UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| (Mark One) | |||||||||||
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 | ||||||||||
| For the fiscal year ended December 31, 2008 | |||||||||||
OR | |||||||||||
o
For the transition period from to | | ||||||||||
Commission file number 333-43005333-43005-01
PARK-OHIO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
| Ohio | 34-6520107 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 6065 Parkland Boulevard | ||
| Cleveland, Ohio | 44124 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (216) 692-7200(440) 947-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Pursuant to a corporate reorganization effective June 15, 1998, Park-Ohio Industries, Inc. became a wholly-owned subsidiary of Park-Ohio Holdings Corp. The registrant meets the conditions set forth in General Instructionsgeneral instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this form within reduced disclosure format.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No Noxþ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes þ No o Nox
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. xo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated fileroAccelerated fileroNon-accelerated filerx(Check one):
Large accelerated filero | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller Reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange ActRule 12b-2). Yes o No Noxþ
All of the outstanding stock of the registrant is held by Park-Ohio Holdings Corp. As of March 15, 2006,17, 2009, 100 shares of the registrant’s common stock, $1 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Part I
| Item 1. | Business |
Overview
Park-Ohio Industries Inc. (“Park-Ohio”), a wholly-owned subsidiary of Park-Ohio Holdings Corp. (“Holdings”), was incorporated as an Ohio corporation in 1984. Park-Ohio, primarily through its subsidiaries is an industrial supply chain logistics and diversified manufacturing business operating in three segments: Supply Technologies (formerly known as Integrated Logistics Solutions (“ILS”)), Aluminum Products and Manufactured Products.
References herein to “we” or “the Company” include, where applicable, Park-Ohio and its direct and indirect subsidiaries.
Supply Technologies provides our customers with integrated supply chain managementTotal Supply Managementtm services for a broad range of high-volume, specialty production components. Our Aluminum Products business manufactures cast and machined aluminum components, and our Manufactured Products business is a major manufacturer of highly-engineered industrial products. Our businesses serve large, industrial original equipment manufacturers (“OEMs”) in a variety of industrial sectors, including the automotive and vehicle parts, heavy-duty truck, industrial equipment, steel, rail, electrical distribution and controls, aerospace and defense, oil and gas, power sports/fitness equipment, HVAC, electrical components, appliance and semiconductor equipment industries. As of December 31, 2005,2008, we employed approximately 3,4003,500 persons.
The following table summarizes the key attributes of each of our business segments:
| Aluminum Products | Manufactured Products | |||||
NET SALES FOR 2008 | $ ( | $ ( | $ ( | |||
| SELECTED PRODUCTS | Sourcing, planning and procurement of over 175,000 production components, including: • Fasteners • Pins • Valves • Hoses • Wire harnesses • Clamps and fittings • Rubber and plastic components | • Control arms • Front engine covers • Cooling modules • Knuckles • Pump housings • Clutch retainers/pistons • Master cylinders • Pinion housings • Oil pans • Flywheel spacers | • Induction heating and melting systems • Pipe threading systems • Industrial oven systems • Injection molded rubber components • Forging presses | |||
| SELECTED INDUSTRIES SERVED | • Heavy-duty truck • Automotive and vehicle parts • Electrical distribution and controls • Power sports/fitness equipment • HVAC • Aerospace and defense • Electrical components • Appliance • Semiconductor equipment | • Automotive • Agricultural equipment • Construction equipment • Heavy-duty truck • Marine equipment | • • Coatings • Forging • Foundry • Heavy-duty truck • Construction equipment • • Automotive • Oil and gas • Rail and locomotive manufacturing • Aerospace and defense |
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Our ILSSupply Technologies business provides our customers with integrated supply chain managementTotal Supply Managementtm, a proactive solutions approach that manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation. Total Supply Managementtm includes such services for a broad range of high-volume, specialty production components. Our ILS customers receive various value-
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In October 2006, we acquired all of the capital stock of NABS, Inc. (“NABS”) for $21.2 million in cash. NABS is a premier international supply chain manager of production components, providing services to high technology companies in the computer, electronics, and consumer products industries. NABS has operations across Europe, Asia, Mexico and the United States. The historical financial data contained throughout this annual report onForm 10-K excludes the results of operations of NABS prior to October 18, 2006. See Note C to the consolidated financial statements included elsewhere herein.
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, operatingcomponents. At acquisition date, PPG operated 12 service centers in the United States, of which nine have since been consolidated into other Supply Technologies operations, and also serves customers in the United Kingdom and Mexico. This acquisition added significantly to our customer and supplier bases, and expanded our geographic presence. ILSSupply Technologies has eliminated substantial overhead costs from PPG and begunthrough the process of consolidating redundant service centers. The historical financial data contained throughout this annual report onForm 10-K exclude the results of operations of PPG other than for the period fromprior to July 20, 2005 through December 31, 2005. See Note C to the consolidated financial statements included elsewhere herein.
Products and Services. Total Supply chainManagementtm provides our customers with an expert partner in strategic planning, global sourcing, technical services, parts and materials, logistics, distribution and inventory 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.components. 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, ILSSupply Technologies delivers an increasingly broad range of higher-cost production components including valves, electro-mechanical hardware, fittings, steering components and many others. Applications-engineeringApplications 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, ILSSupply Technologies recently began providing spare parts and aftermarket products to end users of its customers’ products.
Total Supply chain managementManagementtm 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 ILSSupply Technologies clients exceeds twelve
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years. ILS’sSupply Technologies’ remaining sales are generated through the wholesale supply of industrial products to other manufacturers and distributors pursuant to master or authorized distributor relationships.
The Supply Technologies segment also engineers and manufactures precision cold formed and cold extruded products, including locknuts, SPAC® nuts and wheel hardware, which are principally used in applications where controlled tightening is required due to high vibration. ILSSupply Technologies produces both standard items and specialty products to customer specifications, which 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, 2005,2008, approximately 90%75% of ILS’sSupply Technologies’ net sales were to domestic customers. Remaining sales were primarily to manufacturing facilities of large, multinational customers located in Canada, Mexico, Europe and Europe.Asia. Total Supply chain managementManagementtm 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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Supply Technologies markets and sells its services to over 6,000 customers domestically and internationally. The principal markets served by ILSSupply Technologies are the heavy-duty truck, automotive and vehicle parts, electrical distribution and controls, consumer electronics, power sports/fitness equipment, HVAC, agricultural and construction equipment, semiconductor equipment, plumbing, aerospace and defense, electrical components,and appliance and semiconductor equipment industries. The five largest customers, within which ILSSupply Technologies sells through sole-source contracts to multiple operating divisions or locations, accounted for approximately 40%35% and 38%33% of the sales of ILSSupply Technologies for 20052008 and 2004,2007, respectively, with International TruckNavistar, Inc. (“Navistar”) representing 20%17% and 15%13%, respectively, of segment sales. Two of the five largest customers are in the heavy-duty truck industry. The lossCompany made a decision to exit its relationship with Navistar effective December 31, 2008, which, along with the general economic downturn, resulted in either the closure, downsizing or consolidation of eight facilities in the Company’s distribution network. The Company also evaluated its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, (“FAS 144”), to determine whether the carrying amount of its long-lived assets was recoverable by comparing the carrying amount to the sum of the International Truck account orundiscounted cash flows expected to result from the use and eventual disposition of the assets. If the carrying value of the assets exceeded the expected cash flows, the Company estimated the fair value of these assets to determine whether an impairment existed. The Company recorded restructuring and asset impairment charges of $13.4 million in 2008 and expects to record additional charges of $1.8 million in 2009 related to the Supply Technologies segment. See Note M to the consolidated financial statements included elsewhere herein. The loss of any two of theits remaining top five customers could have a material adverse effect on the results of operations and financial condition of this segment.
Competition. There is aA limited number of companies who compete with ILSSupply Technologies to provide supply management services for supply chain service contracts. ILSproduction parts and materials. Supply Technologies competes mainly with domestic competitorsin North America, Mexico, Europe and Asia, primarily on the basis of its value-addedTotal Supply Managementtm services, which include sourcing,including engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking,just-in-time and point-of-use delivery, capabilities,electronic billing services and ongoing technical support, and its geographic reach, extensive product selection, price and reputation for high service levels. Numerous North American and foreign companies compete with Supply Technologies in manufacturing cold-formed and cold-extruded products.
Aluminum Products
We believe that we are one of the few partaluminum component 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, die-cast sand-cast and lost-foam, as well as emerging alternative casting technologies. Our ability to offer our customers this comprehensive range of capabilities at a low cost
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provides us with a competitive advantage. We produce our aluminum components at fiveseven manufacturing facilities in Ohio and 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 marine equipment OEMs, primarily on a sole-source basis. Aluminum Products’ principal products include front engine covers, cooling modules, control arms, knuckles, pump housings, clutch retainers 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 the sales and production capacity of our Aluminum Products business and added attractive new customers, product lines and production technologies. 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, 2005.
Markets and Customers. The five largest customers, within which Aluminum Products sells to multiple operating divisions through sole-source contracts, accounted for approximately 53%64% of Aluminum Products sales for 20052008 and 58%55% for 2004.2007. 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.
During 2008, due to recent volume declines and volatility in the automotive markets, the Company evaluated its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”) and based on the results of its tests recorded asset impairment charges of $13.2 million related to the Aluminum Products segment. See Note M to the consolidated financial statements included elsewhere herein.
Competition. The aluminum castings industry is highly competitive.serving North America has become less competitive as a result of recent bankruptcies. 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 thereThere are a number of smallerfew domestic companies with aluminum casting capabilities able to meet, the customers’ stringent quality and service standards and lean manufacturing techniques enable only large suppliers with the requisite quality certifications to compete effectively.techniques. 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 nineten international facilities in Canada, Mexico, the United Kingdom, Belgium, Germany, Poland, China and Japan. In January 2006, the Company completed the acquisition of all of the capital stock of Foundry Service GmbH (“Foundry Service”). In December 2005, we acquired substantially all of the assets of Lectrotherm, Inc. (“Lectrotherm”), which is primarily a provider of field service and spare parts for 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,ferrous and non-ferrous metals, silicon, 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% to 40% of our induction heating and melting systems’ revenues isare derived from the sale of replacement parts and provision of field service, primarily for the
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installed base of our own products.
Markets and Customers. We sell induction heating and other capital equipment to component manufacturers and OEMs in the steel,ferrous and non-ferrous metals, silicon, coatings, forging, foundry, automotive, truck, construction equipment and oil and gas industries. We sell forged and machined products to locomotive manufacturers, machining companies and sub-assemblers who finish aerospace and defense products for OEMs, and railcar builders and maintenance providers. We sell rubber products primarily to sub-assemblers in the automotive, food processing and consumer appliance industries.
During 2008, due to recent volume declines and volatility in the automotive markets, the Company evaluated its long-lived assets in accordance with FAS 144 and, based on the results, of its tests recorded an asset impairment charge of $4.3 million related to the Manufactured Products segment. See Note M to the consolidated financial statements.
Competition. We compete with small-small to medium-sized domestic and international equipment manufacturers on the basis of service capability, ability to meet customer specifications, delivery performance and engineering expertise. We compete domestically and internationally with small-small to medium-sizedmedium- sized forging and machining businesses on the basis of product quality and precision. We compete with other domestic small- to medium-sized manufacturers of injection molded rubber and silicone products primarily on the basis of price and product quality.
Sales and Marketing
Supply Technologies markets its products and services in the United States, Mexico, Canada, Western and Eastern Europe and East and South Asia primarily through its direct sales force, which is assisted by applications engineers who provide the technical expertise necessary to assist the engineering staff of OEM customers in designing new products and improving existing products. Aluminum Products primarily markets and sells its products in North America through internal sales personnel.personnel and independent sales representatives. 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 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
Supply Technologies 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. ILSSupply Technologies has multiple sources of supply for its products. An increasing portion of ILS’sSupply Technologies’ delivered components are purchased from suppliers in foreign countries, primarily Canada, Taiwan, China, South Korea, Singapore, India and 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. 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. Most raw materials required by Aluminum Products and Manufactured Products are commodity products available from several domestic suppliers. Management believes that raw materials and component parts other than certain specialty products are available from alternative sources.
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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. The only customer which accounted for more than 10% of our consolidated sales in any of the past three years was International TruckNavistar in 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, 2008.2006.
Backlog
Management believes that backlog is not a meaningful measure for ILS,Supply Technologies, as a majority of ILS’sSupply Technologies’ customers requirejust-injust-in-time-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 “Note K—B — Industry Segments” of the notes to the consolidated financial statements included herein relating to (1) net sales, income (loss) before income taxes, identifiable assets and other information by industry segment and (2) net sales and assets by geographic region for the years ended December 31, 2005, 2004,2008, 2007 and 20032006 is incorporated herein by reference.
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Recent Developments
The information contained under the heading ofheadings “Note C—C — Acquisitions”, “Note D — FAS 142, Goodwill and Other Intangible Assets” and “Note M — Restructuring and Unusual Charges” of the notes to the consolidated financial statements included herein is incorporated herein by reference.
Available Information
We file annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K and other information, including amendments to these reports, with the Securities and Exchange Commission (“SEC”). The public can obtain copies of these materials by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, by calling the SEC at1-800-SEC-0330, or by accessing the SEC’s website athttp://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 athttp://www.pkoh.com. The information on our website is not a part of this annual report onForm 10-K.
| Item 1A. | Risk Factors |
The following are certain risk factors that could affect our business, results of operations and financial condition. These risks are not the only ones we face. If any of the following risks occur, our business, results of operations or financial condition could be adversely affected.
Adverse credit market conditions may significantly affect our access to capital, cost of capital and ability to meet liquidity needs.
Disruptions, uncertainty or volatility in the credit markets may adversely impact our ability to access credit already arranged and the availability and cost of credit to us in the future. These market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to grow and maintain our business. Accordingly, we may be forced to delay raising capital, issue shorter tenors than we prefer or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility. There can be no assurances that government response to the disruptions in the financial markets will stabilize the markets or increase liquidity and the availability of credit. Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures and reducing or eliminating future share repurchases or other discretionary uses of cash. Overall, our results of operations, financial condition and cash flows could be materially adversely affected by disruptions in the credit markets.
The current global financial crisis may have significant effects on our customers and suppliers that would result in material adverse effects on our business and operating results.
The current global financial crisis, which has included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and fluctuations in equity and currency values worldwide, and concerns that the worldwide economy may enter into a prolonged recessionary period, may materially adversely affect our customers’ access to capital or willingness to spend capital on our products or their ability to pay for products that they will order or have already ordered from us. In addition, the current global financial crisis may materially adversely affect our suppliers’ access to capital and liquidity with which to maintain their inventories, production levels and product quality, which could cause them to raise prices or lower production levels.
Also, availability under our revolving credit facility may be adversely impacted by credit quality and performance of our customer accounts receivable. The availability under the revolving credit facility is
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based on the amount of receivables that meet the eligibility criteria of the revolving credit facility. As receivable losses increase or credit quality deteriorates, the amount of eligible receivables declines and, in turn, lowers the availability under the facility.
These potential effects of the current global financial crisis are difficult to forecast and mitigate. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing effects could have a material adverse effect on our business, results of operations and financial condition.
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 existing downturn in the domestic automotive orand heavy-duty truck industry, couldwould have, and continue to 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%20% and 21%13% of our net sales during the year ended December 31, 20052008 from the automobile and heavy-duty truck industries, respectively. International Truck,Dramatically lower global automotive sales have resulted in lower demand for our products. Further economic decline that results in a reduction in automotive sales and production by our customers will have a material adverse effect on our business, results of operations and financial condition.
Navistar, our largest customer, accounted for approximately 12%8% of our net sales for the year ended December 31, 2005.2008. We made a decision to exit our relationship with Navistar effective December 31, 2008. 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 customerthese customers at current levels.
Our Supply Technologies customers are generally not contractually obligated to purchase products and services from us.
Most of the products and services are provided to our ILSSupply Technologies 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 ILSSupply Technologies 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.
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We are dependent on key customers.
We rely on several key customers. For the year ended December 31, 2005,2008, our top tenseven largest customers accounted for approximately 34%20% of our net sales and our toplargest customer, International Truck,Navistar, accounted for approximately 12%8% of our net sales. We made a decision to exit our relationship with Navistar effective December 31, 2008. 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 other 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 substantial customers filed voluntary petitions for reorganization under Chapter 11 of the bankruptcy code during 20042005 and 2005. These were Murray, Inc., a customer of ILS, in 2004 and2006. Delphi Corp. and Dana Corporation, which are primarily customers of our Manufactured Products and Aluminum Products segments, filed in 2005.2005, while Werner Ladder, which is primarily a customer of the Supply Technologies segment, filed in 2006. Collectively, these bankruptcies reduced our operating income in the aggregate by $2.3$1.8 million during 20042005 and 2005 with a further negative impact of approximately $.4 million on our operating income expected2006.
We operate in the first quarter of 2006.highly competitive industries.
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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 ILSSupply Technologies 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
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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 acquisitionacquisitions of theNABS in 2006 and PPG in 2005. We cannot assure you that we will be successful in consummating any acquisitions.
Any targeted acquisitions will be accompanied by the risks commonly encountered in acquisitions of businesses. We may not successfully overcome these risks or any other problems encountered in connection with any of our acquisitions, including the possible inability to integrate an acquired business’ 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 Supply Technologies business depends upon third parties for substantially all of our component parts.
Supply Technologies 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 ILSSupply Technologies 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.
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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 higherwidely fluctuating natural gas costs in 20042007 and in 2005.2008. We could continue tomay 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 that 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, 2005,2008, we were a party to eight collective bargaining agreements with various labor unions that covered approximately 575450 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; |
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| • | disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations including the U.S. Foreign Corrupt Practices Act (“FCPA”): | |
| • | difficulties in staffing and managing multinational operations; | |
| • | limitations on our ability to enforce legal rights and remedies; and | |
| • | potentially adverse tax consequences. |
In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments tonon-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal controls and procedures always will protect us from the reckless or criminal acts committed by our employees or agents. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
Any of thesethe events enumerated above 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.
Unexpected delays in the shipment of large, long-lead industrial equipment could adversely affect our results of operations in the period in which shipment was anticipated.
Long-lead industrial equipment contracts are a significant and growing part of our business. We primarily use the percentage of completion method to account for these contracts. Nevertheless, under this method, a large proportion of revenues and earnings on such contracts are recognized close to shipment of the equipment. Unanticipated shipment delays on large contracts could postpone recognition of revenue and earnings into future periods. Accordingly, if shipment was anticipated in the fourth quarter of a year, unanticipated shipment delays could adversely affect results of operations in that year.
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
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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 ILSSupply Technologies 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,Supply Technologies, 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, 2006,27, 2009, 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%28% of Holdings’ common stock. Mr. E. Crawford is Mr. M. Crawford’s father. Their interests could conflict with your interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of Messrs. E. Crawford and M. Crawford may conflict with your interests.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
As of December 31, 2005,2008, 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 88%89% of the available square footage was located in the United States.
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Approximately 49%45% of the available square footage was owned. In 2005,2008, approximately 36%32% of the available domestic square footage was used by the ILSSupply Technologies segment, 36%44% was used by the Manufactured Products segment and 28%24% was used by the Aluminum Products segment. Approximately 36%48% of the available foreign square footage was used by the ILSSupply Technologies segment and 64%52% 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.
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The following table provides information relative to our principal facilities as of December 31, 2005.2008.
| Related Industry | Owned or | Approximate | ||||||||||
| Segment | Location | Leased | Square Footage | Use | ||||||||
| ILS(1) | Cleveland, OH | Leased | 60,350 | (2) | ILS Corporate Office | |||||||
| Memphis, TN | Leased | 121,700 | Logistics | |||||||||
| Dayton, OH | Leased | 112,960 | Logistics | |||||||||
| Lawrence, PA | Leased | 116,000 | Logistics and Manufacturing | |||||||||
| St. Paul, MN | Leased | 104,425 | Logistics | |||||||||
| Allentown, PA | Leased | 62,200 | Logistics | |||||||||
| Atlanta, GA | Leased | 56,000 | Logistics | |||||||||
| Dallas, TX | Leased | 49,985 | Logistics | |||||||||
| Nashville, TN | Leased | 44,900 | Logistics | |||||||||
| Charlotte, NC | Leased | 24,000 | Logistics | |||||||||
| Kent, OH | Leased | 225,000 | Manufacturing | |||||||||
| Mississauga, | Leased | 117,000 | Manufacturing | |||||||||
| Ontario, Canada | ||||||||||||
| Solon, OH | Leased | 42,600 | Logistics | |||||||||
| Dublin, VA | Leased | 40,000 | Logistics | |||||||||
| Delaware, OH | Owned | 45,000 | Manufacturing | |||||||||
| ALUMINUM | Conneaut, OH(3) | Leased/Owned | 304,000 | Manufacturing | ||||||||
| PRODUCTS | Huntington, IN | Leased | 132,000 | Manufacturing | ||||||||
| Fremont, IN | Owned | 108,000 | Manufacturing | |||||||||
| Wapakoneta, OH | Owned | 188,000 | Manufacturing | |||||||||
| Richmond, IN | Leased/Owned | 97,300 | Manufacturing | |||||||||
| Cedarburg, WI | Leased | 157,000 | Manufacturing | |||||||||
| MANUFACTURED | Cuyahoga Hts., OH | Owned | 427,000 | Manufacturing | ||||||||
| PRODUCTS(4) | Le Roeulx, Belgium | Owned | 120,000 | Manufacturing | ||||||||
| Euclid, OH | Owned | 154,000 | Manufacturing | |||||||||
| Wickliffe, OH | Owned | 110,000 | Manufacturing | |||||||||
| Boaz, AL | Owned | 100,000 | Manufacturing | |||||||||
| Warren, OH | Owned | 195,000 | Manufacturing | |||||||||
| Canton, OH | Leased | 125,000 | Manufacturing | |||||||||
| Oxted, England | Owned | 135,000 | Manufacturing | |||||||||
| Newport, AR | Leased | 111,300 | Manufacturing | |||||||||
| Cicero, IL | Owned | 45,000 | Manufacturing | |||||||||
| Cleveland, OH | Leased | 150,000 | Manufacturing | |||||||||
| Shanghai, China | Leased | 20,500 | Manufacturing | |||||||||
| Related Industry | Owned or | Approximate | ||||||||
Segment | Location | Leased | Square Footage | Use | ||||||
| SUPPLY TECHNOLOGIES(1) | Cleveland, OH | Leased | 60,450 | (2) | Supply Technologies Corporate Office | |||||
| Dayton, OH | Leased | 112,960 | Logistics | |||||||
| Lawrence, PA | Leased | 116,000 | Logistics and Manufacturing | |||||||
| Minneapolis, MN | Leased | 87,100 | Logistics | |||||||
| Allentown, PA | Leased | 62,600 | Logistics | |||||||
| Atlanta, GA | Leased | 56,000 | Logistics | |||||||
| Dallas, TX | Leased | 50,000 | Logistics | |||||||
| Memphis, TN | Leased | 48,750 | Logistics | |||||||
| Louisville, KY | Leased | 30,000 | Logistics | |||||||
| Chicago, IL | Leased | 30,000 | Logistics | |||||||
| Nashville, TN | Leased | 44,900 | Logistics | |||||||
| Tulsa, OK | Leased | 40,000 | Logistics | |||||||
| Austin, TX | Leased | 30,000 | Logistics | |||||||
| Madison Hts., MI | Leased | 32,000 | Logistics | |||||||
| Kent, OH | Leased | 225,000 | Manufacturing | |||||||
| Mississauga, | ||||||||||
| Ontario, Canada | Leased | 117,000 | Manufacturing | |||||||
| Solon, OH | Leased | 54,000 | Logistics | |||||||
| Dublin, VA | Leased | 40,000 | Logistics | |||||||
| Delaware, OH | Owned | 45,000 | Manufacturing | |||||||
| ALUMINUM | Conneaut, OH(3) | Leased/Owned | 304,000 | Manufacturing | ||||||
| PRODUCTS | Huntington, IN | Leased | 125,000 | Manufacturing | ||||||
| Fremont, IN | Owned | 112,000 | Manufacturing | |||||||
| Wapakoneta, OH | Owned | 188,000 | Manufacturing | |||||||
| Rootstown, OH | Owned | 177,000 | Manufacturing | |||||||
| Ravenna, OH | Owned | 64,000 | Manufacturing | |||||||
| Richmond, IN | Leased/Owned | 97,300 | Manufacturing | |||||||
| MANUFACTURED | Cuyahoga Hts., OH | Owned | 427,000 | Manufacturing | ||||||
| PRODUCTS(4) | Cicero, IL | Leased | 450,000 | Manufacturing | ||||||
| Le Roeulx, Belgium | Owned | 120,000 | Manufacturing | |||||||
| Wickliffe, OH | Owned | 110,000 | Manufacturing | |||||||
| Boaz, AL | Owned | 100,000 | Manufacturing | |||||||
| Warren, OH | Leased | 195,000 | Manufacturing | |||||||
| Canton, OH | Leased | 125,000 | Manufacturing | |||||||
| Madison Heights, MI | Leased | 128,000 | Manufacturing | |||||||
| Newport, AR | Leased | 200,000 | Manufacturing | |||||||
| Cleveland, OH | Leased | 150,000 | Manufacturing | |||||||
| Shanghai, China | Leased | 20,500 | Manufacturing | |||||||
| (1) | Supply Technologies has | |
| (2) | Includes | |
| (3) | Includes three leased properties with square footage of | |
| (4) | Manufactured Products has |
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| Item 3. | Legal Proceedings |
We are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation isare not expected to have a material adverse effect on our financial condition, liquidity or results of operations.
At December 31, 2005,2008, we were a co-defendant in approximately 325315 cases asserting claims on behalf of approximately 10,0004,500 plaintiffs alleging personal injury as a result of exposure to asbestos. These asbestos cases generally relate to production and sale of asbestos-containing products and allege
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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 2223 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 one case, the plaintiff has alleged compensatory, punitive and other damages of at least $1.0 million for five separate 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 anotherthe other 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. Among the factors management considered in reaching this conclusion were: (a) our historical success in being dismissed from these types of lawsuits on the bases mentioned above; (b) many cases have been improperly filed against one of our subsidiaries; (c) in many cases , the plaintiffs have been unable to establish any causal relationship to us or our products or premises; (d) in many cases, the plaintiffs have been unable to demonstrate that they have suffered any identifiable injury or compensable loss at all, that any injuries that they have incurred did in fact result from alleged exposure to asbestos; and (e) the complaints assert claims against multiple defendants and, in most cases, the damages alleged are not attributed to individual defendants. Additionally, we do not believe that the amounts claimed in any of the asbestos cases are meaningful indicators of our potential exposure because the amounts claimed typically bear no relation to the extent of the plaintiff’s injury, if any.
Our cost of defending these lawsuits has not been material to date and, based upon available information, our management does not expect its future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial position.
| 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.
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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 and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The historical financial information is not directly comparable on ayear-to-year year-to-year basis, primarily due to thea goodwill impairment charge in 2008, recording of a tax valuation allowance in 2008, restructuring and unusual charges in 2008, 2006 and 2005, reversal of a tax valuation allowance in 2005, debt extinguishment costs2007 and writeoff of deferred financing costs associated with the tender and early redemption during 2004 of our 9.25% senior subordinated notes, restructuring and unusual charges in 2003 and 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, 2005.2008.
Executive Overview
We are an industrial supply chain logisticsTotal Supply Managementtm and diversified manufacturing business, operating in three segments: ILS,Supply Technologies, Aluminum Products and Manufactured Products. In November 2007, our ILS business changed its name to Supply Technologies to better reflect its breadth of services and focus on driving efficiencies throughout the total supply management process. Our Supply Technologies business provides our customers with integrated supply chain managementTotal Supply Managementtm, a proactive solutions approach that manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation. Total Supply Managementtm includes such services for a broad range of high-volume, specialty production components. ILS customers receive various value-added services, such as engineering and design services,support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking,just-injust-in-time-time and point-of usepoint-of-use delivery, electronic billing services and ongoing technical support. The principal customers of ILSSupply Technologies are in the heavy-duty truck, automotive and vehicle parts, electrical distribution and controls, consumer electronics, power sports/fitness equipment, HVAC, agricultural and construction equipment, semiconductor equipment, plumbing, aerospace and defense, electrical components,and 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, 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 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 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 KB to the consolidated financial statements.
During the trend of the prior year, as the domestic and international manufacturing economies continued to grow. Net sales increased 15% and net income increased 117% in 2005 compared to 2004. 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).
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8.375% senior 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 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.
In October 2006, we acquired all of the revolving credit facility are secured by substantiallycapital stock of NABS for $21.2 million in cash. NABS is a premier international supply chain manager of production components, providing services to high technology companies in the computer, electronics, and consumer products industries. NABS had 14 international operations in China, India, Taiwan, Singapore, Ireland, Hungary, Scotland and Mexico plus five locations in the United States.
In January 2006, we completed the acquisition of all our assets. We hadof the capital stock of Foundry Service for approximately $48.2$3.2 million in cash, which resulted in additional goodwill of unused borrowing availability at December 31, 2005. Funds provided by operations plus available$2.3 million. The acquisition was funded with borrowings underfrom foreign subsidiaries of the revolving credit facility are expected to be adequate to meet our cash requirements.Company.
In December 2005, we acquired substantially all of the assets of Lectrotherm, which is primarily a provider of field service and spare parts for induction heating and melting systems, located in Canton, Ohio, for $5.1 million cash funded with borrowings under our revolving credit facility. This acquisition augments our existing, high-margin aftermarket induction business. Lectrotherm had no significant affect on 2005 earnings.
In July 2005, we acquired substantially all the assets of 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 ILSSupply Technologies segment. ILS has already eliminated substantial overhead cost and begun the process of consolidating redundant service centers.
The domestic and international automotive markets were significantly impacted in 2008, which adversely affected our business units serving those markets. During the third quarter of 2008, the Company recorded asset impairment charges associated with the recent volume declines and volatility in the automotive markets. The charges were composed of $.6 million of inventory impairment included in Cost of Products Sold and $17.5 million for impairment of property and equipment and other long-term assets. See Note M to the consolidated financial statements included in this annual report on Form 10-K.
During the fourth quarter of 2008, the Company recorded a non-cash goodwill impairment charge of $95.8 million and restructuring and asset impairment charges of $13.4 million associated with the decision to exit its relationship with its largest customer, Navistar, along with the general economic downturn. The charges were composed of $5.0 million of inventory impairment included in Cost of Products Sold and $8.4 million for impairment of property and equipment, loss on disposal of a foreign subsidiary and severance costs. Impairment charges were offset by a gain of $.6 million recorded in the Aluminum Products segment relating to the sale of certain facilities that were previously written off.
Approximately 20% of the Company’s consolidated net sales are to the automotive markets. The recent deterioration in the global economy and global credit markets continues to negatively impact the automotive markets. General Motors, Ford and Chrsyler have encountered severe financial difficulty, which could ultimately result in the bankruptcy in one or more of these domestic automobile manufacturers, which, in turn, would adversely affect the financial condition of the Company’s automobile OEM customers. In 2009, the Company expects that its business, results of operations and financial condition will continue to be negatively impacted by the performance of the automotive markets.
Accounting Changes and Goodwill
On December 31, 2006, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”). FAS 158 required the Company to recognize the funded status ( i.e. , the difference between the Company’s fair value of plan assets and the benefit obligations) of its defined benefit pension and postretirement benefit plans (collectively, the “postretirement benefit plans”) in the December 31, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at
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adoption represents the net unrecognized actuarial losses, unrecognized prior service costs and unrecognized transition obligation remaining from the initial adoption of FAS 87 and FAS 106, all of which were previously netted against the assetspostretirement benefit plans’ funded status in the Company’s Consolidated Balance Sheet in accordance with the provisions of FAS 87 and FAS 106. These amounts will be subsequently recognized as net periodic benefit cost in accordance with the Amcast Components Group (“Amcast”),Company’s historical accounting policy for amortizing these amounts. In addition, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost in the same periods will be recognized as a producercomponent of aluminum automotive products, on August 23, 2004 for $10.0 million cash and the assumptionother comprehensive income. Those amounts will be subsequently recognized as a component of approximately $9.0 million of operating liabilities. This acquisition significantly increased the sales and production capacity of our Aluminum Products business and added attractive new customers, product lines and production technologies.
In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), we review goodwill annually for potential impairment. This review was performed as of October 1, 2005, 20042007 and 2003,2006, using forecasted discounted cash flows, and it was determined that no further impairment is required.
At December 31, 2005,2007, our balance sheet reflected $82.7$101.0 million of goodwill. In 2008, this review was performed as of October 1 and updated as of December 31 and the Company determined that a non-cash goodwill in the ILSimpairment charge of $95.8 million related to our Supply Technologies and Aluminum Products segments. In 2005, discount rates used ranged from 11.0% to 11.5%segments was required. As of December 31, 2008, after the impact of the $95.8 million impairment charge, we had goodwill remaining of $4.1 million.
On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (“FAS 109”), and long-term revenue growth rates used ranged from 3.5%prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to 4.5%.be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has a 50% or less likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 as of January 1, 2007. See Note H to the consolidated financial statements for the impact on the Company’s financial statements and related disclosures.
15
Results of Operations
2008 versus 2007
Net Sales by Segment:
| Year-Ended | ||||||||||||||||
| December 31, | Percent | |||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Supply Technologies | $ | 521.3 | $ | 531.4 | $ | (10.1 | ) | (2 | )% | |||||||
| Aluminum Products | 156.3 | 169.1 | (12.8 | ) | (8 | )% | ||||||||||
| Manufactured Products | 391.2 | 370.9 | 20.3 | 5 | % | |||||||||||
| Consolidated Net Sales | $ | 1,068.8 | $ | 1,071.4 | $ | (2.6 | ) | 0 | % | |||||||
| Year Ended | ||||||||||||||||||||
| December 31, | Acquired/ | |||||||||||||||||||
| Percent | (Divested) | |||||||||||||||||||
| 2005 | 2004 | Change | Change | Sales | ||||||||||||||||
| ILS | $ | 532.6 | $ | 453.2 | $ | 79.4 | 18 | % | $ | 31.4 | ||||||||||
| Aluminum Products | 159.1 | 135.4 | 23.7 | 18 | % | 34.5 | ||||||||||||||
| Manufactured Products | 241.2 | 220.1 | 21.1 | 10 | % | 3.5 | ||||||||||||||
| Consolidated net sales | $ | 932.9 | $ | 808.7 | $ | 124.2 | 15 | % | $ | 69.4 | ||||||||||
Consolidated net sales increased by 15%were essentially flat in 20052008 compared to 2004. ILSthe same period in 2007 as growth in Manufactured Products segment nearly offset declines in Aluminum Products sales increasedresulting from reduced automotive sales and Supply Technologies sales resulting from reduced sales to the semiconductor, lawn and garden, auto, plumbing and heavy-duty truck markets. Supply Technologies sales decreased 2% primarily due to the July 20, 2005 acquisition of PPG, general economic growth, particularly as a result of significant growthvolume reductions in the heavy-duty truck industry, partially offset by the addition of new customers and increases in product range to existing customers. Aluminum Products sales increaseddecreased 8% as the general decline in 2005 primarily due toauto industry sales volumes exceeded additional sales from manufacturing plants acquired in August 2004 from the Amcast, partially offset by volume decreases in the automotive industry.
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new contracts starting productionramp-up. Manufactured Products sales increased 5% primarily in 2005the induction, pipe threading equipment and forging businesses, due largely to worldwide strength in the steel, oil & gas, aerospace and rail industries. Approximately 20% of the Company’s consolidated net sales are to the automotive markets. Net sales to the automotive markets as a percentage of sales by segment were approximately 13%, 79% and 5% for the Supply Technologies, Aluminum Products and Manufactured Products Segments, respectively.
Cost of Products Sold & Gross Profit:
| Year-Ended | ||||||||||||||||
| December 31, | Percent | |||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Consolidated cost of products sold | $ | 919.3 | $ | 912.3 | $ | 7.0 | 1 | % | ||||||||
| Consolidated gross profit | $ | 149.5 | $ | 159.1 | $ | (9.6 | ) | (6 | )% | |||||||
| Gross margin | 14.0 | % | 14.8 | % | ||||||||||||
Cost of products sold increased $7.0 million in 2008 compared to the same period in 2007, while gross margin decreased to 14.0% in 2008 from 14.8% in the same period of 2007.
Supply Technologies gross margin decreased slightly, as the effect of reduced heavy-duty truck sales volume and restructuring charges outweighed the margin benefit from new sales. Aluminum Products gross margin decreased primarily due to both the costs associated with starting up new contracts and reduced volume. Gross margin in the Manufactured Products segment increased in 2008 compared to 2007 primarily due to increased volume in the induction, pipe threading equipment and forging businesses.
Selling, General & Administrative (“SG&A”) Expenses:
| Year-Ended | ||||||||||||||||
| December 31, | Percent | |||||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Consolidated SG&A expenses | $ | 102.1 | $ | 96.5 | $ | 5.6 | 6 | % | ||||||||
| SG&A percent | 9.6 | % | 9.0 | % | ||||||||||||
Consolidated SG&A expenses increased $5.6 million in 2008 compared to 2007 representing a .6% increase in SG&A expenses as a percent of sales. SG&A expenses increased primarily due to higher professional fees in the Supply Technologies and Manufactured Products segments, expenses related to a new office building and other one-time charges at the corporate office consisting of losses on the sales of securities, severance costs and legal and professional fees, partially offset by a $.6 million increase in net pension credits and a reversal of year end bonus accruals.
Interest Expense:
| Year-Ended | ||||||||||||||
| December 31, | Percent | |||||||||||||
| 2008 | 2007 | Change | Change | |||||||||||
| (Dollars in millions) | ||||||||||||||
| Interest expense | $ | 27.9 | $ | 31.6 | $ | (3.7 | ) | (12)% | ||||||
| Average outstanding borrowings | $ | 385.8 | $ | 383.6 | $ | 2.2 | 1% | |||||||
| Average borrowing rate | 7.23 | % | 8.23 | % | 100 | basis points | ||||||||
Interest expense decreased $3.7 million in 2008 compared to 2007, primarily due to a lower average borrowing rate during 2008 offset by slightly higher average borrowings. The increase in average borrowings in 2008 resulted primarily from decreased cash flow and increased working capital. The lower average borrowing rate in 2008 was due primarily to decreased interest rates under our revolving credit facility compared to 2007.
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Impairment Charges:
During 2008, the Company recorded goodwill impairment charges of $95.8 million. The Company also recorded asset impairment charges of $25.3 million associated with the recent volume declines and volatility in the automotive markets, loss from the disposal of a foreign subsidiary and restructuring expenses associated with the Company’s exit from its relationship with its largest customer, Navistar, Inc., along with realignment of its distribution network.
Income Taxes:
| Year-Ended | ||||||||
| December 31, | ||||||||
| 2008 | 2007 | |||||||
| (Dollars in millions) | ||||||||
| (Loss) income before income taxes | $ | (101.7 | ) | $ | 31.0 | |||
| Income taxes | $ | 21.0 | $ | 10.0 | ||||
| Tax valuation allowance-effective tax rate impact | (33.6 | ) | 0.0 | |||||
| Income taxes excluding tax valuation allowance | $ | (12.6 | ) | $ | 10.0 | |||
| Effective income tax rate | (21 | )% | 32 | % | ||||
| Effective income tax rate, excluding tax valuation allowance (Non-GAAP) | 12 | % | 32 | % | ||||
In the fourth quarter of 2008, the Company recorded a $33.6 million valuation allowance against its deferred tax assets. As of December 31, 2008, the Company was in a cumulative three-year loss position and determined that it was not more likely than not that its deferred tax asset would be realized.
The provision for income taxes was $21.0 million in 2008 compared to $10.0 million in 2007. The effective income tax rate was (21)% in 2008, compared to 32% in 2007.
The Company’s net operating loss carryforward precluded the payment of most cash federal income taxes in both 2008 and 2007, and should similarly preclude such payments in 2009. At December 31, 2008, the Company had net operating loss carryforwards for federal income tax purposes of approximately $42.1 million, which will expire between 2022 and 2028.
2007 versus 2006
Net Sales by Segment:
| Year-Ended | Acquired/ | |||||||||||||||||||
| December 31, | Percent | (Divested) | ||||||||||||||||||
| 2007 | 2006 | Change | Change | Sales | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Supply Technologies | $ | 531.4 | $ | 598.2 | $ | (66.8 | ) | (11 | )% | $ | 29.5 | |||||||||
| Aluminum Products | 169.1 | 154.6 | 14.5 | 9 | % | 0.0 | ||||||||||||||
| Manufactured Products | 370.9 | 303.4 | 67.5 | 22 | % | 0.0 | ||||||||||||||
| Consolidated Net Sales | $ | 1,071.4 | $ | 1,056.2 | $ | 15.2 | 1 | % | $ | 29.5 | ||||||||||
Consolidated net sales increased by 1% in 2007 compared to 2006, as growth in the Manufactured Products segment and new customers in the Supply Technologies and Aluminum Products segments exceeded declines in Supply Technologies segment sales to the heavy-duty truck market caused by the introduction of new environmental standards at the beginning of 2007. Supply Technologies sales decreased 11% primarily due to volume reductions in the heavy-duty truck industry, partially offset by $29.5 million of additional sales from the October 2006 acquisition of NABS, the addition of new customers and increases in product range to existing customers. New customers in the Supply Technologies segment came from organic sales, while new sales in the Aluminum Products segment primarily reflect sales to new customers. Aluminum Products sales increased 9% as the sales volumes from new contracts starting
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productionramp-up exceeded the end of production of other parts and the general decline in auto industry sales volumes. Manufactured Products sales increased 22%, primarily in the induction equipment, pipe threading equipment and forging businesses. Of this increase, $3.5businesses, due largely to worldwide strength in the steel, oil and gas, aerospace and rail industries. At the end of fourth quarter 2007, the Company adjusted downward the amount initially recorded for revenue by approximately $18.0 million was due to reflect the April 2004 acquisitionexclusion of certain costs from suppliers and subcontractors from the remaining 66%percentage of the common stockcompletion calculation that is used to account for long-term industrial equipment contracts. See Selected Quarterly Financial Data (Unaudited) on page 63 for additional information.
Cost of Jamco.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 | % | ||||||||||||
| Year-Ended | ||||||||||||||||
| December 31, | Percent | |||||||||||||||
| 2007 | 2006 | Change | Change | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Consolidated cost of products sold | $ | 912.3 | $ | 908.1 | $ | 4.2 | 0 | % | ||||||||
| Consolidated gross profit | $ | 159.1 | $ | 148.1 | $ | 11.0 | 7 | % | ||||||||
| Gross margin | 14.8 | % | 14.0 | % | ||||||||||||
Cost of products sold increased 17%was relatively flat in 20052007 compared to 2004,2006, while gross margin decreasedincreased to 14.6%14.8% from 15.6%14.0% in 2004. ILS2006. Supply Technologies gross margin increased slightly, as the margin benefit from sales from the NABS acquisition and new customers outweighed the effect of reduced heavy-truck sales volume and higher restructuring charges in 2007. Supply Technologies 2006 and 2007 cost of products sold included $.8 million and $2.2 million, respectively of inventory related restructuring charges associated with the closure of a manufacturing plant. Aluminum Products 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 changescosts associated with starting up new contracts and the increased costslowramp-up of natural gas.new contract volume. Gross margin in the Manufactured Products segment increased primarily as a result ofdue to 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.volume.
| 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 | % | ||||||||||||
SG&A Expenses:
| Year-Ended | ||||||||||||||||
| December 31, | Percent | |||||||||||||||
| 2007 | 2006 | Change | Change | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Consolidated SG&A expenses | $ | 96.5 | $ | 88.9 | $ | 7.6 | 9 | % | ||||||||
| SG&A percent | 9.0 | % | 8.4 | % | ||||||||||||
Consolidated SG&A expenses increased by 6%$7.6 million in 20052007 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 the2006, representing a .6% increase in SG&A expenses. The Company expectsexpenses as a further $.4 million negative impact topercent of sales. SG&A expenses inincreased approximately $5.3 million due to the first quarteracquisition of 2006 resulting from the Dana bankruptcy.NABS. SG&A increased further primarily due to increased expenses were reduced in 2005 comparedrelated to 2004stock options and restricted stock, the new office building, legal and professional fees and franchise taxes, partially offset by a $.4$1.1 million increase in net pension credits, reflecting improved returnshigher return 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 | |||||||||||||||
| 2007 | 2006 | Change | Change | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Interest expense | $ | 31.6 | $ | 31.3 | $ | 0.3 | 1 | % | ||||||||
| Average outstanding borrowings | $ | 383.6 | $ | 376.5 | $ | 7.1 | 2 | % | ||||||||
| Average borrowing rate | 8.23 | % | 8.31 | % | 8 | basis points | ||||||||||
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| Percent | ||||||||||||||||
| 2005 | 2004 | Change | Change | |||||||||||||
| Interest expense | $ | 27.1 | $ | 31.4 | $(4.3 | ) | (14 | )% | ||||||||
| Debt extinguishment costs included in interest expense | -0- | $ | 6.0 | $(6.0 | ) | |||||||||||
| Average outstanding borrowings | $ | 357.1 | $ | 328.9 | $28.2 | 9 | % | |||||||||
| Average borrowing rate | 7.59 | % | 7.72 | % | (13) basis points | |||||||||||
Interest expense decreasedincreased $.3 million in 20052007 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 20052006, due to higher average outstanding borrowings, partially offset by lower average interest rates during 2005.2007. The increase in average borrowings in 20052007 resulted primarily from higher working capital requirements and the purchase of Amcast Components Group and PPGNABS in August 2004 and July 2005, respectively. October 2006.
21
The lower average borrowing rate in 20052007 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 increaseddecreased interest rates under our revolving credit facility compared to 2004,2006, which increased primarily as a result of actions by the Federal Reserve.
| 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 | % | ||||||
Income Taxes:
| Year-Ended | ||||||||
| December 31, | ||||||||
| 2007 | 2006 | |||||||
| (Dollars in millions | ||||||||
| Income before income taxes | $ | 31.0 | $ | 28.8 | ||||
| Income taxes | $ | 10.0 | $ | 3.2 | ||||
| Reversal of tax valuation allowance included in income | 0.0 | (5.0 | ) | |||||
| Income taxes excluding reversal of tax valuation allowance | $ | 10.0 | $ | 8.2 | ||||
| Effective income tax rate | 32 | % | 11 | % | ||||
| Effective income tax rate excluding reversal of tax valuation allowance (Non-GAAP) | 32 | % | 28 | % | ||||
In the fourth quarter 2005,of 2006, the Company reversed $7.3$5.0 million of its $12.3 million year-end 2005 domestic deferred tax asset valuation allowance.allowance, increasing net income for that year and substantially eliminating this reserve. Based on strong recent and projected earnings, the Company has determined that it iswas more likely than not that this portion of theits deferred tax asset willwould 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 expectedwas $10.0 million in 2007 compared 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$3.2 million in 2006, and 2007, and possibly beyond. Inwhich was reduced by 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.
17
presenting taxes and tax rates without the tax benefit of the tax valuation allowance reversal to facilitate comparison between the periods.
The Company’s net operating loss carryforward precluded the payment of Operations
| 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 | % | ||||||||
| 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 | % | ||||||||||||
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| Percent | ||||||||||||||||
| 2004 | 2003 | Change | Change | |||||||||||||
| Consolidated SG&A expenses | $ | 76.7 | $ | 62.4 | $ | 14.3 | 23 | % | ||||||||
| SG&A percent | 9.5 | % | 10.0 | % | ||||||||||||
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| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| Percent | ||||||||||||||||
| 2004 | 2003 | Change | Change | |||||||||||||
| Interest expense | $ | 31.4 | $ | 26.2 | $5.2 | 20 | % | |||||||||
| Debt extinguishment costs included in interest expense | $ | 6.0 | -0- | $6.0 | ||||||||||||
| Average outstanding borrowings | $ | 328.9 | $ | 320.8 | $8.1 | 3 | % | |||||||||
| Average borrowing rate | 7.72 | % | 8.17 | % | (45) basis points | |||||||||||
Critical Accounting Policies
Preparation of financial statements in conformity with GAAPU.S. generally accepted accounting principles 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 moreThe Company recognizes revenue, other than 90% of our revenuefrom long-term contracts, when title is transferred to unaffiliated customers,the customer, typically upon shipment. Our remaining revenue,Revenue from long-term contracts (approximately 16% of consolidated revenue) is recognized usingaccounted for under the percentage of completion method, and recognized on the basis of accounting. Selling prices are fixed basedthe percentage each contract’s cost to date bears to the total estimated contract cost. Revenue earned on purchase orders or contractual arrangements. Ourcontracts 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. 104, “Revenue Recognition.”
Allowance for Uncollectible Accounts Receivable:Doubtful Accounts: Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. Allowances are developed by the individual
22
19
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 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 2008, 2005 2003, 2002 and 2001,2003, 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 M to the consolidated financial statements included elsewhere herein.
Restructuring: We recognize costs in accordance with Emerging Issues Task Force IssueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring)” (“(“EITF 94-3”), and SEC Staff Accounting BulletinSAB No. 100, “Restructuring and Impairment Charges”Charges,” for charges prior to 2003. Detailed contemporaneous documentation is maintained and updated on a quarterly basis to ensure that accruals are properly supported. If management determines that there is a change in the estimate, the accruals are adjusted to reflect the changes.
The Company adopted Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”), which nullifiedEITF 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at the fair value only when the liability is incurred. FAS 146 has no effect on charges recorded for exit activities begun prior to 2002.
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, 2007, 2006, 2005 2004 and 20032004 and have determined that no additional goodwill impairment existed as of those dates. We completed the annual impairment tests as of October 1, 2008 and updated these tests, as necessary, as of December 31, 2008. See Note D to the consolidated financial statements.
Pension and Other Postretirement Benefit Plans: We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans and postre-
20
23
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.
Accounting Changes: In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements.” The statement changes the requirements for the accounting and reporting of a change in accounting principle and is applicable to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement if that pronouncement does not include specific transition provisions. The statement requires retrospective application to prior periods’ financial statements of changes in accounting principle unless it is impractical to determine the period specific effects or the cumulative effect of the change. The correction of an error by the restatement of previously issued financial statements is also addressed by the statement. The Company adopted this statement effective January 1, 2006 as prescribed and its adoption did not have any impact on the Company’s results of operations or financial condition.
In December 2008, the FASB issued Financial Staff Position (“FSP”) 132(R)-1, “Employers Disclosures about Post Retirement Benefit Plan Assets.” FSP 132(R)-1 provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The guidance addresses disclosures related to the categories of plan assets and fair value measurements of plan assets. This staff position is effective for the Company in 2009 and will have no effect on its consolidated financial position or results of operations.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 modifies existing requirements to include qualitative disclosures regarding the objectives and strategies for using derivatives, fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The pronouncement also requires the cross-referencing of derivative disclosures within the financial statements and notes thereto. The requirements of FAS 161 are effective for interim and annual periods beginning after November 15, 2008. The Company is currently evaluating the impact of FAS 161 on its financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“FAS 160”). FAS 160 modifies the reporting for noncontrolling interests in the balance sheet and minority interest income (expense) in the income statement. The pronouncement also requires that increases and decreases in the noncontrolling ownership interest amount be accounted for as equity transactions. FAS 160 is required to be adopted prospectively, with limited exceptions, effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the effect the adoption of FAS 160 will have on its financial position, results of operations and related disclosures.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “Business Combinations” (“FAS 141R”). FAS 141R modifies the accounting for business combinations by requiring that acquired assets and assumed liabilities be recorded at fair value, contingent consideration arrangements be recorded at fair value on the date of the acquisition and preacquisition contingencies will generally be accounted for in purchase accounting at fair value. The pronouncement also requires that transaction costs be expensed as incurred, acquired research and development be capitalized as an indefinite-lived intangible asset and the requirements of Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” be met at the acquisition date in order to accrue for a restructuring plan in purchase accounting. FAS 141R is required to be adopted prospectively effective for fiscal years beginning after December 15, 2008.
24
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The pronouncement also establishes presentation and disclosure requirements to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company did not elect to measure its financial instruments or any other items at fair value as permitted by FAS 159. Therefore, the adoption of FAS 159 did not have a material effect on the Company’s financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of FAS 157 apply under other accounting pronouncements that require or permit fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years for financial assets and liabilities, and for fiscal years beginning after November 15, 2008 for non-financial assets and liabilities. The adoption of FAS 157 for financial assets and liabilities did not have a material effect on the Company’s financial position or results of operations.
As of December 31, 2008, the Company’s financial assets subject to FAS 157 consisted of marketable equity securities and other investments totaling $.9 million and $5.2 million respectively. The marketable securities are classified as having Level 1 inputs, as the fair value is based on quoted prices in active markets. The other investments are classified as having Level 2 inputs, as the fair value is based on inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly, including quoted prices for similar assets in active markets; quoted prices for identical or similar assets in markets that are not active; inputs other than quoted prices that are observable for the asset; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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
25
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 report onForm 10-K contains certain statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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 factors include, but are not limited to the following: our substantial indebtedness; continuation of the current negative global economic environment; 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, unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations, including the uncertainties related to the current global financial crisis; 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 facility and the indenture governing the 8.375% senior subordinated notes due 2014; disruptions, uncertainty or volatility in the credit markets that may limit our access to capital; 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; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending, which could be lower due to the effects of the current financial crisis; our ability to negotiate acceptable contracts with labor unions; dependence on key management; and dependence on information systemssystems; 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 Disclosures About Market Risk |
We are exposed to market risk including changes in interest rates. We are subject to interest rate risk on our floating rate revolving credit facility, which consisted of borrowings of $128.3$164.6 million at December 31, 2005.2008. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $1.3$1.6 million for the year ended December 31, 2005.2008.
Our foreign subsidiaries generally conduct business in local currencies. During 2005,2008, we recorded a favorablean unfavorable foreign currency translation adjustment of $.1$8.7 million related to net assets located outside the United States. This foreign currency translation adjustment resulted primarily from the weakening of the U.S. dollar in relation to the Canadian dollar. Our foreign operations are also subject to other customary risks of operating in a global environment, such as unstable political situations, the effect of local laws and taxes, tariff increases and regulations and requirements for export licenses, the potential imposition of trade or foreign exchange restrictions and transportation delays.
Our largest exposures to commodity prices relate to steel and natural gas price increases,prices, which have increased significantlyfluctuated widely in 2005.recent years. We do not have any commodity swap agreements, forward purchase
26
or hedge contracts for future increases in steel orbut have entered into forward purchase contracts for a portion of our anticipated natural gas prices.
22
| Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements and Supplementary Financial Data
| Page | ||||||||
| Supplementary Financial Data | ||||||||
| 61 | ||||||||
| EX-24.1 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
27
23
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER
The Company’s management is responsibleBoard of Directors and Shareholder of Park-Ohio Industries, Inc.
We have audited the accompanying consolidated balance sheets of Park-Ohio Industries, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholder’s equity and cash flows for establishingeach of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and maintaining adequate internal control over financial reporting, as such term is defined in Rule 15d-15(f) underschedule are the Exchange Act. The Company’s management carried out an evaluation, with the participationresponsibility of the Company’s Chief Executive Officermanagement. Our responsibility is to express an opinion on these financial statements and Chief Financial Officer,schedule based on our audits.
We conducted our audits in accordance with standards of the effectivenessPublic 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 itsmaterial 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, 2008 and 2007 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note H to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Incomes Taxes”, effective January 1, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Park-Ohio Industries, Inc. and subsidiaries internal control over financial reporting as of the end of the last fiscal year. The frameworkDecember 31, 2008, based on which such evaluation was based is containedcriteria established in the report entitled “InternalInternal Control — Integrated Framework”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, 2005. Management has identified no material weakness in internal control over financial reporting.and our report dated March 12, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s management’s assessment
Cleveland, Ohio
March 12, 2009
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of the effectivenessDirectors and Shareholder of the Company’sPark-Ohio Industries, Inc.
We have audited Park-Ohio Industries, Inc. internal control over financial reporting as of December 31, 2005. This attestation report is included at page 25 of this annual report on Form 10-K.
24
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,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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 thatthat: (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, 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, 2005,2008, based on the COSO criteria.
We have 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, 20052008 and 2004,2007, and the related consolidated statements of consolidated operations, shareholder’s equity, and cash flows for each of the three years in the period ended DecemberDeceber 31, 20052008 and our report dated March 13, 200612, 2009 expressed an unqualified opinion thereon.
 |
/s/ Ernst & Young LLP
Cleveland, Ohio
March 13, 200612, 2009
29
25
|
26
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
| December 31, | |||||||||||
| 2005 | 2004 | ||||||||||
| (Dollars in thousands) | |||||||||||
ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 17,868 | $ | 6,407 | |||||||
| Accounts receivable, less allowances for doubtful accounts of $5,120 in 2005 and $3,976 in 2004 | 153,502 | 145,475 | |||||||||
| Inventories | 190,553 | 177,294 | |||||||||
| Deferred tax assets | 8,627 | -0- | |||||||||
| Other current assets | 27,753 | 20,655 | |||||||||
| Total Current Assets | 398,303 | 349,831 | |||||||||
| Property, Plant and Equipment: | |||||||||||
| Land and land improvements | 6,964 | 6,788 | |||||||||
| Buildings | 38,384 | 36,217 | |||||||||
| Machinery and equipment | 198,019 | 185,489 | |||||||||
| 243,367 | 228,494 | ||||||||||
| Less accumulated depreciation | 127,136 | 118,613 | |||||||||
| 116,231 | 109,881 | ||||||||||
| Other Assets: | |||||||||||
| Goodwill | 82,703 | 82,565 | |||||||||
| Net assets held for sale | -0- | 1,035 | |||||||||
| Other | 70,617 | 68,535 | |||||||||
| $ | 667,854 | $ | 611,847 | ||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Trade accounts payable | $ | 115,396 | $ | 108,862 | |||||||
| Accrued expenses | 68,313 | 59,745 | |||||||||
| Current portion of long-term liabilities | 4,161 | 5,812 | |||||||||
| Total Current Liabilities | 187,870 | 174,419 | |||||||||
| Long-Term Liabilities, less current portion 8.375% senior subordinated notes due 2014 | 210,000 | 210,000 | |||||||||
| Revolving credit | 128,300 | 120,600 | |||||||||
| Other long-term debt | 6,705 | 4,776 | |||||||||
| Deferred tax liability | 3,176 | 1,074 | |||||||||
| Other postretirement benefits and other long-term liabilities | 26,174 | 26,496 | |||||||||
| 374,355 | 362,946 | ||||||||||
| Shareholder’s Equity | |||||||||||
| Common stock, par value $1 a share | -0- | -0- | |||||||||
| Additional paid-in capital | 64,844 | 64,844 | |||||||||
| Retained earnings | 42,887 | 11,314 | |||||||||
| Accumulated other comprehensive loss | (2,102 | ) | (1,676 | ) | |||||||
| 105,629 | 74,482 | ||||||||||
| $ | 667,854 | $ | 611,847 | ||||||||
| December 31, | ||||||||
| 2008 | 2007 | |||||||
| (Dollars in thousands) | ||||||||
ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | 17,623 | $ | 13,077 | |||||
| Accounts receivable, less allowances for doubtful accounts of $3,044 in 2008 and $3,724 in 2007 | 165,779 | 172,357 | ||||||
| Inventories | 228,817 | 215,409 | ||||||
| Deferred tax assets | 9,446 | 21,897 | ||||||
| Unbilled contract revenue | 25,602 | 24,817 | ||||||
| Other current assets | 19,266 | 19,757 | ||||||
| Total Current Assets | 466,533 | 467,314 | ||||||
| Property, plant and equipment: | ||||||||
| Land and land improvements | 3,448 | 3,177 | ||||||
| Buildings | 41,004 | 39,977 | ||||||
| Machinery and equipment | 201,287 | 220,334 | ||||||
| 245,739 | 263,488 | |||||||
| Less accumulated depreciation | 156,911 | 159,896 | ||||||
| 88,828 | 103,592 | |||||||
| Other Assets: | ||||||||
| Goodwill | 4,109 | 100,997 | ||||||
| Net assets held for sale | -0- | 3,330 | ||||||
| Other | 63,375 | 94,185 | ||||||
| $ | 622,845 | $ | 769,418 | |||||
LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||
| Current Liabilities | ||||||||
| Trade accounts payable | $ | 122,107 | $ | 121,870 | ||||
| Accrued expenses | 74,394 | 66,923 | ||||||
| Current portion of long-term debt | 8,778 | 2,362 | ||||||
| Current portion of other postretirement benefits | 2,290 | 2,041 | ||||||
| Total Current Liabilities | 207,569 | 193,196 | ||||||
| Long-Term Liabilities, less current portion 8.375% senior subordinated notes due 2014 | 210,000 | 210,000 | ||||||
| Revolving credit | 164,600 | 145,400 | ||||||
| Other long-term debt | 2,283 | 2,287 | ||||||
| Deferred tax liability | 9,090 | 22,722 | ||||||
| Other postretirement benefits and other long-term liabilities | 24,093 | 24,017 | ||||||
| 410,066 | 404,426 | |||||||
| Shareholder’s Equity | ||||||||
| Common stock, par value $1 per share | -0- | -0- | ||||||
| Additional paid-in capital | 56,112 | 64,844 | ||||||
| Retained (deficit) earnings | (33,800 | ) | 88,868 | |||||
| Accumulated other comprehensive (loss) income | (17,102 | ) | 18,084 | |||||
| 5,210 | 171,796 | |||||||
| $ | 622,845 | $ | 769,418 | |||||
See notes to consolidated financial statements.
30
27
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
| Year Ended December 31, | ||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||
| (Dollars in thousands) | ||||||||||||||
| Net sales | $ | 932,900 | $ | 808,718 | $ | 624,295 | ||||||||
| Cost of products sold | 796,283 | 682,658 | 527,586 | |||||||||||
| Gross profit | 136,617 | 126,060 | 96,709 | |||||||||||
| Selling, general and administrative expenses | 81,368 | 76,714 | 62,369 | |||||||||||
| Restructuring and impairment charges | 943 | -0- | 18,808 | |||||||||||
| Operating income | 54,306 | 49,346 | 15,532 | |||||||||||
| Interest expense | 27,056 | 31,413 | 26,151 | |||||||||||
| Income (loss) before income taxes | 27,250 | 17,933 | (10,619 | ) | ||||||||||
| Income taxes (benefit) | (4,323 | ) | 3,400 | 904 | ||||||||||
| Net income (loss) | $ | 31,573 | $ | 14,533 | $ | (11,523 | ) | |||||||
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Net sales | $ | 1,068,757 | $ | 1,071,441 | $ | 1,056,246 | ||||||
| Cost of products sold | 919,297 | 912,337 | 908,095 | |||||||||
| Gross profit | 149,460 | 159,104 | 148,151 | |||||||||
| Selling, general and administrative expenses | 102,127 | 96,523 | 88,940 | |||||||||
| Goodwill impairment charge | 95,763 | -0- | -0- | |||||||||
| Restructuring and impairment charges (credits) | 25,331 | -0- | (809 | ) | ||||||||
| Operating (loss) income | (73,761 | ) | 62,581 | 60,020 | ||||||||
| Interest expense | 27,921 | 31,551 | 31,267 | |||||||||
| (Loss) income before income taxes | (101,682 | ) | 31,030 | 28,753 | ||||||||
| Income taxes | 20,986 | 9,976 | 3,218 | �� | ||||||||
| Net (loss) income | $ | (122,668 | ) | $ | 21,054 | $ | 25,535 | |||||
See notes to consolidated financial statements.
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28
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholder’s Equity
| Accumulated | |||||||||||||||||||||
| Other | |||||||||||||||||||||
| Additional | Comprehensive | ||||||||||||||||||||
| Common | Paid-In | Retained | Income | ||||||||||||||||||
| Stock | Capital | Earnings | (Loss) | Total | |||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Balance at January 1, 2003 | $ | -0- | $ | 64,844 | $ | 8,304 | $ | (8,096 | ) | $ | 65,052 | ||||||||||
| Comprehensive (loss): | |||||||||||||||||||||
| Net Loss | (11,523 | ) | (11,523 | ) | |||||||||||||||||
| Foreign currency translation adjustment | 3,632 | 3,632 | |||||||||||||||||||
| Minimum pension liability | 1,200 | 1,200 | |||||||||||||||||||
| Comprehensive (loss) | (6,691 | ) | |||||||||||||||||||
| Balance at December 31, 2003 | -0- | 64,844 | (3,219 | ) | (3,264 | ) | 58,361 | ||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||
| Net income | 14,533 | 14,533 | |||||||||||||||||||
| Foreign currency translation adjustment | 2,071 | 2,071 | |||||||||||||||||||
| Minimum pension liability | (483 | ) | (483 | ) | |||||||||||||||||
| Comprehensive income | 16,121 | ||||||||||||||||||||
| Balance at December 31, 2004 | -0- | 64,844 | 11,314 | (1,676 | ) | 74,482 | |||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||
| Net income | 31,573 | 31,573 | |||||||||||||||||||
| Foreign currency translation adjustment | 94 | 94 | |||||||||||||||||||
| Minimum pension liability | (520 | ) | (520 | ) | |||||||||||||||||
| Comprehensive income | 31,147 | ||||||||||||||||||||
| Balance at December 31, 2005 | $ | -0- | $ | 64,844 | $ | 42,887 | $ | (2,102 | ) | $ | 105,629 | ||||||||||
| Accumulated | ||||||||||||||||||||
| Additional | Retained | Other | ||||||||||||||||||
| Common | Paid-In | Earnings | Comprehensive | |||||||||||||||||
| Stock | Capital | (Deficit) | Income (Loss) | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Balance at January 1, 2006 | $ | -0- | $ | 64,844 | $ | 42,887 | $ | (2,102 | ) | $ | 105,629 | |||||||||
| Comprehensive income (loss): | ||||||||||||||||||||
| Net income | 25,535 | 25,535 | ||||||||||||||||||
| Foreign currency translation adjustment | 2,128 | 2,128 | ||||||||||||||||||
| Minimum pension liability | 5,358 | 5,358 | ||||||||||||||||||
| Comprehensive income | 33,021 | |||||||||||||||||||
| Adjustment recognized upon adoption of FAS 158 (net of income tax of $404) | 440 | 440 | ||||||||||||||||||
| Balance at December 31, 2006 | -0- | 64,844 | 68,422 | 5,824 | 139,090 | |||||||||||||||
| Adjustment relating to adoption of FIN 48 | (608 | ) | (608 | ) | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||
| Net income | 21,054 | 21,054 | ||||||||||||||||||
| Foreign currency translation adjustment | 7,328 | 7,328 | ||||||||||||||||||
| Pension and postretirement benefit adjustments, net of income tax of $2,834 | 4,932 | 4,932 | ||||||||||||||||||
| Comprehensive income | 33,314 | |||||||||||||||||||
| Balance at December 31, 2007 | -0- | 64,844 | 88,868 | 18,084 | 171,796 | |||||||||||||||
| Comprehensive (loss): | ||||||||||||||||||||
| Net loss | (122,668 | ) | (122,668 | ) | ||||||||||||||||
| Foreign currency translation adjustment | (8,730 | ) | (8,730 | ) | ||||||||||||||||
| Pension and postretirement benefit adjustments, net of income tax of $13,460 | (26,456 | ) | (26,456 | ) | ||||||||||||||||
| Comprehensive (loss) | (157,854 | ) | ||||||||||||||||||
| Distribution of capital to shareholder | (8,732 | ) | (8,732 | ) | ||||||||||||||||
| Balance at December 31, 2008 | $ | -0- | $ | 56,112 | $ | (33,800 | ) | $ | (17,102 | ) | $ | 5,210 | ||||||||
See notes to consolidated financial statements.
32
29
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| Year Ended December 31, | ||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||
| (Dollars in thousands) | ||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||
| Net income (loss) | $ | 31,573 | $ | 14,533 | $ | (11,523 | ) | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operations: | ||||||||||||||
| Depreciation and amortization | 17,261 | 15,385 | 15,479 | |||||||||||
| Restructuring and impairment charges | 1,776 | -0- | 18,641 | |||||||||||
| Deferred income taxes | (6,525 | ) | 1,074 | -0- | ||||||||||
| Changes in operating assets and liabilities excluding acquisitions of businesses: | ||||||||||||||
| Accounts receivable | 5,507 | (35,606 | ) | 539 | ||||||||||
| Inventories | (1,699 | ) | (26,541 | ) | 6,991 | |||||||||
| Accounts payable and accrued expenses | (934 | ) | 39,400 | (12,160 | ) | |||||||||
| Other | (12,464 | ) | (7,331 | ) | (6,149 | ) | ||||||||
| Net cash provided by operating activities | 34,495 | 914 | 11,818 | |||||||||||
| INVESTING ACTIVITIES | ||||||||||||||
| Purchases of property, plant and equipment, net | (20,295 | ) | (9,963 | ) | (10,869 | ) | ||||||||
| Costs of acquisitions, net of cash acquired | (12,181 | ) | (9,997 | ) | -0- | |||||||||
| Proceeds from the sale of business units or assets held for sale | 1,100 | -0- | 7,340 | |||||||||||
| Net cash used by investing activities | (31,376 | ) | (19,960 | ) | (3,529 | ) | ||||||||
| FINANCING ACTIVITIES | ||||||||||||||
| Proceeds from bank arrangements, net | 8,342 | 18,013 | 112,000 | |||||||||||
| Payments on long-term debt | -0- | (199,930 | ) | (126,898 | ) | |||||||||
| Issuance of 8.375% senior subordinated notes, net of deferred financing costs | -0- | 205,179 | -0- | |||||||||||
| Net cash provided (used) by financing activities | 8,342 | 23,262 | (14,898 | ) | ||||||||||
| Increase (decrease) in cash and cash equivalents | 11,461 | 4,216 | (6,609 | ) | ||||||||||
| Cash and cash equivalents at beginning 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) | $ | 881 | $ | 3,370 | $ | (1,038 | ) | |||||||
| Interest paid | 24,173 | 28,891 | 25,213 | |||||||||||
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net (loss) income | $ | (122,668 | ) | $ | 21,054 | $ | 25,535 | |||||
| Adjustments to reconcile net (loss) income to net cash provided by operations: | ||||||||||||
| Depreciation and amortization | 20,782 | 20,469 | 20,037 | |||||||||
| Restructuring and impairment charges (credits) | 121,094 | 2,214 | (9 | ) | ||||||||
| Deferred income taxes | -0- | 4,342 | (4,361 | ) | ||||||||
| Changes in operating assets and liabilities excluding acquisitions of businesses: | ||||||||||||
| Accounts receivable | 6,578 | 9,536 | (16,219 | ) | ||||||||
| Inventories | (12,547 | ) | 8,527 | (28,443 | ) | |||||||
| Accounts payable and accrued expenses | 7,490 | (21,900 | ) | 16,760 | ||||||||
| Other | (10,535 | ) | (15,410 | ) | (8,539 | ) | ||||||
| Net cash provided by operating activities | 10,194 | 28,832 | 4,761 | |||||||||
| INVESTING ACTIVITIES | ||||||||||||
| Purchases of property, plant and equipment | (17,466 | ) | (21,876 | ) | (19,256 | ) | ||||||
| Business acquisitions, net of cash acquired | (5,322 | ) | -0- | (23,271 | ) | |||||||
| Proceeds from sale-leaseback transactions | -0- | -0- | 9,420 | |||||||||
| Proceeds from the sale of assets held for sale | 260 | -0- | 3,200 | |||||||||
| Net cash used by investing activities | (22,528 | ) | (21,876 | ) | (29,907 | ) | ||||||
| FINANCING ACTIVITIES | ||||||||||||
| Proceeds from bank arrangements, net | 25,612 | -0- | 28,150 | |||||||||
| Payments on bank arrangements, net | -0- | (14,751 | ) | -0- | ||||||||
| Distribution of capital to shareholder | (8,732 | ) | -0- | -0- | ||||||||
| Net cash provided (used) by financing activities | 16,880 | (14,751 | ) | 28,150 | ||||||||
| Increase (decrease) in cash and cash equivalents | 4,546 | (7,795 | ) | 3,004 | ||||||||
| Cash and cash equivalents at beginning of year | 13,077 | 20,872 | 17,868 | |||||||||
| Cash and cash equivalents at end of year | $ | 17,623 | $ | 13,077 | $ | 20,872 | ||||||
| Income taxes paid | $ | 6,847 | $ | 6,170 | $ | 5,291 | ||||||
| Interest paid | 26,115 | 30,194 | 28,997 | |||||||||
See notes to consolidated financial statements.
33
30
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
December 31, 2005, 20042008, 2007 and 2003
2006
(Dollars in thousands)
(Dollars in thousands)
| NOTE A — | Summary of Significant Accounting Policies |
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)(“FIFO”) cost or market value. Inventory reserves were $19,166$22,312 and $18,604$20,432 at December 31, 20052008 and 2004,2007, respectively.
| December 31, | ||||||||
| 2005 | 2004 | |||||||
| Finished goods | $ | 128,465 | $ | 121,832 | ||||
| Work in process | 32,547 | 27,959 | ||||||
| Raw materials and supplies | 29,541 | 27,503 | ||||||
| $ | 190,553 | $ | 177,294 | |||||
Major Classes of Inventories
| December 31, | ||||||||
| 2008 | 2007 | |||||||
| Finished goods | $ | 129,939 | $ | 129,074 | ||||
| Work in process | 29,648 | 26,249 | ||||||
| Raw materials and supplies | 69,230 | 60,086 | ||||||
| $ | 228,817 | $ | 215,409 | |||||
Property, Plant and Equipment: Property, plant and equipment are carried at cost. Additions and associated interest costs are capitalized and expenditures for repairs and maintenance are charged to operations. Depreciation of fixed assets is computed principally by the straight-line method based on the estimated useful lives of the assets ranging from 25-6025 to 60 years for buildings, and3-16 3 to 20 years for machinery and equipment. The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recoverable (Seerecoverable. See Note M).M.
We assess the recoverability of long-lived assets (excluding goodwill) and identifiable acquired intangible assets with finite useful lives, whenever events or changes in circumstances indicate that we may not be able to recover the assets’ carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset to the expected net future undiscounted cash flows to be generated by that asset, or, for identifiable intangibles with finite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets with finite useful lives, if any, to be recognized is measured based on projected discounted future cash flows. We measure the amount of impairment of other long-lived assets (excluding goodwill) as the amount by which
34
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the carrying value of the asset exceeds the fair market value of the asset, which is generally determined, based on projected discounted future cash flows or appraised values. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed.
Goodwill and Other Intangible Assets: As discussed in Note B, the Company adoptedIn accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), “Goodwill and Other Intangible Assets,”the Company does not amortize goodwill recorded in connection with business acquisitions. The Company completed the annual impairment tests required by FAS 142 as of JanuaryOctober 1, 2002. Under FAS 142, goodwill2008 and updated these tests as necessary as of December 31, 2008. See Note D for the results of this testing. Other intangible assets, which consist primarily of non-contractual customer relationships, are amortized over their estimated useful lives.
We use an income approach to estimate the fair value of our reporting units. Absent an indication of fair value from a potential buyer or similar specific transactions, we believe that the use of this method provides reasonable estimates of a reporting unit’s fair value. The income approach is no longer amortized butbased on projected future debt-free cash flow that is subjectdiscounted to impairment testing at least annuallypresent value using factors that consider the timing and risk of the future cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating and cash flow performance. This approach also mitigates most of the impact of cyclical downturns that occur in the reporting unit’s industry. The income approach is based on October 1. Priora reporting unit’s projection of operating results and cash flows that is discounted using a weighted-average cost of capital. The projection is based upon our best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements based on management projections. There are inherent uncertainties, however, related to 2002, goodwill was amortized primarily over 40 years usingthese factors and to our judgment in applying them to this analysis. Nonetheless, we believe that this method provides a reasonable approach to estimate the straight-line method.fair value of our reporting units.
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. 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: DueIn accordance with FIN No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143”, “Accounting for Asset Retirement Obligations”, the Company has identified certain conditional asset retirement obligations at various current manufacturing facilities. These obligations relate primarily to asbestos abatement. Using investigative, remediation, and disposal methods that are currently available to thelong-term productive nature Company, the estimated cost of these obligations is not significant and management does not believe that any potential liability ultimately attributed to the Company for its conditional asset retirement obligations will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time during which investigation and remediation takes place. An estimate of the potential impact on the Company’s manufacturing operations absent plans or expectations of planscannot be made due to initiatethe aforementioned uncertainties. Management expects these contingent asset retirement activities, the Companyobligations to be resolved over an extended period of time. Management is unable to determine potential settlement datesprovide a more specific time frame due to be used in fair valuethe indefinite amount of time to conduct investigation activities at any site, the indefinite amount of time to obtain governmental agency approval, as necessary, with respect to investigation and remediation activities, and the indefinite amount of time necessary to conduct remediation activities.
35
31
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued(Continued)
Income Taxes: The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the current enacted tax rates. In determining these amounts, management determined the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, cumulative earnings and losses, expectations of future earnings, taxable income and the extended period of time over which the postretirement benefits will be paid and accordingly records valuation allowances 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 StandardsSFAS 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 10%(approximately 16% 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 assetsunbilled contract revenues in the accompanying consolidated balance sheet. The Company’s revenue recognition policies are in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
Accounts Receivable:Receivable and Allowance for Doubtful Accounts: Accounts receivable are recorded at selling price, which is fixed based on a purchase order or contractual arrangement.net realizable value. 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. On November 16, 2007, the Company entered into a five-year Accounts Receivable Purchase Agreement whereby one specific customer’s accounts receivable may be sold without recourse to a third-party financial institution on a revolving basis. During 2008 and 2007, we sold approximately $33,814 and $10,400, respectively, of accounts receivable to mitigate accounts receivable concentration risk and to provide additional financing capacity. In compliance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“FAS 140”), sales of accounts receivable are reflected as a reduction of accounts receivable in the Consolidated Balance Sheets and the proceeds are included in the cash flows from operating activities in the Consolidated Statements of Cash flows. In 2008 and 2007, a loss in the amount of $200 and $84, respectively, related to the sale of accounts receivable is recorded in the Consolidated Statements of Income. These losses represented implicit interest on the transactions.
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. As of December 31, 2005,2008, the Company had uncollateralized receivables with sixfive customers in the automotive and heavy-duty truck industries, each with several locations, aggregating $42,579,$22,241, which represented approximately 28%13% of the Company’s trade accounts receivable. During 2005,2008, sales to these customers amounted to approximately $255,114,$170,740, which represented approximately 27%16% of the Company’s net sales.
36
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Shipping and Handling Costs: All shipping and handling costs are included in cost of products sold in the Consolidated Statements of Operations.Income Statements.
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 assessmentsand/or remedial efforts are probable and can be reasonably estimated. The estimated liability of the Company is not discounted or reduced for possible recoveries from insurance carriers.
32
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 U.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 shareholder’saccumulated comprehensive income (loss) in shareholders’ equity.
In December 2008, the Financial Accounting Standards Board (“FASB”) issued FSP 132(R)-1, “Employers Disclosures about Post Retirement Benefit Plan Assets.” FSP 132(R)-1 provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The guidance addresses disclosures related to the categories of plan assets and fair value measurements of plan assets. This Staff Position is effective for the Company in 2009 and will have no effect on its consolidated financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 modifies existing requirements to include qualitative disclosures regarding the objectives and strategies for using derivatives, fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The pronouncement also requires the cross-referencing of derivative disclosures within the financial statements and notes thereto. The requirements of FAS 161 are effective for the Company in 2009. The adoption of FAS 161 will not have an impact on the Company’s financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“FAS 160”). FAS 160 modifies the reporting for noncontrolling interests in the prior years’ financial statements have been reclassifiedbalance sheet and minority interest income (expense) in the income statement. The pronouncement also requires that increases and decreases in the noncontrolling ownership interest amount be accounted for as equity transactions. FAS 160 is required to conform to the current year presentation.
In December 2007, the carrying amountFASB issued SFAS No. 141R, “Business Combinations” (“FAS 141R”). FAS 141R modifies the accounting for business combinations by requiring that acquired assets and assumed liabilities be recorded at fair value, contingent consideration arrangements be recorded at fair value on the date of goodwill for the years ended December 31, 2005 and December 31, 2004 by reporting segment.
| Reporting | Goodwill at | Goodwill at | ||||||
| Segment | December 31, 2005 | December 31, 2004 | ||||||
| ILS | $ | 66,188 | $ | 66,050 | ||||
| Aluminum Products | 16,515 | 16,515 | ||||||
| $ | 82,703 | $ | 82,565 | |||||
| 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- | |||
37
33
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
| 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- | |||
| 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 | ||||||
34
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The allocationpronouncement also establishes presentation and disclosure requirements to facilitate comparison between entities that choose different measurement attributes for similar types of the purchase priceassets and liabilities. FAS 159 is as follows:
| Cash acquisition price | $ | 10,000 | |||
| Assets | |||||
| Accounts receivable | (8,948 | ) | |||
| Inventories | (2,044 | ) | |||
| Property and equipment | (15,499 | ) | |||
| Other | (115 | ) | |||
| Liabilities | |||||
| Accounts payable | 4,041 | ||||
| Compensation accruals | 3,825 | ||||
| Other accruals | 8,740 | ||||
| Goodwill | $ | -0- | |||
| Severance | Exit | Relocation | Total | |||||||||||||
| Balance at June 30, 2004 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | ||||||||
| Add: Accruals | 1,916 | 100 | 265 | 2,281 | ||||||||||||
| Less: Payments | 295 | -0- | 2 | 297 | ||||||||||||
| Balance at December 31, 2004 | 1,621 | 100 | 263 | 1,984 | ||||||||||||
| Transfer | 0 | 48 | (48 | ) | 0 | |||||||||||
| Adjustments | (612 | ) | 0 | (113 | ) | (725 | ) | |||||||||
| Less: Payments | 1,009 | 148 | 102 | 1,259 | ||||||||||||
| Balance at December 31, 2005 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
35
| December 31, | |||||||||
| 2005 | 2004 | ||||||||
| Pension assets | $ | 47,164 | $ | 41,295 | |||||
| Idle assets | 5,161 | 6,040 | |||||||
| Deferred financing costs | 7,048 | 7,846 | |||||||
| Tooling | 3,327 | 3,570 | |||||||
| Software development costs | 2,485 | 3,390 | |||||||
| Other | 5,432 | 6,394 | |||||||
| Totals | $ | 70,617 | $ | 68,535 | |||||
| December 31, | |||||||||
| 2005 | 2004 | ||||||||
| Accrued salaries, wages and benefits | $ | 16,435 | $ | 14,098 | |||||
| Advance billings | 21,969 | 10,059 | |||||||
| Warranty, project and installation accruals | 4,391 | 5,660 | |||||||
| Severance and exit costs | 1,451 | 2,175 | |||||||
| Interest payable | 2,900 | 2,022 | |||||||
| State and local taxes | 4,866 | 4,553 | |||||||
| Sundry | 16,301 | 21,178 | |||||||
| Totals | $ | 68,313 | $ | 59,745 | |||||
| December 31, | ||||||||
| 2005 | 2004 | |||||||
| Balance at beginning of year | $ | 4,281 | $ | 5,614 | ||||
| Claims paid during the year | (3,297 | ) | (4,708 | ) | ||||
| Additional warranties issued during year | 2,593 | 2,874 | ||||||
| Acquired warranty liabilities | -0- | 501 | ||||||
| Other | (11 | ) | -0- | |||||
| Balance at end of year | $ | 3,566 | $ | 4,281 | ||||
36
| December 31, | |||||||||
| 2005 | 2004 | ||||||||
| 8.375% senior subordinated notes due 2014 | $ | 210,000 | $ | 210,000 | |||||
| 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% | 3,586 | 4,041 | |||||||
| Other | 4,763 | 3,666 | |||||||
| 346,649 | 338,307 | ||||||||
| Less current maturities | 1,644 | 2,931 | |||||||
| Total | $ | 345,005 | $ | 335,376 | |||||
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, (“FAS 157”) which defines fair value, establishes the framework for measuring fair value under U.S. GAAP and other transaction costs associated withexpands disclosures about fair value measurements. In February 2008, the tenderFASB issued FASB Staff Position157-2, Effective Date of FASB Statement No. 157, that delayed the effective date of FAS 157 for all nonfinancial assets and early redemption and wrote off deferred financing costs associated withnonfinancial liabilities, except those that are recognized or disclosed at fair value in the 9.25% senior subordinated notes totaling $5,963 or $.53 per sharefinancial statements on a diluted basis.
As of December 31, 2005, in addition to amounts borrowed under the Credit Agreement, there was $12,519 outstanding primarily for standby letters of credit. An annual fee of .25% is imposed by the bank on the unused portion of available borrowings. The Credit Agreement expires on December 31, 2010 and borrowings are secured by substantially all of the Company’s assets. At December 31, 2005, the Company also had an operating lease line of credit available of approximately $9,300.
37
| 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 | ||||||
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
| Computed statutory amount | $ | 9,189 | $ | 5,984 | $ | (3,712 | ) | |||||
| Effect of state income taxes | 65 | 16 | 11 | |||||||||
| Foreign rate differences | (151 | ) | 661 | 815 | ||||||||
| Medicare subsidy | (795 | ) | -0- | -0- | ||||||||
| Valuation allowance | (12,093 | ) | (3,042 | ) | 3,695 | |||||||
| Other, net | (538 | ) | (219 | ) | 95 | |||||||
| Income taxes (benefit) | $ | (4,323 | ) | $ | 3,400 | $ | 904 | |||||
38
| December 31, | ||||||||||
| 2005 | 2004 | |||||||||
| Deferred tax assets: | ||||||||||
| Postretirement benefit obligation | $ | 7,542 | $ | 7,933 | ||||||
| Inventory | 10,433 | 11,277 | ||||||||
| Net operating loss and tax credit carryforwards | 18,996 | 20,384 | ||||||||
| Other — net | 12,246 | 11,867 | ||||||||
| Total deferred tax assets | 49,217 | 51,461 | ||||||||
| Deferred tax liabilities: | ||||||||||
| Tax over book depreciation | 15,578 | 15,492 | ||||||||
| Pension | 18,926 | 16,725 | ||||||||
| Deductible goodwill | 2,251 | 1,087 | ||||||||
| Total deferred tax liabilities | 36,755 | 33,304 | ||||||||
| 12,462 | 18,157 | |||||||||
| Valuation reserves | (7,011 | ) | (19,231 | ) | ||||||
| Net deferred tax asset (liability) | $ | 5,451 | $ | (1,074 | ) | |||||
39
other investments totaling $5,239. 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 plansother investments are classified as of December 31, 2005 and 2004:
| Postretirement | ||||||||||||||||
| Pension | Benefits | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Change in benefit obligation | ||||||||||||||||
| Benefit obligation at beginning of year | $ | 55,303 | $ | 53,075 | $ | 24,680 | $ | 27,366 | ||||||||
| Service cost | 364 | 291 | 145 | 136 | ||||||||||||
| Curtailment and settlement | (1,023 | ) | -0- | -0- | -0- | |||||||||||
| Interest cost | 3,194 | 3,320 | 1,281 | 1,532 | ||||||||||||
| Amendments | -0- | 566 | -0- | -0- | ||||||||||||
| Actuarial losses (gains) | 2,101 | 2,799 | 200 | (637 | ) | |||||||||||
| Benefits and expenses paid, net of contributions | (5,205 | ) | (4,748 | ) | (3,463 | ) | (3,717 | ) | ||||||||
| Benefit obligation at end of year | $ | 54,734 | $ | 55,303 | $ | 22,843 | $ | 24,680 | ||||||||
Change in plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 103,948 | $ | 97,603 | $ | -0- | $ | -0- | ||||||||
| Actual return on plan assets | 3,919 | 11,093 | -0- | -0- | ||||||||||||
| Company contributions | -0- | -0- | 3,463 | 3,717 | ||||||||||||
| Curtailments and settlement | (1,023 | ) | -0- | -0- | -0- | |||||||||||
| Benefits and expenses paid, net of contributions | (5,205 | ) | (4,748 | ) | (3,463 | ) | (3,717 | ) | ||||||||
| Fair value of plan assets at end of year | $ | 101,639 | $ | 103,948 | $ | -0- | $ | -0- | ||||||||
| Funded (underfunded) status of the plan | $ | 46,905 | $ | 48,645 | $ | (22,843 | ) | $ | (24,680 | ) | ||||||
| Unrecognized net transition obligation | (386 | ) | (439 | ) | -0- | -0- | ||||||||||
| Unrecognized net actuarial (gain) loss | (13 | ) | (6,929 | ) | 4,734 | 4,639 | ||||||||||
| Unrecognized prior service cost (benefit) | 922 | 1,210 | (178 | ) | (247 | ) | ||||||||||
| Net amount recognized at year end | $ | 47,428 | $ | 42,487 | $ | (18,287 | ) | $ | (20,288 | ) | ||||||
| 2005 | 2004 | ||||||||
| Prepaid pension cost | $ | 47,164 | $ | 41,295 | |||||
| Accrued pension cost | (5,491 | ) | (4,211 | ) | |||||
| Intangible asset | 397 | 565 | |||||||
| Accumulated other comprehensive loss | 5,358 | 4,838 | |||||||
| Net amount recognized at the end of the year | $ | 47,428 | $ | 42,487 | |||||
40
| Plan Assets | ||||||||||||
| Target 2006 | 2005 | 2004 | ||||||||||
Asset Category | ||||||||||||
| Equity securities | 60-70 | % | 71.1 | % | 66.7 | % | ||||||
| Debt securities | 20-30 | 19.7 | 20.5 | |||||||||
| Other | 7-15 | 9.2 | 12.8 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2005 | 2004 | |||||||
| Projected benefit obligation | $ | 17,476 | $ | 17,458 | ||||
| Accumulated benefit obligation | $ | 17,476 | $ | 17,458 | ||||
| Fair value of plan assets | $ | 11,985 | $ | 13,247 | ||||
| Weighted-Average assumptions as of | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| Postretirement | ||||||||||||||||||||||||
| Pension | Benefits | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
| Discount rate | 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 | |||||||||||||||
| Rate of compensation increase | N/A | N/A | 2.00 | % | N/A | N/A | N/A | |||||||||||||||||
41
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||
| Service costs | $ | 364 | $ | 291 | $ | 545 | $ | 145 | $ | 136 | $ | 147 | ||||||||||||
| Interest costs | 3,194 | 3,320 | 3,498 | 1,281 | 1,532 | 1,701 | ||||||||||||||||||
| Expected return on plan assets | (8,804 | ) | (8,313 | ) | (7,229 | ) | -0- | -0- | -0- | |||||||||||||||
| Transition obligation | (49 | ) | (49 | ) | (49 | ) | -0- | -0- | -0- | |||||||||||||||
| Amortization of prior service cost | 163 | 129 | 257 | (69 | ) | (80 | ) | (80 | ) | |||||||||||||||
| Recognized net actuarial (gain) loss | (224 | ) | (286 | ) | 361 | 106 | 99 | 43 | ||||||||||||||||
| Benefit (income) costs | $ | (5,356 | ) | $ | (4,908 | ) | $ | (2,617 | ) | $ | 1,463 | $ | 1,687 | $ | 1,811 | |||||||||
| NOTE B — | Industry Segments |
| Pension | Other | Payments due to | ||||||||||
| Benefits | Benefits | Medicare Subsidy | ||||||||||
| 2006 | $ | 4,534 | $ | 2,517 | $ | 231 | ||||||
| 2007 | 4,374 | 2,465 | 237 | |||||||||
| 2008 | 4,300 | 2,450 | 270 | |||||||||
| 2009 | 4,290 | 2,364 | 242 | |||||||||
| 2010 | 4,240 | 2,304 | 241 | |||||||||
| 2011 to 2015 | 20,087 | 9,881 | 1,080 | |||||||||
| 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 | ) | |||
42
The Company operates through three segments: Integrated Logistics Solutions (“ILS”),Supply Technologies, Aluminum Products and Manufactured Products. ILS isIn November 2007, our Integrated Logistics Solutions segment changed its name to Supply Technologies to better reflect its breadth of services and focus on driving efficiencies throughout the total supply management process. Supply Technologies provides our customers with Total Supply Managementtm services for a supply chain logistics providerbroad range of high-volume, specialty production componentscomponents. Total Supply Managementtm manages the efficiencies of every aspect of supplying production parts and materials to large, multinationalour customers’ manufacturing companies, other manufacturersfloor, from strategic planning to program implementation and distributors. In connection with the supply ofincludes such production components, ILS provides a variety of value-added, cost-effective supply chain management services.services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking,just-in-time and point-of-use delivery, electronic billing services and ongoing technical support. The principal customers of ILSSupply Technologies are in the heavy-duty truck, automotive and vehicle parts, electrical distribution and controls, consumer electronics, power sports/fitness equipment, HVAC, agricultural and construction equipment, semiconductor equipment, plumbing, aerospace and defense, electrical components,and appliance and semiconductor equipment industries. Aluminum Products manufactures cast aluminum components for automotive, agricultural equipment, construction equipment, heavy-duty truck and 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 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.
38
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Net sales: | ||||||||||||
| Supply Technologies | $ | 521,270 | $ | 531,417 | $ | 598,228 | ||||||
| Aluminum Products | 156,269 | 169,118 | 154,639 | |||||||||
| Manufactured Products | 391,218 | 370,906 | 303,379 | |||||||||
| $ | 1,068,757 | $ | 1,071,441 | $ | 1,056,246 | |||||||
| Income (loss) before income taxes: | ||||||||||||
| Supply Technologies | $ | (74,884 | ) | $ | 27,175 | $ | 38,383 | |||||
| Aluminum Products | (36,042 | ) | 3,020 | 3,921 | ||||||||
| Manufactured Products | 50,534 | 45,798 | 28,991 | |||||||||
| (60,392 | ) | 75,993 | 71,295 | |||||||||
| Corporate costs | (13,369 | ) | (13,412 | ) | (11,275 | ) | ||||||
| Interest expense | (27,921 | ) | (31,551 | ) | (31,267 | ) | ||||||
| $ | (101,682 | ) | $ | 31,030 | $ | 28,753 | ||||||
| Identifiable assets: | ||||||||||||
| Supply Technologies | $ | 256,161 | $ | 354,165 | $ | 382,101 | ||||||
| Aluminum Products | 87,215 | 98,524 | 98,041 | |||||||||
| Manufactured Products | 242,057 | 231,459 | 206,089 | |||||||||
| General corporate | 37,412 | 85,270 | 97,438 | |||||||||
| $ | 622,845 | $ | 769,418 | $ | 783,669 | |||||||
| Depreciation and amortization expense: | ||||||||||||
| Supply Technologies | $ | 5,153 | $ | 4,832 | $ | 4,365 | ||||||
| Aluminum Products | 8,564 | 8,563 | 7,892 | |||||||||
| Manufactured Products | 6,586 | 6,723 | 6,960 | |||||||||
| General corporate | 479 | 351 | 820 | |||||||||
| $ | 20,782 | $ | 20,469 | $ | 20,037 | |||||||
| Capital expenditures: | ||||||||||||
| Supply Technologies | $ | 931 | $ | 7,751 | $ | 2,447 | ||||||
| Aluminum Products | 7,750 | 4,775 | 5,528 | |||||||||
| Manufactured Products | 8,101 | 6,534 | 12,548 | |||||||||
| General corporate | 684 | 2,816 | (1,267 | ) | ||||||||
| $ | 17,466 | $ | 21,876 | $ | 19,256 | |||||||
39
43
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued(Continued)
| Year Ended December 31, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
| 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: | |||||||||||||
| 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 | ) | |||||||
| Interest expense | (27,056 | ) | (31,413 | ) | (26,151 | ) | |||||||
| $ | 27,250 | $ | 17,933 | $ | (10,619 | ) | |||||||
| Identifiable assets: | |||||||||||||
| ILS | $ | 323,176 | $ | 297,002 | $ | 267,361 | |||||||
| Aluminum Products | 104,618 | 105,535 | 88,031 | ||||||||||
| Manufactured Products | 169,004 | 163,230 | 121,331 | ||||||||||
| General corporate | 71,056 | 46,080 | 32,821 | ||||||||||
| $ | 667,854 | $ | 611,847 | $ | 509,544 | ||||||||
| Depreciation and amortization expense: | |||||||||||||
| ILS | $ | 4,575 | $ | 4,608 | $ | 4,868 | |||||||
| Aluminum Products | 7,484 | 5,858 | 5,342 | ||||||||||
| Manufactured Products | 4,986 | 4,728 | 5,050 | ||||||||||
| General corporate | 216 | 191 | 219 | ||||||||||
| $ | 17,261 | $ | 15,385 | $ | 15,479 | ||||||||
| Capital expenditures: | |||||||||||||
| ILS | $ | 2,070 | $ | 3,691 | $ | 3,017 | |||||||
| Aluminum Products | 10,473 | 5,497 | 1,878 | ||||||||||
| Manufactured Products | 7,266 | 720 | 5,867 | ||||||||||
| General corporate | 486 | 55 | 107 | ||||||||||
| $ | 20,295 | $ | 9,963 | $ | 10,869 | ||||||||
The Company had sales of $107,853$88,222 in 2005, $95,6102008, $77,389 in 20042007 and $68,238$146,849 in 20032006 to International Truck,Navistar, Inc. (“Navistar”), which represented approximately 12%8%, 12%7% and 11%14% of consolidated net sales for each respective year.
44
The Company’s approximate percentage of net sales by geographic region were as follows:
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
| United States | 79 | % | 74 | % | 83 | % | ||||||
| Canada | 7 | % | 9 | % | 8 | % | ||||||
| Other | 14 | % | 17 | % | 9 | % | ||||||
| 100 | % | 100 | % | 100 | % | |||||||
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| United States | 68 | % | 70 | % | 76 | % | ||||||
| Asia | 11 | % | 9 | % | 5 | % | ||||||
| Canada | 6 | % | 5 | % | 9 | % | ||||||
| Mexico | 6 | % | 6 | % | 4 | % | ||||||
| Europe | 6 | % | 6 | % | 4 | % | ||||||
| Other | 3 | % | 4 | % | 2 | % | ||||||
| 100 | % | 100 | % | 100 | % | |||||||
At December 31, 2005,2008, 2007 and 2006, approximately 86%81%, 85% and 90%, respectively, of the Company’s assets were maintained in the United States.
| NOTE C — | Acquisitions |
During 2008, the Company purchased certain assets of two companies for a total cost of $5,322. These acquisitions were funded with borrowings under the Company’s revolving credit facility. These acquisitions were not deemed significant as defined inRegulation S-X.
In October 2006, the Company acquired all of the capital stock of NABS, Inc. (“NABS”) for $21,201 in cash. NABS is a premier international supply chain manager of production components, providing services to high technology companies in the computer, electronics, and consumer products industries. NABS has 19 operations across Europe, Asia, Mexico and the United States. The acquisition was funded with borrowings under the Company’s revolving credit facility.
The purchase price and results of operations of NABS prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for NABS have been included in the Supply Technologies segment since October 18, 2006. The final allocation of the purchase price has been
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
performed based on the assignments of fair values to assets acquired and liabilities assumed. The final allocation of the purchase price is as follows:
| Cash acquisition price, less cash acquired | $ | 20,053 | ||
| Assets | ||||
| Accounts receivable | (11,460 | ) | ||
| Inventories | (4,326 | ) | ||
| Other current assets | (201 | ) | ||
| Equipment | (365 | ) | ||
| Intangible assets subject to amortization | (8,020 | ) | ||
| Other assets | (724 | ) | ||
| Liabilities | ||||
| Accounts payable | 9,905 | |||
| Accrued expenses and other current liabilities | 4,701 | |||
| Deferred tax liability | 3,128 | |||
| Goodwill | $ | 12,691 | ||
In January 2006, the Company completed the acquisition of all of the capital stock of Foundry Service GmbH (“Foundry Service”) for approximately $3,219, which resulted in additional goodwill of $2,313. The acquisition was funded with borrowings from foreign subsidiaries of the Company. The acquisition was not deemed significant as defined inRegulation S-X.
| NOTE D — | FAS 142, “Goodwill and Other Intangible Assets” |
FAS 142, “Goodwill and Other Intangibles”, requires that our annual, and any interim, impairment assessment be performed at the “reporting unit” level. At October 1, 2008, the Company had four reporting units that had goodwill. Under the provisions of FASB Statement No. 142, these four reporting units were tested for impairment as of October 1, 2008 and updated as of December 31, 2008, as necessary. During the fourth quarter of 2008, indicators of potential impairment caused us to update our impairment tests. Those indicators included the following: a significant decrease in market capitalization; a decline in recent operating results; and a decline in our business outlook primarily due to the macroeconomic environment. In accordance with FAS 142, we completed an impairment analysis and concluded that all of the goodwill in three of the reporting units for a total of $95,763 was impaired and written off in the fourth quarter of 2008.
The following table summarizes the carrying amount of goodwill for the years ended December 31, 2008 and December 31, 2007 by reporting segment.
| Goodwill at | Goodwill at | |||||||
Reporting Segment | December 31, 2008 | December 31, 2007 | ||||||
| Supply Technologies | $ | -0- | $ | 80,249 | ||||
| Aluminum Products | -0- | 16,515 | ||||||
| Manufactured Products | 4,109 | 4,233 | ||||||
| $ | 4,109 | $ | 100,997 | |||||
The decrease in the goodwill in the Manufactured Products segment and in the Supply Technologies segment prior to the impairment charge during 2008 results from foreign currency fluctuations.
41
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other intangible assets were acquired in connection with the acquisition of NABS. Information regarding other intangible assets as of December 31, 2008 follows:
| Acquisition | Accumulated | |||||||||||
| Costs | Amortization | Net | ||||||||||
| Non-contractual customer relationships | $ | 7,200 | $ | 1,200 | $ | 6,000 | ||||||
| Other | 820 | 248 | 572 | |||||||||
| $ | 8,020 | $ | 1,448 | $ | 6,572 | |||||||
Amortization of other intangible assets was $724 for the years ended December 31, 2008 and 2007, respectively.
| NOTE E — | Other Assets |
Other assets consists of the following:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
| Pension assets | $ | 38,985 | $ | 70,558 | ||||
| Deferred financing costs, net | 2,951 | 4,225 | ||||||
| Tooling | 139 | 543 | ||||||
| Software development costs | 4,096 | 3,461 | ||||||
| Intangible assets subject to amortization | 7,513 | 7,504 | ||||||
| Other | 9,691 | 7,894 | ||||||
| Totals | $ | 63,375 | $ | 94,185 | ||||
| NOTE F — | Accrued Expenses |
Accrued expenses include the following:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
| Accrued salaries, wages and benefits | $ | 13,173 | $ | 17,399 | ||||
| Advance billings | 28,412 | 16,387 | ||||||
| Warranty and project accruals | 6,686 | 7,322 | ||||||
| Interest payable | 2,837 | 2,683 | ||||||
| Taxes | 6,386 | 5,607 | ||||||
| Other | 16,900 | 17,525 | ||||||
| Totals | $ | 74,394 | $ | 66,923 | ||||
Substantially all advance billings, warranty and project accruals relate to the Company’s capital equipment businesses.
42
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the aggregate product warranty liability are as follows for the year ended December 31, 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | ||||||||||
| Balance at beginning of year | $ | 5,799 | $ | 3,557 | $ | 3,566 | ||||||
| Claims paid during the year | (3,944 | ) | (2,402 | ) | (2,984 | ) | ||||||
| Warranty expense | 4,202 | 4,526 | 2,797 | |||||||||
| Other | (655 | ) | 118 | 178 | ||||||||
| Balance at end of year | $ | 5,402 | $ | 5,799 | $ | 3,557 | ||||||
| NOTE G — | Financing Arrangements |
Long-term debt consists of the following:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
| 8.375% senior subordinated notes due 2014 | $ | 210,000 | $ | 210,000 | ||||
| Revolving credit facility maturing on December 31, 2010 | 164,600 | 145,400 | ||||||
| Other | 11,061 | 4,649 | ||||||
| 385,661 | 360,049 | |||||||
| Less current maturities | 8,778 | 2,362 | ||||||
| Total | $ | 376,883 | $ | 357,687 | ||||
Maturities of long-term debt during each of the five years following December 31, 2008 are approximately $8,778 in 2009, $166,859 in 2010, $24 in 2011, $-0- in 2012 and $-0- in 2013.
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 $270,000. The credit agreement, as amended, provides lower interest rate brackets and modified certain covenants to provide greater flexibility. The Credit Agreement currently contains a detailed borrowing base formula that provides borrowing capacity to the Company based on negotiated percentages of eligible accounts receivable, inventory and fixed assets. At December 31, 2008, the Company had approximately $47,070 of unused borrowing capacity available under the Credit Agreement. Interest is payable quarterly at either the bank’s prime lending rate (3.25% at December 31, 2008) or, at the Company’s election, at LIBOR plus .75% to 1.75%. The Company’s ability to elect LIBOR-based interest rates as well as the overall interest rate are dependent on the Company’s Debt Service Coverage Ratio, as defined in the Credit Agreement. Up to $40,000 in standby letters of credit and commercial letters of credit may be issued under the Credit Agreement. As of December 31, 2008, in addition to amounts borrowed under the Credit Agreement, there was $10,519 outstanding primarily for standby letters of credit. An annual fee of .25% is imposed by the bank on the unused portion of available borrowings. The Credit Agreement expires on December 31, 2010 and borrowings are secured by substantially all of the Company’s assets.
Foreign subsidiaries of the Company had borrowings of $10,319 and $3,688 at December 31, 2008 and 2007, respectively and outstanding standby letters of credit of $12,194 at December 31, 2008 under their credit arrangements.
The 8.375% senior subordinated notes due 2014 (“8.375% Notes”) are general unsecured senior subordinated obligations of the Company and are fully and unconditionally guaranteed on a joint and several basis by all material domestic subsidiaries of the Company. Provisions of the indenture governing
43
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2008, the Company was in compliance with all financial covenants of the Credit Agreement. During 2008, the Company made a distribution of capital to its shareholder in accordance with its Credit Agreement and the 8.375% Notes.
The weighted average interest rate on all debt was 5.98% at December 31, 2008.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and borrowings under the Credit Agreement approximate fair value at December 31, 2008 and 2007. The approximate fair value of the 8.375% Notes was $79,594 and $189,000 at December 31, 2008 and 2007, respectively.
| NOTE H — | Income Taxes |
Income taxes consisted of the following:
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Current payable (benefit): | ||||||||||||
| Federal | $ | 229 | $ | (9 | ) | $ | 2,355 | |||||
| State | 1,518 | 299 | 432 | |||||||||
| Foreign | 6,156 | 5,344 | 4,792 | |||||||||
| 7,903 | 5,634 | 7,579 | ||||||||||
| Deferred: | ||||||||||||
| Federal | 12,421 | 3,639 | (1,093 | ) | ||||||||
| State | 923 | 198 | (1,521 | ) | ||||||||
| Foreign | (261 | ) | 505 | (1,747 | ) | |||||||
| 13,083 | 4,342 | (4,361 | ) | |||||||||
| Income taxes | $ | 20,986 | $ | 9,976 | $ | 3,218 | ||||||
The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows:
Rate Reconciliation | 2008 | 2007 | 2006 | |||||||||
| Tax at statutory rate | $ | (34,586 | ) | $ | 10,911 | $ | 9,571 | |||||
| Effect of state income taxes, net | (1,834 | ) | 266 | (1,240 | ) | |||||||
| Effect of foreign operations | 293 | (1,082 | ) | (1,441 | ) | |||||||
| Goodwill | 23,241 | -0- | -0- | |||||||||
| Valuation allowance | 33,625 | 238 | (4,806 | ) | ||||||||
| Other, net | 247 | (357 | ) | 1,134 | ||||||||
| Total | $ | 20,986 | $ | 9,976 | $ | 3,218 | ||||||
44
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, | ||||||||
| 2008 | 2007 | |||||||
| Deferred tax assets: | ||||||||
| Postretirement benefit obligation | $ | 7,579 | $ | 7,604 | ||||
| Inventory | 12,126 | 10,969 | ||||||
| Net operating loss and credit carryforwards | 22,133 | 21,544 | ||||||
| Goodwill | 5,465 | -0- | ||||||
| Other | 10,832 | 9,223 | ||||||
| Total deferred tax assets | 58,135 | 49,340 | ||||||
| Deferred tax liabilities: | ||||||||
| Tax over book depreciation | 5,824 | 13,354 | ||||||
| Pension | 14,389 | 26,071 | ||||||
| Inventory | -0- | 864 | ||||||
| Intangible assets and other | 2,645 | 2,955 | ||||||
| Deductible goodwill | -0- | 4,704 | ||||||
| Total deferred tax liabilities | 22,858 | 47,948 | ||||||
| Net deferred tax assets prior to valuation allowances | 35,277 | 1,392 | ||||||
| Valuation allowances | (34,921 | ) | (2,217 | ) | ||||
| Net deferred tax asset (liability) | $ | 356 | $ | (825 | ) | |||
At December 31, 2008, the Company has federal, state and foreign net operating loss carryforwards for income tax purposes. The U.S. federal net operating loss carryforward is approximately $42,129 which expires between 2022 and 2028. Foreign net operating losses of $1,389 have no expiration date. The tax benefit of the U.S. federal net operating loss is $13,372, which has been reduced by $1,373 of FIN 48 liabilities. The Company also has $2,281 of state tax benefit related to state net operating losses which expire between 2011 and 2028. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities).
At December 31, 2008, the Company has research and development credit carryforwards of approximately $2,862 which expire between 2010 and 2028. The Company also has foreign tax credit carryforwards of $1,551, which expire between 2015 and 2018, and alternative minimum tax credit carryforwards of $1,146 which have no expiration date.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 2005 through 2008 remain open for examination by the U.S. and various state and foreign taxing authorities.
As of December 31, 2006, the Company determined that it was more likely than not that it would be able to realize most of its deferred tax assets in the future and released $4,806 of the valuation allowance. As of December 31, 2006, the Company also recognized a tax benefit for net operating losses of $1,284 for state income taxes which it had determined are more likely than not will be fully realized in the future. As of December 31, 2008 the Company was in a cumulative three-year loss position and determined that it was not more likely than not that its net deferred tax assets will be realized. Therefore, as of December 31, 2008, the Company recorded a full valuation allowance of $33,466 against its U.S. net deferred tax assets. The Company reviews all valuation allowances related to deferred tax assets and will reverse these valuation allowances, partially or totally, when appropriate under FAS 109.
45
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $608 increase in the liability for unrecognized tax benefits which was accounted for as a reduction in retained earnings. The total amount of unrecognized tax benefits as of the date of adoption was approximately $4,691. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2008 | 2007 | |||||||
| Unrecognized Tax Benefit — January 1, | $ | 5,255 | $ | 4,691 | ||||
| Gross Increases — Tax Positions in Prior Period | -0- | 72 | ||||||
| Gross Decreases — Tax Positions in Prior Period | (39 | ) | (133 | ) | ||||
| Gross Increases — Tax Positions in Current Period | 590 | 625 | ||||||
| Settlements | -0- | -0- | ||||||
| Lapse of Statute of Limitations | -0- | -0- | ||||||
| Unrecognized Tax Benefit — December 31, | $ | 5,806 | $ | 5,255 | ||||
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $4,692 at December 31, 2008 and $4,311 at December 31, 2007. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2008 and 2007, the Company recognized approximately $94 and $57, respectively, in net interest and penalties. The Company had approximately $631 and $537 for the payment of interest and penalties accrued at December 31, 2008 and 2007, respectively. The Company does not expect that the unrecognized tax benefit will change significantly within the next twelve months.
Deferred taxes have not been provided on undistributed earnings of the Company’s foreign subsidiaries as it is the Company’s policy to permanently reinvest such earnings. The Company has determined that it is not practical to determine the deferred tax liability on such undistributed earnings.
| NOTE I — | Legal Proceedings |
The Company is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation is not expected to have a material adverse effect on the Company’s financial condition, liquidity and results of operations.
| NOTE J — | Pensions and Postretirement Benefits |
On December 31, 2006, the Company adopted the recognition and disclosure provisions of FAS 158. FAS 158 required the Company to recognize the funded status (i.e., the difference between the Company’s fair value of plan assets and the benefit obligations) of its defined benefit pension and postretirement benefit plans (collectively, the “postretirement benefit plans”) in the December 31, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs and unrecognized transition obligation remaining from the initial adoption of FAS 87 and FAS 106, all of which were previously netted against the postretirement benefit plans’ funded status in the company’s Consolidated Balance Sheet in accordance with the provisions of FAS 87 and FAS 106. These amounts will be subsequently recognized as net periodic benefit cost in accordance with the Company’s historical accounting policy for amortizing these amounts. In addition, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost in the same periods will be recognized as a component of other comprehensive income. Those
46
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amounts will be subsequently recognized as a component of net periodic benefit cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of FAS 158.
The estimated net (gain), prior service cost and net transition (asset) for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2009 are $(925), $129 and $(40), respectively.
The estimated net loss for the postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2009 is $386.
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, 2008 and 2007:
| Postretirement | ||||||||||||||||
| Pension | Benefits | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Change in benefit obligation | ||||||||||||||||
| Benefit obligation at beginning of year | $ | 48,320 | $ | 52,387 | $ | 18,711 | $ | 22,989 | ||||||||
| Service cost | 439 | 334 | 87 | 180 | ||||||||||||
| Curtailment and settlement | -0- | 80 | -0- | -0- | ||||||||||||
| Interest cost | 2,892 | 2,842 | 1,215 | 1,103 | ||||||||||||
| Amendments | -0- | -0- | -0- | -0- | ||||||||||||
| Actuarial losses (gains) | 1,150 | (2,571 | ) | 2,348 | (2,990 | ) | ||||||||||
| Benefits and expenses paid, net of contributions | (4,418 | ) | (4,752 | ) | (2,400 | ) | (2,571 | ) | ||||||||
| Benefit obligation at end of year | $ | 48,383 | $ | 48,320 | $ | 19,961 | $ | 18,711 | ||||||||
Change in plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 118,878 | $ | 112,496 | $ | -0- | $ | -0- | ||||||||
| Actual return on plan assets | (27,092 | ) | 11,134 | -0- | -0- | |||||||||||
| Company contributions | -0- | -0- | 2,400 | 2,571 | ||||||||||||
| Benefits and expenses paid, net of contributions | (4,418 | ) | (4,752 | ) | (2,400 | ) | (2,571 | ) | ||||||||
| Fair value of plan assets at end of year | $ | 87,368 | $ | 118,878 | $ | -0- | $ | -0- | ||||||||
| Funded (underfunded) status of the plan | $ | 38,985 | $ | 70,558 | $ | (19,961 | ) | $ | (18,711 | ) | ||||||
47
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amounts recognized in the consolidated balance sheets consist of:
| Postretirement | ||||||||||||||||
| Pension | Benefits | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
| Noncurrent assets | $ | 38,985 | $ | 70,558 | $ | -0- | $ | -0- | ||||||||
| Noncurrent liabilities | -0- | -0- | 11,757 | 12,786 | ||||||||||||
| Current liabilities | -0- | -0- | 2,290 | 2,041 | ||||||||||||
| Accumulated other comprehensive (income) loss | 25,131 | (12,756 | ) | 5,914 | 3,884 | |||||||||||
| Net amount recognized at the end of the year | $ | 64,116 | $ | 57,802 | $ | 19,961 | $ | 18,711 | ||||||||
Amounts recognized in accumulated other comprehensive (income) loss | ||||||||||||||||
| Net actuarial loss/(gain) | $ | 24,972 | $ | (13,005 | ) | $ | 5,914 | $ | 3,936 | |||||||
| Net prior service cost (credit) | 372 | 509 | -0- | (52 | ) | |||||||||||
| Net transition obligation (asset) | (213 | ) | (260 | ) | -0- | -0- | ||||||||||
| Accumulated other comprehensive (income) loss | $ | 25,131 | $ | (12,756 | ) | $ | 5,914 | $ | 3,884 | |||||||
As of December 31, 2008 and 2007, the Company’s defined benefit pension plans did not hold a material amount of shares of Holdings’ common stock.
The pension plan weighted-average asset allocation at December 31, 2008 and 2007 and target allocation for 2009 are as follows:
| Plan Assets | ||||||||||||
| Target 2009 | 2008 | 2007 | ||||||||||
Asset Category | ||||||||||||
| Equity securities | 60-70 | % | 54.0 | % | 64.8 | % | ||||||
| Debt securities | 20-30 | 11.6 | 24.2 | |||||||||
| Other | 7-15 | 34.4 | 11.0 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
The following tables summarize the assumptions used by the consulting actuary and the related cost information.
| Weighted-Average assumptions as of December 31, | ||||||||||||||||||||||||
| Pension | Postretirement Benefits | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
| Discount rate | 6.25 | % | 6.25 | % | 5.75 | % | 6.25 | % | 6.25 | % | 5.75 | % | ||||||||||||
| Expected return on plan assets | 8.25 | % | 8.25 | % | 8.50 | % | N/A | N/A | N/A | |||||||||||||||
| Rate of compensation increase | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||
In determining its expected return on plan assets assumption for the year ended December 31, 2008, 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, 2008 of 8.25%. This assumption was supported by the asset return generation model, which projected future asset returns using simulation and asset class correlation.
48
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For measurement purposes, a 8.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2008. The rate was assumed to decrease gradually to 5.0% for 2011 and remain at that level thereafter.
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||
| Service costs | $ | 439 | $ | 334 | $ | 426 | $ | 87 | $ | 180 | $ | 199 | ||||||||||||
| Interest costs | 2,892 | 2,842 | 2,915 | 1,215 | 1,103 | 1,292 | ||||||||||||||||||
| Expected return on plan assets | (9,634 | ) | (9,049 | ) | (8,408 | ) | -0- | -0- | -0- | |||||||||||||||
| Transition obligation | (47 | ) | (38 | ) | (48 | ) | -0- | -0- | -0- | |||||||||||||||
| FAS 88 one-time charge | -0- | 80 | 297 | -0- | -0- | -0- | ||||||||||||||||||
| Amortization of prior service cost | 137 | 138 | 182 | (52 | ) | (63 | ) | (63 | ) | |||||||||||||||
| Recognized net actuarial (gain) loss | (100 | ) | 13 | 99 | 369 | 227 | 374 | |||||||||||||||||
| Benefit (income) costs | $ | (6,313 | ) | $ | (5,680 | ) | $ | (4,537 | ) | $ | 1,619 | $ | 1,447 | $ | 1,802 | |||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss | ||||||||||||||||||||||||
| AOCI at beginning of year | $ | (12,756 | ) | $ | (8,144 | ) | $ | 5,358 | $ | 3,884 | $ | 7,038 | $ | -0- | ||||||||||
| Net loss/(gain) | 37,876 | (4,499 | ) | 2,347 | (2,990 | ) | ||||||||||||||||||
| Recognition of prior service cost/(credit) | (137 | ) | (138 | ) | -0- | 52 | 63 | -0- | ||||||||||||||||
| Recognition of loss/(gain) | 148 | 25 | -0- | (369 | ) | (227 | ) | -0- | ||||||||||||||||
| Decrease prior to adoption of SFAS No. 158 | -0- | -0- | (5,358 | ) | -0- | -0- | -0- | |||||||||||||||||
| Increase (decrease) due to adoption of SFAS No. 158 | -0- | -0- | (8,144 | ) | -0- | -0- | 7,038 | |||||||||||||||||
| Total recognized in other comprehensive (income) loss at end of year | $ | 25,131 | $ | (12,756 | ) | $ | (8,144 | ) | $ | 5,914 | $ | 3,884 | $ | 7,038 | ||||||||||
Below is a table summarizing the Company’s expected future benefit payments and the expected payments due to Medicare subsidy over the next ten years:
| Postretirement Benefits | ||||||||||||||||
| Pension | Expected | Net including | ||||||||||||||
| Benefits | Gross | Medicare Subsidy | Medicare Subsidy | |||||||||||||
| 2009 | $ | 4,193 | $ | 2,497 | $ | 208 | $ | 2,289 | ||||||||
| 2010 | 4,119 | 2,447 | 210 | 2,237 | ||||||||||||
| 2011 | 4,040 | 2,356 | 207 | 2,149 | ||||||||||||
| 2012 | 3,959 | 2,192 | 204 | 1,988 | ||||||||||||
| 2013 | 3,933 | 2,074 | 195 | 1,879 | ||||||||||||
| 2014 to 2018 | 18,791 | 8,670 | 836 | 7,834 | ||||||||||||
49
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2008 | $ | 108 | $ | (93 | ) | |||
| Effect on postretirement benefit obligation as of December 31, 2008 | $ | 1,581 | $ | (1,386 | ) | |||
The total contribution charged to pension expense for the Company’s defined contribution plans was $2,081 in 2008, $2,068 in 2007 and $1,831 in 2006. The Company expects to have no contributions to its defined benefit plans in 2009.
In January 2008, a Supplemental Executive Retirement Plan (“SERP”) for the Company’s Chairman of the Board of Directors and Chief Executive Officer (“CEO”) was approved by the Compensation Committee of the Board of Directors of the Company. The SERP provides an annual supplemental retirement benefit for up to $375 upon the CEO’s termination of employment with the Company. The vested retirement benefit will be equal to a percentage of the Supplemental Pension that is equal to the ratio of the sum of his credited service with the Company prior to January 1, 2008 (up to a maximum of thirteen years), and his credited service on or after January 1, 2008 (up to a maximum of seven years) to twenty years of credited service. In the event of a change in control before the CEO’s termination of employment, he will receive 100% of the Supplemental Pension. The Company recorded an expense of $389 related with the SERP in 2008. Additionally, a non-qualified defined contribution retirement benefit was also approved in which the company will credit $94 quarterly ($375 annually) for a seven year period to an account in which the CEO will always be 100% vested. The seven year period began on March 31, 2008.
| NOTE K — | Leases and Sale-leaseback Transactions |
Future minimum lease commitments during each of the five years following December 31, 2008 and thereafter are as follows: $13,581 in 2009, $9,967 in 2010, $7,797 in 2011, $5,357 in 2012, $3,381 in 2013 and $8,428 thereafter. Rental expense for 2008, 2007 and 2006 was $14,400, $14,687 and $15,370, respectively.
In 2006, the Company entered into two sale-leaseback arrangements. Under the arrangements, land, building and equipment with a net book value of approximately $7,988 were sold for $9,420 and leased back under two operating lease agreements ranging from five to twelve years. The gain on these transactions of approximately $1,400 was deferred and is being amortized over the terms of the lease agreements.
Certain of the Company’s leases are with related parties at an annual rental expense of approximately $2,000. Transactions with related parties are in the ordinary course of business, are conducted on an arms length basis, and are not material to the Company’s financial position, results of operations or cash flows.
50
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| NOTE L — | Accumulated Comprehensive Loss |
The components of accumulated comprehensive loss at December 31, 20052008 and 20042007 are as follows:
| December 31, | |||||||||
| 2005 | 2004 | ||||||||
| Foreign currency translation adjustment | $ | (3,256 | ) | $ | (3,162 | ) | |||
| Minimum pension liability | 5,358 | 4,838 | |||||||
| Total | $ | 2,102 | $ | 1,676 | |||||
| December 31, | ||||||||
| 2008 | 2007 | |||||||
| Foreign currency translation adjustment | $ | 3,982 | $ | 12,712 | ||||
| Pension and postretirement benefit adjustments, net of tax | (21,084 | ) | 5,372 | |||||
| Total | $ | (17,102 | ) | $ | 18,084 | |||
| NOTE M — | Restructuring and Unusual Charges |
In 2006, the fourth quarter of 2003, the Company continued its multi-year efforts to position the Company for renewed, more profitable growth and recorded restructuring and asset impairment charges aggregating $19,446.associated with its planned closure of a manufacturing facility in the Supply Technologies segment. The action primarilycharges (credits) were composed of $800 of inventory and tooling included in Cost of Products Sold, $297 of pension curtailment and $(1,106) of postretirement benefit curtailment. In 2007, the Company recorded an additional $2,214 charge for inventory related to restructuring atcharges which are included in Cost of Products Sold.
At December 31, 2007, the Company’s Forge Group resultingbalance sheet reflected assets held for sale at their estimated current value of $3,330 for property, plant and equipment. These assets were sold in 2008.
In 2008, due to the recent volume declines and volatility in the automotive markets along with the general economic downturn, the Company evaluated its long-lived assets in accordance with FAS 144. The Company determined whether the carrying amount of its long-lived assets was recoverable by comparing the carrying amount to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. If the carrying value of the assets exceeded the expected cash flows, the Company estimated the fair value of these assets to determine whether an impairment existed. During 2008, based on the results of these tests, the Company recorded asset impairment charges. In addition, the Company made a decision to shut downexit its locomotive crankshaft forging plant after entering intorelationship with its largest customer, Navistar, effective December 31, 2008 which along with the general economic downturn resulted in either the closure, downsizing or consolidation of eight facilities in its distribution network. The Company expects the restructuring activities to be completed in 2009. As a long-term supply contract to purchase these forgings from a third party. Theresult, the Company recorded asset impairment charges of $30,875, which were composed of $990$5,544 of inventory impairment included in Cost of Products Sold, $1,758 for exit costs; $638a loss on disposition of costa foreign subsidiary, $564 of goods sold primarily to write down inventory of discontinued product lines to current market value; $1,767 for pension curtailmentseverance costs (80 employees) 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$23,009 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 | |||||||||||
| Loss on Disposal | ||||||||||||||||||||
| Asset | Cost of | of Foreign | Severance | |||||||||||||||||
| Impairment | Products Sold | Subsidiary | Costs | Total | ||||||||||||||||
| Supply Technologies | $ | 6,143 | $ | 4,965 | $ | 1,758 | $ | 564 | $ | 13,430 | ||||||||||
| Aluminum Products | 12,575 | 579 | -0- | -0- | 13,154 | |||||||||||||||
| Manufactured Products | 4,291 | -0- | -0- | -0- | 4,291 | |||||||||||||||
| $ | 23,009 | $ | 5,544 | $ | 1,758 | $ | 564 | $ | 30,875 | |||||||||||
51
45
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued(Continued)
| 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:
| Balance at January 1, 2003 | $ | 4,045 | ||
| Severance and exit charges recorded in 2003 | 990 | |||
| Cash payments made in 2003 | (2,500 | ) | ||
| Balance at December 31, 2003 | 2,535 | |||
| Severance and exit charges recorded in 2004 | -0- | |||
| Cash payments made in 2004 | (2,073 | ) | ||
| Balance at December 31, 2004 | 462 | |||
| Exit charges recorded in 2005 | 400 | |||
| Cash payments made in 2005 | (266 | ) | ||
| Balance at December 31, 2005 | $ | 596 | ||
| Balance at January 1, 2008 | $ | -0- | ||
| Severance costs recorded in 2008 | 564 | |||
| Cash payments made in 2008 | (19 | ) | ||
| Balance at December 31, 2008 | $ | 545 | ||
| NOTE N — | Derivatives and Hedging |
The Company recognizes all derivative financial instruments as either assets or liabilities at fair value. The Company has no derivative instruments that are classified as fair value hedges. Changes in the fair value of derivative instruments that are classified as cash flow hedges are recognized in other comprehensive income until such time as the hedged items are recognized in net income.
During the second quarter of 2004,2006, the Company entered into forward contracts for the purpose of hedging exposure to changes in the value of accounts receivable in euros against the USU.S. dollar, for a notional amount of $5,075,$1,000, of which $500$-0- 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
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, 20052008 and 2004,2007, consolidating condensed statements of incomeoperations for the years ended December 31, 20052008, 2007 and 2004, consolidating condensed statement of operations for the year ended December 31, 2003,2006, consolidating condensed statements of cash flows for the years ended December 31, 2005, 20042008, 2007 and 20032006 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.
52
47
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — Continued(Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 20052008
| 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 | |||||||||||
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | Reclassifications/ | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | (1,960 | ) | $ | 339 | $ | 10,504 | $ | 8,740 | $ | 17,623 | |||||||||
| Accounts receivable, net | (425 | ) | 124,167 | 42,037 | -0- | 165,779 | ||||||||||||||
| Inventories | -0- | 185,852 | 42,965 | -0- | 228,817 | |||||||||||||||
| Other current assets | 9,996 | 23,035 | 14,030 | (2,193 | ) | 44,868 | ||||||||||||||
| Deferred tax assets | -0- | -0- | -0- | 9,446 | 9,446 | |||||||||||||||
| Total Current Assets | 7,611 | 333,393 | 109,536 | 15,993 | 466,533 | |||||||||||||||
| Investment in subsidiaries | 385,803 | 23,876 | (23,876 | ) | (385,803 | ) | -0- | |||||||||||||
| Inter-company advances | 408,900 | 417,572 | 9,065 | (835,537 | ) | -0- | ||||||||||||||
| Property, Plant and Equipment, net | 3,119 | 74,923 | 10,786 | -0- | 88,828 | |||||||||||||||
| Other Assets: | ||||||||||||||||||||
| Goodwill | -0- | 1,346 | 2,763 | -0- | 4,109 | |||||||||||||||
| Other | 11,218 | 45,077 | 1,564 | 5,516 | 63,375 | |||||||||||||||
| Total Other Assets | 11,218 | 46,423 | 4,327 | 5,516 | 67,484 | |||||||||||||||
| Total Assets | $ | 816,651 | $ | 896,187 | $ | 109,838 | $ | (1,199,831 | ) | $ | 622,845 | |||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||
| Trade accounts payable | $ | 3,726 | $ | 92,134 | $ | 17,880 | $ | 8,367 | $ | 122,107 | ||||||||||
| Accrued expenses | 205 | 52,203 | 21,986 | -0- | 74,394 | |||||||||||||||
| Current portion of long-term liabilities | -0- | 195 | 8,543 | 2,330 | 11,068 | |||||||||||||||
| Total Current Liabilities | 3,931 | 144,532 | 48,409 | 10,697 | 207,569 | |||||||||||||||
| 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 | 164,600 | -0- | -0- | -0- | 164,600 | |||||||||||||||
| Other long-term debt | -0- | 547 | 1,776 | (40 | ) | 2,283 | ||||||||||||||
| Deferred tax liability | 7,686 | -0- | 1,404 | -0- | 9,090 | |||||||||||||||
| Other postretirement benefits and other long-term liabilities | 3,078 | 53,841 | 434 | (33,260 | ) | 24,093 | ||||||||||||||
| Total Long-Term Liabilities | 385,364 | 54,388 | 3,614 | (33,300 | ) | 410,066 | ||||||||||||||
| Inter-company advances | 426,584 | 371,557 | 13,830 | (811,971 | ) | -0- | ||||||||||||||
| Shareholder’s Equity | 772 | 325,710 | 43,985 | (365,257 | ) | 5,210 | ||||||||||||||
| Total Liabilities and Shareholder’s Equity | $ | 816,651 | $ | 896,187 | $ | 109,838 | $ | (1,199,831 | ) | $ | 622,845 | |||||||||
53
48
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — Continued(Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 20042007
| 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 | |||||||||||
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | Reclassifications/ | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | (19,232 | ) | $ | 607 | $ | 11,626 | $ | 20,076 | $ | 13,077 | |||||||||
| Accounts receivable, net | (550 | ) | 127,972 | 44,935 | -0- | 172,357 | ||||||||||||||
| Inventories | -0- | 174,238 | 41,171 | -0- | 215,409 | |||||||||||||||
| Other current assets | (10,464 | ) | 16,364 | 17,936 | 20,738 | 44,574 | ||||||||||||||
| Deferred tax assets | -0- | -0- | -0- | 21,897 | 21,897 | |||||||||||||||
| Total Current Assets | (30,246 | ) | 319,181 | 115,668 | 62,711 | 467,314 | ||||||||||||||
| Investment in subsidiaries | 397,880 | 28,729 | (28,729 | ) | (397,880 | ) | -0- | |||||||||||||
| Inter-company advances | 370,880 | 349,186 | (382 | ) | (719,684 | ) | -0- | |||||||||||||
| Property, Plant and Equipment, net | 2,913 | 77,894 | 22,785 | -0- | 103,592 | |||||||||||||||
| Other Assets: | ||||||||||||||||||||
| Goodwill | -0- | 93,029 | 7,968 | -0- | 100,997 | |||||||||||||||
| Other | 47,176 | 47,364 | 949 | 2,026 | 97,515 | |||||||||||||||
| Total Other Assets | 47,176 | 140,393 | 8,917 | 2,026 | 198,512 | |||||||||||||||
| Total Assets | $ | 788,603 | $ | 915,383 | $ | 118,259 | $ | (1,052,827 | ) | $ | 769,418 | |||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||
| Trade accounts payable | $ | 4,141 | $ | 75,879 | $ | 22,339 | $ | 19,511 | $ | 121,870 | ||||||||||
| Accrued expenses | (9,477 | ) | 45,962 | 18,259 | 12,179 | 66,923 | ||||||||||||||
| Current portion of long-term liabilities | -0- | 185 | 2,138 | 2,080 | 4,403 | |||||||||||||||
| Total Current Liabilities | (5,336 | ) | 122,026 | 42,736 | 33,770 | 193,196 | ||||||||||||||
| 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 | 145,400 | -0- | -0- | -0- | 145,400 | |||||||||||||||
| Other long-term debt | -0- | 776 | 1,551 | (40 | ) | 2,287 | ||||||||||||||
| Deferred tax liability | (3,366 | ) | -0- | 2,101 | 23,987 | 22,722 | ||||||||||||||
| Other postretirement benefits and other long-term liabilities | 4,125 | 52,689 | 557 | (33,354 | ) | 24,017 | ||||||||||||||
| Total Long-Term Liabilities | 356,159 | 53,465 | 4,209 | (9,407 | ) | 404,426 | ||||||||||||||
| Inter-company advances | 279,672 | 398,938 | 20,947 | (699,557 | ) | -0- | ||||||||||||||
| Shareholder’s Equity | 158,108 | 340,954 | 50,367 | (377,633 | ) | 171,796 | ||||||||||||||
| Total Liabilities and Shareholder’s Equity | $ | 788,603 | $ | 915,383 | $ | 118,259 | $ | (1,052,827 | ) | $ | 769,418 | |||||||||
54
49
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — Continued(Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 20052008
| 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 | |||||||||||
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net sales | $ | -0- | $ | 875,260 | $ | 193,497 | $ | -0- | $ | 1,068,757 | ||||||||||
| Cost of sales | -0- | 766,952 | 146,801 | 5,544 | 919,297 | |||||||||||||||
| Gross profit | -0- | 108,308 | 46,696 | (5,544 | ) | 149,460 | ||||||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Selling, general and administrative expenses | (20,346 | ) | 106,893 | 31,939 | (16,359 | ) | 102,127 | |||||||||||||
| Restructuring and impairment charges | -0- | 108,614 | 12,480 | -0- | 121,094 | |||||||||||||||
| Operating Income (loss) | 20,346 | (107,199 | ) | 2,277 | 10,815 | (73,761 | ) | |||||||||||||
| Interest expense | 26,883 | 1,736 | 725 | (1,423 | ) | 27,921 | ||||||||||||||
| Income before income taxes | (6,537 | ) | (108,935 | ) | 1,552 | 12,238 | (101,682 | ) | ||||||||||||
| Income taxes | 14,569 | 96 | 6,321 | -0- | 20,986 | |||||||||||||||
| Net income | $ | (21,106 | ) | $ | (109,031 | ) | $ | (4,769 | ) | $ | 12,238 | $ | (122,668 | ) | ||||||
55
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 20042007
| 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 | ||||||||||
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net sales | $ | -0- | $ | 882,091 | $ | 189,350 | $ | -0- | $ | 1,071,441 | ||||||||||
| Cost of sales | -0- | 766,495 | 143,626 | 2,216 | 912,337 | |||||||||||||||
| Gross profit | -0- | 115,596 | 45,724 | (2,216 | ) | 159,104 | ||||||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Selling, general and administrative expenses | (54,674 | ) | 103,919 | 25,553 | 21,725 | 96,523 | ||||||||||||||
| Operating Income | 54,674 | 11,677 | 20,171 | (23,941 | ) | 62,581 | ||||||||||||||
| Interest expense | 30,588 | 1,793 | 339 | (1,169 | ) | 31,551 | ||||||||||||||
| Income before income taxes | 24,086 | 9,884 | 19,832 | (22,772 | ) | 31,030 | ||||||||||||||
| Income taxes | 3,377 | 216 | 6,383 | -0- | 9,976 | |||||||||||||||
| Net income | $ | 20,709 | $ | 9,668 | $ | 13,449 | $ | (22,772 | ) | $ | 21,054 | |||||||||
56
50
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — Continued(Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONSINCOME
For the Year Ended December 31, 20032006
| 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 | ) | ||||||||
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net sales | $ | -0- | $ | 912,060 | $ | 144,186 | $ | -0- | $ | 1,056,246 | ||||||||||
| Cost of sales | 800 | 795,936 | 111,359 | -0- | 908,095 | |||||||||||||||
| Gross profit | (800 | ) | 116,124 | 32,827 | -0- | 148,151 | ||||||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Selling, general and administrative expenses | (55,175 | ) | 100,320 | 20,769 | 23,026 | 88,940 | ||||||||||||||
| Restructuring and impairment charges | -0- | (809 | ) | -0- | -0- | (809 | ) | |||||||||||||
| Operating Income | 54,375 | 16,613 | 12,058 | (23,026 | ) | 60,020 | ||||||||||||||
| Interest expense | 30,496 | 1,067 | 304 | (600 | ) | 31,267 | ||||||||||||||
| Income before income taxes | 23,879 | 15,546 | 11,754 | (22,426 | ) | 28,753 | ||||||||||||||
| Income taxes | (2,419 | ) | 57 | 5,580 | -0- | 3,218 | ||||||||||||||
| Net income | $ | 26,298 | $ | 15,489 | $ | 6,174 | $ | (22,426 | ) | $ | 25,535 | |||||||||
57
51
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — Continued(Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 20052008
| 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 | |||||||||||
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net cash provided by operations | $ | (3,847 | ) | $ | 25,797 | $ | (11,756 | ) | $ | -0- | $ | 10,194 | ||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of property, plant and equipment, net | (685 | ) | (20,784 | ) | 4,003 | -0- | (17,466 | ) | ||||||||||||
| Business acquisitions, net of cash acquired | -0- | (5,322 | ) | -0- | -0- | (5,322 | ) | |||||||||||||
| Proceeds from the sale of assets held for sale | -0- | 260 | -0- | -0- | 260 | |||||||||||||||
| Net cash (used) in investing activities | (685 | ) | (25,846 | ) | 4,003 | -0- | (22,528 | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Proceeds from bank arrangements, net | 19,200 | (219 | ) | 6,631 | -0- | 25,612 | ||||||||||||||
| Distribution of capital to shareholder | (8,732 | ) | -0- | -0- | -0- | (8,732 | ) | |||||||||||||
| Net cash (used) by financing activities | 10,468 | (219 | ) | 6,631 | -0- | 16,880 | ||||||||||||||
| Increase (decrease) in cash and cash equivalents | 5,936 | (268 | ) | (1,122 | ) | -0- | 4,546 | |||||||||||||
| Cash and cash equivalents at beginning of year | 844 | 607 | 11,626 | -0- | 13,077 | |||||||||||||||
| Cash and cash equivalents at end of year | $ | 6,780 | $ | 339 | $ | 10,504 | $ | -0- | $ | 17,623 | ||||||||||
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52
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — Continued(Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 20042007
| 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 | ||||||||||
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net cash provided by operations | $ | 7,040 | $ | 11,812 | $ | 9,980 | $ | -0- | $ | 28,832 | ||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of property, plant and equipment, net | (2,816 | ) | (9,156 | ) | (9,904 | ) | -0- | (21,876 | ) | |||||||||||
| Net cash (used) in investing activities | (2,816 | ) | (9,156 | ) | (9,904 | ) | -0- | (21,876 | ) | |||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Principal payments on long-term debt | (11,300 | ) | (2,619 | ) | (832 | ) | -0- | (14,751 | ) | |||||||||||
| Net cash (used) by financing activities | (11,300 | ) | (2,619 | ) | (832 | ) | -0- | (14,751 | ) | |||||||||||
| Increase (decrease) in cash and cash equivalents | (7,076 | ) | 37 | (756 | ) | -0- | (7,795 | ) | ||||||||||||
| Cash and cash equivalents at beginning of year | 7,920 | 570 | 12,382 | -0- | 20,872 | |||||||||||||||
| Cash and cash equivalents at end of year | $ | 844 | $ | 607 | $ | 11,626 | $ | -0- | $ | 13,077 | ||||||||||
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53
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — Continued(Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 20032006
| 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 | ||||||||||
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net cash provided (used) by operations | $ | (27,090 | ) | $ | 27,983 | $ | 3,868 | $ | -0- | $ | 4,761 | |||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of property, plant and equipment, net | 1,267 | (16,347 | ) | (4,176 | ) | -0- | (19,256 | ) | ||||||||||||
| Acquisitions, net of cash acquired | -0- | (23,271 | ) | -0- | -0- | (23,271 | ) | |||||||||||||
| Proceeds from sale of assets held for sale | -0- | 3,200 | -0- | -0- | 3,200 | |||||||||||||||
| Proceeds from sale-leaseback transaction | -0- | 9,420 | -0- | -0- | 9,420 | |||||||||||||||
| Net cash provided (used) in investing activities | 1,267 | (26,998 | ) | (4,176 | ) | -0- | (29,907 | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Proceeds from bank arrangements | 28,400 | -0- | 791 | -0- | 29,191 | |||||||||||||||
| Principal payments on long-term debt | -0- | (1,041 | ) | -0- | -0- | (1,041 | ) | |||||||||||||
| Net cash provided (used) by financing activities | 28,400 | (1,041 | ) | 791 | -0- | 28,150 | ||||||||||||||
| Increase (decrease) in cash and cash equivalents | 2,577 | (56 | ) | 483 | -0- | 3,004 | ||||||||||||||
| Cash and cash equivalents at beginning of year | 5,343 | 626 | 11,899 | -0- | 17,868 | |||||||||||||||
| Cash and cash equivalents at end of year | $ | 7,920 | $ | 570 | $ | 12,382 | $ | -0- | $ | 20,872 | ||||||||||
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54
Schedule II
PARK-OHIO INDUSTRIES, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| Balance at | Charged to | Deductions | Balance at | |||||||||||||
| Beginning of | Costs and | and | End of | |||||||||||||
Description | Period | Expenses | Other | Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Year Ended December 31, 2008: | ||||||||||||||||
| Allowances deducted from assets: | ||||||||||||||||
| Trade receivable allowances | $ | 3,724 | $ | 1,429 | $ | (2,109 | )(A) | $ | 3,044 | |||||||
| Inventory Obsolescence reserve | 20,432 | 5,385 | (3,505 | )(B) | 22,312 | |||||||||||
| Tax valuation allowances | 2,217 | 33,625 | (921 | ) | 34,921 | |||||||||||
| Product warranty liability | 5,799 | 4,202 | (4,599 | )(C) | 5,402 | |||||||||||
| Year Ended December 31, 2007: | ||||||||||||||||
| Allowances deducted from assets: | ||||||||||||||||
| Trade receivable allowances | $ | 4,305 | $ | 1,609 | $ | (2,190 | )(A) | $ | 3,724 | |||||||
| Inventory Obsolescence reserve | 22,978 | 4,383 | (6,929 | )(B) | 20,432 | |||||||||||
| Tax valuation allowances | 316 | 1,901 | 0 | (D) | 2,217 | |||||||||||
| Product warranty liability | 3,557 | 4,526 | (2,284 | )(C) | 5,799 | |||||||||||
| Year Ended December 31, 2006: | ||||||||||||||||
| Allowances deducted from assets: | ||||||||||||||||
| Trade receivable allowances | $ | 5,120 | $ | 2,330 | $ | (3,145 | )(A) | $ | 4,305 | |||||||
| Inventory Obsolescence reserve | 19,166 | 7,216 | (3,404 | )(B) | 22,978 | |||||||||||
| Tax valuation allowances | 7,011 | (4,806 | ) | (1,889 | ) | 316 | ||||||||||
| Product warranty liability | 3,566 | 2,797 | (2,806 | )(C) | 3,557 | |||||||||||
Note (A)- Uncollectible accounts written off, net of recoveries.
Note (B)- Amounts written off or payments incurred, net of acquired reserves.
Note (C)- Loss and loss adjustment.
Note (D)- Excess tax benefit initially recorded in connection with the exercise of stock options.
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
There were no changes in or disagreements with the Company’s independent auditors on accounting and financial disclosure matters within the two-year period ended December 31, 2005.
55
| Item 9A. | Controls and Procedures |
Evaluation of disclosure controls and procedures
As of December 31, 2005,2008, 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. As defined inRule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as
61
appropriate to allow timely decisions regarding required disclosure. The Company’s disclosure controls and procedures include components of the Company’s internal control over financial reporting.
Based upon thatthis evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, 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.of December 31, 2008.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRule 15d-15(f)13a-15(f) under the Exchange Act. As required byRule 15d-15(f)13a-15(c) under the Exchange Act, management carried out an evaluation, with participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of December 31, 2005.2008. 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”). ManagementBased upon the evaluation described above under the framework contained in the COSO Report, the Company’s management has identified no material weakness inconcluded that the Company’s internal control over financial reporting. Thereporting was effective as of December 31, 2008.
Ernst & Young LLP, the Company’s managementindependent registered public accounting firm, has assessedissued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 20052008 based on the framework contained in the COSO Report, and has prepared Management’s Annual Report on Internal Control Over Financial ReportingReport. This report is included at page 2429 of this annual report onForm 10-K,10-K. which is incorporated herein by reference.
Changes in internal control over financial reporting
There have issued an attestation report on the Company’s management’s assessment of the effectiveness ofbeen no changes in the Company’s internal control over financial reporting asthat occurred during the fourth quarter of December 31, 2005. This attestation report is included at page 25 of this Form 10-K and is incorporated herein by reference.2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
56
Part III
| Item 10. | Directors, |
Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.
| Item 11. | Executive Compensation |
Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.
| Item 14. | Principal Accountant Fees and Services |
The following table presents fees for professional services rendered by Ernst & Young LLP to
the Company and its parent for the years ended December 31,20052008 and 2004:2007:
the Company and its parent for the years ended December 31,
| 2005 | 2004 | |||||||
| Audit fees | $ | 1,007,000 | $ | 1,264,000 | ||||
| Audit-related fees | 60,000 | 58,000 | ||||||
| Tax fees | 86,000 | 65,000 | ||||||
| 2008 | 2007 | |||||||
| Audit fees | $ | 1,136,00 | $ | 1,043,000 | ||||
| Audit-related fees | 75,000 | 75,000 | ||||||
| Tax fees | 100,810 | 77,800 | ||||||
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 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.audits. 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 and auditor independence requiring the approval by Holdings’ audit committee of all professional services rendered by the Company’s and its parent’s independent auditor prior to the commencement of the specified services.
100% of the services described in “Audit Fees,” “Audit-Related Fees” and “Tax Fees” were pre-approved by Holdings’ audit committee in accordance with Holdings’ formal policy on auditor independence.
63
57
Part IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) The following financial statements are included in Part II, Item 8 of this annual report onForm 10-K:
| Page | |||||
| Report of Independent Registered Public Accounting Firm | |||||
| Report of Independent Registered Public Accounting Firm | |||||
| Consolidated Balance Sheets — December 31, | |||||
| Consolidated Statements of Operations — Years Ended December 31, | |||||
| Consolidated Statements of Shareholder’s Equity — Years Ended December 31, | |||||
| Consolidated Statements of Cash Flows — Years Ended December 31, | |||||
| Notes to Consolidated Financial Statements | |||||
| (2) Financial Statement Schedules | |||||
| The following consolidated financial statement schedule of Park-Ohio Industries, Inc. is included in Item 8: | |||||
| Schedule II — Valuation and Qualifying accounts | 61 | ||||
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and, therefore, have been omitted.
(3) Exhibits:
The exhibits filed as part of this annual report onForm 10-K are listed on the Exhibit Index immediately preceding such exhibits and are incorporated herein by reference.
64
58
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/ |
Jeffrey L. Rutherford, Vice President
and Chief Financial Officer
Date: March 27, 200630, 2009
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 | ||||
* | Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | |||||
* Matthew V. Crawford | President, Chief Operating Officer and Director | |||||
* Patrick V. Auletta | Director | |||||
* Kevin R. Greene | Director | |||||
* | Director | |||||
* Dan T. Moore | Director | |||||
* | ||||||
Ronna Romney | Director | |||||
* James W. Wert | Director | |||||
| * | The undersigned, pursuant to a Power of Attorney executed by each of the directors and officers identified above and filed with the Securities and Exchange Commission, by signing his name hereto, does hereby sign and execute this report on behalf of each of the persons noted above, in the capacities indicated. |
March 27, 200630, 2009
| By: | /s/Robert D. Vilsack |
Robert D. Vilsack,Attorney-in-Fact
65
59
ANNUAL REPORT ONFORM 10-K
PARK-OHIO INDUSTRIES, INC.
For the Year Ended December 31, 20052008
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 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 | ||
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 | Second Amended and Restated Credit Agreement, dated June 20, 2007, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders thereto and JP Morgan Chase Bank, N.A. (successor by merger to Bank One, NA), as agent (filed as exhibit 4.1 to Form 8-K of Park-Ohio Holdings Corp. on June 26, 2007, SEC File No. 000-03134 and incorporated by reference and made a part hereof). | ||
| 4 | .2 | 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 Holdings Corp. 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. 000-03134 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* | Summary of Annual Cash Bonus Plan for Chief Executive Officer (filed as Exhibit 10.1 to Form 10-Q for Park-Ohio Holdings Corp. for the quarter ended March 31, 2005, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 10 | .4* | Supplemental Executive Retirement Plan for Edward F. Crawford, effective as of March 10, 2008 (filed as Exhibit 10.9 to Form10-K of Park-Ohio Holdings Corp. for the year ended December 31, 2007, SEC File No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 10 | .5* | Non-qualified Defined Contribution Retirement Benefit Letter Agreement for Edward F. Crawford, dated March 10, 2008 (filed as Exhibit 10.10 to Form 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 2007, SEC File No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 10 | .6 | Agreement of Settlement and Release, dated July 1, 2008 (filed as Exhibit 10.1 to Form 10-Q of Park-Ohio Holdings Corp. for the quarter ended September 30, 2008, 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. |