products, maintain cost-effective operations, route and re-route orders and provide superior service to our customers. We cannot assure you that a disruption in the operation of our information systems used by Supply Technologies, including the failure of the supply chain management software to function properly, or those used by Aluminum Products and Manufactured Products will not occur. Any such disruption could have a material adverse effect on our financial condition, liquidity and results of operations.
Manufactured Products segment and 23% was used by the Aluminum Products segment. Approximately 46%54% of the available foreign square footage was used by the Supply Technologies segment and 54%46% was used by the Manufactured Products segment. In the opinion of management, our facilities are generally well maintained and are suitable and adequate for their intended uses.
12
The following table provides information relative to our principal facilities as of December 31, 2007.2010.
| | | | | | | | | | | | | | | | | | | | |
Related Industry
| | | | Owned or
| | Approximate
| | | | | | Owned or
| | Approximate
| | |
Segment | | Location | | Leased | | Square Footage | | Use | | Location | | Leased | | Square Footage | | Use |
|
SUPPLY TECHNOLOGIES(1) | | Cleveland, OH | | Leased | | | 60,450 | (2) | | Supply Technologies Corporate Office | | Cleveland, OH | | Leased | | | 60,450 | (2) | | Supply Technologies Corporate Office |
| | Dayton, OH | | Leased | | | 112,960 | | | Logistics | | Dayton, OH | | Leased | | | 70,600 | | | Logistics |
| | Lawrence, PA | | Leased | | | 116,000 | | | Logistics and Manufacturing | | Lawrence, PA | | Leased | | | 116,000 | | | Logistics and Manufacturing |
| | St. Paul, MN | | Leased | | | 104,425 | | | Logistics | | Minneapolis, MN | | Leased | | | 87,100 | | | Logistics |
| | Allentown, PA | | Leased | | | 60,075 | | | Logistics | | Allentown, PA | | Leased | | | 43,800 | | | Logistics |
| | Atlanta, GA | | Leased | | | 56,000 | | | Logistics | | Atlanta, GA | | Leased | | | 56,000 | | | Logistics |
| | Dallas, TX | | Leased | | | 49,985 | | | Logistics | | Des Plaines, IL | | Leased | | | 45,000 | | | Logistics |
| | Memphis, TN | | Leased | | | 48,750 | | | Logistics | | Memphis, TN | | Leased | | | 48,750 | | | Logistics |
| | Louisville, KY | | Leased | | | 30,000 | | | Logistics | | Louisville, KY | | Leased | | | 30,000 | | | Logistics |
| | Nashville, TN | | Leased | | | 44,900 | | | Logistics | | Nashville, TN | | Leased | | | 44,900 | | | Logistics |
| | Tulsa, OK | | Leased | | | 40,000 | | | Logistics | | Tulsa, OK | | Leased | | | 40,000 | | | Logistics |
| | Austin, TX | | Leased | | | 30,000 | | | Logistics | | Lenexa, KS | | Leased | | | 38,000 | | | Logistics |
| | Kent, OH | | Leased | | | 225,000 | | | Manufacturing | | Austin, TX | | Leased | | | 30,000 | | | Logistics |
| | Mississauga, | | Leased | | | 117,000 | | | Manufacturing | | Madison Hts., MI | | Leased | | | 32,000 | | | Logistics |
| | Ontario, Canada | | | | | | | | | Streetsboro, OH | | Leased | | | 45,000 | | | Logistics |
| | Solon, OH | | Leased | | | 62,700 | | | Logistics | | Mississauga, Ontario, Canada | | Leased | | | 145,000 | | | Manufacturing |
| | Dublin, VA | | Leased | | | 40,000 | | | Logistics | | Solon, OH | | Leased | | | 54,000 | | | Logistics |
| | Delaware, OH | | Owned | | | 45,000 | | | Manufacturing | | Dublin, VA | | Leased | | | 40,000 | | | Logistics |
| | | Delaware, OH | | Owned | | | 45,000 | | | Manufacturing |
ALUMINUM | | Conneaut, OH(3) | | Leased/Owned | | | 304,000 | | | Manufacturing | | Conneaut, OH(3) | | Leased/Owned | | | 304,000 | | | Manufacturing |
PRODUCTS | | Huntington, IN | | Leased | | | 132,000 | | | Manufacturing | | Huntington, IN | | Leased | | | 125,000 | | | Manufacturing |
| | | Fremont, IN | | Owned | | | 112,000 | | | Manufacturing |
| | Fremont, IN | | Owned | | | 108,000 | | | Manufacturing | | Wapakoneta, OH | | Owned | | | 188,000 | | | Manufacturing |
| | Wapakoneta, OH | | Owned | | | 188,000 | | | Manufacturing | | Rootstown, OH | | Owned | | | 177,000 | | | Manufacturing |
| | Richmond, IN | | Leased/Owned | | | 97,300 | | | Manufacturing | | Ravenna, OH | | Owned | | | 64,000 | | | Manufacturing |
MANUFACTURED | | Cuyahoga Hts., OH | | Owned | | | 427,000 | | | Manufacturing | | Cuyahoga Hts., OH | | Owned | | | 427,000 | | | Manufacturing |
PRODUCTS(4) | | Cicero, IL | | Owned | | | 450,000 | | | Manufacturing | | Cicero, IL | | Owned | | | 450,000 | | | Manufacturing |
| | Le Roeulx, Belgium | | Owned | | | 120,000 | | | Manufacturing | | Le Roeulx, Belgium | | Owned | | | 120,000 | | | Manufacturing |
| | Euclid, OH | | Leased | | | 60,000 | | | Manufacturing | | Wickliffe, OH | | Owned | | | 110,000 | | | Manufacturing |
| | Wickliffe, OH | | Owned | | | 110,000 | | | Manufacturing | | Brookfield, WI | | Leased | | | 100,000 | | | Manufacturing |
| | Boaz, AL | | Owned | | | 100,000 | | | Manufacturing | | Warren, OH | | Owned | | | 195,000 | | | Manufacturing |
| | Warren, OH | | Owned | | | 195,000 | | | Manufacturing | | Canton, OH | | Leased | | | 125,000 | | | Manufacturing |
| | Canton, OH | | Leased | | | 125,000 | | | Manufacturing | | Madison Heights, MI | | Leased | | | 128,000 | | | Manufacturing |
| | Madison Heights, MI | | Leased | | | 128,000 | | | Manufacturing | | Newport, AR | | Leased | | | 200,000 | | | Manufacturing |
| | Newport, AR | | Leased | | | 200,000 | | | Manufacturing | | Cleveland, OH | | Leased | | | 150,000 | | | Manufacturing |
| | Cleveland, OH | | Leased | | | 150,000 | | | Manufacturing | |
| | Shanghai, China | | Leased | | | 20,500 | | | Manufacturing | |
| | |
(1) | | Supply Technologies has 4349 other facilities, none of which is deemed to be a principal facility. |
|
(2) | | Includes 20,150 square feet used by Holdings’ and Park-Ohio’s corporate office. |
|
(3) | | Includes three leased properties with square footage of 91,800, 64,000 and 45,700, respectively, and two owned properties with 82,300 and 20,200 square feet, respectively. |
|
(4) | | Manufactured Products has 16 other owned and leased facilities, none of which is deemed to be a principal facility. |
| |
Item 3. | Legal Proceedings |
We are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the
14
opinion of management, liabilities, if any, arising from currently pending or threatened litigation are not expected to have a material adverse effect on our financial condition, liquidity or results of operations.
At December 31, 2007,2010, we were a co-defendant in approximately 385260 cases asserting claims on behalf of approximately 8,5001,230 plaintiffs alleging personal injury as a result of exposure to asbestos. These
13
asbestos cases generally relate to production and sale of asbestos-containing products and allege various theories of liability, including negligence, gross negligence and strict liability and seek compensatory and, in some cases, punitive damages.
In every asbestos case in which we are named as a party, the complaints are filed against multiple named defendants. In substantially all of the asbestos cases, the plaintiffs either claim damages in excess of a specified amount, typically a minimum amount sufficient to establish jurisdiction of the court in which the case was filed (jurisdictional minimums generally range from $25,000 to $75,000), or do not specify the monetary damages sought. To the extent that any specific amount of damages is sought, the amount applies to claims against all named defendants.
There are only fourfive asbestos cases, involving 2125 plaintiffs, that plead specified damages. In each of the fourfive cases, the plaintiff is seeking compensatory and punitive damages based on a variety of potentially alternative causes of action. In three cases, the plaintiff has alleged compensatory damages in the amount of $3.0 million for four separate causes of action and $1.0 million for another cause of action and punitive damages in the amount of $10.0 million. In anotherthe fourth case, the plaintiff has alleged against each named defendant, compensatory and punitive damages, each in the amount of $10.0 million for seven separate causes of action. In the fifth case, the plaintiff has alleged compensatory damages in the amount of $20.0 million for three separate causes of action and $5.0 million for another cause of action and punitive damages in the amount of $20.0 million.
Historically, we have been dismissed from asbestos cases on the basis that the plaintiff incorrectly sued one of our subsidiaries or because the plaintiff failed to identify any asbestos-containing product manufactured or sold by us or our subsidiaries. We intend to vigorously defend these asbestos cases and believe we will continue to be successful in being dismissed from such cases. However, it is not possible to predict the ultimate outcome of asbestos-related lawsuits, claims and proceedings due to the unpredictable nature of personal injury litigation. Despite this uncertainty, and although our results of operations and cash flows for a particular period could be adversely affected by asbestos-related lawsuits, claims and proceedings, management believes that the ultimate resolution of these matters will not have a material adverse effect on our financial condition, liquidity or results of operations. Among the factors management considered in reaching this conclusion were: (a) our historical success in being dismissed from these types of lawsuits on the bases mentioned above; (b) many cases have been improperly filed against one of our subsidiaries; (c) in many cases , the plaintiffs have been unable to establish any causal relationship to us or our products or premises; (d) in many cases, the plaintiffs have been unable to demonstrate that they have suffered any identifiable injury or compensable loss at all, that any injuries that they have incurred did in fact result from alleged exposure to asbestos; and (e) the complaints assert claims against multiple defendants and, in most cases, the damages alleged are not attributed to individual defendants. Additionally, we do not believe that the amounts claimed in any of the asbestos cases are meaningful indicators of our potential exposure because the amounts claimed typically bear no relation to the extent of the plaintiff’s injury, if any.
Our cost of defending these lawsuits has not been material to date and, based upon available information, our management does not expect its future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial position.
| |
Item 4. | Submission of Matters to a Vote of Security Holders[Removed and Reserved] |
Information required by this item has been omitted pursuant to General Instruction I of Form 10-K.
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Part II
| |
Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The registrant is a wholly-owned subsidiary of Park-Ohio Holdings Corp. and has no equity securities that trade.
| |
Item 6. | Selected Financial Data |
Information required by this item has been omitted pursuant to General Instructiongeneral instruction I of Form 10-K.
| |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Our consolidated financial statements include the accounts of Park-Ohio and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The historical financial information discussed below is not directly comparable on ayear-to-year basis, primarily due to reversalsa goodwill impairment charge in 2008, recording of a tax valuation allowance in 2006 and 2005,2008, restructuring and unusual charges in 20062010, 2009 and 2005,2008 and acquisitions during the three years ended December 31, 2007.in 2010 and 2008.
Executive Overview
We are an industrial Total Supply Managementtm and diversified manufacturing business, operating in three segments: Supply Technologies, Aluminum Products and Manufactured Products. In November 2007, our ILS business changed its name to Supply Technologies to better reflect its breadth of services and focus on driving efficiencies throughout the total supply management process. Our Supply Technologies business provides our customers with Total Supply Managementtm, a proactive solutions approach that manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation. Total Supply Managementtm includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking,just-in-time andpoint-of-use delivery, electronic billing services and ongoing technical support. The principal customers of Supply 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, and appliance industries. Aluminum Products casts and machines aluminum engine, transmission, brake, suspension and other components such as pump housings, clutch retainers/pistons, control arms, knuckles, master cylinders, pinion housings, brake calipers, oil pans and flywheel spacers for automotive, agricultural equipment, construction equipment, heavy-duty truck and marine equipment OEMs, primarily on a sole-source basis. Aluminum Products also provides value-added services such as design and engineering and assembly. Manufactured Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of highly-engineered products including induction heating and melting systems, pipe threading systems, industrial oven systems, injection molded rubber components, and forged and machined products. Manufactured Products also produces and provides services and spare parts for the equipment it manufactures. The principal customers of Manufactured Products are OEMs,sub-assemblers and end users in the steel, coatings, forging, foundry, heavy-duty truck, construction equipment, bottling, automotive, oil and gas, rail and locomotive manufacturing and aerospace and defense industries. Sales, earnings and other relevant financial data for these three segments are provided in Note B to the consolidated financial statements.statements included elsewhere herein.
SalesThe domestic and pre-tax income continued to growinternational automotive markets were significantly impacted in 2007, as growth2008, which adversely affected our business units serving those markets. During the third quarter of 2008, the Company recorded asset impairment charges associated with the related volume declines and volatility in the Manufactured Products segment and new customersautomotive markets. The charges were composed of $.6 million of inventory impairment included 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 newCost
1516
environmental standards atof Products Sold and $17.5 million for impairment of property and equipment and other long-term assets. See Note N to the beginningconsolidated financial statements included elsewhere herein.
During the fourth quarter of 2007. New customers2008, the Company recorded a non-cash goodwill impairment charge of $95.8 million and restructuring and asset impairment charges of $13.4 million associated with the decision to exit its relationship with its largest customer, Navistar, along with the general economic downturn. The charges were composed of $5.0 million of inventory impairment included in the Supply Technologies segment came both from the October, 2006 acquisitionCost of NABSProducts Sold and from organic sales, while new sales$8.4 million for impairment of property and equipment, loss on disposal of a foreign subsidiary and severance costs. Impairment charges were offset by a gain of $.6 million recorded in the Aluminum Products segment primarily reflect new contracts. Sales increased 1%, while operating income increased 4% and income before income taxes increased 8%. Net income declined in 2007 because 2006 earningsrelating to the sale of certain facilities that were increased by the reversal of the remaining $5.0 million of the Company’s tax valuation allowance. At the end of fourth quarter 2007, the Company adjusted downward the amounts initially recorded for revenue, gross profit and net income by approximately $18.0 million, $4.0 million and $2.6 million, respectively. These adjustments were made to exclude certain costs from suppliers and subcontractors from the percentage of completion calculation that is used to account for long-term industrial equipment contracts. We performed an evaluation to determine if these adjustments recorded inpreviously written off.
During the fourth quarter of 20072009, the Company recorded $7.0 million of asset impairment charges associated with general weakness in the economy including the railroad industry. The charges were material to any individual prior period, taking into account the requirementscomposed of SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB No. 108), which was adopted in 2006. Based on this analysis, we concluded the errors were not material to any individual prior periods and, therefore as provided by SAB No. 108, the correction of the error does not require previously filed reports to be amended.
Net sales increased 13% in 2006 compared to 2005, while operating income increased 11%. Net income declined in 2006 because the reversal of the Company’s tax valuation allowance of $5.0 million in 2006 was smaller than the reversal of the valuation allowance of $7.3 million in 2005, and because of higher interest expense in 2006. The tax valuation allowance was substantially eliminated by December 31, 2006, so no further significant reversals occurred to affect income in 2007 or are anticipated in later years. During 2005, net sales increased 15%, and operating income increased 10% as compared to 2004. 2005 operating income was reduced by $1.8 million of restructuring charges ($.8 million reflectedinventory impairment included in Cost of products soldProducts Sold and $1.0$5.2 million in Restructuringfor impairment of property and impairment charges)equipment
In 2009, the Company recorded a gain of $12.5 million on the purchase of $26.2 million principal amount of Park-Ohio Industries, Inc. 8.375% senior subordinated notes due 2014 (the “8.375% Notes”).
During the years 2004 through 2007, we reinforced our long-term availability and attractive pricingthird quarter of funds by refinancing both of our major sources of borrowed funds: senior subordinated notes and our revolving credit facility. In November 2004, we sold $210.0 million of 8.375% senior subordinated notes due 2014. We have amended our revolving credit facility, most recently in June 2007, to extend its maturity to December 2010, increase the credit limit to $270.0 million subject to an asset-based formula and provide lower interest rate levels.
In October 2006, we acquired all of the capital stock of NABS for $21.2 million in cash. NABS is a premier international supply chain manager of production components, providing services to high technology companies in the computer, electronics, and consumer products industries. NABS had 14 international operations in China, India, Taiwan, Singapore, Ireland, Hungary, Scotland and Mexico plus five locations in the United States.
In January 2006, weSupply Technologies completed the acquisition of allcertain assets and assumed specific liabilities relating to the ACS business of the capital stock of Foundry Service GmbHLawson Products, Inc. for approximately $3.2$16.0 million in cash which resultedand a $2.2 million subordinated promissory note payable in additional goodwill of $2.3 million. The acquisition was funded with borrowings from foreign subsidiaries of the Company.
In December 2005, we acquired substantially all of the assets of Lectrotherm, whichequal quarterly installments over three years. ACS is primarily a provider of field service and spare parts for induction heating and melting systems, located in Canton, Ohio, for $5.1 million cash funded with borrowings under our revolving credit facility. This acquisition augments our existing, high-margin aftermarket induction business.
In July 2005, we acquired substantially all the assets of PPG, a provider of supply chain management servicessolutions for a broad range of production components for $7.0through its service centers throughout North America. The Company recorded a gain of $2.2 million cash funded with borrowings from our revolving credit facility, $.5 million in a short-term note payable andrepresenting the assumptionexcess of approximately $13.3 million of trade liabilities. This acquisition added significantly to the customer and supplier bases, and expanded our geographic presence of our Supply Technologies segment.
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Accounting Changes and Goodwill
On December 31, 2006, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”). FAS 158 required the Company to recognize the funded status ( i.e. , the difference between the Company’saggregate fair value of planpurchased net assets andover 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 FAS 87 and FAS 106, all of which were previously netted against the plans’ funded status in the Company’s Consolidated Balance Sheet in accordance with the provisions of 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, 2007, 2006 and 2005, using forecasted discounted cash flows, and it was determined that no impairment is required. At December 31, 2007, our balance sheet reflected $101.0 million of goodwill. In 2007, discount rates used ranged from 11.0% to 14.0%, and long-term revenue growth rates ranging from 3.5% to 4.0% were used.
On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” and 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.purchase price. See Note HC to the consolidated financial statements included elsewhere herein,herein.
On September 30, 2010, the Company entered a Bill of Sale with Rome Die Casting LLC (“Rome”), a producer of aluminum high pressure die castings, pursuant to which Rome agreed to transfer to the Company substantially all of its assets in exchange for approximately $7.5 million of notes receivable due from Rome held by the Company.
On December 31, 2010, the Company through its subsidiary, Ajax Tocco Magnethermic, acquired the assets and the related induction heating intellectual property of ABP Induction’s United States heating business operating as Pillar Induction (“Pillar”) for $9.9 million in cash. Pillar provides complete turnkey automated induction power systems and aftermarket parts and service to a worldwide market.
On March 8, 2010 and subsequently on August 31, 2010, we amended our revolving credit facility to, among other things, extend its maturity to April 30, 2014 and reduce the loan commitment from $270.0 million to $210.0 million, which amount includes the borrowing under a term loan A that is secured by real estate and machinery and equipment, and an unsecured term loan B. See Note G to the consolidated financial statements included elsewhere herein.
During the third quarter of 2010, the Company recorded an asset impairment charge of $3.5 million related to the writedown of one of its investments.
Approximately 24% of the Company’s consolidated net sales are to the automotive markets. In 2009, the Company recorded a charge of $4.2 million to fully reserve for the impact on the Company’s financial statements and related disclosures.account receivable from Metaldyne resulting from its bankruptcy.
17
Results of Operations
20072010 versus 20062009
Net Sales by Segment:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | | |
| | Year-Ended
| | | | | | Acquired/
| | | December 31, | | | | Percent
| |
| | December 31, | | | | Percent
| | (Divested)
| | | 2010 | | 2009 | | Change | | Change | |
| | 2007 | | 2006 | | Change | | Change | | Sales | | | (Dollars in millions) | |
|
Supply Technologies | | $ | 531.4 | | | $ | 598.2 | | | $ | (66.8 | ) | | | (11 | )% | | $ | 29.5 | | | $ | 402.1 | | | $ | 328.8 | | | $ | 73.3 | | | | 22 | % |
Aluminum Products | | | 169.1 | | | | 154.6 | | | | 14.5 | | | | 9 | % | | | 0.0 | | | | 143.7 | | | | 111.4 | | | | 32.3 | | | | 29 | % |
Manufactured Products | | | 370.9 | | | | 303.4 | | | | 67.5 | | | | 22 | % | | | 0.0 | | | | 267.7 | | | | 260.8 | | | | 6.9 | | | | 3 | % |
| | | | | | | | | | | | | | | | |
Consolidated Net Sales | | $ | 1,071.4 | | | $ | 1,056.2 | | | $ | 15.2 | | | | 1 | % | | $ | 29.5 | | | $ | 813.5 | | | $ | 701.0 | | | $ | 112.5 | | | | 16 | % |
| | | | | | | | | | | | | | | | |
Consolidated net sales increased by 1% in 2007$112.5 million to $813.5 million compared to 2006,$701.0 million in 2009 as growththe Company experienced volume increases in the Manufactured Products segment and new customers in the Supply Technologies and Aluminum Products segments
17
Cost of Products Sold & Gross Profit:
| | | | | | | | | | | | | | | | |
| | Year Ended
| | | | | | | |
| | December 31, | | | | | | Percent
| |
| | 2009 | | | 2008 | | | Change | | | Change | |
| | (Dollars in millions) | |
|
Consolidated cost of products sold | | $ | 597.2 | | | $ | 919.3 | | | $ | (322.1 | ) | | | (35 | )% |
| | | | | | | | | | | | | | | | |
Consolidated gross profit | | $ | 103.8 | | | $ | 149.5 | | | $ | (45.7 | ) | | | (31 | )% |
| | | | | | | | | | | | | | | | |
Gross margin | | | 14.8 | % | | | 14.0 | % | | | | | | | | |
Cost of products sold decreased $322.1 million in 2009 to $597.2 million compared to $919.3 million in 2008, primarily due to reduction in sales volume, while gross margin increased to 14.8% in 2009 from 14.0% in the same period of 2008.
Supply Technologies gross margin remained unchanged from the prior year, as increased product profitability improvements were offset by volume declines. Aluminum Products gross margin increased primarily due to cost cutting measures, a plant closure and improved efficiencies at another plant location. Gross margin in the Manufactured Products segment remained essentially unchanged from the prior year.
S,G & A Expenses:
| | | | | | | | | | | | | | | | |
| | Year Ended
| | | | |
| | December 31, | | | | Percent
|
| | 2009 | | 2008 | | Change | | Change |
| | (Dollars in millions) |
|
Consolidated SG&A expenses | | $ | 84.0 | | | $ | 102.1 | | | $ | (18.1 | ) | | | (18 | )% |
SG&A percent | | | 12.0 | % | | | 9.6 | % | | | | | | | | |
Consolidated SG&A expenses increased $7.6decreased $18.1 million to $84.0 million in 20072009 compared to 2006,$102.1 million in 2008 representing a .6%240 basis point increase in SG&A expenses as a percent of sales. SG&A increased approximately $5.3 million dueexpenses decreased on a dollar basis in 2009 compared to the acquisition of NABS. SG&A increased further2008 primarily due to increased expenses relatedemployee workforce reductions, salary cuts, suspension of the Company’s voluntary contribution to stock optionsits 401(k) defined contribution plan, less business travel and restricted stock, the new office building, legal and professional fees and franchise taxes, partiallya reduction in volume of business offset by a $1.1reduction in pension income. SG&A expenses benefited in 2009 from a reduction of $3.6 million increaseresulting from a second quarter change in net pension credits, reflecting higher return on pension plan assets.our vacation benefit, which is now earned throughout the calendar year rather than earned in full at the beginning of the year, but was offset by a $4.2 million charge to fully reserve for an account receivable from a customer in bankruptcy.
Interest Expense:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Year Ended
| | | | | |
| | Year-Ended
| | | | | | | December 31, | | | | Percent
| |
| | December 31, | | | | Percent
| | | 2009 | | 2008 | | Change | | Change | |
| | 2007 | | 2006 | | Change | | Change | | | (Dollars in millions) | |
|
Interest expense | | $ | 31.6 | | | $ | 31.3 | | | $ | 0.3 | | | | 1 | % | | $ | 23.9 | | | $ | 27.9 | | | $ | (4.0 | ) | | | (14 | )% |
Average outstanding borrowings | | $ | 383.6 | | | $ | 376.5 | | | $ | 7.1 | | | | 2 | % | | $ | 374.1 | | | $ | 385.8 | | | $ | (11.7 | ) | | | (3 | )% |
Average borrowing rate | | | 8.23 | % | | | 8.31 | % | | | 8 | | | | basis points | | | | 6.39 | % | | | 7.23 | % | | | (84 | ) | | | basis points | |
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Interest expense increased $.3decreased $4.0 million in 20072009 compared to 2006,2008, primarily due to higher average outstanding borrowings, partially offset bya lower average interest ratesborrowing rate during 2007.2009, lower average borrowings and the effect of the purchase of the 8.375% Notes. The increasedecrease in average borrowings in 20072009 resulted primarily from higherthe reduction in working capital and the purchase of NABS in October 2006.requirements. The lower average borrowing rate in 20072009 was due primarily to decreased interest rates under our revolving credit facility compared to 2006, which increased as2008.
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Impairment Charges:
During 2009, the Company recorded asset impairment charges totaling $5.2 million associated with general weakness in the economy, including the railroad industry.
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 volume declines and volatility in the automotive markets, loss from the disposal of a resultforeign subsidiary and restructuring expenses associated with the Company’s exit from its relationship with its largest customer, Navistar, along with realignment of actions byits distribution network.
Gain on Purchase of 8.375% Senior Subordinated Notes:
In 2009, the Federal Reserve.Company recorded a gain of $12.5 million on the purchase of $26.2 million aggregate principal amount of the 8.375% Notes due in 2014.
Income Taxes:
| | | | | | | | |
| | Year-Ended
| |
| | December 31, | |
| | 2007 | | | 2006 | |
|
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 — (Non-GAAP) | | $ | 10.0 | | | $ | 8.2 | |
| | | | | | | | |
Effective income tax rate | | | 32 | % | | | 11 | % |
Effective income tax rate excluding reversal of tax valuation allowance — (Non-GAAP) | | | 32 | % | | | 28 | % |
| | | | | | | | |
| | Year Ended
| |
| | December 31, | |
| | 2009 | | | 2008 | |
| | (Dollars in millions) | |
|
Income (loss) before income taxes | | $ | 3.2 | | | $ | (101.7 | ) |
| | | | | | | | |
Income tax (benefit) expense | | $ | (.8 | ) | | $ | 21.0 | |
| | | | | | | | |
Effective income tax rate | | | (25 | )% | | | (21 | )% |
In the fourth quarter of 2006,2009, the Company reversed $5.0released $1.8 million of the valuation allowance attributable to continuing operations. In the fourth quarter of 2008, the Company recorded a $33.6 million valuation allowance against its net U.S. and certain foreign deferred tax asset valuation allowance, increasing net income for that yearassets. As of December 31, 2009 and substantially eliminating this reserve. Based on strong recent and projected earnings,2008, the Company determined that it was not more likely than not that its net U.S. and certain foreign deferred tax assetassets would be realized.
The provision for income taxes was $10.0$(.8) million in 20072009 compared to $3.2$21.0 million in 2006, which was reduced by the $5.0 million reversal of our deferred tax asset valuation allowance.2008. The effective income tax rate was 32%(25)% in 2007,2009, compared to 11%(21)% in 2006. Excluding the reversal of the tax valuation allowance in 2006, the Company provided $8.2 million of income taxes, a 28% effective income tax rate. We are presenting taxes and tax rates without the tax benefit of the tax valuation allowance reversal to facilitate comparison between the periods.2008.
The Company’s net operating loss carryforward precluded the payment of most cash federal income taxes in both 20072010, 2009 and 2006, and should similarly preclude such payments in 2008 and substantially reduce them in 2009.2008. At December 31, 2007,2009, the Company had net operating loss carryforwards for federal income tax purposes of approximately $41.6$38.5 million, which will expire between 20212022 and 2027.2029.
Results of OperationsOff-Balance Sheet Arrangements
2006 versus 2005
Net Sales by Segment:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended
| | | | | | | | | Acquired/
| |
| | December 31, | | | | | | Percent
| | | (Divested)
| |
| | 2006 | | | 2005 | | | Change | | | Change | | | Sales | |
|
Supply Technologies | | $ | 598.2 | | | $ | 532.6 | | | $ | 65.6 | | | | 12 | % | | $ | 38.7 | |
Aluminum products | | | 154.6 | | | | 159.1 | | | | (4.5 | ) | | | (3 | )% | | | 0.0 | |
Manufactured products | | | 303.4 | | | | 241.2 | | | | 62.2 | | | | 26 | % | | | 22.9 | |
| | | | | | | | | | | | | | | | | | | | |
Consolidated Net Sales | | $ | 1,056.2 | | | $ | 932.9 | | | $ | 123.3 | | | | 13 | % | | $ | 61.6 | |
| | | | | | | | | | | | | | | | | | | | |
Net sales increased by 13% in 2006 comparedWe do not have off-balance sheet arrangements, financing or other relationships with unconsolidated entities or other persons. There are occasions whereupon we enter into forward contracts on foreign currencies, primarily the euro, purely for the purpose of hedging exposure to 2005. Supply Technologies sales increased primarily due to the October 2006 acquisition of NABS, a full year of sales of PPG in 2006 (acquired in July 2005), general economic growth, particularly as a result of significant growthchanges in the heavy-duty truck industry,value of accounts receivable in those currencies against the addition of new customers and increases in product range to existing customers. Aluminum Products sales decreased in 2006 primarily due to contraction of automobile and light truck production in North America. Manufactured Products sales increased in 2006 primarily in the induction equipment, pipeU.S. dollar. At December 31, 2010, none were outstanding. We currently have no other derivative instruments.
1922
threading equipment and forging businesses. Of this increase, $22.9 million was due to the acquisitions of Lectrotherm and Foundry Service by the induction business in December 2005 and January 2006, respectively.
Cost of Products Sold & Gross Profit:
| | | | | | | | | | | | | | | | |
| | Year Ended
| | | | | | | |
| | December 31, | | | | | | Percent
| |
| | 2006 | | | 2005 | | | Change | | | Change | |
|
Consolidated cost of products sold | | $ | 908.1 | | | $ | 796.3 | | | $ | 111.8 | | | | 14 | % |
| | | | | | | | | | | | | | | | |
Consolidated gross profit | | $ | 148.1 | | | $ | 136.6 | | | $ | 11.5 | | | | 8 | % |
| | | | | | | | | | | | | | | | |
Gross Margin | | | 14.0 | % | | | 14.6 | % | | | | | | | | |
Cost of products sold increased 14% in 2006 compared to 2005, while gross margin decreased to 14.0% from 14.6% in 2005. Supply Technologies gross margin decreased primarily due to PPG restructuring costs. Aluminum Products gross margin decreased due to volume reductions, product mix and pricing changes, plus the cost of preparations for new contracts due to start production in early 2007. Gross margin in the Manufactured Products segment decreased slightly, primarily as a result of operational and pricing issues in the Company’s rubber products business.
SG&A Expenses:
| | | | | | | | | | | | | | | | |
| | Year Ended
| | | | | | | |
| | December 31, | | | | | | Percent
| |
| | 2006 | | | 2005 | | | Change | | | Change | |
|
Consolidated SG&A expenses | | $ | 88.9 | | | $ | 81.4 | | | $ | 7.5 | | | | 9 | % |
SG&A percent | | | 8.4 | % | | | 8.7 | % | | | | | | | | |
Consolidated SG&A expenses increased by 9%, or $7.5 million, in 2006 compared to 2005, representing a .3% reduction in SG&A expenses as a percent of sales. Approximately $5.7 million of the SG&A increase was due to acquisitions, primarily NABS, Foundry Service, Lectrotherm and PPG. SG&A expenses increased in 2006 compared to 2005 by a $.8 million decrease in net pension credits reflecting reduced returns on pension plan assets. These increases in SG&A expenses from acquisitions and reduced pension credits were partially offset by cost reductions.
Interest Expense:
| | | | | | | | | | | | | | | | |
| | Year Ended
| | | | | | | |
| | December 31, | | | | | | Percent
| |
| | 2006 | | | 2005 | | | Change | | | Change | |
|
Interest expense | | $ | 31.3 | | | $ | 27.1 | | | $ | 4.2 | | | | 15 | % |
Average outstanding borrowings | | $ | 376.5 | | | $ | 357.1 | | | $ | 19.4 | | | | 5 | % |
Average borrowing rate | | | 8.31 | % | | | 7.59 | % | | | 72 | | | | basis points | |
Interest expense increased in 2006 compared to 2005, due to both higher average outstanding borrowings and higher average interest rates during 2006. The increase in average borrowings in 2006 resulted primarily from growth-driven higher working capital requirements and the purchase of NABS, Foundry Service, Lectrotherm and PPG in October and January 2006, and December and July 2005, respectively. The higher average borrowing rate in 2006 was due primarily to increased interest rates under our revolving credit facility compared to 2005, which increased as a result of actions by the Federal Reserve.
20
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 rate (benefit) | | | 11 | % | | | (16 | )% |
Effective income tax rate excluding reversal of tax valuation allowance — (Non-GAAP) | | | 28 | % | | | 11 | % |
In the fourth quarters of 2006 and 2005, the Company reversed $5.0 million and $7.3 million, respectively, of its deferred tax asset valuation allowance, substantially eliminating this reserve. Based on strong recent and projected earnings, the Company has determined that it is more likely than not that its deferred tax asset will be realized. The tax valuation allowance reversals resulted in increases to net income for both of these quarters. In 2006, the Company began recording a quarterly provision for federal income taxes, resulting in a total effective income tax rate of approximately 28%. The Company’s net operating loss carryforward precluded the payment of cash federal income taxes in 2006.
The provision for income taxes was $3.2 million in 2006 while income tax benefits were $4.3 million in 2005, including the reversals of our deferred tax asset valuation allowance. The effective income tax rate was 11% in 2006 compared to an effective tax benefit rate of (16%) in 2005. Excluding reversals of the tax valuation allowance, in 2006, the Company provided $8.2 million of income taxes, a 28% effective income tax rate, compared to providing $3.0 million of income taxes in 2005, an 11% effective income tax rate. In 2006, these taxes consisted of federal, state and foreign income taxes, while federal income tax was not provided in 2005. At December 31, 2006, our subsidiaries had $34.9 million of net operating loss carryforwards for federal tax purposes. We are presenting taxes and tax rates without the tax benefit of the tax valuation allowance reversal to facilitate comparison between the periods.
Critical Accounting Policies and Estimates
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: 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%11% of consolidated revenue) is accounted for under the percentage of completion method, and recognized on the basis of the percentage each contract’s cost to date bears to the total estimated contract cost. Revenue earned on contracts in process in excess of billings is classified in other current assets in the accompanying consolidated balance sheet. The Company’s revenue recognition policies are in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
Allowance for 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 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
21
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-livedIn accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment”, management performs impairment tests of long-lived assets, areincluding property and equipment, whenever an event occurs or circumstances change that indicate that the carrying value may not be recoverable or the useful life of the asset has changed. We reviewed by managementour long-lived assets for indicators of impairment whenever eventssuch as a decision to idle certain facilities and consolidate certain operations, a current-period operating or changes in circumstances indicatecash flow loss or a forecast that demonstrates continuing losses associated with the use of a long-lived asset and the expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. When we identified impairment indicators, we determined whether the carrying amount may not be recoverable. During 2005of our long-lived assets was recoverable by comparing the carrying value to the sum of the undiscounted cash flows expected to result from the use and 2003,eventual disposition of the assets. We considered whether impairments existed at the lowest level of independent identifiable cash flows within a reporting unit (for example, plant location, program level or asset level). If the carrying value of the assets exceeded the expected cash flows, the Company decidedestimated the fair value of these assets by using appraisals or recent selling experience in selling similar assets or for certain assets with reasonably predicable cash flows by performing discounted cash flow analysis using the same discount rate used as the weighted average cost of capital in the respective goodwill impairment analysis to exit certain under-performing product linesestimate fair value when market information wasn’t available to determine whether an impairment existed. Certain assets were abandoned and written down to closescrap or consolidate certain operating facilities and, accordingly,appraised value. During 2008, the Company recorded restructuring andasset impairment charges as discussed aboveof approximately $23.0 million, of which approximately $13.8 million was determined based on appraisals or
23
scrap value and approximately $9.2 million was based on discounted cash flow analysis. The impact of a one percentage point change in the discount rate used in performing the discounted cash flow analysis would have been less than $1.0 million with respect to the asset impairment charges. In 2009, the Company recorded $7.0 million of asset impairment charges of which $5.2 million was based on appraisals and $1.8 million was based on other valuation methods. See 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 Bulletin No. 100, “Restructuring and Impairment Charges,” for charges prior to 2003.ASC 420, “Exit or Disposal Cost Obligations”. Detailed contemporaneous documentation is maintained and updated on a quarterly basis to ensure that accruals are properly supported. If management determines that there is a change in the estimate, the accruals are adjusted to reflect the changes.
The Company adopted Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”), which nullifiedEITF 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at the fair value only when the liability is incurred. FAS 146 has no effect on charges recorded for exit activities begun prior to 2002.
Goodwill: We adopted FAS 142As required by ASC 350, “Intangibles — Goodwill and Other” (“ASC 350”), management performs impairment testing of goodwill at least annually as of JanuaryOctober 1 2002. Under FAS 142, we are required to review goodwill for impairment annuallyof each year or more frequently if impairment indicators arise.
In accordance with ASC 350, management tests goodwill for impairment at the reporting unit level. A reporting unit is a reportable operating segment pursuant to ASC 280 “Segment Reporting”, or one level below the reportable operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management or an aggregate of component levels of a reportable operating segment having similar economic characteristics. Prior to our 2008 impairment analysis, we had four reporting units with recorded goodwill including Supply Technologies (included in the Supply Technologies Segment) with $64.6 million of goodwill, Engineered Specialty Products (included in the Supply Technology Segment) with $14.7 million of goodwill, Aluminum Products with $16.5 million of goodwill and Capital Equipment (included in the Manufactured Products segment) with $4.1 million of goodwill. At the time of goodwill impairment testing, management determined fair value of the reporting units through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved for each reporting unit. If the calculated fair value is less than the carrying value, impairment of the reporting unit may exist. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing in the absence of available domestic and international transactional market evidence to determine the fair value. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the weighted average cost of capital (“WACC”) methodology. The WACC methodology considers market and industry data as well as company-specific risk factors for each reporting unity in determining the appropriate discount rates to be used. The discount rate utilized for each reporting unit, which ranged from 12% to 18%, is indicative of the return an investor would expect to receive for investing in such a business. Operational management, considering industry and company-specific historical and projected data, develops growth rates and cash flow projections for each reporting unit. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. The projections developed for the 2008 impairment test reflected managements’ view considering the significant market downturn during the fourth quarter of 2008. As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow model, the aggregate fair value of all reporting units is reconciled to the market capitalization of the Company, which had a significant decline in the fourth quarter of 2008. We have completed the annual impairment testtests as of October 1, 2007, 2006, 20052008 and 2004updated these tests, as necessary, as of December 31, 2008. We concluded that all of the goodwill in three of the reporting units for a total of $95.8 million was impaired and have determinedwritten off in the fourth quarter of 2008. At December 31, 2008 the Company had remaining goodwill of $4.1 million in the Capital Equipment reporting unit. We completed the annual impairment tests as of October 1, 2009 and 2010 and concluded that no goodwill impairment existed asexisted. On September 30, 2010, the Company completed the acquisition of those dates.Rome and recorded goodwill of $4.6 million in the Aluminum Products reporting unit. On December 31, 2010, the Company completed the acquisition of Pillar and recorded additional goodwill of $.6 million in the Capital Equipment reporting unit.
24
Deferred Income Tax Assets and Liabilities:Taxes: We accountIn accordance with ASC 740, “Income Taxes” (“ASC 740”), 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 currently enacted tax rates. In determining these amounts, management determined the probability of realizingSpecifically, we measure gross deferred tax assets taking into consideration factors including historicalfor deductible temporary differences and carryforwards, such as operating results, expectations of future earningslosses and taxable incometax credits, using the applicable enacted tax rates and apply 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 measurement criterion.
ASC 740 provides that some portionfuture realization of the tax benefit of an existing deductible temporary difference or allcarryforward ultimately depends on the existence of oursufficient taxable income of the appropriate character within the carryback, carryforward period available under the tax law. The Company analyzed the four possible sources of taxable income as set forth in ASC 740 and concluded that the only relevant sources of taxable income is the reversal of its existing taxable temporary differences. The Company reviewed the projected timing of the reversal of its taxable temporary differences and determined that such reversals will offset the Company’s deferred tax assets will not be realized as required by FAS 109.prior to their expiration. Accordingly, a valuation reserve was established against the Company’s domestic deferred tax assets net of its deferred tax liabilities (taxable temporary differences). See Note H to the consolidated financial statements included elsewhere herein.
Pension and Other Postretirement Benefit Plans: We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans and postretirement benefit plans covering substantially all employees. The measurement of liabilities related to these plans is based on management’s assumptions related to future events, including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trends. Pension plan asset performance in the future will directly impact our net income. We have evaluated our pension and other postretirement benefit assumptions, considering current trends in interest rates and market conditions and believe our assumptions are appropriate.
Accounting Changes: In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting
22
otherwise. otherwise, except as required by law. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved.
| |
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 $145.4$124.5 million at December 31, 2007.2010. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $1.4$1.2 million for the year ended December 31, 2007.2010.
Our foreign subsidiaries generally conduct business in local currencies. During 2007,2010, we recorded a favorablean unfavorable foreign currency translation adjustment of $7.3$.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 or hedge contracts for steel but have entered into forward purchase contracts for a portion of our anticipated natural gas usage through April 2008.in 2011.
25
| |
Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements and Supplementary Financial Data
| | | | |
| | Page |
|
| | | 27 | |
Report of Independent Registered Public Accounting Firm | | | 28 | |
Consolidated Balance Sheets — December 31, 2007 and 2006 | | | 29 | |
| | | 30 | |
| | | 31 | |
| | | 3132 | |
| | | 32 | |
Notes to Consolidated Financial Statements2008 | | | 33 | |
Supplementary | | | 34 | |
| | | 6261 | |
2627
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder
of Park-Ohio Industries, Inc.
We have audited the accompanying consolidated balance sheets of Park-Ohio Industries, Inc. and subsidiaries as of December 31, 20072010 and 2006,2009, and the related consolidated statements of income,operations, shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2007.2010. 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, 20072010 and 20062009 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 20072010 in conformity with U.S. generally accepted accounting principles.
As discussed Also, in Note Jour opinion, the related financial statement schedule, when considered in relation to the consolidatedbasic financial statements taken as a whole, presents fairly in all material respects 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. 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.information set forth therein.
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, 2007,2010, 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 13, 20088, 2011 expressed an adverseunqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 13, 20088, 2011
2728
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. and subsidiaries’ internal control over financial reporting as of December 31, 2007,2010, 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 included in the accompanying Management’s Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We 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, 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.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
| | |
| • | Management has identified a material weakness in controls related to the Company’s revenue recognition process. |
The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 consolidated financial statements, and this report does not affect our report dated March 13, 2008, on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the internal control criteria, Park-Ohio Industries, Inc. has notand subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 20072010, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Park-Ohio Industries, Inc. and subsidiaries as of December 31, 2010 and 2009, 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, 2010 of Park-Ohio Industries, Inc. and subsidiaries and our report dated March 8, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 13, 20088, 2011
2829
Park-Ohio Industries, Inc. and Subsidiaries
| | | | | | | | |
| | December 31, | |
| | 2007 | | | 2006 | |
| | (Dollars in thousands) | |
|
ASSETS |
Current Assets | | | | | | | | |
Cash and cash equivalents | | $ | 13,077 | | | $ | 20,872 | |
Accounts receivable, less allowances for doubtful accounts of $3,724 in 2007 and $4,305 in 2006 | | | 172,357 | | | | 181,893 | |
Inventories | | | 215,409 | | | | 223,936 | |
Deferred tax assets | | | 21,897 | | | | 34,142 | |
Unbilled contract revenue | | | 24,817 | | | | 16,886 | |
Other current assets | | | 19,757 | | | | 12,829 | |
| | | | | | | | |
Total Current Assets | | | 467,314 | | | | 490,558 | |
Property, plant and equipment: | | | | | | | | |
Land and land improvements | | | 3,177 | | | | 3,188 | |
Buildings | | | 39,977 | | | | 36,197 | |
Machinery and equipment | | | 220,334 | | | | 205,945 | |
| | | | | | | | |
| | | 263,488 | | | | 245,330 | |
Less accumulated depreciation | | | 159,896 | | | | 146,352 | |
| | | | | | | | |
| | | 103,592 | | | | 98,978 | |
Other Assets: | | | | | | | | |
Goodwill | | | 100,997 | | | | 98,180 | |
Net assets held for sale | | | 3,330 | | | | 4,576 | |
Other | | | 94,185 | | | | 91,377 | |
| | | | | | | | |
| | $ | 769,418 | | | $ | 783,669 | |
| | | | | | | | |
|
LIABILITIES AND SHAREHOLDER’S EQUITY |
Current Liabilities | | | | | | | | |
Trade accounts payable | | $ | 121,870 | | | $ | 132,859 | |
Accrued expenses | | | 66,923 | | | | 77,834 | |
Current portion of long-term debt | | | 2,362 | | | | 3,310 | |
Current portion of other postretirement benefits | | | 2,041 | | | | 2,563 | |
| | | | | | | | |
Total Current Liabilities | | | 193,196 | | | | 216,566 | |
Long-Term Liabilities, less current portion 8.375% senior subordinated notes due 2014 | | | 210,000 | | | | 210,000 | |
Revolving credit | | | 145,400 | | | | 156,700 | |
Other long-term debt | | | 2,287 | | | | 4,790 | |
Deferred tax liability | | | 22,722 | | | | 32,089 | |
Other postretirement benefits and other long-term liabilities | | | 24,017 | | | | 24,434 | |
| | | | | | | | |
| | | 404,426 | | | | 428,013 | |
Shareholder’s Equity | | | | | | | | |
Common stock, par value $1 per share | | | -0- | | | | -0- | |
Additional paid-in capital | | | 64,844 | | | | 64,844 | |
Retained earnings | | | 88,868 | | | | 68,422 | |
Accumulated other comprehensive loss | | | 18,084 | | | | 5,824 | |
| | | | | | | | |
| | | 171,796 | | | | 139,090 | |
| | | | | | | | |
| | $ | 769,418 | | | $ | 783,669 | |
| | | | | | | | |
See notes to consolidated financial statements.
29
Park-Ohio Industries, Inc. and Subsidiaries
Consolidated Statements of Income
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2007 | | | 2006 | | | 2005 | |
| | (Dollars in thousands) | |
|
Net sales | | $ | 1,071,441 | | | $ | 1,056,246 | | | $ | 932,900 | |
Cost of products sold | | | 912,337 | | | | 908,095 | | | | 796,283 | |
| | | | | | | | | | | | |
Gross profit | | | 159,104 | | | | 148,151 | | | | 136,617 | |
Selling, general and administrative expenses | | | 96,523 | | | | 88,940 | | | | 81,368 | |
Restructuring and impairment charges (credits) | | | -0- | | | | (809 | ) | | | 943 | |
| | | | | | | | | | | | |
Operating income | | | 62,581 | | | | 60,020 | | | | 54,306 | |
Interest expense | | | 31,551 | | | | 31,267 | | | | 27,056 | |
| | | | | | | | | | | | |
Income before income taxes | | | 31,030 | | | | 28,753 | | | | 27,250 | |
Income taxes (benefit) | | | 9,976 | | | | 3,218 | | | | (4,323 | ) |
| | | | | | | | | | | | |
Net income | | $ | 21,054 | | | $ | 25,535 | | | $ | 31,573 | |
| | | | | | | | | | | | |
| | | | | | | | |
| | December 31, | |
| | 2010 | | | 2009 | |
| | (Dollars in thousands) | |
|
ASSETS |
Current Assets | | | | | | | | |
Cash and cash equivalents | | $ | 35,075 | | | $ | 21,976 | |
Accounts receivable, less allowances for doubtful accounts of $6,011 in 2010 and $8,388 in 2009 | | | 126,409 | | | | 104,643 | |
Inventories | | | 192,542 | | | | 182,116 | |
Deferred tax assets | | | 10,496 | | | | 8,104 | |
Unbilled contract revenue | | | 12,751 | | | | 19,411 | |
Other current assets | | | 12,797 | | | | 21,476 | |
| | | | | | | | |
Total Current Assets | | | 390,070 | | | | 357,726 | |
Property, plant and equipment: | | | | | | | | |
Land and land improvements | | | 3,628 | | | | 3,673 | |
Buildings | | | 50,505 | | | | 44,721 | |
Machinery and equipment | | | 201,920 | | | | 194,111 | |
| | | | | | | | |
| | | 256,053 | | | | 242,505 | |
Less accumulated depreciation | | | 184,284 | | | | 167,546 | |
| | | | | | | | |
| | | 71,769 | | | | 74,959 | |
Other Assets: | | | | | | | | |
Goodwill | | | 9,100 | | | | 4,155 | |
Other | | | 84,340 | | | | 70,695 | |
| | | | | | | | |
| | $ | 555,279 | | | $ | 507,535 | |
| | | | | | | | |
|
LIABILITIES AND SHAREHOLDER’S EQUITY |
Current Liabilities | | | | | | | | |
Trade accounts payable | | $ | 95,690 | | | $ | 75,078 | |
Payable to affiliates | | | 11,879 | | | | 7,693 | |
Accrued expenses | | | 59,200 | | | | 39,074 | |
Current portion of long-term debt | | | 13,756 | | | | 10,894 | |
Current portion of other postretirement benefits | | | 2,178 | | | | 2,197 | |
| | | | | | | | |
Total Current Liabilities | | | 182,703 | | | | 134,936 | |
Long-Term Liabilities, less current portion | | | | | | | | |
8.375% senior subordinated notes due 2014 | | | 183,835 | | | | 183,835 | |
Revolving credit | | | 113,300 | | | | 134,600 | |
Other long-term debt | | | 5,322 | | | | 4,668 | |
Deferred tax liability | | | 9,721 | | | | 7,200 | |
Other postretirement benefits and other long-term liabilities | | | 22,863 | | | | 21,831 | |
| | | | | | | | |
| | | 335,041 | | | | 352,134 | |
Shareholder’s Equity | | | | | | | | |
Common stock, par value $1 per share | | | -0- | | | | -0- | |
Additional paid-in capital | | | 47,850 | | | | 55,362 | |
Retained (deficit) | | | (12,723 | ) | | | (29,783 | ) |
Accumulated other comprehensive income (loss) | | | 2,408 | | | | (5,114 | ) |
| | | | | | | | |
| | | 37,535 | | | | 20,465 | |
| | | | | | | | |
| | $ | 555,279 | | | $ | 507,535 | |
| | | | | | | | |
See notes to consolidated financial statements.
30
Park-Ohio Industries, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated
| | | | |
| | | | | Additional
| | | | | | Other
| | | | |
| | Common
| | | Paid-In
| | | Retained
| | | Comprehensive
| | | | |
| | Stock | | | Capital | | | Earnings | | | Income (Loss) | | | Total | |
| | (Dollars in thousands) | |
|
Balance at January 1, 2005 | | $ | -0- | | | $ | 64,844 | | | $ | 11,314 | | | $ | (1,676 | ) | | $ | 74,482 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 31,573 | | | | | | | | 31,573 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | 94 | | | | 94 | |
Minimum pension liability | | | | | | | | | | | | | | | (520 | ) | | | (520 | ) |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | 31,147 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2005 | | | -0- | | | | 64,844 | | | | 42,887 | | | | (2,102 | ) | | | 105,629 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 25,535 | | | | | | | | 25,535 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | 2,128 | | | | 2,128 | |
Minimum pension liability | | | | | | | | | | | | | | | 5,358 | | | | 5,358 | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | 33,021 | |
Adjustment recognized upon adoption of FAS 158 (net of income tax of $404) | | | | | | | | | | | | | | | 440 | | | | 440 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | | -0- | | | | 64,844 | | | | 68,422 | | | | 5,824 | | | | 139,090 | |
Adjustment relating to adoption of FIN 48 | | | | | | | | | | | (608 | ) | | | | | | | (608 | ) |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 21,054 | | | | | | | | 21,054 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | 7,328 | | | | 7,328 | |
Pension and postretirement benefit adjustments, net of income tax of $2,834 | | | | | | | | | | | | | | | 4,932 | | | | 4,932 | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | 33,314 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | $ | -0- | | | $ | 64,844 | | | $ | 88,868 | | | $ | 18,084 | | | $ | 171,796 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | (Dollars in thousands) | |
|
Net sales | | $ | 813,522 | | | $ | 701,047 | | | $ | 1,068,757 | |
Cost of products sold | | | 679,425 | | | | 597,200 | | | | 919,297 | |
| | | | | | | | | | | | |
Gross profit | | | 134,097 | | | | 103,847 | | | | 149,460 | |
Selling, general and administrative expenses | | | 89,806 | | | | 84,036 | | | | 102,127 | |
Goodwill impairment charge | | | -0- | | | | -0- | | | | 95,763 | |
Restructuring and impairment charges | | | 3,539 | | | | 5,206 | | | | 25,331 | |
| | | | | | | | | | | | |
Operating income (loss) | | | 40,752 | | | | 14,605 | | | | (73,761 | ) |
Gain on purchase of 8.375% senior subordinated notes | | | -0- | | | | 12,529 | | | | -0- | |
Gain on acquisition of business | | | (2,210 | ) | | | -0- | | | | -0- | |
Interest expense | | | 23,868 | | | | 23,945 | | | | 27,921 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | 19,094 | | | | 3,189 | | | | (101,682 | ) |
Income tax expense (benefit) | | | 2,034 | | | | (828 | ) | | | 20,986 | |
| | | | | | | | | | | | |
Net income (loss) | | $ | 17,060 | | | $ | 4,017 | | | $ | (122,668 | ) |
| | | | | | | | | | | | |
See notes to consolidated financial statements.
31
Park-Ohio Industries, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2007 | | | 2006 | | | 2005 | |
| | (Dollars in thousands) | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | |
Net income | | $ | 21,054 | | | $ | 25,535 | | | $ | 31,573 | |
Adjustments to reconcile net income to net cash provided by operations: | | | | | | | | | | | | |
Depreciation and amortization | | | 20,469 | | | | 20,037 | | | | 17,261 | |
Restructuring and impairment charges (credits) | | | 2,214 | | | | (9 | ) | | | 1,776 | |
Deferred income taxes | | | 4,342 | | | | (4,361 | ) | | | (6,946 | ) |
Changes in operating assets and liabilities excluding acquisitions of businesses: | | | | | | | | | | | | |
Accounts receivable | | | 9,536 | | | | (16,219 | ) | | | 5,507 | |
Inventories | | | 8,527 | | | | (28,443 | ) | | | (1,699 | ) |
Accounts payable and accrued expenses | | | (21,900 | ) | | | 16,760 | | | | (934 | ) |
Other | | | (15,410 | ) | | | (8,539 | ) | | | (12,043 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 28,832 | | | | 4,761 | | | | 34,495 | |
INVESTING ACTIVITIES | | | | | | | | | | | | |
Purchases of property, plant and equipment, net | | | (21,876 | ) | | | (19,256 | ) | | | (20,295 | ) |
Business acquisitions, net of cash acquired | | | -0- | | | | (23,271 | ) | | | (12,181 | ) |
Proceeds from sale-leaseback transactions | | | -0- | | | | 9,420 | | | | -0- | |
| | | | | | | | | | | | |
Proceeds from the sale of assets held for sale | | | -0- | | | | 3,200 | | | | 1,100 | |
| | | | | | | | | | | | |
Net cash used by investing activities | | | (21,876 | ) | | | (29,907 | ) | | | (31,376 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | | |
Proceeds from bank arrangements, net | | | -0- | | | | 28,150 | | | | 8,342 | |
Payments on bank arrangements and long-term debt, net | | | (14,751 | ) | | | -0- | | | | -0- | |
| | | | | | | | | | | | |
Net cash (used) provided by financing activities | | | (14,751 | ) | | | 28,150 | | | | 8,342 | |
(Decrease) Increase in cash and cash equivalents | | | (7,795 | ) | | | 3,004 | | | | 11,461 | |
Cash and cash equivalents at beginning of year | | | 20,872 | | | | 17,868 | | | | 6,407 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 13,077 | | | $ | 20,872 | | | $ | 17,868 | |
| | | | | | | | | | | | |
Income taxes paid | | $ | 6,170 | | | $ | 5,291 | | | $ | 881 | |
Interest paid | | | 30,194 | | | | 28,997 | | | | 24,173 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated
| | | | |
| | | | | Additional
| | | Retained
| | | Other
| | | | |
| | Common
| | | Paid-In
| | | Earnings
| | | Comprehensive
| | | | |
| | Stock | | | Capital | | | (Deficit) | | | Income (Loss) | | | Total | |
| | (Dollars in thousands) | |
|
Balance at January 1, 2008 | | $ | -0- | | | $ | 64,844 | | | $ | 88,868 | | | $ | 18,084 | | | $ | 171,796 | |
Comprehensive (loss): | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | (122,668 | ) | | | | | | | (122,668 | ) |
Foreign currency translation adjustment | | | | | | | | | | | | | | | (8,730 | ) | | | (8,730 | ) |
Pension and postretirement benefit adjustments, net of income tax of $13,460 | | | | | | | | | | | | | | | (26,456 | ) | | | (26,456 | ) |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive (loss) | | | | | | | | | | | | | | | | | | | (157,854 | ) |
Distribution of capital to shareholder | | | | | | | (8,732 | ) | | | | | | | | | | | (8,732 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | | -0- | | | | 56,112 | | | | (33,800 | ) | | | (17,102 | ) | | | 5,210 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 4,017 | | | | | | | | 4,017 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | 2,968 | | | | 2,968 | |
Pension and postretirement benefit adjustments, net of income tax of $1,179 | | | | | | | | | | | | | | | 9,020 | | | | 9,020 | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | 16,005 | |
Distribution of capital to shareholder | | | | | | | (750 | ) | | | | | | | | | | | (750 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2009 | | | -0- | | | | 55,362 | | | | (29,783 | ) | | | (5,114 | ) | | | 20,465 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 17,060 | | | | | | | | 17,060 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | (741 | ) | | | (741 | ) |
Pension and postretirement benefit adjustments, net of income tax of $1,143 | | | | | | | | | | | | | | | 8,263 | | | | 8,263 | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | 24,582 | |
Capital contribution from shareholder | | | | | | | (6,762 | ) | | | | | | | | | | | (6,762 | ) |
Distribution of capital to shareholder | | | | | | | (750 | ) | | | | | | | | | | | (750 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2010 | | $ | -0- | | | $ | 47,850 | | | $ | (12,723 | ) | | $ | 2,408 | | | $ | 37,535 | |
| | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
32
Park-Ohio Industries, Inc. and Subsidiaries
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | (Dollars in thousands) | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | |
Net income (loss) | | $ | 17,060 | | | $ | 4,017 | | | $ | (122,668 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operations: | | | | | | | | | | | | |
Depreciation and amortization | | | 17,122 | | | | 18,776 | | | | 20,782 | |
Restructuring and impairment charges | | | 3,539 | | | | 5,206 | | | | 121,094 | |
Gain on purchase of 8.375% senior subordinated notes | | | -0- | | | | (12,529 | ) | | | -0- | |
Gain on acquisition of business | | | (2,210 | ) | | | -0- | | | | -0- | |
Deferred income taxes | | | (1,126 | ) | | | (1,842 | ) | | | -0- | |
Changes in operating assets and liabilities excluding acquisitions of businesses: | | | | | | | | | | | | |
Accounts receivable | | | (7,624 | ) | | | 61,136 | | | | 6,578 | |
Inventories | | | 10,067 | | | | 46,701 | | | | (12,547 | ) |
Accounts payable and accrued expenses | | | 27,856 | | | | (82,349 | ) | | | 7,490 | |
Other | | | 9,864 | | | | 10,572 | | | | (10,535 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 74,548 | | | | 49,688 | | | | 10,194 | |
INVESTING ACTIVITIES | | | | | | | | | | | | |
Purchases of property, plant and equipment | | | (3,951 | ) | | | (5,575 | ) | | | (17,466 | ) |
Business acquisitions, net of cash acquired | | | (25,900 | ) | | | -0- | | | | (5,322 | ) |
Proceeds from the sale of assets held for sale | | | -0- | | | | -0- | | | | 260 | |
| | | | | | | | | | | | |
Net cash used by investing activities | | | (29,851 | ) | | | (5,575 | ) | | | (22,528 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | | |
Payments on debt, net | | | (19,944 | ) | | | (25,499 | ) | | | 25,612 | |
Debt issue costs | | | (4,142 | ) | | | -0- | | | | -0- | |
Purchase of 8.375% senior subordinated notes | | | -0- | | | | (13,511 | ) | | | -0- | |
Distribution of capital to shareholder | | | (750 | ) | | | (750 | ) | | | (8,732 | ) |
Capital contribution | | | (6,762 | ) | | | -0- | | | | -0- | |
| | | | | | | | | | | | |
Net cash (used) provided by financing activities | | | (31,598 | ) | | | (39,760 | ) | | | 16,880 | |
Increase in cash and cash equivalents | | | 13,099 | | | | 4,353 | | | | 4,546 | |
Cash and cash equivalents at beginning of year | | | 21,976 | | | | 17,623 | | | | 13,077 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 35,075 | | | $ | 21,976 | | | $ | 17,623 | |
| | | | | | | | | | | | |
Income taxes paid | | $ | 1,217 | | | $ | 3,146 | | | $ | 6,847 | |
Interest paid | | | 23,324 | | | | 23,018 | | | | 26,115 | |
See notes to consolidated financial statements.
33
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
December 31, 2007, 20062010, 2009 and 2005
2008
(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 $20,432$22,788 and $22,978$21,456 at December 31, 20072010 and 2006,2009, respectively. Inventory consigned to others was $6,940 and $3,160 at December 31, 2010 and 2009, respectively.
Major Classes of Inventories
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
Finished goods | | $ | 129,074 | | | $ | 143,071 | | | $ | 116,202 | | | $ | 100,309 | |
Work in process | | | 26,249 | | | | 42,405 | | | | 24,339 | | | | 26,778 | |
Raw materials and supplies | | | 60,086 | | | | 38,460 | | | | 52,001 | | | | 55,029 | |
| | | | | | | | | | |
| | $ | 215,409 | | | $ | 223,936 | | | $ | 192,542 | | | $ | 182,116 | |
| | | | | | | | | | |
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 6040 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 the carrying value of the asset exceeds the fair market value
34
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 Codification (“SFAS”ASC”) No. 142, “Goodwill350 “Intangibles — Goodwill and Other Intangible Assets”Other” (“FAS 142”ASC 350”), the Company does not amortize goodwill recorded in connection with business acquisitions. The Company completed the annual impairment tests required by FAS 142ASC 350 as of October 1, and these tests confirmed that the fair value of the Company’s goodwill exceed their respective carrying values and no impairment loss was required to be recognized.2010. Other intangible assets, which consist primarily of non-contractual customer relationships, are amortized over their estimated useful lives.
PensionsWe use an income approach and Other Postretirement Benefits:other valuation techniques 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 using this methodology provides reasonable estimates of a reporting unit’s fair value. 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 areincome approach is based on projected future debt-free cash flow that is discounted to present value using factors that consider the employee’s yearstiming and risk of service. For the defined
33
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contribution plans, the costs charged to operations and the amount funded arefuture cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon a percentagethe reporting unit’s expected long-term operating and cash flow performance. This approach also mitigates most of the covered employees’ compensation.
Accounting for Asset Retirement Obligations: In accordance with FIN No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretationimpact of FASB Statement No. 143”, “Accounting for Asset Retirement Obligations”,cyclical downturns that occur in the Company has identified certain conditional asset retirement obligations at various current manufacturing facilities. These obligations relate primarily to asbestos abatement. Using investigative, remediation,reporting unit’s industry. The income approach is based on a reporting unit’s projection of operating results and disposal methodscash flows that are currently available to the Company, the estimatedis 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 obligations is not significantfactors and management does notto our judgment in applying them to this analysis. Nonetheless, we believe that any potential liability ultimately attributedthis method provides a reasonable approach to estimate the Companyfair value of our reporting units. See Note D 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 periodresults 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.this testing.
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. 109ASC 740 “Income Taxes” (“FAS 109”ASC 740”), “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%11% 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 and Allowance for Doubtful Accounts: Accounts receivable are recorded at net realizable value. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The 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 2007,2010 and 2009, we sold approximately $10,400$37,272 and $20,832, respectively, of accounts receivable to mitigate accounts receivable concentration risk and to provide additional financing capacity. In compliance with SFAS No. 140, “Accounting for TransfersASC 860, “Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“FAS 140”)Servicing”, 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 2007, a loss in the amount of $84 related to the sale of accounts
3435
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Consolidated Statements of Cash flows. In 2010 and 2009, a loss in the amount of $165 and $86, respectively, related to the sale of accounts receivable is recorded in the Consolidated Statements of Income. This lossOperations. 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. Amortization expense was $2,213, $1,454 and $1,288 in 2010, 2009 and 2008, respectively.
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, 2007,2010, the Company had uncollateralized receivables with five customers in the automotive and heavy-duty truck industries,industry, each with several locations, aggregating $22,703,$13,352, which represented approximately 13%11% of the Company’s trade accounts receivable. During 2007,2010, sales to these customers amounted to approximately $179,367,$100,009, which represented approximately 16%12% 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.Statements of Operations.
Environmental: The Company accrues environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Costs that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company records a liability when environmental 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’s equity.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation Accounting Standard Codification (“ASC”) Update (“ASU”)No. 48, “Accounting for Uncertainty2010-06 “Improving Disclosure about Fair Value Measurements”, requires enhanced disclosures about recurring and nonrecurring fair-value measurements including significant transfers in Income Taxes,” An Interpretationand out of FASB Statement Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances and settlements on a gross basis of Level 3 fair-value measurements. ASUNo. 109 (“FIN 48”)” that prescribes a recognition threshold and measurement attribute2010-06 was adopted January 1, 2010, except for the financial statement recognitionrequirement to separately disclose purchases, sales, issuances and measurementsettlements of a tax position taken or expected to be taken in a tax return. Under FIN 48, a contingent tax asset only will be recognized if it is more likely than not that a 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 48recurring Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2006. 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. The Company adopted FIN 48 as of January 1, 2007. See Note H for the impact of such adoption on the Company’s financial statements and related disclosures.2011.
In September 2006,October 2009, the FASB issued SFAS ASUNo. 157, “Fair Value Measurements,2009-13, “Multiple-Deliverable Revenue Arrangements,” which defines fair value in GAAPamends ASC Topic 605, “Revenue Recognition.” ASUNo. 2009-13 amends the ASC to eliminate the residual method of allocation for multiple-deliverable revenue arrangements, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncementsrequires that require or permit fair value measurements and is effectivearrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The ASU also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available, (2) third-party evidence if
3536
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company in 2008.vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. Additionally, ASUNo. 2009-13 expands the disclosure requirements related to a vendor’s multiple-deliverable revenue arrangements. The Company is currently evaluating the potential impact, of adopting this statement on the Company’s financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option would also be required to distinguish, on the faceif any, of the statementadoption of financial position, the fair value of assets and liabilities forthis guidance on its Consolidated Financial Statements, which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. FAS 159 is effective for the Company in 2008. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. The Company is currently evaluating the impact of adoption of FAS 159 on the Company’s financial position and results of operations.January 1, 2011.
In December 2007,June 2009, the FASB issued SFASguidance as codified inASC 810-10, “Consolidation of Variable Interest Entities” (previously Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations” (“FAS 141(R)167, “Amendments to FASB Interpretation No. 46(R)”). FAS 141(R) provides revisedThis guidance on how acquirers recognizeis intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities (“VIEs”) and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interestsby requiring additional disclosures about a company’s involvement with VIEs. This guidance is generally effective for annual periods beginning after November 15, 2009 and goodwill acquired infor interim periods within that first annual reporting period. The adoption of this guidance did not have a business combination. FAS 141(R) also expands required disclosures surrounding the nature and financial effects of business combinations. FAS 141(R) is effective, on a prospective basis, for the Company in 2009. The Company is currently evaluating thematerial impact of adopting FAS 141(R) on the Company’s financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” FAS 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. FAS 160 is effective, on a prospective basis, for the Company in 2009. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The Company is currently evaluating the impact of adopting FAS 160 on the Company’s financial position and results of operations.
Reclassification: Certain amounts in the prior years’ financial statements have been reclassified to conform toof the current year presentation.Company.
| |
NOTE B — | Industry Segments |
The Company operates through three segments: Supply Technologies, Aluminum Products and Manufactured Products. In 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 broad range of high-volume, specialty production components. Total Supply Managementtm manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation and includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking,just-in-time andpoint-of-use delivery, electronic billing services and ongoing technical support. The principal customers of Supply 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, and appliance industries. Aluminum Products manufactures cast
36
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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, | |
| | 2007 | | | 2006 | | | 2005 | |
|
Net sales: | | | | | | | | | | | | |
Supply Technologies | | $ | 531,417 | | | $ | 598,228 | | | $ | 532,624 | |
Aluminum Products | | | 169,118 | | | | 154,639 | | | | 159,053 | |
Manufactured Products | | | 370,906 | | | | 303,379 | | | | 241,223 | |
| | | | | | | | | | | | |
| | $ | 1,071,441 | | | $ | 1,056,246 | | | $ | 932,900 | |
| | | | | | | | | | | | |
Income before income taxes: | | | | | | | | | | | | |
Supply Technologies | | $ | 27,175 | | | $ | 38,383 | | | $ | 34,814 | |
Aluminum Products | | | 3,020 | | | | 3,921 | | | | 9,103 | |
Manufactured Products | | | 45,798 | | | | 28,991 | | | | 20,630 | |
| | | | | | | | | | | | |
| | | 75,993 | | | | 71,295 | | | | 64,547 | |
Corporate costs | | | (13,412 | ) | | | (11,275 | ) | | | (10,241 | ) |
Interest expense | | | (31,551 | ) | | | (31,267 | ) | | | (27,056 | ) |
| | | | | | | | | | | | |
| | $ | 31,030 | | | $ | 28,753 | | | $ | 27,250 | |
| | | | | | | | | | | | |
37
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2010 | | 2009 | | 2008 | |
| |
Net sales: | | | | | | | | | | | | | |
Supply Technologies | | | $ | 402,169 | | | $ | 328,805 | | | $ | 521,270 | |
Aluminum Products | | | | 143,672 | | | | 111,388 | | | | 156,269 | |
Manufactured Products | | | | 267,681 | | | | 260,854 | | | | 391,218 | |
| | | | | | | | |
| | | $ | 813,522 | | | $ | 701,047 | | | $ | 1,068,757 | |
| | | | | | | | |
Income before income taxes: | | | | | | | | | | | | | |
Supply Technologies | | | $ | 22,216 | | | $ | 8,531 | | | $ | (66,419 | ) |
Aluminum Products | | | | 6,582 | | | | (5,155 | ) | | | (23,467 | ) |
Manufactured Products | | | | 28,739 | | | | 26,472 | | | | 54,825 | |
| | | | | | | | |
| | | | 57,537 | | | | 29,848 | | | | (35,061 | ) |
Corporate costs | | | | (13,246 | ) | | | (3,805 | ) | | | (19,601 | ) |
Gain on purchase of 8.375% senior subordinated notes | | | | -0- | | | | 6,297 | | | | 6,232 | |
Gain on acquisition of business | | | | 2,210 | | | | -0- | | | | -0- | |
Asset impairment charge | | | | (3,539 | ) | | | (5,206 | ) | | | (25,331 | ) |
Interest expense | | | | (23,868 | ) | | | (23,945 | ) | | | (27,921 | ) |
| | Year Ended December 31, | | | | | | | | |
| | 2007 | | 2006 | | 2005 | | | $ | 19,094 | | | $ | 3,189 | | | $ | (101,682 | ) |
| | | | | | | |
Identifiable assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Supply Technologies | | $ | 354,165 | | | $ | 382,101 | | | $ | 323,176 | | | $ | 217,915 | | | $ | 207,729 | | | $ | 256,161 | |
Aluminum Products | | | 98,524 | | | | 98,041 | | | | 101,489 | | | | 66,219 | | | | 76,443 | | | | 87,215 | |
Manufactured Products | | | 231,459 | | | | 206,089 | | | | 169,004 | | | | 188,017 | | | | 178,715 | | | | 242,057 | |
General corporate | | | 85,270 | | | | 97,438 | | | | 71,056 | | | | 83,128 | | | | 44,648 | | | | 37,412 | |
| | | | | | | | | | | | | | |
| | $ | 769,418 | | | $ | 783,669 | | | $ | 664,725 | | | $ | 555,279 | | | $ | 507,535 | | | $ | 622,845 | |
| | | | | | | | | | | | | | |
Depreciation and amortization expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Supply Technologies | | $ | 4,832 | | | $ | 4,365 | | | $ | 4,575 | | | $ | 5,272 | | | $ | 4,812 | | | $ | 5,153 | |
Aluminum Products | | | 8,563 | | | | 7,892 | | | | 7,484 | | | | 6,488 | | | | 7,556 | | | | 8,564 | |
Manufactured Products | | | 6,723 | | | | 6,960 | | | | 4,986 | | | | 5,001 | | | | 6,022 | | | | 6,586 | |
General corporate | | | 351 | | | | 820 | | | | 216 | | | | 361 | | | | 386 | | | | 479 | |
| | | | | | | | | | | | | | |
| | $ | 20,469 | | | $ | 20,037 | | | $ | 17,261 | | | $ | 17,122 | | | $ | 18,776 | | | $ | 20,782 | |
| | | | | | | | | | | | | | |
Capital expenditures: | | | | | | | | | | | | | | | | | | | | | | | | |
Supply Technologies | | $ | 7,751 | | | $ | 2,447 | | | $ | 2,070 | | | $ | 1,613 | | | $ | 2,380 | | | $ | 931 | |
Aluminum Products | | | 4,775 | | | | 5,528 | | | | 10,473 | | | | 156 | | | | 1,385 | | | | 7,750 | |
Manufactured Products | | | 6,534 | | | | 12,548 | | | | 7,266 | | | | 2,138 | | | | 2,006 | | | | 8,101 | |
General corporate | | | 2,816 | | | | (1,267 | ) | | | 486 | | | | 44 | | | | (196 | ) | | | 684 | |
| | | | | | | | | | | | | | |
| | $ | 21,876 | | | $ | 19,256 | | | $ | 20,295 | | | $ | 3,951 | | | $ | 5,575 | | | $ | 17,466 | |
| | | | | | | | | | | | | | |
38
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
The Company had sales of $77,389 in 2007, $146,849 in 2006 and $107,853 in 2005 to International Truck, which represented approximately 7%, 14% and 12% of consolidated net sales for each respective year.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, | |
| | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | |
|
United States | | | 70 | % | | | 76 | % | | | 79 | % | | | 73 | % | | | 73 | % | | | 68 | % |
Asia | | | 9 | % | | | 5 | % | | | 5 | % | | | 10 | % | | | 9 | % | | | 11 | % |
Canada | | | 5 | % | | | 9 | % | | | 7 | % | | | 6 | % | | | 6 | % | | | 6 | % |
Mexico | | | 6 | % | | | 4 | % | | | 3 | % | | | 3 | % | | | 2 | % | | | 6 | % |
Europe | | | 6 | % | | | 4 | % | | | 2 | % | | | 5 | % | | | 9 | % | | | 6 | % |
Other | | | 4 | % | | | 2 | % | | | 4 | % | | | 3 | % | | | 1 | % | | | 3 | % |
| | | | | | | | | | | | | | |
| | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | |
At December 31, 2007, 20062010, 2009 and 2005,2008, approximately 85%75%, 90%77% and 86%81%, respectively, of the Company’s assets were maintained in the United States.
In October 2006,Effective August 31, 2010, the Company completed the acquisition of certain assets and assumed specific liabilities relating to Assembly Components Systems (“ACS”) business unit of Lawson Products, Inc. for $16,000 in cash and a $2,160 subordinated promissory note payable in equal quarterly installments over three years. ACS is a provider of supply chain management solutions for a broad range of production components through its service centers throughout North America. The net assets acquired were integrated into the Company’s Supply Technologies business segment. The fair value of the net assets acquired of $20,370 exceeded the total purchase price and, accordingly, resulted in a gain on acquisition of business of $2,210. Net sales of $16,931 were added to the Company’s Supply Technologies business segment in 2010 since the date of acquisition. The acquisition was accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total estimated purchase price is allocated to ACS’s tangible assets and intangible assets acquired and liabilities assumed based on their estimated fair values as of August 31, 2010, the effective date of the acquisition. Based on management’s valuation of the fair value of tangible and intangible assets acquired and liabilities assumed which are based on estimates and assumptions, the purchase price is allocated as follows:
| | | | |
Accounts receivable | | $ | 9,059 | |
Inventories | | | 16,711 | |
Prepaid expenses and other current assets | | | 42 | |
Property, plant and equipment | | | 299 | |
Customer relationships | | | 990 | |
Accounts payable | | | (5,047 | ) |
Accrued expenses | | | (330 | ) |
Deferred tax liability | | | (1,354 | ) |
Gain on acquisition | | | (2,210 | ) |
| | | | |
Total purchase price | | $ | 18,160 | |
| | | | |
Direct transaction costs associated with this acquisition included in selling, general and administrative expenses during the year ended December 31, 2010 were approximately $346.
On September 30, 2010, the Company entered a Bill of Sale with Rome Die Casting LLC (“Rome”), a producer of aluminum high pressure die castings, pursuant to which, Rome agreed to transfer to the Company substantially all of the capital stockassets of NABS, Inc. (“NABS”)Rome in exchange for $21,201 in cash. NABS is a premier international supply chain managerapproximately $7,500 of production components, providing servicesnotes receivable
38
39
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
from Rome. The assets of Rome were integrated into the Company’s aluminum segment. Net sales of $7,031 were added to high technology companiesthe Company’s Aluminum segment in 2010 since the computer, electronics, and consumer products industries. NABS has 17 operations across Europe, Asia, Mexico and the United States.date of acquisition. The acquisition was funded with borrowingsaccounted for under the Company’s revolving credit facility.
The purchase price and resultsacquisition method of operationsaccounting. Under the acquisition method of NABS prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for NABS have been included since October 18, 2006. The final allocation ofaccounting, the purchase price has been performed based on the assignments of fair valuesis allocated to Rome’s tangible assets and intangible assets acquired and liabilities assumed. The final allocationassumed based on their estimated fair values as of September 30, 2010, the effective date of the acquisition. Based on management’s valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price is as follows:
| | | | | | | | |
Cash acquisition price, less cash acquired | | | | | | $ | 20,053 | |
Assets | | | | | | | | |
Accounts receivable | | | | | | | (11,460 | ) |
Inventories | | | | | | | (4,326 | ) |
Other current assets | | | | | | | (201 | ) |
Equipment | | | | | | | (365 | ) |
Intangible assets subject to amortization | | | | | | | (8,020 | ) |
Other assets | | | | | | | (724 | ) |
Liabilities | | | | | | | | |
Accounts payable | | | | | | | 9,905 | |
Accrued expenses and other current liabilities | | | | | | | 4,701 | |
Deferred tax liability | | | | | | | 3,128 | |
| | | | | | | | |
Goodwill | | | | | | $ | 12,691 | |
| | | | | | | | |
| | | | |
Accounts receivable | | $ | 1,918 | |
Inventories | | | 1,000 | |
Property, plant and equipment | | | 2,800 | |
Accounts payable | | | (2,314 | ) |
Accrued expenses | | | (516 | ) |
Goodwill | | | 4,572 | |
| | | | |
Total purchase price | | $ | 7,460 | |
| | | | |
The Company has a plan for integration activities. In accordanceDirect transaction costs associated with FASB EITF IssueNo. 95-3, “Recognition of Liabilitiesthis acquisition included in Connection with a Purchase Business Combination,”selling, general and administrative expenses during 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 | |
Add: Accruals | | | -0- | | | | -0- | | | | -0- | |
Less: Payments | | | (514 | ) | | | (204 | ) | | | (718 | ) |
| | | | | | | | | | | | |
Balance at December 31, 2007 | | $ | -0- | | | $ | -0- | | | $ | -0- | |
| | | | | | | | | | | | |
In January 2006, the Company completed the acquisition of all of the capital stock of Foundry Service GmbH (“Foundry Service”) foryear ended December 31, 2010 were 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.$256.
On December 23, 2005,31, 2010, the Company completed the acquisition ofthrough its subsidiary Ajax Tocco Magnathermic acquired the assets and the related induction heating intellectual property of Lectrotherm, Inc.ABP Induction’s United States heating business operating as Pillar Induction (“Lectrotherm”Pillar”) for $5,125 in cash.. Pillar provides complete turnkey automated induction power systems and aftermarket parts and service to a worldwide market.
The assets of Pillar will be integrated into the Company’s manufactured products segment. The acquisition was funded with borrowingsaccounted for under the Company’s revolving credit facility. Theacquisition method of accounting. Under the acquisition method of accounting, the total estimated purchase price is allocated to Pillar’s tangible assets 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
39
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Lectrotherm have been included since December 23, 2005. In 2006, the allocation of the purchase price was finalized based on the assignments of fair values tointangible assets acquired and liabilities assumed. assumed based on their estimated fair values as of December 31, 2010, the effective date of the acquisition. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed which are based on estimates and assumptions that are subject to change, the preliminary estimated purchase price is allocated as follows:
| | | | |
Accounts receivable | | $ | 3,164 | |
Inventories | | | 2,782 | |
Prepaid expenses and other current assets | | | 178 | |
Property, plant and equipment | | | 447 | |
Customer relationships | | | 3,480 | |
Technological know how | | | 1,890 | |
Trade name and other intangible assets | | | 710 | |
Accounts payable | | | (1,202 | ) |
Accrued expenses | | | (2,133 | ) |
Goodwill | | | 584 | |
| | | | |
Total purchase price | | $ | 9,900 | |
| | | | |
The area of purchase price allocation that is not yet finalized relates to the working capital adjustment as of December 31, 2010. Prior to the measurement period for finalizing 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 | |
| | | | | | | | |
On July 20, 2005, the Company completed the acquisition of the assets of Purchased Parts Group, Inc. (“PPG”) for $7,000 in cash, $1,346 in a short-term note payable and the assumption of approximately $12,787 of trade liabilities. The acquisition was funded with borrowings under the Company’s revolving credit facility. The purchase price and the results of operations of PPG prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for PPG have beenallocation, such adjustments will be included in the Company’s financial statements since July 20, 2005. The final allocation of the purchase price isallocation retrospectively. There were no significant direct transaction costs included in selling, general and administrative expenses during the year ended December 31, 2010. These costs will be expensed as follows:
| | | | | | | | |
Cash acquisition price | | | | | | $ | 7,000 | |
Assets | | | | | | | | |
Accounts receivable | | | | | | | (10,835 | ) |
Inventories | | | | | | | (10,909 | ) |
Prepaid expenses | | | | | | | (1,201 | ) |
Equipment | | | | | | | (407 | ) |
Liabilities | | | | | | | | |
Accounts payable | | | | | | | 12,783 | |
Accrued expenses | | | | | | | 2,270 | |
Note payable | | | | | | | 1,299 | |
| | | | | | | | |
Goodwill | | | | | | $ | -0- | |
| | | | | | | | |
incurred in the first quarter of 2011.
40
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company hasfollowing unaudited pro forma information is provided to present a plansummary of the combined results of the Company’s operations with ACS, Rome and Pillar as if the acquisitions had occurred on January 1, 2009. The unaudited pro forma financial information is for integration activities. In accordance with FASB EITF IssueNo. 95-3, “Recognitioninformational purposes only and is not necessarily indicative of Liabilities in Connection with a Purchase Business Combination,”what the results would have been had the acquisitions been completed at the date indicated above.
| | | | | | | | |
| | Year Ended December 31, |
| | 2010 | | 2009 |
|
Pro forma revenues | | $ | 881,271 | | | $ | 770,603 | |
Pro forma net income | | $ | 15,072 | | | $ | (12,744 | ) |
| |
NOTE D — | Goodwill and Other Intangible Assets |
ASC 350, requires that our annual, and any interim, impairment assessment be performed at the “reporting unit” level. At October 1, 2008, the Company recorded accruals for severance, exit and relocation costs in the purchase price allocation. A reconciliation of the beginning and ending accrual balance is as follows:
| | | | | | | | | | | | |
| | Severance
| | | Exit and
| | | | |
| | and Personnel | | | Relocation | | | Total | |
|
Balance at June 30, 2005 | | $ | -0- | | | $ | -0- | | | $ | -0- | |
Add: Accruals | | | 250 | | | | 1,750 | | | | 2,000 | |
Less: Payments | | | (551 | ) | | | (594 | ) | | | (1,145 | ) |
Transfers | | | 400 | | | | (400 | ) | | | -0- | |
| | | | | | | | | | | | |
Balance at December 31, 2005 | | $ | 99 | | | $ | 756 | | | $ | 855 | |
Less: Payments and adjustments | | | (43 | ) | | | (417 | ) | | | (460 | ) |
Transfers | | | (17 | ) | | | 17 | | | | -0- | |
| | | | | | | | | | | | |
Balance at December 31, 2006 | | $ | 39 | | | $ | 356 | | | $ | 395 | |
Less: Payments and adjustments | | | (39 | ) | | | (356 | ) | | | (395 | ) |
| | | | | | | | | | | | |
Balance at December 31, 2007 | | $ | -0- | | | $ | -0- | | | $ | -0- | |
| | | | | | | | | | | | |
NOTE D — FAS 142, “Goodwill and Other Intangible Assets”
In accordance withhad four reporting units that had goodwill. Under the provisions of FAS 142, the Company has completed its annual goodwillASC 350, these four reporting units were tested for impairment tests as of October 1, 2007, 20062008 and 2005, and has determined that no impairment of goodwill existedupdated as of those dates.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 ASC 350, we completed an impairment analysis and concluded that all of the goodwill in three of the reporting units for a total of $95,763 was impaired and written off in the fourth quarter of 2008.
The following table summarizeschanges in the carrying amount of goodwill by reportable segment for the years ended December 31, 20072010, 2009 and December 31, 2006 by reporting segment.2008 were as follows:
| | | | | | | | |
| | Goodwill at
| | | Goodwill at
| |
Reporting Segment | | December 31, 2007 | | | December 31, 2006 | |
|
Supply Technologies | | $ | 80,249 | | | $ | 77,732 | |
Aluminum Products | | | 16,515 | | | | 16,515 | |
Manufactured Products | | | 4,233 | | | | 3,933 | |
| | | | | | | | |
| | $ | 100,997 | | | $ | 98,180 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Supply
| | | | | | Manufactured
| | | | |
| | Technologies | | | Aluminum | | | Products | | | Total | |
|
Balance at January 1, 2008 | | $ | 80,249 | | | $ | 16,515 | | | $ | 4,233 | | | $ | 100,997 | |
Foreign Currency Translation | | | (1,001 | ) | | | -0- | | | | (124 | ) | | | (1,125 | ) |
Impairment Charge | | | (79,248 | ) | | | (16,515 | ) | | | -0- | | | | (95,763 | ) |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | | -0- | | | | -0- | | | | 4,109 | | | | 4,109 | |
Foreign Currency Translation | | | -0- | | | | -0- | | | | 46 | | | | 46 | |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2009 | | | -0- | | | | -0- | | | | 4,155 | | | | 4,155 | |
Foreign Currency Translation | | | -0- | | | | -0- | | | | (211 | ) | | | (211 | ) |
Acquisitions | | | -0- | | | | 4,572 | | | | 584 | | | | 5,156 | |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2010 | | $ | -0- | | | $ | 4,572 | | | $ | 4,528 | | | $ | 9,100 | |
| | | | | | | | | | | | | | | | |
The increase in the goodwill in the Manufactured Products segment during 2007 results from foreign currency fluctuations. The increase in the goodwill in the Supply Technologies segment during 2007 results from the final purchase price adjustment of the NABS acquisition of $1,714 and foreign currency fluctuations.
Other intangible assets were acquired in connection with the acquisitionacquisitions of NABS.NABS, Inc., ACS and Pillar. Information regarding other intangible assets as of December 31, 20072010 and 2009 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | 2010 | | | | | | 2009 | | | |
| | Acquisition
| | Accumulated
| | | | | Acquisition
| | Accumulated
| | | | Acquisition
| | Accumulated
| | | |
| | Costs | | Amortization | | Net | | | Costs | | Amortization | | Net | | Costs | | Amortization | | Net | |
|
Non-contractual customer relationships | | $ | 7,200 | | | $ | 600 | | | $ | 6,600 | | | $ | 11,670 | | | $ | 2,422 | | | $ | 9,248 | | | $ | 7,200 | | | $ | 1,800 | | | $ | 5,400 | |
Other | | | 820 | | | | 124 | | | | 696 | | | | 3,420 | | | | 495 | | | | 2,925 | | | | 820 | | | | 372 | | | | 448 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 8,020 | | | $ | 724 | | | $ | 7,296 | | | $ | 15,090 | | | $ | 2,917 | | | $ | 12,173 | | | $ | 8,020 | | | $ | 2,172 | | | $ | 5,848 | |
| | | | | | | | | | | | | | | | | | | | |
41
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE E — Other AssetsAmortization of other intangible assets was $745 for the year ended December 31, 2010 and $724 for each of the years ended December 31, 2009 and 2008. Amortization expense for each of the five years following December 31, 2010 is approximately $1,169 in 2011, $1,169 in 2012 and $1,045 for each of the three subsequent years thereafter.
Other assets consists of the following:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
Pension assets | | $ | 70,558 | | | $ | 60,109 | | | $ | 60,786 | | | $ | 49,435 | |
Deferred financing costs | | | 4,225 | | | | 5,618 | | |
Deferred financing costs, net | | | | 3,695 | | | | 1,345 | |
Tooling | | | 543 | | | | 1,501 | | | | 417 | | | | 384 | |
Software development costs | | | 3,461 | | | | 6,368 | | | | 2,292 | | | | 3,893 | |
Deferred tax assets | | | -0- | | | | 6,555 | | |
Intangible assets subject to amortization | | | 7,504 | | | | 8,779 | | | | 12,173 | | | | 5,848 | |
Other | | | 7,894 | | | | 2,447 | | | | 4,977 | | | | 9,790 | |
| | | | | | | | | | |
Totals | | $ | 94,185 | | | $ | 91,377 | | | $ | 84,340 | | | $ | 70,695 | |
| | | | | | | | | | |
NOTE F — Accrued Expenses
Accrued expenses include the following:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
Accrued salaries, wages and benefits | | $ | 17,399 | | | $ | 17,349 | | | $ | 13,832 | | | $ | 8,978 | |
Advance billings | | | 16,387 | | | | 26,729 | | | | 23,218 | | | | 14,189 | |
Warranty and project accruals | | | 7,322 | | | | 4,820 | | |
Warranty accrual | | | | 4,046 | | | | 2,760 | |
Interest payable | | | 2,683 | | | | 3,232 | | | | 2,504 | | | | 2,191 | |
State and local taxes | | | 5,607 | | | | 5,746 | | |
Sundry | | | 17,525 | | | | 19,958 | | |
Taxes, income and other | | | | 3,252 | | | | 1,788 | |
Other | | | | 12,348 | | | | 9,168 | |
| | | | | | | | | | |
Totals | | $ | 66,923 | | | $ | 77,834 | | | $ | 59,200 | | | $ | 39,074 | |
| | | | | | | | | | |
Substantially all advance billings warranty and projectwarranty 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, 2007, 20062010, 2009 and 2005:2008:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | |
|
Balance at beginning of year | | $ | 3,557 | | | $ | 3,566 | | | $ | 4,281 | | | $ | 2,760 | | | $ | 5,402 | | | $ | 5,799 | |
Claims paid during the year | | | (2,402 | ) | | | (2,984 | ) | | | (3,297 | ) | | | (1,260 | ) | | | (3,367 | ) | | | (3,944 | ) |
Warranty expense | | | 4,526 | | | | 2,797 | | | | 2,593 | | | | 2,294 | | | | 704 | | | | 4,202 | |
Acquired warranty liabilities | | | -0- | | | | 178 | | | | -0- | | |
Other | | | 118 | | | | -0- | | | | (11 | ) | | | 252 | | | | 21 | | | | (655 | ) |
| | | | | | | | | | | | | | |
Balance at end of year | | $ | 5,799 | | | $ | 3,557 | | | $ | 3,566 | | | $ | 4,046 | | | $ | 2,760 | | | $ | 5,402 | |
| | | | | | | | | | | | | | |
42
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE G — Financing Arrangements
| |
NOTE G — | Financing Arrangements |
Long-term debt consists of the following:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
8.375% senior subordinated notes due 2014 | | $ | 210,000 | | | $ | 210,000 | | | $ | 183,835 | | | $ | 183,835 | |
Revolving credit facility maturing on December 31, 2010 | | | 145,400 | | | | 156,700 | | |
Industrial development revenue bonds maturing in 2012 at interest rates from 2.00% to 4.15% | | | -0- | | | | 3,114 | | |
Revolving credit | | | | 90,200 | | | | 101,200 | |
Term Loan A | | | | 25,900 | | | | 28,000 | |
Term Loan B | | | | 8,400 | | | | 12,000 | |
Other | | | 4,649 | | | | 4,986 | | | | 7,878 | | | | 8,962 | |
| | | | | | | | | | |
| | | 360,049 | | | | 374,800 | | | | 316,213 | | | | 333,997 | |
Less current maturities | | | 2,362 | | | | 3,310 | | | | 13,756 | | | | 10,894 | |
| | | | | | | | | | |
Total | | $ | 357,687 | | | $ | 371,490 | | | $ | 302,457 | | | $ | 323,103 | |
| | | | | | | | | | |
Maturities of long-term debt during each of the five years following December 31, 2007 are approximately $2,362 in 2008, $330 in 2009, $147,332 in 2010, $24 in 2011 and $-0- in 2012.
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 upcredit. On March 8, 2010, and subsequently on August 31, 2010, the Credit Agreement was amended and restated to $270,000. The credit agreement, as recently amended, provides lower interest rate bracketsamong other things, extend its maturity date to April 30, 2014 and modified certain covenantsreduce the loan commitment from $270,000 to provide greater flexibility.$210,000, which includes a term loan A that is secured by real estate and machinery and equipment and an unsecured term loan B. 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, 2007,2010, the Company had approximately $70,429$44,634 of unused borrowing capacity available under the Credit Agreement. Interest is payable quarterly at either the bank’s prime lending rate (7.25% at December 31, 2007) 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, 2007,2010, in addition to amounts borrowed under the Credit Agreement, there was $12,723$7,554 outstanding primarily for standby letters of credit. An annual fee of .25%.75% is imposed by the bank on the unused portion of available borrowings.
Amounts borrowed under the revolving credit facility may be borrowed at either (i) LIBOR plus 2.25% to 3.25% or (ii) the bank’s prime lending rate minus (.25)% to plus .75% at the Company’s election. The interest rate is dependent on the Company’s debt service coverage ratio, as defined in the Credit Agreement expiresAgreement. Interest on the term loan A is at either (i) LIBOR plus 3.25% to 4.25% or (ii) the bank’s prime lending rate plus .75% to 1.75% at the Company’s election. Interest on the term loan B is at either (i) LIBOR plus 5.25% to 6.25% or (ii) the bank’s prime lending rate plus 3.25% to 4.25%, at the Company’s election. The term loan A is amortized based on a ten year schedule with the balance due at maturity. The term loan B is amortized over a two-year period plus 50% of debt service coverage excess capped at $3,500.
Maturities of long-term debt during each of the five years following December 31, 2010 are approximately $13,756 in 2011, $4,290 in 2012, $3,300 in 2013, $292,058 in 2014 and $523 in 2015.
Foreign subsidiaries of the Company had borrowings of $1,229 and $3,787 at December 31, 2010 and borrowings are secured by substantially all2009, respectively and outstanding bank guarantees of the Company’s assets.
A foreign subsidiary of the Company had outstanding standby letters of credit of $11,968$7,363 at December 31, 20072010 under itstheir credit arrangement.arrangements.
The 8.375% senior subordinated notes due 2014 (“8.375% Notes”) are general unsecured senior subordinated obligations of the Company and are fully and unconditionally guaranteed on a joint and several basis by all material domestic subsidiaries of the Company. Provisions of the indenture governing 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
43
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consolidate with an unaffiliated entity. At December 31, 2007,2010, the Company was in compliance with all financial covenants of the Credit Agreement.
The weighted average interest rate on all debt was 7.4%6.21% at December 31, 2007.2010.
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, 20072010 and 2006.2009. The approximate fair value of the 8.375% Notes was $187,512 and $144,310 at December 31, 2010 and 2009, respectively.
In 2009, a foreign subsidiary of the Company purchased $26,165 aggregate principal amount of the 8.375% Notes for $13,511. After writing off $125 of deferred financing costs, the Company recorded a net gain of $12,529.
In 2008, the Company purchased $11,015 aggregate principal amount of the 8.375% Notes for $4,658. After writing off $125 of deferred financing costs, the Company recorded a net gain of $6,232. The 8.375% Notes were not contributed to Park-Ohio Industries, Inc. in 2008 but were held by Park-Ohio Holdings Corp. During the fourth quarter of 2009, these notes were sold to a wholly-owned subsidiary of Park-Ohio Industries, Inc.
Income (loss) from continuing operations before income tax expense consists of the following:
| | | | | | | | | | | | |
| | Year Ended December 31 | |
| | 2010 | | | 2009 | | | 2008 | |
|
United States | | $ | 8,596 | | | $ | (934 | ) | | $ | (116,564 | ) |
Outside the United States | | | 10,498 | | | | 4,123 | | | | 14,882 | |
| | | | | | | | | | | | |
| | $ | 19,094 | | | $ | 3,189 | | | $ | (101,682 | ) |
| | | | | | | | | | | | |
Income taxes consisted of the following:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
|
Current expense (benefit): | | | | | | | | | | | | |
Federal | | $ | 61 | | | $ | (147 | ) | | $ | 229 | |
State | | | 573 | | | | 179 | | | | 1,518 | |
Foreign | | | 2,526 | | | | 982 | | | | 6,156 | |
| | | | | | | | | | | | |
| | | 3,160 | | | | 1,014 | | | | 7,903 | |
Deferred: | | | | | | | | | | | | |
Federal | | | (2,014 | ) | | | (1,231 | ) | | | 12,421 | |
State | | | 689 | | | | (39 | ) | | | 923 | |
Foreign | | | 199 | | | | (572 | ) | | | (261 | ) |
| | | | | | | | | | | | |
| | | (1,126 | ) | | | (1,842 | ) | | | 13,083 | |
| | | | | | | | | | | | |
Income tax expense (benefit) | | $ | 2,034 | | | $ | (828 | ) | | $ | 20,986 | |
| | | | | | | | | | | | |
4344
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The approximate fair value of the 8.375% Notes was $189,000 and $195,300 at December 31, 2007 and 2006, respectively.
NOTE H — Income Taxes
Income taxes consisted of the following:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2007 | | | 2006 | | | 2005 | |
|
Current payable (benefit): | | | | | | | | | | | | |
Federal | | $ | (9 | ) | | $ | 2,355 | | | $ | 165 | |
State | | | 299 | | | | 432 | | | | 198 | |
Foreign | | | 5,344 | | | | 4,792 | | | | 2,260 | |
| | | | | | | | | | | | |
| | | 5,634 | | | | 7,579 | | | | 2,623 | |
Deferred: | | | | | | | | | | | | |
Federal | | | 3,639 | | | | (1,093 | ) | | | (7,300 | ) |
State | | | 198 | | | | (1,521 | ) | | | -0- | |
Foreign | | | 505 | | | | (1,747 | ) | | | 354 | |
| | | | | | | | | | | | |
| | | 4,342 | | | | (4,361 | ) | | | (6,946 | ) |
| | | | | | | | | | | | |
Income taxes (benefit) | | $ | 9,976 | | | $ | 3,218 | | | $ | (4,323 | ) |
| | | | | | | | | | | | |
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 | | 2007 | | | 2006 | | | 2005 | |
|
Tax at statutory rate | | $ | 10,911 | | | $ | 9,571 | | | $ | 9,189 | |
Effect of state income taxes, net | | | 266 | | | | (1,240 | ) | | | 129 | |
Effect of foreign operations | | | (1,082 | ) | | | (1,441 | ) | | | (151 | ) |
Medicare subsidy | | | 196 | | | | (126 | ) | | | (795 | ) |
FIN 48 | | | 471 | | | | -0- | | | | -0- | |
Valuation allowance | | | 238 | | | | (4,806 | ) | | | (12,093 | ) |
Prior years adjustments | | | (848 | ) | | | 889 | | | | 50 | |
Research and development credit | | | (206 | ) | | | (250 | ) | | | (237 | ) |
Nondeductible expenses | | | 572 | | | | 417 | | | | 53 | |
Foreign tax credit | | | (501 | ) | | | -0- | | | | -0- | |
Other, net | | | (41 | ) | | | 204 | | | | (468 | ) |
| | | | | | | | | | | | |
Total | | $ | 9,976 | | | $ | 3,218 | | | $ | (4,323 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Rate Reconciliation | | 2010 | | | 2009 | | | 2008 | |
|
Tax at statutory rate | | $ | 6,027 | | | $ | (2,113 | ) | | $ | (34,586 | ) |
Effect of state income taxes, net | | | 1,048 | | | | (161 | ) | | | (1,834 | ) |
Effect of foreign operations | | | 1,472 | | | | 1,247 | | | | 293 | |
Goodwill | | | -0- | | | | -0- | | | | 23,241 | |
Valuation allowance, federal and foreign | | | (6,475 | ) | | | (1,815 | ) | | | 33,625 | |
Equity compensation | | | (59 | ) | | | 148 | | | | 18 | |
Tax credits | | | (72 | ) | | | (192 | ) | | | (240 | ) |
Prior year adjustments | | | 365 | | | | 141 | | | | (304 | ) |
Non-deductable items | | | 480 | | | | 735 | | | | 802 | |
Gain on asset purchase | | | (772 | ) | | | -0- | | | | -0- | |
Other, net | | | 20 | | | | 1,182 | | | | (29 | ) |
| | | | | | | | | | | | |
Total | | $ | 2,034 | | | $ | (828 | ) | | $ | 20,986 | |
| | | | | | | | | | | | |
44
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Company’s net deferred tax assets and liabilities are as follows:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
Deferred tax assets: | | | | | | | | | | | | | | | | |
Postretirement benefit obligation | | $ | 7,604 | | | $ | 9,409 | | | $ | 7,003 | | | $ | 7,060 | |
Inventory | | | 10,969 | | | | 12,493 | | | | 12,363 | | | | 10,342 | |
Net operating loss and credit carryforwards | | | 21,544 | | | | 18,626 | | | | 16,184 | | | | 22,478 | |
Other — net | | | 9,223 | | | | 11,616 | | |
Goodwill | | | | 3,177 | | | | 4,381 | |
Other | | | | 11,138 | | | | 8,348 | |
| | | | | | | | | | |
Total deferred tax assets | | | 49,340 | | | | 52,144 | | | | 49,865 | | | | 52,609 | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | |
Tax over book depreciation | | | 13,354 | | | | 12,858 | | |
Depreciation and amortization | | | | 1,090 | | | | 692 | |
Pension | | | 26,071 | | | | 22,693 | | | | 21,423 | | | | 18,010 | |
Inventory | | | 864 | | | | 889 | | |
Intangible assets | | | 2,955 | | | | 3,127 | | |
Deductible goodwill | | | 4,704 | | | | 3,452 | | |
Intangible assets and other | | | | 4,191 | | | | 2,335 | |
| | | | | | | | | | |
Total deferred tax liabilities | | | 47,948 | | | | 43,019 | | | | 26,704 | | | | 21,037 | |
| | | | | | | | | | |
Net deferred tax assets prior to valuation allowances | | | 1,392 | | | | 9,125 | | | | 23,161 | | | | 31,572 | |
Valuation allowances | | | (2,217 | ) | | | (316 | ) | | | (22,386 | ) | | | (30,668 | ) |
| | | | | | | | | | |
Net deferred tax (liability) asset | | $ | (825 | ) | | $ | 8,809 | | |
Net deferred tax asset | | | $ | 775 | | | $ | 904 | |
| | | | | | | | | | |
At December 31, 2007,2010, the Company has federal, state and foreign net operating loss carryforwards for income tax purposes. The U.S. federal net operating loss carryforward is approximately $41,602$24,699 which expires between 20212023 and 2027. Foreign2029. The foreign net operating lossesloss carryforward is $3,988 of $1,389 havewhich $1,315 expires in 2029 and $2,673 has no expiration date. The Company also has a tax benefit of the U.S. federalfrom a state net operating loss is $13,053,carryforward of $4,748 which expires between 2011 and 2030.
At December 31, 2010, the Company has been reduced by $1,508research and development credit carryforwards of FIN 48 liabilities.approximately $2,875 which expire between 2012 and 2030. The Company also has $1,614alternative minimum tax credit carryforwards of $1,083 which have no expiration date.
45
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax benefit related toyears for 2007 through 2010 remain open for examination by the U.S. and various state and foreign taxing authorities.
As of December 31, 2010 and 2009, the Company was in a cumulative three-year loss position and it was determined that it was not more likely than not that its U.S. net operating losses which expire between 2011deferred tax assets will be realized. As of December 31, 2010 and 2027.2009, the Company recorded full valuation allowances of $20,089 and $28,813, respectively, against its U.S. net deferred tax assets. In addition, the Company determined that it was not more likely than not that certain foreign net deferred tax assets will be realized. As of December 31, 2010 and 2009, the Company recorded valuation allowances of $2,297 and $1,855, respectively, against certain foreign net deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities).
The Company is subjectreviews all valuation allowances related to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 2004 through 2007 remain open for examination by the U.S. and various state and foreign taxing authorities.
As of December 31, 2004, the Company was in a cumulative three-year loss position and determined it was not more likely than not that its net deferred tax assets and will be realized. Therefore, as of December 31, 2004, the Company had a fullreverse these valuation allowance against its U.S. net deferred tax asset and a portion of its foreign net operating loss carryforwards. As of December 31, 2005, the Company was no longer in a three-year cumulative loss position and after consideration of the relevant positive and negative evidence, the Company determined a full valuation allowance was no longer appropriate. Accordingly, the Company reversed a portion of its valuation allowance and recognized a $7,300 tax benefit related to its US net deferred tax asset as it has been determined the realization of this amount was more likely than not. As of December 31, 2006, the Company determined that it was more likely than not that it would be able to realize most of its deferred tax assets in the future and released $4,806 of the valuation allowance. As of December 31, 2006, the Company also recognized a tax benefit for net operating losses of $1,284 for state income taxes which it has determined are more likely than not will be fully realized in the future.allowances, partially or totally, when appropriate under ASC 740.
The Company recorded a deferred tax asset for a capital loss carryforward that was generated in 2005 in the amount of $4,750 which expires in 2010. During 2007, the Company was able to offset the loss with
45
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
capital gains in the amount of $1,772. The Company has recorded a valuation allowance against the remaining balance of the capital loss carryforward of $2,978 as it is not considered more likely than not that this amount will be fully realized in the future.
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:
| | | | | | | | | | | | | | | | |
Unrecognized Tax Benefit — January 1, 2007 | | $ | 4,691 | | |
| | | 2010 | | 2009 | | 2008 | |
| |
Unrecognized Tax Benefit — January 1, | | | $ | 5,718 | | | $ | 5,806 | | | $ | 5,255 | |
Gross Increases — Tax Positions in Prior Period | | | 72 | | | | 283 | | | | 101 | | | | -0- | |
Gross Decreases — Tax Positions in Prior Period | | | (133 | ) | | | (4 | ) | | | (55 | ) | | | (39 | ) |
Gross Increases — Tax Positions in Current Period | | | 625 | | | | 341 | | | | 97 | | | | 590 | |
Settlements | | | -0- | | | | (18 | ) | | | -0- | | | | -0- | |
Lapse of Statute of Limitations | | | -0- | | | | (178 | ) | | | (231 | ) | | | -0- | |
| | | | | | | | | | |
Unrecognized Tax Benefit — December 31, 2007 | | $ | 5,255 | | |
Unrecognized Tax Benefit — December 31, | | | $ | 6,142 | | | $ | 5,718 | | | $ | 5,806 | |
| | | | | | | | | | |
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $4,916 at December 31, 2010 and $4,633 at December 31, 2009. The Company recognizes accrued interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2007,2010 and 2009, the Company recognized approximately $57$9 and $42, respectively, in net interest and penalties. The Company had approximately $537$682 and $480$673 for the payment of interest and penalties accrued at December 31, 20072010 and January 1, 2007,2009, respectively. At December 31, 2007, the Company had total recognized tax benefits of $5,255, of which $4,311 would impact the effective tax rate if recognized. The Company does not expect that the unrecognized tax benefit will change significantly within the next twelve months.
At December 31, 2007, the Company has research and development credit carryforwards of approximately $2,689, which expire between 2010 and 2027. The Company also has foreign tax credit carryforwards of $1,213, which expire between 2015 and 2017, and alternative minimum tax credit carryforwards of $1,214, which have no expiration date.
Deferred taxes have not been provided on undistributed earnings of the Company’s foreign subsidiaries as it is the Company’s policy and intent to permanently reinvest such earnings. The Company has determined that it is not practical to determine the deferred tax liability on such undistributed earnings.
NOTE I — Legal Proceedings
| |
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 and its subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans, covering substantially all employees. In addition, the Company adoptedhas two unfunded postretirement benefit plans. For the recognition and disclosure provisions of FAS 158. FAS 158 required the Company to recognize the funded status (i.e., the difference between the Company’s fair value of plan assets and the 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 representsbenefits are based on
46
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the net unrecognized actuarial losses, unrecognized prior service costs and unrecognized transition obligation remaining from the initial adoptionemployee’s years of FAS 87 and FAS 106, all of which were previously netted against the plans’ funded status in the company’s Consolidated Balance Sheet in accordance with the provisions of 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.
The incremental effects of adopting the provisions of FAS 158 on the company’s Consolidated Balance Sheet at December 31, 2006 are presented in the following table. The adoption of FAS 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 FAS
| | | Adopting FAS
| | | at December 31,
| |
| | No. 158 | | | No. 158 | | | 2006 | |
|
Assets | | | | | | | | | | | | |
Other non-current assets | | $ | 83,493 | | | $ | 7,884 | | | $ | 91,377 | |
| | | | | | | | | | | | |
Total assets | | $ | 775,785 | | | $ | 7,884 | | | $ | 783,669 | |
| | | | | | | | | | | | |
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 | | $ | 775,785 | | | $ | 7,884 | | | $ | 783,669 | |
| | | | | | | | | | | | |
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.
The estimated net (gain), prior service cost and net transition (asset) forservice. For the defined benefit pensioncontribution plans, that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2008costs charged to operations and the amount funded are $(117), $137 and $(47), respectively.
The estimated net loss and prior service credit forbased upon a percentage of the postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2008 are $200 and $(52), respectively.
47
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)covered employees’ compensation.
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, 20062010 and 2005:2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Postretirement
| | | | | Postretirement
| |
| | Pension | | Benefits | | | Pension | | Benefits | |
| | 2007 | | 2006 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2010 | | 2009 | |
|
Change in benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 52,387 | | | $ | 54,734 | | | $ | 22,989 | | | $ | 22,843 | | | $ | 48,820 | | | $ | 48,383 | | | $ | 18,288 | | | $ | 19,961 | |
Service cost | | | 334 | | | | 426 | | | | 180 | | | | 199 | | | | 295 | | | | 471 | | | | 31 | | | | 61 | |
Curtailment and settlement | | | 80 | | | | 12 | | | | -0- | | | | (254 | ) | |
Interest cost | | | 2,842 | | | | 2,915 | | | | 1,103 | | | | 1,292 | | | | 2,596 | | | | 2,748 | | | | 959 | | | | 1,053 | |
Amendments | | | -0- | | | | -0- | | | | -0- | | | | (1,106 | ) | | | -0- | | | | 10 | | | | -0- | | | | (920 | ) |
Actuarial losses (gains) | | | (2,571 | ) | | | (580 | ) | | | (2,990 | ) | | | 3,047 | | |
Actuarial losses | | | | 2,622 | | | | 1,446 | | | | 1,364 | | | | 279 | |
Benefits and expenses paid, net of contributions | | | (4,752 | ) | | | (5,120 | ) | | | (2,571 | ) | | | (3,032 | ) | | | (4,661 | ) | | | (4,238 | ) | | | (2,210 | ) | | | (2,146 | ) |
| | | | | | | | | | | | | | | | | | |
Benefit obligation at end of year | | $ | 48,320 | | | $ | 52,387 | | | $ | 18,711 | | | $ | 22,989 | | | $ | 49,672 | | | $ | 48,820 | | | $ | 18,432 | | | $ | 18,288 | |
| | | | | | | | | | | | | | | | | | |
Change in plan assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 112,496 | | | $ | 101,639 | | | $ | -0- | | | $ | -0- | | | $ | 98,255 | | | $ | 87,368 | | | $ | -0- | | | $ | -0- | |
Actual return on plan assets | | | 11,134 | | | | 15,977 | | | | -0- | | | | -0- | | | | 18,364 | | | | 16,725 | | | | -0- | | | | -0- | |
Company contributions | | | -0- | | | | -0- | | | | 2,571 | | | | 3,032 | | | | -0- | | | | -0- | | | | 2,210 | | | | 2,146 | |
Curtailments and settlement | | | -0- | | | | -0- | | | | -0- | | | | -0- | | |
Cash transfer to fund postretirement benefit payments | | | | (1,500 | ) | | | (1,600 | ) | | | -0- | | | | -0- | |
Benefits and expenses paid, net of contributions | | | (4,752 | ) | | | (5,120 | ) | | | (2,571 | ) | | | (3,032 | ) | | | (4,661 | ) | | | (4,238 | ) | | | (2,210 | ) | | | (2,146 | ) |
| | | | | | | | | | | | | | | | | | |
Fair value of plan assets at end of year | | $ | 118,878 | | | $ | 112,496 | | | $ | -0- | | | $ | -0- | | | $ | 110,458 | | | $ | 98,255 | | | $ | -0- | | | $ | -0- | |
| | | | | | | | | | | | | | | | | | |
Funded (underfunded) status of the plan | | $ | 70,558 | | | $ | 60,109 | | | $ | (18,711 | ) | | $ | (22,989 | ) | |
Funded (underfunded) status of the plans | | | $ | 60,786 | | | $ | 49,435 | | | $ | (18,432 | ) | | $ | (18,288 | ) |
| | | | | | | | | | | | | | | | | | |
47
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amounts recognized in the consolidated balance sheets consist of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Postretirement
| | | | | Postretirement
| |
| | Pension | | Benefits | | | Pension | | Benefits | |
| | 2007 | | 2006 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2010 | | 2009 | |
|
Noncurrent assets | | $ | 70,558 | | | $ | 60,109 | | | $ | -0- | | | $ | -0- | | | $ | 60,786 | | | $ | 49,435 | | | $ | -0- | | | $ | -0- | |
Noncurrent liabilities | | | -0- | | | | -0- | | | | 12,786 | | | | 13,387 | | | | -0- | | | | -0- | | | | 10,196 | | | | 11,111 | |
Current liabilities | | | -0- | | | | -0- | | | | 2,041 | | | | 2,564 | | | | -0- | | | | -0- | | | | 2,177 | | | | 2,197 | |
Accumulated other comprehensive (income) loss | | | (12,756 | ) | | | (8,144 | ) | | | 3,884 | | | | 7,038 | | | | 7,701 | | | | 15,900 | | | | 6,059 | | | | 4,980 | |
| | | | | | | | | | | | | | | | | | |
Net amount recognized at the end of the year | | $ | 57,802 | | | $ | 51,965 | | | $ | 18,711 | | | $ | 22,989 | | | $ | 68,487 | | | $ | 65,335 | | | $ | 18,432 | | | $ | 18,288 | |
| | | | | | | | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive income | | | | | | | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive (income) loss | | | | | | | | | | | | | | | | | |
Net actuarial loss/(gain) | | $ | (13,005 | ) | | $ | (8,452 | ) | | $ | 3,936 | | | $ | 7,153 | | | $ | 7,641 | | | $ | 15,819 | | | $ | 6,059 | | | $ | 4,980 | |
Net prior service cost (credit) | | | 509 | | | | 646 | | | | (52 | ) | | | (115 | ) | | | 192 | | | | 253 | | | | -0- | | | | -0- | |
Net transition obligation (asset) | | | (260 | ) | | | (338 | ) | | | -0- | | | | -0- | | | | (132 | ) | | | (172 | ) | | | -0- | | | | -0- | |
| | | | | | | | | | | | | | | | | | |
Accumulated other comprehensive income | | $ | (12,756 | ) | | $ | (8,144 | ) | | $ | 3,884 | | | $ | 7,038 | | |
Accumulated other comprehensive (income) loss | | | $ | 7,701 | | | $ | 15,900 | | | $ | 6,059 | | | $ | 4,980 | |
| | | | | | | | | | | | | | | | | | |
As of December 31, 20072010 and 2006,2009, the Company’s defined benefit pension plans did not hold a material amount of shares of the Company’s common stock.
The pension plan weighted-average asset allocation at December 31, 2010 and 2009 and target allocation for 2011 are as follows:
| | | | | | | | | | | | |
| | | | | Plan Assets | |
| | Target 2011 | | | 2010 | | | 2009 | |
|
Asset Category | | | | | | | | | | | | |
Equity securities | | | 45-75 | % | | | 78.3 | % | | | 69.3 | % |
Debt securities | | | 10-40 | | | | 19.3 | | | | 9.9 | |
Other | | | 0-20 | | | | 2.4 | | | | 20.8 | |
| | | | | | | | | | | | |
| | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
The following table sets forth, by level within the fair value hierarchy, the pension plans assets:
| | | | | | | | | | | | | | | | |
| | 2010 | | | 2009 | |
| | Level 2 | | | Total | | | Level 2 | | | Total | |
|
Collective trust and pooled insurance funds: | | | | | | | | | | | | | | | | |
Common stock | | $ | 65,362 | | | $ | 65,362 | | | $ | 52,507 | | | $ | 52,507 | |
Equity Funds | | | 16,142 | | | | 16,142 | | | | 12,727 | | | | 12,727 | |
Foreign Stock | | | 5,000 | | | | 5,000 | | | | 2,590 | | | | 2,590 | |
Convertible Securities | | | 967 | | | | 967 | | | | 1,063 | | | | 1,063 | |
U.S. Government Obligations | | | 9,840 | | | | 9,840 | | | | 4,900 | | | | 4,900 | |
Fixed income funds | | | 5,242 | | | | 5,242 | | | | 4,588 | | | | 4,588 | |
Corporate Bonds | | | 5,295 | | | | 5,295 | | | | -0- | | | | -0- | |
Cash and Cash Equivalents | | | 2,381 | | | | 2,381 | | | | 19,779 | | | | 19,779 | |
Other | | | 229 | | | | 229 | | | | 101 | | | | 101 | |
| | | | | | | | | | | | | | | | |
| | $ | 110,458 | | | $ | 110,458 | | | $ | 98,255 | | | $ | 98,255 | |
| | | | | | | | | | | | | | | | |
48
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The pension plan weighted-average asset allocation at December 31, 2007 and 2006 and target allocation for 2008 are as follows:
| | | | | | | | | | | | |
| | | | | Plan Assets | |
| | Target 2008 | | | 2007 | | | 2006 | |
|
Asset Category | | | | | | | | | | | | |
Equity securities | | | 60-70 | % | | | 64.8 | % | | | 65.1 | % |
Debt securities | | | 20-30 | | | | 24.2 | | | | 25.7 | |
Other | | | 7-15 | | | | 11.0 | | | | 9.2 | |
| | | | | | | | | | | | |
| | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
The following tables summarize the assumptions used by the consulting actuary and the related cost information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted-Average assumptions as of December 31, | | | Weighted-Average assumptions as of December 31, |
| | Pension | | Postretirement Benefits | | | Pension | | Postretirement Benefits |
| | 2007 | | 2006 | | 2005 | | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 |
|
Discount rate | | | 6.25 | % | | | 5.75 | % | | | 5.50 | % | | | 6.25 | % | | | 5.75 | % | | | 5.50 | % | | | 5.00 | % | | | 5.50 | % | | | 6.00 | % | | | 5.00 | % | | | 5.50 | % | | | 6.00 | % |
Expected return on plan assets | | | 8.25 | % | | | 8.50 | % | | | 8.75 | % | | | N/A | | | | N/A | | | | N/A | | | | 8.25 | % | | | 8.25 | % | | | 8.25 | % | | | 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, 2007,2010, 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, 20072010 of 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 7.0% and a 8.75% annual rate of increase in the per capita cost of covered medical health care benefits and drug benefits, respectively were assumed for 2010. The rates were assumed to decrease gradually to 5.0% for medical and drug for 2042 and remain at that level thereafter.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Postretirement Benefits | |
| | 2010 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | 2008 | |
|
Components of net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | |
Service costs | | $ | 295 | | | $ | 471 | | | $ | 439 | | | $ | 31 | | | $ | 61 | | | $ | 87 | |
Interest costs | | | 2,596 | | | | 2,748 | | | | 2,892 | | | | 959 | | | | 1,053 | | | | 1,215 | |
Expected return on plan assets | | | (7,932 | ) | | | (7,036 | ) | | | (9,634 | ) | | | -0- | | | | -0- | | | | -0- | |
Transition obligation | | | (40 | ) | | | (40 | ) | | | (47 | ) | | | -0- | | | | -0- | | | | -0- | |
FAS 88 one-time charge | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
Amortization of prior service cost | | | 61 | | | | 129 | | | | 137 | | | | (96 | ) | | | -0- | | | | (52 | ) |
Recognized net actuarial (gain) loss | | | 366 | | | | 910 | | | | (100 | ) | | | 381 | | | | 294 | | | | 369 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Benefit (income) costs | | $ | (4,654 | ) | | $ | (2,818 | ) | | $ | (6,313 | ) | | $ | 1,275 | | | $ | 1,408 | | | $ | 1,619 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss | | | | | | | | | | | | | | | | | | | | | | | | |
AOCI at beginning of year | | $ | 15,900 | | | $ | 25,131 | | | $ | (12,756 | ) | | $ | 4,980 | | | $ | 5,914 | | | $ | 3,884 | |
Net (gain)/loss | | | (7,811 | ) | | | (8,241 | ) | | | 37,876 | | | | 1,364 | | | | 280 | | | | 2,347 | |
Recognition of prior service cost/(credit) | | | (62 | ) | | | (120 | ) | | | (137 | ) | | | 96 | | | | (920 | ) | | | 52 | |
Recognition of (gain)/loss | | | (326 | ) | | | (870 | ) | | | 148 | | | | (381 | ) | | | (294 | ) | | | (369 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total recognized in other comprehensive loss at end of year | | $ | 7,701 | | | $ | 15,900 | | | $ | 25,131 | | | $ | 6,059 | | | $ | 4,980 | | | $ | 5,914 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The estimated net (gain), prior service cost and net transition (asset) for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2011 are $-0-, $44 and $(40), respectively.
49
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For measurement purposes, a 9.0% annual rate of increase inThe estimated net loss and prior service cost for the per capitapostretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost of covered health care benefits was assumed for 2007. The rate was assumed to decrease gradually to 5.0% forover the year ending December 31, 2011 is $441 and remain at that level thereafter.$(96), respectively.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | 2007 | | | 2006 | | | 2005 | | | 2007 | | | 2006 | | | 2005 | |
|
Components of net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | |
Service costs | | $ | 334 | | | $ | 426 | | | $ | 364 | | | $ | 180 | | | $ | 199 | | | $ | 145 | |
Interest costs | | | 2,842 | | | | 2,915 | | | | 3,194 | | | | 1,103 | | | | 1,292 | | | | 1,281 | |
Expected return on plan assets | | | (9,049 | ) | | | (8,408 | ) | | | (8,804 | ) | | | -0- | | | | -0- | | | | -0- | |
Transition obligation | | | (38 | ) | | | (48 | ) | | | (49 | ) | | | -0- | | | | -0- | | | | -0- | |
FAS 88 one-time charge | | | 80 | | | | 297 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
Amortization of prior service cost | | | 138 | | | | 182 | | | | 163 | | | | (63 | ) | | | (63 | ) | | | (69 | ) |
Recognized net actuarial (gain) loss | | | 13 | | | | 99 | | | | (224 | ) | | | 227 | | | | 374 | | | | 106 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Benefit (income) costs | | $ | (5,680 | ) | | $ | (4,537 | ) | | $ | (5,356 | ) | | $ | 1,447 | | | $ | 1,802 | | | $ | 1,463 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive income(a) | | | | | | | | | | | | | | | | | | | | | | | | |
AOCI at beginning of year | | $ | (8,144 | ) | | $ | 5,358 | | | | N/A | | | $ | 7,038 | | | $ | -0- | | | | N/A | |
Net loss/(gain) | | | (4,499 | ) | | | | | | | | | | | (2,990 | ) | | | | | | | | |
Recognition of prior service cost/(credit) | | | (138 | ) | | | -0- | | | | N/A | | | | 63 | | | | -0- | | | | N/A | |
Recognition of loss/(gain) | | | 25 | | | | -0- | | | | N/A | | | | (227 | ) | | | -0- | | | | N/A | |
Decrease prior to adoption of SFAS No. 158 | | | -0- | | | | (5,358 | ) | | | N/A | | | | -0- | | | | -0- | | | | N/A | |
Increase (decrease) due to adoption of SFAS No. 158 | | | -0- | | | | (8,144 | ) | | | N/A | | | | -0- | | | | 7,038 | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total recognized in other comprehensive income at end of year | | $ | (12,756 | ) | | $ | (8,144 | ) | | | N/A | | | $ | 3,884 | | | $ | 7,038 | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(a) | | These disclosures are not applicable to 2005 defined benefit pension plans and postretirement plans due to FAS No. 158 being effective for the year ended December 31, 2006. |
Below is a table summarizing the Company’s expected future benefit payments and the expected payments due to Medicare subsidy over the next ten years:
| | | | | | | | | | | | | | | | |
| | | | | Postretirement Benefits | |
| | Pension
| | | | | | Expected
| | | Net including
| |
| | Benefits | | | Gross | | | Medicare Subsidy | | | Medicare Subsidy | |
|
2008 | | $ | 4,235 | | | $ | 2,243 | | | $ | 202 | | | $ | 2,041 | |
2009 | | | 4,217 | | | | 2,223 | | | | 205 | | | | 2,018 | |
2010 | | | 4,138 | | | | 2,185 | | | | 204 | | | | 1,981 | |
2011 | | | 4,053 | | | | 2,117 | | | | 198 | | | | 1,919 | |
2012 | | | 3,957 | | | | 1,972 | | | | 195 | | | | 1,777 | |
2013 to 2017 | | | 19,079 | | | | 8,318 | | | | 826 | | | | 7,492 | |
| | | | | | | | | | | | | | | | |
| | | | Postretirement Benefits |
| | Pension
| | | | Expected
| | Net including
|
| | Benefits | | Gross | | Medicare Subsidy | | Medicare Subsidy |
|
2011 | | | 4,041 | | | | 2,454 | | | | 223 | | | | 2,231 | |
2012 | | | 3,942 | | | | 2,240 | | | | 225 | | | | 2,015 | |
2013 | | | 3,860 | | | | 2,092 | | | | 219 | | | | 1,873 | |
2014 | | | 3,788 | | | | 1,988 | | | | 209 | | | | 1,779 | |
2015 | | | 3,739 | | | | 1,879 | | | | 197 | | | | 1,682 | |
2016 to 2020 | | | 17,837 | | | | 7,497 | | | | 811 | | | | 6,686 | |
50
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 2007 | | $ | 121 | | | $ | (103 | ) |
Effect on postretirement benefit obligation as of December 31, 2007 | | $ | 1,463 | | | $ | (1,274 | ) |
| | | | | | | | |
| | 1-Percentage
| | 1-Percentage
|
| | Point
| | Point
|
| | Increase | | Decrease |
|
Effect on total of service and interest cost components in 2010 | | $ | 68 | | | $ | (60 | ) |
Effect on postretirement benefit obligation as of December 31, 2010 | | $ | 1,383 | | | $ | (1,229 | ) |
The total contribution charged to pension expense for the Company’s defined contribution plans was $2,068$-0-in 2010, $301 in 2007, $1,8312009 and $2,081 in 2006 and $1,753 in 2005.2008. During March 2009, the Company suspended indefinitely its voluntary contribution to its 401(k) defined contribution plan covering substantially all U.S. employees. The Company expects to have no contributions to its defined benefit plans in 2011.
In January 2008, a Supplemental Executive Retirement Plan (“SERP”) for the Company’s Chairman of the Board of Directors and Chief Executive Officer (“CEO”) was approved by the Compensation Committee of the Board of Directors of the Company. The SERP provides an annual supplemental retirement benefit for up to $375 upon the CEO’s termination of employment with the Company. The vested retirement benefit will be equal to a percentage of the Supplemental Pension that is equal to the ratio of the sum of his credited service with the Company prior to January 1, 2008 (up to a maximum of thirteen years), and his credited service on or after January 1, 2008 (up to a maximum of seven years) to twenty years of credited service. In the event of a change in control before the CEO’s termination of employment, he will receive 100% of the Supplemental Pension. The Company recorded an expense of $389 related with the SERP in 2010, 2009 and 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, 20072010 and thereafter are as follows: $13,400 in 2008, $11,106 in 2009, $8,338 in 2010, $5,305$13,109 in 2011, $3,812$9,816 in 2012, $6,416 in 2013, $4,538 in 2014, $3,642 in 2015 and $12,799$2,178 thereafter. Rental expense for 2007, 20062010, 2009 and 20052008 was $14,687, $15,370$13,068, $12,812 and $13,494,$14,400, respectively.
50
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.PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTE LNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Accumulated Comprehensive Loss(Continued)
Certain of the Company’s leases are with related parties at an annual rental expense of approximately $2,464. Transactions with related parties are in the ordinary course of business, are conducted on an arms length basis, and are not material to the Company’s financial position, results of operations or cash flows.
| |
NOTE L — | Accumulated Comprehensive Loss |
The components of accumulated comprehensive loss at December 31, 20072010 and 20062009 are as follows:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
Foreign currency translation adjustment | | $ | 12,712 | | | $ | 5,384 | | | $ | 6,239 | | | $ | 6,950 | |
Pension and postretirement benefit adjustments, net of tax | | | 5,372 | | | | 440 | | | | (3,801 | ) | | | (12,064 | ) |
| | | | | | | | | | |
Total | | $ | 18,084 | | | $ | 5,824 | | | $ | 2,438 | | | $ | (5,114 | ) |
| | | | | | | | | | |
| |
NOTE M — | Restructuring and Unusual Charges |
During the fourththird quarter of 2005,2010, the Company reviewed one of its investments and determined there was diminution in value and therefore recorded an asset impairment charge of $3,539.
In 2009 and 2008, due to volume declines and volatility in the automotive markets along with the general economic downturn, the Company evaluated its long-lived assets in accordance with ASC 360 “Property, Plant and Equipment”. 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’s restructuring andactivities were substantially completed in 2009. In 2008, the Company recorded asset impairment charges associated with executing restructuring actions in the Aluminum Products and Manufactured Products segments initiated in prior years. The chargesof $30,875, which were composed of $833$5,544 of inventory impairment included in Cost of Products Sold, $391$1,758 for a loss on disposition of asseta foreign subsidiary, $564 of severance costs (80 employees) and $23,009 for impairment $152 of multi-employer pension plan withdrawal costsproperty and $400 of restructuring charges related to the closure of two Manufactured Products manufacturing facilities.equipment and other long-term assets. Below is a summary of these 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 | |
| | | | | | | | | | | | | | | | | | | | |
51
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, 2007.2010. 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 has concluded that the Company did not maintain effectiveCompany’s internal controlscontrol over financial reporting solelywas effective as a result of the following material weakness:
Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an attestationaudit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.2010 based on the framework contained in the COSO Report. This attestation report is included at page 2836 of this annual report onForm 10-K and is incorporated herein by reference.
There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 20072010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company is evaluating appropriate changes in internal controls to address the material weakness described above.
None.