or requiring corrective measures. Pursuant to certain environmental laws, owners or operators of facilities may be liable for the costs of response or other corrective actions for contamination identified at or emanating from current or former locations, without regard to whether the owner or operator knew of, or was responsible for, the presence of any such contamination, and for related damages to natural resources. Additionally, persons who arrange for the disposal or treatment of hazardous substances or materials may be liable for costs of response at sites where they are located, whether or not the site is owned or operated by such person.
From time to time, we have incurred, and are presently incurring, costs and obligations for correcting environmental noncompliance and remediating environmental conditions at certain of our properties. In general, we have not experienced difficulty in complying with environmental laws in the past, and compliance with environmental laws has not had a material adverse effect on our financial condition, liquidity and results of operations. Our capital expenditures on environmental control facilities were not material during the past five years and such expenditures are not expected to be material to us in the foreseeable future.
We are currently, and may in the future, be required to incur costs relating to the investigation or remediation of property, including property where we have disposed of our waste, and for addressing environmental conditions. For instance, we have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certainclean-up efforts at several of these sites. The availability of third-party payments or insurance for environmental remediation activities is subject to risks associated with the willingness and ability of the third party to make payments. However, our share of such costs has not been material and, based on available information, we do not expect our exposure at any of these locations to have a material adverse effect on our results of operations, liquidity or financial condition.
Information as to Industry Segment Reporting and Geographic Areas
The information contained under the heading “Notein note B — Industry Segments” of the notes to the consolidated financial statements included elsewhere herein relating to (1) net sales, income before income taxes, identifiable assets and other information by industry segment and (2) net sales and assets by geographic region for the years ended December 31, 2007, 20062010, 2009 and 20052008 is incorporated herein by reference.
Recent Developments
The information contained under the heading of “Notein Note C, — Acquisitions” of the notesNote D and Note M to the consolidated financial statements included elsewhere herein is incorporated herein by reference.
Available Information
We file annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K and other information, including amendments to these reports, with the Securities and Exchange Commission (“SEC”). The public can obtain copies of these materials by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, by calling the SEC at1-800-SEC-0330, or by accessing the SEC’s website athttp://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, we make such materials available on our website athttp://www.pkoh.com. The information on our website is not a part of this annual report onForm 10-K.
6
| Item 1A. | Risk Factors |
The following are certain risk factors that could affect our business, results of operations and financial condition. These risks are not the only ones we face. If any of the following risks occur, our business, results of operations or financial condition could be adversely affected.
6
Adverse credit market conditions may significantly affect our access to capital, cost of capital and ability to meet liquidity needs.
Disruptions, uncertainty or volatility in the credit markets may adversely impact our ability to access credit already arranged and the availability and cost of credit to us in the future. These market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to grow and maintain our business. Accordingly, we may be forced to delay raising capital or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility. Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures and reducing or eliminating future share repurchases or other discretionary uses of cash. Overall, our results of operations, financial condition and cash flows could be materially adversely affected by disruptions in the credit markets.
The recent global financial crisis may have significant effects on our customers and suppliers that would result in material adverse effects on our business and operating results.
The recent global financial crisis, which included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and fluctuations in equity and currency values worldwide, and concerns that the worldwide economy may enter into a prolonged recessionary period, may materially adversely affect our customers’ access to capital or willingness to spend capital on our products or their ability to pay for products that they will order or have already ordered from us. In addition, the recent global financial crisis may materially adversely affect our suppliers’ access to capital and liquidity with which to maintain their inventories, production levels and product quality, which could cause them to raise prices or lower production levels.
These potential effects of the recent global financial crisis are difficult to forecast and mitigate. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing effects could have a material adverse effect on our business, results of operations and financial condition.
The recent global financial crisis may have significant effects on our customers that would result in our inability to borrow or to meet our debt service coverage ratio in our revolving credit facility.
As of December 31, 2010, we were in compliance with our debt service coverage ratio covenant and other covenants contained in our revolving credit facility. While we expect to remain in compliance throughout 2011, declines in demand in the automotive industry and in sales volumes could adversely impact our ability to remain in compliance with certain of these financial covenants. Additionally, to the extent our customers are adversely affected by the decline in the economy in general, they may not be able to pay their accounts payable to us on a timely basis or at all, which would make the accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our ability to borrow.
The industries in which we operate are cyclical and are affected by the economy in general.
We sell products to customers in industries that experience cyclicality (expectancy of recurring periods of economic growth and slowdown) in demand for products and may experience substantial increases and decreases in business volume throughout economic cycles. Industries we serve, including the automotive and vehicle parts, heavy-duty truck, industrial equipment, steel, rail, electrical distribution
7
and controls, aerospace and defense, power sports/fitness equipment, HVAC, electrical components, appliance and semiconductor equipment industries, are affected by consumer spending, general economic conditions and the impact of international trade. A downturn in any of the industries we serve particularly the domestic automotive or heavy-duty truck industry, could have a material adverse effect on our financial condition, liquidity and results of operations.
Because a significant portion of our sales is to the automotive and heavy-duty truck industries, a decrease in the demand of these industries or the loss of any of our major customers in these industries could adversely affect our financial health.
Demand for certain of our products is affected by, among other things, the relative strength or weakness of the automotive and heavy-duty truck industries. The domestic automotive and heavy-duty truck industries are highly cyclical and may be adversely affected by international competition. In addition, the automotive and heavy-duty truck industries are significantly unionized and subject to work slowdowns and stoppages resulting from labor disputes. We derived 24% and 11%5% of our net sales during the year ended December 31, 20072010 from the automobile and heavy-duty truck industries, respectively. International Truck,Dramatically lower global automotive sales have resulted in lower demand for our largest customer, accounted for approximately 7%products. Further economic decline that results in a reduction in automotive sales and production by our customers could have a material adverse effect on our business, results of our net sales for the year ended December 31, 2007. operations and financial condition.
The loss of a portion of business to International Truck or any of our other major automotive or heavy-duty truck customers could have a material adverse effect on our financial condition, cash flow and results of operations. We cannot assure you that we will maintain or improve our relationships in these industries or that we will continue to supply this customerthese customers at current levels.
Our Supply Technologies customers are generally not contractually obligated to purchase products and services from us.
Most of the products and services are provided to our Supply Technologies customers under purchase orders as opposed to long-term contracts. When we do enter into long-term contracts with our customers, many of them only establish pricing terms and do not obligate our Supply Technologies customers to buy required minimum amounts from us or to buy from us exclusively. Accordingly, many of our Supply Technologies customers may decrease the amount of products and services that they purchase from us or even stop purchasing from us altogether, either of which could have a material adverse effect on our net sales and profitability.
We are dependent on key customers.
We rely on several key customers. For the year ended December 31, 2007,2010, our top seventen largest customers accounted for approximately 21% of our net sales and our top customer, International Truck, accounted for approximately 7%27% of our net sales. Many of our customers place orders for products on an as-needed basis and operate in cyclical industries and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future. Due to competitive issues, we have lost key customers in the past and may again in the future. Customer orders are dependent upon their markets and may be subject to
7
delays or cancellations. As a result of dependence on our key customers, we could experience a material adverse effect on our business and results of operations if any of the following were to occur:
| • | the loss of any key customer, in whole or in part; | |
| • | the insolvency or bankruptcy of any key customer; | |
| • | a declining market in which customers reduce orders or demand reduced prices; or | |
| • | a strike or work stoppage at a key customer facility, which could affect both their suppliers and customers. |
If any of our key customers become insolvent or file for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payments we received in the
8
preference period prior to a bankruptcy filing may be potentially recoverable, which could adversely impact our results of operations.
We operate in highly competitive industries.
The markets in which all three of our segments sell their products are highly competitive. Some of our competitors are large companies that have greater financial resources than we have. We believe that the principal competitive factors for our Supply Technologies segment are an approach reflecting long-term business partnership and reliability, sourced product quality and conformity to customer specifications, timeliness of delivery, price and design and engineering capabilities. We believe that the principal competitive factors for our Aluminum Products and Manufactured Products segments are product quality and conformity to customer specifications, design and engineering capabilities, product development, timeliness of delivery and price. The rapidly evolving nature of the markets in which we compete may attract new entrants as they perceive opportunities, and our competitors may foresee the course of market development more accurately than we do. In addition, our competitors may develop products that are superior to our products or may adapt more quickly than we do to new technologies or evolving customer requirements.
We expect competitive pressures in our markets to remain strong. These pressures arise from existing competitors, other companies that may enter our existing or future markets and, in some cases, our customers, which may decide to internally produce items we sell. We cannot assure you that we will be able to compete successfully with our competitors. Failure to compete successfully could have a material adverse effect on our financial condition, liquidity and results of operations.
The loss of key executives could adversely impact us.
Our success depends upon the efforts, abilities and expertise of our executive officers and other senior managers, including Edward Crawford, our Chairman and Chief Executive Officer, and Matthew Crawford, our President and Chief Operating Officer, as well as the president of each of our operating units. An event of default occurs under our revolving credit facility if Messrs. E. Crawford and M. Crawford or certain of their related parties own in the aggregate less than 15% of Holdings’our outstanding common stock orand if they own less than 15% ofat such stock, then if eithertime neither Mr. E. Crawford ornor Mr. M. Crawford ceases to holdholds the office of chairman, chief executive officer or president. The loss of the services of Messrs. E. Crawford and M. Crawford, senior and executive officers,and/or other key individuals could have a material adverse effect on our financial condition, liquidity and results of operations.
8
We may encounter difficulty in expanding our business through targeted acquisitions.
We have pursued, and may continue to pursue, targeted acquisition opportunities that we believe would complement our business, such as the acquisitions of NABS in 2006 and PPG in 2005.business. We cannot assure you that we will be successful in consummating any acquisitions.
Any targeted acquisitions will be accompanied by the risks commonly encountered in acquisitions of businesses. We may not successfully overcome these risks or any other problems encountered in connection with any of our acquisitions, including the possible inability to integrate an acquired business’ operations, IT technologies, services and products into our business, diversion of management’s attention, the assumption of unknown liabilities, increases in our indebtedness, the failure to achieve the strategic
9
objectives of those acquisitions and other unanticipated problems, some or all of which could materially and adversely affect us. The process of integrating operations could cause an interruption of, or loss of momentum in, our activities. Any delays or difficulties encountered in connection with any acquisition and the integration of our operations could have a material adverse effect on our business, results of operations, financial condition or prospects of our business.
Our Supply Technologies business depends upon third parties for substantially all of our component parts.
Our Supply Technologies business purchases substantially all of its component parts from third-party suppliers and manufacturers. Our businessAs such, it is subject to the risk of price fluctuations and periodic delays in the delivery of component parts. Failure by suppliers to continue to supply us with these component parts on commercially reasonable terms, or at all, wouldcould have a material adverse effect on us. We depend upon the ability of these suppliers, among other things, to meet stringent performance and quality specifications and to conform to delivery schedules. Failure by third-party suppliers to comply with these and other requirements could have a material adverse effect on our financial condition, liquidity and results of operations.
The raw materials used in our production processes and by our suppliers of component parts are subject to price and supply fluctuations that could increase our costs of production and adversely affect our results of operations.
Our supply of raw materials for our Aluminum Products and Manufactured Products businesses could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect our results of operations and profit margins. While we generally attempt to pass along increased raw materials prices to our customers in the form of price increases, there may be a time delay between the increased raw materials prices and our ability to increase the price of our products, or we may be unable to increase the prices of our products due to pricing pressure or other factors.
Our suppliers of component parts, particularly in our Supply Technologies business, may significantly and quickly increase their prices in response to increases in costs of the raw materials, such as steel, that they use to manufacture our component parts. We may not be able to increase our prices commensurate with our increased costs. Consequently, our results of operations and financial condition may be materially adversely affected.
The energy costs involved in our production processes and transportation are subject to fluctuations that are beyond our control and could significantly increase our costs of production.
Our manufacturing process and the transportation of raw materials, components and finished goods are energy intensive. Our manufacturing processes are dependent on adequate supplies of electricity and natural gas. A substantial increase in the cost of transportation fuel, natural gas or electricity could have a material adverse effect on our margins. We experienced widely fluctuating natural gas costs in 2006 and in 2007. We may experience higher than anticipated gas costs in the future, which could adversely affect our
9
results of operations. In addition, a disruption or curtailment in supply could have a material adverse effect on our production and sales levels.
Potential product liability risks exist from the products whichthat we sell.
Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and sale of our products and products of third-party vendors that we use or resell. While we currently maintain what we believe to be suitable and adequate product liability insurance, we cannot assure you that we will be able to maintain our insurance on acceptable terms or that our insurance will provide adequate protection against potential liabilities. In the event of a claim against us, a lack of sufficient insurance coverage could have a material adverse effect on our financial condition, liquidity and
10
results of operations. Moreover, even if we maintain adequate insurance, any successful claim could have a material adverse effect on our financial condition, liquidity and results of operations.
Some of our employees belong to labor unions, and strikes or work stoppages could adversely affect our operations.
As of December 31, 2007,2010, we were a party to seven collective bargaining agreements with various labor unions that covered approximately 550385 full-time employees. Our inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. If the unionized workers were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized, we could experience a significant disruption of our operations and higher ongoing labor costs, which could have a material adverse effect on our business, financial condition and results of operations.
We operate and source internationally, which exposes us to the risks of doing business abroad.
Our operations are subject to the risks of doing business abroad, including the following:
| • | fluctuations in currency exchange rates; | |
| • | limitations on ownership and on repatriation of earnings; | |
| • | transportation delays and interruptions; | |
| • | political, social and economic instability and disruptions; | |
| • | government embargoes or foreign trade restrictions; | |
| • | the imposition of duties and tariffs and other trade barriers; | |
| • | import and export controls; | |
| • | labor unrest and current and changing regulatory environments; | |
| • | the potential for nationalization of enterprises; | |
| • | disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations including the U.S. Foreign Corrupt Practices Act (“FCPA”); | |
| • | difficulties in staffing and managing multinational operations; | |
| • | limitations on our ability to enforce legal rights and remedies; and | |
| • | potentially adverse tax consequences. |
In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments tonon-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal controls and procedures always will protect us from the reckless or criminal acts committed by our employees or agents. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
Any of thesethe events enumerated above could have an adverse effect on our operations in the future by reducing the demand for our products and services, decreasing the prices at which we can sell our
11
products or otherwise having an adverse effect on our business, financial condition or results of operations. We cannot assure you that we will continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject. We also cannot assure you that these laws will not be modified.
10
Unexpected delays in the shipment of large, long-lead industrial equipment could adversely affect our results of operations in the period in which shipment was anticipated.
Long-lead industrial equipment contracts are a significant and growing part of our business. We primarily use the percentage of completion method to account for these contracts. Nevertheless, under this method, a large proportion of revenues and earnings on such contracts are recognized close to shipment of the equipment. Unanticipated shipment delays on large contracts could postpone recognition of revenue and earnings into future periods. Accordingly, if shipment was anticipated in the fourth quarter of a year, unanticipated shipment delays could adversely affect results of operations in that year.
We are subject to significant environmental, health and safety laws and regulations and related compliance expenditures and liabilities.
Our businesses are subject to many foreign, federal, state and local environmental, health and safety laws and regulations, particularly with respect to the use, handling, treatment, storage, discharge and disposal of substances and hazardous wastes used or generated in our manufacturing processes. Compliance with these laws and regulations is a significant factor in our business. We have incurred and expect to continue to incur significant expenditures to comply with applicable environmental laws and regulations. Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions.
We are currently, and may in the future be, required to incur costs relating to the investigation or remediation of property, including property where we have disposed of our waste, and for addressing environmental conditions. Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities. Consequently, we cannot assure you that existing or future circumstances, the development of new facts or the failure of third parties to address contamination at current or former facilities or properties will not require significant expenditures by us.
We expect to continue to be subject to increasingly stringent environmental and health and safety laws and regulations. It is difficult to predict the future interpretation and development of environmental and health and safety laws and regulations or their impact on our future earnings and operations. We anticipate that compliance will continue to require increased capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities arising for example out of discovery of previously unknown conditions or more aggressive enforcement actions, could adversely affect our results of operations, and there is no assurance that they will not exceed our reserves or have a material adverse effect on our financial condition.
If our information systems fail, our business will be materially affected.
We believe that our information systems are an integral part of the Supply Technologies segment and, to a lesser extent, the Aluminum Products and Manufactured Products segments. We depend on our information systems to process orders, manage inventory and accounts receivable collections, purchase
12
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.
11
Operating problems in our business may materially adversely affect our financial condition and results of operations.
Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could adversely affect our financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these polices require use of estimates and assumptions that may affect the reported value of our assets or liabilities and financial results and are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain. Those who set and interpret the accounting standards (such as the Financial Accounting Standards Board, the Securities and Exchange Commission, and our independent registered public accounting firm) may amend or even reverse their previous interpretations or positions on how these standards should be applied. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. For a further discussion of some of our critical accounting policies and standards and recent changes, see Critical Accounting Policies and Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note A to the consolidated financial statements included elsewhere herein.
Holdings’ Chairman of the Board and Chief Executive Officer and ourHoldings’ President and Chief Operating Officer collectively beneficially own a significant portion of our parentHoldings’ company’s outstanding common stock and their interests may conflict with yours.
As of February 29, 2008,25, 2011, Edward Crawford, our Chairman of the Board and Chief Executive Officer, and Matthew Crawford, our President and Chief Operating Officer, collectively beneficially owned approximately 26%27% of Holdings’ common stock. Mr. E. Crawford is Mr. M. Crawford’s father. Their interests could conflict with your interests.the interests of Holdings’ shareholders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of Messrs. E. Crawford and M. Crawford may conflict with your interests.the interests of Holdings’ shareholders.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
As of December 31, 2007,2010, our operations included numerous manufacturing and supply chain logistics services facilities located in 2324 states in the United States and in Puerto Rico, as well as in Asia, Canada, Europe and Mexico. Approximately 89%87% of the available square footage was located in the United States. Approximately 45%43% of the available square footage was owned. In 2007,2010, approximately 33%30% of the available domestic square footage was used by the Supply Technologies segment, 45%47% was used by the
13
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 | |
| (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. |
1415
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.
1516
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.
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.
16
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
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 | ||||||||||||||||||||||||||||||||
| Year-Ended | December 31, | Percent | ||||||||||||||||||||||||||||||
| December 31, | Percent | 2010 | 2009 | Change | Change | |||||||||||||||||||||||||||
| 2007 | 2006 | Change | Change | (Dollars in millions) | ||||||||||||||||||||||||||||
| Consolidated cost of products sold | $ | 912.3 | $ | 908.1 | $ | 4.2 | 0 | % | $ | 679.4 | $ | 597.2 | $ | 82.2 | 14 | % | ||||||||||||||||
| Consolidated gross profit | $ | 159.1 | $ | 148.1 | $ | 11.0 | 7 | % | $ | 134.1 | $ | 103.8 | $ | 30.3 | 29 | % | ||||||||||||||||
| Gross margin | 14.8 | % | 14.0 | % | 16.5 | % | 14.8 | % | ||||||||||||||||||||||||
Cost of products sold was relatively flatincreased $82.2 million in 20072010 to $679.4 million compared to 2006,$597.2 million in 2009, primarily due to increases in sales volume, while gross margin increased to 16.5% in 2010 from 14.8% from 14.0% in 2006. the same period of 2009.
Supply Technologies gross margin increased slightly, as the margin benefit from sales from the NABS acquisition and new customers outweighed the effect of reduced heavy-truck sales volume and higher restructuring charges in 2007. Supply Technologies 2006 and 2007 cost of products sold included $.8 million and $2.2 million, respectively of inventory related restructuring charges associated with the closure of a manufacturing plant. Aluminum Products gross margin decreased primarily due to the costs associated with starting up new contracts and the slowramp-up of new contract volume. Grossincreased resulting from volume increases while gross margin in the Manufactured Products segment increased primarily due to increased sales volume.remained essentially unchanged from the prior year.
Selling, General & Administrative (“SG&A”) Expenses:
| Year Ended | ||||||||||||||||||||||||||||||||
| Year-Ended | December 31, | Percent | ||||||||||||||||||||||||||||||
| December 31, | Percent | 2010 | 2009 | Change | Change | |||||||||||||||||||||||||||
| 2007 | 2006 | Change | Change | (Dollars in millions) | ||||||||||||||||||||||||||||
| Consolidated SG&A expenses | $ | 96.5 | $ | 88.9 | $ | 7.6 | 9 | % | $ | 89.8 | $ | 84.0 | $ | 5.8 | 7 | % | ||||||||||||||||
| SG&A percent | 9.0 | % | 8.4 | % | 11.0 | % | 12.0 | % | ||||||||||||||||||||||||
18
Consolidated SG&A expenses increased $5.8 million to $89.8 million in 2010 compared to $84.0 million in 2009 representing a 100 basis point decrease in SG&A expenses as a percent of sales. SG&A expenses increased on a dollar basis in 2010 compared to 2009 primarily due to an increase in salaries and benefits levels resulting from restoration to 2008 salary levels along with a bonus accrual offset by a $4.2 million charge in 2009 for a reserve for an account receivable from a customer in bankruptcy and an increase in pension income.
Interest Expense:
| Year Ended | ||||||||||||||
| December 31, | Percent | |||||||||||||
| 2010 | 2009 | Change | Change | |||||||||||
| (Dollars in millions) | ||||||||||||||
| Interest expense | $ | 23.9 | $ | 23.9 | $ | 0 | 0% | |||||||
| Average outstanding borrowings | $ | 322.0 | $ | 363.9 | $ | (41.9 | ) | (11.5)% | ||||||
| Average borrowing rate | 7.42 | % | 6.57 | % | 85 | basis points | ||||||||
Interest expense was unchanged in 2010 compared to 2009, primarily due to a higher average borrowing rate during 2010, offset by lower average borrowings. The decrease in average borrowings in 2010 resulted primarily from earnings and the reduction in working capital requirements. The higher average borrowing rate in 2010 was due primarily to increased interest rates under our revolving credit facility compared to 2009.
Impairment Charges:
During 2010, the Company reviewed one of its investments and determined there was diminution in value and therefore recorded an asset impairment charge of $3.5 million.
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 foreign subsidiary and restructuring expenses associated with the Company’s exit from its relationship with its largest customer, Navistar, along with realignment of its distribution network.
Gain on Purchase of 8.375% Senior Subordinated Notes:
In 2009, the 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, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in millions) | ||||||||
| Income before income taxes | $ | 19.1 | $ | 3.2 | ||||
| Income tax expense (benefit) | $ | 2.0 | $ | (.8 | ) | |||
| Effective income tax rate | 10.5 | % | (25 | )% | ||||
The Company released $5.8 million of the valuation allowance attributable to continuing operations in 2010 compared to $1.8 million in 2009. 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 assets. As of December 31, 2010
19
and 2009, the Company determined that it was not more likely than not that its net U.S. and certain foreign deferred tax assets would be realized.
The provision for income taxes was $2.0 million in 2010 compared to $(.8) million in 2009. The effective income tax rate was 10.5% in 2010, compared to (25)% in 2009.
The Company’s net operating loss carryforward precluded the payment of most federal income taxes in both 2010 and 2009, and should similarly preclude such payments in 2011. At December 31, 2010, the Company had net operating loss carryforwards for federal income tax purposes of approximately $24.7 million, which will expire between 2023 and 2029.
2009 versus 2008
Net Sales by Segment:
| Year Ended | ||||||||||||||||
| December 31, | Percent | |||||||||||||||
| 2009 | 2008 | Change | Change | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Supply Technologies | $ | 328.8 | $ | 521.3 | $ | (192.5 | ) | (37 | )% | |||||||
| Aluminum Products | 111.4 | 156.3 | (44.9 | ) | (29 | )% | ||||||||||
| Manufactured Products | 260.8 | 391.2 | (130.4 | ) | (33 | )% | ||||||||||
| Consolidated Net Sales | $ | 701.0 | $ | 1,068.8 | $ | (367.8 | ) | (34 | )% | |||||||
Consolidated net sales declined $367.8 million to $701.0 million compared to $1,068.8 million in 2008 as the Company experienced volume declines in each segment resulting from the challenging global economic downturn. Supply Technologies sales decreased 37% primarily due to volume reductions in the heavy-duty truck industry, of which $83.0 million resulted from the Company’s decision to exit its relationship with its largest customer in the fourth quarter of 2008. The remaining sales reductions were due to the overall declining demand from customers in most end-markets partially offset by the addition of new customers. Aluminum Products sales decreased 29% as the general decline in auto industry sales volumes exceeded additional sales from new contracts starting productionramp-up. Manufactured Products sales decreased 33% primarily from the declining business environment in each of its business reporting units. Approximately 20% of the Company’s consolidated net sales are to the automotive markets. Net sales to the automotive markets as a percentage of sales by segment were approximately 8%, 83% and 5% for the Supply Technologies, Aluminum Products and Manufactured Products Segments, respectively for the year ended December 31, 2009.
20
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 | |||||||||||||||||||
18
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.
21
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.
| 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 | ||||||||||
1922
| 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 | % | ||||||||||||
| 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 | % | ||||||||||||
| 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 | ||||||||||
20
| 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 | % | ||||
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.
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
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.
22
Recent Accounting Pronouncements
Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Update (“ASU”)No. 2010-06 “Improving Disclosure about Fair Value Measurements”, requires enhanced disclosures about recurring and nonrecurring fair-value measurements including significant transfers in and out of 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. 2010-06 was adopted January 1, 2010, except for the requirement to separately disclose purchases, sales, issuances and settlements of recurring Level 3 fair value measurements, which is effective January 1, 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 requires that arrangement 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 vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. Additionally, ASUNo. 2009-13expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements and is effective for the Company in 2008.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 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 variable interest entities. This guidance is
25
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 resultsstatements of operations.
Environmental
We have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certainclean-up efforts at several of these sites. However, our share of such
23
costs has not been material and based on available information, our management does not expect our exposure at any of these locations to have a material adverse effect on itsour results of operations, liquidity or financial condition.
We have been named as one of many defendants in a number of asbestos-related personal injury lawsuits. Our cost of defending such lawsuits has not been material to date and, based upon available information, our management does not expect our future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial condition. We caution, however, that inherent in management’s estimates of our exposure are expected trends in claims severity, frequency and other factors that may materially vary as claims are filed and settled or otherwise resolved.
Seasonality; Variability of Operating Results
The timing of orders placed by our customers has varied with, among other factors, orders for customers’ finished goods, customer production schedules, competitive conditions and general economic conditions. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations in the operations of our business units. Such variability is particularly evident at the capital equipment businesses, included in the Manufactured Products segment, which typically ship a few large systems per year.
Forward-Looking Statements
This annual report onForm 10-K contains certain statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These factors include, but are not limited to the following: our substantial indebtedness; continuation of the current negative global economic environment; general business conditions and competitive factors, including pricing pressures and product innovation; dependence on the automotive and heavy-duty truck industries, which are highly cyclical; demand for our products and services; raw material availability and pricing; component part availability and pricing; adverse changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate recent and future acquisitions into existing operations; changes in general domestic economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations, including the uncertainties related to the recent global financial crisis; adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities; our ability to meet various covenants, including financial covenants, contained in the agreements governing our revolvingindebtedness; disruptions, uncertainties or volatility in the credit facility and the indenture governing the 8.375% senior subordinated notes due 2014;markets that may limit our access to capital; increasingly stringent domestic and foreign governmental regulations, including those affecting the environment; inherent uncertainties involved in assessing our potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims, including, without limitation asbestos claims; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending, which could
26
be lower due to the effects of the current financial crisis; our ability to negotiate acceptable contracts with labor unions; our dependence on key management; our dependence on information systems; and the otherrisk factors we describe under the “Item 1A. Risk Factors”. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or
24
| 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 | ||||
| 28 | ||||
| 29 | ||||
| 30 | ||||
| 31 | ||||
| 33 | ||||
| 34 | ||||
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.
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.
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.
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.
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 | |||||
29
| 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
2008
(Dollars in thousands)
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.
33
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 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)
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.
| NOTE B — |
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
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’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.
| NOTE C — | Acquisitions |
| 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.
| 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 | ||
| 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- | ||||||
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
| 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 | ||||||
| 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- | ||||||
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 | ||||||||
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 Assets |
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 |
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 | ||||||||
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.
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.
| NOTE H — | Income Taxes |
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)
| 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
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.
45
| 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.
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 |
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 |
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.
| 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 | ||||||
47
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 | % | |||||||
| 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)
| 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 | ||||||||||||
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
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 |
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
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
| Cost of | ||||||||||||||||||||
| Products | Asset | Restructuring | Pension | |||||||||||||||||
| Sold | Impairment | & Severance | Curtailment | Total | ||||||||||||||||
| Manufactured Products | $ | 833 | $ | -0- | $ | 400 | $ | 152 | $ | 1,385 | ||||||||||
| Aluminum Products | -0- | 391 | -0- | -0- | 391 | |||||||||||||||
| $ | 833 | $ | 391 | $ | 400 | $ | 152 | $ | 1,776 | |||||||||||
| Balance at January 1, 2005 | $ | 462 | ||
| Exit charges recorded in 2005 | 400 | |||
| Cash payments made in 2005 | (266 | ) | ||
| Balance at December 31, 2005 | 596 | |||
| Cash payments made in 2006 | (312 | ) | ||
| Balance at December 31, 2006 | 284 | |||
| Cash payments made in 2007 | (284 | ) | ||
| Balance at December 31, 2007 | $ | -0- | ||
52
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accrued liability for severance costs and related cash payments consisted of:
| Balance at January 1, 2008 | $ | -0- | ||
| Severance costs recorded in 2008 | 564 | |||
| Cash payments made in 2008 | (19 | ) | ||
| Balance at December 31, 2008 | 545 | |||
| Cash payments made in 2009 | (460 | ) | ||
| Balance at December 31, 2009 | 85 | |||
| Cash payments made in 2010 | (85 | ) | ||
| Balance at December 31, 2010 | $ | -0- | ||
In the fourth quarter of 2009, due to weakness in the general economy including the railroad industry, the Company recorded $7,003 of asset impairment charges which were composed of $1,797 for inventory impairment and $5,206 for impairment of property and equipment and other long-term assets. Below is a summary of these charges by segment.
| Asset | Cost of | |||||||||||
| Impairment | Products Sold | Total | ||||||||||
| Supply Technologies | $ | 2,206 | $ | 1,797 | $ | 4,003 | ||||||
| Manufactured Products | 3,000 | -0- | $ | 3,000 | ||||||||
| $ | 5,206 | $ | 1,797 | $ | 7,003 | |||||||
NOTE ON — Supplemental Guarantor Information
Each of the material domestic direct and indirect wholly-owned subsidiaries of the Company (the “Guarantor Subsidiaries”) has fully and unconditionally guaranteed, on a joint and several basis, to pay principal, premium and interest with respect to the 8.375% Notes. Each of the Guarantor Subsidiaries is “100% owned” as defined by Rule 3-10(h)(1) of Regulation S-X.
The following supplemental consolidating condensed financial statements present consolidating condensed balance sheets as of December 31, 20072010 and 2006,2009, consolidating condensed statements of incomeoperations for the years ended December 31, 2007, 20062010, 2009 and 20052008, consolidating condensed statements of cash flows for the years ended December 31, 2007, 20062010, 2009 and 20052008 and reclassification and elimination entries necessary to consolidate the Parent and all of its subsidiaries. The “Parent” reflected in the accompanying supplemental guarantor information is Park-Ohio Industries, Inc.
5352
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 20072010
| Combined | Combined | Combined | Combined | |||||||||||||||||||||||||||||||||||||
| Guarantor | Non-Guarantor | Reclassifications/ | Guarantor | Non-Guarantor | Reclassifications/ | |||||||||||||||||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | (19,232 | ) | $ | 607 | $ | 11,626 | $ | 20,076 | $ | 13,077 | $ | (4,983 | ) | $ | 2,286 | $ | 33,736 | $ | 4,036 | $ | 35,075 | ||||||||||||||||||
| Accounts receivable, net | (550 | ) | 127,972 | 44,935 | -0- | 172,357 | (2,650 | ) | 100,754 | 25,141 | 3,164 | 126,409 | ||||||||||||||||||||||||||||
| Inventories | -0- | 174,238 | 41,171 | -0- | 215,409 | -0- | 157,180 | 32,580 | 2,782 | 192,542 | ||||||||||||||||||||||||||||||
| Other current assets | (10,464 | ) | 16,364 | 17,936 | 20,738 | 44,574 | 24,322 | 8,932 | 14,491 | (22,197 | ) | 25,548 | ||||||||||||||||||||||||||||
| Deferred tax assets | -0- | -0- | -0- | 21,897 | 21,897 | -0- | -0- | -0- | 10,496 | 10,496 | ||||||||||||||||||||||||||||||
| Total Current Assets | (30,246 | ) | 319,181 | 115,668 | 62,711 | 467,314 | 16,689 | 269,152 | 105,948 | (1,719 | ) | 390,070 | ||||||||||||||||||||||||||||
| Investment in subsidiaries | 397,880 | 28,729 | (28,729 | ) | (397,880 | ) | -0- | 311,612 | 26,234 | (26,234 | ) | (311,612 | ) | -0- | ||||||||||||||||||||||||||
| Inter-company advances | 370,880 | 349,186 | (382 | ) | (719,684 | ) | -0- | 9,520 | 42,063 | 37,393 | (88,976 | ) | -0- | |||||||||||||||||||||||||||
| Property, Plant and Equipment, net | 2,913 | 77,894 | 22,785 | -0- | 103,592 | 5,505 | 68,036 | 5,482 | (7,254 | ) | 71,769 | |||||||||||||||||||||||||||||
| Other Assets: | ||||||||||||||||||||||||||||||||||||||||
| Goodwill | -0- | 93,029 | 7,968 | -0- | 100,997 | -0- | 5,918 | 2,597 | 585 | 9,100 | ||||||||||||||||||||||||||||||
| Other | 47,176 | 47,364 | 949 | 2,026 | 97,515 | 63,684 | 16,094 | 14,466 | (9,904 | ) | 84,340 | |||||||||||||||||||||||||||||
| Total Other Assets | 47,176 | 140,393 | 8,917 | 2,026 | 198,512 | 63,684 | 22,012 | 17,063 | (9,319 | ) | 93,440 | |||||||||||||||||||||||||||||
| Total Assets | $ | 788,603 | $ | 915,383 | $ | 118,259 | $ | (1,052,827 | ) | $ | 769,418 | $ | 407,010 | $ | 427,497 | $ | 139,652 | $ | (418,880 | ) | $ | 555,279 | ||||||||||||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | LIABILITIES AND SHAREHOLDER’S EQUITY | LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||||||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||||||||||||||||||||||
| Trade accounts payable | $ | 4,141 | $ | 75,879 | $ | 22,339 | $ | 19,511 | $ | 121,870 | $ | 3,371 | $ | 70,191 | $ | 16,856 | $ | 5,272 | $ | 95,690 | ||||||||||||||||||||
| Payable to affiliates | 11,879 | -0- | -0- | -0- | 11,879 | |||||||||||||||||||||||||||||||||||
| Accrued expenses | (9,477 | ) | 45,962 | 18,259 | 12,179 | 66,923 | 3,496 | 37,347 | 16,240 | 2,117 | 59,200 | |||||||||||||||||||||||||||||
| Current portion of long-term liabilities | -0- | 185 | 2,138 | 2,080 | 4,403 | -0- | 50 | 1,229 | 14,655 | 15,934 | ||||||||||||||||||||||||||||||
| Total Current Liabilities | (5,336 | ) | 122,026 | 42,736 | 33,770 | 193,196 | 18,746 | 107,588 | 34,325 | 22,044 | 182,703 | |||||||||||||||||||||||||||||
| Long-Term Liabilities, less current portion | ||||||||||||||||||||||||||||||||||||||||
| 8.375% Senior Subordinated Notes due 2014 | 210,000 | -0- | -0- | -0- | 210,000 | 210,000 | -0- | -0- | (26,165 | ) | 183,835 | |||||||||||||||||||||||||||||
| Revolving credit maturing on December 31, 2010 | 145,400 | -0- | -0- | -0- | 145,400 | |||||||||||||||||||||||||||||||||||
| Revolving credit | 124,500 | -0- | -0- | (11,200 | ) | 113,300 | ||||||||||||||||||||||||||||||||||
| Other long-term debt | -0- | 776 | 1,551 | (40 | ) | 2,287 | -0- | 4,000 | -0- | 1,322 | 5,322 | |||||||||||||||||||||||||||||
| Deferred tax liability | (3,366 | ) | -0- | 2,101 | 23,987 | 22,722 | 8,343 | -0- | 1,378 | -0- | 9,721 | |||||||||||||||||||||||||||||
| Other postretirement benefits and other long-term liabilities | 4,125 | 52,689 | 557 | (33,354 | ) | 24,017 | 23,195 | 4,213 | 216 | (4,761 | ) | 22,863 | ||||||||||||||||||||||||||||
| Total Long-Term Liabilities | 356,159 | 53,465 | 4,209 | (9,407 | ) | 404,426 | 366,038 | 8,213 | 1,594 | (40,804 | ) | 335,041 | ||||||||||||||||||||||||||||
| Inter-company advances | 279,672 | 398,938 | 20,947 | (699,557 | ) | -0- | 6,646 | 22,689 | 49,908 | (79,243 | ) | -0- | ||||||||||||||||||||||||||||
| Shareholder’s Equity | 158,108 | 340,954 | 50,367 | (377,633 | ) | 171,796 | 15,580 | 289,007 | 53,825 | (320,877 | ) | 37,535 | ||||||||||||||||||||||||||||
| Total Liabilities and Shareholder’s Equity | $ | 788,603 | $ | 915,383 | $ | 118,259 | $ | (1,052,827 | ) | $ | 769,418 | $ | 407,010 | $ | 427,497 | $ | 139,652 | $ | 418,880 | $ | 555,279 | |||||||||||||||||||
5453
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 20062009
| Combined | Combined | Combined | Combined | |||||||||||||||||||||||||||||||||||||
| Guarantor | Non-Guarantor | Reclassifications/ | Guarantor | Non-Guarantor | Reclassifications/ | |||||||||||||||||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | (15,770 | ) | $ | 570 | $ | 12,382 | $ | 23,690 | $ | 20,872 | $ | (2,876 | ) | $ | 1,613 | $ | 21,839 | $ | 1,400 | $ | 21,976 | ||||||||||||||||||
| Accounts receivable, net | (1,043 | ) | 147,834 | 35,102 | -0- | 181,893 | (1,300 | ) | 84,669 | 24,477 | (3,203 | ) | 104,643 | |||||||||||||||||||||||||||
| Inventories | -0- | 187,649 | 36,287 | -0- | 223,936 | -0- | 148,658 | 33,458 | -0- | 182,116 | ||||||||||||||||||||||||||||||
| Other current assets | 3,362 | 12,278 | 8,575 | 9,927 | 34,142 | 16,462 | 18,365 | 9,878 | (3,818 | ) | 40,887 | |||||||||||||||||||||||||||||
| Deferred tax assets | -0- | -0- | -0- | 29,715 | 29,715 | -0- | -0- | -0- | 8,104 | 8,104 | ||||||||||||||||||||||||||||||
| Total Current Assets | (13,451 | ) | 348,331 | 92,346 | 63,332 | 490,558 | 12,286 | 253,305 | 89,652 | 2,483 | 357,726 | |||||||||||||||||||||||||||||
| Investment in subsidiaries | 388,117 | 17,169 | (17,169 | ) | (388,117 | ) | -0- | 313,315 | 26,129 | (26,129 | ) | (313,315 | ) | -0- | ||||||||||||||||||||||||||
| Inter-company advances | 338,471 | 531,453 | 4,427 | (874,351 | ) | -0- | 383,098 | 292,128 | 21,935 | (697,161 | ) | -0- | ||||||||||||||||||||||||||||
| Property, Plant and Equipment, net | 448 | 83,478 | 15,052 | -0- | 98,978 | (464 | ) | 70,962 | 10,506 | (6,045 | ) | 74,959 | ||||||||||||||||||||||||||||
| Other Assets: | ||||||||||||||||||||||||||||||||||||||||
| Goodwill | (5,514 | ) | 96,830 | 6,864 | -0- | 98,180 | -0- | 1,346 | 2,809 | -0- | 4,155 | |||||||||||||||||||||||||||||
| Other | 52,312 | 40,599 | 719 | 2,323 | 95,953 | 25,864 | 38,660 | 14,528 | (8,357 | ) | 70,695 | |||||||||||||||||||||||||||||
| Total Other Assets | 46,798 | 137,429 | 7,583 | 2,323 | 194,133 | 25,864 | 40,006 | 17,337 | (8,357 | ) | 74,850 | |||||||||||||||||||||||||||||
| Total Assets | $ | 760,383 | $ | 1,117,860 | $ | 102,239 | $ | (1,196,813 | ) | $ | 783,669 | $ | 734,099 | $ | 682,530 | $ | 113,301 | $ | (1,022,395 | ) | $ | 507,535 | ||||||||||||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | LIABILITIES AND SHAREHOLDER’S EQUITY | LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||||||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||||||||||||||||||||||
| Trade accounts payable | $ | 3,759 | $ | 84,003 | $ | 21,610 | $ | 23,487 | $ | 132,859 | $ | 3,360 | $ | 55,920 | $ | 14,375 | $ | 1,423 | $ | 75,078 | ||||||||||||||||||||
| Payable to affiliates | 7,693 | -0- | -0- | -0- | 7,693 | |||||||||||||||||||||||||||||||||||
| Accrued expenses | 1,579 | 51,638 | 12,138 | 12,479 | 77,834 | 1,581 | 25,889 | 11,604 | -0- | 39,074 | ||||||||||||||||||||||||||||||
| Current portion of long-term liabilities | -0- | 552 | 2,758 | 2,563 | 5,873 | 6,600 | 102 | 2,163 | 4,226 | 13,091 | ||||||||||||||||||||||||||||||
| Total Current Liabilities | 5,338 | 136,193 | 36,506 | 38,529 | 216,566 | 19,234 | 81,911 | 28,142 | 5,649 | 134,936 | ||||||||||||||||||||||||||||||
| Long-Term Liabilities, less current portion | ||||||||||||||||||||||||||||||||||||||||
| 8.375% Senior Subordinated Notes due 2014 | 210,000 | -0- | -0- | -0- | 210,000 | 210,000 | -0- | -0- | (26,165 | ) | 183,835 | |||||||||||||||||||||||||||||
| Revolving credit maturing on December 31, 2010 | 156,700 | -0- | -0- | -0- | 156,700 | |||||||||||||||||||||||||||||||||||
| Revolving credit | 134,600 | -0- | -0- | -0- | 134,600 | |||||||||||||||||||||||||||||||||||
| Other long-term debt | -0- | 3,027 | 1,763 | -0- | 4,790 | -0- | 4,409 | 1,623 | (1,364 | ) | 4,668 | |||||||||||||||||||||||||||||
| Deferred tax liability | -0- | -0- | 42 | 32,047 | 32,089 | 6,007 | -0- | 1,193 | -0- | 7,200 | ||||||||||||||||||||||||||||||
| Other postretirement benefits and other long-term liabilities | 9,199 | 54,136 | 2,692 | (41,593 | ) | 24,434 | 2,710 | 52,637 | 314 | (33,830 | ) | 21,831 | ||||||||||||||||||||||||||||
| Total Long-Term Liabilities | 375,899 | 57,163 | 4,497 | (9,546 | ) | 428,013 | 353,317 | 57,046 | 3,130 | (61,359 | ) | 352,134 | ||||||||||||||||||||||||||||
| Inter-company advances | 242,672 | 594,730 | 17,423 | (854,825 | ) | -0- | 361,789 | 286,093 | 37,505 | (685,387 | ) | -0- | ||||||||||||||||||||||||||||
| Shareholder’s Equity | 136,474 | 329,774 | 43,813 | (370,971 | ) | 139,090 | (241 | ) | 257,480 | 44,524 | (281,298 | ) | 20,465 | |||||||||||||||||||||||||||
| Total Liabilities and Shareholder’s Equity | $ | 760,383 | $ | 1,117,860 | $ | 102,239 | $ | (1,196,813 | ) | $ | 783,669 | $ | 734,099 | $ | 682,530 | $ | 113,301 | $ | (1,022,395 | ) | $ | 507,535 | ||||||||||||||||||
5554
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 20072010
| Combined | Combined | Combined | Combined | |||||||||||||||||||||||||||||||||||||
| Guarantor | Non-Guarantor | Guarantor | Non-Guarantor | |||||||||||||||||||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
| Net sales | $ | -0- | $ | 882,091 | $ | 189,350 | $ | -0- | $ | 1,071,441 | $ | -0- | $ | 668,089 | $ | 145,433 | $ | -0- | $ | 813,522 | ||||||||||||||||||||
| Cost of sales | -0- | 766,495 | 143,626 | 2,216 | 912,337 | -0- | 566,648 | 112,777 | -0- | 679,425 | ||||||||||||||||||||||||||||||
| Gross profit | -0- | 115,596 | 45,724 | (2,216 | ) | 159,104 | -0- | 101,441 | 32,656 | -0- | 134,097 | |||||||||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (54,674 | ) | 103,919 | 25,553 | 21,725 | 96,523 | (39,747 | ) | 95,466 | 20,865 | 13,222 | 89,806 | ||||||||||||||||||||||||||||
| Asset Impairment Charge | -0- | 3,539 | -0- | -0- | 3,539 | |||||||||||||||||||||||||||||||||||
| Operating Income | 54,674 | 11,677 | 20,171 | (23,941 | ) | 62,581 | ||||||||||||||||||||||||||||||||||
| Operating Income (loss) | 39,747 | 2,436 | 11,791 | (13,222 | ) | 40,752 | ||||||||||||||||||||||||||||||||||
| Interest expense | 30,588 | 1,793 | 339 | (1,169 | ) | 31,551 | 25,054 | 954 | 296 | (2,436 | ) | 23,868 | ||||||||||||||||||||||||||||
| Gain on acquisition of business | -0- | -0- | -0- | (2,210 | ) | (2,210 | ) | |||||||||||||||||||||||||||||||||
| Income before income taxes | 24,086 | 9,884 | 19,832 | (22,772 | ) | 31,030 | 14,693 | 1,482 | 11,495 | (8,576 | ) | 19,094 | ||||||||||||||||||||||||||||
| Income taxes | 3,377 | 216 | 6,383 | -0- | 9,976 | 721 | 144 | 1,169 | -0- | 2,034 | ||||||||||||||||||||||||||||||
| Net income | $ | 20,709 | $ | 9,668 | $ | 13,449 | $ | (22,772 | ) | $ | 21,054 | |||||||||||||||||||||||||||||
| Net (loss) income | $ | 13,972 | $ | 1,338 | $ | 10,326 | $ | (8,576 | ) | $ | 17,060 | |||||||||||||||||||||||||||||
5655
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 20062009
| Combined | Combined | Combined | Combined | |||||||||||||||||||||||||||||||||||||
| Guarantor | Non-Guarantor | Guarantor | Non-Guarantor | |||||||||||||||||||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
| Net sales | $ | -0- | $ | 912,060 | $ | 144,186 | $ | -0- | $ | 1,056,246 | $ | -0- | $ | 572,333 | $ | 128,714 | $ | -0- | $ | 701,047 | ||||||||||||||||||||
| Cost of sales | 800 | 795,936 | 111,359 | -0- | 908,095 | -0- | 494,323 | 102,877 | -0- | 597,200 | ||||||||||||||||||||||||||||||
| Gross profit | (800 | ) | 116,124 | 32,827 | -0- | 148,151 | -0- | 78,010 | 25,837 | -0- | 103,847 | |||||||||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (55,175 | ) | 100,320 | 20,769 | 23,026 | 88,940 | (12,463 | ) | 91,238 | 19,193 | (13,932 | ) | 84,036 | |||||||||||||||||||||||||||
| Restructuring and impairment charges | -0- | (809 | ) | -0- | -0- | (809 | ) | -0- | 2,206 | -0- | 3,000 | 5,206 | ||||||||||||||||||||||||||||
| Operating Income | 54,375 | 16,613 | 12,058 | (23,026 | ) | 60,020 | ||||||||||||||||||||||||||||||||||
| Operating Income (loss) | 12,463 | (15,434 | ) | 6,644 | 10,932 | 14,605 | ||||||||||||||||||||||||||||||||||
| Gain on purchase of 8.375% senior subordinated notes | -0- | -0- | -0- | (12,529 | ) | (12,529 | ) | |||||||||||||||||||||||||||||||||
| Interest expense | 30,496 | 1,067 | 304 | (600 | ) | 31,267 | 23,243 | 1,152 | 752 | (1,202 | ) | 23,945 | ||||||||||||||||||||||||||||
| Income before income taxes | 23,879 | 15,546 | 11,754 | (22,426 | ) | 28,753 | ||||||||||||||||||||||||||||||||||
| Income taxes | (2,419 | ) | 57 | 5,580 | -0- | 3,218 | ||||||||||||||||||||||||||||||||||
| (Loss) income before income tax (benefit) expense | (10,780 | ) | (16,586 | ) | 5,892 | 24,663 | 3,189 | |||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | (1,067 | ) | 60 | 179 | -0- | (828 | ) | |||||||||||||||||||||||||||||||||
| Net income | $ | 26,298 | $ | 15,489 | $ | 6,174 | $ | (22,426 | ) | $ | 25,535 | |||||||||||||||||||||||||||||
| Net income (loss) | $ | (9,713 | ) | $ | (16,646 | ) | $ | 5,713 | $ | 24,663 | $ | 4,017 | ||||||||||||||||||||||||||||
5756
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 20052008
| Combined | Combined | Combined | Combined | |||||||||||||||||||||||||||||||||||||
| Guarantor | Non-Guarantor | Guarantor | Non-Guarantor | |||||||||||||||||||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
| Net sales | $ | -0- | $ | 827,815 | $ | 114,179 | $ | (9,094 | ) | $ | 932,900 | $ | -0- | $ | 875,260 | $ | 193,497 | $ | -0- | $ | 1,068,757 | |||||||||||||||||||
| Cost of sales | -0- | 715,057 | 90,320 | (9,094 | ) | 796,283 | -0- | 766,952 | 146,801 | 5,544 | 919,297 | |||||||||||||||||||||||||||||
| Gross profit | -0- | 112,758 | 23,859 | -0- | 136,617 | -0- | 108,308 | 46,696 | (5,544 | ) | 149,460 | |||||||||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 3,349 | 62,394 | 15,025 | 600 | 81,368 | (20,346 | ) | 106,893 | 31,939 | (16,359 | ) | 102,127 | ||||||||||||||||||||||||||||
| Restructuring and impairment charges | -0- | 943 | -0- | -0- | 943 | -0- | 108,614 | 12,480 | -0- | 121,094 | ||||||||||||||||||||||||||||||
| Operating Income | (3,349 | ) | 49,421 | 8,834 | (600 | ) | 54,306 | |||||||||||||||||||||||||||||||||
| Operating Income (loss) | 20,346 | (107,199 | ) | 2,277 | 10,815 | (73,761 | ) | |||||||||||||||||||||||||||||||||
| Interest expense | (5,346 | ) | 31,442 | 1,560 | (600 | ) | 27,056 | 26,883 | 1,736 | 725 | (1,423 | ) | 27,921 | |||||||||||||||||||||||||||
| Income before income taxes | 1,997 | 17,979 | 7,274 | -0- | 27,250 | |||||||||||||||||||||||||||||||||||
| (Loss) income before income taxes | (6,537 | ) | (108,935 | ) | 1,552 | 12,238 | (101,682 | ) | ||||||||||||||||||||||||||||||||
| Income taxes | (7,439 | ) | 59 | 3,057 | -0- | (4,323 | ) | 14,569 | 96 | 6,321 | -0- | 20,986 | ||||||||||||||||||||||||||||
| Net income | $ | 9,436 | $ | 17,920 | $ | 4,217 | $ | -0- | $ | 31,573 | ||||||||||||||||||||||||||||||
| Net (loss) income | $ | (21,106 | ) | $ | (109,031 | ) | $ | (4,769 | ) | $ | 12,238 | $ | (122,668 | ) | ||||||||||||||||||||||||||
5857
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 20072010
| Combined | Combined | Combined | Combined | |||||||||||||||||||||||||||||||||||||
| Guarantor | Non-Guarantor | Guarantor | Non-Guarantor | |||||||||||||||||||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
| Net cash provided by operations | $ | 7,040 | $ | 11,812 | $ | 9,980 | $ | -0- | $ | 28,832 | $ | 28,927 | $ | 35,234 | $ | 10,387 | $ | -0- | $ | 74,548 | ||||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||||||
| Acquisitions | -0- | (25,900 | ) | -0- | -0- | (25,900 | ) | |||||||||||||||||||||||||||||||||
| Purchases of property, plant and equipment, net | (2,816 | ) | (9,156 | ) | (9,904 | ) | -0- | (21,876 | ) | (44 | ) | (7,924 | ) | 4,017 | -0- | (3,951 | ) | |||||||||||||||||||||||
| Net cash (used) in investing activities | (2,816 | ) | (9,156 | ) | (9,904 | ) | -0- | (21,876 | ) | (44 | ) | (33,824 | ) | 4,017 | -0- | (29,851 | ) | |||||||||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||||||
| Principal payments on long-term debt | (11,300 | ) | (2,619 | ) | (832 | ) | -0- | (14,751 | ) | |||||||||||||||||||||||||||||||
| Distribution of capital to shareholder | (750 | ) | -0- | -0- | -0- | (750 | ) | |||||||||||||||||||||||||||||||||
| Capital contributions from parent | (6,762 | ) | -0- | -0- | -0- | (6,762 | ) | |||||||||||||||||||||||||||||||||
| Debt issue costs | (4,142 | ) | (4,142 | ) | ||||||||||||||||||||||||||||||||||||
| Payments on debt | (16,700 | ) | (737 | ) | (2,507 | ) | -0- | (19,944 | ) | |||||||||||||||||||||||||||||||
| Net cash (used) by financing activities | (11,300 | ) | (2,619 | ) | (832 | ) | -0- | (14,751 | ) | (28,354 | ) | (737 | ) | (2,507 | ) | -0- | (31,598 | ) | ||||||||||||||||||||||
| Increase (decrease) in cash and cash equivalents | (7,076 | ) | 37 | (756 | ) | -0- | (7,795 | ) | ||||||||||||||||||||||||||||||||
| Increase in cash and cash equivalents | 529 | 673 | 11,897 | -0- | 13,099 | |||||||||||||||||||||||||||||||||||
| Cash and cash equivalents at beginning of year | 7,920 | 570 | 12,382 | -0- | 20,872 | (1,476 | ) | 1,613 | 21,839 | -0- | 21,976 | |||||||||||||||||||||||||||||
| Cash and cash equivalents at end of year | $ | 844 | $ | 607 | $ | 11,626 | $ | -0- | $ | 13,077 | $ | (947 | ) | $ | 2,286 | $ | 33,736 | $ | -0- | $ | 35,075 | |||||||||||||||||||
5958
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 20062009
| Combined | Combined | Combined | Combined | |||||||||||||||||||||||||||||||||||||
| Guarantor | Non-Guarantor | Guarantor | Non-Guarantor | |||||||||||||||||||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
| Net cash provided (used) by operations | $ | (27,090 | ) | $ | 27,983 | $ | 3,868 | $ | -0- | $ | 4,761 | |||||||||||||||||||||||||||||
| Net cash provided by operations | $ | 15,697 | $ | 965 | $ | 33,026 | $ | -0- | $ | 49,688 | ||||||||||||||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||||||
| Purchases of property, plant and equipment, net | 1,267 | (16,347 | ) | (4,176 | ) | -0- | (19,256 | ) | 197 | (4,125 | ) | (1,647 | ) | -0- | (5,575 | ) | ||||||||||||||||||||||||
| Acquisitions, net of cash acquired | -0- | (23,271 | ) | -0- | -0- | (23,271 | ) | |||||||||||||||||||||||||||||||||
| Proceeds from sale of assets held for sale | -0- | 3,200 | -0- | -0- | 3,200 | |||||||||||||||||||||||||||||||||||
| Proceeds from sale-leaseback transaction | -0- | 9,420 | -0- | -0- | 9,420 | |||||||||||||||||||||||||||||||||||
| Net cash provided (used) in investing activities | 1,267 | (26,998 | ) | (4,176 | ) | -0- | (29,907 | ) | 197 | (4,125 | ) | (1,647 | ) | -0- | (5,575 | ) | ||||||||||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||||||
| Distribution of capital to shareholder | (750 | ) | -0- | -0- | -0- | (750 | ) | |||||||||||||||||||||||||||||||||
| Purchase of 8.375% senior subordinated notes | -0- | -0- | (13,511 | ) | -0- | (13,511 | ) | |||||||||||||||||||||||||||||||||
| Proceeds from bank arrangements | 28,400 | -0- | 791 | -0- | 29,191 | (23,400 | ) | 4,434 | (6,533 | ) | -0- | (25,499 | ) | |||||||||||||||||||||||||||
| Principal payments on long-term debt | -0- | (1,041 | ) | -0- | -0- | (1,041 | ) | |||||||||||||||||||||||||||||||||
| Net cash provided (used) by financing activities | 28,400 | (1,041 | ) | 791 | -0- | 28,150 | ||||||||||||||||||||||||||||||||||
| Net cash (used) provided by financing activities | (24,150 | ) | 4,434 | (20,044 | ) | -0- | (39,760 | ) | ||||||||||||||||||||||||||||||||
| Increase (decrease) in cash and cash equivalents | 2,577 | (56 | ) | 483 | -0- | 3,004 | (8,256 | ) | 1,274 | 11,335 | -0- | 4,353 | ||||||||||||||||||||||||||||
| Cash and cash equivalents at beginning of year | 5,343 | 626 | 11,899 | -0- | 17,868 | 6,780 | 339 | 10,504 | -0- | 17,623 | ||||||||||||||||||||||||||||||
| Cash and cash equivalents at end of year | $ | 7,920 | $ | 570 | $ | 12,382 | $ | -0- | $ | 20,872 | $ | (1,476 | ) | $ | 1,613 | $ | 21,839 | $ | -0- | $ | 21,976 | |||||||||||||||||||
6059
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED — (Continued)
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 20052008
| Combined | Combined | Combined | Combined | |||||||||||||||||||||||||||||||||||||
| Guarantor | Non-Guarantor | Guarantor | Non-Guarantor | |||||||||||||||||||||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
| Net cash provided (used) by operations | $ | (1,228 | ) | $ | 29,314 | $ | 6,409 | $ | -0- | $ | 34,495 | |||||||||||||||||||||||||||||
| Net cash (used) provided by operations | $ | (3,847 | ) | $ | 25,797 | $ | (11,756 | ) | $ | -0- | $ | 10,194 | ||||||||||||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||||||
| Purchases of property, plant and equipment, net | (486 | ) | (17,769 | ) | (2,040 | ) | -0- | (20,295 | ) | (685 | ) | (20,784 | ) | 4,003 | -0- | (17,466 | ) | |||||||||||||||||||||||
| Acquisitions, net of cash acquired | -0- | (12,181 | ) | -0- | -0- | (12,181 | ) | |||||||||||||||||||||||||||||||||
| Proceeds from sale of assets held for sale | -0- | 1,100 | -0- | -0- | 1,100 | |||||||||||||||||||||||||||||||||||
| Business acquisitions, net of cash acquired | -0- | (5,322 | ) | -0- | -0- | (5,322 | ) | |||||||||||||||||||||||||||||||||
| Proceeds from the sale of assets held for sale | -0- | 260 | -0- | -0- | 260 | |||||||||||||||||||||||||||||||||||
| Net cash provided (used) in investing activities | (486 | ) | (28,850 | ) | (2,040 | ) | -0- | (31,376 | ) | |||||||||||||||||||||||||||||||
| Net cash (used) provided in investing activities | (685 | ) | (25,846 | ) | 4,003 | -0- | (22,528 | ) | ||||||||||||||||||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||||||
| Proceeds from bank arrangements, net | 7,700 | (37 | ) | 679 | -0- | 8,342 | 19,200 | (219 | ) | 6,631 | -0- | 25,612 | ||||||||||||||||||||||||||||
| Distribution of capital to shareholder | (8,732 | ) | -0- | -0- | -0- | (8,732 | ) | |||||||||||||||||||||||||||||||||
| Net cash provided (used) by financing activities | 7,700 | (37 | ) | 679 | -0- | 8,342 | 10,468 | (219 | ) | 6,631 | -0- | 16,880 | ||||||||||||||||||||||||||||
| Increase (decrease) in cash and cash equivalents | 5,986 | 427 | 5,048 | -0- | 11,461 | 5,936 | (268 | ) | (1,122 | ) | -0- | 4,546 | ||||||||||||||||||||||||||||
| Cash and cash equivalents at beginning of year | (643 | ) | 199 | 6,851 | -0- | 6,407 | 844 | 607 | 11,626 | -0- | 13,077 | |||||||||||||||||||||||||||||
| Cash and cash equivalents at end of year | $ | 5,343 | $ | 626 | $ | 11,899 | $ | -0- | $ | 17,868 | $ | 6,780 | $ | 339 | $ | 10,504 | $ | -0- | $ | 17,623 | ||||||||||||||||||||
6160
Schedule II
PARK-OHIO INDUSTRIES, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| Balance at | Charged to | Deductions | Balance at | Balance at | Charged to | Deductions | Balance at | |||||||||||||||||||||||||
| Beginning of | Costs and | and | End of | Beginning of | Costs and | and | End of | |||||||||||||||||||||||||
Description | Period | Expenses | Other | Period | Period | Expenses | Other | Period | ||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Year Ended December 31, 2007: | ||||||||||||||||||||||||||||||||
| Year Ended December 31, 2010: | ||||||||||||||||||||||||||||||||
| Allowances deducted from assets: | ||||||||||||||||||||||||||||||||
| Trade receivable allowances | $ | 4,305 | $ | 1,609 | $ | (2,190 | )(A) | $ | 3,724 | $ | 8,388 | $ | 2,581 | $ | (4,958 | )(A) | $ | 6,011 | ||||||||||||||
| Inventory Obsolescence reserve | 22,978 | 4,383 | (6,929 | )(B) | 20,432 | 21,456 | 8,956 | (7,624 | )(B) | 22,788 | ||||||||||||||||||||||
| Tax valuation allowances | 316 | 1,901 | 0 | 2,217 | 30,668 | (5,754 | ) | (2,528 | )(D) | 22,386 | ||||||||||||||||||||||
| Product warranty liability | 3,557 | 4,526 | (2,284 | )(C) | 5,799 | 2,760 | 2,294 | (1,008 | )(C) | 4,046 | ||||||||||||||||||||||
| Year Ended December 31, 2006: | ||||||||||||||||||||||||||||||||
| Year Ended December 31, 2009: | ||||||||||||||||||||||||||||||||
| Allowances deducted from assets: | ||||||||||||||||||||||||||||||||
| Trade receivable allowances | $ | 5,120 | $ | 2,330 | $ | (3,145 | )(A) | $ | 4,305 | $ | 3,044 | $ | 6,527 | $ | (1,183 | )(A) | $ | 8,388 | ||||||||||||||
| Inventory Obsolescence reserve | 19,166 | 7,216 | (3,404 | )(B) | 22,978 | 22,313 | 7,153 | (8,010 | )(B) | 21,456 | ||||||||||||||||||||||
| Tax valuation allowances | 7,011 | (4,806 | ) | (1,889 | )(D) | 316 | 34,921 | (1,815 | ) | (2,438 | ) | 30,668 | ||||||||||||||||||||
| Product warranty liability | 3,566 | 2,797 | (2,806 | )(C) | 3,557 | 5,402 | 704 | (3,346 | )(C) | 2,760 | ||||||||||||||||||||||
| Year Ended December 31, 2005: | ||||||||||||||||||||||||||||||||
| Year Ended December 31, 2008: | ||||||||||||||||||||||||||||||||
| Allowances deducted from assets: | ||||||||||||||||||||||||||||||||
| Trade receivable allowances | $ | 3,976 | $ | 3,230 | $ | (2,086 | )(A) | $ | 5,120 | $ | 3,724 | $ | 1,429 | $ | (2,109 | )(A) | $ | 3,044 | ||||||||||||||
| Inventory Obsolescence reserve | 18,604 | 6,704 | (6,142 | )(B) | 19,166 | 20,432 | 5,385 | (3,505 | )(B) | 22,312 | ||||||||||||||||||||||
| Tax valuation allowances | 19,231 | (12,220 | ) | 7,011 | 2,217 | 33,625 | (921 | )(D) | 34,921 | |||||||||||||||||||||||
| Product warranty liability | 4,281 | 2,593 | (3,308 | )(C) | 3,566 | 5,799 | 4,202 | (4,599 | )(C) | 5,402 | ||||||||||||||||||||||
Note (A)- Uncollectible accounts written off, net of recoveries.
Note (B)- Amounts written off or payments incurred, net of acquired reserves.
Note (C)- Loss and loss adjustment.
Note (D)- Excess tax benefit initiallyAmounts recorded in connection with the exercise of stock options.other comprehensive income.
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
There were no changes in or disagreements with the Company’s independent auditors on accounting and financial disclosure matters within the two-year period ended December 31, 2007.2010.
| Item 9A. | Controls and Procedures |
Evaluation of disclosure controls and procedures
As of December 31, 2007, management, includingthe end of the period covered by this report, we carried out an evaluation , under the supervision and with the participation of our Chairman and Chief Executive Officer and our Vice President and Chief Financial Officer, evaluatedof the effectiveness of the design and operation of the Company’sour disclosure controls and procedures. As defined inprocedures pursuant toRule 13a-15(e) underandRule 15d-15(e) of the Securities Exchange Act of 1934, (the “Exchangeas amended (“Exchange Act”), disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as
62
. Based upon this evaluation, our Chairman and Chief Executive Officer and Vice President and Chief Financial Officer concluded that, as of the Company’send of the period covered by this report, our disclosure controls and procedures were not effective, as of December 31, 2007, due solely to the material weakness in the Company’s internal control over financial reporting described below in “Management’s assessment of the effectiveness of the Company’s internal control over financial reporting.” In light of this material weakness, the Company performed additional analysis as deemed necessary to ensure that the consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles. Management believes that the consolidated financial statements included in this annual report on Form 10-K present fairly in all material respects the Company’s financial position, results of operations and cash flows for the periods presented.effective.
61
Management’s assessment of the effectiveness of the Company’s internal controlReport on Internal Control over financial reportingFinancial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRule 13a-15(f) under the Exchange Act. As required byRule 13a-15(c) under the Exchange Act, management carried out an evaluation, with participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of December 31, 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.
Changes in internal control over financial reporting
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.
| Item 9B. | Other Information |
None.
6362
Part III
| Item 10. | Directors, Executive Officers and Corporate Governance |
Information required by this item has been omitted pursuant to Generalgeneral Instruction I of Form 10-K.
| Item 11. | Executive Compensation |
Information required by this item has been omitted pursuant to Generalgeneral Instruction I of Form 10-K.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information required by this item has been omitted pursuant to Generalgeneral Instruction I of Form 10-K.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Information required by this item has been omitted pursuant to Generalgeneral Instruction I of Form 10-K.
| Item 14. | Principal Accountant Fees and Services |
The following table presents fees for professional services rendered by Ernst & Young LLP to the Company and its parent for the years ended December 31, 20072010 and 2006:2009:
| 2007 | 2006 | 2010 | 2009 | |||||||||||||
| Audit fees | $ | 1,043,000 | $ | 1,084,000 | $ | 965,000 | $ | 965,000 | ||||||||
| Audit-related fees | 75,000 | 83,000 | 425,000 | 75,000 | ||||||||||||
| Tax fees | 77,800 | 112,000 | 64,000 | 52,210 | ||||||||||||
Fees for audit services include fees associated with the annual audit, the reviews of the Company’s quarterly reports on Form 10-Q, statutory audits required internationally and the audit of management’s assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. Audit-related fees principally included fees in connection with pension plan audits of ACS and accounting consultation.audits of Rome Die Casting. Tax fees include fees in connection with tax compliance and tax planning. Park-Ohio is a wholly-owned subsidiary of Holdings and does not have a separate audit committee. Holdings’ audit committee has adopted a pre-approval policy for audit and non-audit related services and auditor independence requiring the approval by Holdings’ audit committee of all professional services rendered by the Company’s and its parent’s independent auditor prior to the commencement of the specified services.
100% of the services described in “Audit Fees,” “Audit-Related Fees” and “Tax Fees” were pre-approved by Holdings’ audit committee in accordance with Holdings’ formal policy on auditor independence.
6463
Part IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) The following financial statements are included in Part II, Item 8 of this annual report onForm 10-K:
| Page | ||||||||
| Report of Independent Registered Public Accounting Firm | 28 | |||||||
| Report of Independent Registered Public Accounting Firm | 29 | |||||||
| Consolidated Balance Sheets — December 31, | 30 | |||||||
| Consolidated Statements of | 31 | |||||||
| Consolidated Statements of Shareholder’s Equity — Years Ended December 31, | 32 | |||||||
| Consolidated Statements of Cash Flows — Years Ended December 31, | 33 | |||||||
| Notes to Consolidated Financial Statements | 34 | |||||||
| The following consolidated financial statement schedule of Park-Ohio Industries Inc. is included in Item 8: | ||||||||
| Schedule II — Valuation and Qualifying accounts | 61 | |||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and, therefore, have been omitted.
(3) Exhibits:
The exhibits filed as part of this annual report onForm 10-K are listed on the Exhibit Index immediately preceding such exhibits and are incorporated herein by reference.
6564
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARK-OHIO INDUSTRIES, INC. (Registrant)
| By: | /s/ |
and Chief Financial Officer
Date: March 28, 20088, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
* Edward F. Crawford | Chairman, Chief Executive Officer and Director | |||||
| March | ||||||
* | Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | |||||
* Matthew V. Crawford | President, Chief Operating Officer and Director | |||||
* Patrick V. Auletta | Director | |||||
* Kevin R. Greene | Director | |||||
* A. Malachi Mixon, III | Director | |||||
* Dan T. Moore | Director | |||||
* Ronna Romney | Director | |||||
* James W. Wert | Director | |||||
| * | The undersigned, pursuant to a Power of Attorney executed by each of the directors and officers identified above and filed with the Securities and Exchange Commission, by signing his name hereto, does hereby sign and execute this report on behalf of each of the persons noted above, in the capacities indicated. |
March 28, 20088, 2011
| By: | /s/ |
6665
ANNUAL REPORT ONFORM 10-K
PARK-OHIO INDUSTRIES, INC.
PARK-OHIO INDUSTRIES, INC.
For the Year Ended December 31, 20072010
EXHIBIT INDEX
Exhibit | ||||
| 3 | .1 | Amended and Restated Articles of Incorporation of Park-Ohio Holdings Corp. (filed as Exhibit 3.1 to theForm 10-K of Industries, Inc. for the year ended December 31, 1998, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 3 | .2 | Code of Regulations of Park-Ohio Industries, Inc. (filed as Exhibit 3.2 to theForm 10-K of Park-Ohio Industries, Inc. for the year ended December 31, 1998, SEC FileNo. 333-43005 and incorporated by reference and made a part hereof) | ||
| 4 | .1 | Second Amended and Restated Credit Agreement, dated June 20, 2007, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders thereto and JP Morgan Chase Bank, N.A. (successor by merger to Bank One, NA), as agent (filed as exhibit 4.1 toForm 8-K of Park-Ohio Holdings Corp. on June 26, 2007, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof). | ||
| 4 | .2 | Indenture, dated as of November 30, 2004, among Park-Ohio Industries, Inc., the Guarantors (as defined therein) and Wells Fargo Bank, NA, as trustee (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 10 | .1 | Form of Indemnification Agreement entered into between Park-Ohio Industries, Inc. and each of its directors and certain officers (filed as Exhibit 10.1 to theForm 10-K of Park-Ohio Industries, Inc. for the year ended December 31, 1998, SEC FileNo. 333-43005 and incorporated by reference and made a part hereof) | ||
| 10 | .2* | Amended and Restated 1998 Long-Term Incentive Plan (filed as Appendix A to the Definitive Proxy Statement of Park-Ohio Holdings Corp., filed on April 23, 2001, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 24 | .1 | Power of Attorney | ||
| 31 | .1 | Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31 | .2 | Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | .1 | Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002 | ||
Exhibit | ||||
| 3 | .1 | Amended and Restated Articles of Incorporation of Park-Ohio Holdings Corp. (filed as Exhibit 3.1 to theForm 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 1998, SECFile No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 3 | .2 | Code of Regulations of Park-Ohio Holdings Corp. (filed as Exhibit 3.2 to theForm 10-K ofPark-Ohio Holdings Corp. for the year ended December 31, 1998, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 4 | .1 | Third Amended and Restated Credit Agreement, dated March 8, 2010, among Park-Ohio Industries, Inc., RB&W Corporation of Canada Inc., the Ex-Im Borrowers party thereto, the other loan parties thereto, the lenders party thereto and JP Morgan Chase Bank, N.A., as Administrative Agent, JP Morgan Chase Bank, N.A. Toronto Branch, as Canadian Agent, RBS Business Capital as Syndication Agent, Key Bank National Association , as Co-Documentation Agent, JP Morgan Securities Inc., as Sole Lead Arranger, PNC Bank, National Association, as Joint Bookrunner and U.S. Bank National Association, as Co-Documentation Agent and Joint Bookrunner (filed as Exhibit 4.1 to theForm 10-Q of Park-Ohio Holdings Corp., filed on May 10, 2010, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 4 | .2 | Consent and Amendment No. 1 to Third Amended and Restated Credit Agreement, dated July 9, 2010, among Park-Ohio Industries, Inc., RB&W Corporation of Canada, the Ex-Im Borrowers party to the Credit Agreement, the other loan parties to the Credit Agreement, the lenders party to the Credit Agreement, JP Morgan Chase Bank, N.A., as Administrative Agent, and JP Morgan Chase Bank, N.A., Toronto Branch, as Canadian Agent (filed as Exhibit 4.1 to the Form10-Q of Park-Ohio Holdings Corp., filed on November 15, 2010, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 4 | .3 | Consent and Amendment No. 2 to Third Amended and Restated Credit Agreement, dated August 31, 2010, among Park-Ohio Industries, Inc., RB&W Corporation of Canada, the Ex-Im Borrowers party to the Credit Agreement, the other loan parties to the Credit Agreement, the lenders party to the Credit Agreement, JP Morgan Chase Bank, N.A., as Administrative Agent, and JP Morgan Chase Bank, N.A., Toronto Branch, as Canadian Agent (filed as Exhibit 4.1 to theForm 10-Q of Park-Ohio Holdings Corp., filed on November 15, 2010, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 4 | .4 | Indenture, dated as of November 30, 2004, among Park-Ohio Industries, Inc., the Guarantors (as defined therein) and Wells Fargo Bank, NA, as trustee (filed as Exhibit 4.1 to theForm 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 10 | .1 | Form of Indemnification Agreement entered into between Park-Ohio Holdings Corp. and each of its directors and certain officers (filed as Exhibit 10.1 to theForm 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 1998, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 10 | .2* | Amended and Restated 1998 Long-Term Incentive Plan (filed as Exhibit 10.1 toForm 8-K ofPark-Ohio Holdings Corp., filed on June 3, 2009, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 10 | .3* | Park-Ohio Holdings Corp. Annual Cash Bonus Plan (filed as Exhibit 10.2 to theForm 8-K forPark-Ohio Holdings Corp, filed June 1, 2006, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 10 | .4* | Supplemental Executive Retirement Plan for Edward F. Crawford, effective as of March 10, 2008 (filed as Exhibit 10.9 toForm 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 2007, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
66
Exhibit | ||||
| 10 | .5* | Non-qualified Defined Contribution Retirement Benefit Letter Agreement for Edward F. Crawford, dated March 10, 2008 (filed as Exhibit 10.10 toForm 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 2007, SEC FileNo. 000-03134 and incorporated by reference and made a part hereof) | ||
| 10 | .6 | Agreement of Settlement and Release, dated July 1, 2008 (filed as Exhibit 10.1 toForm 10-Q of Park-Ohio Holdings Corp. for the quarter ended September 30, 2008, SEC FileNo. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 10 | .12 | Asset Purchase Agreement, dated as of August 31, 2010, by and among Assembly Component Systems, Inc., Lawson Products, Inc., Supply Technologies LLC and Park-Ohio Industries, Inc. (filed as Exhibit 10.1 to the Form 10-Q of Park-Ohio Holdings Corp., filed on November 15, 2010, SEC File No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 10 | .13 | Bill of Sale, dated September 30, 2010, by Rome Die Casting LLC and Johnny Johnson in favor of General Aluminum Mfg. Company (filed as Exhibit 10.2 to the Form 10-Q of Park-Ohio Holdings Corp., filed on November 15, 2010, SEC File No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 24 | .1 | Power of Attorney | ||
| 31 | .1 | Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31 | .2 | Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | .1 | Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| * | Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 15(c) of this Report. |
67