 64,844 | 69,044 | (4,252 | ) | 129,636 | |||||||||||||||
| Comprehensive (loss): | |||||||||||||||||||||
| Net loss | (60,740 | ) | (60,740 | ) | |||||||||||||||||
| Foreign currency translation adjustment | 1,711 | 1,711 | |||||||||||||||||||
| Minimum pension liability | (5,555 | ) | (5,555 | ) | |||||||||||||||||
| Comprehensive (loss) | (64,584 | ) | |||||||||||||||||||
| Balance at December 31, 2002 | $ | -0- | $ | 64,844 | $ | 8,304 | $ | (8,096 | ) | $ | 65,052 | ||||||||||
| Comprehensive (loss): | |||||||||||||||||||||
| Net Loss | (11,523 | ) | (11,523 | ) | |||||||||||||||||
| Foreign currency translation adjustment | 3,632 | 3,632 | |||||||||||||||||||
| Minimum pension liability | 1,200 | 1,200 | |||||||||||||||||||
| Comprehensive (loss) | (6,691 | ) | |||||||||||||||||||
| Balance at December 31, 2003 | $ | -0- | $ | 64,844 | $ | (3,219 | ) | $ | (3,264 | ) | $ | 58,361 | |||||||||
| Accumulated | ||||||||||||||||||||
| Additional | Other | |||||||||||||||||||
| Common | Paid-In | Retained | Comprehensive | |||||||||||||||||
| Stock | Capital | Earnings | Income (Loss) | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Balance at January 1, 2004 | $ | -0- | $ | 64,844 | $ | (3,219 | ) | $ | (3,264 | ) | $ | 58,361 | ||||||||
| Comprehensive income (loss): | ||||||||||||||||||||
| Net income | 14,533 | 14,533 | ||||||||||||||||||
| Foreign currency translation adjustment | 2,071 | 2,071 | ||||||||||||||||||
| Minimum pension liability | (483 | ) | (483 | ) | ||||||||||||||||
| Comprehensive income | 16,121 | |||||||||||||||||||
| Balance at December 31, 2004 | -0- | 64,844 | 11,314 | (1,676 | ) | 74,482 | ||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||
| Net income | 31,573 | 31,573 | ||||||||||||||||||
| Foreign currency translation adjustment | 94 | 94 | ||||||||||||||||||
| Minimum pension liability | (520 | ) | (520 | ) | ||||||||||||||||
| Comprehensive income | 31,147 | |||||||||||||||||||
| Balance at December 31, 2005 | -0- | 64,844 | 42,887 | (2,102 | ) | 105,629 | ||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||
| Net income | 25,535 | 25,535 | ||||||||||||||||||
| Foreign currency translation adjustment | 2,128 | 2,128 | ||||||||||||||||||
| Minimum pension liability | 5,358 | 5,358 | ||||||||||||||||||
| Comprehensive income | 33,021 | |||||||||||||||||||
| Adjustment recognized upon adoption of SFAS No. 158 (net of income tax of $404) | 440 | 440 | ||||||||||||||||||
| Balance at December 31, 2006 | $ | -0- | $ | 64,844 | $ | 68,422 | $ | 5,824 | $ | 139,090 | ||||||||||
See notes to consolidated financial statements.
32
20
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| Year Ended December 31 | |||||||||||||
| 2003 | 2002 | 2001 | |||||||||||
| (Dollars in thousands) | |||||||||||||
| OPERATING ACTIVITIES | |||||||||||||
| Net income (loss) | $ | (11,523 | ) | $ | (60,740 | ) | $ | (25,444 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operations: | |||||||||||||
| Cumulative effect of accounting change | -0- | 48,799 | -0- | ||||||||||
| Depreciation and amortization | 15,479 | 16,265 | 19,911 | ||||||||||
| Restructuring and impairment charges | 18,641 | 10,399 | 16,362 | ||||||||||
| Deferred income taxes | -0- | 1,951 | (6,473 | ) | |||||||||
| Changes in operating assets and liabilities excluding acquisitions of businesses: | |||||||||||||
| Accounts receivable | 539 | 4,652 | 16,257 | ||||||||||
| Inventories | 6,991 | 4,682 | 34,327 | ||||||||||
| Accounts payable and accrued expenses | (12,160 | ) | 15,856 | (23,911 | ) | ||||||||
| Other | (6,149 | ) | (12,770 | ) | (8,731 | ) | |||||||
| Net Cash Provided by Operating Activities | 11,818 | 29,094 | 22,298 | ||||||||||
| INVESTING ACTIVITIES | |||||||||||||
| Purchases of property, plant and equipment, net | (10,869 | ) | (13,731 | ) | (13,923 | ) | |||||||
| Costs of acquisitions, net of cash acquired | -0- | (5,748 | ) | -0- | |||||||||
| Proceeds from the sale of business units | 7,340 | 2,486 | 6,051 | ||||||||||
| Net Cash Used by Investing Activities | (3,529 | ) | (16,993 | ) | (7,872 | ) | |||||||
| FINANCING ACTIVITIES | |||||||||||||
| Proceeds from financing arrangements | 112,000 | 6,749 | 19,000 | ||||||||||
| Payments on long-term debt | (126,898 | ) | (12,394 | ) | (33,634 | ) | |||||||
| Net Cash Used by Financing Activities | (14,898 | ) | (5,645 | ) | (14,634 | ) | |||||||
| Increase (Decrease) in Cash and Cash Equivalents | (6,609 | ) | 6,456 | (208 | ) | ||||||||
| Cash and Cash Equivalents at Beginning of Year | 8,800 | 2,344 | 2,552 | ||||||||||
| Cash and Cash Equivalents at End of Year | $ | 2,191 | $ | 8,800 | $ | 2,344 | |||||||
| Taxes paid (refunded) | $ | (1,038 | ) | $ | (4,817 | ) | $ | (3,346 | ) | ||||
| Interest paid | 25,213 | 25,880 | 28,554 | ||||||||||
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 25,535 | $ | 31,573 | $ | 14,533 | ||||||
| Adjustments to reconcile net income to net cash provided by operations: | ||||||||||||
| Depreciation and amortization | 20,037 | 17,261 | 15,385 | |||||||||
| Restructuring and impairment charges (credits) | (9 | ) | 1,776 | -0- | ||||||||
| Deferred income taxes | (4,631 | ) | (6,525 | ) | 1,074 | |||||||
| Changes in operating assets and liabilities excluding acquisitions of businesses: | ||||||||||||
| Accounts receivable | (16,219 | ) | 5,507 | (35,606 | ) | |||||||
| Inventories | (28,443 | ) | (1,699 | ) | (26,541 | ) | ||||||
| Accounts payable and accrued expenses | 16,760 | (934 | ) | 39,400 | ||||||||
| Other | (8,269 | ) | (12,464 | ) | (7,331 | ) | ||||||
| Net cash provided by operating activities | 4,761 | 34,495 | 914 | |||||||||
| INVESTING ACTIVITIES | ||||||||||||
| Purchases of property, plant and equipment, net | (19,256 | ) | (20,295 | ) | (9,963 | ) | ||||||
| Business acquisitions, net of cash acquired | (23,271 | ) | (12,181 | ) | (9,997 | ) | ||||||
| Proceeds from sale-leaseback transactions | 9,420 | -0- | -0- | |||||||||
| Proceeds from the sale of assets held for sale | 3,200 | 1,100 | -0- | |||||||||
| Net cash used by investing activities | (29,907 | ) | (31,376 | ) | (19,960 | ) | ||||||
| FINANCING ACTIVITIES | ||||||||||||
| Proceeds from bank arrangements, net | 28,150 | 8,342 | 18,013 | |||||||||
| Payments on long-term debt | -0- | -0- | (199,930 | ) | ||||||||
| Issuance of 8.375% senior subordinated notes, net of deferred financing costs | -0- | -0- | 205,179 | |||||||||
| Net cash provided by financing activities | 28,150 | 8,342 | 23,262 | |||||||||
| Increase in cash and cash equivalents | 3,004 | 11,461 | 4,216 | |||||||||
| Cash and cash equivalents at beginning of year | 17,868 | 6,407 | 2,191 | |||||||||
| Cash and cash equivalents at end of year | $ | 20,872 | $ | 17,868 | $ | 6,407 | ||||||
| Income taxes paid | $ | 5,291 | $ | 881 | $ | 3,370 | ||||||
| Interest paid | 28,997 | 24,173 | 28,891 | |||||||||
See notes to consolidated financial statements.
33
21
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
December 31, 2003, 20022006, 2005 and 20012004
(Dollars in thousands)
NOTE A — Summary of Significant Accounting Policies
The Company does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. In the ordinary course of business, the Company leases certain real properties as described in Note K. Transactions with related parties are in the ordinary course of business, are conducted on an arm’s-length basis, and 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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents:The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories:Inventories are stated at the lower offirst-in, first-out (FIFO) cost or market value (See Note B).value. Inventory reserves were $18,817$22,978 and $23,385$19,166 at December 31, 20032006 and 2002,2005, respectively.
Major Classes of Inventories
| December 31 | ||||||||
| 2003 | 2002 | |||||||
| In-process and finished goods | $ | 121,154 | $ | 136,430 | ||||
| Raw materials and supplies | 27,921 | 19,637 | ||||||
| $ | 149,075 | $ | 156,067 | |||||
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| Finished goods | $ | 143,071 | $ | 128,465 | ||||
| Work in process | 42,405 | 32,547 | ||||||
| Raw materials and supplies | 38,460 | 29,541 | ||||||
| $ | 223,936 | $ | 190,553 | |||||
Property, Plant and Equipment:Property, plant and equipment are carried at cost. Major additionsAdditions and associated interest costs are capitalized and betterments are charged to accumulated depreciation; expenditures for repairs and maintenance are charged to operations. Depreciation of fixed assets is computed principally by the straight-line method based on the estimated useful lives of the assets ranging from 25-6025 to 60 years for buildings, and 3-18three to 16 years for machinery and equipment. The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recoverable (Seerecoverable. See Note P).
M.
their estimated useful lives.
Pensions and Other Postretirement Benefits:The Company and its subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans, covering substantially all employees. In addition, the Company has two unfunded postretirement benefit plans. For the defined benefit plans, benefits are based on the employee’s years of service and the Company’s policy is to fund that amount recommended by its independent actuaries.service. For the defined
34
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contribution plans, the costs charged to operations and the amount funded are based upon a percentage of the covered employees’ compensation.
Accounting for Asset Retirement Obligations: Due to the long-term productive nature of the Company’s manufacturing operations, absent plans or expectations of plans to initiate asset retirement activities, the Company is unable to determine potential settlement dates to be used in fair value calculations for estimating conditional asset retirement obligations. As such, the Company has not recognized conditional asset retirement obligations when there are no plans or expectations of plans to undertake a major renovation or demolition project that would require the removal of asbestos.
Income Taxes:The Company accounts for income taxes under the 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
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
rates. In determining these amounts, management determined the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, expectations of future earnings, and taxable income and the extended period of time over which the postretirement benefits will be paid and accordingly records valuation allowances when necessary (See Note H).
if, based on the weight of available evidence it is more likely than not that some portion or all of our deferred tax assets will not be realized as required by SFAS No. 109 (“FAS 109”), “Accounting for Income Taxes.”
Revenue Recognition:The Company recognizes revenue, other than from long-term contracts, when title is transferred to the customer, typically upon shipment. Revenue from long-term contracts (less than 5%(approximately 10% of consolidated revenue) is accounted for under the percentage of completion method, and recognized on the basis of the percentage each contract’s cost to date bears to the total estimated contract cost. Revenue earned on contracts in process in excess of billings is classified in other current assets in the accompanying consolidated balance sheet. The Company’s revenue recognition policies are in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 101,104, “Revenue Recognition.”
Accounts Receivable:Accounts receivable are recorded at selling price, which is fixed based on a purchase order or contractual arrangement. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The Company’s policy is to identify and reserve for specific collectibility concerns based on customers’ financial condition and payment history.
Software Development Costs: Software development costs incurred subsequent to establishing feasibility through the general release of the software products are capitalized and included in other assets in the consolidated balance sheet. Technological feasibility is demonstrated by the completion of a working model. All costs prior to the development of the working model are expensed as incurred. Capitalized costs are amortized on a straight-line basis over five years, which is the estimated useful life of the software product.
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 and other information. Write-offs of accounts receivable have historically been low. As of December 31, 2003,2006, the Company had uncollateralized receivables with sevenfive customers in the automotive and heavy-duty truck industries, each with several locations, aggregating $28,365,$41,860, which represented approximately 22% of the Company’s trade accounts receivable. During 2006, sales to these customers amounted to approximately $282,074, which represented approximately 27% of the Company’s trade accounts receivable. During 2003, sales to these customers amounted to approximately $185,248, which represented 30% of the Company’s net sales.
Shipping and Handling Costs:All shipping and handling costs are included in cost of products sold in the Consolidated Statements of Operations.Income Statements.
35
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Environmental:The Company accrues environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Costs whichthat extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company records a liability when environmental assessmentsand/or remedial efforts are probable and can be reasonably estimated. The estimated liability of the Company is not discounted or reduced for possible recoveries from insurance carriers.
Foreign Currency Translation:The functional currency for all subsidiaries outside the United States is the local currency. Financial statements for these subsidiaries are translated into United StatesU.S. dollars at year-end exchange rates as to assets and liabilities and weighted-average exchange rates as to revenues and expenses. The resulting translation adjustments are recorded in shareholders’accumulated comprehensive income (loss) in shareholder’s equity.
In June 2002,November 2004, the FASB issued StatementSFAS No. 151, “Inventory Costs.” SFAS No. 151 amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of Financial Accounting Standardsidle facility expense, freight, handling costs and wasted material. SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“FAS 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” FAS 146151 requires that a liability for a cost associated with an exit or disposal activitythese items be recognized as current-period charges and measured initially atrequires that the fair value only whenallocation of fixed production overhead to the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost was recognized atcosts of conversion be based on the datenormal capacity of an entity’s commitment to an exit plan. FAS 146 isthe associated production facilities. The Company adopted SFAS No. 151 effective for exit and disposal activities that are initiated after December 31, 2002. FAS 146 has no effect on charges recorded for exit activities
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
begun prior to 2003.January 1, 2006. The adoption of this statementSFAS No. 151 did not have a material effectimpact on the Company’s financial position or results of operation.
operations.
In November 2002,May 2005, the FASB issued InterpretationSFAS No. 45 (“FIN 45”), “Guarantor’s Accounting154, “Accounting Changes and Disclosure RequirementsError Corrections.” SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement that do not include explicit transition provisions. SFAS No. 154 requires that changes in accounting principle be applied retroactively, instead of including the cumulative effect in the income statement. The correction of an error will continue to require financial statement restatement. A change in accounting estimate will continue to be accounted for Guarantees, Including Indirect Guaranteesin the period of Indebtedness of Others”. FIN 45 elaborates on required disclosures by a guarantorchange and in its financial statements about obligations under certain guarantees that it has issued and requires a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee.subsequent periods, if necessary. The Company has adopted the provisionsSFAS No. 154 as of FIN 45 relating to initial recognition and measurements of guarantor liabilities, which are effective for qualifying guarantees entered into or modified after December 15, 2002.January 1, 2006. The adoption of SFAS No. 154 did not have a material impact on the consolidatedCompany’s financial statements.
position or results of operations.
In January 2003,June 2006, the FASB issued Interpretation No. 4648 (“FIN 46”48”), “Consolidation“Accounting for Uncertainty in Income Taxes,” that prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of Variable Interest Entities,” which clarifiesa tax position taken or expected to be taken in a tax return. Under FIN 48, a tax benefit will only be recognized if it is more likely than not that the applicationtax position ultimately will be sustained. After this threshold is met, a tax position is reported at the largest amount of Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” relating to consolidation of certain entities. First, FIN 46 will require identification of the Company’s participation in variable interest entities (“VIEs”), which are defined as entities with a level of invested equitybenefit that is more likely than not sufficient to fund future activities to permit them to operatebe realized. FIN 48 also provides guidance on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for entities identified as VIEs,derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIEs that are deemed significant, even if consolidation is not required. The Company’s adoption of FIN 46 had no effect on its financial position, results of operations and cash flows.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“FAS 149”). FAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS 133, “Accounting for Derivative Instruments and Hedging Activities.” FAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company’s adoption of FAS 149 had no effect on its financial position, results of operations and cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“FAS 150”). FAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. FAS 15048 is effective for all financial instruments entered into or modified after May 31, 2003 and mustthe Company in 2007. FIN 48 requires the cumulative effect of applying the provisions to be appliedreported separately as an adjustment to the Company’s existing financial instruments effective July 1, 2003,opening balance of retained earnings in the beginningyear of adoption. We are currently evaluating the first fiscal period after June 15, 2003. The Company adopted FAS 150 on June 1, 2003. The adoptionimpact of this statement had no effect onInterpretation and do not believe at this time that its implementation will result in a significant impact to the Company’s financial position, resultsstatements.
In September of operations or cash flows.
In January 2004,2006, the FASB issued FASB Staff Position (“FSP”) 106-1,(FSP) AUG AIR-1, “Accounting and Disclosure Requirements Related tofor Planned Major Maintenance Activities,” (“FSP AUG AIR-1”). FSP AUG AIR-1 prohibits the Medicare Prescription Drug, Improvement and Modernization Actuse of 2003” (“the Act”). The FSP permits a sponsoraccrue-in-advance method of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. Regardless of whether a sponsor elects that deferral, the FSP requires certain disclosures pending further consideration of the underlying accounting issues. The Company has elected to defer accountingplanned major maintenance activities in annual and interim financial reporting periods and is effective for the effectsCompany in 2007. The adoption of FSP AUG AIR-1 is not expected to have a material impact on the Company’s financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value in GAAP and expands disclosures about fair value measurements. This statement applies under
24
36
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued(Continued)
other accounting pronouncements that require or permit fair value measurements and is effective for the Act.Company in 2008. The Company is currently evaluating the impact of adopting this statement.
On December 31, 2006, the Act onCompany adopted SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires an employer that is a business entity and sponsors one or more single employer benefit plans to (1) recognize the funded status of the benefit in its statement of financial position, (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year end statement of financial position and results(4) disclose additional information in the notes to financial statements about certain effects on net periodic benefit costs for the next fiscal year that arise from delayed recognition of operations.
gains or losses, prior service costs or credits, and transition assets or obligations. See Note J for the impact of the adoption of SFAS No. 158 on the Company’s financial statements.
Reclassification:Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.
NOTE B — Accounting Change
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
Effective June 30, 2003, the Company changed the method of accounting for the 15% of its inventories utilizing the LIFO method to the FIFO method. The Company believes that this change is preferable for the following reasons: 1) the change conforms all of its inventories to one method of determining cost, which is the FIFO method; 2) the costs of the Company’s inventories have remained fairly level during the past several years, which has substantially negated the benefits of the LIFO method (a better matching of current costs with current revenue in periods of rising costs); 3) the impact of utilizing the LIFO method has had an insignificant impact on the Company’s consolidated net income (loss) during the past several years; and 4) the FIFO method results in the valuation of inventories at current costs on the consolidated balance sheet, which provides a more meaningful presentation for investors and financial institutions.
As required under accounting principles generally accepted in the United States, the Company has restated the consolidated balance sheet as of December 31, 2002 to increase inventories by the recorded LIFO reserve ($4.4 million), increase deferred tax liabilities ($1.7 million), and increase shareholders’ equity ($2.7 million). Previously reported results of operations have not been restated because the impact of utilizing the LIFO method had an insignificant impact on the Company’s reported amounts for consolidated net income (loss).
NOTE C — Adoption of FAS 142, “Goodwill and Other Intangible Assets”
Effective January 1, 2002, the Company adopted FAS 142, “Goodwill and Other Intangible Assets.” Under this standard, goodwill is no longer amortized, but is subject to an impairment test at least annually. The Company has selected October 1 as its annual testing date. In the year of adoption, FAS 142 also requires the Company to perform a transitional test to determine whether goodwill was impaired as of the beginning of the year. Under FAS 142, the initial step in testing for goodwill impairment is to compare the fair value of each reporting unit to its book value. To the extent the fair value of any reporting unit is less than its book value, which would indicate that potential impairment of goodwill exists, a second test is required to determine the amount of impairment.
The Company, with assistance of an outside consultant, completed the transitional impairment review of goodwill using a discounted cash flow approach to determine the fair value of each reporting unit. Based upon the results of these calculations, the Company recorded a non-cash charge for goodwill impairment which aggregated $48,799. In accordance with the provisions of FAS 142, the charge has been accounted for as a cumulative effect of a change in accounting principle, effective January 1, 2002. The Company also completed the annual impairment tests as of October 1, 2003 and 2002, and has determined that no additional impairment of goodwill existed as of those dates.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The following table summarizes the transitional goodwill impairment charge by reporting segment as well as the carrying amount of goodwill for the years ended December 31, 2002 and December 31, 2003.
| Impairment Charge | ||||||||||||
| Reporting | recorded effective | Goodwill at | Goodwill at | |||||||||
| Segment | January 1, 2002 | December 31, 2002 | December 31, 2003 | |||||||||
| ILS | $ | 32,239 | $ | 64,949 | $ | 65,763 | ||||||
| Aluminum Products | 9,700 | 16,515 | 16,515 | |||||||||
| Manufactured Products | 6,860 | -0- | -0- | |||||||||
| $ | 48,799 | $ | 81,464 | $ | 82,278 | |||||||
The increase in the goodwill in the ILS segment during 2003 results from foreign currency fluctuations.
In accordance with FAS 142, prior period amounts have not been restated. The following table summarizes the reported results for 2001, and the results that would have been reported had the non-amortization provisions of FAS 142 been in effect for that year.
| December 31 | ||||
| 2001 | ||||
| Reported net loss | $ | (25,444 | ) | |
| Amortization of goodwill adjustment, net of tax | 3,315 | |||
| Adjusted net loss | $ | (22,129 | ) | |
NOTE D — Acquisitions and Dispositions
During the first quarter of 2003, the Company completed the sale of substantially all of the assets of Green Bearing (“Green”) and St. Louis Screw and Bolt (“St. Louis Screw”) for cash of approximately $7,300. No gain or loss was recorded on the sale. Green and St. Louis Screw were non-core businesses in the ILS Segment and Manufactured Products Segment, respectively, and had been identified as businesses the Company was selling as part of its restructuring activities during 2002 and 2001.
On September 10, 2002, the Company acquired substantially all of the assets of Ajax Magnethermic Corporation (“Ajax”), a manufacturer of induction heating and melting equipment. The purchase price of approximately $5,500 and the results of operations of Ajax prior to its date of acquisition were not deemed significant as defined in Regulation S-X.
On April 26, 2002, the Company completed the sale of substantially all of the assets of Castle Rubber Company for cash of approximately $2,500. Castle Rubber, a non-core business in the Manufactured Products Segment, had been identified as a business the Company was discontinuing as part of its restructuring activities during 2001. No gain or loss was recorded on the sale.
On December 21, 2001, the Company completed the sale of substantially all of the assets of Cleveland City Forge for cash of approximately $6,100 and recorded a gain of approximately $100. Cleveland City Forge was a non-core business in the Manufactured Products Segment, producing clevises and turnbuckles for the construction industry.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE E — Other Assets
Other assets consists of the following:
| December 31 | |||||||||
| 2003 | 2002 | ||||||||
| Pension assets | $ | 36,186 | $ | 32,816 | |||||
| Idle assets | 6,516 | -0- | |||||||
| Deferred financing costs | 5,774 | 4,636 | |||||||
| Tooling | 4,222 | 4,213 | |||||||
| Software development costs | 3,947 | 4,118 | |||||||
| Other | 4,665 | 5,800 | |||||||
| Totals | $ | 61,310 | $ | 51,583 | |||||
NOTE F — Accrued Expenses
Accrued expenses include the following:
| December 31 | |||||||||
| 2003 | 2002 | ||||||||
| Accrued salaries, wages and benefits | $ | 9,484 | $ | 10,583 | |||||
| Advance billings | 8,496 | 6,594 | |||||||
| Warranty and installation accruals | 6,762 | 8,990 | |||||||
| Severance and exit costs | 2,535 | 4,045 | |||||||
| Interest payable | 2,055 | 3,529 | |||||||
| State and local taxes | 3,809 | 3,206 | |||||||
| Sundry | 13,243 | 11,892 | |||||||
| Totals | $ | 46,384 | $ | 48,839 | |||||
Substantially all advance billings and warranty and installation accruals relate to the Company’s capital equipment businesses.
The changes in the aggregate product warranty liability are as follows for the year ended December 31, 2003 and 2002:
| December 31 | ||||||||
| 2003 | 2002 | |||||||
| Balance at beginning of year | $ | 6,506 | $ | 997 | ||||
| Claims paid during the year | (2,399 | ) | (1,430 | ) | ||||
| Additional warranties issued during year | 1,139 | 1,858 | ||||||
| Acquired warranty liabilities | -0- | 5,081 | ||||||
| Other | 368 | -0- | ||||||
| Balance at end of year | $ | 5,614 | $ | 6,506 | ||||
The acquired warranty liability during 2002 reflects the warranty liability of Ajax, which was acquired in September, 2002.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE G — Financing Arrangements
Long-term debt consists of the following:
| December 31 | |||||||||
| 2003 | 2002 | ||||||||
| 9.25% Senior Subordinated Notes due 2007. | $ | 199,930 | $ | 199,930 | |||||
| Revolving credit maturing on June 30, 2004. | -0- | 114,000 | |||||||
| Revolving credit maturing on July 30, 2007. | 101,000 | -0- | |||||||
| Industrial Development Revenue Bonds maturing in 2012 at interest rates from 2.00% to 4.15% | 4,478 | 4,863 | |||||||
| Other | 4,817 | 6,329 | |||||||
| 310,225 | 325,122 | ||||||||
| Less current maturities | 1,061 | 1,306 | |||||||
| Total | $ | 309,164 | $ | 323,816 | |||||
Maturities of long-term debt during each of the five years following December 31, 2003 are approximately $1,061 in 2004, $1,011 in 2005, $1,016 in 2006, $301,969 in 2007 and $804 in 2008.
The Company is a party to a credit and security agreement dated November 5, 2003, as amended (“Credit Agreement”), with a group of banks, under which it may borrow or issue standby letters of credit or commercial letters of credit up to $165,000. The Credit Agreement currently contains a detailed borrowing base formula which provides borrowing capacity to the Company based on negotiated percentages of eligible accounts receivable, inventory and fixed assets. At December 31, 2003, the Company had approximately $47,500 of unused borrowing capacity available under the Credit Agreement. Interest is payable quarterly at either the bank’s prime lending rate (4.00% at December 31, 2003) or, at Park-Ohio’s election, at LIBOR plus 1.75%-2.50%. The Company’s ability to elect LIBOR-based interest as well as the overall interest rate are dependent on the Company’s Debt Service Coverage Ratio, as defined in the Credit Agreement. Up to $20,000 in standby letters of credit and commercial letters of credit may be issued under the Credit Agreement. As of December 31, 2003, in addition to amounts borrowed under the Credit Agreement, there is $7,900 outstanding primarily for standby letters of credit. A fee of .25% is imposed by the bank on the unused portion of available borrowings. The Credit Agreement expires on July 30, 2007 and borrowings are secured by substantially all of the Company’s assets.
Provisions of the indenture governing the Senior Subordinated Notes and the revolving credit agreement contain restrictions on the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments, investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets or to merge or consolidate with an unaffiliated entity. At December 31, 2003, the Company was in compliance with all financial covenants of the Credit Agreement.
The weighted average interest rate on all debt was 7.26% at December 31, 2003.
The fair market value of the Senior Subordinated Notes based on published market prices was approximately $201,429 and $129,955 at December 31, 2003 and 2002, respectively. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and borrowings under the credit agreement approximate fair value at December 31, 2003 and 2002.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE H — Income Taxes
Income taxes consisted of the following:
| Year Ended December 31 | |||||||||||||
| 2003 | 2002 | 2001 | |||||||||||
| Current (refundable): | |||||||||||||
| Federal | $ | -0- | $ | (2,210 | ) | $ | (5,828 | ) | |||||
| State | 16 | 387 | 369 | ||||||||||
| Foreign | 888 | 769 | 532 | ||||||||||
| 904 | (1,054 | ) | (4,927 | ) | |||||||||
| Deferred: | |||||||||||||
| Federal | -0- | 1,951 | (6,135 | ) | |||||||||
| State | -0- | -0- | (338 | ) | |||||||||
| -0- | 1,951 | (6,473 | ) | ||||||||||
| Income taxes | $ | 904 | $ | 897 | $ | (11,400 | ) | ||||||
The reasons for the difference between income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes are as follows:
| Year Ended December 31 | ||||||||||||
| 2003 | 2002 | 2001 | ||||||||||
| Computed statutory amount | $ | (3,712 | ) | $ | (3,895 | ) | $ | (12,700 | ) | |||
| Effect of state income taxes | 11 | 411 | 20 | |||||||||
| Goodwill | -0- | -0- | 668 | |||||||||
| Foreign rate differences | 815 | 599 | 275 | |||||||||
| Valuation allowance | 3,695 | 3,475 | -0- | |||||||||
| Other, net | 95 | 307 | 337 | |||||||||
| Income taxes (benefit) | $ | 904 | $ | 897 | $ | (11,400 | ) | |||||
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Significant components of the Company’s net deferred tax assets and liabilities are as follows:
| December 31 | ||||||||||
| 2003 | 2002 | |||||||||
| Deferred tax assets: | ||||||||||
| Postretirement benefit obligation | $ | 7,600 | $ | 8,100 | ||||||
| Inventory | 8,400 | 7,200 | ||||||||
| Net operating loss and tax credit carryforwards | 14,300 | 10,900 | ||||||||
| Goodwill | 6,800 | 6,800 | ||||||||
| Other—net | 8,400 | 2,600 | ||||||||
| Total deferred tax assets | 45,500 | 35,600 | ||||||||
| Deferred tax liabilities: | ||||||||||
| Tax over book depreciation | 13,900 | 12,800 | ||||||||
| Pension | 11,400 | 10,500 | ||||||||
| Total deferred tax liabilities | 25,300 | 23,300 | ||||||||
| 20,200 | 12,300 | |||||||||
| Valuation reserves | (20,200 | ) | (12,300 | ) | ||||||
| Net deferred tax assets | $ | -0- | $ | -0- | ||||||
At December 31, 2003, the Company has net operating loss carryforwards for income tax purposes of approximately $35,700, which will expire between 2021 and 2023. In accordance with the provisions of FAS 109 “Accounting for Income Taxes”, the tax benefits related to these carryforwards have been fully reserved as of December 31, 2003 since the Company is in a three year cumulative loss position.
NOTE I — Legal Proceedings
The Company is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation will not have a material adverse effect on the Company’s financial condition, liquidity and results of operations.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE J — Pensions and Postretirement Benefits
The following tables set forth the change in benefit obligation, plan assets, funded status and amounts recognized in the consolidated balance sheet for the defined benefit pension and postretirement benefit plans as of December 31, 2003 and 2002:
| Postretirement | ||||||||||||||||
| Pension | Benefits | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Change in benefit obligation | ||||||||||||||||
| Benefit obligation at beginning of year | $ | 52,481 | $ | 50,564 | $ | 24,869 | $ | 23,403 | ||||||||
| Service cost | 545 | 399 | 147 | 204 | ||||||||||||
| Curtailment and settlement | (208 | ) | 2,053 | -0- | -0- | |||||||||||
| Interest cost | 3,498 | 3,556 | 1,701 | 1,712 | ||||||||||||
| Plan participants’ contributions | -0- | -0- | 247 | 135 | ||||||||||||
| Actuarial losses (gains) | 1,800 | 1,132 | 3,758 | 1,570 | ||||||||||||
| Benefits and expenses paid | (5,041 | ) | (5,223 | ) | (3,356 | ) | (2,155 | ) | ||||||||
| Benefit obligation at end of year | $ | 53,075 | $ | 52,481 | $ | 27,366 | $ | 24,869 | ||||||||
Change in plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 85,401 | $ | 100,498 | $ | -0- | $ | -0- | ||||||||
| Actual return on plan assets | 17,243 | (8,811 | ) | -0- | -0- | |||||||||||
| Settlement accounting | -0- | (1,063 | ) | -0- | -0- | |||||||||||
| Company contributions | -0- | -0- | 3,109 | 2,020 | ||||||||||||
| Plan participants’ contributions | -0- | -0- | 247 | 135 | ||||||||||||
| Benefits and expense paid | (5,041 | ) | (5,223 | ) | (3,356 | ) | (2,155 | ) | ||||||||
| Fair value of plan assets at end of year | $ | 97,603 | $ | 85,401 | $ | -0- | $ | -0- | ||||||||
| Funded (underfunded) status of the plan | $ | 44,528 | $ | 32,920 | $ | (27,366 | ) | $ | (24,869 | ) | ||||||
| Unrecognized net transition obligation | (487 | ) | (536 | ) | -0- | -0- | ||||||||||
| Unrecognized net actuarial (gain) loss | (7,235 | ) | 1,547 | 5,375 | (303 | ) | ||||||||||
| Unrecognized prior service cost (benefit) | 773 | 1,198 | (327 | ) | (407 | ) | ||||||||||
| Net amount recognized at year end | $ | 37,579 | $ | 35,129 | $ | (22,318 | ) | $ | (25,579 | ) | ||||||
Amounts recognized in the consolidated balance sheets consists of:
| 2003 | 2002 | ||||||||
| Prepaid pension cost | $ | 36,186 | $ | 32,816 | |||||
| Accrued pension cost | (2,962 | ) | (3,526 | ) | |||||
| Intangible asset | -0- | 284 | |||||||
| Accumulated other comprehensive loss | 4,355 | 5,555 | |||||||
| Net amount recognized at the end of year | $ | 37,579 | $ | 35,129 | |||||
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The pension plan weighted-average asset allocation at year ended 2003 and 2002 and target allocation for 2004 are as follows:
| Plan Assets | ||||||||||||
| Target 2004 | 2003 | 2002 | ||||||||||
Asset Category | ||||||||||||
| Equity securities | 60-70 | % | 64.8 | % | 62.7 | % | ||||||
| Debt securities | 25-30 | 26.0 | 28.7 | |||||||||
| Other | 5-10 | 9.2 | 8.6 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
The Company recorded a minimum pension liability of $4,355 at December 31, 2003 and $5,555 at December 31, 2002, as required by Financial Accounting Standards Board Statement No. 87. The adjustment is reflected in other comprehensive income and long-term liabilities. The adjustment relates to two of the Company’s defined benefit plans, for which the accumulated benefit obligations of $16,336 at December 31, 2003 ($15,573 at December 31, 2002), exceed the fair value of the underlying pension assets of $13,374 at December 31, 2003 ($12,047 at December 31, 2002). Amounts were as follows:
| 2003 | 2002 | |||||||
| Projected benefit obligation | $ | 16,336 | $ | 15,573 | ||||
| Accumulated benefit obligation | $ | 16,336 | $ | 15,573 | ||||
| Fair value of plan assets | $ | 13,374 | $ | 12,047 | ||||
The following tables summarize the assumptions used by the consulting actuary and the related cost information.
| Postretirement | ||||||||||||||||
| Pension | Benefits | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Weighted-Average assumptions as of December 31 | ||||||||||||||||
| Discount rate | 6.50 | % | 7.00 | % | 6.50 | % | 7.00 | % | ||||||||
| Expected return on plan assets | 8.75 | % | 8.75 | % | N/A | N/A | ||||||||||
| Rate of compensation increase | 2.00 | % | 2.00 | % | N/A | N/A | ||||||||||
In determining its expected return on plan assets assumption for the year ended December 31, 2003, the Company considered historical experience, its asset allocation, expected future long-term rates of return for each major asset class, and an assumed long-term inflation rate. Based on these factors, the Company derived an expected return on plan assets for the year ended December 31, 2003 of 8.75%. This assumption was supported by the asset return generation model used by the Company’s independent actuaries, which projected future asset returns using simulation and asset class correlation.
The Company has elected to defer recognition of the potential effect of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 until authoritative guidance on the accounting for the federal subsidy is issued.
For measurement purposes, a 10% percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to decrease gradually to 5% for 2009 and remain at that level thereafter.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||
| Service costs | $ | 545 | $ | 399 | $ | 590 | $ | 147 | $ | 204 | $ | 179 | ||||||||||||
| Interest costs | 3,498 | 3,556 | 3,506 | 1,701 | 1,712 | 1,663 | ||||||||||||||||||
| Expected return on plan assets | (7,229 | ) | (8,394 | ) | (8,658 | ) | -0- | -0- | -0- | |||||||||||||||
| Transition obligation | (49 | ) | (49 | ) | (56 | ) | -0- | -0- | -0- | |||||||||||||||
| Amortization of prior service cost | 257 | 319 | 363 | (80 | ) | (79 | ) | (79 | ) | |||||||||||||||
| Recognized net actuarial (gain) loss | 361 | (1,055 | ) | (1,720 | ) | 43 | 11 | (28 | ) | |||||||||||||||
| Benefit (income) costs | $ | (2,617 | ) | $ | (5,224 | ) | $ | (5,975 | ) | $ | 1,811 | $ | 1,848 | $ | 1,735 | |||||||||
The Company recorded $167 of non-cash pension curtailment charges in 2003, $2,700 in 2002 and $200 in 2001 related to the disposal or closure of three manufacturing facilities. These were classified as restructuring charges in each year.
The Company has two postretirement benefit plans. Under both of these plans, health care benefits are provided on both a contributory and noncontributory basis. The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
| 1-Percentage | 1-Percentage | |||||||
| Point | Point | |||||||
| Increase | Decrease | |||||||
| Effect on total of service and interest cost components in 2003 | $ | 138 | $ | 104 | ||||
| Effect on post retirement benefit obligation as of December 31, 2003 | $ | 1,767 | $ | 1,545 | ||||
The total contribution charged to pension expense for the Company’s defined contribution plans was $1,331 in 2003, $1,273 in 2002 and $1,382 in 2001. The Company expects to have no contribution to its defined benefit plans in 2004.
NOTE K — Leases
Rental expense for 2003, 2002 and 2001 was $10,263, $10,749 and $12,638, respectively. Future minimum lease commitments during each of the five years following December 31, 2003 are as follows: $7,178 in 2004, $5,259 in 2005, $3,273 in 2006, $1,600 in 2007, $1,329 in 2008 and $1,856 thereafter.
NOTE L — Industry Segments
The Company operates through three segments: Integrated Logistics Solutions (“ILS”), Aluminum Products and Manufactured Products. ILS is a leading supply chain logistics provider of production components to large, multinational manufacturing companies, other manufacturers and distributors. In connection with the supply of such production components, ILS provides a variety of value-added, cost-effective supply chain management services. The principal customers of ILS are in the semiconductor equipment, heavy-duty truck, industrialautomotive and vehicle parts, electrical distribution and controls, power sports/fitness equipment, HVAC, aerospace and defense, electrical controls, HVAC, vehicle partscomponents, appliance and accessories, appliances, and lawn and gardensemiconductor equipment industries. Aluminum Products manufactures cast aluminum components for automotive, agricultural equipment, construction equipment, heavy-duty truck and construction equipment.marine equipment industries. Aluminum Products also provides value-added services such as design and engineering, machining and assembly. Manufactured Products operates a diverse group of niche manu-
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
facturingmanufacturing businesses that design and manufacture a broad range of high quality products engineered for specific customer applications. The principal customers of Manufactured Products are original equipment manufacturers and end-usersend users in the steel, coatings, forging, foundry, heavy-duty truck, construction equipment, bottling, automotive, oil and gas, rail and locomotive manufacturing and aerospace automotive, railroad, truck and oildefense industries.
The Company’s sales are made through its own sales organization, distributors and representatives. Intersegment sales are immaterial and eliminated in consolidation and are not included in the figures presented. Intersegment sales are accounted for at values based on market prices. Income allocated to segments excludes certain corporate expenses and interest expense. Identifiable assets by industry segment include assets directly identified with those operations.
37
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Corporate assets generally consist of cash and cash equivalents, deferred tax assets, property and equipment, and other assets.
| Year Ended December 31 | |||||||||||||
| 2003 | 2002 | 2001 | |||||||||||
| Net sales: | |||||||||||||
| ILS | $ | 377,645 | $ | 398,141 | $ | 416,962 | |||||||
| Aluminum products | 90,080 | 106,148 | 84,846 | ||||||||||
| Manufactured products | 156,570 | 130,166 | 134,609 | ||||||||||
| $ | 624,295 | $ | 634,455 | $ | 636,417 | ||||||||
| Income (loss) before income taxes and amortization of goodwill: | |||||||||||||
| ILS | $ | 24,893 | $ | 17,467 | $ | 22,944 | |||||||
| Aluminum products | 10,201 | 4,739 | (2,327 | ) | |||||||||
| Manufactured products | (13,759 | ) | (1,342 | ) | (14,287 | ) | |||||||
| $ | 21,335 | $ | 20,864 | $ | 6,330 | ||||||||
| Amortization of goodwill: | |||||||||||||
| ILS | $ | -0- | $ | -0- | $ | 2,702 | |||||||
| Aluminum products | -0- | -0- | 745 | ||||||||||
| Manufactured products | -0- | -0- | 286 | ||||||||||
| $ | -0- | $ | -0- | $ | 3,733 | ||||||||
| Income (loss) before income taxes and change in accounting principle: | |||||||||||||
| ILS | $ | 24,893 | $ | 17,467 | $ | 20,242 | |||||||
| Aluminum products | 10,201 | 4,739 | (3,072 | ) | |||||||||
| Manufactured products | (13,759 | ) | (1,342 | ) | (14,573 | ) | |||||||
| 21,335 | 20,864 | 2,597 | |||||||||||
| Corporate costs | (5,803 | ) | (4,285 | ) | (6,483 | ) | |||||||
| Interest expense | (26,151 | ) | (27,623 | ) | (31,108 | ) | |||||||
| Non-operating items, net | -0- | -0- | (1,850 | ) | |||||||||
| $ | (10,619 | ) | $ | (11,044 | ) | $ | (36,844 | ) | |||||
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
| Net sales: | ||||||||||||
| ILS | $ | 598,228 | $ | 532,624 | $ | 453,223 | ||||||
| Aluminum Products | 154,639 | 159,053 | 135,402 | |||||||||
| Manufactured Products | 303,379 | 241,223 | 220,093 | |||||||||
| $ | 1,056,246 | $ | 932,900 | $ | 808,718 | |||||||
| Income before income taxes: | ||||||||||||
| ILS | $ | 38,383 | $ | 34,814 | $ | 29,191 | ||||||
| Aluminum Products | 3,921 | 9,103 | 9,021 | |||||||||
| Manufactured Products | 28,991 | 20,630 | 18,890 | |||||||||
| 71,295 | 64,547 | 57,102 | ||||||||||
| Corporate costs | (11,275 | ) | (10,241 | ) | (7,756 | ) | ||||||
| Interest expense | (31,267 | ) | (27,056 | ) | (31,413 | ) | ||||||
| $ | 28,753 | $ | 27,250 | $ | 17,933 | |||||||
| Identifiable assets: | ||||||||||||
| ILS | $ | 382,101 | $ | 323,176 | $ | 297,002 | ||||||
| Aluminum Products | 98,041 | 101,489 | 105,535 | |||||||||
| Manufactured Products | 206,089 | 169,004 | 163,230 | |||||||||
| General corporate | 97,829 | 71,056 | 46,080 | |||||||||
| $ | 784,060 | $ | 664,725 | $ | 611,847 | |||||||
| Depreciation and amortization expense: | ||||||||||||
| ILS | $ | 4,365 | $ | 4,575 | $ | 4,608 | ||||||
| Aluminum Products | 7,892 | 7,484 | 5,858 | |||||||||
| Manufactured Products | 6,960 | 4,986 | 4,728 | |||||||||
| General corporate | 820 | 216 | 191 | |||||||||
| $ | 20,037 | $ | 17,261 | $ | 15,385 | |||||||
| Capital expenditures: | ||||||||||||
| ILS | $ | 2,447 | $ | 2,070 | $ | 3,691 | ||||||
| Aluminum Products | 5,528 | 10,473 | 5,497 | |||||||||
| Manufactured Products | 12,548 | 7,266 | 720 | |||||||||
| General corporate | (1,267 | ) | 486 | 55 | ||||||||
| $ | 19,256 | $ | 20,295 | $ | 9,963 | |||||||
The Company had sales of $146,849 in 2006, $107,853 in 2005 and $95,610 in 2004 to International Truck, which represented approximately 14%, 12% and 12% of consolidated net sales for each respective year.
34
38
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued(Continued)
| Year Ended December 31 | |||||||||||||
| 2003 | 2002 | 2001 | |||||||||||
| Identifiable assets: | |||||||||||||
| ILS | $ | 267,361 | $ | 273,442 | $ | 312,288 | |||||||
| Aluminum products | 88,031 | 79,797 | 95,033 | ||||||||||
| Manufactured products | 121,331 | 151,880 | 141,774 | ||||||||||
| General corporate | 32,821 | 37,824 | 45,813 | ||||||||||
| $ | 509,544 | $ | 542,943 | $ | 594,908 | ||||||||
| Depreciation and amortization expense: | |||||||||||||
| ILS | $ | 4,868 | $ | 5,206 | $ | 8,441 | |||||||
| Aluminum products | 5,342 | 6,432 | 5,532 | ||||||||||
| Manufactured products | 5,050 | 4,307 | 5,632 | ||||||||||
| General corporate | 219 | 320 | 306 | ||||||||||
| $ | 15,479 | $ | 16,265 | $ | 19,911 | ||||||||
| Capital expenditures: | |||||||||||||
| ILS | $ | 3,017 | $ | 1,603 | $ | 1,972 | |||||||
| Aluminum products | 1,878 | 5,927 | 3,160 | ||||||||||
| Manufactured products | 5,867 | 6,201 | 8,352 | ||||||||||
| General corporate | 107 | -0- | 439 | ||||||||||
| $ | 10,869 | $ | 13,731 | $ | 13,923 | ||||||||
The Company had sales of $68,238 in 2003 to Navistar which represented approximately 11% of consolidated net sales. For 2002 and 2001, sales to no single customer were greater than 10% of consolidated net sales.
The Company’s approximate percentage of net sales by geographic region were as follows:
| Year Ended | ||||||||||||
| December 31 | ||||||||||||
| 2003 | 2002 | 2001 | ||||||||||
| United States | 83 | % | 80 | % | 88 | % | ||||||
| Canada | 8 | % | 13 | % | 7 | % | ||||||
| Other | 9 | % | 7 | % | 5 | % | ||||||
| 100 | % | 100 | % | 100 | % | |||||||
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
| United States | 76 | % | 79 | % | 74 | % | ||||||
| Canada | 9 | % | 7 | % | 9 | % | ||||||
| Other | 15 | % | 14 | % | 17 | % | ||||||
| 100 | % | 100 | % | 100 | % | |||||||
At December 31, 2003,2006, 2005 and 2004, approximately 88%90%, 86% and 86%, respectively, of the Company’s assets arewere maintained in the United States.
NOTE C — Acquisitions
In October 2006, the Company acquired all of the capital stock of NABS, Inc. (“NABS”) for $21,201 in cash. NABS is a premier international supply chain manager of production components, providing services to high technology companies in the computer, electronics, and consumer products industries. NABS has 19 operations across Europe, Asia, Mexico and the United States. The acquisition was funded with borrowings under the Company’s revolving credit facility.
The purchase price and results of operations of NABS prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for NABS have been included since October 18, 2006. The preliminary allocation of the purchase price has been performed based on the assignments of fair values to assets acquired and liabilities assumed. The preliminary allocation of the purchase price is as follows:
| Cash acquisition price, less cash acquired | $ | 20,053 | ||
| Assets | ||||
| Accounts receivable | (11,460 | ) | ||
| Inventories | (4,326 | ) | ||
| Other current assets | (201 | ) | ||
| Equipment | (365 | ) | ||
| Intangible assets subject to amortization | (8,020 | ) | ||
| Other assets | (724 | ) | ||
| Liabilities | ||||
| Accounts payable | 8,989 | |||
| Accrued expenses and other current liabilities | 3,904 | |||
| Deferred tax liability | 3,128 | |||
| Goodwill | $ | 10,978 | ||
35
39
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued(Continued)
The Company has a plan for integration activities. In accordance with FASB EITF IssueNo. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” the Company recorded accruals for severance, exit and relocation costs in the purchase price allocation. A reconciliation of the beginning and ending accrual balances is as follows:
| Severance and | Exit and | |||||||||||
| Personnel | Relocation | Total | ||||||||||
| Balance at October 18, 2006 | $ | -0- | $ | -0- | $ | -0- | ||||||
| Add: Accruals | 650 | 250 | 900 | |||||||||
| Less: Payments | (136 | ) | (46 | ) | (182 | ) | ||||||
| Balance at December 31, 2006 | $ | 514 | $ | 204 | $ | 718 | ||||||
In January 2006, the Company completed the acquisition of all of the capital stock of Foundry Service GmbH (“Foundry Service”) for approximately $3,219, which resulted in additional goodwill of $2,313. The acquisition was funded with borrowings from foreign subsidiaries of the Company. The acquisition was not deemed significant as defined inRegulation S-X.
On December 23, 2005, the Company completed the acquisition of the assets of Lectrotherm, Inc. (“Lectrotherm”) for $5,125 in cash. The acquisition was funded with borrowings under the Company’s revolving credit facility. The purchase price and the results of operations of Lectrotherm prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for Lectrotherm have been included since December 23, 2005. In 2006, the allocation of the purchase price was finalized based on the assignments of fair values to assets acquired and liabilities assumed. The allocation of the purchase price is as follows:
| Cash acquisition price, less cash acquired | $ | 4,698 | ||
| Assets | ||||
| Accounts receivable | (2,465 | ) | ||
| Inventories | -0- | |||
| Prepaid expenses | (97 | ) | ||
| Equipment | (1,636 | ) | ||
| Liabilities | ||||
| Accrued expenses | 846 | |||
| Goodwill | $ | 1,346 | ||
40
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On July 20, 2005, the Company completed the acquisition of the assets of Purchased Parts Group, Inc. (“PPG”) for $7,000 in cash, $1,346 in a short-term note payable and the assumption of approximately $12,787 of trade liabilities. The acquisition was funded with borrowings under the Company’s revolving credit facility. The purchase price and the results of operations of PPG prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for PPG have been included in the Company’s financial statements since July 20, 2005. The final allocation of the purchase price is as follows:
| Cash acquisition price | $ | 7,000 | ||
| Assets | ||||
| Accounts receivable | (10,835 | ) | ||
| Inventories | (10,909 | ) | ||
| Prepaid expenses | (1,201 | ) | ||
| Equipment | (407 | ) | ||
| Liabilities | ||||
| Accounts payable | 12,783 | |||
| Accrued expenses | 2,270 | |||
| Note payable | 1,299 | |||
| Goodwill | $ | -0- | ||
The Company has a plan for integration activities. In accordance with FASB EITF IssueNo. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” the Company recorded accruals for severance, exit and relocation costs in the purchase price allocation. A reconciliation of the beginning and ending accrual balance is as follows:
| Severance | Exit and | |||||||||||
and Personnel | Relocation | Total | ||||||||||
| Balance at June 30, 2005 | $ | -0- | $ | -0- | $ | -0- | ||||||
| Add: Accruals | 250 | 1,750 | 2,000 | |||||||||
| Less: Payments | (551 | ) | (594 | ) | (1,145 | ) | ||||||
| Transfers | 400 | (400 | ) | -0- | ||||||||
| Balance at December 31, 2005 | $ | 99 | $ | 756 | $ | 855 | ||||||
| Less: Payments and adjustments | (43 | ) | (417 | ) | (460 | ) | ||||||
| Transfers | (17 | ) | 17 | -0- | ||||||||
| Balance at December 31, 2006 | $ | 39 | $ | 356 | $ | 395 | ||||||
On August 23, 2004, the Company acquired substantially all of the assets of the Automotive Components Group (“Amcast Components Group”) of Amcast Industrial Corporation. The purchase price was approximately $10,000 in cash and the assumption of approximately $9,000 of operating liabilities. The acquisition was funded with borrowings under the Company’s revolving credit facility. The purchase price and the results of operations of Amcast Components Group prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for Amcast Components Group have been included in the Company’s results since August 23, 2004.
41
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The final allocation of the purchase price has been performed based on the assignment of fair values to assets acquired and liabilities assumed. The allocation of the purchase price is as follows:
| Cash acquisition price | $ | 10,000 | ||
| Assets | ||||
| Accounts receivable | (8,948 | ) | ||
| Inventories | (2,044 | ) | ||
| Property and equipment | (15,499 | ) | ||
| Other | (115 | ) | ||
| Liabilities | ||||
| Accounts payable | 4,041 | |||
| Compensation accruals | 3,825 | |||
| Other accruals | 8,740 | |||
| Goodwill | $ | -0- | ||
The Company has a plan for integration activities and plant rationalization. In accordance with FASB EITF IssueNo. 95-3, the Company recorded accruals for severance, exit and relocation costs in the purchase price allocation. A reconciliation of the beginning and ending accrual balances is as follows:
Severance | Exit | Relocation | Total | |||||||||||||
| Balance at June 30, 2004 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | ||||||||
| Add: Accruals | 1,916 | 100 | 265 | 2,281 | ||||||||||||
| Less: Payments | 295 | -0- | 2 | 297 | ||||||||||||
| Balance at December 31, 2004 | 1,621 | 100 | 263 | 1,984 | ||||||||||||
| Transfer | 0 | 48 | (48 | ) | 0 | |||||||||||
| Adjustments | (612 | ) | 0 | (113 | ) | (725 | ) | |||||||||
| Less: Payments | 1,009 | 148 | 102 | 1,259 | ||||||||||||
| Balance at December 31, 2005 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
On April 1, 2004, the Company acquired the remaining 66% of the common stock of Japan Ajax Magnethermic Company (“Jamco”) for cash existing on the balance sheet of Jamco at that date. No additional purchase price was paid by the Company. The purchase price and the results of operations of Jamco prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for Jamco have been included in the Company’s results since April 1, 2004.
NOTE MD — FAS 142, “Goodwill and Other Intangible Assets”
In accordance with the provisions of FAS 142, the Company has completed its annual goodwill impairment tests as of October 1, 2006, 2005 and 2004, and has determined that no impairment of goodwill existed as of those dates.
42
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the carrying amount of goodwill for the years ended December 31, 2006 and December 31, 2005 by reporting segment.
| Goodwill at | Goodwill at | |||||||
Reporting Segment | December 31, 2006 | December 31, 2005 | ||||||
| ILS | $ | 77,732 | $ | 66,188 | ||||
| Aluminum Products | 16,515 | 16,515 | ||||||
| Manufactured Products | 3,933 | -0- | ||||||
| $ | 98,180 | $ | 82,703 | |||||
The increase in the goodwill in the ILS segment during 2006 results from the acquisition of NABS and foreign currency fluctuations. The increase in the goodwill in the Manufactured Products segment during 2006 results from the final allocation of the purchase price for Lectrotherm and the acquisition of Foundry Service.
Other intangible assets were acquired in connection with the acquisition of NABS. Information regarding other intangible assets as of December 31, 2006 follows:
| Acquisition | Accumulated | |||||||||||
| Costs | Amortization | Net | ||||||||||
| Non-contractual customer relationships | $ | 7,200 | $ | -0- | $ | 7,200 | ||||||
| Other | 820 | -0- | 820 | |||||||||
| $ | 8,020 | $ | -0- | $ | 8,020 | |||||||
NOTE E — Other Assets
Other assets consists of the following:
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| Pension assets | $ | 60,109 | $ | 47,561 | ||||
| Idle assets | -0- | 5,161 | ||||||
| Deferred financing costs | 5,618 | 7,048 | ||||||
| Tooling | 1,501 | 3,327 | ||||||
| Software development costs | 2,868 | 2,485 | ||||||
| Deferred tax assets | 6,555 | -0- | ||||||
| Intangible assets subject to amortization | 8,779 | -0- | ||||||
| Other | 2,447 | 5,035 | ||||||
| Totals | $ | 87,877 | $ | 70,617 | ||||
43
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE F — Accrued Expenses
Accrued expenses include the following:
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| Accrued salaries, wages and benefits | $ | 17,349 | $ | 16,435 | ||||
| Advance billings | 26,729 | 21,969 | ||||||
| Warranty, project and installation accruals | 4,820 | 4,391 | ||||||
| Severance and exit costs | -0- | 1,451 | ||||||
| Interest payable | 3,232 | 2,900 | ||||||
| State and local taxes | 5,746 | 4,866 | ||||||
| Sundry | 20,349 | 13,172 | ||||||
| Totals | $ | 78,225 | $ | 65,184 | ||||
Substantially all advance billings and warranty, project and installation accruals relate to the Company’s capital equipment businesses.
The changes in the aggregate product warranty liability are as follows for the year ended December 31, 2006 and 2005:
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| Balance at beginning of year | $ | 3,566 | $ | 4,281 | ||||
| Claims paid during the year | (2,984 | ) | (3,297 | ) | ||||
| Additional warranties issued during year | 2,797 | 2,593 | ||||||
| Acquired warranty liabilities | 178 | -0- | ||||||
| Other | -0- | (11 | ) | |||||
| Balance at end of year | $ | 3,557 | $ | 3,566 | ||||
NOTE G — Financing Arrangements
Long-term debt consists of the following:
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| 8.375% senior subordinated notes due 2014 | $ | 210,000 | $ | 210,000 | ||||
| Revolving credit facility maturing on December 31, 2010 | 156,700 | 128,300 | ||||||
| Industrial development revenue bonds maturing in 2012 at interest rates from 2.00% to 4.15% | 3,114 | 3,586 | ||||||
| Other | 4,986 | 4,763 | ||||||
| 374,800 | 346,649 | |||||||
| Less current maturities | 3,310 | 1,644 | ||||||
| Total | $ | 371,490 | $ | 345,005 | ||||
Maturities of long-term debt during each of the five years following December 31, 2006 are approximately $3,310 in 2007, $863 in 2008, $658 in 2009, $158,884 in 2010 and $598 in 2011.
44
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In November 2004, the Company issued $210,000 of 8.375% senior subordinated notes due November 15, 2014 (“8.375% Notes”). The net proceeds from this debt issuance were approximately $205,178 net of underwriting and other debt offering fees. Proceeds from the 8.375% Notes were used to fund the tender offer and early redemption of the Company’s 9.25% senior subordinated notes due 2007. The Company incurred debt extinguishment costs related primarily to premiums and other transaction costs associated with the tender and early redemption and wrote off deferred financing costs associated with the 9.25% senior subordinated notes totaling $5,963, or $.53 per share on a diluted basis.
The Company is a party to a credit and security agreement dated November 5, 2003, as amended (“Credit Agreement”), with a group of banks, under which it may borrow or issue standby letters of credit or commercial letters of credit up to $230,000. The credit agreement, as recently amended, provides lower interest rate brackets and modified certain covenants to provide greater flexibility. The Credit Agreement currently contains a detailed borrowing base formula that provides borrowing capacity to the Company based on negotiated percentages of eligible accounts receivable, inventory and fixed assets. At December 31, 2006, the Company had approximately $39,995 of unused borrowing capacity available under the Credit Agreement. Interest is payable quarterly at either the bank’s prime lending rate (8.25% at December 31, 2006) or, at the Company’s election, at LIBOR plus .75% to 1.75%. The Company’s ability to elect LIBOR-based interest rates as well as the overall interest rate are dependent on the Company’s Debt Service Coverage Ratio, as defined in the Credit Agreement. Up to $40,000 in standby letters of credit and commercial letters of credit may be issued under the Credit Agreement. As of December 31, 2006, in addition to amounts borrowed under the Credit Agreement, there was $24,169 outstanding primarily for standby letters of credit. An annual fee of .25% is imposed by the bank on the unused portion of available borrowings. The Credit Agreement expires on December 31, 2010 and borrowings are secured by substantially all of the Company’s assets.
A foreign subsidiary of the Company had outstanding standby letters of credit of $10,574 at December 31, 2006 under its credit arrangement.
The 8.375% Notes are general unsecured senior subordinated obligations of the Company and are fully and unconditionally guaranteed on a joint and several basis by all material domestic subsidiaries of the Company. Provisions of the indenture governing the 8.375% Notes and the Credit Agreement contain restrictions on the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments, investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets or to merge or consolidate with an unaffiliated entity. At December 31, 2006, the Company was in compliance with all financial covenants of the Credit Agreement.
The weighted average interest rate on all debt was 7.41% at December 31, 2006.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, borrowings under the Credit Agreement and the 8.375% Notes approximate fair value at December 31, 2006 and 2005. The approximate fair value of the 8.375% Notes was $195,300 and $184,800 at December 31, 2006 and 2005, respectively.
45
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE H — Income Taxes
Income taxes consisted of the following:
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
| Current payable (benefit): | ||||||||||||
| Federal | $ | 2,355 | $ | 165 | $ | (426 | ) | |||||
| State | 432 | 198 | 23 | |||||||||
| Foreign | 4,792 | 2,260 | 3,245 | |||||||||
| 7,579 | 2,623 | 2,842 | ||||||||||
| Deferred: | ||||||||||||
| Federal | (1,093 | ) | (7,300 | ) | -0- | |||||||
| State | (1,521 | ) | -0- | -0- | ||||||||
| Foreign | (1,747 | ) | 354 | 558 | ||||||||
| (4,361 | ) | (6,946 | ) | 558 | ||||||||
| Income taxes (benefit) | $ | 3,218 | $ | (4,323 | ) | $ | 3,400 | |||||
The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows:
Rate Reconciliation | 2006 | 2005 | 2004 | |||||||||
| Tax at statutory rate | $ | 9,571 | $ | 9,189 | $ | 5,984 | ||||||
| Effect of state income taxes, net | (1,240 | ) | 129 | 15 | ||||||||
| Effect of foreign operations | (1,441 | ) | (151 | ) | 661 | |||||||
| Medicare subsidy | (126 | ) | (795 | ) | -0- | |||||||
| Valuation allowance | (4,806 | ) | (12,093 | ) | (3,042 | ) | ||||||
| Contingencies | 889 | 50 | -0- | |||||||||
| Research and development credit | (250 | ) | (237 | ) | -0- | |||||||
| Nondeductible expenses | 417 | 53 | 207 | |||||||||
| Other, net | 204 | (468 | ) | (425 | ) | |||||||
| Total | $ | 3,218 | $ | (4,323 | ) | $ | 3,400 | |||||
46
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s net deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| Deferred tax assets: | ||||||||
| Postretirement benefit obligation | $ | 9,409 | $ | 7,542 | ||||
| Inventory | 12,493 | 10,433 | ||||||
| Net operating loss and credit carryforwards | 18,626 | 18,996 | ||||||
| Other — net | 11,616 | 12,246 | ||||||
| Total deferred tax assets | 52,144 | 49,217 | ||||||
| Deferred tax liabilities: | ||||||||
| Tax over book depreciation | 12,858 | 15,578 | ||||||
| Pension | 22,693 | 18,926 | ||||||
| Inventory | 889 | -0- | ||||||
| Intangible assets | 3,127 | -0- | ||||||
| Deductible goodwill | 3,452 | 2,251 | ||||||
| Total deferred tax liabilities | 43,019 | 36,755 | ||||||
| 9,125 | 12,462 | |||||||
| Valuation reserves | (316 | ) | (7,011 | ) | ||||
| Net deferred tax asset | $ | 8,809 | $ | 5,451 | ||||
At December 31, 2006, the Company has federal net operating loss carryforwards for income tax purposes of approximately $34,855, which expire between 2021 and 2024, and foreign net operating losses of $1,130. The Company also has $1,284 of state tax benefit related to state net operating losses. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities).
As of December 31, 2004, the Company was in a cumulative three-year loss position and determined it was not more likely than not that its net deferred tax assets will be realized. Therefore, as of December 31, 2004, the Company had a full valuation allowance against its federal net deferred tax asset and a portion of its foreign net operating loss carryforwards. As of December 31, 2005, the Company was no longer in a three-year cumulative loss position and after consideration of the relevant positive and negative evidence, the Company reversed a portion of its valuation allowance and recognized $7,300 of tax benefit related to its federal net deferred tax asset as it has been determined the realization of this amount was more likely than not. As of December 31, 2006, the Company determined that it was more likely than not that it would be able to realize most of its deferred tax assets in the future and released $4,806 of the valuation allowance. The Company also recognized a $1,284 tax benefit with respect to state net operating losses, which it has determined are more likely than not to be fully realized in the future.
At December 31, 2006, the Company has research and development credit carryforwards of approximately $2,466, which expire between 2010 and 2024. The Company also has foreign tax credit carryforwards of $486, which expire in 2015, and alternative minimum tax credit carryforwards of $1,277, which have no expiration date.
Deferred taxes have not been provided on undistributed earnings of the Company’s foreign subsidiaries as it is the Company’s policy to permanently reinvest such earnings. The Company has determined that it is not practical to determine the deferred tax liability on such undistributed earnings. .
47
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE I — Legal Proceedings
The Company is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation is not expected to have a material adverse effect on the Company’s financial condition, liquidity and results of operations.
NOTE J — Pensions and Postretirement Benefits
On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158. SFAS No. 158 required the Company to recognize the funded status ( i.e. , the difference between the Company’s fair value of plan assets and the projected benefit obligations) of its defined benefit pension and postretirement benefit plans (collectively, the “postretirement benefit plans”) in the December 31, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs and unrecognized transition obligation remaining from the initial adoption of SFAS No. 87 and SFAS No. 106, all of which were previously netted against the plans’ funded status in the company’s Consolidated Balance Sheet in accordance with the provisions of SFAS No. 87 and SFAS No. 106. These amounts will be subsequently recognized as net periodic benefit cost in accordance with the Company’s historical accounting policy for amortizing these amounts. In addition, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic benefit cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of SFAS No. 158.
The incremental effects of adopting the provisions of SFAS No. 158 on the company’s Consolidated Balance Sheet at December 31, 2006 are presented in the following table. The adoption of SFAS No. 158 had no effect on the Company’s Consolidated Statement of Income for the year ended December 31, 2006 and 2005, respectively, and it will not effect the Company’s operating results in subsequent periods.
| At December 31, 2006 | ||||||||||||
| Prior to | Effect of | As Reported | ||||||||||
| Adopting SFAS | �� | Adopting SFAS | at December 31, | |||||||||
| No. 158 | No. 158 | 2006 | ||||||||||
Assets | ||||||||||||
| Other non-current assets | $ | 79,993 | $ | 7,884 | $ | 87,877 | ||||||
| Total assets | $ | 776,176 | $ | 7,884 | $ | 784,060 | ||||||
Liabilities and Shareholder’s Equity: | ||||||||||||
| Pension and postretirement benefit liabilities | $ | 15,951 | $ | 7,040 | $ | 22,989 | ||||||
| Deferred income taxes | 12,880 | 404 | 13,284 | |||||||||
| Accumulated other comprehensive income | -0- | 440 | 440 | |||||||||
| Total liabilities and shareholder’s equity | $ | 776,176 | $ | 7,884 | $ | 784,060 | ||||||
In the table presented above, deferred income taxes represent current and non-current deferred income tax assets on the Consolidated Balance Sheet as of December 31, 2006. In addition, pension and postretirement benefit liabilities represent salaries, wages and benefits, accrued pension cost and accrued postretirement benefits costs on the Consolidated Balance Sheet as of December 31, 2006.
48
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated net (gain), prior service cost and net transition (asset) for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $(69), $137 and $(48), respectively.
The estimated net loss and prior service credit for the postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $454 and $(63), respectively.
The following tables set forth the change in benefit obligation, plan assets, funded status and amounts recognized in the consolidated balance sheet for the defined benefit pension and postretirement benefit plans as of December 31, 2006 and 2005:
| Postretirement | ||||||||||||||||
| Pension | Benefits | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Change in benefit obligation | ||||||||||||||||
| Benefit obligation at beginning of year | $ | 54,734 | $ | 55,303 | $ | 22,843 | $ | 24,680 | ||||||||
| Service cost | 426 | 364 | 199 | 145 | ||||||||||||
| Curtailment and settlement | 12 | (1,023 | ) | (254 | ) | -0- | ||||||||||
| Interest cost | 2,915 | 3,194 | 1,292 | 1,281 | ||||||||||||
| Amendments | -0- | -0- | (1,106 | ) | -0- | |||||||||||
| Actuarial losses (gains) | (580 | ) | 2,101 | 3,047 | 200 | |||||||||||
| Benefits and expenses paid, net of contributions | (5,120 | ) | (5,205 | ) | (3,032 | ) | (3,463 | ) | ||||||||
| Benefit obligation at end of year | $ | 52,387 | $ | 54,734 | $ | 22,989 | $ | 22,843 | ||||||||
Change in plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 101,639 | $ | 103,948 | $ | -0- | $ | -0- | ||||||||
| Actual return on plan assets | 15,977 | 3,919 | -0- | -0- | ||||||||||||
| Company contributions | -0- | -0- | 3,032 | 3,463 | ||||||||||||
| Curtailments and settlement | -0- | (1,023 | ) | -0- | -0- | |||||||||||
| Benefits and expenses paid, net of contributions | (5,120 | ) | (5,205 | ) | (3,032 | ) | (3,463 | ) | ||||||||
| Fair value of plan assets at end of year | $ | 112,496 | $ | 101,639 | $ | -0- | $ | -0- | ||||||||
| Funded (underfunded) status of the plan | $ | 60,109 | $ | 46,905 | $ | (22,989 | ) | $ | (22,843 | ) | ||||||
49
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amounts recognized in the consolidated balance sheets consist of:
| Pension | Postretirement Benefits | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
| Noncurrent assets | $ | 60,109 | $ | 47,561 | $ | -0- | $ | -0- | ||||||||
| Noncurrent liabilities | -0- | (5,491 | ) | 13,387 | 20,326 | |||||||||||
| Current liabilities | -0- | -0- | 2,564 | 2,517 | ||||||||||||
| Accumulated other comprehensive (income) loss | (8,144 | ) | 5,358 | 7,038 | -0- | |||||||||||
| Net amount recognized at the end of the year | $ | 51,965 | $ | 47,428 | $ | 22,989 | $ | 22,843 | ||||||||
Amounts recognized in accumulated other comprehensive income | ||||||||||||||||
| Net actuarial loss/(gain) | $ | (8,452 | ) | N/A | $ | 7,153 | N/A | |||||||||
| Net prior service cost (credit) | 646 | N/A | (115 | ) | N/A | |||||||||||
| Net transition obligation (asset) | (338 | ) | N/A | -0- | N/A | |||||||||||
| Accumulated other comprehensive income | $ | (8,144 | ) | N/A | $ | 7,038 | N/A | |||||||||
As of December 31, 2006 and 2005, the Company’s defined benefit pension plans did not hold a material amount of shares of the Company’s common stock.
The pension plan weighted-average asset allocation at December 31, 2006 and 2005 and target allocation for 2007 are as follows:
| Plan Assets | ||||||||||||
| Target 2007 | 2006 | 2005 | ||||||||||
Asset Category | ||||||||||||
| Equity securities | 60-70 | % | 65.1 | % | 71.1 | % | ||||||
| Debt securities | 20-30 | 25.7 | 19.7 | |||||||||
| Other | 7-15 | 9.2 | 9.2 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
The Company recorded a minimum pension liability of $5,358 at December 31, 2005, as required by SFAS No. 87. The adjustment is reflected in other comprehensive income and long-term liabilities. The adjustment relates to two of the Company’s defined benefit plans, for which the accumulated benefit obligations of $17,476 at December 31, 2005, exceeded the fair value of the underlying pension assets of $11,985 at December 31, 2005. Amounts were as follows:
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| Projected benefit obligation | N/A | $ | 17,476 | |||||
| Accumulated benefit obligation | N/A | $ | 17,476 | |||||
| Fair value of plan assets | N/A | $ | 11,985 | |||||
In 2006, as a result of a merger of these two defined benefit plans with an overfunded plan, the Company adjusted the minimum pension liability to $-0-.
50
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables summarize the assumptions used by the consulting actuary and the related cost information.
| Weighted-Average assumptions as of December 31, | ||||||||||||||||||||||||
| Postretirement | ||||||||||||||||||||||||
| Pension | Benefits | |||||||||||||||||||||||
| 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
| Discount rate | 5.75 | % | 5.50 | % | 6.00 | % | 5.75 | % | 5.50 | % | 6.00 | % | ||||||||||||
| Expected return on plan assets | 8.50 | % | 8.75 | % | 8.75 | % | N/A | N/A | N/A | |||||||||||||||
| Rate of compensation increase | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||
In determining its expected return on plan assets assumption for the year ended December 31, 2006, the Company considered historical experience, its asset allocation, expected future long-term rates of return for each major asset class, and an assumed long-term inflation rate. Based on these factors, the Company derived an expected return on plan assets for the year ended December 31, 2006 of 8.50%. This assumption was supported by the asset return generation model, which projected future asset returns using simulation and asset class correlation.
For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2006. The rate was assumed to decrease gradually to 5.0% for 2011 and remain at that level thereafter.
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||
| Service costs | $ | 426 | $ | 364 | $ | 291 | $ | 199 | $ | 145 | $ | 136 | ||||||||||||
| Interest costs | 2,915 | 3,194 | 3,320 | 1,292 | 1,281 | 1,532 | ||||||||||||||||||
| Expected return on plan assets | (8,408 | ) | (8,804 | ) | (8,313 | ) | -0- | -0- | -0- | |||||||||||||||
| Transition obligation | (48 | ) | (49 | ) | (49 | ) | -0- | -0- | -0- | |||||||||||||||
| FAS 88 one-time charge | 297 | -0- | -0- | -0- | -0- | -0- | ||||||||||||||||||
| Amortization of prior service cost | 182 | 163 | 129 | (63 | ) | (69 | ) | (80 | ) | |||||||||||||||
| Recognized net actuarial (gain) loss | 99 | (224 | ) | (286 | ) | 374 | 106 | 99 | ||||||||||||||||
| Benefit (income) costs | $ | (4,537 | ) | $ | (5,356 | ) | $ | (4,908 | ) | $ | 1,802 | $ | 1,463 | $ | 1,687 | |||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income(a) | ||||||||||||||||||||||||
| AOCI at December 31, 2005 | $ | 5,358 | N/A | N/A | $ | -0- | N/A | N/A | ||||||||||||||||
| Net loss/(gain) | ||||||||||||||||||||||||
| Recognition of prior service cost/(credit) | -0- | N/A | N/A | -0- | N/A | N/A | ||||||||||||||||||
| Recognition of loss/(gain) | -0- | N/A | N/A | -0- | N/A | N/A | ||||||||||||||||||
| Decrease prior to adoption of SFAS No. 158 | (5,358 | ) | N/A | N/A | -0- | N/A | N/A | |||||||||||||||||
| Increase (decrease) due to adoption of SFAS No. 158 | (8,144 | ) | N/A | N/A | 7,038 | N/A | N/A | |||||||||||||||||
| Total recognized in other comprehensive income at December 31, 2006 | $ | (8,144 | ) | N/A | N/A | $ | 7,038 | N/A | N/A | |||||||||||||||
| (a) | These disclosures are not applicable to 2005 and 2004 defined benefit pension plans and postretirement plans due to SFAS No. 158 being effective for the year ended December 31, 2006. |
51
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Below is a table summarizing the Company’s expected future benefit payments and the expected payments due to Medicare subsidy over the next ten years:
| Postretirement Benefits | ||||||||||||||||
| Pension | Expected | Net including | ||||||||||||||
| Benefits | Gross | Medicare Subsidy | Medicare Subsidy | |||||||||||||
| 2007 | $ | 4,373 | $ | 2,801 | $ | 237 | $ | 2,564 | ||||||||
| 2008 | 4,293 | 2,739 | 240 | 2,499 | ||||||||||||
| 2009 | 4,260 | 2,660 | 242 | 2,418 | ||||||||||||
| 2010 | 4,192 | 2,566 | 241 | 2,325 | ||||||||||||
| 2011 | 4,106 | 2,419 | 234 | 2,185 | ||||||||||||
| 2012 to 2016 | 19,493 | 9,726 | 1,033 | 8,693 | ||||||||||||
The Company has two postretirement benefit plans. Under both of these plans, health care benefits are provided on both a contributory and noncontributory basis. The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:
| 1-Percentage | 1-Percentage | |||||||
| Point | Point | |||||||
| Increase | Decrease | |||||||
| Effect on total of service and interest cost components in 2006 | $ | 155 | $ | (127 | ) | |||
| Effect on postretirement benefit obligation as of December 31, 2006 | $ | 2,001 | $ | (1,709 | ) | |||
The total contribution charged to pension expense for the Company’s defined contribution plans was $1,831 in 2006, $1,753 in 2005 and $1,446 in 2004. The Company expects to have no contributions to its defined benefit plans in 2007.
NOTE K — Leases and Sale-leaseback Transactions
Future minimum lease commitments during each of the five years following December 31, 2006 and thereafter are as follows: $14,221 in 2007, $10,811 in 2008, $8,593 in 2008, $6,945 in 2010, $3,779 in 2011 and $8,129 thereafter. Rental expense for 2006, 2005 and 2004 was $15,370, $13,494 and $10,588, respectively.
In 2006, the Company entered into two sale-leaseback arrangements. Under the arrangements, land, building and equipment with a net book value of approximately $7,988 were sold for $9,420 and leased back under two operating lease agreements ranging from five to twelve years. The gain on these transactions of approximately $1,400 was deferred and is being amortized over the terms of the lease agreements.
NOTE L — Accumulated Comprehensive Loss
The components of accumulated comprehensive loss at December 31, 20032006 and 20022005 are as follows:
| December 31 | |||||||||
| 2003 | 2002 | ||||||||
| Foreign currency translation adjustment | $ | (1,091 | ) | $ | 2,541 | ||||
| Minimum pension liability | 4,355 | 5,555 | |||||||
| Total | $ | 3,264 | $ | 8,096 | |||||
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| Foreign currency translation adjustment | $ | 5,384 | $ | 3,256 | ||||
| Pension and postretirement benefit adjustments, net of tax | 440 | (5,358 | ) | |||||
| Total | $ | 5,824 | $ | (2,102 | ) | |||
52
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE NM — Restructuring and Unusual Charges
Since 2001,
During the Company has responded to the economic downturn by reducing costs in a varietyfourth quarter of ways, including restructuring businesses and selling non-core manufacturing assets. These activities generated restructuring and asset impairment charges in 2001, 2002 and 2003, as the Company’s restructuring efforts continued and evolved.
During 2001,2005, the Company recorded restructuring and asset impairment charges aggregating $28,462, primarily related to management’s decision to exit certain under-performing product lines and to close or consolidate certain operating facilitiesassociated with executing restructuring actions in 2002. The Company’s actions included 1) selling or discontinuing the businesses of Castle Rubber and Ajax Manufacturing, 2) closing the Cicero Flexible Products’ manufacturing facility and discontinue certain product lines, 3) inventory write-downs and other restructuring activities at St. Louis Screw and Bolt and Tocco, 4) closing twenty ILS supply chain logistics facilities and two ILS manufacturing plants, 5) closing an Aluminum Products machining facility, and 6) write-down of certain Corporate assets to current value.Manufactured Products segments initiated in prior years. The charges were composed of $11,280 for$833 of inventory impairment included in Cost of Products Sold, $391 of asset impairment, $152 of multi-employer pension plan withdrawal costs and $400 of restructuring charges related to the impairmentclosure of property and equipment and other long-term assets; $10,299 million of cost of goods sold, primarily to write down inventory of discontinued businesses and product lines to current market value; and $6,883 for severance (525 employees) and exit costs.two Manufactured Products manufacturing facilities. Below is a summary of these charges by segment.
| Cost of | ||||||||||||||||
| Products | Asset | Restructuring | ||||||||||||||
| Sold | Impairment | & Severance | Total | |||||||||||||
| Manufactured Products | $ | 8,599 | $ | 10,080 | $ | 2,030 | $ | 20,709 | ||||||||
| ILS | 1,700 | 600 | 4,070 | 6,370 | ||||||||||||
| Aluminum Products | -0- | -0- | 783 | 783 | ||||||||||||
| Corporate | -0- | 600 | -0- | 600 | ||||||||||||
| $ | 10,299 | $ | 11,280 | $ | 6,883 | $ | 28,462 | |||||||||
During 2002,
| Cost of | ||||||||||||||||||||
| Products | Asset | Restructuring | Pension | |||||||||||||||||
| Sold | Impairment | & Severance | Curtailment | Total | ||||||||||||||||
| Manufactured Products | $ | 833 | $ | -0- | $ | 400 | $ | 152 | $ | 1,385 | ||||||||||
| Aluminum Products | -0- | 391 | -0- | -0- | 391 | |||||||||||||||
| $ | 833 | $ | 391 | $ | 400 | $ | 152 | $ | 1,776 | |||||||||||
In 2006, the Company recorded further restructuring and asset impairment charges aggregating $19,190, primarily related to management decisions to exit additional product lines and consolidate additional facilities. The Company’s planned actions included 1) selling or discontinuing the businesses of St. Louis Screw and Bolt and Green Bearing, 2) closing five additional supply chain logistics facilities and 3) closing or selling two Aluminum Products manufacturing plants (one of which was closed as of December 31, 2002). The charges were composed of $5,599 for severance (490 employees) and exit costs, $2,700 for pension curtailment costs; $5,628 of costs of goods sold, primarily to write down inventory of discontinued businesses and product lines to current market value; and $5,263 for impairment of property and equipment and other long-term assets. Below is a summary of these charges by segment.
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
| Cost of | ||||||||||||||||||||
| Products | Asset | Restructuring | Pension | |||||||||||||||||
| Sold | Impairment | & Severance | Curtailment | Total | ||||||||||||||||
| ILS | $ | 4,500 | $ | -0- | $ | 2,534 | $ | 2,000 | $ | 9,034 | ||||||||||
| Manufactured Products | 1,128 | 2,103 | 2,628 | 700 | 6,559 | |||||||||||||||
| Aluminum Products | -0- | 3,160 | 437 | -0- | 3,597 | |||||||||||||||
| $ | 5,628 | $ | 5,263 | $ | 5,599 | $ | 2,700 | $ | 19,190 | |||||||||||
During the fourth quarter of 2003, the Company continued its multi-year efforts to position the Company for renewed, more profitable growth and recorded restructuring and asset impairment charges aggregating $19,446.associated with its planned closure of a manufacturing facility in the ILS segment. The action primarily related to restructuring at the Company’s Forge Group resulting from a decision to shut down its locomotive crankshaft forging plant after entering into a long-term supply contract to purchase these forgings from a third party. The charges (credits) were composed of $990 for exit costs; $638$800 of costinventory and tooling included in Cost of goods sold primarily to write down inventoryProducts Sold, $297 of discontinued product lines to current market value; $1,767 for pension curtailment and multi-employer pension plan withdrawal costs resulting primarily from the termination$(1,106) of union representation at the locomotive crankshaft forging plant and another Manufactured Products manufacturing facility and the closure of an Aluminum Products manufacturing plant; and $16,051 for impairment of property and equipment and other long-term assets. Below is a summary of these charges by segment.
| Cost of | ||||||||||||||||||||
| Products | Asset | Restructuring | Pension | |||||||||||||||||
| Sold | Impairment | & Severance | Curtailment | Total | ||||||||||||||||
| Manufactured Products | $ | 638 | $ | 16,051 | $ | 990 | $ | 1,600 | $ | 19,279 | ||||||||||
| Aluminum Products | -0- | -0- | -0- | 167 | 167 | |||||||||||||||
| $ | 638 | $ | 16,051 | $ | 990 | $ | 1,767 | $ | 19,446 | |||||||||||
postretirement benefit curtailment.
The accrued liability for severance and exit costs and related cash payments consisted of:
| Severance and exit charges recorded in 2001 | $ | 6,883 | ||
| Cash payments made in 2001 | (2,731 | ) | ||
| Balance at December 31, 2001 | 4,152 | |||
| Severance and exit charges recorded in 2002 | 5,599 | |||
| Cash payments made in 2002 | (5,706 | ) | ||
| Balance at December 31, 2002 | 4,045 | |||
| Severance and exit charges recorded in 2003 | 990 | |||
| Cash payments made in 2003 | (2,500 | ) | ||
| Balance at December 31, 2003 | $ | 2,535 | ||
| Balance at January 1, 2004 | 2,535 | |||
| Severance and exit charges recorded in 2004 | -0- | |||
| Cash payments made in 2004 | (2,073 | ) | ||
| Balance at December 31, 2004 | 462 | |||
| Exit charges recorded in 2005 | 400 | |||
| Cash payments made in 2005 | (266 | ) | ||
| Balance at December 31, 2005 | 596 | |||
| Cash payments made in 2006 | (312 | ) | ||
| Balance at December 31, 2006 | $ | 284 | ||
As of December 31, 2003,2006, all of the 525 employees identified in 2001 and all but 5 of the 490 employees identified in 2002 had been terminated. The workforce reductions under the restructuring plan consisted of hourly and salarysalaried employees at various operating facilities due to either closure or consolidation. As of December 31, 2003,2006, the Company had an accrued liability of $2,535$284 for future estimated employee severance and plant closing payments.
Idle fixed assets of $6,516 were included in other assets as of December 31, 2003. These consisted primarily of property, plant and equipment of two idled aluminum casting plants, for which the Com-
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
pany is evaluating new products and technologies. These assets may either be reclassified to property, plant and equipment if placed in service, or sold. They are currently carried at estimated fair value.
At December 31, 2003,2006, the Company’s balance sheet reflected assets held for sale at their estimated current value of $2,321$4,967 for inventory, property, plant and equipment and other long-term assets.equipment. Net sales for the businesses that were included in net assets held for sale were $1,139$-0- in 2003, $19,159 in 2002,2006, 2005, and $25,356 in 2001.2004. Operating income (loss), excluding restructuring and unusual charges for these entities were $(32)$-0- in 2003, $(334) in 2002,2006, 2005, and $703 in 2001.2004.
38
53
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE N — Derivatives and Hedging
The Company recognizes all derivative financial instruments as either assets or liabilities at fair value. The Company has no derivative instruments that are classified as fair value hedges. Changes in the fair value of derivative instruments that are classified as cash flow hedges are recognized in other comprehensive income until such time as the hedged items are recognized in net income.
During 2006, the Company entered into forward contracts for the purpose of hedging exposure to changes in the value of accounts receivable in euros against the U.S. dollar, for a notional amount of $1,000, of which $-0- was outstanding at December 31, 2006. The Company recognized $61 of foreign currency losses upon settlement of the forward contracts.
54
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE O — Supplemental Guarantor Information
Each of the material domestic direct and indirectwholly-owned subsidiaries of the Company (the “Guarantor Subsidiaries”) has fully and unconditionally guaranteed, on a joint and several basis, to pay principal, premium and interest with respect to the 8.375% Notes. Each of the Guarantor Subsidiaries is “100% owned” as defined byRule 3-10(h)(1) ofRegulation S-X.
The following supplemental consolidating condensed financial statements present consolidating condensed balance sheets as of December 31, 2006 and 2005, consolidating condensed statements of income for the years ended December 31, 2006, 2005, 2004, consolidating condensed statements of cash flows for the years ended December 31, 2006, 2005 and 2004 and reclassification and elimination entries necessary to consolidate the Parent and all of its subsidiaries. The “Parent” reflected in the accompanying supplemental guarantor information isPark-Ohio Industries, Inc.
55
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2006
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | Reclassifications/ | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | (15,770 | ) | $ | 570 | $ | 12,382 | $ | 23,690 | $ | 20,872 | |||||||||
| Accounts receivable, net | (1,043 | ) | 147,834 | 35,102 | -0- | 181,893 | ||||||||||||||
| Inventories | -0- | 187,649 | 36,287 | -0- | 223,936 | |||||||||||||||
| Other current assets | 3,362 | 12,278 | 8,575 | 9,927 | 34,142 | |||||||||||||||
| Deferred tax assets | -0- | -0- | -0- | 29,715 | 29,715 | |||||||||||||||
| Total Current Assets | (13,451 | ) | 348,331 | 92,346 | 63,332 | 490,558 | ||||||||||||||
| Investment in subsidiaries | 388,117 | 17,169 | (17,169 | ) | (388,117 | ) | -0- | |||||||||||||
| Inter-company advances | 338,471 | 531,453 | 4,427 | (874,351 | ) | -0- | ||||||||||||||
| Property, Plant and Equipment, net | 448 | 86,978 | 15,052 | -0- | 102,478 | |||||||||||||||
| Other Assets: | ||||||||||||||||||||
| Goodwill | (5,514 | ) | 96,830 | 6,864 | -0- | 98,180 | ||||||||||||||
| Other | 52,312 | 37,099 | 719 | 2,714 | 92,844 | |||||||||||||||
| Total Other Assets | 46,798 | 133,929 | 7,583 | 2,714 | 191,024 | |||||||||||||||
| Total Assets | $ | 760,383 | $ | 1,117,860 | $ | 102,239 | $ | (1,196,422 | ) | $ | 784,060 | |||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||
| Trade accounts payable | $ | 3,759 | $ | 84,003 | $ | 21,610 | $ | 23,487 | $ | 132,859 | ||||||||||
| Accrued expenses | 1,579 | 51,638 | 12,138 | 12,870 | 78,225 | |||||||||||||||
| Current portion of long-term liabilities | -0- | 552 | 2,758 | 2,563 | 5,873 | |||||||||||||||
| Total Current Liabilities | 5,338 | 136,193 | 36,506 | 38,920 | 216,957 | |||||||||||||||
| Long-Term Liabilities, less current portion | ||||||||||||||||||||
| 8.375% Senior Subordinated Notes due 2014 | 210,000 | -0- | -0- | -0- | 210,000 | |||||||||||||||
| Revolving credit maturing on December 31, 2010 | 156,700 | -0- | -0- | -0- | 156,700 | |||||||||||||||
| Other long-term debt | -0- | 3,027 | 1,763 | -0- | 4,790 | |||||||||||||||
| Deferred tax liability | -0- | -0- | 42 | 32,047 | 32,089 | |||||||||||||||
| Other postretirement benefits and other long-term liabilities | 9,199 | 54,136 | 2,692 | (41,593 | ) | 24,434 | ||||||||||||||
| Total Long-Term Liabilities | 375,899 | 57,163 | 4,497 | (9,546 | ) | 428,013 | ||||||||||||||
| Inter-company advances | 242,672 | 594,730 | 17,423 | (854,825 | ) | -0- | ||||||||||||||
| Shareholder’s Equity | 136,474 | 329,774 | 43,813 | (370,971 | ) | 139,090 | ||||||||||||||
| Total Liabilities and Shareholder’s Equity | $ | 760,383 | $ | 1,117,860 | $ | 102,239 | $ | (1,196,422 | ) | $ | 784,060 | |||||||||
56
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2005
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | Reclassifications/ | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | (11,036 | ) | $ | 626 | $ | 11,899 | $ | 16,379 | $ | 17,868 | |||||||||
| Accounts receivable, net | -0- | 129,302 | 24,200 | -0- | 153,502 | |||||||||||||||
| Inventories | -0- | 160,775 | 29,778 | -0- | 190,553 | |||||||||||||||
| Other current assets | 464 | 20,029 | 1,147 | 6,113 | 27,753 | |||||||||||||||
| Deferred tax assets | -0- | -0- | -0- | 8,627 | 8,627 | |||||||||||||||
| Total Current Assets | (10,572 | ) | 310,732 | 67,024 | 31,119 | 398,303 | ||||||||||||||
| Investment in subsidiaries | 290,802 | -0- | -0- | (290,802 | ) | -0- | ||||||||||||||
| Inter-company advances | 359,963 | 372,156 | 8,208 | (740,327 | ) | -0- | ||||||||||||||
| Property, Plant and Equipment, net | 2,536 | 98,046 | 12,520 | -0- | 113,102 | |||||||||||||||
| Other Assets: | ||||||||||||||||||||
| Goodwill | -0- | 78,424 | 4,279 | -0- | 82,703 | |||||||||||||||
| Other | 34,724 | 37,530 | 686 | (2,323 | ) | 70,617 | ||||||||||||||
| Total Other Assets | 34,724 | 115,954 | 4,965 | (2,323 | ) | 153,320 | ||||||||||||||
| Total Assets | $ | 677,453 | $ | 896,888 | $ | 92,717 | $ | (1,002,333 | ) | $ | 664,725 | |||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||
| Trade accounts payable | $ | 3,348 | $ | 87,666 | $ | 9,778 | $ | 14,604 | $ | 115,396 | ||||||||||
| Accrued expenses | 1,643 | 43,718 | 14,763 | 5,060 | 65,184 | |||||||||||||||
| Current portion of long-term liabilities | -0- | 11,054 | 590 | (7,483 | ) | 4,161 | ||||||||||||||
| Total Current Liabilities | 4,991 | 142,438 | 25,131 | 12,181 | 184,741 | |||||||||||||||
| Long-Term Liabilities, less current portion | ||||||||||||||||||||
| 8.375% Senior Subordinated Notes due 2014 | 210,000 | -0- | -0- | -0- | 210,000 | |||||||||||||||
| Revolving credit maturing on December 31, 2010 | 128,300 | -0- | -0- | -0- | 128,300 | |||||||||||||||
| Other long-term debt | -0- | 34,533 | 3,140 | (30,968 | ) | 6,705 | ||||||||||||||
| Deferred tax liability | -0- | -0- | -0- | 3,176 | 3,176 | |||||||||||||||
| Other postretirement benefits and other long-term liabilities | 4,115 | 21,501 | 3,076 | (2,518 | ) | 26,174 | ||||||||||||||
| Total Long-Term Liabilities | 342,415 | 56,034 | 6,216 | (30,310 | ) | 374,355 | ||||||||||||||
| Inter-company advances | 227,614 | 415,558 | 17,674 | (660,846 | ) | -0- | ||||||||||||||
| Shareholder’s Equity | 102,433 | 282,858 | 43,696 | (323,358 | ) | 105,629 | ||||||||||||||
| Total Liabilities and Shareholder’s Equity | $ | 677,453 | $ | 896,888 | $ | 92,717 | $ | (1,002,333 | ) | $ | 664,725 | |||||||||
57
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 2006
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net sales | $ | -0- | $ | 912,060 | $ | 144,186 | $ | -0- | $ | 1,056,246 | ||||||||||
| Cost of sales | 800 | 795,936 | 111,359 | -0- | 908,095 | |||||||||||||||
| Gross profit | (800 | ) | 116,124 | 32,827 | -0- | 148,151 | ||||||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Selling, general and administrative expenses | (55,175 | ) | 100,320 | 20,769 | 23,026 | 88,940 | ||||||||||||||
| Restructuring and impairment charges | -0- | (809 | ) | -0- | -0- | (809 | ) | |||||||||||||
| Operating Income | 54,375 | 16,613 | 12,058 | (23,026 | ) | 60,020 | ||||||||||||||
| Interest expense | 30,496 | 1,067 | 304 | (600 | ) | 31,267 | ||||||||||||||
| Income before income taxes | 23,879 | 15,546 | 11,754 | (22,426 | ) | 28,753 | ||||||||||||||
| Income taxes | (2,419 | ) | 57 | 5,580 | -0- | 3,218 | ||||||||||||||
| Net income | $ | 26,298 | $ | 15,489 | $ | 6,174 | $ | (22,426 | ) | $ | 25,535 | |||||||||
58
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 2005
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net sales | $ | -0- | $ | 827,815 | $ | 114,179 | $ | (9,094 | ) | $ | 932,900 | |||||||||
| Cost of sales | -0- | 715,057 | 90,320 | (9,094 | ) | 796,283 | ||||||||||||||
| Gross profit | -0- | 112,758 | 23,859 | -0- | 136,617 | |||||||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Selling, general and administrative expenses | 3,349 | 62,394 | 15,025 | 600 | 81,368 | |||||||||||||||
| Restructuring and impairment charges | -0- | 943 | -0- | -0- | 943 | |||||||||||||||
| Operating Income | (3,349 | ) | 49,421 | 8,834 | (600 | ) | 54,306 | |||||||||||||
| Interest expense | (5,346 | ) | 31,442 | 1,560 | (600 | ) | 27,056 | |||||||||||||
| Income before income taxes | 1,997 | 17,979 | 7,274 | -0- | 27,250 | |||||||||||||||
| Income taxes | (7,439 | ) | 59 | 3,057 | -0- | (4,323 | ) | |||||||||||||
| Net income | $ | 9,436 | $ | 17,920 | $ | 4,217 | $ | -0- | $ | 31,573 | ||||||||||
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 2004
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net sales | $ | -0- | $ | 697,888 | $ | 123,827 | $ | (12,997 | ) | $ | 808,718 | |||||||||
| Cost of sales | -0- | 599,379 | 96,276 | (12,997 | ) | 682,658 | ||||||||||||||
| Gross profit | -0- | 98,509 | 27,551 | -0- | 126,060 | |||||||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Selling, general and administrative expenses | (22,748 | ) | 82,657 | 16,605 | 200 | 76,714 | ||||||||||||||
| Operating Income | 22,748 | 15,852 | 10,946 | (200 | ) | 49,346 | ||||||||||||||
| Interest expense | 30,954 | 439 | 220 | (200 | ) | 31,413 | ||||||||||||||
| Income before income taxes | (8,206 | ) | 15,413 | 10,726 | -0- | 17,933 | ||||||||||||||
| Income taxes | 318 | -0- | 3,082 | -0- | 3,400 | |||||||||||||||
| Net income | $ | (8,524 | ) | $ | 15,413 | $ | 7,644 | $ | -0- | $ | 14,533 | |||||||||
59
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2006
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net cash provided (used) by operations | $ | (27,090 | ) | $ | 27,983 | $ | 3,868 | $ | -0- | $ | 4,761 | |||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of property, plant and equipment, net | 1,267 | (16,347 | ) | (4,176 | ) | -0- | (19,256 | ) | ||||||||||||
| Acquisitions, net of cash acquired | -0- | (23,271 | ) | -0- | -0- | (23,271 | ) | |||||||||||||
| Proceeds from sale of assets held for sale | -0- | 3,200 | -0- | -0- | 3,200 | |||||||||||||||
| Proceeds from sale-leaseback transaction | -0- | 9,420 | -0- | -0- | 9,420 | |||||||||||||||
| Net cash provided (used) in investing activities | 1,267 | (26,998 | ) | (4,176 | ) | -0- | (29,907 | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Proceeds from bank arrangements | 28,400 | -0- | 791 | -0- | 29,191 | |||||||||||||||
| Principal payments on long-term debt | -0- | (1,041 | ) | -0- | -0- | (1,041 | ) | |||||||||||||
| Net cash provided (used) by financing activities | 28,400 | (1,041 | ) | 791 | -0- | 28,150 | ||||||||||||||
| Increase (decrease) in cash and cash equivalents | 2,577 | (56 | ) | 483 | -0- | 3,004 | ||||||||||||||
| Cash and cash equivalents at beginning of year | 5,343 | 626 | 11,899 | -0- | 17,868 | |||||||||||||||
| Cash and cash equivalents at end of year | $ | 7,920 | $ | 570 | $ | 12,382 | $ | -0- | $ | 20,872 | ||||||||||
60
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2005
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net cash provided (used) by operations | $ | (1,228 | ) | $ | 29,314 | $ | 6,409 | $ | -0- | $ | 34,495 | |||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of property, plant and equipment, net | (486 | ) | (17,769 | ) | (2,040 | ) | -0- | (20,295 | ) | |||||||||||
| Acquisitions, net of cash acquired | -0- | (12,181 | ) | -0- | -0- | (12,181 | ) | |||||||||||||
| Proceeds from sale of assets held for sale | -0- | 1,100 | -0- | -0- | 1,100 | |||||||||||||||
| Net cash provided (used) in investing activities | (486 | ) | (28,850 | ) | (2,040 | ) | -0- | (31,376 | ) | |||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Proceeds from bank arrangements, net | 7,700 | (37 | ) | 679 | -0- | 8,342 | ||||||||||||||
| Net cash provided (used) by financing activities | 7,700 | (37 | ) | 679 | -0- | 8,342 | ||||||||||||||
| Increase (decrease) in cash and cash equivalents | 5,986 | 427 | 5,048 | -0- | 11,461 | |||||||||||||||
| Cash and cash equivalents at beginning of year | (643 | ) | 199 | 6,851 | -0- | 6,407 | ||||||||||||||
| Cash and cash equivalents at end of year | $ | 5,343 | $ | 626 | $ | 11,899 | $ | -0- | $ | 17,868 | ||||||||||
61
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2004
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net cash provided (used) by operations | $ | (24,045 | ) | $ | 18,123 | $ | 6,836 | $ | -0- | $ | 914 | |||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of property, plant and equipment, net | (55 | ) | (8,979 | ) | (929 | ) | -0- | (9,963 | ) | |||||||||||
| Acquisitions, net of cash acquired | -0- | (9,997 | ) | -0- | -0- | (9,997 | ) | |||||||||||||
| Proceeds from sale of assets held for sale | -0- | -0- | -0- | -0- | -0- | |||||||||||||||
| Net cash provided (used) in investing activities | (55 | ) | (18,976 | ) | (929 | ) | -0- | (19,960 | ) | |||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Proceeds from 8.375% Senior Subordinated Notes | 205,179 | -0- | -0- | -0- | 205,179 | |||||||||||||||
| Payment on 9.25% Senior Subordinated Notes | (199,930 | ) | -0- | -0- | -0- | (199,930 | ) | |||||||||||||
| Principal payments on revolving credit and long-term debt, net | 19,600 | 171 | (1,758 | ) | -0- | 18,013 | ||||||||||||||
| Net cash provided (used) by financing activities | 24,849 | 171 | (1,758 | ) | -0- | 23,262 | ||||||||||||||
| Increase (decrease) in cash and cash equivalents | 749 | (682 | ) | 4,149 | -0- | 4,216 | ||||||||||||||
| Cash and cash equivalents at beginning of year | (1,392 | ) | 881 | 2,702 | -0- | 2,191 | ||||||||||||||
| Cash and cash equivalents at end of year | $ | (643 | ) | $ | 199 | $ | 6,851 | $ | -0- | $ | 6,407 | |||||||||
62
| Item 9. | Changes in and Disagreements |
There were no changes in noror disagreements with Park-Ohio’sthe Company’s independent auditors on accounting and financial disclosure matters within the two-year period ended December 31, 2003.2006.
| Item 9A. | Controls and Procedures |
Evaluation of disclosure controls and procedures
As of December 31, 2003,2006, management, including our chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon and as of the date of, that evaluation, our chief executive officerChief Executive Officer and chief financial officerChief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects,as of December 31, 2006, to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as and when required.
Changes in internal controls over financial reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 20032006 that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inPart IIIRule 13a-15(f) under the Exchange Act. As required byRule 13a-15(c) under the Exchange Act, management carried out an evaluation, with participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of December 31, 2006. The framework on which such evaluation was based is contained in the report entitled “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Report”). Management has identified no material weakness in internal control over financial reporting. The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 based on the framework contained in the COSO Report, and has prepared Management’s Annual Report on Internal Control Over Financial Reporting included at page 27 of this annual report onForm 10-K, which is incorporated herein by reference.
Ernst & Young LLP, the Company’s independent registered public accounting firm, have issued an attestation report on the Company’s management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. This attestation report is included at page 28 of thisForm 10-K and is incorporated herein by reference.
During 2006, we invested approximately $23.3 million, including debt assumed, in the acquisition of businesses across all our operations. As part of our ongoing integration activities, we are continuing to incorporate our controls and procedures into these recently acquired businesses.
| Item 9B. | Other Information |
None.
63
Part III
| Item 10. | Directors, |
Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.
| Item 11. | Executive Compensation |
Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.
| Item 14. | Principal Accountant Fees and Services |
The following table presents fees for professional audit services rendered by Ernst & Young LLP forto the audit of the Company’sCompany and its parent’s annual financial statementsparent for the years ended December 31, 20032006 and 2002:
| 2003 | 2002 | |||||||
| Audit fees | $ | 401,000 | $ | 427,000 | ||||
| Tax fees | 67,250 | 71,000 | ||||||
| Audit-related fees | 215,500 | 204,000 | ||||||
2005:
| 2006 | 2005 | |||||||
| Audit fees | $ | 1,084,000 | $ | 1,075,000 | ||||
| Audit-related fees | 83,000 | 60,000 | ||||||
| Tax fees | 112,000 | 179,000 | ||||||
Fees for audit services include fees associated with the annual audit, the review’sreviews of the Company’s quarterly reports on Form 10-Q, and statutory audits required internationally.internationally and the audit of management’s assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. Audit-related fees principally included fees in connection with pension plan audits and accounting consultation. Tax fees includedinclude fees in connection with tax compliance tax advice and tax planning. Park-Ohio is a wholly-owned subsidiary of Holdings and does not have a separate audit committee. Holdings’ audit committee has adopted a pre-approval policy for audit and non-audit related services. For a descriptionservices and auditor independence requiring the approval by Holdings’ audit committee of all professional services rendered by the Company’s and its parent’s independent auditor prior to the commencement of the specified services.
100% of the services described in “Audit Fees,” “Audit-Related Fees” and “Tax Fees” werepre-approved by Holdings’ pre-approval policies for audit and non-audit related services, seecommittee in accordance with Holdings’ proxy statement.formal policy on auditor independence.
64
39
Part IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) The following financial statements are included in Part II, Item 8:8 of this annual report onForm 10-K:
| Page | |||||
| Management’s Annual Report on Internal Control Over Financial Reporting | 27 | ||||
| Report of | |||||
| Report of Independent Registered Public Accounting Firm | 29 | ||||
| Consolidated Balance Sheets — December 31, 2006 and 2005 | 30 | ||||
| Consolidated Statements of Income — Years Ended December 31, 2006, 2005 and 2004 | 31 | ||||
| Consolidated Statements of Shareholder’s Equity — Years Ended December 31, 2006, 2005 and 2004 | 32 | ||||
| Consolidated Statements of Cash Flows — Years Ended December 31, 2006, 2005 and 2004 | 33 | ||||
| Notes to Consolidated Financial Statements | 34 | ||||
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations |
(3) Exhibits:
Supplemental Information to be furnished with reports filed pursuant to Section 15(d) of the ActSEC are not required under the related instructions or are not applicable and, therefore, have been omitted.
(3) Exhibits:
The exhibits filed as part of thisForm 10-K are listed on the Exhibit Index immediately preceding such exhibits and are incorporated herein by registrants which have not registered securities pursuant to Section 12 of the Act.reference.
65
No annual report or proxy statement covering the Company’s last fiscal year has been or will be circulated to security holders.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARK-OHIO INDUSTRIES, INC. (Registrant)
| By: | /s/ |
| Richard P. Elliott |
Richard P. Elliott, Vice President
and Chief Financial Officer
Date: March 29, 2004
26, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
* Edward F. Crawford | Chairman, Chief Executive Officer and Director | |||||
| March 26, 2007 | ||||||
* Richard P. Elliott | Vice President | March 15, 2007 | ||||
* The undersigned, pursuant to a Power of Attorney executed by each of the Directors and officers identified above and filed with the Securities and Exchange Commission, by signing his name hereto, does hereby sign and execute this report on behalf of each of the persons noted above, in the capacities indicated.
March 29, 2004
41
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2003
EXHIBIT INDEX
* | ||||||
* Patrick V. Auletta | Director | March 15, 2007 | ||||
* Kevin R. Greene | Director | March 15, 2007 | ||||
* Dan T. Moore | Director | March 15, 2007 | ||||
* Ronna Romney | Director | March 15, 2007 | ||||
* James W. Wert | Director | March 15, 2007 | ||||
* | The undersigned, pursuant to a Power of Attorney executed by each of the directors and officers identified above and filed with the Securities and Exchange Commission, by signing his name hereto, does hereby sign and execute this report on behalf of each of the persons noted above, in the capacities indicated. |
March 26, 2007
/s/ Robert D. Vilsack, |
Robert D. Vilsack,Attorney-in-Fact
66
ANNUAL REPORT ONFORM 10-K
PARK-OHIO INDUSTRIES, INC.
PARK-OHIO INDUSTRIES, INC.
For the Year Ended December 31, 2006
EXHIBIT INDEX
Exhibit | ||||
| 3 | .1 | Amended and Restated Articles of Incorporation of Park-Ohio Holdings Corp. (filed as Exhibit 3.1 to theForm 10-K of Park-Ohio Industries, Inc. for the year ended December 31, 1998, SEC File No. 333-43005 and incorporated by reference and made a part hereof) | ||
| 3 | .2 | Code of Regulations of Park-Ohio Industries, Inc. (filed as Exhibit 3.2 to theForm 10-K of Park-Ohio Industries, Inc. for the year ended December 31, 1998, SEC File No. 333-43005 and incorporated by reference and made a part hereof) | ||
| 4 | .1 | Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties party thereto, the lenders party thereto, Bank One, NA and Banc One Capital Markets Inc. (filed as Exhibit 4 to theForm 10-Q of Park-Ohio Holdings Corp. for the quarter ended September 30, 2003, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 4 | .2 | First Amendment, dated September 30, 2004, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders party thereto, Bank One, NA and Bank One Capital Markets, Inc. (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. on October 1, 2004, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 4 | .3 | Second Amendment, dated December 29, 2004, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders party thereto and JP Morgan Chase Bank, NA (successor by merger to Bank One, NA), as agent (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. filed on January 5, 2005, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 4 | .4 | Third Amendment, dated May 5, 2006, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lender’s party thereto and J.P. Morgan Chase Bank, NA (successor by merger to Bank One, NA), as agent (filed as Exhibit 4 to theForm 10-Q of Park-Ohio Holdings Corp. for the quarter ended March 31, 2006, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 4 | .5 | Fourth Amendment, dated June 9, 2006, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lender’s party thereto and J.P. Morgan Chase Bank, NA (successor by merger to Bank One, NA), as agent (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. filed on June 14, 2006, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 4 | .6 | Fifth Amendment, dated October 18, 2006, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lender’s party thereto and J.P. Morgan Chase Bank, NA (successor by merger to Bank One, NA), as agent (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. filed on October 24, 2006, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 4 | .7 | Indenture, dated as of November 30, 2004, among Park-Ohio Industries, Inc., the Guarantors (as defined therein) and Wells Fargo Bank, NA, as trustee (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 10 | .1 | Form of Indemnification Agreement entered into between Park-Ohio Industries, Inc. and each of its directors and certain officers (filed as Exhibit 10.1 to theForm 10-K of Park-Ohio Industries, Inc. for the year ended December 31, 1998, SEC File No. 333-43005 and incorporated by reference and made a part hereof) | ||
| 10 | .2* | Amended and Restated 1998 Long-Term Incentive Plan (filed as Appendix A to the Definitive Proxy Statement of Park-Ohio Holdings Corp., filed on April 23, 2001, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 24 | .1 | Power of Attorney | ||
Exhibit | ||||
| 31 | .1 | Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31 | .2 | Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | .1 | Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| * | ||||