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electronic billing services and ongoing technical support. We operate 3240 logistics service centers in the United States, Mexico, Canada, Puerto Rico and Europe as well as production sourcing and support centers in Asia. Through our supply chain management programs, we supply more than 175,000 globally-sourced production components, many of which are specialized and customized to meet individual customers’ needs.
In July 2005, we acquired substantially all of the assets of the Purchased Parts Group, Inc. (“PPG”), a provider of supply chain management services for a broad range of production components, operating 12 service centers in the United States, the United Kingdom and Mexico. This acquisition added significantly to our customer and supplier bases, and expanded our geographic presence. ILS has eliminated substantial overhead costs from PPG and begun the process of consolidating redundant service centers. The historical financial data contained throughout this annual report on Form 10-K exclude the results of operations of PPG, other than for the period from July 20, 2005 through December 31, 2005. See Note C to the consolidated financial statements included elsewhere herein.
Products and Services. Supply chain management services, which is ILS’s primary focus for future growth, involves offering customers comprehensive,on-site management for most of their production component needs. Some production components are characterized by low per unit supplier prices relative to the indirect costs of supplier management, quality assurance, inventory management and delivery to the production line. In addition, ILS delivers an increasingly broad range of higher-cost production components including valves, fittings, steering components and many others. Applications-engineering specialists and the direct sales force work closely with the engineering staff of OEM customers to recommend the appropriate production components for a new product or to suggest alternative components that reduce overall production costs, streamline assembly or enhance the appearance or performance of the end product. As an additional service, ILS recently began providing spare parts and aftermarket products to end users of its customers’ products.
Supply chain management services are typically provided to customers pursuant to sole-source arrangements. We believe our services distinguish us from traditional buy/sell distributors, as well as manufacturers who supply products directly to customers, because we outsource our customers’ high-volume production components supply chain management, providing processes customized to each customer’s needs and replacing numerous current suppliers with a sole-source relationship. Our highly-developed, customized, information systems provide transparency and flexibility through the complete supply chain. This enables our customers to: (1) significantly reduce the direct and indirect cost of production component processes by outsourcing internal purchasing, quality assurance and inventory fulfillment responsibilities; (2) reduce the amount of working capital invested in inventory and floor space; (3) reduce component costs through purchasing efficiencies, including bulk buying and supplier consolidation; and (4) receive technical expertise in production component selection and design and engineering. Our sole-source arrangements foster long-term, entrenched supply relationships with our customers and, as a result, the average tenure of service for our top 50 ILS clients exceeds twelve years. ILS’s remaining non-manufacturing sales are generated through the wholesale supply of industrial products to other manufacturers and distributors pursuant to master or authorized distributor relationships.
ILS also engineers and manufactures precision cold formed and cold extruded products, including locknuts, SPAC®SPAC® nuts and wheel hardware, thatwhich are principally used in applications where controlled tightening is required due to high vibration. ILS produces both standard items and specialty products to customer specifications, thatwhich are used in large volumes by customers in the automotive, heavy-duty truck and rail industries.
Markets and Customers. For the year ended December 31, 2004,2005, approximately 79%90% of ILS’s net sales were to domestic customers. Remaining sales were primarily to manufacturing facilities of large, multinational customers located in Canada, Mexico and Europe. Supply chain management services and production components are used extensively in a variety of industries, and demand is generally related to the state of the economy and to the overall level of manufacturing activity.
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ILS markets and sells its services to over 6,5006,000 customers domestically and internationally. The principal markets served by ILS are the heavy-duty truck, automotive and vehicle parts, electrical distribution and controls, automotive, other vehicle, industrialpower sports/ fitness equipment, power sports equipment, lawnHVAC, aerospace and gardendefense, electrical components, appliance and semiconductor equipment industries. The five largest customers, within which ILS sells through sole-source contracts to multiple operating divisions or locations, accounted for approximately 32%40% and 38% of sales of ILS for 20032005 and 2004, respectively, with International Truck representing 15%20% and 19%15%, respectively, of segment sales. Two of the five largest customers are in the heavy-duty truck industry. The loss of the International Truck account or any two of the remaining top five customers could have a material adverse effect on the results of operations and financial condition of this segment.
Competition. There areis a limited number of companies who compete with ILS for supply chain service contracts. ILS competes mainly with domestic competitors primarily on the basis of its value-added services, which includesinclude sourcing, engineering and delivery capabilities, geographic reach, extensive product selection, price and reputation for high service levels.
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Aluminum Products
We believe that we are one of the few part suppliers that has the capability to provide a wide range of high-volume, high-quality products utilizing a broad range of processes, including gravity and low pressure permanent mold, low-pressure, die-cast, sand-cast and lost-foam, as well as a proprietary sub-liquidous process.emerging alternative casting technologies. Our ability to offer our customers this comprehensive range of capabilities at a low cost provides us with a competitive advantage. We produce our aluminum components at sixfive manufacturing facilities in Ohio Indiana and Wisconsin.
Indiana.
Products and Services. Our Aluminum Products business casts and machines aluminum engine, transmission, brake, suspension and other components for automotive, agricultural equipment, construction equipment, heavy-duty truck and constructionmarine equipment OEMs, primarily on a sole-source basis. Aluminum Products’ principal products include transmission pump housings, intake manifolds, planetary pinion carriers, oil filter adapters, clutch retainers bearing cups, brackets,and pistons, control arms, knuckles, master cylinders, pinion housings, brake calipers, oil pans and flywheel spacers. In addition, we also provide value-added services such as design engineering, machining and part assembly. Although these parts are lightweight, they possess high durability and integrity characteristics even under extreme pressure and temperature conditions.
Demand by automotive OEMs for aluminum castings has increased in recent years as they have sought lighter alternatives to steel and iron, primarily to increase fuel efficiency without compromising structural integrity. We believe that this replacement trend will continue as end-users and the regulatory environment require greater fuel efficiency. To capitalize on this trend, in August 2004, we acquired substantially all of the assets of the Amcast Components Group, a producer of aluminum automotive components. This acquisition significantly increased ourthe sales and production capacity of our Aluminum Products business and added attractive new customers, product lines and production technologies. We believe that the acquisition of the Amcast Components Group will significantly increase the net sales of our Aluminum Products business. The historical financial data contained throughout this annual report on Form 10-K exclude the results of operations of the Amcast Components Group other than for the period from August 23, 2004 through December 31, 2004.
2005.
Markets and Customers. The five largest customers, ofwithin which Aluminum Products sells to multiple operating divisions through sole-source contracts, accounted for approximately 79%53% of Aluminum Products sales for both 20032005 and 2004, respectively.58% for 2004. 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: (1) engineer and manufacture high-quality, cost-effective, machined castings utilizing multiple casting technologies in large volumes; (2) provide timely delivery; and (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,
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Aluminum Products is well-positioned to benefit as customers continue to consolidate their supplier base.
Manufactured Products
Our Manufactured Products segment operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of highly-engineered products, including induction heating and melting systems, pipe threading systems, rubber products and forged and machined products. We manufacture these products in eleven domestic facilities and eightnine international facilities in Canada, Mexico, the United Kingdom, Belgium, Germany, Poland, China and Japan.
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 induction heating and melting systems, located in Canton, Ohio.
Products and Services. Our induction heating and melting business 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. Our 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 35%-40% to 40% of our 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 our own products.
Additional manufactured products include other capital equipment, forged and machined metal components, and injection-molded rubber and silicone products. We also produce and provide services and spare parts formanufacture other capital equipment such as pipe threading equipment for the oil and gas industry, and industrial oven systems and mechanical forging presses,
as well as manufacture injection molded rubberprovide field service and silicone productsspare parts for use in automotive and industrial applications. Our forged and machined products include locomotive crankshafts, aircraft structural components such as landing gears and rail products such as railcar center plates.equipment. We also engineer and install mechanical forging presses, for the automotive and truck manufacturing industries and sell spare parts and provide field service for the large existing base of mechanical forging presses and hammers in North America.
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We manufacturemachine, induction harden and surface finish crankshafts of up to 6,000 pounds 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 moldedmold rubber 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 includeincluding wire harnesses, shock and vibration mounts, spark plug boots and nipples and general sealing gaskets. During 2002, we reduced rubber products’ costs and discontinued underperforming products by selling one business unit and closing a manufacturing plant.
Markets and Customers. In our Manufactured Products’We sell induction heating and other capital equipment business, approximately 38% of net sales forto component manufacturers and OEMs in the year ended December 31, 2004 was derived from replacement partssteel, coatings, forging, foundry, automotive, truck, construction equipment and the provision of field service. In addition, we manufactureoil and gas industries. We sell forged and machined products produced from closed-die metal forgings of up to 6,000 pounds. Aerospace forgings are sold primarily tolocomotive manufacturers, machining companies and sub-assemblers who finish theaerospace and defense products for sale to OEMs. We also machine, induction hardenOEMs, and surface finish crankshafts and camshafts used primarily in locomotives. In the fourth quarter of 2003, we decided to shut down our locomotive crankshaft forging plant and entered into a long-term supply contract to purchase locomotive crankshaft forgings at a more favorable price from a third-party supplier. Forged rail products are sold primarily to railcar builders and maintenance providers. Forged and machinedWe sell rubber products are soldprimarily to a wide variety of domestic and international OEMs and other manufacturers, primarilysub-assemblers in the transportationautomotive, food processing and consumer appliance industries.
Competition. Our capital equipment unitsWe compete with smallsmall- to medium-sized domestic and international equipment manufacturers on the basis of service capability, ability to meet customer specifications, delivery performance and engineering expertise. Our rubber products operating unitsWe compete primarilydomestically and internationally with small- to medium-sized forging and machining 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. Our forged and machined products business competes domestically and internationally with other small- to medium-sized businessesprimarily on the basis of price and product quality and precision.
quality.
Sales and Marketing
ILS markets its products and services in the United States, Mexico, Canada and Europe, 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
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America and northern 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. An increasing portion of ILS’s delivered components are purchased from suppliers in foreign countries, primarily Canada, Taiwan, China, South Korea, Singapore, India and Eastern Europe.multiple 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.
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Customer Dependence
We have thousands of customers who demand quality, delivery and service. Numerous customers have recognized our performance by awarding us with supplier quality awards. NoThe only customer which accounted for more than 10% of our consolidated sales in any of the past three years except forwas International Truck in 2004 and 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’s customers require just-in-timejust-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
We are subject to numerous federal, state and local laws and regulations designed to protect public health and the environment, 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, 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 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 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, we have not experienced difficulty in complying with environmental laws in the past, and compliance with environmental laws has not had a material adverse effect on our financial condition, liquidity and results of operations. Our capital expenditures on environmental control facilities were not material during the past five years and such expenditures are not expected to be material to us in the foreseeable future.
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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. We 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, our share of such costs has not been material and, based on available information, we do not expect our exposure at any of these locations to have a material adverse effect on our 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—K—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, 2005, 2004, 2003, and 20022003 is incorporated herein by reference.
Recent Developments
The information contained under the heading of “Note D—C—Acquisitions” of the notes to the consolidated financial statements included herein is incorporated herein by reference.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 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 100 F Street, 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 on Form 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 only ones we face. If any of the following risks occur, our business, results of operations or financial condition could be adversely affected.
| 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.
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| Because a significant portion of our sales is to the automotive and heavy-duty truck industries, a decrease in the demand of 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 28% and 21% of our net sales during the year ended December 31, 2005 from the automobile and heavy-duty truck industries, respectively. International Truck, our largest customer, accounted for approximately 12% of our net sales for the year ended December 31, 2005. 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, 2005, our top ten customers accounted for approximately 34% of our net sales and our top customer, International Truck, accounted for approximately 12% 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; | |
| • | 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 customers filed voluntary petitions for reorganization under Chapter 11 of the bankruptcy code during 2004 and 2005. These were Murray, Inc., a customer of ILS, in 2004 and Delphi Corp. and Dana Corporation, primarily customers of our Manufactured Products and Aluminum Products segments, in 2005. Collectively, these bankruptcies reduced our operating income by $2.3 million during 2004 and 2005 with a further negative impact of approximately $.4 million on our operating income expected in the first quarter of 2006.
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| 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 acquisition of the 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’ 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
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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 substantially higher natural gas costs in 2004 and in 2005. We could continue to 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 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, 2005, we were a party to eight collective bargaining agreements with various labor unions that covered approximately 575 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.
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| 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 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
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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, 2006, Edward Crawford, our Chairman of the Board and Chief Executive Officer, and Matthew Crawford, our President and Chief Operating Officer, collectively beneficially owned approximately 26% 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.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
As of December 31, 2004,2005, our operations included numerous manufacturing and supply chain logistics services facilities located in 23 states in the United States, and in Puerto Rico, as well as in Asia, Canada, Europe and Mexico. Approximately 90%88% of the available square footage was located in the United States. Approximately 49% of the available square footage was owned. In 2004,2005, approximately 35%36% of the available domestic square footage was used by the ILS segment, 38%36% was used by the Manufactured Products segment and 27%28% by the Aluminum Products segment. Approximately 27%36% of the available foreign square footage was used by the ILS segment and 73%64% was used by the Manufactured Products segment. In the opinion of management, our facilities are generally well maintained and are suitable and adequate for their intended uses.
11
The following table provides information relative to our principal facilities as of December 31, 2004.2005.
| Related Industry | Owned or | Approximate | Owned or | Approximate | ||||||||||||||||||||
| Segment | Location | Leased | Square Footage | Use | Location | Leased | Square Footage | Use | ||||||||||||||||
| ILS(1) | Cleveland, OH | Leased | 41,000 | (2) | ILS Corporate Office | Cleveland, OH | Leased | 60,350 | (2) | ILS Corporate Office | ||||||||||||||
| Memphis, TN | Leased | 121,700 | Logistics | |||||||||||||||||||||
| Dayton, OH | Leased | 112,960 | Logistics | |||||||||||||||||||||
| Dayton, OH | Leased | 84,700 | Logistics | Lawrence, PA | Leased | 116,000 | Logistics and Manufacturing | |||||||||||||||||
| Lawrence, PA | Leased | 116,000 | Logistics and Manufacturing | St. Paul, MN | Leased | 104,425 | Logistics | |||||||||||||||||
| St. Paul, MN | Leased | 74,425 | Logistics | Allentown, PA | Leased | 62,200 | Logistics | |||||||||||||||||
| Atlanta, GA | Leased | 56,000 | Logistics | Atlanta, GA | Leased | 56,000 | Logistics | |||||||||||||||||
| Dallas, TX | Leased | 49,985 | Logistics | Dallas, TX | Leased | 49,985 | Logistics | |||||||||||||||||
| Nashville, TN | Leased | 44,900 | Logistics | Nashville, TN | Leased | 44,900 | Logistics | |||||||||||||||||
| Charlotte, NC | Leased | 36,800 | Logistics | Charlotte, NC | Leased | 24,000 | Logistics | |||||||||||||||||
| Kent, OH | Leased | 225,000 | Manufacturing | Kent, OH | Leased | 225,000 | Manufacturing | |||||||||||||||||
| Mississauga, Ontario, Canada | Leased | 56,000 | Manufacturing | Mississauga, | Leased | 117,000 | Manufacturing | |||||||||||||||||
| Solon, OH | Leased | 42,600 | Logistics | Ontario, Canada | ||||||||||||||||||||
| Cleveland, OH | Leased | 40,000 | Manufacturing | Solon, OH | Leased | 42,600 | Logistics | |||||||||||||||||
| Delaware, OH | Owned | 45,000 | Manufacturing | Dublin, VA | Leased | 40,000 | Logistics | |||||||||||||||||
| Delaware, OH | Owned | 45,000 | Manufacturing | |||||||||||||||||||||
| ALUMINUM | Conneaut, OH(3) | Leased/Owned | 283,800 | Manufacturing | Conneaut, OH(3) | Leased/Owned | 304,000 | Manufacturing | ||||||||||||||||
| PRODUCTS | Huntington, IN | Leased | 132,000 | Manufacturing | Huntington, IN | Leased | 132,000 | Manufacturing | ||||||||||||||||
| Fremont, IN | Owned | 108,000 | Manufacturing | Fremont, IN | Owned | 108,000 | Manufacturing | |||||||||||||||||
| Wapakoneta, OH | Owned | 185,000 | Manufacturing | Wapakoneta, OH | Owned | 188,000 | Manufacturing | |||||||||||||||||
| Richmond, IN | Leased/Owned | 140,000 | Manufacturing | Richmond, IN | Leased/Owned | 97,300 | Manufacturing | |||||||||||||||||
| Cedarburg, WI | Leased | 130,000 | Manufacturing | Cedarburg, WI | Leased | 157,000 | Manufacturing | |||||||||||||||||
| MANUFACTURED | Cuyahoga Hts., OH | Owned | 427,000 | Manufacturing | Cuyahoga Hts., OH | Owned | 427,000 | Manufacturing | ||||||||||||||||
| PRODUCTS(4) | Le Roeulx, Belgium | Owned | 120,000 | Manufacturing | Le Roeulx, Belgium | Owned | 120,000 | Manufacturing | ||||||||||||||||
| Euclid, OH | Owned | 154,000 | Manufacturing | Euclid, OH | Owned | 154,000 | Manufacturing | |||||||||||||||||
| Wickliffe, OH | Owned | 110,000 | Manufacturing | Wickliffe, OH | Owned | 110,000 | Manufacturing | |||||||||||||||||
| Boaz, AL | Owned | 100,000 | Manufacturing | Boaz, AL | Owned | 100,000 | Manufacturing | |||||||||||||||||
| Warren, OH | Owned | 195,000 | Manufacturing | Warren, OH | Owned | 195,000 | Manufacturing | |||||||||||||||||
| Oxted, England | Owned | 135,000 | Manufacturing | Canton, OH | Leased | 125,000 | Manufacturing | |||||||||||||||||
| Cicero, IL | Owned | 450,000 | Manufacturing | Oxted, England | Owned | 135,000 | Manufacturing | |||||||||||||||||
| Cleveland, OH | Leased | 150,000 | Manufacturing | Newport, AR | Leased | 111,300 | Manufacturing | |||||||||||||||||
| Shanghai, China | Leased | 40,000 | Manufacturing | Cicero, IL | Owned | 45,000 | Manufacturing | |||||||||||||||||
| Cleveland, OH | Leased | 150,000 | Manufacturing | |||||||||||||||||||||
| Shanghai, China | Leased | 20,500 | Manufacturing | |||||||||||||||||||||
| (1) | ILS has |
| (2) | Includes |
| (3) | Includes three leased properties with square footage of 82,300, 64,000 and 45,700 and |
| (4) | Manufactured Products has |
Item 3. Legal Proceedings
| 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,
6
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 our financial condition, liquidity or results of operations.
At December 31, 2005, we were a co-defendant in approximately 325 cases asserting claims on behalf of approximately 10,000 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
12
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 five asbestos cases, involving 22 plaintiffs, that plead specified damages. In each of the five 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. In the final case, the plaintiff has alleged compensatory damages in the amount of $0.41 million and punitive damages in the amount of $2.5 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 our financial condition, liquidity or results of operations. WeAmong 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 a number of asbestos-related personal injury lawsuits. Mostmost 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 that have been dismissed wereare meaningful indicators of our potential exposure because the amounts claimed typically bear no relation to the extent of a failure to identify an asbestos containing product manufactured by us or a predecessor.the plaintiff’s injury, if any.
Our cost of defending suchthese lawsuits has not been material to date and, based upon available information, our management does not expect ourits future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity ofor 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 Form 10-K.
713
Part II
Part II
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The registrant is a wholly-owned subsidiary of Park-Ohio Holdings Corp. and has no equity securities that trade.
| Item 6. | Selected Financial Data |
Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Our consolidated financial statements 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 a year-to-yearyear-to-year basis, primarily due to the reversal of a tax valuation allowance in 2005, 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 due 2007,senior subordinated notes, restructuring and unusual charges in 20022003 and 2003,2005, a goodwill impairment charge in 2002 to reflect the cumulative effect of an accounting change, and acquisitions and divestitures during the three years ended December 31, 2004.
2005.
Executive Overview
We are an industrial supply chain logistics and diversified manufacturing business, operating in three segments: ILS, Aluminum Products and Manufactured Products. ILS provides customers with integrated supply chain management 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-timejust-in-time and point-of use delivery, electronic billing and ongoing technical support. The principal customers of ILS are in the heavy-duty truck, electrical controls, automotive and other vehicle industrialparts, electrical distribution and controls, power sports/fitness equipment, power sports equipment, lawnHVAC, aerospace and garden equipment,defense, electrical components, appliance and semiconductor equipment industries. Aluminum Products casts and machines aluminum engine, transmission, brake, suspension and other components such as pump housings, clutch retainers/pistons, control arms, knuckles, master cylinders, pinion housings, brake calipers, oil pans and flywheel spacers for automotive, agricultural equipment, construction equipment, and 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 and assembly. Manufactured Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of highly-engineered products including induction heating and melting systems, pipe threading systems, industrial oven systems, injection molded rubber products,components, and forged and machined products. Manufactured Products also produces and provides services and spare parts for 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 and defense industries. Sales, earnings and other relevant financial data for these three segments are provided in Note LK to the consolidated financial statements.
During 2004, we experienced the increased sales
Sales and profitability previously forecast,continued to grow substantially in 2005, continuing the trend of the prior year, as the domestic and international manufacturing economy returnedeconomies continued to growth, particularly in three of our customer industries: heavy-duty truck; semiconductor equipment; and equipment for steel manufacturing.grow. Net sales increased 30%15% and net income increased 117% in 2005 compared to 2003. Profitability2004. 2005 net income was affected by a $7.3 million reversal of the tax valuation allowance and $1.8 million of restructuring charges ($.8 million reflected in Cost of products sold and $1.0 million in Restructuring and impairment charges).
14
During 2004, net sales increased more than proportionally30%, and net income was $14.5 million compared to sales, based on cost reductions from our restructuring during the downturna net loss of $11.5 in 2001, 2002 and 2003. During those years, we consolidated 28 supply chain logistics facilities, and closed or sold 11 manufacturing plants.
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 agreement.facility. In November 2004, we sold $210.0 million of 8.375% Senior Subordinated Notessenior subordinated notes due 2014. We used the net proceeds to fund the tender and early redemption of $199.9 million of our 9.25% Senior Subordinated Notessenior subordinated notes due 2007. We incurred debt extinguishment costs primarily related to premiums and other 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.
8
In December 2004, we amended our revolving credit agreement,facility, extending its maturity to six years so that it now expires in December 2010, increasing the credit limit so that we may borrow up to $200.0 million subject to an asset basedasset-based formula, and providing lower interest rate levels. Borrowings under the revolving credit agreementfacility are secured by substantially all our assets. We had approximately $53.9$48.2 million of unused borrowing availability at December 31, 2004.2005. Funds provided by operations plus available borrowings under the revolving credit agreementfacility are expected to be adequate to meet our cash requirements.
At the end of 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 PPG, 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 the assumption of approximately $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.
We acquired substantially all of the assets of the Amcast Components Group (“Amcast”), a producer of aluminum automotive products, on August 23, 2004 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.
We acquired the remaining 66% of the common stock of Japan Ajax Magnethermic Company (“Jamco”), now a Japanese-located subsidiary of our induction heating and melting equipment business, on April 1, 2004 for cash existing on the balance sheet of Jamco at that date. We sold substantially all the assets of St. Louis Screw and Green Bearing in first quarter 2003 for cash totaling approximately $7.3 million, and Castle Rubber Company in second quarter 2002, for cash of approximately $2.5 million. We purchased substantially all the assets of Ajax Magnethermic Corp. in third quarter 2002, for cash of approximately $5.5 million.
Accounting Changes and
Goodwill
On January 1, 2002, we adopted
In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). Under FAS 142,, we reviewedreview 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 economy. The effects of these circumstances on our 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, starting in 2002.
In accordance with FAS 142, goodwill is now reviewed annually for potential impairment. This review was performed as of October 1, 2005, 2004 2003 and 2002,2003, using forecasted discounted cash flows, and it was determined that no further impairment is required.
At December 31, 2004, the2005, our balance sheet reflected $82.6$82.7 million of goodwill in the ILS and Aluminum Products segments. In 2004,2005, discount rates used ranged from 10.25%11.0% to 12.25%11.5%, and long-term revenue growth rates used ranged from 3.5% to 4.0%4.5%.
In 2003, we changed our method of accounting for the 15% of inventories utilizing the LIFO method to the FIFO method. As required by accounting principles generally accepted in the United States, the Company restated its balance sheet as of December 31, 2002 and increased inventories by the recorded LIFO reserve ($4.4 million), increased deferred tax liabilities ($1.7 million), and increased shareholders’ equity ($2.7 million). Previously reported results of operations were not 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.15
Results of Operations
| Net Sales by Segment: |
| Year Ended | Year Ended | |||||||||||||||||||||||||||||||||||||||
| December 31, | Acquired/ | December 31, | Acquired/ | |||||||||||||||||||||||||||||||||||||
| Percent | (Divested) | Percent | (Divested) | |||||||||||||||||||||||||||||||||||||
| 2004 | 2003 | Change | Change | Sales | 2005 | 2004 | Change | Change | Sales | |||||||||||||||||||||||||||||||
| ILS | $ | 453.2 | $ | 377.6 | $ | 75.6 | 20 | % | $ | (1.0 | ) | $ | 532.6 | $ | 453.2 | $ | 79.4 | 18 | % | $ | 31.4 | |||||||||||||||||||
| Aluminum Products | 135.4 | 90.1 | 45.3 | 50 | % | 30.4 | 159.1 | 135.4 | 23.7 | 18 | % | 34.5 | ||||||||||||||||||||||||||||
| Manufactured Products | 220.1 | 156.6 | 63.5 | 41 | % | 15.9 | 241.2 | 220.1 | 21.1 | 10 | % | 3.5 | ||||||||||||||||||||||||||||
| Consolidated net sales | $ | 808.7 | $ | 624.3 | $ | 184.4 | 30 | % | $ | 45.3 | $ | 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 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 equipment, pipe threading equipment and forging businesses, and also due to $.8 million writeoff of inventory associated with discontinued product lines.
| Selling, General & Administrative (“SG&A”) Expenses: |
| 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 6% in 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. The Company expects a further $.4 million negative impact to SG&A expenses in the first quarter of 2006 resulting from the Dana bankruptcy. SG&A expenses were reduced in 2005 compared to 2004 by a $.4 million 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 point.
16
| Interest Expense: |
| 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 in 2005 compared to 2004, primarily due to the 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 outstanding borrowings, partially offset by lower average interest rates during 2005. The increase in average borrowings in 2005 resulted primarily from higher working capital requirements and the purchase of Amcast Components Group and PPG in August 2004 and July 2005, respectively. The lower average borrowing rate in 2005 was due primarily to the lower interest rate of 8.375% on our senior subordinated notes sold in November 2004 compared to the 9.25% interest rate on the senior 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 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 | $ | 3.0 | ||||||
| Effective income tax rate | (16 | )% | 19 | % | ||||
| Effective income tax rate excluding reversal of tax valuation allowance | 11 | % | ||||||
In fourth quarter 2005, the Company reversed $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 will begin recording a quarterly provision for federal income taxes, which is expected to result in a total effective income tax rate of approximately 40%. The Company’s significant net operating loss carry-forward should preclude the payment of cash federal income taxes in 2006 and 2007, and possibly beyond. In the fourth quarter of 2006, the Company will reassess the remaining tax valuation allowance. If it is determined that a portion or all of the remaining deferred tax asset will more likely than not be realized, then the appropriate portion of its remaining tax valuation allowance will be reversed into income at that time, which could increase 2006 net income by as much as $5.0 million.
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 reversal of the $7.3 million tax valuation allowance, in 2005 we provided $3.0 million of income taxes, an 11% effective income tax rate. In both years, these taxes consisted primarily of state and foreign taxes on profitable operations. In neither year did the income tax provision include federal income taxes. At December 31, 2005, we had $41.0 million of net operating loss carryforwards for federal tax purposes. We are
17
presenting taxes and tax rates without the tax benefit of the tax valuation allowance reversal to facilitate comparison between the periods.
Results of Operations
| 2004 versus 2003 |
| Net Sales by Segment: |
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| Percent | ||||||||||||||||
| 2004 | 2003 | Change | Change | |||||||||||||
| ILS | $ | 453.2 | $ | 377.6 | $ | 75.6 | 20 | % | ||||||||
| Aluminum Products | 135.4 | 90.1 | 45.3 | 50 | % | |||||||||||
| Manufactured Products | 220.1 | 156.6 | 63.5 | 41 | % | |||||||||||
| Consolidated net sales | $ | 808.7 | $ | 624.3 | $ | 184.4 | 30 | % | ||||||||
Net sales increased by 30% in 2004 compared to 2003. ILS sales increased due to general economic growth, in particular due to significant growth in the heavy-duty truck and semiconductor industries, the addition of new customers and increases in product range to existing customers. ILS growth was partially offset by a $1.0 million sales decrease related to the 2003 sale of Green Bearing. Aluminum
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
9
Products 2004 sales increased $30.4 million due to the Amcast Components Group acquisition in August 2004, with additional growth from new contracts and increased volumes in the existing business. Manufactured Products sales increased primarily in the induction equipment, pipe threading equipment and forging businesses. Of this increase, $15.9 million was due to the second quarter 2004 acquisition of the remaining 66% of the common stock of Jamco, partially offset by the divestiture of St. Louis Screw in the first quarter of 2003.
| Cost of Products Sold & Gross Profit: |
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| Percent | ||||||||||||||||
| 2004 | 2003 | Change | Change | |||||||||||||
| Consolidated cost of products sold | $ | 682.6 | $ | 527.6 | $ | 155.0 | 29 | % | ||||||||
| Consolidated gross profit | $ | 126.1 | $ | 96.7 | $ | 29.4 | 30 | % | ||||||||
| Gross margin | 15.6 | % | 15.5 | % | ||||||||||||
Cost of products sold increased 29% in 2004 compared to 2003, while gross margin increased to 15.6% from 15.5% in 2003. ILS gross margin decreased modestly, primarily due to steel price increases and mix changes and the negative impact of $1.1 million resulting from the bankruptcy of a significant customer, Murray, Inc. Aluminum Products gross margin decreased due to a combination of the addition of the lower-margin Amcast business, product mix and pricing changes and specific one-time costs incurred in 2004 for product startup, scrap and reserves. The $30.4 million of sales from the acquired Amcast business generated significantly lower margins than the existing Aluminum Products business. We expect margins at the acquired plants to increase over time as a result of post-acquisition cost reductions, price increases and new business. Gross margin in the Manufactured Products segment increased, primarily as a result of increased sales and overhead efficiencies achieved in the induction equipment, pipe threading equipment and forging businesses. Gross margins in both the Aluminum Products and Manufactured Products segments were negatively impacted by rising natural gas costs.
| Year Ended | Year Ended | |||||||||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||||||||
| Percent | Percent | |||||||||||||||||||||||||||||||
| 2004 | 2003 | Change | Change | 2004 | 2003 | Change | Change | |||||||||||||||||||||||||
| Consolidated SG&A expenses | $ | 76.7 | $ | 62.4 | $ | 14.3 | 23 | % | $ | 76.7 | $ | 62.4 | $ | 14.3 | 23 | % | ||||||||||||||||
| SG&A as a percent of sales | 9.5 | % | 10.0 | % | ||||||||||||||||||||||||||||
| SG&A percent | 9.5 | % | 10.0 | % | ||||||||||||||||||||||||||||
18
Consolidated SG&A expenses increased by 23% in 2004 compared to 2003. Approximately $5.5$2.8 million of the SG&A increase was due to acquisitions, primarily Jamco and Amcast Components Group, andwhile approximately $2.7 million of the increase was due to compliance costs associated with Section 404 of the Sarbanes-Oxley Act, whileAct. The remainder of the remainderSG&A increase was primarily due to increased sales and production volumes. Despite this increase, SG&A expenses as a percent of sales decreased by 50 basis points due both to cost reductions from restructuring and to the absorption of these expenses over increased sales. SG&A expenses were reduced in 2004 compared to 2003 by a $2.3 million increase in net pension credits reflecting improved returns on pension plan assets.
| Interest Expense: |
| Year Ended | Year Ended | |||||||||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||||||||
| Percent | Percent | |||||||||||||||||||||||||||||||
| 2004 | 2003 | Change | Change | 2004 | 2003 | Change | Change | |||||||||||||||||||||||||
| Interest expense | $ | 31.4 | $ | 26.2 | $5.2 | 20 | % | $ | 31.4 | $ | 26.2 | $5.2 | 20 | % | ||||||||||||||||||
| Debt extinguishment costs included in interest expense | $ | 6.0 | $ | 6.0 | -0- | $6.0 | ||||||||||||||||||||||||||
| Average outstanding borrowings | $ | 328.9 | $ | 320.8 | $8.1 | 3 | % | $ | 328.9 | $ | 320.8 | $8.1 | 3 | % | ||||||||||||||||||
| Average borrowing rate | 7.74 | % | 8.15 | % | (41) basis points | 7.72 | % | 8.17 | % | (45) basis points | ||||||||||||||||||||||
Interest expense increased in 2004 compared to 2003, primarily due to the fourth quarter 2004 debt extinguishment costs. These costs primarily related to premiums and other transaction costs associated with the tender and early redemption and writeoff of deferred financing costs associated with the 9.25% Senior Subordinated Notes.senior subordinated notes. Excluding these costs, interest decreased due to lower average interest rates in 2004, partially offset by higher average outstanding borrowings. The lower average
10
borrowing rate in 2004 was due primarily to decreased rates on our revolving credit agreement.facility. The increase in average borrowings in 2004 resulted primarily from higher working capital requirements.
| Income |
The effective income tax rate for 2004 was 19%. Primarily foreign and certain state income taxes were provided for in both years because federal income taxes were not owed due to the recognition of net operating loss carryforwardscarry-forwards for which valuation allowances had been provided. At December 31, 2004, our subsidiarieswe had $47.7 million of net operating loss carryforwardscarry-forwards for federal tax purposes. We have not recognized any tax benefit for these loss carryforwards.carry-forwards. In accordance with the provision of Statement of Financial Accounting Standards No. 109, (“FAS 109”), “Accounting for Income Taxes,” we(“FAS 109”) recorded no tax benefit for the 2003 net loss because we 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.
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 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 declined by 2% in 2003. $10.4 million of the ILS sales decline related to the sale of Green Bearing and the termination of a high-margin pharmaceutical sales contract, while the remainder reflected general economic weakness. Aluminum Products net sales were lower primarily due to the ending of $10.0 million of sales contracts, the majority of which relate to the closure of the Tupelo and Hudson plants. Manufactured Products net sales increased $26.4 million primarily in the induction business. The acquisition of Ajax Magnethermic increased 2003 net sales by $29.6 million and the divestiture of Castle Rubber and St. Louis Screw decreased 2003 net sales by $6.8 million.
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2003 | 2002 | Change | Percent | |||||||||||||
| 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% | ||||||||||
| Gross margin | 15.5 | % | 13.8 | % | ||||||||||||
Cost of products sold declined 4% in 2003, and gross profit increased 10%, while gross margin increased to 15.5% in 2003, from 13.8% in 2002. 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. Aluminum Products gross margin increased significantly, primarily as a result of restructuring and cost reductions and higher margins on new contracts. Gross margin in the Manufactured Products segment increased, primarily as a result of increased sales and overhead efficiencies achieved in the induction business.
11
| Year Ended | ||||||||||||||||||||||||
| December 31, | 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 | ) | ||||||||||||||||||||
Consolidated SG&A expenses increased by 8% in 2003, while SG&A expenses as 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.
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 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 | |||||||||||
Interest expense decreased by 5% due to lower average debt outstanding and lower average interest rates during 2003. The decrease in average borrowings resulted primarily from the sale of two manufacturing units and lower working capital requirements. The lower average borrowing rate in 2003 was due primarily to decreased rates on the Company’s new revolving credit agreement, beginning in August 2003.
In accordance with the provision of FAS 109, the Company recorded no tax benefit for the 2003 or 2002 net losses, because in both years it had incurred three years of cumulative losses. Income taxes of $.9 million were provided in 2003 and 2002, primarily for state and foreign taxes on profitable operations. At December 31, 2003, subsidiaries of the Company had $35.7 million of net operating loss carryforwards for federal tax purposes. The Company has not recognized any tax benefit for these loss carryforwards.
Critical Accounting Policies
Preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Revenue Recognition: We recognize more than 93%90% of our revenue when title is transferred to unaffiliated customers, typically upon shipment. Our 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. Our 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
19
individual operating units based on historical losses, adjusting for economic conditions. Our 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
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
12
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, which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for based on estimated selling prices less disposal costs. Though we consider these allowances adequate and proper, changes in economic conditions in specific markets in which we operate could have a material effect on 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, 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 included elsewhere herein.
Restructuring: We recognize costs in accordance with Emerging Issues Task Force 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)” (“EITF 94-3”), and SABSEC Staff Accounting Bulletin No. 100, “Restructuring and Impairment 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.
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 nullified EITF 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.
Goodwill: We adopted FAS 142 as of January 1, 2002. Under FAS 142, we are required to review goodwill for impairment annually or more frequently if impairment indicators arise.
We 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. We have also completed the annual impairment test as of October 1, 2005, 2004 2003 and 20022003 and have determined that no additional goodwill impairment existed as of those dates.
Deferred Income Tax Assets and Liabilities: 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, 2004, the Company2005, we had net operating loss carryforwardscarry-forwards for federal income tax purposes of approximately $47.7$41.0 million, which will expire between 2021 and 2024. In accordance with the provisions of FAS 109, the tax benefits related to these carryforwards have been fully reserved as of December 31, 2004 because the Company is in a three-year cumulative loss position.
Pension and Other Postretirement Benefit Plans: We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans and postretirementpostre-
20
tirement benefit plans covering substantially all employees. The measurement of liabilities related to these plans is based on management’s assumptions related to future events, including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trends. Pension plan asset performance in the future will directly impact our net income. We have evaluated our pension and other postretirement benefit assumptions, considering current trends in interest rates and market conditions and believe our assumptions are appropriate.
13
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 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
Our results of operations are typically stronger in the first six months 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 our customers has varied with, among other factors, orders for customers’ finished goods, customer production schedules, competitive conditions and general economic conditions. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations in the operations of our business units. Such variability is particularly evident 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 on Form 10-K contains certain statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These 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 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
21
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-duty truck industries, which are highly cyclical;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.
| Item 7A. | Quantitative and Qualitative |
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 $120.6$128.3 million at December 31, 2004.2005. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $1.2$1.3 million for the year ended December 31, 2004.
2005.
Our foreign subsidiaries generally conduct business in local currencies. During 2004,2005, we recorded a favorable foreign currency translation adjustment of $2.1$.1 million related to net assets located outside the United States. This foreign currency translation adjustment resulted primarily from the weakening of the United StatesU.S. dollar in relation to the Canadian dollar, British pound and euro.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 price increases, which have increased significantly in 2004.2005. We do not have any commodity swap agreements or hedge contracts for future increases in steel or natural gas prices.
1422
| Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements
| Page | ||||
| Report of Independent Registered Public Accounting Firm | ||||
| 26 | ||||
| Consolidated Balance Sheets — December 31, | ||||
| Consolidated Statements of Operations — Years Ended December 31, 2005, 2004 | ||||
| Consolidated Statements of Shareholder’s Equity — Years Ended December 31, 2005, 2004 | ||||
| Consolidated Statements of Cash Flows — Years Ended December 31, 2005, 2004 | ||||
| Notes to Consolidated Financial Statements | ||||
1523
MANAGEMENT’S ANNUAL
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 15d-15(f) 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, 2004.2005. 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, 2004.2005. This attestation report is included at page 1725 of this Annual Reportannual report on Form 10-K.
Park-Ohio Industries, Inc.
March 10, 200513, 2006
1624
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder
Park-Ohio Industries, Inc.
We have audited management’s assessment, included in the accompanying Management’s Annual 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, 2004,2005, 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, 2004,2005, 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, 2004,2005, 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. as of December 31, 20042005 and 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2004, and our report dated March 10, 2005 expressed an unqualified opinion thereon.
March 10, 2005
Park-Ohio Industries, Inc.
Cleveland, Ohio
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholder
We have audited the accompanying consolidated balance sheets of Park-Ohio Industries, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2004.2005 and our report dated March 13, 2006 expressed an unqualified opinion thereon.
 |
Cleveland, Ohio
March 13, 2006
25
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, 2005 and 2004, and the related consolidated statements of operations, shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2005. 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 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 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, 20042005 and 20032004 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 20042005 in conformity with U.S. generally accepted accounting principles.
As discussed in Note B to the consolidated financial statements, effective June 30, 2003, the Company changed its method of accounting for inventories at certain subsidiaries. As discussed in Note C to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’sPark-Ohio Industries, Inc. and subsidiaries internal control over financial reporting as of December 31, 2004,2005, based on criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 200513, 2006 expressed an unqualified opinion thereon.
|
Cleveland, Ohio
March 10, 200513, 2006
1826
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
| December 31, | |||||||||||||||||||||
| December 31, | |||||||||||||||||||||
| 2004 | 2003 | ||||||||||||||||||||
| 2005 | 2004 | ||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||
ASSETS | ASSETS | ASSETS | |||||||||||||||||||
| Current Assets | Current Assets | Current Assets | |||||||||||||||||||
| Cash and cash equivalents | $ | 6,407 | $ | 2,191 | Cash and cash equivalents | $ | 17,868 | $ | 6,407 | ||||||||||||
| Accounts receivable, less allowances for doubtful accounts of $3,976 in 2004 and $3,271 in 2003 | 145,475 | 100,938 | Accounts receivable, less allowances for doubtful accounts of $5,120 in 2005 and $3,976 in 2004 | 153,502 | 145,475 | ||||||||||||||||
| Inventories | 177,294 | 149,075 | Inventories | 190,553 | 177,294 | ||||||||||||||||
| Other current assets | 20,655 | 16,155 | Deferred tax assets | 8,627 | -0- | ||||||||||||||||
| Other current assets | 27,753 | 20,655 | |||||||||||||||||||
| Total Current Assets | 349,831 | 268,359 | |||||||||||||||||||
| Property, Plant and Equipment | |||||||||||||||||||||
| Total Current Assets | 398,303 | 349,831 | |||||||||||||||||||
| Property, Plant and Equipment: | Property, Plant and Equipment: | ||||||||||||||||||||
| Land and land improvements | 6,788 | 6,059 | Land and land improvements | 6,964 | 6,788 | ||||||||||||||||
| Buildings | 36,217 | 37,606 | Buildings | 38,384 | 36,217 | ||||||||||||||||
| Machinery and equipment | 185,489 | 181,045 | Machinery and equipment | 198,019 | 185,489 | ||||||||||||||||
| 228,494 | 224,710 | 243,367 | 228,494 | ||||||||||||||||||
| Less accumulated depreciation | 118,613 | 129,434 | Less accumulated depreciation | 127,136 | 118,613 | ||||||||||||||||
| 109,881 | 95,276 | 116,231 | 109,881 | ||||||||||||||||||
| Other Assets | |||||||||||||||||||||
| Other Assets: | Other Assets: | ||||||||||||||||||||
| Goodwill | 82,565 | 82,278 | Goodwill | 82,703 | 82,565 | ||||||||||||||||
| Net assets held for sale | 1,035 | 2,321 | Net assets held for sale | -0- | 1,035 | ||||||||||||||||
| Other | 68,535 | 61,310 | Other | 70,617 | 68,535 | ||||||||||||||||
| $ | 611,847 | $ | 509,544 | $ | 667,854 | $ | 611,847 | ||||||||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||||||
| Current Liabilities | Current Liabilities | Current Liabilities | |||||||||||||||||||
| Trade accounts payable | $ | 108,862 | $ | 66,153 | Trade accounts payable | $ | 115,396 | $ | 108,862 | ||||||||||||
| Accrued expenses | 59,745 | 46,384 | Accrued expenses | 68,313 | 59,745 | ||||||||||||||||
| Current portion of long-term liabilities | 5,812 | 2,811 | Current portion of long-term liabilities | 4,161 | 5,812 | ||||||||||||||||
| Total Current Liabilities | 174,419 | 115,348 | Total Current Liabilities | 187,870 | 174,419 | ||||||||||||||||
| Long-Term Liabilities, less current portion | |||||||||||||||||||||
| 8.375% Senior Subordinated Notes due 2014 | 210,000 | -0- | |||||||||||||||||||
| Long-Term Liabilities, less current portion 8.375% senior subordinated notes due 2014 | Long-Term Liabilities, less current portion 8.375% senior subordinated notes due 2014 | 210,000 | 210,000 | ||||||||||||||||||
| 9.25% Senior Subordinated Notes due 2007 | -0- | 199,930 | Revolving credit | 128,300 | 120,600 | ||||||||||||||||
| Revolving credit | 120,600 | 101,000 | Other long-term debt | 6,705 | 4,776 | ||||||||||||||||
| Other long-term debt | 4,776 | 8,234 | Deferred tax liability | 3,176 | 1,074 | ||||||||||||||||
| Other postretirement benefits and other long-term liabilities | 27,570 | 26,671 | Other postretirement benefits and other long-term liabilities | 26,174 | 26,496 | ||||||||||||||||
| 362,946 | 335,835 | 374,355 | 362,946 | ||||||||||||||||||
| Shareholder’s Equity | Shareholder’s Equity | Shareholder’s Equity | |||||||||||||||||||
| Common stock, par value $1 a share | -0- | -0- | Common stock, par value $1 a share | -0- | -0- | ||||||||||||||||
| Additional paid-in capital | 64,844 | 64,844 | Additional paid-in capital | 64,844 | 64,844 | ||||||||||||||||
| Retained earnings | 11,314 | (3,219 | ) | Retained earnings | 42,887 | 11,314 | |||||||||||||||
| Accumulated other comprehensive loss | (1,676 | ) | (3,264 | ) | Accumulated other comprehensive loss | (2,102 | ) | (1,676 | ) | ||||||||||||
| 74,482 | 58,361 | 105,629 | 74,482 | ||||||||||||||||||
| $ | 611,847 | $ | 509,544 | $ | 667,854 | $ | 611,847 | ||||||||||||||
See notes to consolidated financial statements.
1927
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
| Year Ended December 31, | ||||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||
| Net sales | Net sales | $ | 808,718 | $ | 624,295 | $ | 634,455 | Net sales | $ | 932,900 | $ | 808,718 | $ | 624,295 | ||||||||||||||
| Cost of products sold | Cost of products sold | 682,658 | 527,586 | 546,857 | Cost of products sold | 796,283 | 682,658 | 527,586 | ||||||||||||||||||||
| Gross profit | 126,060 | 96,709 | 87,598 | Gross profit | 136,617 | 126,060 | 96,709 | |||||||||||||||||||||
| Selling, general and administrative expenses | Selling, general and administrative expenses | 76,714 | 62,369 | 57,418 | Selling, general and administrative expenses | 81,368 | 76,714 | 62,369 | ||||||||||||||||||||
| Restructuring and impairment charges | Restructuring and impairment charges | -0- | 18,808 | 13,601 | Restructuring and impairment charges | 943 | -0- | 18,808 | ||||||||||||||||||||
| Operating income | 49,346 | 15,532 | 16,579 | Operating income | 54,306 | 49,346 | 15,532 | |||||||||||||||||||||
| Interest expense | Interest expense | 31,413 | 26,151 | 27,623 | Interest expense | 27,056 | 31,413 | 26,151 | ||||||||||||||||||||
| Income (loss) before income taxes and cumulative effect of accounting change | 17,933 | (10,619 | ) | (11,044 | ) | Income (loss) before income taxes | 27,250 | 17,933 | (10,619 | ) | ||||||||||||||||||
| Income taxes | 3,400 | 904 | 897 | |||||||||||||||||||||||||
| Income (loss) before cumulative effect of accounting change | 14,533 | (11,523 | ) | (11,941 | ) | |||||||||||||||||||||||
| Cumulative effect of accounting change | -0- | -0- | (48,799 | ) | ||||||||||||||||||||||||
| Income taxes (benefit) | Income taxes (benefit) | (4,323 | ) | 3,400 | 904 | |||||||||||||||||||||||
| Net income (loss) | $ | 14,533 | $ | (11,523 | ) | $ | (60,740 | ) | Net income (loss) | $ | 31,573 | $ | 14,533 | $ | (11,523 | ) | ||||||||||||
See notes to consolidated financial statements.
2028
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholder’s Equity
| Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||
| Additional | Other | Other | ||||||||||||||||||||||||||||||||||||||||
| Common | Paid-In | Retained | Comprehensive | Additional | Comprehensive | |||||||||||||||||||||||||||||||||||||
| Stock | Capital | Earnings | Income (Loss) | Total | Common | Paid-In | Retained | Income | ||||||||||||||||||||||||||||||||||
| Stock | Capital | Earnings | (Loss) | Total | ||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2002 | $ | -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 | ||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2003 | Balance at January 1, 2003 | $ | -0- | $ | 64,844 | $ | 8,304 | $ | (8,096 | ) | $ | 65,052 | ||||||||||||||||||||||||||||||
| Comprehensive (loss): | Comprehensive (loss): | Comprehensive (loss): | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | (11,523 | ) | (11,523 | ) | Net Loss | (11,523 | ) | (11,523 | ) | |||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 3,632 | 3,632 | Foreign currency translation adjustment | 3,632 | 3,632 | |||||||||||||||||||||||||||||||||||||
| Minimum pension liability | 1,200 | 1,200 | Minimum pension liability | 1,200 | 1,200 | |||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) | (6,691 | ) | Comprehensive (loss) | (6,691 | ) | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2003 | Balance at December 31, 2003 | -0- | 64,844 | (3,219 | ) | (3,264 | ) | 58,361 | Balance at December 31, 2003 | -0- | 64,844 | (3,219 | ) | (3,264 | ) | 58,361 | ||||||||||||||||||||||||||
| Comprehensive income (loss): | Comprehensive income (loss): | Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||
| Net income | 14,533 | 14,533 | Net income | 14,533 | 14,533 | |||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 2,071 | 2,071 | Foreign currency translation adjustment | 2,071 | 2,071 | |||||||||||||||||||||||||||||||||||||
| Minimum pension liability | (483 | ) | (483 | ) | Minimum pension liability | (483 | ) | (483 | ) | |||||||||||||||||||||||||||||||||
| Comprehensive income | 16,121 | Comprehensive income | 16,121 | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2004 | Balance at December 31, 2004 | $ | -0- | $ | 64,844 | $ | 11,314 | $ | (1,676 | ) | $ | 74,482 | Balance at December 31, 2004 | -0- | 64,844 | 11,314 | (1,676 | ) | 74,482 | |||||||||||||||||||||||
| Comprehensive income (loss): | 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 | Balance at December 31, 2005 | $ | -0- | $ | 64,844 | $ | 42,887 | $ | (2,102 | ) | $ | 105,629 | ||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
2129
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| Year Ended December 31, | ||||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||
| OPERATING ACTIVITIES | OPERATING ACTIVITIES | OPERATING ACTIVITIES | ||||||||||||||||||||||||||
| Net income (loss) | Net income (loss) | $ | 14,533 | $ | (11,523 | ) | $ | (60,740 | ) | Net income (loss) | $ | 31,573 | $ | 14,533 | $ | (11,523 | ) | |||||||||||
| Adjustments to reconcile net loss to net cash provided by operations: | ||||||||||||||||||||||||||||
| Cumulative effect of accounting change | -0- | -0- | 48,799 | |||||||||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operations: | Adjustments to reconcile net income (loss) to net cash provided by operations: | |||||||||||||||||||||||||||
| Depreciation and amortization | 15,385 | 15,479 | 16,265 | Depreciation and amortization | 17,261 | 15,385 | 15,479 | |||||||||||||||||||||
| Restructuring and impairment charges | -0- | 18,641 | 10,399 | Restructuring and impairment charges | 1,776 | -0- | 18,641 | |||||||||||||||||||||
| Deferred income taxes | -0- | -0- | 1,951 | Deferred income taxes | (6,525 | ) | 1,074 | -0- | ||||||||||||||||||||
| Changes in operating assets and liabilities excluding acquisitions of businesses: | Changes in operating assets and liabilities excluding acquisitions of businesses: | Changes in operating assets and liabilities excluding acquisitions of businesses: | ||||||||||||||||||||||||||
| Accounts receivable | (35,606 | ) | 539 | 4,652 | Accounts receivable | 5,507 | (35,606 | ) | 539 | |||||||||||||||||||
| Inventories | (26,541 | ) | 6,991 | 4,682 | Inventories | (1,699 | ) | (26,541 | ) | 6,991 | ||||||||||||||||||
| Accounts payable and accrued expenses | 39,400 | (12,160 | ) | 15,856 | Accounts payable and accrued expenses | (934 | ) | 39,400 | (12,160 | ) | ||||||||||||||||||
| Other | (6,257 | ) | (6,149 | ) | (12,770 | ) | Other | (12,464 | ) | (7,331 | ) | (6,149 | ) | |||||||||||||||
| Net cash provided by operating activities | 914 | 11,818 | 29,094 | Net cash provided by operating activities | 34,495 | 914 | 11,818 | |||||||||||||||||||||
| INVESTING ACTIVITIES | INVESTING ACTIVITIES | INVESTING ACTIVITIES | ||||||||||||||||||||||||||
| Purchases of property, plant and equipment, net | Purchases of property, plant and equipment, net | (9,963 | ) | (10,869 | ) | (13,731 | ) | Purchases of property, plant and equipment, net | (20,295 | ) | (9,963 | ) | (10,869 | ) | ||||||||||||||
| Costs of acquisitions, net of cash acquired | Costs of acquisitions, net of cash acquired | (9,997 | ) | -0- | (5,748 | ) | Costs of acquisitions, net of cash acquired | (12,181 | ) | (9,997 | ) | -0- | ||||||||||||||||
| Proceeds from the sale of business units | -0- | 7,340 | 2,486 | |||||||||||||||||||||||||
| Proceeds from the sale of business units or assets held for sale | Proceeds from the sale of business units or assets held for sale | 1,100 | -0- | 7,340 | ||||||||||||||||||||||||
| Net cash used by investing activities | (19,960 | ) | (3,529 | ) | (16,993 | ) | Net cash used by investing activities | (31,376 | ) | (19,960 | ) | (3,529 | ) | |||||||||||||||
| FINANCING ACTIVITIES | FINANCING ACTIVITIES | FINANCING ACTIVITIES | ||||||||||||||||||||||||||
| Proceeds from bank arrangements, net | Proceeds from bank arrangements, net | 18,013 | 112,000 | 6,749 | Proceeds from bank arrangements, net | 8,342 | 18,013 | 112,000 | ||||||||||||||||||||
| Payments on long-term debt | Payments on long-term debt | (199,930 | ) | (126,898 | ) | (12,394 | ) | Payments on long-term debt | -0- | (199,930 | ) | (126,898 | ) | |||||||||||||||
| Issuance of 8.375% Senior Subordinated Notes, net of deferred financing costs | 205,179 | -0- | -0- | |||||||||||||||||||||||||
| Issuance of 8.375% senior subordinated notes, net of deferred financing costs | Issuance of 8.375% senior subordinated notes, net of deferred financing costs | -0- | 205,179 | -0- | ||||||||||||||||||||||||
| Net cash provided (used) by financing activities | 23,262 | (14,898 | ) | (5,645 | ) | Net cash provided (used) by financing activities | 8,342 | 23,262 | (14,898 | ) | ||||||||||||||||||
| Increase (decrease) in cash and cash equivalents | 4,216 | (6,609 | ) | 6,456 | Increase (decrease) in cash and cash equivalents | 11,461 | 4,216 | (6,609 | ) | |||||||||||||||||||
| Cash and cash equivalents at beginning of year | 2,191 | 8,800 | 2,344 | Cash and cash equivalents at beginning of year | 6,407 | 2,191 | 8,800 | |||||||||||||||||||||
| Cash and cash equivalents at end of year | $ | 6,407 | $ | 2,191 | $ | 8,800 | Cash and cash equivalents at end of year | $ | 17,868 | $ | 6,407 | $ | 2,191 | |||||||||||||||
| Income taxes paid (refunded) | Income taxes paid (refunded) | $ | 3,370 | $ | (1,038 | ) | $ | (4,817 | ) | Income taxes paid (refunded) | $ | 881 | $ | 3,370 | $ | (1,038 | ) | |||||||||||
| Interest paid | Interest paid | 28,891 | 25,213 | 25,880 | Interest paid | 24,173 | 28,891 | 25,213 | ||||||||||||||||||||
See notes to consolidated financial statements.
2230
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 2003 and 20022003
(Dollars in thousands)
NOTE A — Summary of Significant Accounting Policies
Consolidation: The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.
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 $18,500$19,166 and $18,817$18,604 at December 31, 2005 and 2004, and 2003, respectively.
| Major Classes of Inventories |
| December 31, | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| 2004 | 2003 | |||||||||||||||
| In-process and finished goods | $ | 151,759 | $ | 121,154 | ||||||||||||
| Finished goods | $ | 128,465 | $ | 121,832 | ||||||||||||
| Work in process | 32,547 | 27,959 | ||||||||||||||
| Raw materials and supplies | 25,535 | 27,921 | 29,541 | 27,503 | ||||||||||||
| $ | 177,294 | $ | 149,075 | $ | 190,553 | $ | 177,294 | |||||||||
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 25-60 years for buildings, and3-16 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 (See Note N)M).
Goodwill: As discussed in Note C,B, the Company adopted Statement of Financial Accounting Standards No. 142 (“FAS 142”), “Goodwill and Other Intangible Assets,” as of January 1, 2002. Under FAS 142, goodwill is no longer amortized but is subject to impairment testing at least annually on October 1. Prior to 2002, goodwill was amortized primarily over 40 years using the straight-line method.
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 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 thelong-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
31
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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 rates. In determining these amounts, management determined the probability of realizing deferred tax
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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 Statement of Financial Accounting Standards 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 7%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, 2004,2005, the Company had uncollateralized receivables with six customers in the automotive and heavy-duty truck industries, each with several locations, aggregating $44,522,$42,579, which represented approximately 31%28% of the Company’s trade accounts receivable. During 2004,2005, sales to these customers amounted to approximately $240,787,$255,114, which represented approximately 30%27% 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.
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 that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company records a liability when environmental assessments and/or remedial efforts are probable and can be reasonably estimated. The estimated liability of the Company is not discounted or reduced for possible recoveries from insurance carriers.
32
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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’shareholder’s equity.
Impact of Other Recently Issued Accounting Pronouncements: In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which clarifies the application 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 equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for entities identified as VIEs, 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
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company’s existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company adopted FAS 150 on June 1, 2003. The adoption of this statement had no effect on the Company’s financial position, results of operations or cash flows.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) was enacted in the United States. The Medicare Act, among other things, expanded existing Medicare healthcare benefits to include an outpatient prescription drug benefit to Medicare eligible residents of the U.S. (“Part D”) beginning in 2006. Prescription drug coverage will be available to eligible individuals who voluntarily enroll under a Part D plan. As an alternative, employers may provide drug coverage at least “actuarially equivalent to standard coverage” and receive a tax-free federal subsidy equal to 28% of a portion of a Medicare beneficiary’s drug costs. However, if covered retirees enroll in a Part D plan, the employer would not receive the subsidy.
The FASB has issued Staff Position (“FSP”) FAS No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” to provide guidance on accounting for effects of this healthcare benefit legislation. The FSP treats the effect of the employer subsidy on the accumulated postretirement benefit obligation (“APBO”) as an actuarial gain. The effect of the subsidy would also be reflected in the estimate of service cost in measuring the cost of benefits attributable to current service. The effects of plan amendments adopted subsequent to the adoption of the Medicare Act to qualify plans as actuarially equivalent would be treated as actuarial gains if the net effect of the amendments reduces the APBO. The net effect on the APBO of any plan amendments that (a) reduce benefits under the plan and thus disqualify the benefits as actuarially equivalent and (b) eliminate the subsidy would be accounted for as prior service cost.
The Company has completed its assessment of the provisions of the Medicare Act on its postretirement healthcare plans. The effect of the Medicare Act is a reduction to the APBO of $2,350. The effect of the Medicare Act reduced the net periodic postretirement benefit cost by $310 in 2004.
In the fourth quarter of 2004, the FASB issued Statement of Financial Accounting Standards No. 151, “Inventory Costs” (“FAS 151”), an amendment of Accounting Research Bulletin No. 43, Chapter 4. The amendments made by FAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) are to be recognized as current-period charges and will require the allocation of fixed production overheads to inventory based on the normal capacity
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company expects the adoption of FAS 151 to have little impact on its consolidated financial position, results of operations, or cash flows.
The American Jobs Creation Act of 2004 (the “Jobs Act”) was signed into law in October 2004. The Jobs Act provides, among other things, for a tax deduction on qualified domestic production activities and introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. The FASB issued FASB Staff Position 109-1 to provide guidance on the application of FAS 109, and FASB Staff Position 109-2 to provide accounting and disclosure guidance for the repatriation provision. The Company is reviewing the implication of the Jobs Act, recently released treasury guidance, and the FASB staff positions and does not expect the Jobs Act will have a material impact on the Company’s financial position, results of operations or cash flows.
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
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 $4,400, increase deferred tax liabilities ($1,700), and increase shareholders’ equity $2,700. 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
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
goodwill impairment which aggregated $48,799.
In accordance with the provisions of FAS 142, the chargeCompany has been accounted for as a cumulative effect of a change in accounting principle, effective January 1, 2002. The Company also completed theits annual goodwill impairment tests as of October 1, 2005, 2004 2003 and 2002,2003, and has determined that no additional impairment of goodwill existed as of those dates.
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, 20032005 and December 31, 2004.2004 by reporting segment.
| Impairment Charge | ||||||||||||||||||||
| Reporting | recorded effective | Goodwill at | Goodwill at | Goodwill at | Goodwill at | |||||||||||||||
| Segment | January 1, 2002 | December 31, 2003 | December 31, 2004 | December 31, 2005 | December 31, 2004 | |||||||||||||||
| ILS | $ | 32,239 | $ | 65,763 | $ | 66,050 | $ | 66,188 | $ | 66,050 | ||||||||||
| Aluminum Products | 9,700 | 16,515 | 16,515 | 16,515 | 16,515 | |||||||||||||||
| Manufactured Products | 6,860 | -0- | -0- | |||||||||||||||||
| $ | 48,799 | $ | 82,278 | $ | 82,565 | $ | 82,703 | $ | 82,565 | |||||||||||
The increase in the goodwill in the ILS segment during 2003 and 20042005 results from foreign currency fluctuations.
NOTE DC — Acquisitions
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 in Regulation S-X. The results of operations for Lectrotherm have been included since December 23, 2005. The preliminary allocation of the purchase price has been performed 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 | (2,640 | ) | |||
| Inventories | (954 | ) | |||
| Prepaid expenses | (97 | ) | |||
| Equipment | (871 | ) | |||
| Other assets | (545 | ) | |||
| Liabilities | |||||
| Accrued expenses | 409 | ||||
| Goodwill | $ | -0- | |||
On July 20, 2005, the Company completed the acquisition of the assets of Purchased Parts Group, Inc. (“PPG”) for $7,000 in cash, $483 in a short-term note payable and the assumption of approximately $13,255 of trade liabilities. The acquisition was funded with borrowings under the Company’s revolving
33
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
credit facility. The purchase price and the results of operations of PPG prior to its date of acquisition were not deemed significant as defined in Regulation S-X. The results of operations for PPG have been included since July 20, 2005. The preliminary allocation of the purchase price is as follows:
| Cash acquisition price | $ | 7,000 | |||
| Assets | |||||
| Accounts receivable | (10,894 | ) | |||
| Inventories | (10,606 | ) | |||
| Prepaid expenses | (1,201 | ) | |||
| Equipment | (407 | ) | |||
| Liabilities | |||||
| Accounts payable | 13,255 | ||||
| Accrued expenses | 2,370 | ||||
| Note payable | 483 | ||||
| Goodwill | $ | -0- | |||
The Company has a plan for integration activities. In accordance with FASB EITF Issue No. 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 | ||||||
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 in Regulation S-X. The results of operations for Amcast Components Group have been included in the Company’s results since August 23, 2004.
The tentativefinal allocation of the purchase price has been performed based on the assignment of fair values to assets acquired and liabilities assumed. Final fair values will be based primarily on appraisals from an independent appraisal firm.
34
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The tentative allocation of the purchase price is as follows:
| Cash acquisition price | Cash acquisition price | $ | 10,000 | Cash acquisition price | $ | 10,000 | ||||
| Assets | Assets | Assets | ||||||||
| Accounts receivable | (8,931 | ) | Accounts receivable | (8,948 | ) | |||||
| Inventories | (1,677 | ) | Inventories | (2,044 | ) | |||||
| Property and equipment | (16,964 | ) | Property and equipment | (15,499 | ) | |||||
| Other | (115 | ) | Other | (115 | ) | |||||
| Liabilities | Liabilities | Liabilities | ||||||||
| Accounts payable | 4,041 | Accounts payable | 4,041 | |||||||
| Compensation accruals | 5,504 | Compensation accruals | 3,825 | |||||||
| Other accruals | 8,142 | Other accruals | 8,740 | |||||||
| Goodwill | Goodwill | $ | -0- | Goodwill | $ | -0- | ||||
The Company has a plan for integration activities and plant rationalization. In accordance with FASB EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combina-
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
tion”, 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 | Severance | Exit | Relocation | Total | |||||||||||||||||||||||||
| Balance at June 30, 2004 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | ||||||||||||||||
| Add: Accruals | 1,916 | 100 | 265 | 2,281 | 1,916 | 100 | 265 | 2,281 | ||||||||||||||||||||||||
| Less: Payments | 295 | -0- | 2 | 297 | 295 | -0- | 2 | 297 | ||||||||||||||||||||||||
| Balance at December 31, 2004 | $ | 1,621 | $ | 100 | $ | 263 | $ | 1,984 | 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 in Regulation S-X. The results of operations for Jamco have been included in the Company’s results since April 1, 2004.
35
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE ED — Other Assets
Other assets consists of the following:
| December 31, | December 31, | |||||||||||||||||
| 2004 | 2003 | 2005 | 2004 | |||||||||||||||
| Pension assets | Pension assets | $ | 41,295 | $ | 36,186 | Pension assets | $ | 47,164 | $ | 41,295 | ||||||||
| Idle assets | Idle assets | 6,040 | 6,516 | Idle assets | 5,161 | 6,040 | ||||||||||||
| Deferred financing costs | Deferred financing costs | 7,846 | 5,774 | Deferred financing costs | 7,048 | 7,846 | ||||||||||||
| Tooling | Tooling | 3,570 | 4,222 | Tooling | 3,327 | 3,570 | ||||||||||||
| Software development costs | Software development costs | 3,390 | 3,947 | Software development costs | 2,485 | 3,390 | ||||||||||||
| Other | Other | 6,394 | 4,665 | Other | 5,432 | 6,394 | ||||||||||||
| Totals | $ | 68,535 | $ | 61,310 | Totals | $ | 70,617 | $ | 68,535 | |||||||||
NOTE FE — Accrued Expenses
Accrued expenses include the following:
| December 31, | December 31, | |||||||||||||||||
| 2004 | 2003 | 2005 | 2004 | |||||||||||||||
| Accrued salaries, wages and benefits | Accrued salaries, wages and benefits | $ | 14,098 | $ | 9,484 | Accrued salaries, wages and benefits | $ | 16,435 | $ | 14,098 | ||||||||
| Advance billings | Advance billings | 10,059 | 8,496 | Advance billings | 21,969 | 10,059 | ||||||||||||
| Warranty, project and installation accruals | Warranty, project and installation accruals | 5,660 | 6,762 | Warranty, project and installation accruals | 4,391 | 5,660 | ||||||||||||
| Severance and exit costs | Severance and exit costs | 2,175 | 2,535 | Severance and exit costs | 1,451 | 2,175 | ||||||||||||
| Interest payable | Interest payable | 2,022 | 2,055 | Interest payable | 2,900 | 2,022 | ||||||||||||
| State and local taxes | State and local taxes | 4,553 | 3,809 | State and local taxes | 4,866 | 4,553 | ||||||||||||
| Sundry | Sundry | 21,178 | 13,243 | Sundry | 16,301 | 21,178 | ||||||||||||
| Totals | $ | 59,745 | $ | 46,384 | Totals | $ | 68,313 | $ | 59,745 | |||||||||
Substantially all advance billings and warranty, project and installation accruals relate to the Company’s capital equipment businesses.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The changes in the aggregate product warranty liability are as follows for the year ended December 31, 20042005 and 2003:2004:
| �� | ||||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2004 | 2003 | 2005 | 2004 | |||||||||||||
| Balance at beginning of year | $ | 5,614 | $ | 6,506 | $ | 4,281 | $ | 5,614 | ||||||||
| Claims paid during the year | (4,708 | ) | (2,399 | ) | (3,297 | ) | (4,708 | ) | ||||||||
| Additional warranties issued during year | 2,874 | 1,139 | 2,593 | 2,874 | ||||||||||||
| Acquired warranty liabilities | 501 | -0- | -0- | 501 | ||||||||||||
| Other | -0- | 368 | (11 | ) | -0- | |||||||||||
| Balance at end of year | $ | 4,281 | $ | 5,614 | $ | 3,566 | $ | 4,281 | ||||||||
The acquired warranty liability during 2004 reflects the warranty liability of Jamco, which was acquired in April 2004.
36
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE GF — Financing Arrangements
Long-term debt consists of the following:
| December 31, | ||||||||||||||||||
| December 31, | ||||||||||||||||||
| 2005 | 2004 | |||||||||||||||||
| 2004 | 2003 | |||||||||||||||||
| 8.375% Senior Subordinated Notes due 2014 | $ | 210,000 | $ | -0- | ||||||||||||||
| 9.25% Senior Subordinated Notes due 2007 | -0- | 199,930 | ||||||||||||||||
| 8.375% senior subordinated notes due 2014 | 8.375% senior subordinated notes due 2014 | $ | 210,000 | $ | 210,000 | |||||||||||||
| Revolving credit maturing on December 31, 2010 | Revolving credit maturing on December 31, 2010 | 120,600 | 101,000 | Revolving credit maturing on December 31, 2010 | 128,300 | 120,600 | ||||||||||||
| Industrial Development Revenue Bonds maturing in 2012 at interest rates from 2.00% to 4.15% | 4,041 | 4,478 | ||||||||||||||||
| Industrial development revenue bonds maturing in 2012 at interest rates from 2.00% to 4.15% | Industrial development revenue bonds maturing in 2012 at interest rates from 2.00% to 4.15% | 3,586 | 4,041 | |||||||||||||||
| Other | Other | 3,666 | 4,817 | Other | 4,763 | 3,666 | ||||||||||||
| 338,307 | 310,225 | 346,649 | 338,307 | |||||||||||||||
| Less current maturities | Less current maturities | 2,931 | 1,061 | Less current maturities | 1,644 | 2,931 | ||||||||||||
| Total | $ | 335,376 | $ | 309,164 | Total | $ | 345,005 | $ | 335,376 | |||||||||
Maturities of long-term debt during each of the five years following December 31, 20042005 are approximately $2,931 in 2005, $821$1,644 in 2006, $836$2,019 in 2007, $674$827 in 2008, $646 in 2009 and $689$130,471 in 2009.
2010.
In November 2004, the Company issued $210,000 of 8.375% Senior Subordinated Notessenior 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 Notessenior 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 Notessenior 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 $200,000. During 2004, the Credit Agreement was amended to extend the maturity to December 31, 2010 and increase the credit line from $165,000 at December 31, 2003 to $200,000 at December 31, 2004.$200,000. The amended credit agreement 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
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
negotiated percentages of eligible accounts receivable, inventory and fixed assets. At December 31, 2004,2005, the Company had approximately $53,941$48,335 of unused borrowing capacity available under the Credit Agreement. Interest is payable quarterly at either the bank’s prime lending rate (5.25%(7.25% at December 31, 2004)2005) or, at the Company’s election, at LIBOR plus .75%-2.25% to 2.25%. 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 $20,000 in standby letters of credit and commercial letters of credit may be issued under the Credit Agreement. As of December 31, 2004,2005, in addition to amounts borrowed under the Credit Agreement, there was $9,133$12,519 outstanding primarily for standby letters of credit. AAn 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.
At December 31, 2005, the Company also had an operating lease line of credit available of approximately $9,300.
A foreign subsidiary of the Company had outstanding standby letters of credit of $1,485$5,156 at December 31, 20042005 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 domestic subsidiaries of the
37
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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, 2004,2005, the Company was in compliance with all financial covenants of the Credit Agreement.
The weighted average interest rate on all debt was 6.84%7.35% at December 31, 2004.
2005.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, borrowings under the credit agreementCredit Agreement and the senior subordinated notes8.375% Notes approximate fair value at December 31, 20042005 and 2003.
2004.
NOTE HG — Income Taxes
Income taxes consisted of the following:
| Year Ended December 31, | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| Current payable (refundable): | |||||||||||||
| Federal | $ | (426 | ) | $ | -0- | $ | (2,210 | ) | |||||
| State | 23 | 16 | 387 | ||||||||||
| Foreign | 3,245 | 888 | 769 | ||||||||||
| 2,842 | 904 | (1,054 | ) | ||||||||||
| Deferred: | |||||||||||||
| Federal | -0- | -0- | 1,951 | ||||||||||
| State | -0- | -0- | -0- | ||||||||||
| Foreign | 558 | -0- | -0- | ||||||||||
| 558 | -0- | 1,951 | |||||||||||
| Income taxes | $ | 3,400 | $ | 904 | $ | 897 | |||||||
| Year Ended December 31, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
| Current payable (benefit): | |||||||||||||
| Federal | $ | 165 | $ | (426 | ) | $ | -0- | ||||||
| State | 198 | 23 | 16 | ||||||||||
| Foreign | 2,260 | 3,245 | 888 | ||||||||||
| 2,623 | 2,842 | 904 | |||||||||||
| Deferred: | |||||||||||||
| Federal | (7,300 | ) | -0- | -0- | |||||||||
| State | -0- | -0- | -0- | ||||||||||
| Foreign | 354 | 558 | -0- | ||||||||||
| (6,946 | ) | 558 | -0- | ||||||||||
| Income taxes (benefit) | $ | (4,323 | ) | $ | 3,400 | $ | 904 | ||||||
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The reasons for the difference between income tax expense and the amount computed by applying the statutory Federalfederal income tax rate to income before income taxes are as follows:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||||
| Computed statutory amount | $ | 5,984 | $ | (3,712 | ) | $ | (3,895 | ) | $ | 9,189 | $ | 5,984 | $ | (3,712 | ) | |||||||||
| Effect of state income taxes | 16 | 11 | 411 | 65 | 16 | 11 | ||||||||||||||||||
| Foreign rate differences | 661 | 815 | 599 | (151 | ) | 661 | 815 | |||||||||||||||||
| Medicare subsidy | (795 | ) | -0- | -0- | ||||||||||||||||||||
| Valuation allowance | (3,042 | ) | 3,695 | 3,475 | (12,093 | ) | (3,042 | ) | 3,695 | |||||||||||||||
| Other, net | (219 | ) | 95 | 307 | (538 | ) | (219 | ) | 95 | |||||||||||||||
| Income taxes (benefit) | $ | 3,400 | $ | 904 | $ | 897 | $ | (4,323 | ) | $ | 3,400 | $ | 904 | |||||||||||
38
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, | December 31, | |||||||||||||||||||
| 2004 | 2003 | 2005 | 2004 | |||||||||||||||||
| Deferred tax assets: | Deferred tax assets: | Deferred tax assets: | ||||||||||||||||||
| Postretirement benefit obligation | $ | 7,933 | $ | 7,600 | Postretirement benefit obligation | $ | 7,542 | $ | 7,933 | |||||||||||
| Inventory | 11,277 | 8,400 | Inventory | 10,433 | 11,277 | |||||||||||||||
| Net operating loss and tax credit carryforwards | 20,384 | 14,300 | Net operating loss and tax credit carryforwards | 18,996 | 20,384 | |||||||||||||||
| Other—net | 11,867 | 15,200 | Other — net | 12,246 | 11,867 | |||||||||||||||
| Total deferred tax assets | 51,461 | 45,500 | Total deferred tax assets | 49,217 | 51,461 | |||||||||||||||
| Deferred tax liabilities: | Deferred tax liabilities: | Deferred tax liabilities: | ||||||||||||||||||
| Tax over book depreciation | 15,492 | 13,900 | Tax over book depreciation | 15,578 | 15,492 | |||||||||||||||
| Pension | 16,725 | 11,400 | Pension | 18,926 | 16,725 | |||||||||||||||
| Deductible goodwill | 1,087 | -0- | Deductible goodwill | 2,251 | 1,087 | |||||||||||||||
| Total deferred tax liabilities | 33,304 | 25,300 | Total deferred tax liabilities | 36,755 | 33,304 | |||||||||||||||
| 18,157 | 20,200 | 12,462 | 18,157 | |||||||||||||||||
| Valuation reserves | Valuation reserves | (19,231 | ) | (20,200 | ) | Valuation reserves | (7,011 | ) | (19,231 | ) | ||||||||||
| Net deferred tax liability | $ | (1,074 | ) | $ | -0- | |||||||||||||||
| Net deferred tax asset (liability) | Net deferred tax asset (liability) | $ | 5,451 | $ | (1,074 | ) | ||||||||||||||
At December 31, 2004,2005, the Company hashad net operating loss carryforwards for federal income tax purposes of approximately $47,700,$40,960, which will expire between 2021 and 2024. In accordance with
The ultimate realization of deferred tax assets is dependent upon the provisionsgeneration of FAS 109 “Accounting for Income Taxes”,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 benefits related to these carryforwards have been fully reservedassets would be realized. Therefore, as of December 31, 2004, because the Company ishad a full valuation allowance against its U.S. 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.
position and after consideration of the relevant positive and negative evidence, the Company determined a full valuation allowance was no longer appropriate. Accordingly, the Company reversed a portion of its valuation allowance and recognized $7,300 of tax benefit related to its U.S. net deferred tax asset as it has been determined the realization of this amount is more likely than not.
At December 31, 20042005, the Company hashad research and developmentaldevelopment credit carryforwards of approximately $1,691$1,985, which will expire between 2010 and 2023.2024. The Company also has anhad foreign tax credit carryforwards of $711 which expire in 2015 and alternative minimum tax credit carryforward incarryforwards of $1,141 which have no expiration date.
Deferred taxes have not been provided on undistributed earnings of the amount of approximately $1,020 whichCompany’s foreign subsidiaries as it is the Company’s policy to permanently reinvest such earnings. The Company has an indefinite carryforward life.
determined that it is not practical to determine the deferred tax liability on such undistributed earnings.
NOTE IH — 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
3139
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
threatened litigation willis not expected to have a material adverse effect on the Company’s financial condition, liquidity and results of operations.
NOTE JI — 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, 20042005 and 2003:2004:
| Postretirement | Postretirement | |||||||||||||||||||||||||||||||
| Pension | Benefits | Pension | Benefits | |||||||||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||
Change in benefit obligation | ||||||||||||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 53,075 | $ | 52,481 | $ | 27,366 | $ | 24,869 | $ | 55,303 | $ | 53,075 | $ | 24,680 | $ | 27,366 | ||||||||||||||||
| Service cost | 291 | 545 | 136 | 147 | 364 | 291 | 145 | 136 | ||||||||||||||||||||||||
| Curtailment and settlement | -0- | (208 | ) | -0- | -0- | (1,023 | ) | -0- | -0- | -0- | ||||||||||||||||||||||
| Interest cost | 3,320 | 3,498 | 1,532 | 1,701 | 3,194 | 3,320 | 1,281 | 1,532 | ||||||||||||||||||||||||
| Amendments | 566 | -0- | -0- | -0- | -0- | 566 | -0- | -0- | ||||||||||||||||||||||||
| Actuarial losses (gains) | 2,799 | 1,800 | (637 | ) | 3,758 | 2,101 | 2,799 | 200 | (637 | ) | ||||||||||||||||||||||
| Benefits and expenses paid, net of contributions | (4,748 | ) | (5,041 | ) | (3,717 | ) | (3,109 | ) | (5,205 | ) | (4,748 | ) | (3,463 | ) | (3,717 | ) | ||||||||||||||||
| Benefit obligation at end of year | $ | 55,303 | $ | 53,075 | $ | 24,680 | $ | 27,366 | $ | 54,734 | $ | 55,303 | $ | 22,843 | $ | 24,680 | ||||||||||||||||
Change in plan assets | ||||||||||||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 97,603 | $ | 85,401 | $ | -0- | $ | -0- | $ | 103,948 | $ | 97,603 | $ | -0- | $ | -0- | ||||||||||||||||
| Actual return on plan assets | 11,093 | 17,243 | -0- | -0- | 3,919 | 11,093 | -0- | -0- | ||||||||||||||||||||||||
| Company contributions | -0- | -0- | 3,717 | 3,109 | -0- | -0- | 3,463 | 3,717 | ||||||||||||||||||||||||
| Curtailments and settlement | (1,023 | ) | -0- | -0- | -0- | |||||||||||||||||||||||||||
| Benefits and expenses paid, net of contributions | (4,748 | ) | (5,041 | ) | (3,717 | ) | (3,109 | ) | (5,205 | ) | (4,748 | ) | (3,463 | ) | (3,717 | ) | ||||||||||||||||
| Fair value of plan assets at end of year | $ | 103,948 | $ | 97,603 | $ | -0- | $ | -0- | $ | 101,639 | $ | 103,948 | $ | -0- | $ | -0- | ||||||||||||||||
| Funded (underfunded) status of the plan | $ | 48,645 | $ | 44,528 | $ | (24,680 | ) | $ | (27,366 | ) | $ | 46,905 | $ | 48,645 | $ | (22,843 | ) | $ | (24,680 | ) | ||||||||||||
| Unrecognized net transition obligation | (439 | ) | (487 | ) | -0- | -0- | (386 | ) | (439 | ) | -0- | -0- | ||||||||||||||||||||
| Unrecognized net actuarial (gain) loss | (6,929 | ) | (7,235 | ) | 4,639 | 5,375 | (13 | ) | (6,929 | ) | 4,734 | 4,639 | ||||||||||||||||||||
| Unrecognized prior service cost (benefit) | 1,210 | 773 | (247 | ) | (327 | ) | 922 | 1,210 | (178 | ) | (247 | ) | ||||||||||||||||||||
| Net amount recognized at year end | $ | 42,487 | $ | 37,579 | $ | (20,288 | ) | $ | (22,318 | ) | $ | 47,428 | $ | 42,487 | $ | (18,287 | ) | $ | (20,288 | ) | ||||||||||||
Amounts recognized in the consolidated balance sheets consists of:
| 2004 | 2003 | 2005 | 2004 | |||||||||||||||
| Prepaid pension cost | Prepaid pension cost | $ | 41,295 | $ | 36,186 | Prepaid pension cost | $ | 47,164 | $ | 41,295 | ||||||||
| Accrued pension cost | Accrued pension cost | (4,211 | ) | (2,962 | ) | Accrued pension cost | (5,491 | ) | (4,211 | ) | ||||||||
| Intangible asset | Intangible asset | 565 | -0- | Intangible asset | 397 | 565 | ||||||||||||
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | 4,838 | 4,355 | Accumulated other comprehensive loss | 5,358 | 4,838 | ||||||||||||
| Net amount recognized at the end of year | $ | 42,487 | $ | 37,579 | Net amount recognized at the end of the year | $ | 47,428 | $ | 42,487 | |||||||||
3240
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The pension plan weighted-average asset allocation at year endedDecember 31, 2005 and 2004 and 2003 and target allocation for 20042006 are as follows:
| Plan Assets | Plan Assets | |||||||||||||||||||||||
| Target 2005 | 2004 | 2003 | Target 2006 | 2005 | 2004 | |||||||||||||||||||
Asset Category | ||||||||||||||||||||||||
| Equity securities | 60-70 | % | 66.7 | % | 64.8 | % | 60-70 | % | 71.1 | % | 66.7 | % | ||||||||||||
| Debt securities | 20-30 | 20.5 | 26.0 | 20-30 | 19.7 | 20.5 | ||||||||||||||||||
| Other | 7-15 | 12.8 | 9.2 | 7-15 | 9.2 | 12.8 | ||||||||||||||||||
| 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||
The Company recorded a minimum pension liability of $5,358 at December 31, 2005 and $4,838 at December 31, 2004, and $4,355 at December 31, 2003, 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 $17,458$17,476 at December 31, 20042005 ($16,33617,458 at December 31, 2003)2004), exceed the fair value of the underlying pension assets of $13,247$11,985 at December 31, 20042005 ($13,37413,247 at December 31, 2003)2004). Amounts were as follows:
| For the Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2004 | 2003 | 2005 | 2004 | |||||||||||||
| Projected benefit obligation | $ | 17,458 | $ | 16,336 | $ | 17,476 | $ | 17,458 | ||||||||
| Accumulated benefit obligation | $ | 17,458 | $ | 16,336 | $ | 17,476 | $ | 17,458 | ||||||||
| Fair value of plan assets | $ | 13,247 | $ | 13,374 | $ | 11,985 | $ | 13,247 | ||||||||
The following tables summarize the assumptions used by the consulting actuary and the related cost information.
| Weighted-Average assumptions as of | ||||||||||||||||||||||||||||||||||||||||||||||||
| Postretirement | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| Pension | Benefits | |||||||||||||||||||||||||||||||||||||||||||||||
| Postretirement | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | Pension | Benefits | |||||||||||||||||||||||||||||||||||||||||
Weighted-Average assumptions as of December 31 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||||||||||||||||||||||||||
| Discount rate | 6.00 | % | 6.50 | % | 7.00 | % | 6.00 | % | 6.50 | % | 7.00 | % | 5.50 | % | 6.00 | % | 6.50 | % | 5.50 | % | 6.00 | % | 6.50 | % | ||||||||||||||||||||||||
| Expected return on plan assets | 8.75 | % | 8.75 | % | 8.75 | % | N/A | N/A | N/A | 8.75 | % | 8.75 | % | 8.75 | % | N/A | N/A | N/A | ||||||||||||||||||||||||||||||
| Rate of compensation increase | N/A | 2.00 | % | 2.00 | % | N/A | N/A | N/A | N/A | N/A | 2.00 | % | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
In determining its expected return on plan assets assumption for the year ended December 31, 2004,2005, 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, 20042005 of 8.75%8.50%. 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.
3341
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
For measurement purposes, a 10% percent9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2004.2005. The rate was assumed to decrease gradually to 5% for 2009 and remain at that level thereafter.
| Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||||||||||||||||||||||||||
| Service costs | $ | 291 | $ | 545 | $ | 399 | $ | 136 | $ | 147 | $ | 204 | $ | 364 | $ | 291 | $ | 545 | $ | 145 | $ | 136 | $ | 147 | ||||||||||||||||||||||||
| Interest costs | 3,320 | 3,498 | 3,556 | 1,532 | 1,701 | 1,712 | 3,194 | 3,320 | 3,498 | 1,281 | 1,532 | 1,701 | ||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | (8,313 | ) | (7,229 | ) | (8,394 | ) | -0- | -0- | -0- | (8,804 | ) | (8,313 | ) | (7,229 | ) | -0- | -0- | -0- | ||||||||||||||||||||||||||||||
| Transition obligation | (49 | ) | (49 | ) | (49 | ) | -0- | -0- | -0- | (49 | ) | (49 | ) | (49 | ) | -0- | -0- | -0- | ||||||||||||||||||||||||||||||
| Amortization of prior service cost | 129 | 257 | 319 | (80 | ) | (80 | ) | (79 | ) | 163 | 129 | 257 | (69 | ) | (80 | ) | (80 | ) | ||||||||||||||||||||||||||||||
| Recognized net actuarial (gain) loss | (286 | ) | 361 | (1,055 | ) | 99 | 43 | 11 | (224 | ) | (286 | ) | 361 | 106 | 99 | 43 | ||||||||||||||||||||||||||||||||
| Benefit (income) costs | $ | (4,908 | ) | $ | (2,617 | ) | $ | (5,224 | ) | $ | 1,687 | $ | 1,811 | $ | 1,848 | $ | (5,356 | ) | $ | (4,908 | ) | $ | (2,617 | ) | $ | 1,463 | $ | 1,687 | $ | 1,811 | ||||||||||||||||||
Below is a table summarizing the Company’s expected future benefit payments and the expected payments due to the Medicare subsidy over the next ten years:
| Pension | Other | Payments due to | Pension | Other | Payments due to | |||||||||||||||||||
| Benefits | Benefits | Medicare Subsidy | Benefits | Benefits | Medicare Subsidy | |||||||||||||||||||
| 2005 | $ | 4,512 | $ | 2,881 | $ | -0- | ||||||||||||||||||
| 2006 | 4,386 | 2,568 | 288 | $ | 4,534 | $ | 2,517 | $ | 231 | |||||||||||||||
| 2007 | 4,303 | 2,482 | 290 | 4,374 | 2,465 | 237 | ||||||||||||||||||
| 2008 | 4,254 | 2,413 | 285 | 4,300 | 2,450 | 270 | ||||||||||||||||||
| 2009 | 4,285 | 2,319 | 278 | 4,290 | 2,364 | 242 | ||||||||||||||||||
| 2010 to 2014 | 20,567 | 9,875 | 1,199 | |||||||||||||||||||||
| 2010 | 4,240 | 2,304 | 241 | |||||||||||||||||||||
| 2011 to 2015 | 20,087 | 9,881 | 1,080 | |||||||||||||||||||||
The Company recorded $167 of non-cash pension curtailment charges in 2003 and $2,700 in 2002 related to the disposal or closure of threea manufacturing facilities.facility. 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 2004 | $ | 129 | $ | 110 | ||||
| Effect on post retirement benefit obligation as of December 31, 2004 | $ | 1,797 | $ | 1,558 | ||||
| 1-Percentage | 1-Percentage | |||||||
| Point | Point | |||||||
| Increase | Decrease | |||||||
| Effect on total of service and interest cost components in 2005 | $ | 127 | $ | (107 | ) | |||
| Effect on post retirement benefit obligation as of December 31, 2005 | $ | 1,886 | $ | (1,601 | ) | |||
The total contribution charged to pension expense for the Company’s defined contribution plans was $1,753 in 2005, $1,446 in 2004 and $1,331 in 2003 and $1,273 in 2002.2003. The Company expects to have no contributions of $1,212 to its defined benefit plans in 2005.2006.
3442
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE KJ — Leases
Rental expense for 2005, 2004 and 2003 was $13,494, $10,588 and 2002 was $10,588, $10,263, and $10,749, respectively. Future minimum lease commitments during each of the five years following December 31, 20042005 and thereafter are as follows: $9,820 in 2005, $7,632$10,637 in 2006, $5,030$7,662 in 2007, $3,993$5,389 in 2008, $3,094$4,279 in 2009, $2,724 in 2010 and $3,858$2,286 thereafter.
NOTE LK — 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 manufacturing 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.
Corporate assets generally consist of cash and cash equivalents, deferred tax assets, property and equipment, and other assets.
| Year Ended December 31, | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| Net sales: | |||||||||||||
| ILS | $ | 453,223 | $ | 377,645 | $ | 398,141 | |||||||
| Aluminum products | 135,402 | 90,080 | 106,148 | ||||||||||
| Manufactured products | 220,093 | 156,570 | 130,166 | ||||||||||
| $ | 808,718 | $ | 624,295 | $ | 634,455 | ||||||||
| Income (loss) before income taxes and change in accounting principle: | |||||||||||||
| ILS | $ | 29,191 | $ | 24,893 | $ | 17,467 | |||||||
| Aluminum products | 9,021 | 10,201 | 4,739 | ||||||||||
| Manufactured products | 18,890 | (13,759 | ) | (1,342 | ) | ||||||||
| 57,102 | 21,335 | 20,864 | |||||||||||
| Corporate costs | (7,756 | ) | (5,803 | ) | (4,285 | ) | |||||||
| Interest expense | (31,413 | ) | (26,151 | ) | (27,623 | ) | |||||||
| $ | 17,933 | $ | (10,619 | ) | $ | (11,044 | ) | ||||||
3543
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||||||
| Net sales: | Net sales: | |||||||||||||||||||||||||
| ILS | $ | 532,624 | $ | 453,223 | $ | 377,645 | ||||||||||||||||||||
| Aluminum Products | 159,053 | 135,402 | 90,080 | |||||||||||||||||||||||
| Manufactured Products | 241,223 | 220,093 | 156,570 | |||||||||||||||||||||||
| $ | 932,900 | $ | 808,718 | $ | 624,295 | |||||||||||||||||||||
| Income (loss) before income taxes: | Income (loss) before income taxes: | |||||||||||||||||||||||||
| ILS | $ | 34,814 | $ | 29,191 | $ | 24,893 | ||||||||||||||||||||
| Aluminum Products | 9,103 | 9,021 | 10,201 | |||||||||||||||||||||||
| Manufactured Products | 20,630 | 18,890 | (13,759 | ) | ||||||||||||||||||||||
| 64,547 | 57,102 | 21,335 | ||||||||||||||||||||||||
| Corporate costs | (10,241 | ) | (7,756 | ) | (5,803 | ) | ||||||||||||||||||||
| Year Ended December 31, | Interest expense | (27,056 | ) | (31,413 | ) | (26,151 | ) | |||||||||||||||||||
| 2004 | 2003 | 2002 | $ | 27,250 | $ | 17,933 | $ | (10,619 | ) | |||||||||||||||||
| Identifiable assets: | Identifiable assets: | Identifiable assets: | ||||||||||||||||||||||||
| ILS | $ | 297,002 | $ | 267,361 | $ | 273,442 | ILS | $ | 323,176 | $ | 297,002 | $ | 267,361 | |||||||||||||
| Aluminum products | 105,535 | 88,031 | 79,797 | Aluminum Products | 104,618 | 105,535 | 88,031 | |||||||||||||||||||
| Manufactured products | 163,230 | 121,331 | 151,880 | Manufactured Products | 169,004 | 163,230 | 121,331 | |||||||||||||||||||
| General corporate | 46,080 | 32,821 | 37,824 | General corporate | 71,056 | 46,080 | 32,821 | |||||||||||||||||||
| $ | 611,847 | $ | 509,544 | $ | 542,943 | $ | 667,854 | $ | 611,847 | $ | 509,544 | |||||||||||||||
| Depreciation and amortization expense: | Depreciation and amortization expense: | Depreciation and amortization expense: | ||||||||||||||||||||||||
| ILS | $ | 4,608 | $ | 4,868 | $ | 5,206 | ILS | $ | 4,575 | $ | 4,608 | $ | 4,868 | |||||||||||||
| Aluminum products | 5,858 | 5,342 | 6,432 | Aluminum Products | 7,484 | 5,858 | 5,342 | |||||||||||||||||||
| Manufactured products | 4,728 | 5,050 | 4,307 | Manufactured Products | 4,986 | 4,728 | 5,050 | |||||||||||||||||||
| General corporate | 191 | 219 | 320 | General corporate | 216 | 191 | 219 | |||||||||||||||||||
| $ | 15,385 | $ | 15,479 | $ | 16,265 | $ | 17,261 | $ | 15,385 | $ | 15,479 | |||||||||||||||
| Capital expenditures: | Capital expenditures: | Capital expenditures: | ||||||||||||||||||||||||
| ILS | $ | 3,691 | $ | 3,017 | $ | 1,603 | ILS | $ | 2,070 | $ | 3,691 | $ | 3,017 | |||||||||||||
| Aluminum products | 5,497 | 1,878 | 5,927 | Aluminum Products | 10,473 | 5,497 | 1,878 | |||||||||||||||||||
| Manufactured products | 720 | 5,867 | 6,201 | Manufactured Products | 7,266 | 720 | 5,867 | |||||||||||||||||||
| General corporate | 55 | 107 | -0- | General corporate | 486 | 55 | 107 | |||||||||||||||||||
| $ | 9,963 | $ | 10,869 | $ | 13,731 | $ | 20,295 | $ | 9,963 | $ | 10,869 | |||||||||||||||
The Company had sales of $107,853 in 2005, $95,610 in 2004 and $68,238 in 2003 to International Truck, which represented approximately 12%, 12% and 11% of consolidated net sales for each respective year. For 2002, sales to no single customer were greater than 10% of consolidated net sales.
44
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The Company’s approximate percentage of net sales by geographic region were as follows:
| Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||||
| United States | 74 | % | 83 | % | 80 | % | 79 | % | 74 | % | 83 | % | ||||||||||||
| Canada | 9 | % | 8 | % | 13 | % | 7 | % | 9 | % | 8 | % | ||||||||||||
| Other | 17 | % | 9 | % | 7 | % | 14 | % | 17 | % | 9 | % | ||||||||||||
| 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||
At December 31, 2004,2005, approximately 86% of the Company’s assets arewere maintained in the United States.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE ML — Accumulated Comprehensive Loss
The components of accumulated comprehensive loss at December 31, 20042005 and 20032004 are as follows:
| December 31, | December 31, | |||||||||||||||||
| 2004 | 2003 | 2005 | 2004 | |||||||||||||||
| Foreign currency translation adjustment | Foreign currency translation adjustment | $ | (3,162 | ) | $ | (1,091 | ) | Foreign currency translation adjustment | $ | (3,256 | ) | $ | (3,162 | ) | ||||
| Minimum pension liability | Minimum pension liability | 4,838 | 4,355 | Minimum pension liability | 5,358 | 4,838 | ||||||||||||
| Total | $ | 1,676 | $ | 3,264 | Total | $ | 2,102 | $ | 1,676 | |||||||||
NOTE NM — Restructuring and Unusual Charges
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
Since 2001, the Company has responded to the economic downturn by reducing costs in a variety 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, 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 facilities 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 & 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. The charges were composed of $11,280 for the impairment of property and equipment and other long-term assets; $10,299 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. 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, 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 impair-
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
ment 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 | ||||||||||||||||
| 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. 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 were composed of $990 for exit costs; $638 of cost of goods sold primarily to write down inventory 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 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 | |||||||||||
During the fourth quarter of 2005, the Company recorded additional restructuring and asset impairment charges associated with executing restructuring actions in the Aluminum Products and Manufactured Products segments initiated in prior years. The charges were composed of $833 of inventory impairment included in Cost of Products Sold, $391 of asset impairment, $152 of multi-employer
45
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
pension plan withdrawal costs and $400 of restructuring charges related to the closure of two Manufactured Products manufacturing facilities. Below is a summary of these charges by segment.
| 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 | |||||||||||
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 | |||||||
| Balance at January 1, 2003 | $ | 4,045 | ||||||
| Severance and exit charges recorded in 2003 | 990 | 990 | ||||||
| Cash payments made in 2003 | (2,500 | ) | (2,500 | ) | ||||
| Balance at December 31, 2004 | 2,535 | |||||||
| Balance at December 31, 2003 | 2,535 | |||||||
| Severance and exit charges recorded in 2004 | -0- | -0- | ||||||
| Cash payments made in 2004 | (2,073 | ) | (2,073 | ) | ||||
| Balance at December 31, 2004 | $ | 462 | 462 | |||||
| Exit charges recorded in 2005 | 400 | |||||||
| Cash payments made in 2005 | (266 | ) | ||||||
| Balance at December 31, 2005 | $ | 596 | ||||||
As of December 31, 2004,2005, all of the 525 employees identified in 2001 and all of the 490 employees identified in 2002 had been terminated. The workforce reductions under the restructuring plan consisted of hourly and salaried employees at various operating facilities due to either closure or consolidation.
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
As of December 31, 2004,2005, the Company had an accrued liability of $462$596 for future estimated employee severance and plant closing payments.
Idle fixed assets of $6,040$5,161 were included in other assets as of December 31, 2004.2005. These consisted primarily of property, plant and equipment of two idled aluminum casting plants, for which the Company 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, 2004,2005, the Company’s balance sheet reflected assets held for sale at their estimated current value of $3,027$1,992 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 $ -0-$-0- in 2005, $-0- in 2004, and $1,139 in 2003, and $19,159 in 2002.2003. Operating income (loss), excluding restructuring and unusual charges for these entities were $ -0-$-0- in 2005, $-0- in 2004, and $(32) in 2003, and $(334) in 2002.
2003.
NOTE ON — 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 the second quarter of 2004, the Company entered into forward contracts for the purpose of hedging exposure to changes in the value of accounts receivable in Euroseuros against the US dollar, for a notional amount of $5,075, of which $500 was outstanding at December 31, 2004. These transactions are considered cash flow hedges and, therefore, the fair market value at December 31, 2004 of a $75 loss has
46
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
been recognized in other comprehensive income (loss). Because there is no ineffectiveness on the cash flow hedges, all changes in fair value of these derivatives are recorded in equity and not included in the current period’s income statement. The $75 of loss on the fair value of the hedges is classified in current accrued liabilities. The Company recognized $169 of foreign currency losses upon settlement of the forward contracts.
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 by Rule 3-10(h)(1) of Regulation S-X.
The following supplemental consolidating condensed financial statements present consolidating condensed balance sheets as of December 31, 2005 and 2004, consolidating condensed statements of income for the years ended December 31, 2005 and 2004, consolidating condensed statement of operations for the year ended December 31, 2003, consolidating condensed statements of cash flows for the years ended December 31, 2005, 2004 and 2003 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.
3947
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 | 101,175 | 12,520 | -0- | 116,231 | |||||||||||||||||
| 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 | $ | 900,017 | $ | 92,717 | $ | (1,002,333 | ) | $ | 667,854 | |||||||||||
| LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||||
| Trade accounts payable | $ | 3,348 | $ | 87,666 | $ | 9,778 | $ | 14,604 | $ | 115,396 | ||||||||||||
| Accrued expenses | 1,643 | 46,847 | 14,763 | 5,060 | 68,313 | |||||||||||||||||
| Current portion of long-term liabilities | -0- | 11,054 | 590 | (7,483 | ) | 4,161 | ||||||||||||||||
| Total Current Liabilities | 4,991 | 145,567 | 25,131 | 12,181 | 187,870 | |||||||||||||||||
| 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 | $ | 900,017 | $ | 92,717 | $ | (1,002,333 | ) | $ | 667,854 | |||||||||||
48
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2004
| Combined | Combined | |||||||||||||||||||||
| Guarantor | Non-Guarantor | Reclassifications/ | ||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||
| Cash and cash equivalents | $ | (14,387 | ) | $ | 199 | $ | 6,851 | $ | 13,744 | $ | 6,407 | |||||||||||
| Accounts receivable, net | 114 | 117,097 | 30,208 | (1,944 | ) | 145,475 | ||||||||||||||||
| Inventories | (81 | ) | 151,187 | 26,188 | -0- | 177,294 | ||||||||||||||||
| Other current assets | 499 | 12,215 | 1,799 | 6,142 | 20,655 | |||||||||||||||||
| Total Current Assets | (13,855 | ) | 280,698 | 65,046 | 17,942 | 349,831 | ||||||||||||||||
| Investment in subsidiaries | 341,088 | -0- | -0- | (341,088 | ) | -0- | ||||||||||||||||
| Inter-company advances | 251,357 | 224,918 | 5,145 | (481,420 | ) | -0- | ||||||||||||||||
| Property, Plant and Equipment, net | 2,266 | 95,494 | 12,121 | -0- | 109,881 | |||||||||||||||||
| Other Assets: | ||||||||||||||||||||||
| Goodwill | -0- | 78,424 | 4,141 | -0- | 82,565 | |||||||||||||||||
| Net assets held for sale | -0- | 1,035 | -0- | -0- | 1,035 | |||||||||||||||||
| Other | 43,908 | 37,316 | 1,490 | (14,179 | ) | 68,535 | ||||||||||||||||
| Total Other Assets | 43,908 | 116,775 | 5,631 | (14,179 | ) | 152,135 | ||||||||||||||||
| Total Assets | $ | 624,764 | $ | 717,885 | $ | 87,943 | $ | (818,745 | ) | $ | 611,847 | |||||||||||
| LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||||
| Trade accounts payable | $ | 4,347 | $ | 87,291 | $ | 16,130 | $ | 1,094 | $ | 108,862 | ||||||||||||
| Accrued expenses | 6,291 | 44,529 | 8,925 | -0- | 59,745 | |||||||||||||||||
| Current portion of long-term liabilities | -0- | 587 | 2,344 | 2,881 | 5,812 | |||||||||||||||||
| Total Current Liabilities | 10,638 | 132,407 | 27,399 | 3,975 | 174,419 | |||||||||||||||||
| 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 | 120,600 | -0- | -0- | -0- | 120,600 | |||||||||||||||||
| Other long-term debt | -0- | 35,037 | 707 | (30,968 | ) | 4,776 | ||||||||||||||||
| Deferred tax liability | 1,074 | -0- | -0- | -0- | 1,074 | |||||||||||||||||
| Other postretirement benefits and other long-term liabilities | 4,241 | 21,875 | 3,261 | (2,881 | ) | 26,496 | ||||||||||||||||
| Total Long-Term Liabilities | 335,915 | 56,912 | 3,968 | (33,849 | ) | 362,946 | ||||||||||||||||
| Inter-company advances | 206,503 | 242,202 | 17,425 | (466,130 | ) | -0- | ||||||||||||||||
| Shareholder’s Equity | 71,708 | 286,364 | 39,151 | (322,741 | ) | 74,482 | ||||||||||||||||
| Total Liabilities and Shareholder’s Equity | $ | 624,764 | $ | 717,885 | $ | 87,943 | $ | (818,745 | ) | $ | 611,847 | |||||||||||
49
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 | ||||||||||
50
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2003
| Combined | Combined | ||||||||||||||||||||
| Guarantor | Non-Guarantor | ||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||
| (In thousands) | |||||||||||||||||||||
| Net sales | $ | -0- | $ | 546,002 | $ | 84,298 | $ | (6,005 | ) | $ | 624,295 | ||||||||||
| Cost of sales | -0- | 463,984 | 69,607 | (6,005 | ) | 527,586 | |||||||||||||||
| Gross profit | -0- | 82,018 | 14,691 | -0- | 96,709 | ||||||||||||||||
| Operating Expenses: | |||||||||||||||||||||
| Selling, general and administrative expenses | 2,094 | 48,682 | 11,593 | -0- | 62,369 | ||||||||||||||||
| Restructuring and impairment charges | -0- | 18,553 | 255 | -0- | 18,808 | ||||||||||||||||
| Operating Income | (2,094 | ) | 14,783 | 2,843 | -0- | 15,532 | |||||||||||||||
| Interest expense | 1,239 | 23,781 | 1,131 | -0- | 26,151 | ||||||||||||||||
| Income before income taxes | (3,333 | ) | (8,998 | ) | 1,712 | -0- | (10,619 | ) | |||||||||||||
| Income taxes | 16 | -0- | 888 | -0- | 904 | ||||||||||||||||
| Net income | $ | (3,349 | ) | $ | (8,998 | ) | $ | 824 | $ | -0- | $ | (11,523 | ) | ||||||||
51
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 | |||||||||||
52
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 | ||||||||||
53
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, 2003
| Combined | Combined | ||||||||||||||||||||
| Guarantor | Non-Guarantor | ||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||
| (In thousands) | |||||||||||||||||||||
| Net cash provided (used) by operations | $ | 7,459 | $ | 737 | $ | 3,622 | $ | -0- | $ | 11,818 | |||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||
| Purchases of property, plant and equipment, net | (50 | ) | (8,398 | ) | (2,421 | ) | -0- | (10,869 | ) | ||||||||||||
| Acquisitions, net of cash acquired | -0- | -0- | -0- | -0- | -0- | ||||||||||||||||
| Proceeds from sale of assets held for sale | -0- | 7,340 | -0- | -0- | 7,340 | ||||||||||||||||
| Net cash provided (used) in investing activities | (50 | ) | (1,058 | ) | (2,421 | ) | -0- | (3,529 | ) | ||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||
| Proceeds from bank arrangements | 112,000 | -0- | -0- | -0- | 112,000 | ||||||||||||||||
| Repayment of old revolving credit agreement | (112,000 | ) | -0- | -0- | -0- | (112,000 | ) | ||||||||||||||
| Principal payments on revolving credit and long-term debt | (13,000 | ) | (796 | ) | (1,102 | ) | -0- | (14,898 | ) | ||||||||||||
| Net cash provided (used ) by financing activities | (13,000 | ) | (796 | ) | (1,102 | ) | -0- | (14,898 | ) | ||||||||||||
| Increase (decrease) in cash and cash equivalents | (5,591 | ) | (1,117 | ) | 99 | -0- | (6,609 | ) | |||||||||||||
| Cash and cash equivalents at beginning of year | 4,199 | 1,998 | 2,603 | -0- | 8,800 | ||||||||||||||||
| Cash and cash equivalents at end of year | $ | (1,392 | ) | $ | 881 | $ | 2,702 | $ | -0- | $ | 2,191 | ||||||||||
54
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
There were no changes in noror disagreements with the Company’s independent auditors on accounting and financial disclosure matters within the two-year period ended December 31, 2004.2005.
55
| Item 9A. | Controls and Procedures |
Evaluation of disclosure controls and procedures
As of December 31, 2004,2005, management, including our Chief Executive Officer and 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 Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act 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 20042005 that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Assessmentassessment of the Effectivenesseffectiveness of the Company’s Internal Controlinternal control over Financial Reporting
financial reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 15d-15(f) under the Exchange Act. ManagementAs required by Rule 15d-15(f) 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, 2004.2005. 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, 20042005 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 1624 of this Annual Reportannual report on Form 10-K.
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, 2004.2005. This attestation report is included at page 1725 of this Form 10-K.10-K and is incorporated herein by reference.
During 2005, we invested approximately $12.2 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.
56
Item 9B. Other Information.
Information
None.
40
Part III
Part III
| Item 10. | Directors and Executive Officers of the Registrant |
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 |
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 for to
theaudit of the Company’sCompany and its parent’s annual financial statementsparent for the years ended December 31, 20042005 and 2003:2004:
the
| 2004 | 2003 | 2005 | 2004 | |||||||||||||
| Audit fees | $ | 1,264,000 | $ | 568,500 | $ | 1,007,000 | $ | 1,264,000 | ||||||||
| Audit-related fees | 58,000 | 48,000 | 60,000 | 58,000 | ||||||||||||
| Tax fees | 65,000 | 67,250 | 86,000 | 65,000 | ||||||||||||
Fees for audit services include fees associated with the annual audit, the reviews of the Company’s quarterly reports on Form 10-Q, statutory audits required internationally, services associated with the Company’s issuance of the 8.375% Senior Subordinated Notessenior subordinated notes due 2014 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 include fees in connection with tax compliance 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 description of Holdings’ pre-approval policies for audit and non-audit related services and auditor independence requiring the percentageapproval by Holdings’ audit committee of audit-related, taxall professional services rendered by the Company’s and all otherits parent’s independent auditor prior to the commencement of the specified services.
100% of the services thatdescribed in “Audit Fees,” “Audit-Related Fees” and “Tax Fees” were not pre-approved by Holdings’ audit committee pursuant to the de minimis exception, seein accordance with Holdings’ proxy statement for the 2005 annual meeting of Holdings’ shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of Holdings’ fiscal year.formal policy on auditor independence.
4157
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 on Form 10-K:
| Page | ||||
| Management’s Annual Report on Internal Control Over Financial Reporting | ||||
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | ||||
| Report of Independent Registered Public Accounting Firm | ||||
| Consolidated Balance Sheets — December 31, | ||||
| Consolidated Statements of Operations — Years Ended December 31, 2005, 2004 | ||||
| Consolidated Statements of Shareholder’s Equity — Years Ended December 31, 2005, 2004 | ||||
| Consolidated Statements of Cash Flows — Years Ended December 31, 2005, 2004 | ||||
| Notes to Consolidated Financial Statements | ||||
(2) Financial Statement Schedules
| All schedules for which provision is made in the applicable accounting regulations of the |
(3) Exhibits:
| The exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such exhibits and are incorporated herein by reference. | |
| No annual report or proxy statement covering the Company’s last fiscal year has been or will be circulated to security holders. |
4258
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, Vice President | |
| and Chief Financial Officer |
Date: March 21, 2005
27, 2006
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 15, 2006 | ||
| * Richard P. Elliott | Vice President | March 15, 2006 | ||
| * Matthew V. Crawford | President, Chief Operating Officer and Director | March 15, 2006 | ||
| * Patrick V. Auletta | Director | March 15, 2006 | ||
| * Kevin R. Greene | Director | March 15, 2006 | ||
| * Lewis E. Hatch, Jr. | Director | March | ||
| * Dan T. Moore | Director | March 15, 2006 | ||
| * Lawrence O. Selhorst | Director | March 15, 2006 | ||
| * Ronna Romney | Director | March 15, 2006 | ||
| * James W. Wert | Director | March 15, 2006 | ||
| * | The undersigned, pursuant to a Power of Attorney executed by each of the |
March 21, 200527, 2006
| By: | /s/ |
| Robert D. Vilsack, |
4359
ANNUAL REPORT ON FORM 10-K
PARK-OHIO INDUSTRIES, INC.
For the Year Ended December 31, 2004
2005
EXHIBIT INDEX
| Exhibit | ||||
| 3 | .1 | Amended and Restated Articles of Incorporation of Park-Ohio Industries, Inc. (filed as Exhibit 3.1 to the Form 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 Holdings Corp. (filed as Exhibit 3.2 to the Form 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 the Form 10-Q of Park-Ohio Holdings Corp. for the quarter ended September 30, 2003, SEC File No. 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 the Form 8-K of Park-Ohio Holdings Corp. on October 1, 2004, SEC File No. 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 the Form 8-K of Park-Ohio Holdings Corp. filed on January 5, 2005, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 4 | .4 | 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 the Form 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC File No. 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 the Form 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 1998, SEC File No. 333-43005 and incorporated by reference and made a part hereof) | ||
| 10 | .2 | Registration Rights Agreement, dated November 30, 2004, among Park-Ohio Industries, Inc., the Guarantors (as defined therein) and the initial purchasers that are party thereto (filed as Exhibit 10.1 to Form 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 12 | .1 | Computation of Ratio of Earnings to Fixed Charges | ||
| 21 | .1 | List of Subsidiaries of Park-Ohio Industries, Inc. | ||
| 24 | .1 | Power of Attorney | ||
| 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 | ||
| Exhibit | ||||
| 3 | .1 | Amended and Restated Articles of Incorporation of Park-Ohio Industries, Inc. (filed as Exhibit 3.1 to the Form 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 the Form 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 the Form 10-Q of Park-Ohio Holdings Corp. for the quarter ended September 30, 2003, SEC File No. 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 the Form 8-K of Park-Ohio Holdings Corp. on October 1, 2004, SEC File No. 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 the Form 8-K of Park-Ohio Holdings Corp. filed on January 5, 2005, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 4 | .4 | 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 the Form 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC File No. 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 the Form 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 File No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 10 | .3 | Registration Rights Agreement, dated November 30, 2004, among Park-Ohio Industries, Inc., the Guarantors (as defined therein) and the initial purchasers that are party thereto (filed as Exhibit 10.1 to Form 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 24 | .1 | Power of Attorney | ||
| 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 | ||
| * | Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 15(c) of this Report. |
44