Park Ohio Industries 10-Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number 333-43005

Park-Ohio Industries, Inc.

(Exact name of registrant as specified in its charter)

Ohio	34-6520107
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
23000 Euclid Avenue, Cleveland, Ohio (Address of principal executive offices)	44117 (Zip Code)

216/692-7200

(Registrant’s telephone number, including area code)

Pursuant to a corporate reorganization effective June 15, 1998, Park-Ohio Industries, Inc.

became a wholly-owned subsidiary of Park-Ohio Holdings Corp.

The registrant meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form in reduced disclosure format.

Indicate by check mark whether the registrant:

(1)	Has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2)	Has been subject to such filing requirements for the past 90 days.

      Yes þ          No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o          Accelerated Filer o          Non-Accelerated Filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

      Yes o          No þ

All of the outstanding capital stock of the registrant is held by Park-Ohio Holdings Corp. As of July 31, 2006, 100 shares of the registrant’s common stock, $1 par value, were outstanding.

The Exhibit Index is located on page 29.

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Consolidated balance sheets — June 30, 2006 and December 31, 2005		3
	Consolidated statements of income — Three months and six months ended June 30, 2006 and 2005		4
	Consolidated statement of shareholder’s equity — Six months ended June 30, 2006		5
	Consolidated statements of cash flows — Six months ended June 30, 2006 and 2005		6
	Notes to consolidated financial statements — June 30, 2006		7
	Report of Independent Registered Public Accounting Firm		19
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		25
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		26
Item 1A.	Risk Factors		27
Item 6.	Exhibits		27
SIGNATURE			28
EXHIBIT INDEX			29
Exhibit 31.1
Exhibit 31.2
Exhibit 32

2

PART I. Financial Information

ITEM 1.  Financial Statements

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

			(Unaudited)
			June 30,		December 31,
			2006		2005
			(Dollars in thousands)
ASSETS
Current Assets
	Cash and cash equivalents		$	16,201	$	17,868
	Accounts receivable, less allowances for doubtful accounts of $3,889 at June 30, 2006 and $5,120 at December 31, 2005			187,869		153,502
	Inventories			227,536		190,553
	Deferred tax assets			8,627		8,627
	Other current assets			17,624		27,753
		Total Current Assets		457,857		398,303
Property, Plant and Equipment				249,025		243,367
	Less accumulated depreciation			139,994		130,265
				109,031		113,102
Other Assets
	Goodwill			85,418		82,703
	Net assets held for sale			5,186		-0-
	Other			70,147		70,617
			$	727,639	$	664,725
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
	Trade accounts payable		$	135,161	$	115,396
	Accrued expenses			66,932		65,184
	Current portion of long-term liabilities			5,557		4,161
		Total Current Liabilities		207,650		184,741
Long-Term Liabilities, less current portion 8.375% Senior Subordinated Notes due 2014				210,000		210,000
	Revolving credit			157,400		128,300
	Other long-term debt			6,116		6,705
	Deferred tax liability			3,176		3,176
	Other postretirement benefits and other long-term liabilities			24,967		26,174
				401,659		374,355
Shareholder’s Equity
	Common Stock, par value $1 a share			-0-		-0-
	Additional paid-in capital			64,844		64,844
	Retained earnings			53,005		42,887
	Accumulated other comprehensive income (loss)			481		(2,102	)
				118,330		105,629
			$	727,639	$	664,725

Note:  The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See notes to consolidated financial statements.

3

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2006		2005		2006		2005
		(Amounts in thousands)
Net sales		$	268,453	$	228,795	$	528,674	$	457,678
Cost of products sold			230,738		193,429		454,072		387,216
	Gross profit		37,715		35,366		74,602		70,462
Selling, general and administrative expenses			21,953		20,264		43,406		41,823
	Operating income		15,762		15,102		31,196		28,639
Interest expense			7,735		6,715		15,105		13,174
	Income before income taxes		8,027		8,387		16,091		15,465
Income taxes			2,900		710		5,973		1,509
	Net income	$	5,127	$	7,677	$	10,118	$	13,956

See notes to consolidated financial statements.

4

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY (UNAUDITED)

								Accumulated
								Other
				Additional				Comprehensive
		Common		Paid-In		Retained		Income
		Stock		Capital		Earnings		(Loss)			Total
		(Dollars in thousands)
Balance at January 1, 2006		$	-0-	$	64,844	$	42,887	$	(2,102	)	$	105,629
Comprehensive income:
	Net income						10,118					10,118
	Foreign currency translation adjustment								2,583			2,583
	Comprehensive income											12,701
Balance at June 30, 2006		$	-0-	$	64,844	$	53,005	$	481		$	118,330

See notes to consolidated financial statements.

5

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

				Six Months Ended
				June 30,
				2006			2005
				(Dollars in thousands)
OPERATING ACTIVITIES
	Net income			$	10,118		$	13,956
	Adjustments to reconcile net income to net cash used by operating activities:
		Depreciation and amortization			9,827			8,876
	Changes in operating assets and liabilities:
		Accounts receivable			(33,655	)		(9,181	)
		Inventories and other current assets			(26,232	)		(13,068	)
		Accounts payable and accrued expenses			20,605			(14,147	)
		Other			(1,495	)		(3,090	)
			Net Cash Used by Operating Activities		(20,832	)		(16,654	)
INVESTING ACTIVITIES
	Purchases of property, plant and equipment, net				(7,523	)		(7,665	)
	Acquisitions, net of cash acquired				(3,219	)		-0-
	Proceeds from sale of assets held for sale				-0-			1,100
		Net Cash Used by Investing Activities			(10,742	)		(6,565	)
FINANCING ACTIVITIES
	Proceeds from debt, net				29,907			17,476
		Net Cash Provided by Financing Activities			29,907			17,476
Decrease in Cash and Cash Equivalents					(1,667	)		(5,743	)
Cash and Cash Equivalents at Beginning of Period					17,868			6,407
Cash and Cash Equivalents at End of Period				$	16,201		$	664
Taxes paid				$	3,022		$	1,334
Interest paid					13,897			11,328

See notes to consolidated financial statements.

6

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2006

(Amounts in Thousands)

NOTE A — Basis of Presentation

      The consolidated financial statements include the accounts of Park-Ohio Industries, Inc. and its subsidiaries (“Park-Ohio” or the “Company”). Park-Ohio is a wholly-owned subsidiary of Park-Ohio Holdings Corp. All significant intercompany transactions have been eliminated in consolidation.

      The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.

NOTE B — Recent Accounting Pronouncements

      In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” The statement changes the requirements for the accounting and reporting of a change in accounting principle and is applicable to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement if that pronouncement does not include specific transition provisions. The statement requires retrospective application to prior periods’ financial statements of changes in accounting principle unless it is impractical to determine the period specific effects or the cumulative effect of the change. The correction of an error by the restatement of previously issued financial statements is also addressed by the statement. The Company adopted this statement effective January 1, 2006 as prescribed and its adoption did not have any impact on the Company’s results of operations or financial condition.

      In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a “more likely than not” threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. This interpretation is effective for the Company as of January 1, 2007. We are currently evaluating the impact of FIN 48 on our financial statements.

NOTE C — Acquisitions

      In January 2006, the Company completed the acquisition of all of the shares of Foundry Service GmbH (“Foundry Service”) for approximately $3,219, which resulted in additional goodwill of $2,313. The acquisition was funded with borrowings from foreign subsidiaries of the Company. The acquisition was not deemed significant as defined in Regulation S-X.

      On December 23, 2005, the Company completed the acquisition of the assets of Lectrotherm, Inc. (“Lectrotherm”) for $5,125 in cash. The acquisition was funded with borrowings under the Company’s revolving credit facility. The purchase price and the results of operations of Lectrotherm prior to its date of

7

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

acquisition were not deemed significant as defined in Regulation S-X. The preliminary allocation of the purchase price has been performed based on the assignments of fair values to assets acquired and liabilities assumed. The allocation of the purchase price is as follows:

Cash acquisition price, less cash acquired		$	4,698
Assets
	Accounts receivable		(2,640	)
	Inventories		(954	)
	Prepaid expenses		(97	)
	Equipment		(871	)
	Other assets		(545	)
Liabilities
	Accrued expenses		409
Goodwill		$	-0-

      On July 20, 2005, the Company completed the acquisition of the assets of Purchased Parts Group, Inc. (“PPG”) for $7,000 in cash, $1,346 in the form of a short-term note payable and the assumption of approximately $12,787 of trade liabilities. The acquisition was funded with borrowings under the Company’s revolving credit facility. The purchase price and the results of operations of PPG prior to its date of acquisition were not deemed significant as defined in Regulation S-X. The results of operations for PPG have been included in the Company’s financial statements since July 20, 2005. The final allocation of the purchase price is as follows:

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-

      The Company has a plan for integration activities. In accordance with FASB EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” the Company recorded

8

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

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 and			Exit 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	)		(356	)		(399	)
Transfers		(56	)		56			-0-
Balance at June 30, 2006	$	-0-		$	456		$	456

NOTE D — Inventories

      The components of inventory consist of the following:

	June 30,		December 31,
	2006		2005
Finished goods	$	154,981	$	128,465
Work in process		40,730		32,547
Raw materials and supplies		31,825		29,541
	$	227,536	$	190,553

NOTE E — Pension Plans and Other Postretirement Benefits

      The components of net periodic benefit cost recognized during the periods indicated were as follows:

	Pension Benefits												Postretirement Benefits
	Three Months						Six Months						Three Months						Six Months
	Ended						Ended						Ended						Ended
	June 30,						June 30,						June 30,						June 30,
	2006			2005			2006			2005			2006			2005			2006			2005
Service costs	$	87		$	97		$	174		$	194		$	50		$	35		$	100		$	70
Interest costs		726			796			1,452			1,592			323			348			646			696
Expected return on plan assets		(2,078	)		(2,211	)		(4,156	)		(4,422	)		-0-			-0-			-0-			-0-
Transition obligation		(12	)		(12	)		(24	)		(24	)		-0-			-0-			-0-			-0-
Amortization of prior service cost		39			41			78			82			(16	)		(17	)		(32	)		(34	)
Recognized net actuarial (gain) loss		81			(60	)		162			(120	)		94			50			188			100
Benefit (income) costs	$	(1,157	)	$	(1,349	)	$	(2,314	)	$	(2,698	)	$	451		$	416		$	902		$	832

NOTE F — Segments

      The Company operates through three segments: Integrated Logistics Solutions (“ILS”), Aluminum Products and Manufactured Products. ILS is a leading supply chain logistics provider of production components to large, multinational manufacturing companies, other manufacturers and distributors. In connection with the supply of such production components, ILS provides a variety of value-added, cost-

9

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

effective supply chain management services. Aluminum Products manufactures cast aluminum components for automotive, agricultural equipment, heavy-duty truck and construction equipment. 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.

      Results by business segment were as follows:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2006			2005			2006			2005
Net sales:
	ILS	$	150,338		$	129,515		$	300,497		$	256,402
	Aluminum products		44,913			43,094			87,615			85,984
	Manufactured products		73,202			56,186			140,562			115,292
		$	268,453		$	228,795		$	528,674		$	457,678
Income before income taxes:
	ILS	$	10,231		$	8,271		$	20,653		$	16,475
	Aluminum products		2,396			3,481			4,436			5,904
	Manufactured products		6,132			5,949			11,794			11,762
			18,759			17,701			36,883			34,141
Corporate costs			(2,997	)		(2,599	)		(5,687	)		(5,502	)
Interest expense			(7,735	)		(6,715	)		(15,105	)		(13,174	)
		$	8,027		$	8,387		$	16,091		$	15,465

		June 30,		December 31,
		2006		2005
Identifiable assets were as follows:
	ILS	$	358,662	$	323,176
	Aluminum products		113,782		101,489
	Manufactured products		207,126		169,004
	General corporate		48,069		71,056
		$	727,639	$	664,725

NOTE G — Comprehensive Income

      Total comprehensive income was as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006		2005			2006		2005
Net income	$	5,127	$	7,677		$	10,118	$	13,956
Foreign currency translation		2,105		(1,018	)		2,583		(689	)
Total comprehensive income	$	7,232	$	6,659		$	12,701	$	13,267

10

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

      The components of accumulated comprehensive income (loss) at June 30, 2006 and December 31, 2005 are as follows:

	June 30,			December 31,
	2006			2005
Foreign currency translation adjustment	$	5,839		$	3,256
Minimum pension liability		(5,358	)		(5,358	)
	$	481		$	(2,102	)

NOTE H — Restructuring Activities

      The Company has responded to the economic downturn by reducing costs in a variety of ways, including restructuring businesses and selling non-core manufacturing assets. These activities generated restructuring and asset impairment charges in 2001, 2002, 2003 and 2005, as the Company’s restructuring efforts continued and evolved. For further details on the restructuring activities, see Note M to the audited financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

      The accrued liability balance for severance and exit costs and related cash payments during the first six months of 2006 consisted of:

Balance at December 31, 2005	$	596
Cash payments		(179	)
Balance at June 30, 2006	$	417

NOTE I — Accrued Warranty Costs

      The Company estimates the amount of warranty claims on sold products that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. The following table presents the changes in the Company’s product warranty liability:

Balance at January 1, 2006		$	3,566
	Claims paid during the year		(1,246	)
	Additional warranties issued during the year		1,862
	Acquired warranty liabilities		164
Balance at June 30, 2006		$	4,346

NOTE J — Financing Arrangements

      On June 9, 2006, Park-Ohio, the other loan parties thereto, the lenders party thereto and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA), as agent, entered into a Fourth Amendment to the Amended and Restated Credit Agreement dated November 5, 2003, which among other things, increases the availability under the credit facility from $200,000 to $220,000 and increases the availability of letters of credit from $20,000 to $40,000.

NOTE K — Income Taxes

      In 2006, the Company began recording a quarterly provision for federal income taxes resulting in a total effective income tax rate of approximately 37%, compared to 10% for the corresponding period in 2005. Only foreign and state income taxes were provided for in 2005 because federal income taxes were offset by net

11

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

operating loss carryforwards that were not recognized previously. At December 31, 2005, the Company had net operating loss carryforwards of approximately $41,000, which should preclude the cash payment of federal income taxes in 2006. In the fourth quarter of 2006, if a portion or all of its remaining deferred tax asset will more likely than not be realized, the Company will reverse into income the appropriate portion of its remaining tax valuation allowance of approximately $5,000.

NOTE L — Derivatives and Hedging

      The Company recognizes all derivative financial instruments as either assets or liabilities at fair value. The Company has no derivative instruments that are classified as fair value hedges. Changes in the fair value of derivative instruments that are classified as cash flow hedges are recognized in other comprehensive income until such time as the hedged items are recognized in net income.

      During the first half of 2006, the Company entered into forward contracts for the purpose of hedging exposure to changes in the value of accounts receivable, primarily euros against the U.S. dollar, for a notional amount of $1,000, of which $545 was outstanding at June 30, 2006. These transactions are considered cash flow hedges. The fair market value of these transactions at June 30, 2006 was approximately $577 and therefore, $32 has been recognized in other comprehensive income (loss). Because there is no ineffectiveness on the cash flow hedges, all changes in fair value of these derivatives are recorded in equity and not included in the current period’s income statement.

NOTE M — 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 Company’s 8.375% Senior Subordinated Notes due 2014. 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 June 30, 2006 and December 31, 2005, consolidating condensed statements of income for the three months and six months ended June 30, 2006 and 2005, consolidating condensed statements of cash flows for the six months ended June 30, 2006 and 2005 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.

12

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2006

						Combined		Combined
						Guarantor		Non-Guarantor			Reclassifications/
			Parent			Subsidiaries		Subsidiaries			Eliminations			Consolidated
			(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	(21,506	)	$	11,376	$	8,825		$	17,506		$	16,201
	Accounts receivable, net			(300	)		161,168		27,001			-0-			187,869
	Inventories			-0-			186,735		40,801			-0-			227,536
	Other current assets			881			8,732		1,837			6,174			17,624
	Deferred tax assets			-0-			-0-		-0-			8,627			8,627
		Total Current Assets		(20,925	)		368,011		78,464			32,307			457,857
Investment in subsidiaries				379,877			12,110		(12,110	)		(379,877	)		-0-
Inter-company advances				307,543			429,080		3,490			(740,113	)		-0-
Property, Plant and Equipment, net				2,510			97,049		12,610			(3,138	)		109,031
Other Assets:
	Goodwill			-0-			78,424		6,994			-0-			85,418
	Net assets held for sale			-0-			-0-		-0-			5,186			5,186
	Other			34,178			37,335		682			(2,048	)		70,147
		Total Other Assets		34,178			115,759		7,676			3,138			160,751
		Total Assets	$	703,183		$	1,022,009	$	90,130		$	(1,087,683	)	$	727,639
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities:
	Trade accounts payable		$	3,395		$	103,638	$	12,775		$	15,353		$	135,161
	Accrued expenses			5,791			36,768		18,922			5,451			66,932
	Current portion of long-term liabilities			-0-			1,035		2,005			2,517			5,557
		Total Current Liabilities		9,186			141,441		33,702			23,321			207,650
Long-Term Liabilities, less current portion
	8.375% Senior Subordinated Notes due 2014			210,000			-0-		-0-			-0-			210,000
	Revolving credit maturing on December 31, 2010			157,400			-0-		-0-			-0-			157,400
	Other long-term debt			-0-			34,326		2,758			(30,968	)		6,116
	Deferred tax liability			-0-			-0-		-0-			3,176			3,176
	Other postretirement benefits and other long-term liabilities			3,435			21,520		2,529			(2,517	)		24,967
		Total Long-Term Liabilities		370,835			55,846		5,287			(30,309	)		401,659
Inter-company advances				210,588			517,013		14,653			(742,254	)		-0-
Shareholder’s Equity				112,574			307,709		36,488			(338,441	)		118,330
		Total Liabilities and Shareholder’s Equity	$	703,183		$	1,022,009	$	90,130		$	(1,087,683	)	$	727,639

13

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2005

						Combined		Combined
						Guarantor		Non-Guarantor		Reclassifications/
			Parent			Subsidiaries		Subsidiaries		Eliminations			Consolidated
			(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	(11,036	)	$	626	$	11,899	$	16,379		$	17,868
	Accounts receivable, net			-0-			129,302		24,200		-0-			153,502
	Inventories			-0-			160,775		29,778		-0-			190,553
	Other current assets			464			20,029		1,147		6,113			27,753
	Deferred tax assets			-0-			-0-		-0-		8,627			8,627
		Total Current Assets		(10,572	)		310,732		67,024		31,119			398,303
Investment in subsidiaries				290,802			-0-		-0-		(290,802	)		-0-
Inter-company advances				359,963			372,156		8,208		(740,327	)		-0-
Property, Plant and Equipment, net				2,536			98,046		12,520		-0-			113,102
Other Assets:
	Goodwill			-0-			78,424		4,279		-0-			82,703
	Other			34,724			37,530		686		(2,323	)		70,617
		Total Other Assets		34,724			115,954		4,965		(2,323	)		153,320
		Total Assets	$	677,453		$	896,888	$	92,717	$	(1,002,333	)	$	664,725
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities:
	Trade accounts payable		$	3,348		$	87,666	$	9,778	$	14,604		$	115,396
	Accrued expenses			1,643			43,718		14,763		5,060			65,184
	Current portion of long-term liabilities			-0-			11,054		590		(7,483	)		4,161
		Total Current Liabilities		4,991			142,438		25,131		12,181			184,741
Long-Term Liabilities, less current portion
	8.375% Senior Subordinated Notes due 2014			210,000			-0-		-0-		-0-			210,000
	Revolving credit maturing on December 31, 2010			128,300			-0-		-0-		-0-			128,300
	Other long-term debt			-0-			34,533		3,140		(30,968	)		6,705
	Deferred tax liability			-0-			-0-		-0-		3,176			3,176
	Other postretirement benefits and other long-term liabilities			4,115			21,501		3,076		(2,518	)		26,174
		Total Long-Term Liabilities		342,415			56,034		6,216		(30,310	)		374,355
Inter-company advances				227,614			415,558		17,674		(660,846	)		-0-
Shareholder’s Equity				102,433			282,858		43,696		(323,358	)		105,629
		Total Liabilities and Shareholder’s Equity	$	677,453		$	896,888	$	92,717	$	(1,002,333	)	$	664,725

14

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2006

					Combined		Combined
					Guarantor		Non-Guarantor
		Parent			Subsidiaries		Subsidiaries		Eliminations			Consolidated
		(In thousands)
Net sales		$	-0-		$	236,691	$	31,762		-0-		$	268,453
Cost of sales			-0-			206,736		24,002		-0-			230,738
Gross profit			-0-			29,955		7,760		-0-			37,715
Operating Expenses:
	Selling, general and administrative expenses		836			16,997		3,970		150			21,953
Operating Income (loss)			(836	)		12,958		3,790		(150	)		15,762
Interest expense			(1,656	)		9,023		518		(150	)		7,735
Income before income taxes			820			3,935		3,272		-0-			8,027
Income taxes			1,498			-0-		1,402		-0-			2,900
	Net income (loss)	$	(678	)	$	3,935	$	1,870	$	-0-		$	5,127

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2005

					Combined		Combined
					Guarantor		Non-Guarantor
		Parent			Subsidiaries		Subsidiaries		Eliminations			Consolidated
		(In thousands)
Net sales		$	-0-		$	203,545	$	26,984	$	(1,734	)	$	228,795
Cost of sales			-0-			173,373		21,790		(1,734	)		193,429
Gross profit			-0-			30,172		5,194		-0-			35,366
Operating Expenses:
	Selling, general and administrative expenses		392			16,520		3,202		150			20,264
Operating Income (loss)			(392	)		13,652		1,992		(150	)		15,102
Interest expense			(1,482	)		7,811		536		(150	)		6,715
Income before income taxes			1,090			5,841		1,456		-0-			8,387
Income taxes			146			-0-		564		-0-			710
	Net income	$	944		$	5,841	$	892	$	-0-		$	7,677

15

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2006

					Combined		Combined
					Guarantor		Non-Guarantor
		Parent			Subsidiaries		Subsidiaries		Eliminations			Consolidated
		(In thousands)
Net sales		$	-0-		$	464,682	$	63,992		-0-		$	528,674
Cost of sales			-0-			404,302		49,770		-0-			454,072
Gross profit			-0-			60,380		14,222		-0-			74,602
Operating Expenses:
	Selling, general and administrative expenses		1,345			34,282		7,479		300			43,406
Operating Income (loss)			(1,345	)		26,098		6,743		(300	)		31,196
Interest expense			(3,113	)		17,619		899		(300	)		15,105
Income before income taxes			1,768			8,479		5,844		-0-			16,091
Income taxes			3,629			25		2,319		-0-			5,973
	Net income (loss)	$	(1,861	)	$	8,454	$	3,525	$	-0-		$	10,118

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2005

					Combined		Combined
					Guarantor		Non-Guarantor
		Parent			Subsidiaries		Subsidiaries		Eliminations			Consolidated
		(In thousands)
Net sales		$	-0-		$	406,194	$	55,635	$	(4,151	)	$	457,678
Cost of sales			-0-			346,870		44,497		(4,151	)		387,216
Gross profit			-0-			59,324		11,138		-0-			70,462
Operating Expenses:
	Selling, general and administrative expenses		2,513			32,652		6,358		300			41,823
Operating Income (loss)			(2,513	)		26,672		4,780		(300	)		28,639
Interest expense			(2,906	)		15,308		1,072		(300	)		13,174
Income before income taxes			393			11,364		3,708		-0-			15,465
Income taxes			(515	)		-0-		2,024		-0-			1,509
	Net income	$	908		$	11,364	$	1,684	$	-0-		$	13,956

16

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 Six Months Ended June 30, 2006

					Combined			Combined
					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
		(In thousands)
Net cash provided (used) by operations		$	(38,311	)	$	17,436		$	43		$	-0-	$	(20,832	)
Cash flows from investing activities:
	Acquisitions, net of cash acquired		-0-			-0-			(3,219	)		-0-		(3,219	)
	Purchases of property, plant and equipment, net		(132	)		(6,460	)		(931	)		-0-		(7,523	)
Net cash provided (used) in investing activities			(132	)		(6,460	)		(4,150	)		-0-		(10,742	)
Cash flows from financing activities:
	Proceeds from bank arrangements		29,100			-0-			1,033			-0-		30,133
	Principal payments on revolving credit and long-term debt		-0-			(226	)		-0-			-0-		(226	)
Net cash provided (used) by financing activities			29,100			(226	)		1,033			-0-		29,907
Increase (decrease) in cash and cash equivalents			(9,343	)		10,750			(3,074	)		-0-		(1,667	)
Cash and cash equivalents at beginning of period			5,343			626			11,899			—		17,868
Cash and cash equivalents at end of period		$	(4,000	)	$	11,376		$	8,825		$	-0-	$	16,201

17

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 Six Months Ended June 30, 2005

					Combined			Combined
					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
		(In thousands)
Net cash provided (used) by operations		$	(45,135	)	$	29,496		$	(1,015	)	$	-0-	$	(16,654	)
Cash flows from investing activities:
	Purchases of property, plant and equipment, net		(203	)		(6,335	)		(1,127	)		-0-		(7,665	)
	Proceeds from sale of assets held for sale		-0-			1,100			-0-			-0-		1,100
Net cash provided (used) in investing activities			(203	)		(5,235	)		(1,127	)		-0-		(6,565	)
Cash flows from financing activities:
	Proceeds from revolving credit arrangements		15,000			-0-			2,701			-0-		17,701
	Principal payments on revolving credit and long-term debt		-0-			(225	)		-0-			-0-		(225	)
Net cash provided (used) by financing activities			15,000			(225	)		2,701			-0-		17,476
Increase (decrease) in cash and cash equivalents			(30,338	)		24,036			559			-0-		(5,743	)
Cash and cash equivalents at beginning of period			(643	)		199			6,851			-0-		6,407
Cash and cash equivalents at end of period		$	(30,981	)	$	24,235		$	7,410		$	-0-	$	664

18

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholder

Park-Ohio Industries, Inc.

      We have reviewed the accompanying consolidated balance sheet of Park-Ohio Industries, Inc. and subsidiaries as of June 30, 2006 and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2006 and 2005, the consolidated statement of shareholder’s equity for the six-month period ended June 30, 2006 and the consolidated statements of cash flows for the six-month periods ended June 30, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

      We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

      Based upon our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

      We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Park-Ohio Industries, Inc. and subsidiaries as of December 31, 2005 and the related consolidated statements of income, shareholder’s equity, and cash flows for the year then ended, not presented herein, and in our report dated March 13, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Cleveland, Ohio

August 8, 2006

19

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

      Our consolidated financial statements include the accounts of Park-Ohio Industries, Inc. and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Financial information for the three-month and six-month periods ended June 30, 2006 is not directly comparable to the financial information for the same periods in 2005 primarily due to acquisitions.

Executive Overview

      We are an industrial supply chain logistics and diversified manufacturing business, operating in three segments: ILS, Aluminum Products and Manufactured Products. ILS provides customers with integrated supply chain management services for a broad range of high-volume, specialty production components. ILS customers receive various value-added services, such as engineering and design services, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking,just-in-time and point-of use delivery, electronic billing and ongoing technical support. The principal customers of ILS are in the heavy-duty truck, automotive and vehicle parts, electrical distribution and controls, power sports/fitness equipment, HVAC, aerospace and defense, electrical components, appliance and semiconductor equipment industries.

      Aluminum Products casts and machines aluminum engine, transmission, brake, suspension and other components such as pump housings, clutch retainers/pistons, control arms, knuckles, master cylinders, pinion housings, brake calipers, oil pans and flywheel spacers for automotive, agricultural equipment, construction equipment, 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 F to the consolidated financial statements.

      Sales and pre-tax profitability continued to grow substantially in the first six months of 2006. Net sales increased 16%, to $528.7 million, and pre-tax income grew 4% to $16.1 million. We recorded income tax expense of $6.0 million in the first six months of 2006, an effective income tax rate of 37%, compared to $1.5 million, or an effective income tax rate of 10% in the first six months of 2005. No federal income taxes were expensed in the first half of 2005 due to our deferred tax valuation allowance, of which a portion was reversed at the end of 2005. This resulted in net income of $10.1 million for the first six months of 2006, compared to $14.0 million in the same period of 2005.

      Sales and profitability grew substantially in 2004 and 2005 as result of new business development, growth in domestic and international manufacturing economies, and acquisitions. Net sales increased 30% and 15% in 2004 and 2005, respectively. We reported net income of $14.5 million in 2004, which grew 118% in 2005 to $31.6 million. 2005 net income was affected by a $7.3 million reversal of our domestic deferred tax asset valuation allowance and $1.8 million of restructuring charges ($.8 million reflected in Cost of products sold and $1.0 million in Restructuring and impairment charges).

      During 2004, we reinforced our long-term availability and attractive pricing of funds by refinancing both of our major sources of borrowed funds: senior subordinated notes and our revolving credit facility. In November 2004, we sold $210.0 million of 8.375% senior subordinated notes due 2014. We used the net proceeds to fund the tender and early redemption of $199.9 million of our 9.25% senior subordinated notes due 2007. We incurred debt extinguishment costs primarily related to premiums and other transaction costs

20

associated with the tender offer and early redemption and wrote off deferred financing costs totaling $6.0 million associated with the repurchased 9.25% senior subordinated notes.

      We recently made two acquisitions to build on the success of our induction heating and melting systems business. In December 2005, we acquired the assets of Lectrotherm, in Canton, Ohio, for $5.1 million in cash, and in January 2006 we acquired the stock of Foundry Service, in Germany, for $3.2 million in cash. These acquisitions augment our existing, high-margin aftermarket induction business, and increased our presence, revenues and profits in Germany, an important capital equipment market. We funded these acquisitions with borrowings from our revolving credit facilities and funds from foreign subsidiaries.

      We acquired substantially all the assets of PPG, a provider of supply chain management services for a broad range of production components, in July 2005, for $7.0 million in cash funded with borrowings from our revolving credit facility, $1.3 million in the form of a short-term note payable and the assumption of approximately $12.8 million of trade liabilities. This acquisition added significantly to the customer and supplier bases, and expanded the geographic presence of, our ILS segment. ILS has already eliminated substantial overhead cost and begun the process of consolidating redundant service centers.

Results of Operations

Six Months 2006 versus Six Months 2005

Net Sales by Segment:

	Six Months
	Ended June 30,									Acquired/
							Percent			(Divested)
	2006		2005		Change		Change			Sales
ILS	$	300.5	$	256.4	$	44.1		17	%	$	28.0
Aluminum products		87.6		86.0		1.6		2	%		0.0
Manufactured products		140.6		115.3		25.3		22	%		11.4
Consolidated net sales	$	528.7	$	457.7	$	71.0		16	%	$	39.4

      Net sales increased by 16% in the first six months of 2006 compared to the same period in 2005. ILS sales increased 17% primarily due to the July 2005 acquisition of PPG, general economic growth, particularly as a result of significant growth in the heavy-duty truck industry, the addition of new customers and increases in product range to existing customers. Aluminum Products sales increased 2% primarily due to passed-through aluminum cost increases. Manufactured Products sales increased 22% primarily in the induction, pipe threading equipment, rubber and forging businesses. Of this increase, $11.4 million was due to the acquisitions of Lectrotherm and Foundry Service by the induction business in December 2005 and January 2006, respectively.

Cost of Products Sold & Gross Profit:

	Six Months
	Ended June 30,
									Percent
	2006			2004			Change		Change
Consolidated cost of products sold	$	454.1		$	387.2		$	66.9		17	%
Consolidated gross profit	$	74.6		$	70.5		$	4.1		6	%
Gross margin		14.1	%		15.4	%

      Cost of products sold increased 17% in the first six months of 2006 compared to the same period in 2005, while gross margin decreased to 14.1% in the first six months of 2006 from 15.4% in the same period in 2005.

      ILS gross margin increased primarily due to increased volumes and greater recovery of steel cost increases. Aluminum Products gross margin decreased primarily due to product mix and pricing changes, plus the cost of preparations for new contracts that will start production in the fourth quarter of 2006. Gross margin

21

in the Manufactured Products segment decreased primarily as a result of operational issues in the Company’s rubber products business, and changes in contract mix and timing in the induction and pipe threading equipment businesses.Quarter-to-quarter, gross margins vary widely in Manufactured Products, and these timing issues are not expected to depress full-year 2006 gross margin for the Manufactured Products segment.

Selling, General & Administrative (“SG&A”) Expenses:

	Six Months
	Ended June 30,
									Percent
	2006			2005			Change		Change
Consolidated SG&A expenses	$	43.4		$	41.8		$	1.6		4	%
SG&A percent		8.2	%		9.1	%

      Consolidated SG&A expenses increased 4% in the first six months of 2006 compared to the same period in 2005, representing a .9% reduction in SG&A as a percent of sales. SG&A increased approximately $2.6 million due to the acquisitions of PPG, Lectrotherm and Foundry Services. SG&A expenses were increased in the first six months 2006 compared to 2005 by a $.4 million decrease in net pension credits reflecting reduced returns on pension plan assets.

Interest Expense:

	Six Months
	Ended June 30,
										Percent
	2006			2005			Change			Change
Interest expense	$	15.1		$	13.2		$	1.9			14	%
Average outstanding borrowings	$	368.6		$	356.8		$	11.8			3	%
Average borrowing rate		8.20	%		7.39	%		81	basis  points

      Interest expense increased $1.9 million in the first six months of 2006 compared to the same period of 2005, primarily due to higher average interest rates and average outstanding borrowings during the first six months of 2006. The increase in average borrowings in the first six months of 2006 resulted primarily from higher working capital requirements and the purchases of PPG, Lectrotherm and Foundry Service in July and December 2005 and January 2006, respectively. The higher average borrowing rate in the first six months of 2006 was due primarily to increased interest rates under our revolving credit facility compared to the same period of 2005, which rates increased primarily as a result of actions by the Federal Reserve.

Income Tax:

      The provision for income taxes was $6.0 million in the six-month period ended June 30, 2006, a 37% effective income tax rate, compared to income taxes of $1.5 million provided in the corresponding period of 2005, a 10% effective income tax rate. In the first six months of 2005, these taxes consisted primarily of state and foreign taxes on profitable operations. Taxes in the first six months of 2006 included state and foreign taxes, but also included federal income taxes. This change resulted from the fourth-quarter 2005 reversal of a portion of our domestic deferred tax valuation allowance.

      In the fourth quarter of 2005, the Company reversed $7.3 million of its $12.3 million year-end 2005 domestic deferred tax valuation allowance. Based on strong recent and projected earnings, the Company determined that it was more likely than not that this portion of the deferred tax asset would be realized. In 2006, the Company began recording a quarterly provision for federal income taxes. Our significant net operating loss carry-forward should preclude the payment of cash federal income taxes in 2006 and 2007, and possibly beyond. In the fourth quarter of 2006, the Company will reassess the remaining tax valuation allowance. If it is determined that a portion or all of the remaining deferred tax asset will more likely than not be realized, then the appropriate portion of its remaining tax valuation allowance will be reversed into income at that time, which could increase 2006 net income by as much as $5.0 million.

22

      At December 31, 2005, our subsidiaries had $41.0 million of net operating loss carryforwards for federal tax purposes.

Second Quarter 2006 versus Second Quarter 2005

Net Sales by Segment:

	Three Months
	Ended June 30,									Acquired/
							Percent			(Divested)
	2006		2005		Change		Change			Sales
ILS	$	150.3	$	129.5	$	20.8		16	%	$	14.1
Aluminum products		44.9		43.1		1.8		4	%		0.0
Manufactured products		73.2		56.2		17.0		30	%		5.8
Consolidated net sales	$	268.4	$	228.8	$	39.6		17	%	$	19.9

      Net sales increased 17% in the second quarter of 2006 compared to the same quarter in 2005. ILS sales increased 16% primarily due to the July 20, 2005 acquisition of PPG, general economic growth, particularly as a result of significant growth in the heavy-duty truck industry, the addition of new customers and increases in product range to existing customers. Aluminum Products sales increased 4% primarily due to passed-through aluminum cost increases. Manufactured Products sales increased 30% primarily in the induction, pipe threading equipment, rubber and forging businesses. Of this increase, $5.8 million was due to the acquisitions of Lectrotherm and Foundry Service by the induction business, in December 2005 and January 2006, respectively.

Cost of Products Sold & Gross Profit:

	Three Months
	Ended June 30,
									Percent
	2006			2005			Change		Change
Consolidated cost of products sold	$	230.7		$	193.4		$	37.3		19	%
Consolidated gross profit	$	37.7		$	35.4		$	2.3		6	%
Gross margin		14.0	%		15.5	%

      Cost of products sold increased 19% in the second quarter of 2006 compared to the same quarter in 2005, while gross margin decreased to 14.0% in the second quarter of 2006 from 15.5% in the same quarter of 2005.

      ILS gross margin increased primarily due to increased volumes and greater recovery of steel cost increases. Aluminum Products gross margin decreased primarily due to product mix and pricing changes, plus the cost of preparations for new contracts that will start production in the fourth quarter of 2006. Gross margin in the Manufactured Products segment decreased primarily as a result of operational issues in the Company’s rubber products business, and changes in contract mix and timing in the induction and pipe threading equipment businesses.Quarter-to-quarter, gross margins vary widely in Manufactured Products, and these timing issues are not expected to depress full-year 2006 gross margin for the Manufactured Products segment.

SG&A Expenses:

	Three Months
	Ended June 30,
									Percent
	2006			2005			Change		Change
Consolidated SG&A expenses	$	22.0		$	20.3		$	1.7		8	%
SG&A percent		8.2	%		8.9	%

      Consolidated SG&A expenses increased 8% in the second quarter of 2006 compared to the same quarter in 2005, representing a .7% reduction in SG&A as a percent of sales. SG&A increased approximately $1.2 million due to the acquisitions of PPG, Lectrotherm and Foundry Services. SG&A expenses were

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increased in the second quarter of 2006 compared to 2005 by a $.2 million decrease in net pension credits reflecting reduced returns on pension plan assets.

Interest Expense:

	Three Months
	Ended June 30,
										Percent
	2006			2005			Change			Change
Interest expense	$	7.7		$	6.7		$	1.0			15	%
Average outstanding borrowings	$	379.3		$	361.4		$	17.9			5	%
Average borrowing rate		8.16	%		7.43	%		73	basis points

      Interest expense increased $1.0 million in the second quarter of 2006 compared to the same period of 2005, primarily due to higher average interest rates and average outstanding borrowings during the second quarter of 2006. The increase in average borrowings in the second quarter of 2006 resulted primarily from higher working capital requirements and the purchases of PPG, Lectrotherm and Foundry Service in July and December 2005 and January 2006, respectively. The higher average borrowing rate in the second quarter of 2006 was due primarily to increased interest rates under our revolving credit facility compared to the same quarter of 2005, which rates increased primarily as a result of actions by the Federal Reserve.

Income Tax:

      The provision for income taxes was $2.9 million in the three-month period ended June 30, 2006, a 36% effective income tax rate, compared to income taxes of $0.7 million provided in the corresponding period of 2005, an effective 8% income tax rate. In the second quarter of 2005, these taxes consisted primarily of state and foreign taxes on profitable operations. Taxes in the second quarter of 2006 included such state and foreign taxes, but also included federal income taxes. This change resulted from the fourth-quarter 2005 reversal of a portion of our domestic deferred tax valuation allowance.

Seasonality; Variability of Operating Results

      Our results of operations are typically stronger in the first six months than the last six months of each calendar year due to scheduled plant maintenance in the third quarter to coincide with customer plant shutdowns and due to holidays in the fourth quarter.

      The timing of orders placed by our customers has varied with, among other factors, orders for customers’ finished goods, customer production schedules, competitive conditions and general economic conditions. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations in the operations of our business units. Such variability is particularly evident at the capital equipment businesses that are included in the Manufactured Products segment, which typically ship a few large systems per year.

Forward-Looking Statements

      This quarterly report on Form 10-Q contains certain statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These uncertainties and other factors include such things as: general business conditions and competitive factors, including pricing pressures and product innovation; demand for our products and services; raw material availability and pricing; changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate recent and future acquisitions into existing operations; changes in general domestic economic conditions such as inflation rates, interest rates, tax rates and adverse impacts to us, our suppliers

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and customers from acts of terrorism or hostilities; our ability to meet various covenants, including financial covenants, contained in our revolving credit agreement and the indenture governing our senior subordinated notes; 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; dependence on the automotive and heavy-duty truck industries, which are highly cyclical; dependence on key management; and dependence on information systems. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved.

Review By Registered Public Accounting Firm

      The consolidated financial statements at June 30, 2006 and for the three-month and six-month periods ended June 30, 2006 and 2005 have been reviewed, prior to filing, by Ernst & Young LLP, our registered public accounting firm, and their report is included herein.

Item 3.  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 borrowings under our floating rate revolving credit agreement, which consisted of borrowings of $157.4 million at June 30, 2006. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $.8 million during the six-month period ended June 30, 2006.

      Our foreign subsidiaries generally conduct business in local currencies. During the first six months of 2006, we recorded a favorable foreign currency translation adjustment of $2.6 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 euro and 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.

      The Company enters into forward contracts on foreign currencies, primarily the euro and the British Pound Sterling, purely for the purpose of hedging exposure to changes in the value of accounts receivable in those currencies against the U.S. dollar. The Company currently uses no other derivative instruments. At June 30, 2006, $.5 million of such currency hedge contracts were outstanding.

Item 4.  Controls and Procedures

      Under the supervision of and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report.

      Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective.

      There have been no changes in our internal control over financial reporting that occurred during the second quarter of 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

      We are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation is not expected to have a material adverse effect on our financial condition, liquidity or results of operations.

      At June 30, 2006, we were a co-defendant in approximately 380 cases asserting claims on behalf of approximately 10,000 plaintiffs alleging personal injury as a result of exposure to asbestos. These asbestos cases generally relate to production and sale of asbestos-containing products and allege 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 four asbestos cases, involving 21 plaintiffs, that plead specified damages. In each of the four 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 the other case, the plaintiff has alleged compensatory damages in the amount of $20.0 million for three separate causes of action and $5.0 million for another cause of action and punitive damages in the amount of $20.0 million.

      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.

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Item 1A.  Risk Factors

      There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Item 6.  Exhibits

      The following exhibits are included herein:

4	Fourth Amendment, dated June 9, 2006, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders party thereto and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA), as agent (filed as Exhibit 4.1 to the Form 8-K of Park-Ohio Holdings Corp. filed on June 14, 2006, SEC File No. 000-03134 and incorporated by reference and made a part hereof)
10.1	Park-Ohio Holdings Corp. Amended and Restated 1998 Long-Term Incentive Plan (filed as Exhibit 10.1 to the Form 8-K of Park-Ohio Holdings Corp. filed on June 1, 2006, SEC File No. 000-03134 and incorporated by reference and made a part hereof)
10.2	Park-Ohio Holdings Corp. Annual Cash Bonus Plan (filed as Exhibit 10.2 to the Form 8-K of Park-Ohio Holdings Corp. filed on June 1, 2006, SEC File No. 000-03134 and incorporated by reference and made a part hereof)
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	Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

      Pursuant to the requirements 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.

Date: August 11, 2006

PARK-OHIO INDUSTRIES, INC.

(Registrant)

By  /s/Richard P. Elliott
 

Name: Richard P. Elliott

Title: Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

QUARTERLY REPORT ON FORM 10-Q

PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES

FOR THE QUARTER ENDED JUNE 30, 2006

Exhibit
	4	Fourth Amendment, dated June 9, 2006, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders party thereto and JP Morgan Chase Bank, N.A. (successor by merger to Bank One, NA), as agent (filed as Exhibit 4.1 to the Form 8-K of Park-Ohio Holdings Corp. filed on June 14, 2006, SEC File No. 000-03134 and incorporated by reference and made a part hereof)
	10.1	Park-Ohio Holdings Corp. Amended and Restated 1998 Long-Term Incentive Plan (filed as Exhibit 10.1 to the Form 8-K of Park-Ohio Holdings Corp. filed on June 1, 2006, SEC File No. 000-03134 and incorporated by reference and made a part hereof)
	10.2	Park-Ohio Holdings Corp. Annual Cash Bonus Plan (filed as Exhibit 10.2 to the Form 8-K of Park-Ohio Holdings Corp. filed on June 1, 2006, SEC File No. 000-03134 and incorporated by reference and made a part hereof)
	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	Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002

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