- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2001, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ____________ TO____________
</Table>
COMMISSION FILE NO. 0-3134
PARK-OHIO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
<Table>
OHIO 34-1867219
- ----------------------------------------- -----------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23000 EUCLID AVENUE, CLEVELAND, OHIO 44117
- ----------------------------------------- -----------------------------------------
(Address of principal executive offices) (Zip Code)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 216/692-7200
PARK-OHIO HOLDINGS CORP. IS A SUCCESSOR ISSUER TO PARK-OHIO INDUSTRIES, INC.
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 twelve 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 [X] NO [ ]
Number of shares outstanding of registrant's Common Stock, par value $1.00 per
share, as of October 31, 2001: 10,496,191.
The Exhibit Index is located on page 20.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
INDEX
<Table>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- September 30, 2001 and
December 31, 2000
Consolidated statements of operations -- Nine months and
three months ended September 30, 2001 and 2000
Consolidated statement of shareholders' equity -- Nine
months ended September 30, 2001
Consolidated statements of cash flows -- Nine months ended
September 30, 2001 and 2000
Notes to consolidated financial statements -- September 30,
2001
Independent accountants' review report
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
</Table>
2
PART I
FINANCIAL INFORMATION
3
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31
2001 2000
------------ -----------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 2,942 $ 2,612
Accounts receivable, less allowances for doubtful accounts
of $2,961 at September 30, 2001 and $3,292 at December
31, 2000............................................... 108,990 117,318
Inventories............................................... 177,881 189,023
Other current assets...................................... 12,155 13,191
-------- --------
Total Current Assets.............................. 301,968 322,144
Property, Plant and Equipment............................... 244,468 234,463
Less accumulated depreciation............................. 113,350 101,757
-------- --------
131,118 132,706
Other Assets
Excess purchase price over net assets acquired, net of
accumulated amortization of $15,081 at September 30,
2001 and $12,283 at December 31, 2000.................. 132,724 133,612
Other..................................................... 55,408 46,870
-------- --------
$621,218 $635,332
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable.................................... $ 58,052 $ 76,041
Accrued expenses.......................................... 30,703 28,831
Current portion of long-term liabilities.................. 2,528 3,904
-------- --------
Total Current Liabilities......................... 91,283 108,776
Long-Term Liabilities, less current portion
Long-term debt............................................ 351,540 343,248
Other postretirement benefits............................. 23,127 24,487
Other..................................................... 8,012 6,695
-------- --------
382,679 374,430
Shareholders' Equity
Capital stock, par value $1 a share:
Serial Preferred Stock................................. -0- -0-
Common Stock........................................... 11,210 11,210
Additional paid-in capital................................ 56,135 56,135
Retained earnings......................................... 93,258 97,192
Treasury stock, at cost................................... (9,092) (9,092)
Accumulated other comprehensive income (loss)............. (3,934) (2,858)
Unearned compensation - restricted stock awards........... (321) (461)
-------- --------
147,256 152,126
-------- --------
$621,218 $635,332
======== ========
</Table>
Note: The balance sheet at December 31, 2000 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.
4
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
Net sales........................................... $156,183 $170,923 $489,756 $581,822
Cost of products sold............................... 132,078 143,217 412,573 480,546
-------- -------- -------- --------
Gross profit...................................... 24,105 27,706 77,183 101,276
Selling, general and administrative expenses........ 17,152 15,854 52,726 56,308
Amortization of goodwill............................ 941 893 2,798 2,875
Restructuring and other non-recurring expenses...... 709 -0- 1,012 -0-
-------- -------- -------- --------
Operating income.................................. 5,303 10,959 20,647 42,093
Interest expense.................................... 7,856 7,601 23,656 22,826
Non-operating items, net............................ -0- (4,700) 1,850 10,618
-------- -------- -------- --------
Income (loss) before income taxes................. (2,553) 8,058 (4,859) 8,649
Income taxes (benefit).............................. 147 3,260 (925) 7,558
-------- -------- -------- --------
Net income (loss)................................. $ (2,700) $ 4,798 $ (3,934) $ 1,091
======== ======== ======== ========
Net income (loss) per common share:
Basic............................................. $ (.26) $ .46 $ (.38) $ .10
======== ======== ======== ========
Diluted........................................... $ (.26) $ .46 $ (.38) $ .10
======== ======== ======== ========
Common shares used in the computation:
Basic............................................. 10,434 10,456 10,434 10,511
======== ======== ======== ========
Diluted........................................... 10,434 10,462 10,434 10,513
======== ======== ======== ========
</Table>
See notes to consolidated financial statements.
5
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<Table>
<Caption>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED TREASURY INCOME UNEARNED
STOCK CAPITAL EARNINGS STOCK (LOSS) COMPENSATION TOTAL
------- ---------- -------- -------- ------------- ------------ --------
(DOLLARS IN THOUSANDS)
Balance January 1, 2001........... $11,210 $56,135 $97,192 $(9,092) $(2,858) $(461) $152,126
Comprehensive income:
Net income (loss)............... (3,934) (3,934)
Foreign currency translation
adjustment................... (1,076) (1,076)
--------
Comprehensive income (loss)..... (5,010)
Amortization of restricted
stock........................... 140 140
------- ------- ------- ------- ------- ----- --------
Balance September 30, 2001........ $11,210 $56,135 $93,258 $(9,092) $(3,934) $(321) $147,256
======= ======= ======= ======= ======= ===== ========
</Table>
See notes to consolidated financial statements.
6
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
2001 2000
--------- ---------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)......................................... $ (3,934) $ 1,091
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 15,369 15,343
Loss on sale of Kay Home Products...................... -0- 15,318
Gain from fire insurance............................... -0- (4,700)
-------- --------
11,435 27,052
Changes in operating assets and liabilities excluding
acquisitions of businesses:
Accounts receivable.................................... 8,327 (11,374)
Inventories and other current assets................... 12,179 (9,296)
Accounts payable and accrued expenses.................. (16,117) 5,645
Other.................................................. (11,427) (7,655)
-------- --------
Net Cash Provided by Operating Activities............ 4,397 4,372
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (10,983) (17,513)
Costs of acquisitions, net of cash acquired............... -0- (3,530)
Proceeds from sale of Kay Home Products................... -0- 9,177
-------- --------
Net Cash (Used) by Investing Activities................ (10,983) (11,866)
FINANCING ACTIVITIES
Proceeds from bank arrangements........................... 19,000 23,000
Payments on debt.......................................... (12,084) (19,602)
Purchase of treasury stock................................ -0- (1,295)
Issuance of common stock under stock option plan.......... -0- 123
-------- --------
Net Cash Provided by Financing Activities.............. 6,916 2,226
-------- --------
Increase (Decrease) in Cash and Cash Equivalents....... 330 (5,268)
Cash and Cash Equivalents at Beginning of Period....... 2,612 5,867
-------- --------
Cash and Cash Equivalents at End of Period............. $ 2,942 $ 599
======== ========
Taxes paid (refunded)....................................... $ (1,509) $ 1,601
======== ========
Interest paid............................................... $ 17,705 $ 17,367
======== ========
</Table>
See notes to consolidated financial statements.
7
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
NOTE A -- BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Park-Ohio
Holdings Corp. and its subsidiaries ("the Company"). All significant
intercompany transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 nine-month periods
ended September 30, 2001 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2001. 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, 2000.
The Company's results of operations are typically stronger in the first six
months, rather 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 to holidays in the fourth quarter. Certain amounts have been reclassified to
conform to current year presentation.
NOTE B -- ACQUISITIONS AND DISPOSITION
On September 30, 2000, the Company acquired IBM's plant automation software
product lines and related assets for cash of approximately $3.9 million. The
transaction has been accounted for as a purchase and the results of operations
prior to the date of acquisition were not deemed to be significant as defined in
Regulation S-X.
On June 30, 2000 the Company completed the sale of substantially all of the
assets of Kay Home Products for cash of approximately $9.2 million and recorded
a loss of approximately $15.3 million, which is included in non-operating items,
net in the consolidated statement of operations. Kay Home was a non-core
business producing and distributing barbecue grills, tray tables, screen houses
and plant stands.
NOTE C -- INVENTORIES
The components of inventory consist of the following:
<Table>
<Caption>
SEPTEMBER 30 DECEMBER 31
2001 2000
------------ -----------
In process and finished goods.............................. $155,422 $164,833
Raw materials and supplies................................. 22,459 24,190
-------- --------
$177,881 $189,023
======== ========
</Table>
NOTE D -- SHAREHOLDERS' EQUITY
At September 30, 2001, capital stock consists of (i) Serial Preferred Stock
of which 632,470 shares were authorized and none were issued and (ii) Common
Stock of which 40,000,000 shares were authorized and 10,496,191 shares were
issued and outstanding.
8
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
NOTE E -- NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
NUMERATOR
Net income (loss)................................. $(2,700) $ 4,798 $(3,934) $ 1,091
======= ======= ======= =======
DENOMINATOR
Denominator for basic earnings per share-weighted
average shares.................................. 10,434 10,456 10,434 10,511
Effect of dilutive securities:
Employee stock awards........................... -0- 6 -0- 2
------- ------- ------- -------
Denominator for diluted earnings per
share-adjusted weighted average shares and
assumed conversions............................. 10,434 10,462 10,434 10,513
======= ======= ======= =======
Net income (loss) per common share-basic.......... $ (.26) $ .46 $ (.38) $ .10
======= ======= ======= =======
Net income (loss) per common share-diluted........ $ (.26) $ .46 $ (.38) $ .10
======= ======= ======= =======
</Table>
NOTE F -- ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards Board Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities," as amended, on
January 1, 2001. Because the Company does not currently use derivatives,
adoption of the new Statement did not impact earnings or the financial position
of the Company.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("FAS 141"). FAS 141 requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method, which is consistent with the
Company's treatment of prior business combinations.
In June 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Under FAS
142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed for impairment annually, or more frequently if
impairment indicators arise. Separable intangible assets that are not deemed to
have indefinite lives will continue to be amortized over their useful lives (but
with no maximum life). The Company is required to adopt FAS 142 effective
January 1, 2002, and finish evaluating potential impairment of existing goodwill
by June 30, 2002. The Company is currently evaluating the effect that adoption
of FAS 142 will have on its results of operations and financial position,
including any potential for goodwill impairment. At September 30, 2001, the
Company has $132.7 million of goodwill, with annual amortization expense of
approximately $3.7 million.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"), which establishes a single accounting model to be used for
long-lived assets, to be disposed of. The new rules supercede FAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Although retaining many of the fundamental recognition and
measurement provisions of FAS 121, the new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale. This
distinction is important because assets to be disposed of are stated at the
lower of their fair values or carrying amounts and depreciation is no longer
recognized. The new rules also will supercede the provisions of APB Opinion 30
with
9
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
regard to reporting the effects of a disposal of a segment of a business. FAS
144 will also require the expected future operating losses from discontinued
operations to be displayed in discontinued operations in the periods in which
the losses are incurred rather than as of the measurement date as presently
required by APB 30. In addition, more dispositions will qualify for discontinued
operations treatment in the income statement. FAS 144 is effective for fiscal
years beginning after December 15, 2001. The Company is currently evaluating the
effect that adoption of this standard will have on the Company's financial
position, results of operations or cash flows.
NOTE G -- SEGMENTS
The Company operates through three segments: Integrated Logistics Solutions
("ILS"), Aluminum Products and Manufactured Products. ILS is a leading logistics
provider of "Class C" production components to original equipment manufacturers
("OEMs"), other manufacturers and distributors. In connection with the supply of
such industrial products, ILS provides a variety of value-added, cost-effective
supply chain management services. Aluminum Products manufactures cast aluminum
components primarily for automotive OEMs. In addition, 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. Intersegment sales are
immaterial.
Results by Business Segment were as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net sales:
ILS..................................... $ 97,817 $111,934 $324,137 $376,525
Aluminum products....................... 20,545 24,871 62,503 89,935
Manufactured products................... 37,821 34,118 103,116 115,362
-------- -------- -------- --------
$156,183 $170,923 $489,756 $581,822
======== ======== ======== ========
Income (loss) before income taxes:
ILS..................................... $ 5,303 $ 9,351 $ 21,649 $ 33,900
Aluminum products....................... (773) (670) (1,908) 4,236
Manufactured products................... 2,485 4,002 5,567 9,346
-------- -------- -------- --------
7,015 12,683 25,308 47,482
Corporate costs.............................. (1,712) (1,724) (4,661) (5,389)
Interest expense............................. (7,856) (7,601) (23,656) (22,826)
Non-recurring items, net..................... -0- 4,700 (1,850) (10,618)
-------- -------- -------- --------
$ (2,553) $ 8,058 $ (4,859) $ 8,649
======== ======== ======== ========
</Table>
NOTE H -- OPTION OFFER PROGRAM
The Company completed a program ("the Option Offer Program") whereby all
outstanding options (1,089,500 at May 29, 2001) to purchase shares of Company
common stock held by Company employees and directors were tendered to the
Company and cancelled. The Company intends to grant new options on a one for one
basis in December 2001 under the Company's 1998 Long-Term Incentive Plan at an
exercise price equal to the market price on the date of grant.
10
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
NOTE I -- COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) was as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -----------------
2001 2000 2001 2000
-------- ------- ------- ------
(DOLLARS IN THOUSANDS)
Net income (loss).................................. $(2,700) $4,798 $(3,934) $1,091
Foreign currency translation gain (loss)........... 163 (404) (1,076) (924)
------- ------ ------- ------
Total comprehensive income (loss).................. $(2,537) $4,394 $(5,010) $ 167
======= ====== ======= ======
</Table>
NOTE J -- RESTRUCTURING AND OTHER NON-RECURRING EXPENSES
During 2001, the Company closed several ILS distribution centers and a
manufacturing plant, began restructuring its Rubber Group manufacturing
activities in the aftermath of the fire that destroyed the Cicero Rubber plant,
and closed a manufacturing facility in its Aluminum Products Group. As a result
of these actions, the Company reduced employee headcount by 311, incurring
severance costs of $.5 million and incurred $.5 million related to the closing
of facilities. Of these amounts, $.7 million was incurred in the third quarter.
All amounts incurred have been paid as of September 30, 2001. The Company
continues to evaluate additional restructuring and cost reductions.
NOTE K -- NON-OPERATING ITEMS, NET
In June 2000, the Company's Cicero Flexible Products plant was destroyed in
a fire. In the third quarter of 2000, the Company received a partial settlement
from its insurance carrier, primarily reflecting the replacement cost of fixed
assets, and recognized a net gain of $4.7 million. In the nine months ended
September 30, 2001, the Company expensed $1.9 million of non-recurring business
interruption costs, which were not covered by insurance.
In June 2000, the Company completed the sale of substantially all of the
assets of Kay Home Products and recorded a pretax loss of approximately $15.3
million.
NOTE L -- INCOME TAXES
Despite a loss before income taxes of $2.6 million, the Company recorded a
$.1 million tax provision as a result of the change in the estimated income tax
rate for 2001 from 46% to 19%. This change, which reduced the third quarter
income tax benefit by $.6 million, resulted from the tax-rate impact of
permanent tax items such as goodwill amortization given the pretax loss during
the first nine months of 2001.
NOTE M -- FINANCING ARRANGEMENTS
The Company is a party to a credit agreement dated December 21, 2000 (as
amended) with a group of banks, under which it may borrow or issue standby
letters of credit and commercial letters of credit up to $180 million. Interest
is payable quarterly at either the banks' prime lending rate plus 0.5%-1.5% or
at the Company's election at LIBOR plus 2.75%-3.50%. The Company's ability to
elect LIBOR-based interest and the interest rate are dependent on the Company's
ratio of senior funded indebtedness to pro forma earnings before interest,
taxes, depreciation and amortization ("EBITDA"), as defined in the credit
agreement and adjusted every quarter. The revolving credit is secured by
substantially all of the Company's assets.
11
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Park-Ohio Holdings Corp.
We have reviewed the accompanying consolidated balance sheet (unaudited) of
Park-Ohio Holdings Corp. and subsidiaries as of September 30, 2001, and the
related consolidated statements of operations (unaudited) for the three-month
and nine-month periods ended September 30, 2001 and 2000, the consolidated
statement of shareholders' equity (unaudited) for the nine-month period ended
September 30, 2001 and the consolidated statements of cash flows (unaudited) for
the nine-month periods ended September 30, 2001 and 2000. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based upon our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Park-Ohio
Holdings Corp. and subsidiaries as of December 31, 2000 and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended, not presented herein, and in our report dated March 26, 2001,
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, 2000, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it is
derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
November 12, 2001
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The financial information for the nine and three-month periods ended
September 30, 2001 is not directly comparable to the financial information for
the nine and three-month periods ended September 30, 2000 due to a divestiture,
business interruption expenses relating to a fire at one of the Company's rubber
plants, and restructuring and other non-recurring expenses. On June 30, 2000,
the Company sold substantially all the assets of Kay Home Products, for cash of
approximately $9.2 million, recognizing a non-operating loss of $15.3 million.
In June 2000, the Company's Cicero Flexible Products plant was destroyed in a
fire. In the third quarter of 2000, the company received interim insurance
payments, primarily reflecting the replacement cost of fixed assets, and
recognized a net gain of $4.7 million. In the first and second quarters of 2001,
the Company expensed $950 thousand and $900 thousand respectively, of
non-recurring business interruption costs which were not covered by insurance.
In 2001, the Company closed nine logistics warehouses and two manufacturing
plants, incurring restructuring and other non-recurring expenses of $1.0 million
($.7 million in the third quarter of 2001).
OVERVIEW
The Company has three operating segments: Integrated Logistics Solutions
("ILS"), Aluminum Products, and Manufactured Products. ILS is a leading
logistics provider of "Class C" production components to original equipment
manufacturers ("OEMs"), other manufacturers and distributors. In connection with
the supply of such industrial products, ILS provides a variety of value-added,
cost-effective supply chain management services to major OEM's. The principal
customers of ILS are in the heavy duty truck, vehicle parts and accessories,
industrial equipment, electrical controls, HVAC, appliances and motors, and lawn
and garden equipment industries. Aluminum Products manufactures cast aluminum
components primarily for automotive OEMs. 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 OEMs and end-users in the automotive, railroad, truck, oil and
aerospace industries.
Between 1993 and 2000, the Company grew significantly, both internally and
through acquisitions. Over this period, the Company's net sales increased at a
35% compounded annual growth rate ("CAGR"), from $94.5 million to $754.7
million, and income from continuing operations on a fully taxed basis, excluding
the 2000 effects of the sale of Kay Home Products and fire insurance gains,
increased at a 23% CAGR from $2.4 million to $10.1 million.
The Company's sales volumes and profitability began to decline in third
quarter 2000 and have continued through the current quarter. This volume drop is
directly linked to overall weakness in the manufacturing economy, and
particularly to contraction in the Heavy Truck and Automotive industries. As a
result, net sales declined by $92.0 million in the first nine months of 2001 to
$489.8 million, and the Company incurred a net loss of $3.9 million ($1.6
million excluding the after-tax impact of the non-recurring charges discussed
above). The Company expects this trend in sales and earnings to continue in
fourth quarter 2001. Despite these sales declines, the Company believes it has
retained or gained market share in most major markets served.
The Company responded to this downturn by reducing costs and taking
targeted actions to increase specific prices and exit low-margin products. These
actions have partially offset the decline in gross margins caused by the
absorption of fixed overheads over a reduced sales base. The Company has also
begun to restructure several of its businesses, including the closure of two
manufacturing plants and nine logistics warehouses. In the three months ended
September 30, 2001, the Company recognized restructuring and other non-recurring
expenses of $.7 million, with $.2 million occurring in ILS, $.1 million in
Aluminum Products and $.4 million in Manufactured Products. The Company
continues to evaluate additional restructuring and cost reductions. Management's
actions are intended to position the Company for profitability when the
manufacturing economy stabilizes and returns to growth.
13
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("FAS 142"). Under FAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed for impairment
annually, or more frequently if impairment indicators arise. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life). The Company is
required to adopt FAS 142 effective January 1, 2002, and finish evaluating
potential impairment of existing goodwill by June 30, 2002. There may be a
charge to earnings if goodwill has been impaired. The Company is currently
evaluating the effect that adoption of FAS 142 will have on its results of
operations and financial position, including any potential goodwill impairment.
RESULTS OF OPERATIONS
Nine Months 2001 versus Nine Months 2000
Net sales declined by $92.0 million, or 16%, from $581.8 million for the
first nine months of 2000 to $489.8 million for the first nine months of 2001.
Organic sales declined 14%, or $79.3 million, while sales decreased by $12.8
million due to the divestiture of Kay Home Products. ILS net sales declined 14%,
or $52.4 million, due primarily to shrinkage in heavy truck and other customer
industries. Aluminum Products net sales declined 31%, or $27.4 million. This
included an $11.3 million decrease relating to the ending of sales contracts at
Metalloy which were expected at the time of its purchase in 1999, and $3.6
million relating to the Company's decision to discontinue production of
low-volume non-automotive products, while the remainder, $12.5 million, resulted
from reductions in production releases from automotive customers. Manufactured
Products net sales decreased 11%, or $12.3 million, consisting of a $.5 million
increase in organic sales offset by the divestiture of $12.8 million sales.
Gross profit declined by $24.1 million, or 24%, from $101.3 million for the
first three quarters of 2000 to $77.2 million for the first three quarters of
2001. Of this decline, $10.9 million was attributable to the organic sales
decreases and the remainder to the divestiture. The Company's consolidated gross
margin decreased to 15.8% for the first nine months of 2001 from 17.4% for the
first nine months of 2000, due to decreased margins in all three segments. The
decline in ILS gross margin related to reduced volumes resulting in the
absorption of fixed operational overheads over a smaller sales base. For
Aluminum Products, the decrease in gross margins related to the absorption of
fixed manufacturing overhead over a smaller production base. The decrease in
margins in the Manufactured Products segment resulted primarily from the
divestiture of Kay Home Products with its high first-half gross margin, and
secondarily from decreased production levels which absorbed fixed overhead costs
over a smaller production base.
Selling, general and administrative expenses and amortization of goodwill
("SG&A") decreased by 6%, or $3.7 million, to $55.5 million for the first nine
months of 2001 from $59.2 million for the first nine months of 2000. SG&A
expenses were reduced by $5.1 million in response to declining sales from
continuing operations and $2.0 million by the divestiture of Kay Home Products,
partially offset by the addition of $2.7 million of SG&A in acquired businesses
and a decline in net pension credits of $.7 million. SG&A expenses as a
percentage of net sales were 11.3% for the first nine months of 2001 compared to
10.2% for the first nine months of 2000.
Interest expense increased by $.9 million from $22.8 million in the first
nine months of 2000 to $23.7 million in the first nine months of 2001 due to
higher average debt outstanding during the current period. During the first nine
months of 2001, the Company averaged outstanding borrowings of $356.8 million as
compared to $342.8 million for the corresponding period of the prior year. The
$14.0 million increase related primarily to increases in working capital. The
average interest rate of 8.84% for the nine months ended September 30, 2001 was
4 basis points lower than the average rate of 8.88% for the first nine months of
2000, primarily due to decreased rates on the Company's revolving credit
facility.
The effective income tax rate for the nine-month period ended September 30,
2001 was 19%, compared to 41% for the nine-month period ended September 30,
2000, before considering the tax effect of the divestiture of Kay Home Products.
This decrease resulted from the tax-rate impact of permanent tax items
14
such as goodwill amortization given the pretax loss during the first nine months
of 2001 as compared to the pretax profit in the first nine months of 2000.
Third Quarter 2001 versus Third Quarter 2000
Net sales decreased by $14.7 million, or 9%, from $170.9 million for the
quarter ended September 30, 2000 to $156.2 million for the quarter ended
September 30, 2001. ILS net sales decreased 13%, or $14.1 million, due primarily
to shrinkage in customer industries. Aluminum Products net sales declined 17%,
or $4.3 million. This included a $1.4 million decrease relating to the ending of
sales contracts at Metalloy which were expected at the time of its purchase in
1999, and $.8 million relating to the Company's decision to discontinue
production of low-volume, non-automotive products, while the remainder, $2.1
million, resulted from reductions in production releases from automotive
customers. Manufactured Products net sales increased by $3.7 million, or 11%,
primarily related to increases in sales of capital equipment.
Gross profit declined by $3.6 million, or 13%, from $27.7 million for the
third quarter ended September 30, 2000 to $24.1 million for the quarter ended
September 30, 2001. The Company's consolidated gross margin decreased to 15.4%
for the current quarter from 16.2% for the third quarter 2000. Declines in gross
margin in both the ILS and Manufactured Products segments related to reduced
volumes resulting in the absorption of fixed operational and manufacturing
overheads over a smaller sales base. Gross margin increased in the third quarter
in the Aluminum Products segment as the benefit of cost reductions and start of
production of higher-margin new contracts was partially offset by the margin
impact of continued volume declines.
Selling, general and administrative expenses and amortization of goodwill
("SG&A") increased by 8%, or $1.4 million, to $18.1 million for the quarter
ended September 30, 2001 from $16.7 million for quarter ended September 30,
2000. This increase primarily results from the addition of $.9 million of SG&A
in acquired businesses and a decline in net pension credits of $.3 million.
Consolidated SG&A expenses as a percentage of net sales were 11.5% in third
quarter 2001 as compared to 9.8% in the same period of 2000.
Interest expense increased by $.3 million from $7.6 million in third
quarter 2000 to $7.9 million in 2001 primarily due to higher average debt
outstanding during the current period. During the third quarter of 2001, the
Company averaged outstanding borrowings of $356.3 million as compared to $338.0
million for the corresponding period of the prior year. The $18.3 million
increase related primarily to increases in working capital. The average interest
rate of 8.82% for third quarter 2001 was 18 basis points lower than the average
rate of 9.00% for the corresponding period of 2000, primarily due to decreased
rates on the Company's revolving credit facility.
Despite a loss before income taxes of $2.6 million, the Company recorded a
$.1 million tax provision as a result of the change in the estimated income tax
rate for 2001 from 46% to 19%. This change, which reduced the third quarter
income tax benefit by $.6 million, resulted from the tax-rate impact of
permanent tax items such as goodwill amortization given the pretax loss during
the first nine months of 2001.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity needs are primarily for working capital and capital
expenditures. The Company's primary sources of liquidity have been funds
provided by operations and funds available from an existing bank credit
agreement and the sale of Senior Subordinated Notes. The Company is a party to a
credit agreement dated December 21, 2000 (as amended) with a group of banks
under which it may borrow up to $180 million secured by substantially all of the
assets of the Company. The proceeds from the credit agreement, which expires on
December 31, 2003, will be used for general corporate purposes. Amounts are
borrowed under the credit agreement, at the Company's election, at either (i)
the bank's prime lending rate plus 50-150 basis points or (ii) LIBOR plus
275-350 basis points. The Company's ability to elect LIBOR-based interest and
the interest rate are dependent on the Company's ratio of senior funded
indebtedness to pro forma EBITDA, as defined. As of September 30, 2001, $145.0
million was outstanding under the facility, a decrease of $9.0 million from the
balance outstanding at June 30, 2001.
15
Current financial resources (working capital and available bank borrowing
arrangements) and anticipated funds from operations are expected to be adequate
to meet current cash requirements. The availability of bank borrowings is based
on the company's ability to meet various financial covenants, which could be
materially impacted if negative economic trends continue.
The ratio of current assets to current liabilities was 3.31 at September
30, 2001 versus 2.96 at December 31, 2000. Working capital decreased by $2.7
million, to $210.7 million at September 30, 2001 from $213.4 million at December
31, 2000.
During the first nine months of 2001, the Company generated $11.4 million
from operations before changes in operating assets and liabilities. After giving
effect to the use of $7.0 million in the operating accounts, the Company
generated $4.4 million from operating activities, the same cash as generated in
the first nine months of 2000. During the first nine months of 2001, the Company
invested $11.0 million in capital expenditures, including $2.0 million for
replacement of fire-destroyed equipment and tooling. The remaining cash used,
along with an increase in cash of $.3 million, was offset by an increase in
borrowings of $6.9 million.
SEASONALITY; VARIABILITY OF OPERATING RESULTS
The Company's results of operations are typically stronger in the first six
months rather 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 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.
This 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 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. Certain statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations contain forward-
looking statements, including without limitation, discussion regarding the
Company's anticipated amounts of restructuring charges, credit availability and
trends for the fourth quarter. Forward-looking statements are necessarily
subject to risks, uncertainties and other factors, many of which are outside our
control, which could cause actual results to differ materially from such
statements. These uncertainties and other factors include such things as:
general business conditions, competitive factors, including pricing pressures
and product innovation; raw material availability and pricing; changes in the
Company's relationships with customers and suppliers; the ability of the Company
to successfully integrate recent and future acquisitions into its existing
operations; changes in general domestic economic conditions such as inflation
rates, interest rates, tax rates and adverse impacts to the Company, its
suppliers and customers from acts of terrorism or hostilities; the ability of
the Company to meet various covenants, including financial covenants, contained
in its credit agreement and the indenture governing the 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 truck industries; 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. 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.
16
REVIEW BY INDEPENDENT ACCOUNTANTS
The consolidated financial statements at September 30, 2001, and for the
three-month and nine-month periods ended September 30, 2001 and 2000, have been
reviewed by Ernst & Young LLP, independent accountants, and their report is
included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk including changes in interest rates.
The Company is subject to interest rate risk on its floating rate revolving
credit facility, which consisted of borrowings of $145.0 million at September
30, 2001. A 100 basis point increase in the interest rate would have resulted in
an increase in interest expense of approximately $1.1 million during the nine
months ended September 30, 2001.
17
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
third quarter of 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
(15) Letter re: unaudited financial information
The Company did not file any reports on Form 8-K during the three months
ended September 30, 2001.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PARK-OHIO HOLDINGS CORP.
------------------------------------
(Registrant)
By /s/ RICHARD P. ELLIOTT
-----------------------------------
Name: Richard P. Elliott
Title: Vice President and Chief
Financial Officer (Principal
Accounting and Financial
Officer)
Dated November 14, 2001
---------------------------------
19
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
EXHIBIT
- -------
(15) Letter re: unaudited financial information
</Table>
20