The registrant is a wholly-owned subsidiary of Park-Ohio Holdings Corp. and has no equity securities that trade.
Information required by this item has been omitted pursuant to General Instruction I of Form10-K.
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 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.
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, 2006, 20052007 and 2004,2006, using forecasted discounted cash flows, and it was determined that no impairment is required. At December 31, 2006,2007, our balance sheet reflected $98.2$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 impairment charge of $95.8 million related to our Supply Technologies and Aluminum Products 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, discount rates used ranged from 11.5% to 12.5%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 4% long-term revenue growth rates were used.prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to 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.
16
Results of Operations
20062008 versus 20052007
Net Sales by Segment:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended
| | | | | | | | | Acquired/
| |
| | December 31, | | | | | | Percent
| | | (Divested)
| |
| | 2006 | | | 2005 | | | Change | | | Change | | | Sales | |
|
ILS | | $ | 598.2 | | | $ | 532.6 | | | $ | 65.6 | | | | 12 | % | | $ | 38.7 | |
Aluminum products | | | 154.6 | | | | 159.1 | | | | (4.5 | ) | | | (3 | )% | | | 0.0 | |
Manufactured products | | | 303.4 | | | | 241.2 | | | | 62.2 | | | | 26 | % | | | 22.9 | |
| | | | | | | | | | | | | | | | | | | | |
Consolidated Net Sales | | $ | 1,056.2 | | | $ | 932.9 | | | $ | 123.3 | | | | 13 | % | | $ | 61.6 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | | | | | |
NetConsolidated net sales increased by 13%were essentially flat in 20062008 compared to 2005. 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 October 2006 acquisition of NABS, 2006’s full-year’s sales of PPG (acquired in July 2005), 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 decreased 8% as the general decline in 2006 primarily due to contraction of automobile and light truckauto industry sales volumes exceeded additional sales from
18
new contracts starting production in North America.ramp-up. Manufactured Products sales increased in 20065% primarily in the induction, equipment, pipe threading equipment and forging businesses. Of this increase, $22.9 million wasbusinesses, 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 acquisitionsautomotive markets. Net sales to the automotive markets as a percentage of Lectrothermsales by segment were approximately 13%, 79% and Foundry Service by5% for the induction business in December 2005Supply Technologies, Aluminum Products and January 2006,Manufactured Products Segments, respectively.
Cost of Products Sold & Gross Profit:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Year-Ended
| | | | | |
| | Year Ended
| | | | | | | December 31, | | | | Percent
| |
| | December 31, | | | | Percent
| | | 2008 | | 2007 | | Change | | Change | |
| | 2006 | | 2005 | | Change | | Change | | | (Dollars in millions) | |
|
Consolidated cost of products sold | | $ | 908.1 | | | $ | 796.3 | | | $ | 111.8 | | | | 14 | % | | $ | 919.3 | | | $ | 912.3 | | | $ | 7.0 | | | | 1 | % |
| | | | | | | | | | | | | | |
Consolidated gross profit | | $ | 148.1 | | | $ | 136.6 | | | $ | 11.5 | | | | 8 | % | | $ | 149.5 | | | $ | 159.1 | | | $ | (9.6 | ) | | | (6 | )% |
| | | | | | | | | | | | | | |
Gross Margin | | | 14.0 | % | | | 14.6 | % | | | | | | | | | |
Gross margin | | | | 14.0 | % | | | 14.8 | % | | | | | | | | |
Cost of products sold increased 14%$7.0 million in 20062008 compared to 2005,the same period in 2007, while gross margin decreased to 14.0% in 2008 from 14.6%14.8% in 2005. ILSthe 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 PPG restructuring costs. Aluminum Products gross margin decreased due to volume reductions, product mix and pricing changes, plusboth the cost of preparations forcosts associated with starting up new contracts due to start production in early 2007.and reduced volume. Gross margin in the Manufactured Products segment decreased slightly,increased in 2008 compared to 2007 primarily as a result of operational and pricing issuesdue to increased volume in the Company’s rubber products business.induction, pipe threading equipment and forging businesses.
Selling, General & Administrative (“SG&A”) Expenses:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Year-Ended
| | | | | |
| | Year Ended
| | | | | | | December 31, | | | | Percent
| |
| | December 31, | | | | Percent
| | | 2008 | | 2007 | | Change | | Change | |
| | 2006 | | 2005 | | Change | | Change | | | (Dollars in millions) | |
|
Consolidated SG&A expenses | | $ | 88.9 | | | $ | 81.4 | | | $ | 7.5 | | | | 9 | % | | $ | 102.1 | | | $ | 96.5 | | | $ | 5.6 | | | | 6 | % |
SG&A percent | | | 8.4 | % | | | 8.7 | % | | | | | | | | | | | 9.6 | % | | | 9.0 | % | | | | | | | | |
Consolidated SG&A expenses increased by 9%, or $7.5$5.6 million in 20062008 compared to 2005,2007 representing a .3% reduction.6% increase in SG&A expenses as a percent of sales. Approximately $5.7 million of the SG&A increase was due to acquisitions, primarily NABS, Foundry Service, Lectrotherm and PPG. SG&A expenses increased primarily due to higher professional fees in 2006 comparedthe Supply Technologies and Manufactured Products segments, expenses related to 2005a 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 $.8$.6 million decreaseincrease in net pension credits reflecting reduced returns on pension plan assets. These increases in SG&A expenses from acquisitions and reduced pension credits were partially offset by cost reductions.a reversal of year end bonus accruals.
17
Interest Expense:
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Year-Ended
| | | | |
| | Year Ended
| | | | | | December 31, | | | | Percent
|
| | December 31, | | | | Percent
| | 2008 | | 2007 | | Change | | Change |
| | 2006 | | 2005 | | Change | | Change | | (Dollars in millions) |
|
Interest expense | | $ | 31.3 | | | $ | 27.1 | | | $ | 4.2 | | | 15% | | $ | 27.9 | | | $ | 31.6 | | | $ | (3.7 | ) | | (12)% |
Average outstanding borrowings | | $ | 376.5 | | | $ | 357.1 | | | $ | 19.4 | | | 5% | | $ | 385.8 | | | $ | 383.6 | | | $ | 2.2 | | | 1% |
Average borrowing rate | | | 8.31 | % | | | 7.59 | % | | | 72 | | | basis points | | | 7.23 | % | | | 8.23 | % | | | 100 | | | basis points |
Interest expense increaseddecreased $3.7 million in 20062008 compared to 2005,2007, primarily due to botha lower average borrowing rate during 2008 offset by slightly higher average outstanding borrowings and higher average interest rates during 2006.borrowings. The increase in average borrowings in 20062008 resulted primarily from growth-driven higherdecreased cash flow and increased working capital requirements and the purchase of NABS, Foundry Service, Lectrotherm and PPG in October and January 2006, and December and July 2005, respectively.capital. The higherlower average borrowing rate in 20062008 was due primarily to increaseddecreased interest rates under our revolving credit facility compared to 2005,2007.
19
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
20
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, 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 to reflect the exclusion of certain costs from suppliers and subcontractors from the percentage of completion 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 Products Sold & Gross Profit:
| | | | | | | | | | | | | | | | |
| | 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 was relatively flat in 2007 compared to 2006, while gross margin increased to 14.8% from 14.0% in 2006. 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 the costs associated with starting up new contracts and the slowramp-up of new contract volume. Gross margin in the Manufactured Products segment increased primarily due to increased sales volume.
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 $7.6 million in 2007 compared to 2006, representing a .6% increase in SG&A expenses as a percent of sales. SG&A increased approximately $5.3 million due to the acquisition of NABS. SG&A increased further primarily due to increased expenses related to stock options and restricted stock, the new office building, legal and professional fees and franchise taxes, partially offset by a $1.1 million increase in net pension credits, reflecting higher return on pension plan assets.
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 | |
Interest expense increased $.3 million in 2007 compared to 2006, due to higher average outstanding borrowings, partially offset by lower average interest rates during 2007. The increase in average borrowings in 2007 resulted primarily from higher working capital and the purchase of NABS in October 2006.
21
The lower average borrowing rate in 2007 was due primarily to decreased interest rates under our revolving credit facility compared to 2006, which increased as a result of actions by the Federal Reserve.
Income Taxes:
| | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | |
|
Income before income taxes | | $ | 28.8 | | | $ | 27.3 | |
Income taxes (benefit) | | $ | 3.2 | | | $ | (4.3 | ) |
Reversal of tax valuation allowance included in income | | | (5.0 | ) | | | (7.3 | ) |
| | | | | | | | |
Income taxes, excluding reversal of tax valuation allowance — (non GAAP) | | $ | 8.2 | | | $ | 3.0 | |
| | | | | | | | |
Effective income tax (benefit) rate | | | 11 | % | | | (16 | )% |
Effective income tax rate excluding reversal of tax valuation allowance — (non GAAP) | | | 28 | % | | | 11 | % |
| | | | | | | | |
| | 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 quartersquarter of 2006, and 2005, the Company reversed $5.0 million and $7.3 million, respectively, of its deferred tax asset valuation 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 its deferred tax asset willwould be realized. The tax valuation allowance reversals resulted in increases to net income for both of these quarters. In 2006, the Company began recording a quarterly provision for federal income taxes, resulting in a total effective income tax rate of approximately 28%. The Company’s net operating loss carryforward precluded the payment of cash federal income taxes in 2006, and should significantly reduce cash payments in 2007.
The provision for income taxes was $10.0 million in 2007 compared to $3.2 million in 2006, while income tax benefits were $4.3which was reduced by the $5.0 million in 2005, including the reversalsreversal of our deferred tax asset valuation allowance. The effective income tax rate was 32% in 2007, compared to 11% in 2006 compared to an effective tax benefit rate of (16%) in 2005.2006. Excluding reversalsthe reversal of the tax valuation allowance in 2006, the Company provided $8.2 million of income taxes, a 28% effective income tax rate, compared to providing $3.0 million of income taxes in 2005, an 11% effective income tax rate. In 2006, these taxes consisted of federal, state and foreign income taxes, while federal income tax was not provided in 2005. At December 31, 2006, our subsidiaries had $34.9 million of net operating loss carryforwards for federal tax purposes. We are presenting taxes and tax rates without the tax benefit of the tax valuation allowance reversal to facilitate comparison between the periods.
18
Results of Operations
2005 versus 2004
Net Sales by Segment:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Acquired/
| |
| | Year Ended December 31, | | | | | | Percent
| | | (Divested)
| |
| | 2005 | | | 2004 | | | Change | | | Change | | | Sales | |
|
ILS | | $ | 532.6 | | | $ | 453.2 | | | $ | 79.4 | | | | 18 | % | | $ | 31.4 | |
Aluminum Products | | | 159.1 | | | | 135.4 | | | | 23.7 | | | | 18 | % | | | 34.5 | |
Manufactured Products | | | 241.2 | | | | 220.1 | | | | 21.1 | | | | 10 | % | | | 3.5 | |
| | | | | | | | | | | | | | | | | | | | |
Consolidated net sales | | $ | 932.9 | | | $ | 808.7 | | | $ | 124.2 | | | | 15 | % | | $ | 69.4 | |
| | | | | | | | | | | | | | | | | | | | |
Net sales increased by 15% in 2005 compared to 2004. ILS sales increased primarily due to the July 20, 2005 acquisition of PPG, general economic growth, particularly as a result of significant growth in the heavy-duty truck industry, the addition of new customers and increases in product range to existing customers. Aluminum Products sales increased in 2005 primarily due to sales from manufacturing plants acquired in August 2004 from the Amcast, partially offset by volume decreases in the automotive industry. Manufactured Products sales increased in 2005 primarily in the induction equipment, pipe threading equipment and forging businesses. Of this increase, $3.5 million was due to the April 2004 acquisition of the remaining 66% of the common stock of Jamco.
Cost of Products Sold & Gross Profit:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | Percent
| |
| | 2005 | | | 2004 | | | Change | | | Change | |
|
Consolidated cost of products sold | | $ | 796.3 | | | $ | 682.6 | | | $ | 113.7 | | | | 17 | % |
| | | | | | | | | | | | | | | | |
Consolidated gross profit | | $ | 136.6 | | | $ | 126.1 | | | $ | 10.5 | | | | 8 | % |
| | | | | | | | | | | | | | | | |
Gross margin | | | 14.6 | % | | | 15.6 | % | | | | | | | | |
Cost of products sold increased 17% in 2005 compared to 2004, while gross margin decreased to 14.6% from 15.6% in 2004. ILS gross margin decreased primarily due to steel price increases and mix changes partially offset by the absence of the negative impact of $1.1 million in 2004 of the bankruptcy of a customer, Murray, Inc. Aluminum Products gross margin decreased due to the addition of the lower-margin Amcast business, product mix and pricing changes and the increased cost of natural gas. Gross margin in the Manufactured Products segment increased, primarily as a result of increased sales and overhead efficiencies achieved in the induction equipment, pipe threading equipment and forging businesses, and also due to $.8 million writeoff of inventory associated with discontinued product lines.
SG&A Expenses:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | Percent
| |
| | 2005 | | | 2004 | | | Change | | | Change | |
|
Consolidated SG&A expenses | | $ | 81.4 | | | $ | 76.7 | | | $ | 4.7 | | | | 6 | % |
SG&A percent | | | 8.7 | % | | | 9.5 | % | | | | | | | | |
Consolidated SG&A expenses increased by 6% in 2005 compared to 2004. Approximately $3.6 million of the SG&A increase was due to acquisitions, primarily PPG, Amcast and Jamco, while bonus expenses of $1.4 million and charges relating to the Delphi and Dana bankruptcies totaling $1.2 million also contributed to the increase in SG&A expenses. SG&A expenses were reduced in 2005 compared to 2004 by a $.4 million
19
increase in net pension credits reflecting improved returns on pension plan assets. Other than these changes, SG&A expenses remained essentially flat, despite increased sales and production volumes. SG&A expenses as a percent of sales decreased by .8 of a percentage point.
Interest Expense:
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | Percent
| |
| | 2005 | | | 2004 | | | Change | | Change | |
|
Interest expense | | $ | 27.1 | | | $ | 31.4 | | | $(4.3) | | | (14 | )% |
Debt extinguishment costs included in interest expense | | | -0- | | | $ | 6.0 | | | $(6.0) | | | | |
Average outstanding borrowings | | $ | 357.1 | | | $ | 328.9 | | | $28.2 | | | 9 | % |
Average borrowing rate | | | 7.59 | % | | | 7.72 | % | | (13) basis points | | | | |
Interest expense decreased in 2005 compared to 2004, primarily due to the fourth quarter 2004 debt extinguishment costs. These costs primarily related to premiums and other transaction costs associated with the tender offer and early redemption and writeoff of deferred financing costs associated with the 9.25% senior subordinated notes. Excluding these 2004 costs, interest increased in 2005 due to higher average outstanding borrowings, partially offset by lower average interest rates during 2005. The increase in average borrowings in 2005 resulted primarily from higher working capital requirements and the purchase of Amcast Components Group and PPG in August 2004 and July 2005, respectively. The lower average borrowing rate in 2005 was due primarily to the lower interest rate of 8.375% on our senior subordinated notes sold in November 2004 compared to the 9.25% interest rate on the senior subordinated notes outstanding during the first eleven months of 2004. The lower average borrowing rate in 2005 included increased interest rates under our revolving credit facility compared to 2004, which increased primarily as a result of actions by the Federal Reserve.
Income Taxes:
| | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | |
|
Income before income taxes | | $ | 27.3 | | | $ | 17.9 | |
Income taxes (benefit) | | $ | (4.3 | ) | | $ | 3.4 | |
Reversal of tax valuation allowance included in 2005 income tax benefit | | | (7.3 | ) | | | | |
| | | | | | | | |
2005 Income taxes excluding reversal of tax valuation allowance — (non GAAP) | | $ | 3.0 | | | | | |
| | | | | | | | |
Effective income tax (benefit) rate | | | (16 | )% | | | 19 | % |
Effective income tax rate excluding reversal of tax valuation allowance — (non GAAP) | | | 11 | % | | | | |
In fourth quarter 2005, the Company reversed $7.3 million of its $12.3 million year-end 2005 domestic deferred tax valuation allowance. Based on strong recent and projected earnings, the Company has determined that it is more likely than not that this portion of the deferred tax asset will be realized. The tax valuation allowance reversal resulted in an increase to net income for the quarter. In 2006, the Company began recording a quarterly provision for federal income taxes. The Company’s significant net operating loss carryforward should preclude the payment of cash federal income taxes in 2006 and 2007, and possibly beyond.
We had income tax benefits of $4.3 million in 2005, including a $7.3 million reversal of our deferred tax asset valuation allowance. This was an effective income tax benefit rate of (16%). The provision for income taxes was $3.4 million in 2004, an effective income tax rate of 19%. Excluding the reversal of the $7.3 million tax valuation allowance, in 2005 we provided $3.0 million of income taxes, an 11% effective income tax
20
rate. In both years, these taxes consisted primarily of state and foreign taxes on profitable operations. In neither year did the income tax provision include federal income taxes. At December 31, 2005, our subsidiaries had $41.0 million of net operating loss carryforwards for federal tax purposes. We are presenting taxes and tax rates without the tax benefit of the tax valuation allowance reversal to facilitate comparison between the periods.
The Company’s net operating loss carryforward precluded the payment of most cash federal income taxes in both 2007 and 2006, and should similarly preclude such payments in 2008 and substantially reduce them in 2009. At December 31, 2007, the Company had net operating loss carryforwards for federal income tax purposes of approximately $41.6 million, which will expire between 2021 and 2027.
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
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, and 2002,2003, 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,” for charges prior to 2003. Detailed contemporaneous documentation is maintained and updated on a quarterly basis to ensure that accruals are properly supported. If management determines that there is a change in the estimate, the accruals are adjusted to reflect the changes.
21
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 have completed the annual impairment test as of October 1, 2007, 2006, 2005 and 2004 and have determined that no 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.
Deferred Income Tax Assets and Liabilities:Taxes: We account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. 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 and taxable income and the extended period of time over which the postretirement benefits will be paid and accordingly records a tax valuation allowance if, based on the weight of available evidence it is more likely than not that some portion or all of our deferred tax assets will not be realized as required by FAS 109.
At December 31, 2006, We made significant estimates and judgments in order to determine the Company had net operating loss carryforwards for federal incomeextent that a valuation allowance should be provided against deferred tax purposes of approximately $34.9 million, which will expire between 2021 and 2024.assets.
Pension and Other Postretirement Benefit Plans: We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans and postretirement benefit plans covering substantially all employees. The measurement of liabilities related to these plans is based on management’s assumptions related to future events, including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trends. Pension plan asset
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 SFASStatement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFASStatement 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.
Recent Accounting Pronouncements
In November 2004,December 2008, the FASB issued SFAS No. 151, “Inventory Costs.Financial Staff Position (“FSP”) 132(R)-1, “Employers Disclosures about Post Retirement Benefit Plan Assets.” SFAS No. 151 amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amountsFSP 132(R)-1 provides guidance on an employer’s disclosures about plan assets of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that these items be recognized as current-period charges and requires that the allocation of fixed production overheada defined benefit pension or other postretirement plan. The guidance addresses disclosures related to the costscategories of conversion be basedplan assets and fair value measurements of plan assets. This staff position is effective for the Company in 2009 and will have no effect on the normal capacity of the associated production facilities. The Company adopted SFAS No. 151 effective January 1, 2006. The adoption of SFAS No. 151 did not have a material impact on the Company’sits 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.
2224
In May 2005,February 2007, the FASB issued SFASStatement of Financial Accounting Standards No. 154, “Accounting Changes159, “The Fair Value Option for Financial Assets and Error Corrections.” SFAS No. 154 appliesFinancial Liabilities” (“FAS 159”). FAS 159 permits entities to all voluntary changes in accounting principlechoose to measure many financial instruments and to changescertain other items at fair value that are not currently required by an accounting pronouncement that do not include explicit transition provisions. SFAS No. 154 requires that changes in accounting principle be applied retroactively, instead of including the cumulative effect in the income statement. The correction of an error will continue to require financial statement restatement. A change in accounting estimate will continue to be accountedmeasured at fair value. The pronouncement also establishes presentation and disclosure requirements to facilitate comparison between entities that choose different measurement attributes for in the periodsimilar types of changeassets and in subsequent periods, if necessary.liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 154did not elect to measure its financial instruments or any other items at fair value as of January 1, 2006. Thepermitted by FAS 159. Therefore, the adoption of SFAS No. 154FAS 159 did not have a material impacteffect on the Company’s financial position or results of operations.
In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes,” that prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN No. 48, a tax benefit will only be recognized if it is more likely than not that the tax position ultimately will be sustained. After this threshold is met, a tax position is reported at the largest amount of benefit that is more likely than not to be realized. FIN No. 48 is effective for the Company in 2007. FIN No. 48 requires the cumulative effect of applying the provisions to be reported separately as an adjustment to the opening balance of retained earnings in the year of adoption. We are currently evaluating the impact of this Interpretation and do not believe at this time that its implementation will result in a significant impact to the financial statements.
In September of 2006, the FASB issued FASB Staff Position (FSP)AUG AIR-1, “Accounting for Planned Major Maintenance Activities,”(“FSP AUG AIR-1”).FSP AUG AIR-1 prohibits the use of theaccrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods and is effective for the Company in 2007. The adoption ofFSP AUG AIR-1 is not expected to have a material impact on the Company’s financial statements.
In September 2006, the FASB issued SFASStatement of Financial Accounting Standards No. 157, “Fair Value Measurements,” whichMeasurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in GAAP,generally accepted accounting principles and expands disclosures about fair value measurements. This statement appliesThe provisions of FAS 157 apply under other accounting pronouncements that require or permit fair value measurements andmeasurements. FAS 157 is effective for the Company in 2008. The Company is currently evaluating the impact of adopting this Statement.
On December 31, 2006, the Company adopted SFAS No. 158, “Employer’s Accountingfiscal years beginning after November 15, 2007 and interim periods within those fiscal years for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires an employer that is a business entity and sponsors one or more single employer benefit plans to (1) recognize the funded status of the benefit in its statement of financial position, (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets and obligations as of the date of the employer’sliabilities, and for fiscal year end statement of financial positionyears beginning after November 15, 2008 for non-financial assets and (4) disclose additional information in the notes to financial statements about certain effects on net periodic benefit costs for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits, and transition assets or obligations. See Note J to the consolidated financial statements included elsewhere herein for the impact of theliabilities. The adoption of SFAS No. 158FAS 157 for financial assets and liabilities did not have a material effect on the Company’s financial statements.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
23
information, our management does not expect our future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial condition. We caution, however, that inherent in management’s estimates of our exposure are expected trends in claims severity, frequency and other factors that may materially vary as claims are filed and settled or otherwise resolved.
Seasonality; Variability of Operating Results
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 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; dependence on information systems; and the other factors we describe under the “Item 1A. Risk Factors”. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved.
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risk including changes in interest rates. We are subject to interest rate risk on our floating rate revolving credit facility, which consisted of borrowings of $156.7$164.6 million at December 31, 2006.2008. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $1.6 million for the year ended December 31, 2006.2008.
24
Our foreign subsidiaries generally conduct business in local currencies. During 2006,2008, we recorded a favorablean unfavorable foreign currency translation adjustment of $2.1$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 prices, which have fluctuated widely in recent years. We do not have any commodity swap agreements, forward purchase
26
or hedge contracts for steel but have entered into forward purchase contracts for a portion of our anticipated natural gas usage through April 2007.usage.
25
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Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements and Supplementary Financial Data
26
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRule 13a-15(f) under the Exchange Act. As required byRule 13a-15(c) under the Exchange Act, the Company’s management carried out an evaluation, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of the end of the last fiscal year. The framework on which such evaluation was based is contained in the report entitled “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Report”). Based upon the evaluation described above under the framework contained in the COSO Report, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006. Management has identified no material weakness in internal control over financial reporting.
Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. This attestation report is included at page 28 of this annual report onForm 10-K.
Park-Ohio Industries, Inc.
March 12, 2007
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder
of Park-Ohio Industries, Inc.
We have audited management’s assessment, included in the accompanying Reportconsolidated balance sheets of Management on Internal Control Over Financial Reporting, that Park-Ohio Industries, Inc. maintainedand subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Park-Ohio Industries, Inc. and subsidiaries at December 31, 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 December 31, 2006,2008, based on criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 12, 2009
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder of Park-Ohio Industries, Inc.
We have audited Park-Ohio Industries, Inc. internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Park-Ohio Industries, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting.reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,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 that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Park-Ohio Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Park-Ohio Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006,2008, 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, 20062008 and 2005,2007, and the related consolidated statements of income,consolidated operations, shareholder’s equity, and cash flows for each of the three years in the period ended DecemberDeceber 31, 20062008 and our report dated March 12, 20072009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 12, 2007
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholder
Park-Ohio Industries, Inc.
We have audited the accompanying consolidated balance sheets of Park-Ohio Industries, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Park-Ohio Industries, Inc. and subsidiaries at December 31, 2006 and 2005 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles.
As discussed in Note J to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans,” effective December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Park-Ohio Industries, Inc. and subsidiaries internal control over financial reporting as of December 31, 2006, based on criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 12, 20072009
29
Park-Ohio Industries, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2006 | | 2005 | | | 2008 | | 2007 | |
| | (Dollars in thousands) | | | (Dollars in thousands) | |
|
ASSETS | ASSETS | ASSETS |
Current Assets | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 20,872 | | | $ | 17,868 | | | | 17,623 | | | $ | 13,077 | |
Accounts receivable, less allowances for doubtful accounts of $4,305 in 2006 and $5,120 in 2005 | | | 181,893 | | | | 153,502 | | |
Accounts receivable, less allowances for doubtful accounts of $3,044 in 2008 and $3,724 in 2007 | | | | 165,779 | | | | 172,357 | |
Inventories | | | 223,936 | | | | 190,553 | | | | 228,817 | | | | 215,409 | |
Deferred tax assets | | | 34,142 | | | | 8,627 | | | | 9,446 | | | | 21,897 | |
Unbilled contract revenue | | | | 25,602 | | | | 24,817 | |
Other current assets | | | 29,715 | | | | 27,753 | | | | 19,266 | | | | 19,757 | |
| | | | | | | | | | |
Total Current Assets | | | 490,558 | | | | 398,303 | | | | 466,533 | | | | 467,314 | |
Property, Plant and Equipment: | | | | | | | | | |
Property, plant and equipment: | | | | | | | | | |
Land and land improvements | | | 3,188 | | | | 6,964 | | | | 3,448 | | | | 3,177 | |
Buildings | | | 36,197 | | | | 38,384 | | | | 41,004 | | | | 39,977 | |
Machinery and equipment | | | 209,445 | | | | 198,019 | | | | 201,287 | | | | 220,334 | |
| | | | | | | | | | |
| | | 248,830 | | | | 243,367 | | | | 245,739 | | | | 263,488 | |
Less accumulated depreciation | | | 146,352 | | | | 130,265 | | | | 156,911 | | | | 159,896 | |
| | | | | | | | | | |
| | | 102,478 | | | | 113,102 | | | | 88,828 | | | | 103,592 | |
Other Assets: | | | | | | | | | | | | | | | | |
Goodwill | | | 98,180 | | | | 82,703 | | | | 4,109 | | | | 100,997 | |
Net assets held for sale | | | 4,967 | | | | -0- | | | | -0- | | | | 3,330 | |
Other | | | 87,877 | | | | 70,617 | | | | 63,375 | | | | 94,185 | |
| | | | | | | | | | |
| | $ | 784,060 | | | $ | 664,725 | | | $ | 622,845 | | | $ | 769,418 | |
| | | | | | | | | | |
| LIABILITIES AND SHAREHOLDER’S EQUITY | LIABILITIES AND SHAREHOLDER’S EQUITY | LIABILITIES AND SHAREHOLDER’S EQUITY |
Current Liabilities | | | | | | | | | | | | | | | | |
Trade accounts payable | | $ | 132,859 | | | $ | 115,396 | | | $ | 122,107 | | | $ | 121,870 | |
Accrued expenses | | | 78,225 | | | | 65,184 | | | | 74,394 | | | | 66,923 | |
Current portion of long-term liabilities | | | 5,873 | | | | 4,161 | | |
Current portion of long-term debt | | | | 8,778 | | | | 2,362 | |
Current portion of other postretirement benefits | | | | 2,290 | | | | 2,041 | |
| | | | | | | | | | |
Total Current Liabilities | | | 216,957 | | | | 184,741 | | | | 207,569 | | | | 193,196 | |
Long-Term Liabilities, less current portion | | | | | | | | | |
8.375% senior subordinated notes due 2014 | | | 210,000 | | | | 210,000 | | |
Long-Term Liabilities, less current portion 8.375% senior subordinated notes due 2014 | | | | 210,000 | | | | 210,000 | |
Revolving credit | | | 156,700 | | | | 128,300 | | | | 164,600 | | | | 145,400 | |
Other long-term debt | | | 4,790 | | | | 6,705 | | | | 2,283 | | | | 2,287 | |
Deferred tax liability | | | 32,089 | | | | 3,176 | | | | 9,090 | | | | 22,722 | |
Other postretirement benefits and other long-term liabilities | | | 24,434 | | | | 26,174 | | | | 24,093 | | | | 24,017 | |
| | | | | | | | | | |
| | | 428,013 | | | | 374,355 | | | | 410,066 | | | | 404,426 | |
Shareholder’s Equity | | | | | | | | | | | | | | | | |
Common stock, par value $1 per share | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
Additional paid-in capital | | | 64,844 | | | | 64,844 | | | | 56,112 | | | | 64,844 | |
Retained earnings | | | 68,422 | | | | 42,887 | | |
Accumulated other comprehensive income (loss) | | | 5,824 | | | | (2,102 | ) | |
Retained (deficit) earnings | | | | (33,800 | ) | | | 88,868 | |
Accumulated other comprehensive (loss) income | | | | (17,102 | ) | | | 18,084 | |
| | | | | | | | | | |
| | | 139,090 | | | | 105,629 | | | | 5,210 | | | | 171,796 | |
| | | | | | | | | | |
| | $ | 784,060 | | | $ | 664,725 | | | $ | 622,845 | | | $ | 769,418 | |
| | | | | | | | | | |
See notes to consolidated financial statements.
30
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of IncomeOperations
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2006 | | 2005 | | 2004 | | | 2008 | | 2007 | | 2006 | |
| | (Dollars in thousands) | | | (Dollars in thousands) | |
|
Net sales | | $ | 1,056,246 | | | $ | 932,900 | | | $ | 808,718 | | | $ | 1,068,757 | | | $ | 1,071,441 | | | $ | 1,056,246 | |
Cost of products sold | | | 908,095 | | | | 796,283 | | | | 682,658 | | | | 919,297 | | | | 912,337 | | | | 908,095 | |
| | | | | | | | | | | | | | |
Gross profit | | | 148,151 | | | | 136,617 | | | | 126,060 | | | | 149,460 | | | | 159,104 | | | | 148,151 | |
Selling, general and administrative expenses | | | 88,940 | | | | 81,368 | | | | 76,714 | | | | 102,127 | | | | 96,523 | | | | 88,940 | |
Goodwill impairment charge | | | | 95,763 | | | | -0- | | | | -0- | |
Restructuring and impairment charges (credits) | | | (809 | ) | | | 943 | | | | -0- | | | | 25,331 | | | | -0- | | | | (809 | ) |
| | | | | | | | | | | | | | |
Operating income | | | 60,020 | | | | 54,306 | | | | 49,346 | | |
Operating (loss) income | | | | (73,761 | ) | | | 62,581 | | | | 60,020 | |
Interest expense | | | 31,267 | | | | 27,056 | | | | 31,413 | | | | 27,921 | | | | 31,551 | | | | 31,267 | |
| | | | | | | | | | | | | | |
Income before income taxes | | | 28,753 | | | | 27,250 | | | | 17,933 | | |
Income taxes (benefit) | | | 3,218 | | | | (4,323 | ) | | | 3,400 | | |
(Loss) income before income taxes | | | | (101,682 | ) | | | 31,030 | | | | 28,753 | |
Income taxes | | | | 20,986 | | | | 9,976 | | | | 3,218 | �� |
| | | | | | | | | | | | | | |
Net income | | $ | 25,535 | | | $ | 31,573 | | | $ | 14,533 | | |
Net (loss) income | | | $ | (122,668 | ) | | $ | 21,054 | | | $ | 25,535 | |
| | | | | | | | | | | | | | |
See notes to consolidated financial statements.
31
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholder’s Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated
| | | | | | | | | | | Accumulated
| | | |
| | | | Additional
| | | | Other
| | | | | | | Additional
| | Retained
| | Other
| | | |
| | Common
| | Paid-In
| | Retained
| | Comprehensive
| | | | | Common
| | Paid-In
| | Earnings
| | Comprehensive
| | | |
| | Stock | | Capital | | Earnings | | Income (Loss) | | Total | | | Stock | | Capital | | (Deficit) | | Income (Loss) | | Total | |
| | (Dollars in thousands) | | | (Dollars in thousands) | |
|
| | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2004 | | $ | -0- | | | $ | 64,844 | | | $ | (3,219 | ) | | $ | (3,264 | ) | | $ | 58,361 | | |
Balance at January 1, 2006 | | | $ | -0- | | | $ | 64,844 | | | $ | 42,887 | | | $ | (2,102 | ) | | $ | 105,629 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 14,533 | | | | | | | | 14,533 | | | | | | | | | | | | 25,535 | | | | | | | | 25,535 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | 2,071 | | | | 2,071 | | | | | | | | | | | | | | | | 2,128 | | | | 2,128 | |
Minimum pension liability | | | | | | | | | | | | | | | (483 | ) | | | (483 | ) | | | | | | | | | | | | | | | 5,358 | | | | 5,358 | |
| | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | 16,121 | | | | | | | | | | | | | | | | | | | | 33,021 | |
Adjustment recognized upon adoption of FAS 158 (net of income tax of $404) | | | | | | | | | | | | | | | | 440 | | | | 440 | |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2004 | | | -0- | | | | 64,844 | | | | 11,314 | | | | (1,676 | ) | | | 74,482 | | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | |
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 | | | | | | | | | | | 31,573 | | | | | | | | 31,573 | | | | | | | | | | | | 21,054 | | | | | | | | 21,054 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | 94 | | | | 94 | | | | | | | | | | | | | | | | 7,328 | | | | 7,328 | |
Minimum pension liability | | | | | | | | | | | | | | | (520 | ) | | | (520 | ) | |
| | | | |
Pension and postretirement benefit adjustments, net of income tax of $2,834 | | | | | | | | | | | | | | | | 4,932 | | | | 4,932 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | 31,147 | | | | | | | | | | | | | | | | | | | | 33,314 | |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2005 | | | -0- | | | | 64,844 | | | | 42,887 | | | | (2,102 | ) | | | 105,629 | | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 25,535 | | | | | | | | 25,535 | | |
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 | | | | | | | | | | | | | | | 2,128 | | | | 2,128 | | | | | | | | | | | | | | | | (8,730 | ) | | | (8,730 | ) |
Minimum pension liability | | | | | | | | | | | | | | | 5,358 | | | | 5,358 | | |
Pension and postretirement benefit adjustments, net of income tax of $13,460 | | | | | | | | | | | | | | | | (26,456 | ) | | | (26,456 | ) |
| | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | 33,021 | | |
Adjustment recognized upon adoption of SFAS No. 158 (net of income tax of $404) | | | | | | | | | | | | | | | 440 | | | | 440 | | |
Comprehensive (loss) | | | | | | | | | | | | | | | | | | | | (157,854 | ) |
Distribution of capital to shareholder | | | | | | | | (8,732 | ) | | | | | | | | | | | (8,732 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | $ | -0- | | | $ | 64,844 | | | $ | 68,422 | | | $ | 5,824 | | | $ | 139,090 | | |
Balance at December 31, 2008 | | | $ | -0- | | | $ | 56,112 | | | $ | (33,800 | ) | | $ | (17,102 | ) | | $ | 5,210 | |
| | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
32
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2006 | | 2005 | | 2004 | | | 2008 | | 2007 | | 2006 | |
| | (Dollars in thousands) | | | (Dollars in thousands) | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 25,535 | | | $ | 31,573 | | | $ | 14,533 | | |
Adjustments to reconcile net income to net cash provided by operations: | | | | | | | | | | | | | |
Net (loss) income | | | $ | (122,668 | ) | | $ | 21,054 | | | $ | 25,535 | |
Adjustments to reconcile net (loss) income to net cash provided by operations: | | | | | | | | | | | | | |
Depreciation and amortization | | | 20,037 | | | | 17,261 | | | | 15,385 | | | | 20,782 | | | | 20,469 | | | | 20,037 | |
Restructuring and impairment charges (credits) | | | (9 | ) | | | 1,776 | | | | -0- | | | | 121,094 | | | | 2,214 | | | | (9 | ) |
Deferred income taxes | | | (4,631 | ) | | | (6,525 | ) | | | 1,074 | | | | -0- | | | | 4,342 | | | | (4,361 | ) |
Changes in operating assets and liabilities excluding acquisitions of businesses: | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | (16,219 | ) | | | 5,507 | | | | (35,606 | ) | | | 6,578 | | | | 9,536 | | | | (16,219 | ) |
Inventories | | | (28,443 | ) | | | (1,699 | ) | | | (26,541 | ) | | | (12,547 | ) | | | 8,527 | | | | (28,443 | ) |
Accounts payable and accrued expenses | | | 16,760 | | | | (934 | ) | | | 39,400 | | | | 7,490 | | | | (21,900 | ) | | | 16,760 | |
Other | | | (8,269 | ) | | | (12,464 | ) | | | (7,331 | ) | | | (10,535 | ) | | | (15,410 | ) | | | (8,539 | ) |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 4,761 | | | | 34,495 | | | | 914 | | | | 10,194 | | | | 28,832 | | | | 4,761 | |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of property, plant and equipment, net | | | (19,256 | ) | | | (20,295 | ) | | | (9,963 | ) | |
Purchases of property, plant and equipment | | | | (17,466 | ) | | | (21,876 | ) | | | (19,256 | ) |
Business acquisitions, net of cash acquired | | | (23,271 | ) | | | (12,181 | ) | | | (9,997 | ) | | | (5,322 | ) | | | -0- | | | | (23,271 | ) |
Proceeds from sale-leaseback transactions | | | 9,420 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 9,420 | |
Proceeds from the sale of assets held for sale | | | 3,200 | | | | 1,100 | | | | -0- | | | | 260 | | | | -0- | | | | 3,200 | |
| | | | | | | | | | | | | | |
Net cash used by investing activities | | | (29,907 | ) | | | (31,376 | ) | | | (19,960 | ) | | | (22,528 | ) | | | (21,876 | ) | | | (29,907 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from bank arrangements, net | | | 28,150 | | | | 8,342 | | | | 18,013 | | | | 25,612 | | | | -0- | | | | 28,150 | |
Payments on long-term debt | | | -0- | | | | -0- | | | | (199,930 | ) | |
Issuance of 8.375% senior subordinated notes, net of deferred financing costs | | | -0- | | | | -0- | | | | 205,179 | | |
Payments on bank arrangements, net | | | | -0- | | | | (14,751 | ) | | | -0- | |
Distribution of capital to shareholder | | | | (8,732 | ) | | | -0- | | | | -0- | |
| | | | | | | | | | | | | | |
Net cash provided by financing activities | | | 28,150 | | | | 8,342 | | | | 23,262 | | |
Increase in cash and cash equivalents | | | 3,004 | | | | 11,461 | | | | 4,216 | | |
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 | | | 17,868 | | | | 6,407 | | | | 2,191 | | | | 13,077 | | | | 20,872 | | | | 17,868 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 20,872 | | | $ | 17,868 | | | $ | 6,407 | | | $ | 17,623 | | | $ | 13,077 | | | $ | 20,872 | |
| | | | | | | | | | | | | | |
Income taxes paid | | $ | 5,291 | | | $ | 881 | | | $ | 3,370 | | | $ | 6,847 | | | $ | 6,170 | | | $ | 5,291 | |
Interest paid | | | 28,997 | | | | 24,173 | | | | 28,891 | | | | 26,115 | | | | 30,194 | | | | 28,997 | |
See notes to consolidated financial statements.
33
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
December 31, 2006, 20052008, 2007 and 2004
2006
(Dollars in thousands)
NOTE A — Summary of Significant Accounting Policies
| |
NOTE A — | Summary of Significant Accounting Policies |
Consolidation and Basis of Presentation: The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. The Company does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. In the ordinary course of business, the Company leases certain real properties as described in Note K. Transactions with related parties are in the ordinary course of business, are conducted on an arm’s-length basis, and are not material to the Company’s financial position, results of operations or cash flows.
Accounting Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are stated at the lower offirst-in, first-out (FIFO)(“FIFO”) cost or market value. Inventory reserves were $22,978$22,312 and $19,166$20,432 at December 31, 20062008 and 2005,2007, respectively.
Major Classes of Inventories
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2006 | | 2005 | | | 2008 | | 2007 | |
|
Finished goods | | $ | 143,071 | | | $ | 128,465 | | | $ | 129,939 | | | $ | 129,074 | |
Work in process | | | 42,405 | | | | 32,547 | | | | 29,648 | | | | 26,249 | |
Raw materials and supplies | | | 38,460 | | | | 29,541 | | | | 69,230 | | | | 60,086 | |
| | | | | | | | | | |
| | $ | 223,936 | | | $ | 190,553 | | | $ | 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 to 60 years for buildings, and three3 to 1620 years for machinery and equipment. The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recoverable. See Note M.
Impairment of Long-Lived Assets
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: In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), 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 October 1, 2008 and updated these tests confirmed thatas necessary as of December 31, 2008. See Note D for the fair valueresults of the Company’s goodwill exceed their respective carrying values and no impairment loss was required to be recognized.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 based on projected future debt-free cash flow that is discounted to present 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 a 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 these factors and to our judgment in applying them to this analysis. Nonetheless, we believe that this method provides a reasonable approach to estimate the 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: In 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 the 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 operations cannot be made due to the aforementioned uncertainties. Management expects these contingent asset retirement obligations to be resolved over an extended period of time. Management is unable to provide a more specific time frame due to the 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.
3435
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contribution plans, the costs charged to operations and the amount funded are based upon a percentage of the covered employees’ compensation.
Accounting for Asset Retirement Obligations: Due to the long-term productive nature of the Company’s manufacturing operations, absent plans or expectations of plans to initiate asset retirement activities, the Company is unable to determine potential settlement dates to be used in fair value calculations for estimating conditional asset retirement obligations. As such, the Company has not recognized conditional asset retirement obligations when there are no plans or expectations of plans to undertake a major renovation or demolition project that would require the removal of asbestos.
Income Taxes: The Company accounts for income taxes under the 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 SFAS No. 109 (“FAS 109”), “Accounting for Income Taxes.”
Revenue Recognition: The Company recognizes revenue, other than from long-term contracts, when title is transferred to the customer, typically upon shipment. Revenue from long-term contracts (approximately 10%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, 2006,2008, the Company had uncollateralized receivables with five customers in the automotive and heavy-duty truck industries, each with several locations, aggregating $41,860,$22,241, which represented approximately 22%13% of the Company’s trade accounts receivable. During 2006,2008, sales to these customers amounted to approximately $282,074,$170,740, which represented approximately 27%16% of the Company’s net sales.
Shipping and Handling Costs: All shipping and handling costs are included in cost of products sold in the Consolidated Income Statements.
3536
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 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.
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 accumulated comprehensive income (loss) in shareholder’sshareholders’ equity.
Recent Accounting Pronouncements
In November 2004,December 2008, the FASBFinancial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs.FSP 132(R)-1, “Employers Disclosures about Post Retirement Benefit Plan Assets.” SFAS No. 151 amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amountsFSP 132(R)-1 provides guidance on an employer’s disclosures about plan assets of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that these items be recognized as current-period charges and requires that the allocation of fixed production overheada defined benefit pension or other postretirement plan. The guidance addresses disclosures related to the costscategories of conversion be basedplan assets and fair value measurements of plan assets. This Staff Position is effective for the Company in 2009 and will have no effect on the normal capacity of the associated production facilities. The Company adopted SFAS No. 151 effective January 1, 2006. The adoption of SFAS No. 151 did not have a material impact on the Company’sits consolidated financial position or results of operations.
In May 2005,March 2008, the FASB issued SFAS No. 154, “Accounting Changes161, “Disclosures about Derivative Instruments and Error Corrections.” SFASHedging Activities — an amendment of FASB Statement No. 154 applies133” (“FAS 161”). FAS 161 modifies existing requirements to all voluntary changesinclude 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 accounting principle and to changes required by an accountingderivative agreements. The pronouncement that do not include explicit transition provisions. SFAS No. 154also requires that changes in accounting principle be applied retroactively, insteadthe cross-referencing of including the cumulative effect in the income statement. The correction of an error will continue to require financial statement restatement. A change in accounting estimate will continue to be accounted for in the period of change and in subsequent periods, if necessary. The Company adopted SFAS No. 154 as of January 1, 2006. The adoption of SFAS No. 154 did not have a material impact on the Company’s financial position or results of operations.
In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” that prescribes a recognition threshold and measurement attribute forderivative disclosures within the financial statement recognitionstatements and measurementnotes thereto. The requirements of a tax position taken or expected to be taken in a tax return. Under FIN 48, a tax benefit will only be recognized if it is more likely than not that the tax position ultimately will be sustained. After this threshold is met, a tax position is reported at the largest amount of benefit that is more likely than not to be realized. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 isFAS 161 are effective for the Company in 2007. FIN 48 requires the cumulative effect of applying the provisions to be reported separately as an adjustment to the opening balance of retained earnings in the year of adoption. We are currently evaluating the impact of this Interpretation and do not believe at this time that its implementation will result in a significant impact to the financial statements.
In September of 2006, the FASB issued FASB Staff Position (FSP) AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” (“FSP AUG AIR-1”). FSP AUG AIR-1 prohibits the use of theaccrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods and is effective for the Company in 2007.2009. The adoption of FSP AUG AIR-1 isFAS 161 will not expected to have a materialan impact on the Company’s financial statements.
In September 2006,December 2007, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines160, “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 the Company in 2009.
In December 2007, the FASB 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, in GAAP and expands disclosures aboutcontingent consideration arrangements be recorded at fair value measurements. This statement applies underon 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.
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 accounting pronouncements that require or permititems at fair value measurementsthat 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 the Company in 2008.fiscal years beginning after November 15, 2007. The Company is currentlydid not elect to measure its financial instruments or any other items at fair value as permitted by FAS 159.
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 expands disclosures about fair value measurements. In February 2008, the FASB 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 nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. We adopted the non-deferred portion of FAS 157 on January 1, 2008, and such adoption did not have an impact on our financial statements. We are evaluating the impacteffect that adoption of adopting this statement.the deferred portion of FAS 157 will have on our financial statements in 2009, specifically in the areas of measuring fair value in business combinations and goodwill.
OnAs of December 31, 2006, the Company adopted SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires an employer that is a business entity and sponsors one or more single employer benefit plans to (1) recognize the funded status of the benefit in its statement of financial position, (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year end statement of financial position and (4) disclose additional information in the notes to financial statements about certain effects on net periodic benefit costs for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits, and transition assets or obligations. See Note J for the impact of the adoption of SFAS No. 158 on2008, the Company’s financial statements.assets subject to FAS 157 consisted of other investments totaling $5,239. 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.
Reclassification: Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.
NOTE B — Industry Segments
| |
NOTE B — | Industry Segments |
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 | |
| | | | | | | | | | | | |
3739
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Corporate assets generally consist of cash and cash equivalents, deferred tax assets, property and equipment, and other assets.
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Net sales: | | | | | | | | | | | | |
ILS | | $ | 598,228 | | | $ | 532,624 | | | $ | 453,223 | |
Aluminum Products | | | 154,639 | | | | 159,053 | | | | 135,402 | |
Manufactured Products | | | 303,379 | | | | 241,223 | | | | 220,093 | |
| | | | | | | | | | | | |
| | $ | 1,056,246 | | | $ | 932,900 | | | $ | 808,718 | |
| | | | | | | | | | | | |
Income before income taxes: | | | | | | | | | | | | |
ILS | | $ | 38,383 | | | $ | 34,814 | | | $ | 29,191 | |
Aluminum Products | | | 3,921 | | | | 9,103 | | | | 9,021 | |
Manufactured Products | | | 28,991 | | | | 20,630 | | | | 18,890 | |
| | | | | | | | | | | | |
| | | 71,295 | | | | 64,547 | | | | 57,102 | |
Corporate costs | | | (11,275 | ) | | | (10,241 | ) | | | (7,756 | ) |
Interest expense | | | (31,267 | ) | | | (27,056 | ) | | | (31,413 | ) |
| | | | | | | | | | | | |
| | $ | 28,753 | | | $ | 27,250 | | | $ | 17,933 | |
| | | | | | | | | | | | |
Identifiable assets: | | | | | | | | | | | | |
ILS | | $ | 382,101 | | | $ | 323,176 | | | $ | 297,002 | |
Aluminum Products | | | 98,041 | | | | 101,489 | | | | 105,535 | |
Manufactured Products | | | 206,089 | | | | 169,004 | | | | 163,230 | |
General corporate | | | 97,829 | | | | 71,056 | | | | 46,080 | |
| | | | | | | | | | | | |
| | $ | 784,060 | | | $ | 664,725 | | | $ | 611,847 | |
| | | | | | | | | | | | |
Depreciation and amortization expense: | | | | | | | | | | | | |
ILS | | $ | 4,365 | | | $ | 4,575 | | | $ | 4,608 | |
Aluminum Products | | | 7,892 | | | | 7,484 | | | | 5,858 | |
Manufactured Products | | | 6,960 | | | | 4,986 | | | | 4,728 | |
General corporate | | | 820 | | | | 216 | | | | 191 | |
| | | | | | | | | | | | |
| | $ | 20,037 | | | $ | 17,261 | | | $ | 15,385 | |
| | | | | | | | | | | | |
Capital expenditures: | | | | | | | | | | | | |
ILS | | $ | 2,447 | | | $ | 2,070 | | | $ | 3,691 | |
Aluminum Products | | | 5,528 | | | | 10,473 | | | | 5,497 | |
Manufactured Products | | | 12,548 | | | | 7,266 | | | | 720 | |
General corporate | | | (1,267 | ) | | | 486 | | | | 55 | |
| | | | | | | | | | | | |
| | $ | 19,256 | | | $ | 20,295 | | | $ | 9,963 | |
| | | | | | | | | | | | |
The Company had sales of $88,222 in 2008, $77,389 in 2007 and $146,849 in 2006 $107,853 in 2005 and $95,610 in 2004 to International Truck,Navistar, Inc. (“Navistar”), which represented approximately 14%8%, 12%7% and 12%14% of consolidated net sales for each respective year.
38
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s approximate percentage of net sales by geographic region were as follows:
| | | | | | | | | | | | | | | | | | |
| | Year Ended
| | | Year Ended
| |
| | December 31, | | | December 31, | |
| | 2006 | | 2005 | | 2004 | | | 2008 | | 2007 | | 2006 | |
|
United States | | | 76 | % | | | 79 | % | | | 74 | % | | | 68 | % | | | 70 | % | | | 76 | % |
Asia | | | | 11 | % | | | 9 | % | | | 5 | % |
Canada | | | 9 | % | | | 7 | % | | | 9 | % | | | 6 | % | | | 5 | % | | | 9 | % |
Mexico | | | | 6 | % | | | 6 | % | | | 4 | % |
Europe | | | | 6 | % | | | 6 | % | | | 4 | % |
Other | | | 15 | % | | | 14 | % | | | 17 | % | | | 3 | % | | | 4 | % | | | 2 | % |
| | | | | | | | | | | | | | |
| | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | |
At December 31, 2008, 2007 and 2006, 2005approximately 81%, 85% and 2004, approximately 90%, 86% and 86%, respectively, of the Company’s assets were maintained in the United States.
| |
NOTE C — | 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 preliminaryfinal allocation of the purchase price has been performed based on the assignments of fair values to assets acquired and liabilities assumed. The preliminary allocation of the purchase price is as follows:
| | | | |
Cash acquisition price, less cash acquired | | $ | 20,053 | |
Assets | | | | |
Accounts receivable | | | (11,460 | ) |
Inventories | | | (4,326 | ) |
Other current assets | | | (201 | ) |
Equipment | | | (365 | ) |
Intangible assets subject to amortization | | | (8,020 | ) |
Other assets | | | (724 | ) |
Liabilities | | | | |
Accounts payable | | | 8,989 | |
Accrued expenses and other current liabilities | | | 3,904 | |
Deferred tax liability | | | 3,128 | |
| | | | |
Goodwill | | $ | 10,978 | |
| | | | |
3940
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
performed based on the assignments of fair values to assets acquired and liabilities assumed. The Company has a plan for integration activities. In accordance with FASB EITF IssueNo. 95-3, “Recognitionfinal allocation of Liabilities in Connection with a Purchase Business Combination,” the Company recorded accruals for severance, exit and relocation costs in the purchase price allocation. A reconciliation of the beginning and ending accrual balances is as follows:
| | | | | | | | | | | | |
| | Severance and
| | | Exit and
| | | | |
| | Personnel | | | Relocation | | | Total | |
|
Balance at October 18, 2006 | | $ | -0- | | | $ | -0- | | | $ | -0- | |
Add: Accruals | | | 650 | | | | 250 | | | | 900 | |
Less: Payments | | | (136 | ) | | | (46 | ) | | | (182 | ) |
| | | | | | | | | | | | |
Balance at December 31, 2006 | | $ | 514 | | | $ | 204 | | | $ | 718 | |
| | | | | | | | | | | | |
| | | | |
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” |
On December 23, 2005,
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 the acquisitionan impairment analysis and concluded that all of the assets of Lectrotherm, Inc. (“Lectrotherm”) for $5,125goodwill in cash. The acquisition was funded with borrowings under the Company’s revolving credit facility. The purchase price and the results of operations of Lectrotherm prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for Lectrotherm have been included since December 23, 2005. In 2006, the allocationthree of the purchase pricereporting units for a total of $95,763 was finalized based onimpaired and written off in the assignmentsfourth quarter of fair values to assets acquired and liabilities assumed. The allocation of the purchase price is as follows:
| | | | |
Cash acquisition price, less cash acquired | | $ | 4,698 | |
Assets | | | | |
Accounts receivable | | | (2,465 | ) |
Inventories | | | -0- | |
Prepaid expenses | | | (97 | ) |
Equipment | | | (1,636 | ) |
Liabilities | | | | |
Accrued expenses | | | 846 | |
| | | | |
Goodwill | | $ | 1,346 | |
| | | | |
40
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On July 20, 2005,The following table summarizes the Company completedcarrying amount of goodwill for the acquisition of the assets of Purchased Parts Group, Inc. (“PPG”) for $7,000 in cash, $1,346 in a short-term note payableyears ended December 31, 2008 and the assumption of approximately $12,787 of trade liabilities. The acquisition was funded with borrowings under the Company’s revolving credit facility. The purchase price and the results of operations of PPG prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for PPG have been included in the Company’s financial statements since July 20, 2005. The final allocation of the purchase price is as follows:December 31, 2007 by reporting segment.
| | | | |
Cash acquisition price | | $ | 7,000 | |
Assets | | | | |
Accounts receivable | | | (10,835 | ) |
Inventories | | | (10,909 | ) |
Prepaid expenses | | | (1,201 | ) |
Equipment | | | (407 | ) |
Liabilities | | | | |
Accounts payable | | | 12,783 | |
Accrued expenses | | | 2,270 | |
Note payable | | | 1,299 | |
| | | | |
Goodwill | | $ | -0- | |
| | | | |
| | | | | | | | |
| | 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 Company has a plan for integration activities. In accordance with FASB EITF IssueNo. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” the Company recorded accruals for severance, exit and relocation costsdecrease in the purchase price allocation. A reconciliation ofgoodwill in the beginningManufactured Products segment and ending accrual balance is as follows:
| | | | | | | | | | | | |
| | Severance
| | | Exit and
| | | | |
| | and Personnel | | | Relocation | | | Total | |
|
Balance at June 30, 2005 | | $ | -0- | | | $ | -0- | | | $ | -0- | |
Add: Accruals | | | 250 | | | | 1,750 | | | | 2,000 | |
Less: Payments | | | (551 | ) | | | (594 | ) | | | (1,145 | ) |
Transfers | | | 400 | | | | (400 | ) | | | -0- | |
| | | | | | | | | | | | |
Balance at December 31, 2005 | | $ | 99 | | | $ | 756 | | | $ | 855 | |
Less: Payments and adjustments | | | (43 | ) | | | (417 | ) | | | (460 | ) |
Transfers | | | (17 | ) | | | 17 | | | | -0- | |
| | | | | | | | | | | | |
Balance at December 31, 2006 | | $ | 39 | | | $ | 356 | | | $ | 395 | |
| | | | | | | | | | | | |
On August 23, 2004,in the Company acquired substantially all of the assets of the Automotive Components Group (“Amcast Components Group”) of Amcast Industrial Corporation. The purchase price was approximately $10,000 in cash and the assumption of approximately $9,000 of operating liabilities. The acquisition was funded with borrowings under the Company’s revolving credit facility. The purchase price and the results of operations of Amcast Components GroupSupply Technologies segment prior to its date of acquisition were not deemed significant as defined inRegulation S-X. Thethe impairment charge during 2008 results of operations for Amcast Components Group have been included in the Company’s results since August 23, 2004.from foreign currency fluctuations.
41
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The final allocationOther intangible assets were acquired in connection with the acquisition of the purchase price has been performed based on the assignmentNABS. Information regarding other intangible assets as of fair values to assets acquired and liabilities assumed. The allocation of the purchase price is asDecember 31, 2008 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- | |
| | | | |
| | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | |
The Company has a planAmortization of other intangible assets was $724 for integration activitiesthe years ended December 31, 2008 and plant rationalization. In accordance with FASB EITF IssueNo. 95-3, the Company recorded accruals for severance, exit and relocation costs in the purchase price allocation. A reconciliation2007, respectively.
Other assets consists of the beginning and ending accrual balances is as follows:following:
| | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| | 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 | |
| | | | | | | | |
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 | |
| | | | | | | | |
On April 1, 2004, the Company acquired the remaining 66% of the common stock of Japan Ajax Magnethermic Company (“Jamco”) for cash existing on the balance sheet of Jamco at that date. No additional purchase price was paid by the Company. The purchase priceSubstantially all advance billings, warranty and the results of operations of Jamco priorproject accruals relate to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for Jamco have been included in the Company’s results since April 1, 2004.capital equipment businesses.
NOTE D — FAS 142, “Goodwill and Other Intangible Assets”
In accordance with the provisions of FAS 142, the Company has completed its annual goodwill impairment tests as of October 1, 2006, 2005 and 2004, and has determined that no impairment of goodwill existed as of those dates.
42
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the carrying amount of goodwill for the years ended December 31, 2006 and December 31, 2005 by reporting segment.
| | | | | | | | |
| | Goodwill at
| | | Goodwill at
| |
Reporting Segment | | December 31, 2006 | | | December 31, 2005 | |
|
ILS | | $ | 77,732 | | | $ | 66,188 | |
Aluminum Products | | | 16,515 | | | | 16,515 | |
Manufactured Products | | | 3,933 | | | | -0- | |
| | | | | | | | |
| | $ | 98,180 | | | $ | 82,703 | |
| | | | | | | | |
The increase in the goodwill in the ILS segment during 2006 results from the acquisition of NABS and foreign currency fluctuations. The increase in the goodwill in the Manufactured Products segment during 2006 results from the final allocation of the purchase price for Lectrotherm and the acquisition of Foundry Service.
Other intangible assets were acquired in connection with the acquisition of NABS. Information regarding other intangible assets as of December 31, 2006 follows:
| | | | | | | | | | | | |
| | Acquisition
| | | Accumulated
| | | | |
| | Costs | | | Amortization | | | Net | |
|
Non-contractual customer relationships | | $ | 7,200 | | | $ | -0- | | | $ | 7,200 | |
Other | | | 820 | | | | -0- | | | | 820 | |
| | | | | | | | | | | | |
| | $ | 8,020 | | | $ | -0- | | | $ | 8,020 | |
| | | | | | | | | | | | |
NOTE E — Other Assets
Other assets consists of the following:
| | | | | | | | |
| | December 31, | |
| | 2006 | | | 2005 | |
|
Pension assets | | $ | 60,109 | | | $ | 47,561 | |
Idle assets | | | -0- | | | | 5,161 | |
Deferred financing costs | | | 5,618 | | | | 7,048 | |
Tooling | | | 1,501 | | | | 3,327 | |
Software development costs | | | 2,868 | | | | 2,485 | |
Deferred tax assets | | | 6,555 | | | | -0- | |
Intangible assets subject to amortization | | | 8,779 | | | | -0- | |
Other | | | 2,447 | | | | 5,035 | |
| | | | | | | | |
Totals | | $ | 87,877 | | | $ | 70,617 | |
| | | | | | | | |
43
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE F — Accrued Expenses
Accrued expenses include the following:
| | | | | | | | |
| | December 31, | |
| | 2006 | | | 2005 | |
|
Accrued salaries, wages and benefits | | $ | 17,349 | | | $ | 16,435 | |
Advance billings | | | 26,729 | | | | 21,969 | |
Warranty, project and installation accruals | | | 4,820 | | | | 4,391 | |
Severance and exit costs | | | -0- | | | | 1,451 | |
Interest payable | | | 3,232 | | | | 2,900 | |
State and local taxes | | | 5,746 | | | | 4,866 | |
Sundry | | | 20,349 | | | | 13,172 | |
| | | | | | | | |
Totals | | $ | 78,225 | | | $ | 65,184 | |
| | | | | | | | |
Substantially all advance billings and warranty, project and installation accruals relate to the Company’s capital equipment businesses.
The changes in the aggregate product warranty liability are as follows for the year ended December 31, 20062008, 2007 and 2005:2006:
| | | | | | | | | |
| | December 31, | | | | | | | | | | | | | |
| | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
|
Balance at beginning of year | | $ | 3,566 | | | $ | 4,281 | | | $ | 5,799 | | | $ | 3,557 | | | $ | 3,566 | |
Claims paid during the year | | | (2,984 | ) | | | (3,297 | ) | | | (3,944 | ) | | | (2,402 | ) | | | (2,984 | ) |
Additional warranties issued during year | | | 2,797 | | | | 2,593 | | |
Acquired warranty liabilities | | | 178 | | | | -0- | | |
Warranty expense | | | | 4,202 | | | | 4,526 | | | | 2,797 | |
Other | | | -0- | | | | (11 | ) | | | (655 | ) | | | 118 | | | | 178 | |
| | | | | | | | | | | | |
Balance at end of year | | $ | 3,557 | | | $ | 3,566 | | | $ | 5,402 | | | $ | 5,799 | | | $ | 3,557 | |
| | | | | | | | | | | | |
NOTE G — Financing Arrangements
| |
NOTE G — | Financing Arrangements |
Long-term debt consists of the following:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2006 | | 2005 | | | 2008 | | 2007 | |
|
8.375% senior subordinated notes due 2014 | | $ | 210,000 | | | $ | 210,000 | | | $ | 210,000 | | | $ | 210,000 | |
Revolving credit facility maturing on December 31, 2010 | | | 156,700 | | | | 128,300 | | | | 164,600 | | | | 145,400 | |
Industrial development revenue bonds maturing in 2012 at interest rates from 2.00% to 4.15% | | | 3,114 | | | | 3,586 | | |
Other | | | 4,986 | | | | 4,763 | | | | 11,061 | | | | 4,649 | |
| | | | | | | | | | |
| | | 374,800 | | | | 346,649 | | | | 385,661 | | | | 360,049 | |
Less current maturities | | | 3,310 | | | | 1,644 | | | | 8,778 | | | | 2,362 | |
| | | | | | | | | | |
Total | | $ | 371,490 | | | $ | 345,005 | | | $ | 376,883 | | | $ | 357,687 | |
| | | | | | | | | | |
Maturities of long-term debt during each of the five years following December 31, 20062008 are approximately $3,310 in 2007, $863 in 2008, $658$8,778 in 2009, $158,884$166,859 in 2010, $24 in 2011, $-0- in 2012 and $598$-0- in 2011.
44
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In November 2004, the Company issued $210,000 of 8.375% senior subordinated notes due November 15, 2014 (“8.375% Notes”). The net proceeds from this debt issuance were approximately $205,178 net of underwriting and other debt offering fees. Proceeds from the 8.375% Notes were used to fund the tender offer and early redemption of the Company’s 9.25% senior subordinated notes due 2007. The Company incurred debt extinguishment costs related primarily to premiums and other transaction costs associated with the tender and early redemption and wrote off deferred financing costs associated with the 9.25% senior subordinated notes totaling $5,963, or $.53 per share on a diluted basis.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 $230,000.$270,000. The credit agreement, as recently amended, provides lower interest rate brackets and modified certain covenants to provide greater flexibility. The Credit Agreement currently contains a detailed borrowing base formula that provides borrowing capacity to the Company based on negotiated percentages of eligible accounts receivable, inventory and fixed assets. At December 31, 2006,2008, the Company had approximately $39,995$47,070 of unused borrowing capacity available under the Credit Agreement. Interest is payable quarterly at either the bank’s prime lending rate (8.25%(3.25% at December 31, 2006)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, 2006,2008, in addition to amounts borrowed under the Credit Agreement, there was $24,169$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.
A foreign subsidiaryForeign 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 $10,574$12,194 at December 31, 20062008 under itstheir credit arrangement.arrangements.
The 8.375% Notessenior 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, 2006,2008, 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 7.41%5.98% at December 31, 2006.2008.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and borrowings under the Credit Agreement and the 8.375% Notes approximate fair value at December 31, 20062008 and 2005.2007. The approximate fair value of the 8.375% Notes was $195,300$79,594 and $184,800$189,000 at December 31, 20062008 and 2005,2007, respectively.
45
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE H — Income Taxes
Income taxes consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2006 | | 2005 | | 2004 | | | 2008 | | 2007 | | 2006 | |
|
Current payable (benefit): | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | $ | 2,355 | | | $ | 165 | | | $ | (426 | ) | | $ | 229 | | | $ | (9 | ) | | $ | 2,355 | |
State | | | 432 | | | | 198 | | | | 23 | | | | 1,518 | | | | 299 | | | | 432 | |
Foreign | | | 4,792 | | | | 2,260 | | | | 3,245 | | | | 6,156 | | | | 5,344 | | | | 4,792 | |
| | | | | | | | | | | | | | |
| | | 7,579 | | | | 2,623 | | | | 2,842 | | | | 7,903 | | | | 5,634 | | | | 7,579 | |
Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | (1,093 | ) | | | (7,300 | ) | | | -0- | | | | 12,421 | | | | 3,639 | | | | (1,093 | ) |
State | | | (1,521 | ) | | | -0- | | | | -0- | | | | 923 | | | | 198 | | | | (1,521 | ) |
Foreign | | | (1,747 | ) | | | 354 | | | | 558 | | | | (261 | ) | | | 505 | | | | (1,747 | ) |
| | | | | | | | | | | | | | |
| | | (4,361 | ) | | | (6,946 | ) | | | 558 | | | | 13,083 | | | | 4,342 | | | | (4,361 | ) |
| | | | | | | | | | | | | | |
Income taxes (benefit) | | $ | 3,218 | | | $ | (4,323 | ) | | $ | 3,400 | | |
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 | | 2006 | | 2005 | | 2004 | | | 2008 | | 2007 | | 2006 | |
|
Tax at statutory rate | | $ | 9,571 | | | $ | 9,189 | | | $ | 5,984 | | | $ | (34,586 | ) | | $ | 10,911 | | | $ | 9,571 | |
Effect of state income taxes, net | | | (1,240 | ) | | | 129 | | | | 15 | | | | (1,834 | ) | | | 266 | | | | (1,240 | ) |
Effect of foreign operations | | | (1,441 | ) | | | (151 | ) | | | 661 | | | | 293 | | | | (1,082 | ) | | | (1,441 | ) |
Medicare subsidy | | | (126 | ) | | | (795 | ) | | | -0- | | |
Goodwill | | | | 23,241 | | | | -0- | | | | -0- | |
Valuation allowance | | | (4,806 | ) | | | (12,093 | ) | | | (3,042 | ) | | | 33,625 | | | | 238 | | | | (4,806 | ) |
Contingencies | | | 889 | | | | 50 | | | | -0- | | |
Research and development credit | | | (250 | ) | | | (237 | ) | | | -0- | | |
Nondeductible expenses | | | 417 | | | | 53 | | | | 207 | | |
Other, net | | | 204 | | | | (468 | ) | | | (425 | ) | | | 247 | | | | (357 | ) | | | 1,134 | |
| | | | | | | | | | | | | | |
Total | | $ | 3,218 | | | $ | (4,323 | ) | | $ | 3,400 | | | $ | 20,986 | | | $ | 9,976 | | | $ | 3,218 | |
| | | | | | | | | | | | | | |
4644
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s net deferred tax assets and liabilities are as follows:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2006 | | 2005 | | | 2008 | | 2007 | |
|
Deferred tax assets: | | | | | | | | | | | | | | | | |
Postretirement benefit obligation | | $ | 9,409 | | | $ | 7,542 | | | $ | 7,579 | | | $ | 7,604 | |
Inventory | | | 12,493 | | | | 10,433 | | | | 12,126 | | | | 10,969 | |
Net operating loss and credit carryforwards | | | 18,626 | | | | 18,996 | | | | 22,133 | | | | 21,544 | |
Other — net | | | 11,616 | | | | 12,246 | | |
Goodwill | | | | 5,465 | | | | -0- | |
Other | | | | 10,832 | | | | 9,223 | |
| | | | | | | | | | |
Total deferred tax assets | | | 52,144 | | | | 49,217 | | | | 58,135 | | | | 49,340 | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | |
Tax over book depreciation | | | 12,858 | | | | 15,578 | | | | 5,824 | | | | 13,354 | |
Pension | | | 22,693 | | | | 18,926 | | | | 14,389 | | | | 26,071 | |
Inventory | | | 889 | | | | -0- | | | | -0- | | | | 864 | |
Intangible assets | | | 3,127 | | | | -0- | | |
Intangible assets and other | | | | 2,645 | | | | 2,955 | |
Deductible goodwill | | | 3,452 | | | | 2,251 | | | | -0- | | | | 4,704 | |
| | | | | | | | | | |
Total deferred tax liabilities | | | 43,019 | | | | 36,755 | | | | 22,858 | | | | 47,948 | |
| | | | | | | | | | |
Net deferred tax assets prior to valuation allowances | | | | 35,277 | | | | 1,392 | |
Valuation allowances | | | | (34,921 | ) | | | (2,217 | ) |
| | | 9,125 | | | | 12,462 | | | | | | |
Valuation reserves | | | (316 | ) | | | (7,011 | ) | |
Net deferred tax asset (liability) | | | $ | 356 | | | $ | (825 | ) |
| | | | | | | | | | |
Net deferred tax asset | | $ | 8,809 | | | $ | 5,451 | | |
| | | | | | |
At December 31, 2006,2008, the Company has federal, state and foreign net operating loss carryforwards for income tax purposes ofpurposes. The U.S. federal net operating loss carryforward is approximately $34,855,$42,129 which expireexpires between 20212022 and 2024, and foreign2028. Foreign net operating losses of $1,130.$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 $1,284$2,281 of state tax benefit related to state net operating losses.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).
As ofAt December 31, 2004,2008, the Company washas 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 a cumulative three-year loss positionthe U.S. and determined it was not more likely than not that its net deferredvarious state and foreign jurisdictions. The Company’s tax assets will be realized. Therefore, as of December 31, 2004,years for 2005 through 2008 remain open for examination by the Company had a full valuation allowance against its federal net deferred tax assetU.S. and a portion of itsvarious state and foreign net operating loss carryforwards. As of December 31, 2005, the Company was no longer in a three-year cumulative loss position and after consideration of the relevant positive and negative evidence, the Company reversed a portion of its valuation allowance and recognized $7,300 of tax benefit related to its federal net deferred tax asset as it has been determined the realization of this amount was more likely than not. 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. TheAs of December 31, 2006, the Company also recognized a $1,284 tax benefit with respect to statefor net operating losses of $1,284 for state income taxes which it hashad determined are more likely than not towill 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
AtNOTES 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, 2006,2008 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 has researchrecognized approximately $94 and development credit carryforwards of approximately $2,466, which expire between 2010$57, respectively, in net interest and 2024.penalties. The Company also has foreignhad 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 credit carryforwards of $486, which expire in 2015, and alternative minimum tax credit carryforwards of $1,277, which have no expiration date.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. .
47
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE I — Legal Proceedings
| |
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
| |
NOTE J — | Pensions and Postretirement Benefits |
On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No.FAS 158. SFAS No.FAS 158 required the Company to recognize the funded status ( i.e. (i.e., the difference between the Company’s fair value of plan assets and the projected benefit obligations) of its defined benefit pension and postretirement benefit plans (collectively, the “postretirement benefit plans”) in the December 31, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs and unrecognized transition obligation remaining from the initial adoption of SFAS No.FAS 87 and SFAS No.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 SFAS No.FAS 87 and SFAS No.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 SFAS No.FAS 158.
The incremental effects of adopting the provisions of SFAS No. 158 on the company’s Consolidated Balance Sheet at December 31, 2006 are presented in the following table. The adoption of SFAS No. 158 had no effect on the Company’s Consolidated Statement of Income for the year ended December 31, 2006 and 2005, respectively, and it will not effect the Company’s operating results in subsequent periods.
| | | | | | | | | | | | |
| | At December 31, 2006 | | | | |
| | Prior to
| | | Effect of
| | | As Reported
| |
| | Adopting SFAS
| �� | | Adopting SFAS
| | | at December 31,
| |
| | No. 158 | | | No. 158 | | | 2006 | |
|
Assets | | | | | | | | | | | | |
Other non-current assets | | $ | 79,993 | | | $ | 7,884 | | | $ | 87,877 | |
| | | | | | | | | | | | |
Total assets | | $ | 776,176 | | | $ | 7,884 | | | $ | 784,060 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Liabilities and Shareholder’s Equity: | | | | | | | | | | | | |
Pension and postretirement benefit liabilities | | $ | 15,951 | | | $ | 7,040 | | | $ | 22,989 | |
Deferred income taxes | | | 12,880 | | | | 404 | | | | 13,284 | |
Accumulated other comprehensive income | | | -0- | | | | 440 | | | | 440 | |
| | | | | | | | | | | | |
Total liabilities and shareholder’s equity | | $ | 776,176 | | | $ | 7,884 | | | $ | 784,060 | |
| | | | | | | | | | | | |
In the table presented above, deferred income taxes represent current and non-current deferred income tax assets on the Consolidated Balance Sheet as of December 31, 2006. In addition, pension and postretirement benefit liabilities represent salaries, wages and benefits, accrued pension cost and accrued postretirement benefits costs on the Consolidated Balance Sheet as of December 31, 2006.
48
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated net (gain), prior service cost and net transition (asset) for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year ending December 31, 2009 are $(69)$(925), $137$129 and $(48)$(40), respectively.
The estimated net loss and prior service credit for the postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $454 and $(63), respectively.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, 20062008 and 2005:2007:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Postretirement
| | | | | Postretirement
| |
| | Pension | | Benefits | | | Pension | | Benefits | |
| | 2006 | | 2005 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2008 | | 2007 | |
|
Change in benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 54,734 | | | $ | 55,303 | | | $ | 22,843 | | | $ | 24,680 | | | $ | 48,320 | | | $ | 52,387 | | | $ | 18,711 | | | $ | 22,989 | |
Service cost | | | 426 | | | | 364 | | | | 199 | | | | 145 | | | | 439 | | | | 334 | | | | 87 | | | | 180 | |
Curtailment and settlement | | | 12 | | | | (1,023 | ) | | | (254 | ) | | | -0- | | | | -0- | | | | 80 | | | | -0- | | | | -0- | |
Interest cost | | | 2,915 | | | | 3,194 | | | | 1,292 | | | | 1,281 | | | | 2,892 | | | | 2,842 | | | | 1,215 | | | | 1,103 | |
Amendments | | | -0- | | | | -0- | | | | (1,106 | ) | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
Actuarial losses (gains) | | | (580 | ) | | | 2,101 | | | | 3,047 | | | | 200 | | | | 1,150 | | | | (2,571 | ) | | | 2,348 | | | | (2,990 | ) |
Benefits and expenses paid, net of contributions | | | (5,120 | ) | | | (5,205 | ) | | | (3,032 | ) | | | (3,463 | ) | | | (4,418 | ) | | | (4,752 | ) | | | (2,400 | ) | | | (2,571 | ) |
| | | | | | | | | | | | | | | | | | |
Benefit obligation at end of year | | $ | 52,387 | | | $ | 54,734 | | | $ | 22,989 | | | $ | 22,843 | | | $ | 48,383 | | | $ | 48,320 | | | $ | 19,961 | | | $ | 18,711 | |
| | | | | | | | | | | | | | | | | | |
Change in plan assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 101,639 | | | $ | 103,948 | | | $ | -0- | | | $ | -0- | | | $ | 118,878 | | | $ | 112,496 | | | $ | -0- | | | $ | -0- | |
Actual return on plan assets | | | 15,977 | | | | 3,919 | | | | -0- | | | | -0- | | | | (27,092 | ) | | | 11,134 | | | | -0- | | | | -0- | |
Company contributions | | | -0- | | | | -0- | | | | 3,032 | | | | 3,463 | | | | -0- | | | | -0- | | | | 2,400 | | | | 2,571 | |
Curtailments and settlement | | | -0- | | | | (1,023 | ) | | | -0- | | | | -0- | | |
Benefits and expenses paid, net of contributions | | | (5,120 | ) | | | (5,205 | ) | | | (3,032 | ) | | | (3,463 | ) | | | (4,418 | ) | | | (4,752 | ) | | | (2,400 | ) | | | (2,571 | ) |
| | | | | | | | | | | | | | | | | | |
Fair value of plan assets at end of year | | $ | 112,496 | | | $ | 101,639 | | | $ | -0- | | | $ | -0- | | | $ | 87,368 | | | $ | 118,878 | | | $ | -0- | | | $ | -0- | |
| | | | | | | | | | | | | | | | | | |
Funded (underfunded) status of the plan | | $ | 60,109 | | | $ | 46,905 | | | $ | (22,989 | ) | | $ | (22,843 | ) | | $ | 38,985 | | | $ | 70,558 | | | $ | (19,961 | ) | | $ | (18,711 | ) |
| | | | | | | | | | | | | | | | | | |
4947
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amounts recognized in the consolidated balance sheets consist of:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Postretirement
| |
| | Pension | | Postretirement Benefits | | | Pension | | Benefits | |
| | 2006 | | 2005 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2008 | | 2007 | |
|
Noncurrent assets | | $ | 60,109 | | | $ | 47,561 | | | $ | -0- | | | $ | -0- | | | $ | 38,985 | | | $ | 70,558 | | | $ | -0- | | | $ | -0- | |
Noncurrent liabilities | | | -0- | | | | (5,491 | ) | | | 13,387 | | | | 20,326 | | | | -0- | | | | -0- | | | | 11,757 | | | | 12,786 | |
Current liabilities | | | -0- | | | | -0- | | | | 2,564 | | | | 2,517 | | | | -0- | | | | -0- | | | | 2,290 | | | | 2,041 | |
Accumulated other comprehensive (income) loss | | | (8,144 | ) | | | 5,358 | | | | 7,038 | | | | -0- | | | | 25,131 | | | | (12,756 | ) | | | 5,914 | | | | 3,884 | |
| | | | | | | | | | | | | | | | | | |
Net amount recognized at the end of the year | | $ | 51,965 | | | $ | 47,428 | | | $ | 22,989 | | | $ | 22,843 | | | $ | 64,116 | | | $ | 57,802 | | | $ | 19,961 | | | $ | 18,711 | |
| | | | | | | | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive income | | | | | | | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive (income) loss | | | | | | | | | | | | | | | | | |
Net actuarial loss/(gain) | | $ | (8,452 | ) | | | N/A | | | $ | 7,153 | | | | N/A | | | $ | 24,972 | | | $ | (13,005 | ) | | $ | 5,914 | | | $ | 3,936 | |
Net prior service cost (credit) | | | 646 | | | | N/A | | | | (115 | ) | | | N/A | | | | 372 | | | | 509 | | | | -0- | | | | (52 | ) |
Net transition obligation (asset) | | | (338 | ) | | | N/A | | | | -0- | | | | N/A | | | | (213 | ) | | | (260 | ) | | | -0- | | | | -0- | |
| | | | | | | | | | | | | | |
Accumulated other comprehensive income | | $ | (8,144 | ) | | | N/A | | | $ | 7,038 | | | | N/A | | |
Accumulated other comprehensive (income) loss | | | $ | 25,131 | | | $ | (12,756 | ) | | $ | 5,914 | | | $ | 3,884 | |
| | | | | | | | | | | | | | |
As of December 31, 20062008 and 2005,2007, the Company’s defined benefit pension plans did not hold a material amount of shares of the Company’sHoldings’ common stock.
The pension plan weighted-average asset allocation at December 31, 20062008 and 20052007 and target allocation for 20072009 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Plan Assets | | | | | Plan Assets | |
| | Target 2007 | | 2006 | | 2005 | | | Target 2009 | | 2008 | | 2007 | |
|
Asset Category | | | | | | | | | | | | | | | | | | | | | | | | |
Equity securities | | | 60-70 | % | | | 65.1 | % | | | 71.1 | % | | | 60-70 | % | | | 54.0 | % | | | 64.8 | % |
Debt securities | | | 20-30 | | | | 25.7 | | | | 19.7 | | | | 20-30 | | | | 11.6 | | | | 24.2 | |
Other | | | 7-15 | | | | 9.2 | | | | 9.2 | | | | 7-15 | | | | 34.4 | | | | 11.0 | |
| | | | | | | | | | | | | | |
| | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | |
The Company recorded a minimum pension liability of $5,358 at December 31, 2005, as required by SFAS No. 87. The adjustment is reflected in other comprehensive income and long-term liabilities. The adjustment relates to two of the Company’s defined benefit plans, for which the accumulated benefit obligations of $17,476 at December 31, 2005, exceeded the fair value of the underlying pension assets of $11,985 at December 31, 2005. Amounts were as follows:
| | | | | | | | |
| | For the Year Ended
| |
| | December 31, | |
| | 2006 | | | 2005 | |
|
Projected benefit obligation | | | N/A | | | $ | 17,476 | |
| | | | | | | | |
Accumulated benefit obligation | | | N/A | | | $ | 17,476 | |
| | | | | | | | |
Fair value of plan assets | | | N/A | | | $ | 11,985 | |
| | | | | | | | |
In 2006, as a result of a merger of these two defined benefit plans with an overfunded plan, the Company adjusted the minimum pension liability to $-0-.
50
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables summarize the assumptions used by the consulting actuary and the related cost information.
| | | | | | | | | | | | | | | | | | | |
| | Weighted-Average assumptions as of December 31, | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Postretirement
| | | Weighted-Average assumptions as of December 31, | |
| | Pension | | Benefits | | | Pension | | Postretirement Benefits | |
| | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | | 2004 | | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | |
|
Discount rate | | | 5.75 | % | | | 5.50 | % | | | 6.00 | % | | | 5.75 | % | | | 5.50 | % | | | 6.00 | % | | | 6.25 | % | | | 6.25 | % | | | 5.75 | % | | | 6.25 | % | | | 6.25 | % | | | 5.75 | % |
Expected return on plan assets | | | 8.50 | % | | | 8.75 | % | | | 8.75 | % | | | N/A | | | | N/A | | | | N/A | | | | 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 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
In determining its expected return on plan assets assumption for the year ended December 31, 2006,2008, 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, 20062008 of 8.50%8.25%. This assumption was supported by the asset return generation model, which projected future asset returns using simulation and asset class correlation.
For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2006. The rate was assumed to decrease gradually to 5.0% for 2011 and remain at that level thereafter.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | | | 2004 | |
|
Components of net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | |
Service costs | | $ | 426 | | | $ | 364 | | | $ | 291 | | | $ | 199 | | | $ | 145 | | | $ | 136 | |
Interest costs | | | 2,915 | | | | 3,194 | | | | 3,320 | | | | 1,292 | | | | 1,281 | | | | 1,532 | |
Expected return on plan assets | | | (8,408 | ) | | | (8,804 | ) | | | (8,313 | ) | | | -0- | | | | -0- | | | | -0- | |
Transition obligation | | | (48 | ) | | | (49 | ) | | | (49 | ) | | | -0- | | | | -0- | | | | -0- | |
FAS 88 one-time charge | | | 297 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
Amortization of prior service cost | | | 182 | | | | 163 | | | | 129 | | | | (63 | ) | | | (69 | ) | | | (80 | ) |
Recognized net actuarial (gain) loss | | | 99 | | | | (224 | ) | | | (286 | ) | | | 374 | | | | 106 | | | | 99 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Benefit (income) costs | | $ | (4,537 | ) | | $ | (5,356 | ) | | $ | (4,908 | ) | | $ | 1,802 | | | $ | 1,463 | | | $ | 1,687 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive income(a) | | | | | | | | | | | | | | | | | | | | | | | | |
AOCI at December 31, 2005 | | $ | 5,358 | | | | N/A | | | | N/A | | | $ | -0- | | | | N/A | | | | N/A | |
Net loss/(gain) | | | | | | | | | | | | | | | | | | | | | | | | |
Recognition of prior service cost/(credit) | | | -0- | | | | N/A | | | | N/A | | | | -0- | | | | N/A | | | | N/A | |
Recognition of loss/(gain) | | | -0- | | | | N/A | | | | N/A | | | | -0- | | | | N/A | | | | N/A | |
Decrease prior to adoption of SFAS No. 158 | | | (5,358 | ) | | | N/A | | | | N/A | | | | -0- | | | | N/A | | | | N/A | |
Increase (decrease) due to adoption of SFAS No. 158 | | | (8,144 | ) | | | N/A | | | | N/A | | | | 7,038 | | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total recognized in other comprehensive income at December 31, 2006 | | $ | (8,144 | ) | | | N/A | | | | N/A | | | $ | 7,038 | | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(a) | | These disclosures are not applicable to 2005 and 2004 defined benefit pension plans and postretirement plans due to SFAS No. 158 being effective for the year ended December 31, 2006. |
5148
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 | | | | | Postretirement Benefits | |
| | Pension
| | | | Expected
| | Net including
| | | Pension
| | | | Expected
| | Net including
| |
| | Benefits | | Gross | | Medicare Subsidy | | Medicare Subsidy | | | Benefits | | Gross | | Medicare Subsidy | | Medicare Subsidy | |
|
2007 | | $ | 4,373 | | | $ | 2,801 | | | $ | 237 | | | $ | 2,564 | | |
2008 | | | 4,293 | | | | 2,739 | | | | 240 | | | | 2,499 | | |
2009 | | | 4,260 | | | | 2,660 | | | | 242 | | | | 2,418 | | | $ | 4,193 | | | $ | 2,497 | | | $ | 208 | | | $ | 2,289 | |
2010 | | | 4,192 | | | | 2,566 | | | | 241 | | | | 2,325 | | | | 4,119 | | | | 2,447 | | | | 210 | | | | 2,237 | |
2011 | | | 4,106 | | | | 2,419 | | | | 234 | | | | 2,185 | | | | 4,040 | | | | 2,356 | | | | 207 | | | | 2,149 | |
2012 to 2016 | | | 19,493 | | | | 9,726 | | | | 1,033 | | | | 8,693 | | |
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 2006 | | $ | 155 | | | $ | (127 | ) |
Effect on postretirement benefit obligation as of December 31, 2006 | | $ | 2,001 | | | $ | (1,709 | ) |
| | | | | | | | |
| | 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, $1,753 in 2005 and $1,446 in 2004.2006. The Company expects to have no contributions to its defined benefit plans in 2007.2009.
NOTE K — LeasesIn January 2008, a Supplemental Executive Retirement Plan (“SERP”) for the Company’s Chairman of the Board of Directors and Sale-leaseback TransactionsChief 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, 20062008 and thereafter are as follows: $14,221$13,581 in 2007, $10,811 in 2008, $8,593 in 2008, $6,9452009, $9,967 in 2010, $3,779$7,797 in 2011, $5,357 in 2012, $3,381 in 2013 and $8,129$8,428 thereafter. Rental expense for 2008, 2007 and 2006 2005was $14,400, $14,687 and 2004 was $15,370, $13,494 and $10,588, respectively.
In 2006, the Company entered into two sale-leaseback arrangements. Under the arrangements, land, building and equipment with a net book value of approximately $7,988 were sold for $9,420 and leased back under two operating lease agreements ranging from five to twelve years. The gain on these transactions of approximately $1,400 was deferred and is being amortized over the terms of the lease agreements.
NOTE L — Accumulated Comprehensive Loss
The componentsCertain of accumulated comprehensive lossthe Company’s leases are with related parties at December 31, 2006an 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 2005 are as follows:not material to the Company’s financial position, results of operations or cash flows.
| | | | | | | | |
| | December 31, | |
| | 2006 | | | 2005 | |
|
Foreign currency translation adjustment | | $ | 5,384 | | | $ | 3,256 | |
Pension and postretirement benefit adjustments, net of tax | | | 440 | | | | (5,358 | ) |
| | | | | | | | |
Total | | $ | 5,824 | | | $ | (2,102 | ) |
| | | | | | | | |
5250
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE M — Restructuring
| |
NOTE L — | Accumulated Comprehensive Loss |
The components of accumulated comprehensive loss at December 31, 2008 and Unusual Charges2007 are as follows:
| | | | | | | | |
| | 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 | |
| | | | | | | | |
During the fourth quarter of 2005, the Company recorded restructuring and asset impairment charges associated with executing restructuring actions in the Aluminum Products and Manufactured Products segments initiated in prior years. The charges were composed of $833 of inventory impairment included in Cost of Products Sold, $391 of asset impairment, $152 of multi-employer pension plan withdrawal costs and $400 of restructuring charges related to the closure of two Manufactured Products manufacturing facilities. Below is a summary of these charges by segment.
| | | | | | | | | | | | | | | | | | | | |
| | Cost of
| | | | | | | | | | | | | |
| | Products
| | | Asset
| | | Restructuring
| | | Pension
| | | | |
| | Sold | | | Impairment | | | & Severance | | | Curtailment | | | Total | |
|
Manufactured Products | | $ | 833 | | | $ | -0- | | | $ | 400 | | | $ | 152 | | | $ | 1,385 | |
Aluminum Products | | | -0- | | | | 391 | | | | -0- | | | | -0- | | | | 391 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 833 | | | $ | 391 | | | $ | 400 | | | $ | 152 | | | $ | 1,776 | |
| | | | | | | | | | | | | | | | | | | | |
| |
NOTE M — | Restructuring and Unusual Charges |
In 2006, the Company recorded restructuring and asset impairment charges associated with its planned closure of a manufacturing facility in the ILSSupply Technologies segment. The charges (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.
The accrued liability for severance and exit costs and related cash payments consisted of:
| | | | |
Balance at January 1, 2004 | | | 2,535 | |
Severance and exit charges recorded in 2004 | | | -0- | |
Cash payments made in 2004 | | | (2,073 | ) |
| | | | |
Balance at December 31, 2004 | | | 462 | |
Exit charges recorded in 2005 | | | 400 | |
Cash payments made in 2005 | | | (266 | ) |
| | | | |
Balance at December 31, 2005 | | | 596 | |
Cash payments made in 2006 | | | (312 | ) |
| | | | |
Balance at December 31, 2006 | | $ | 284 | |
| | | | |
As of December 31, 2006, all of the 525 employees identified in 2001 and all of the 490 employees identified in 2002 had been terminated. The workforce reductions under the restructuring plan consisted of hourly and salaried employees at various operating facilities due to either closure or consolidation. As of December 31, 2006, In 2007, the Company hadrecorded an accrued liabilityadditional $2,214 charge for inventory related restructuring charges which are included in Cost of $284 for future estimated employee severance and plant closing payments.Products Sold.
At December 31, 2006,2007, the Company’s balance sheet reflected assets held for sale at their estimated current value of $4,967$3,330 for property, plant and equipment. Net sales forThese assets were sold in 2008.
In 2008, due to the businesses thatrecent 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 exit its relationship 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 result, the Company recorded asset impairment charges of $30,875, which were composed of $5,544 of inventory impairment included in net assets heldCost of Products Sold, $1,758 for sale were $-0- in 2006, 2005,a loss on disposition of a foreign subsidiary, $564 of severance costs (80 employees) and 2004. Operating income (loss)$23,009 for impairment of property and equipment and other long-term assets. Below is a summary of these entities were $-0- in 2006, 2005, and 2004.charges by segment.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
5351
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE N — DerivativesThe accrued liability for severance costs and Hedgingrelated cash payments consisted of:
| | | | |
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 2006, the Company entered into forward contracts for the purpose of hedging exposure to changes in the value of accounts receivable in euros against the U.S. dollar, for a notional amount of $1,000, of which $-0- was outstanding at December 31, 2006. The Company recognized $61 of foreign currency losses upon settlement of the forward contracts.
54
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
contracts in 2006. The Company used no derivative instruments in 2008 or 2007, and there were no such currency hedge contracts outstanding at December 31, 2008 or December 31, 2007.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE O — Supplemental Guarantor Information
Each of the material domestic direct and indirectwholly-owned subsidiaries of the Company (the “Guarantor Subsidiaries”) has fully and unconditionally guaranteed, on a joint and several basis, to pay principal, premium and interest with respect to the 8.375% Notes. Each of the Guarantor Subsidiaries is “100% owned” as defined byRule 3-10(h)(1) ofRegulation S-X.
The following supplemental consolidating condensed financial statements present consolidating condensed balance sheets as of December 31, 20062008 and 2005,2007, consolidating condensed statements of incomeoperations for the years ended December 31, 2008, 2007 and 2006, 2005, 2004, consolidating condensed statements of cash flows for the years ended December 31, 2006, 20052008, 2007 and 20042006 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
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2008
| | | | | | | | | | | | | | | | | | | | |
| | | | | 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
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2007
| | | | | | | | | | | | | | | | | | | | |
| | | | | 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
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, 2008
| | | | | | | | | | | | | | | | | | | | |
| | | | | 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
CONDENSED CONSOLIDATING BALANCE SHEETSTATEMENT OF INCOME
For the Year Ended December 31, 20062007
| | | | | | | | | | | | | | | | | | | | |
| | | | | Combined
| | | Combined
| | | | | | | |
| | | | | Guarantor
| | | Non-Guarantor
| | | Reclassifications/
| | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (In thousands) | |
|
ASSETS |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | (15,770 | ) | | $ | 570 | | | $ | 12,382 | | | $ | 23,690 | | | $ | 20,872 | |
Accounts receivable, net | | | (1,043 | ) | | | 147,834 | | | | 35,102 | | | | -0- | | | | 181,893 | |
Inventories | | | -0- | | | | 187,649 | | | | 36,287 | | | | -0- | | | | 223,936 | |
Other current assets | | | 3,362 | | | | 12,278 | | | | 8,575 | | | | 9,927 | | | | 34,142 | |
Deferred tax assets | | | -0- | | | | -0- | | | | -0- | | | | 29,715 | | | | 29,715 | |
| | | | | | | | | | | | | | | | | | | | |
Total Current Assets | | | (13,451 | ) | | | 348,331 | | | | 92,346 | | | | 63,332 | | | | 490,558 | |
Investment in subsidiaries | | | 388,117 | | | | 17,169 | | | | (17,169 | ) | | | (388,117 | ) | | | -0- | |
Inter-company advances | | | 338,471 | | | | 531,453 | | | | 4,427 | | | | (874,351 | ) | | | -0- | |
Property, Plant and Equipment, net | | | 448 | | | | 86,978 | | | | 15,052 | | | | -0- | | | | 102,478 | |
Other Assets: | | | | | | | | | | | | | | | | | | | | |
Goodwill | | | (5,514 | ) | | | 96,830 | | | | 6,864 | | | | -0- | | | | 98,180 | |
Other | | | 52,312 | | | | 37,099 | | | | 719 | | | | 2,714 | | | | 92,844 | |
| | | | | | | | | | | | | | | | | | | | |
Total Other Assets | | | 46,798 | | | | 133,929 | | | | 7,583 | | | | 2,714 | | | | 191,024 | |
| | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 760,383 | | | $ | 1,117,860 | | | $ | 102,239 | | | $ | (1,196,422 | ) | | $ | 784,060 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
|
LIABILITIES AND SHAREHOLDER’S EQUITY |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Trade accounts payable | | $ | 3,759 | | | $ | 84,003 | | | $ | 21,610 | | | $ | 23,487 | | | $ | 132,859 | |
Accrued expenses | | | 1,579 | | | | 51,638 | | | | 12,138 | | | | 12,870 | | | | 78,225 | |
Current portion of long-term liabilities | | | -0- | | | | 552 | | | | 2,758 | | | | 2,563 | | | | 5,873 | |
| | | | | | | | | | | | | | | | | | | | |
Total Current Liabilities | | | 5,338 | | | | 136,193 | | | | 36,506 | | | | 38,920 | | | | 216,957 | |
Long-Term Liabilities, less current portion | | | | | | | | | | | | | | | | | | | | |
8.375% Senior Subordinated Notes due 2014 | | | 210,000 | | | | -0- | | | | -0- | | | | -0- | | | | 210,000 | |
Revolving credit maturing on December 31, 2010 | | | 156,700 | | | | -0- | | | | -0- | | | | -0- | | | | 156,700 | |
Other long-term debt | | | -0- | | | | 3,027 | | | | 1,763 | | | | -0- | | | | 4,790 | |
Deferred tax liability | | | -0- | | | | -0- | | | | 42 | | | | 32,047 | | | | 32,089 | |
Other postretirement benefits and other long-term liabilities | | | 9,199 | | | | 54,136 | | | | 2,692 | | | | (41,593 | ) | | | 24,434 | |
| | | | | | | | | | | | | | | | | | | | |
Total Long-Term Liabilities | | | 375,899 | | | | 57,163 | | | | 4,497 | | | | (9,546 | ) | | | 428,013 | |
Inter-company advances | | | 242,672 | | | | 594,730 | | | | 17,423 | | | | (854,825 | ) | | | -0- | |
Shareholder’s Equity | | | 136,474 | | | | 329,774 | | | | 43,813 | | | | (370,971 | ) | | | 139,090 | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities and Shareholder’s Equity | | $ | 760,383 | | | $ | 1,117,860 | | | $ | 102,239 | | | $ | (1,196,422 | ) | | $ | 784,060 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | 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
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2005
| | | | | | | | | | | | | | | | | | | | |
| | | | | Combined
| | | Combined
| | | | | | | |
| | | | | Guarantor
| | | Non-Guarantor
| | | Reclassifications/
| | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (In thousands) | |
|
ASSETS |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | (11,036 | ) | | $ | 626 | | | $ | 11,899 | | | $ | 16,379 | | | $ | 17,868 | |
Accounts receivable, net | | | -0- | | | | 129,302 | | | | 24,200 | | | | -0- | | | | 153,502 | |
Inventories | | | -0- | | | | 160,775 | | | | 29,778 | | | | -0- | | | | 190,553 | |
Other current assets | | | 464 | | | | 20,029 | | | | 1,147 | | | | 6,113 | | | | 27,753 | |
Deferred tax assets | | | -0- | | | | -0- | | | | -0- | | | | 8,627 | | | | 8,627 | |
| | | | | | | | | | | | | | | | | | | | |
Total Current Assets | | | (10,572 | ) | | | 310,732 | | | | 67,024 | | | | 31,119 | | | | 398,303 | |
Investment in subsidiaries | | | 290,802 | | | | -0- | | | | -0- | | | | (290,802 | ) | | | -0- | |
Inter-company advances | | | 359,963 | | | | 372,156 | | | | 8,208 | | | | (740,327 | ) | | | -0- | |
Property, Plant and Equipment, net | | | 2,536 | | | | 98,046 | | | | 12,520 | | | | -0- | | | | 113,102 | |
Other Assets: | | | | | | | | | | | | | | | | | | | | |
Goodwill | | | -0- | | | | 78,424 | | | | 4,279 | | | | -0- | | | | 82,703 | |
Other | | | 34,724 | | | | 37,530 | | | | 686 | | | | (2,323 | ) | | | 70,617 | |
| | | | | | | | | | | | | | | | | | | | |
Total Other Assets | | | 34,724 | | | | 115,954 | | | | 4,965 | | | | (2,323 | ) | | | 153,320 | |
| | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 677,453 | | | $ | 896,888 | | | $ | 92,717 | | | $ | (1,002,333 | ) | | $ | 664,725 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
|
LIABILITIES AND SHAREHOLDER’S EQUITY |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Trade accounts payable | | $ | 3,348 | | | $ | 87,666 | | | $ | 9,778 | | | $ | 14,604 | | | $ | 115,396 | |
Accrued expenses | | | 1,643 | | | | 43,718 | | | | 14,763 | | | | 5,060 | | | | 65,184 | |
Current portion of long-term liabilities | | | -0- | | | | 11,054 | | | | 590 | | | | (7,483 | ) | | | 4,161 | |
| | | | | | | | | | | | | | | | | | | | |
Total Current Liabilities | | | 4,991 | | | | 142,438 | | | | 25,131 | | | | 12,181 | | | | 184,741 | |
Long-Term Liabilities, less current portion | | | | | | | | | | | | | | | | | | | | |
8.375% Senior Subordinated Notes due 2014 | | | 210,000 | | | | -0- | | | | -0- | | | | -0- | | | | 210,000 | |
Revolving credit maturing on December 31, 2010 | | | 128,300 | | | | -0- | | | | -0- | | | | -0- | | | | 128,300 | |
Other long-term debt | | | -0- | | | | 34,533 | | | | 3,140 | | | | (30,968 | ) | | | 6,705 | |
Deferred tax liability | | | -0- | | | | -0- | | | | -0- | | | | 3,176 | | | | 3,176 | |
Other postretirement benefits and other long-term liabilities | | | 4,115 | | | | 21,501 | | | | 3,076 | | | | (2,518 | ) | | | 26,174 | |
| | | | | | | | | | | | | | | | | | | | |
Total Long-Term Liabilities | | | 342,415 | | | | 56,034 | | | | 6,216 | | | | (30,310 | ) | | | 374,355 | |
Inter-company advances | | | 227,614 | | | | 415,558 | | | | 17,674 | | | | (660,846 | ) | | | -0- | |
Shareholder’s Equity | | | 102,433 | | | | 282,858 | | | | 43,696 | | | | (323,358 | ) | | | 105,629 | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities and Shareholder’s Equity | | $ | 677,453 | | | $ | 896,888 | | | $ | 92,717 | | | $ | (1,002,333 | ) | | $ | 664,725 | |
| | | | | | | | | | | | | | | | | | | | |
57
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 2006
| | | | | | | | | | | | | | | | | | | | |
| | | | | Combined
| | | Combined
| | | | | | | |
| | | | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (In thousands) | |
|
Net sales | | $ | -0- | | | $ | 912,060 | | | $ | 144,186 | | | $ | -0- | | | $ | 1,056,246 | |
Cost of sales | | | 800 | | | | 795,936 | | | | 111,359 | | | | -0- | | | | 908,095 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | (800 | ) | | | 116,124 | | | | 32,827 | | | | -0- | | | | 148,151 | |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | (55,175 | ) | | | 100,320 | | | | 20,769 | | | | 23,026 | | | | 88,940 | |
Restructuring and impairment charges | | | -0- | | | | (809 | ) | | | -0- | | | | -0- | | | | (809 | ) |
| | | | | | | | | | | | | | | | | | | | |
Operating Income | | | 54,375 | | | | 16,613 | | | | 12,058 | | | | (23,026 | ) | | | 60,020 | |
Interest expense | | | 30,496 | | | | 1,067 | | | | 304 | | | | (600 | ) | | | 31,267 | |
| | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 23,879 | | | | 15,546 | | | | 11,754 | | | | (22,426 | ) | | | 28,753 | |
Income taxes | | | (2,419 | ) | | | 57 | | | | 5,580 | | | | -0- | | | | 3,218 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 26,298 | | | $ | 15,489 | | | $ | 6,174 | | | $ | (22,426 | ) | | $ | 25,535 | |
| | | | | | | | | | | | | | | | | | | | |
57
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2008
| | | | | | | | | | | | | | | | | | | | |
| | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
58
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, 2005
| | | | | | | | | | | | | | | | | | | | |
| | | | | Combined
| | | Combined
| | | | | | | |
| | | | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (In thousands) | |
|
Net sales | | $ | -0- | | | $ | 827,815 | | | $ | 114,179 | | | $ | (9,094 | ) | | $ | 932,900 | |
Cost of sales | | | -0- | | | | 715,057 | | | | 90,320 | | | | (9,094 | ) | | | 796,283 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | -0- | | | | 112,758 | | | | 23,859 | | | | -0- | | | | 136,617 | |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | 3,349 | | | | 62,394 | | | | 15,025 | | | | 600 | | | | 81,368 | |
Restructuring and impairment charges | | | -0- | | | | 943 | | | | -0- | | | | -0- | | | | 943 | |
| | | | | | | | | | | | | | | | | | | | |
Operating Income | | | (3,349 | ) | | | 49,421 | | | | 8,834 | | | | (600 | ) | | | 54,306 | |
Interest expense | | | (5,346 | ) | | | 31,442 | | | | 1,560 | | | | (600 | ) | | | 27,056 | |
| | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 1,997 | | | | 17,979 | | | | 7,274 | | | | -0- | | | | 27,250 | |
Income taxes | | | (7,439 | ) | | | 59 | | | | 3,057 | | | | -0- | | | | (4,323 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 9,436 | | | $ | 17,920 | | | $ | 4,217 | | | $ | -0- | | | $ | 31,573 | |
| | | | | | | | | | | | | | | | | | | | |
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOMECASH FLOWS
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 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 | |
| | | | | | | | | | | | | | | | | | | | |
59
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2006
| | | | | | | | | | | | | | | | | | | | |
| | | | | Combined
| | | Combined
| | | | | | | |
| | | | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (In thousands) | |
|
Net cash provided (used) by operations | | $ | (27,090 | ) | | $ | 27,983 | | | $ | 3,868 | | | $ | -0- | | | $ | 4,761 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Purchases of property, plant and equipment, net | | | 1,267 | | | | (16,347 | ) | | | (4,176 | ) | | | -0- | | | | (19,256 | ) |
Acquisitions, net of cash acquired | | | -0- | | | | (23,271 | ) | | | -0- | | | | -0- | | | | (23,271 | ) |
Proceeds from sale of assets held for sale | | | -0- | | | | 3,200 | | | | -0- | | | | -0- | | | | 3,200 | |
Proceeds from sale-leaseback transaction | | | -0- | | | | 9,420 | | | | -0- | | | | -0- | | | | 9,420 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided (used) in investing activities | | | 1,267 | | | | (26,998 | ) | | | (4,176 | ) | | | -0- | | | | (29,907 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Proceeds from bank arrangements | | | 28,400 | | | | -0- | | | | 791 | | | | -0- | | | | 29,191 | |
Principal payments on long-term debt | | | -0- | | | | (1,041 | ) | | | -0- | | | | -0- | | | | (1,041 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided (used) by financing activities | | | 28,400 | | | | (1,041 | ) | | | 791 | | | | -0- | | | | 28,150 | |
| | | | | | | | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 2,577 | | | | (56 | ) | | | 483 | | | | -0- | | | | 3,004 | |
Cash and cash equivalents at beginning of year | | | 5,343 | | | | 626 | | | | 11,899 | | | | -0- | | | | 17,868 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 7,920 | | | $ | 570 | | | $ | 12,382 | | | $ | -0- | | | $ | 20,872 | |
| | | | | | | | | | | | | | | | | | | | |
60
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
Schedule II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2005
| | | | | | | | | | | | | | | | | | | | |
| | | | | Combined
| | | Combined
| | | | | | | |
| | | | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (In thousands) | |
|
Net cash provided (used) by operations | | $ | (1,228 | ) | | $ | 29,314 | | | $ | 6,409 | | | $ | -0- | | | $ | 34,495 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Purchases of property, plant and equipment, net | | | (486 | ) | | | (17,769 | ) | | | (2,040 | ) | | | -0- | | | | (20,295 | ) |
Acquisitions, net of cash acquired | | | -0- | | | | (12,181 | ) | | | -0- | | | | -0- | | | | (12,181 | ) |
Proceeds from sale of assets held for sale | | | -0- | | | | 1,100 | | | | -0- | | | | -0- | | | | 1,100 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided (used) in investing activities | | | (486 | ) | | | (28,850 | ) | | | (2,040 | ) | | | -0- | | | | (31,376 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Proceeds from bank arrangements, net | | | 7,700 | | | | (37 | ) | | | 679 | | | | -0- | | | | 8,342 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided (used) by financing activities | | | 7,700 | | | | (37 | ) | | | 679 | | | | -0- | | | | 8,342 | |
| | | | | | | | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 5,986 | | | | 427 | | | | 5,048 | | | | -0- | | | | 11,461 | |
Cash and cash equivalents at beginning of year | | | (643 | ) | | | 199 | | | | 6,851 | | | | -0- | | | | 6,407 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 5,343 | | | $ | 626 | | | $ | 11,899 | | | $ | -0- | | | $ | 17,868 | |
| | | | | | | | | | | | | | | | | | | | |
61
PARK-OHIO INDUSTRIES, INC.
SCHEDULE II — VALUATION AND SUBSIDIARIES
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 | |
| | | | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2004
| | | | | | | | | | | | | | | | | | | | |
| | | | | Combined
| | | Combined
| | | | | | | |
| | | | | Guarantor
| | | Non-Guarantor
| | | | | | | |
| | Parent | | | Subsidiaries | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (In thousands) | |
|
Net cash provided (used) by operations | | $ | (24,045 | ) | | $ | 18,123 | | | $ | 6,836 | | | $ | -0- | | | $ | 914 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Purchases of property, plant and equipment, net | | | (55 | ) | | | (8,979 | ) | | | (929 | ) | | | -0- | | | | (9,963 | ) |
Acquisitions, net of cash acquired | | | -0- | | | | (9,997 | ) | | | -0- | | | | -0- | | | | (9,997 | ) |
Proceeds from sale of assets held for sale | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided (used) in investing activities | | | (55 | ) | | | (18,976 | ) | | | (929 | ) | | | -0- | | | | (19,960 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Proceeds from 8.375% Senior Subordinated Notes | | | 205,179 | | | | -0- | | | | -0- | | | | -0- | | | | 205,179 | |
Payment on 9.25% Senior Subordinated Notes | | | (199,930 | ) | | | -0- | | | | -0- | | | | -0- | | | | (199,930 | ) |
Principal payments on revolving credit and long-term debt, net | | | 19,600 | | | | 171 | | | | (1,758 | ) | | | -0- | | | | 18,013 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided (used) by financing activities | | | 24,849 | | | | 171 | | | | (1,758 | ) | | | -0- | | | | 23,262 | |
| | | | | | | | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 749 | | | | (682 | ) | | | 4,149 | | | | -0- | | | | 4,216 | |
Cash and cash equivalents at beginning of year | | | (1,392 | ) | | | 881 | | | | 2,702 | | | | -0- | | | | 2,191 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | (643 | ) | | $ | 199 | | | $ | 6,851 | | | $ | -0- | | | $ | 6,407 | |
| | | | | | | | | | | | | | | | | | | | |
Note (A)- Uncollectible accounts written off, net of recoveries.
62
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, 2006.2008.
| |
Item 9A. | Controls and Procedures |
Evaluation of disclosure controls and procedures
As of December 31, 2006,2008, 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, as of December 31, 2006, 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.2008.
Changes in internal controlsManagement’s Report on Internal Control over financial reportingFinancial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRule 13a-15(f) under the Exchange Act. As required byRule 13a-15(c) under the Exchange Act, management carried out an evaluation, with participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of December 31, 2006.2008. 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, 20062008 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 2729 of this annual report onForm 10-K,10-K. which is incorporated herein by reference.
Ernst & Young LLP, the Company’s independent registered public accounting firm,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, 2006. This attestation report is included at page 28 of thisForm 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.
During 2006, we invested approximately $23.3 million, including debt assumed, in the acquisition of businesses across all our operations. As part of our ongoing integration activities, we are continuing to incorporate our controls and procedures into these recently acquired businesses.
| |
Item 9B. | Other Information |
None.
6362
Part III
| |
Item 10. | Directors, Executive Officers and Corporate Governance |
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, 20062008 and 2005:2007:
| | | | | | | | | |
| | | | | | | | | | 2008 | | 2007 | |
| | 2006 | | 2005 | |
Audit fees | | $ | 1,084,000 | | | $ | 1,075,000 | | | $ | 1,136,00 | | | $ | 1,043,000 | |
Audit-related fees | | | 83,000 | | | | 60,000 | | | | 75,000 | | | | 75,000 | |
Tax fees | | | 112,000 | | | | 179,000 | | | | 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 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” werepre-approved by Holdings’ audit committee in accordance with Holdings’ formal policy on auditor independence.
6463
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 | |
|
Management’s Annual Report on Internal Control Over Financial Reporting | | | 27 | |
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | | | 28 | |
Report of Independent Registered Public Accounting Firm | | | 29 | |
Consolidated Balance Sheets — December 31, 20062008 and 20052007 | | | 30 | |
Consolidated Statements of IncomeOperations — Years Ended December 31, 2006, 20052008, 2007 and 20042006 | | | 31 | |
Consolidated Statements of Shareholder’s Equity — Years Ended December 31, 2006, 20052008, 2007 and 20042006 | | | 32 | |
Consolidated Statements of Cash Flows — Years Ended December 31, 2006, 20052008, 2007 and 20042006 | | | 33 | |
Notes to Consolidated Financial Statements | | | 34 | |
(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 | |
(2) Financial Statement Schedules
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.
6564
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARK-OHIO INDUSTRIES, INC. (Registrant)
| | |
| By: | /s/ Richard P. ElliottJeffrey L. Rutherford |
Richard P. Elliott,Jeffrey L. Rutherford, Vice President
and Chief Financial Officer
Date: March 26, 200730, 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 26, 2007 | | |
| | | | 30, 2009 |
*
Richard P. ElliottJeffrey L. Rutherford | | Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | March 15, 2007 |
| | | | |
* Matthew V. Crawford | | President, Chief Operating Officer and Director | | March 15, 2007 |
| | | | |
* Patrick V. Auletta | | Director | | March 15, 2007 |
| | | | |
* Kevin R. Greene | | Director | | March 15, 2007 |
* A. Malachi Mixon, III | | Director | | |
* Dan T. Moore | | Director | | March 15, 2007 |
| | | | |
* Ronna Romney | | Director | | March 15, 2007 |
| | | | |
* James W. Wert | | Director | | March 15, 2007 |
| | |
* | | The undersigned, pursuant to a Power of Attorney executed by each of the directors and officers identified above and filed with the Securities and Exchange Commission, by signing his name hereto, does hereby sign and execute this report on behalf of each of the persons noted above, in the capacities indicated. |
March 26, 200730, 2009
| | |
| By: | /s/ Robert D. Vilsack |
Robert D. Vilsack,Attorney-in-Fact
6665
ANNUAL REPORT ONFORM 10-K
PARK-OHIO INDUSTRIES, INC.
For the Year Ended December 31, 20062008
EXHIBIT INDEX
| | | | |
Exhibit | | |
|
| 3 | .1 | | Amended and Restated Articles of Incorporation of Park-Ohio Holdings Corp. (filed as Exhibit 3.1 to theForm 10-K of Park-Ohio Industries, Inc. for the year ended December 31, 1998, SEC File No. 333-43005 and incorporated by reference and made a part hereof) |
| 3 | .2 | | Code of Regulations of Park-Ohio Industries, Inc. (filed as Exhibit 3.2 to theForm 10-K of Park-Ohio Industries, Inc. for the year ended December 31, 1998, SEC File No. 333-43005 and incorporated by reference and made a part hereof) |
| 4 | .1 | | Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties party thereto, the lenders party thereto, Bank One, NA and Banc One Capital Markets Inc. (filed as Exhibit 4 to theForm 10-Q of Park-Ohio Holdings Corp. for the quarter ended September 30, 2003, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) |
| 4 | .2 | | First Amendment, dated September 30, 2004, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders party thereto, Bank One, NA and Bank One Capital Markets, Inc. (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. on October 1, 2004, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) |
| 4 | .3 | | Second Amendment, dated December 29, 2004, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders party thereto and JP Morgan Chase Bank, NA (successor by merger to Bank One, NA), as agent (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. filed on January 5, 2005, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) |
| 4 | .4 | | Third Amendment, dated May 5, 2006, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lender’s party thereto and J.P. Morgan Chase Bank, NA (successor by merger to Bank One, NA), as agent (filed as Exhibit 4 to theForm 10-Q of Park-Ohio Holdings Corp. for the quarter ended March 31, 2006, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) |
| 4 | .5 | | Fourth Amendment, dated June 9, 2006, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lender’s party thereto and J.P. Morgan Chase Bank, NA (successor by merger to Bank One, NA), as agent (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. filed on June 14, 2006, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) |
| 4 | .6 | | Fifth Amendment, dated October 18, 2006, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lender’s party thereto and J.P. Morgan Chase Bank, NA (successor by merger to Bank One, NA), as agent (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. filed on October 24, 2006, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) |
| 4 | .7 | | Indenture, dated as of November 30, 2004, among Park-Ohio Industries, Inc., the Guarantors (as defined therein) and Wells Fargo Bank, NA, as trustee (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) |
| 10 | .1 | | Form of Indemnification Agreement entered into between Park-Ohio Industries, Inc. and each of its directors and certain officers (filed as Exhibit 10.1 to theForm 10-K of Park-Ohio Industries, Inc. for the year ended December 31, 1998, SEC File No. 333-43005 and incorporated by reference and made a part hereof) |
| 10 | .2* | | Amended and Restated 1998 Long-Term Incentive Plan (filed as Appendix A to the Definitive Proxy Statement of Park-Ohio Holdings Corp., filed on April 23, 2001, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) |
| 24 | .1 | | Power of Attorney |
| | | | |
Exhibit | | |
|
| 31 | .1 | | Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31 | .2 | | Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | .1 | | Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | | |
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. |