- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 2003, 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. 333-43005
PARK-OHIO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<Table>
OHIO 34-6520107
- ----------------------------------------- -----------------------------------------
(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.
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 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2).
YES [ ] NO [X]
All of the outstanding capital stock of the registrant is held by Park-Ohio
Holdings Corp. As of October 31, 2003, 100 shares of the registrant's common
stock, $1 par value were outstanding.
The Exhibit Index is located on page 21.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
<Table>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated balance sheets -- September 30, 2003 and
December 31, 2002
Consolidated statements of operations -- Three months and
nine months ended September 30, 2003 and 2002
Consolidated statement of shareholder's equity -- Nine
months ended September 30, 2003
Consolidated statements of cash flows -- Nine months ended
September 30, 2003 and 2002
Notes to consolidated financial statements -- September 30,
2003
Independent accountants' review report
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 4 Controls and Procedures
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
</Table>
2
PART I
FINANCIAL INFORMATION
3
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ -----------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 332 $ 8,800
Accounts receivable, less allowances for doubtful accounts
of $3,748 at September 30, 2003 and $3,313 at December
31, 2002............................................... 106,783 101,477
Inventories............................................... 153,756 156,067
Other current assets...................................... 15,825 12,181
-------- --------
Total Current Assets.............................. 276,696 278,525
Property, Plant and Equipment............................... 236,825 226,426
Less accumulated depreciation............................. 127,298 114,260
-------- --------
109,527 112,166
Other Assets
Goodwill.................................................. 82,111 81,464
Net assets held for sale.................................. 10,193 19,205
Prepaid pension and other................................. 55,545 51,583
-------- --------
$534,072 $542,943
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Trade accounts payable.................................... $ 61,980 $ 74,868
Accrued expenses.......................................... 56,591 48,839
Current portion of long-term liabilities.................. 2,492 3,056
-------- --------
Total Current Liabilities......................... 121,063 126,763
Long-Term Liabilities, less current portion
9.25% Senior Subordinated Notes........................... 199,930 199,930
Revolving Credit maturing on July 31, 2007................ 104,500 114,000
Other long-term debt...................................... 10,169 9,886
Other postretirement benefits............................. 23,079 23,829
Other..................................................... 2,663 3,483
-------- --------
340,341 351,128
Shareholder's Equity
Common Stock.............................................. -0- -0-
Additional paid-in capital................................ 64,844 64,844
Retained earnings......................................... 13,780 8,304
Accumulated other comprehensive (loss).................... (5,956) (8,096)
-------- --------
72,668 65,052
-------- --------
$534,072 $542,943
======== ========
</Table>
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date, as restated for the Company's change in
accounting for inventories at certain subsidiaries as discussed in Note B.
However, it 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 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Net sales.......................................... $146,830 $157,832 $461,596 $478,300
Cost of products sold.............................. 125,078 134,639 389,588 409,029
-------- -------- -------- --------
Gross profit..................................... 21,752 23,193 72,008 69,271
Selling, general and administrative expenses....... 14,955 14,353 45,452 43,019
Restructuring and impairment charges............... -0- 1,006 -0- 5,262
-------- -------- -------- --------
Operating income................................. 6,797 7,834 26,556 20,990
Interest expense................................... 6,512 7,024 19,964 20,663
-------- -------- -------- --------
Income (loss) before income taxes and cumulative
effect of accounting change................... 285 810 6,592 327
Income tax......................................... 144 909 1,116 610
-------- -------- -------- --------
Income (loss) before cumulative effect of
accounting change............................. 141 (99) 5,476 (283)
Cumulative effect of accounting change............. -0- -0- -0- (48,799)
-------- -------- -------- --------
Net income (loss)................................ $ 141 $ (99) $ 5,476 $(49,082)
======== ======== ======== ========
</Table>
See notes to consolidated financial statements.
5
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
<Table>
<Caption>
ACCUMULATED
OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS (LOSS) TOTAL
------- ------- -------- ------------- -------
Balance January 1, 2003, as previously
stated...................................... $ -0- $64,844 $ 5,563 $(8,096) $62,311
Adjustment for the cumulative effect on the
prior years of applying retroactively the
change in the method of accounting for
inventories (see Note B).................... 2,741 2,741
------- ------- ------- ------- -------
Balance January 1, 2003, as restated.......... -0- 64,844 8,304 (8,096) 65,052
Comprehensive income:
Net income.................................. 5,476 5,476
Foreign currency translation adjustment..... 2,140 2,140
-------
Comprehensive income........................ 7,616
------- ------- ------- ------- -------
Balance September 30, 2003.................... $ -0- $64,844 $13,780 $(5,956) $72,668
======= ======= ======= ======= =======
</Table>
See notes to consolidated financial statements.
6
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2003 2002
---------- ---------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)......................................... $ 5,476 $(49,082)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting.............. -0- 48,799
Depreciation and amortization.......................... 11,999 12,613
Changes in operating assets and liabilities:
Accounts receivable.................................... (5,306) (17,461)
Inventories and other current assets................... (1,334) 5,439
Accounts payable and accrued expenses.................. (5,136) 28,224
Other.................................................. (3,427) (10,375)
--------- --------
Net Cash Provided by Operating Activities............ 2,272 18,157
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (8,298) (9,195)
Proceeds from sale of assets held for sale................ 7,340 2,486
Acquisitions.............................................. -0- (5,748)
--------- --------
Net Cash Used by Investing Activities.................. (958) (12,457)
FINANCING ACTIVITIES
Proceeds from bank arrangements........................... 112,000 1,510
Repayment of old revolving credit agreement............... (112,000) -0-
Payments on debt.......................................... (9,782) (2,604)
--------- --------
Net Cash Used by Financing Activities.................. (9,782) (1,094)
--------- --------
(Decrease) Increase in Cash and Cash Equivalents............ (8,468) 4,606
Cash and Cash Equivalents at Beginning of Period............ 8,800 2,344
--------- --------
Cash and Cash Equivalents at End of Period.................. $ 332 $ 6,950
========= ========
Taxes refunded.............................................. $ (881) $ (4,207)
Interest paid............................................... 14,902 14,560
</Table>
See notes to consolidated financial statements.
7
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2003
(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," "the Company"). Park-Ohio is
a wholly-owned subsidiary of Park-Ohio Holdings Corp. as of June 10, 1998. 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
nine-month periods ended September 30, 2003 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003. 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, 2002.
Certain amounts have been reclassified to conform to current year
presentation.
NOTE B -- ACCOUNTING CHANGE
As described in Note A to the consolidated financial statements for the
year ended December 31, 2002, inventories are stated at the lower of cost or
market value. The first-in, first-out (FIFO) method was used to determine cost
for 85% of inventories and the last-in, first-out (LIFO) method was used to
determine cost for the remaining 15% of inventories.
Effective June 30, 2003, the Company changed the method of accounting for
the 15% of its inventories utilizing the LIFO method to the FIFO method. The
Company believes that this change is preferable for the following reasons: 1)
the change conforms all of its inventories to one method of determining cost,
which is the FIFO method; 2) the costs of the Company's inventories have
remained fairly level during the past several years, which has substantially
negated the benefits of the LIFO method (a better matching of current costs with
current revenues in periods of rising costs); 3) the impact of utilizing the
LIFO method has had an insignificant impact on the Company's consolidated net
income (loss) during the past several years; and 4) the FIFO method results in
the valuation of inventories at current costs on the consolidated balance sheet,
which provides a more meaningful presentation for investors and financial
institutions.
As required under accounting principles generally accepted in the United
States, the Company has restated the consolidated balance sheet as of December
31, 2002 to increase inventories by the recorded LIFO reserve ($4.4 million),
increase deferred tax liabilities ($1.7 million), and increase shareholders'
equity ($2.7 million). Previously reported results of operations have not been
restated because the impact of utilizing the LIFO method had an insignificant
impact on the Company's reported amounts for consolidated net income (loss).
NOTE C -- ACQUISITION AND DISPOSITIONS
During the first quarter of 2003, the Company completed the sale of
substantially all of the assets of Green Bearing ("Green") and St. Louis Screw
and Bolt ("St. Louis Screw") for cash of approximately $7.3 million. No gain or
loss was recorded on the sale. Green and St. Louis Screw were non-core
businesses in the ILS Segment and Manufactured Products Segment, respectively,
and had been identified as businesses the Company was selling as part of its
restructuring activities during 2002 and 2001.
8
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
On September 10, 2002, the Company acquired substantially all of the assets
of Ajax Magnethermic Corporation ("Ajax"), a manufacturer of induction heating
and melting equipment. The purchase price of approximately $5.5 million and the
results of operations of Ajax prior to its date of acquisition were not deemed
significant as defined in Regulation S-X.
On April 26, 2002, the Company completed the sale of substantially all of
the assets of Castle Rubber Company ("Castle Rubber") for cash of approximately
$2.5 million. Castle Rubber, a non-core business in the Manufactured Products
Segment, had been identified as a business the Company was discontinuing as part
of its restructuring activities during 2001.
NOTE D -- INVENTORIES
The components of inventory consist of the following:
<Table>
<Caption>
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ -----------
In process and finished goods............................... $133,903 $136,430
Raw materials and supplies.................................. 19,853 19,637
-------- --------
$153,756 $156,067
======== ========
</Table>
NOTE E -- ADOPTION OF FAS 142 "GOODWILL AND OTHER INTANGIBLE ASSETS"
Effective January 1, 2002, the Company adopted FAS 142, "Goodwill and Other
Intangible Assets". Under this standard, goodwill is no longer amortized but is
subject to an impairment test at least annually. The Company has selected
October 1 as its annual testing date.
The Company, with the assistance of an outside consultant, completed the
transitional impairment review of goodwill during the fourth quarter of 2002 and
recorded a non-cash charge for goodwill impairment which aggregated $48,799. In
accordance with the provisions of FAS 142, the charge has been accounted for as
a cumulative effect of a change in accounting principle, retroactive to January
1, 2002.
NOTE F -- ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," ("FAS 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS
146 requires that a liability for a cost that is associated with an exit or
disposal activity be recognized when a legal liability is incurred. FAS 146 is
effective for exit and disposal activities that are initiated after December 31,
2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on required
disclosures by a guarantor in its financial statements about obligations under
certain guarantees that it has issued and requires a guarantor to recognize, at
the inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company is reviewing the
provisions of FIN 45 relating to initial recognition and measurements of
guarantor liabilities, which are effective for qualifying guarantees entered
into or modified after December 31, 2002. The adoption did not have a material
impact on the consolidated financial statements.
9
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which clarifies the application
of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial
Statements," relating to consolidation of certain entities. First, FIN 46 will
require identification of the Company's participation in variable interest
entities ("VIEs"), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit them to operate on a
stand alone basis, or whose equity holders lack certain characteristics of a
controlling financial interest. Then, for entities identified as VIEs, FIN 46
sets forth a model to evaluate potential consolidation based on an assessment of
which party to the VIE, if any, bears a majority of the exposure to its expected
losses, or stands to gain from a majority of its expected returns. FIN 46 also
sets forth certain disclosures regarding interests in VIEs that are deemed
significant, even if consolidation is not required. The Company's adoption of
FIN 46 had no effect on its financial position, results of operations and cash
flows.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities ("FAS 149"). FAS 149 amends and clarifies the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under FAS 133, "Accounting for
Derivative Instruments and Hedging Activities." FAS 149 is generally effective
for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The Company's adoption of FAS 149
had no effect on its financial position, results of operations and cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("FAS 150"). FAS 150 requires that certain
financial instruments, which under previous guidance were accounted for as
equity, must now be accounted for as liabilities. The financial instruments
affected include mandatorily redeemable stock, certain financial instruments
that require or may require the issuer to buy back some of its shares in
exchange for cash or other assets and certain obligations that can be settled
with shares of stock. FAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003 and must be applied to the Company's
existing financial instruments effective July 1, 2003, the beginning of the
first fiscal period after June 15, 2003. The Company adopted FAS 150 on June 1,
2003. The adoption of this statement had no effect 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 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-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. Intersegment sales are immaterial.
10
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Results by business segment were as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net sales, including intersegment sales:
ILS...................................... $ 89,436 $104,769 $278,312 $304,511
Aluminum products........................ 20,045 24,729 68,018 81,232
Manufactured products.................... 37,349 28,334 115,266 92,557
-------- -------- -------- --------
$146,830 $157,832 $461,596 $478,300
======== ======== ======== ========
Income (loss) before income taxes and
cumulative effect of accounting change:
ILS...................................... $ 5,847 $ 7,676 $ 17,932 $ 18,042
Aluminum products........................ 1,901 1,367 8,701 5,118
Manufactured products.................... 563 (115) 4,309 1,053
-------- -------- -------- --------
8,311 8,928 30,942 24,213
Corporate costs............................ (1,514) (1,094) (4,386) (3,223)
Interest expense........................... (6,512) (7,024) (19,964) (20,663)
-------- -------- -------- --------
$ 285 $ 810 $ 6,592 $ 327
======== ======== ======== ========
</Table>
<Table>
<Caption>
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ -----------
Identifiable assets were as follows:
ILS....................................................... $263,464 $273,442
Aluminum products......................................... 76,684 79,797
Manufactured products..................................... 151,229 151,880
General corporate......................................... 42,695 37,824
-------- --------
$534,072 $542,943
======== ========
</Table>
NOTE H -- COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) was as follows:
<Table>
<Caption>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------- -----------------
2003 2002 2003 2002
------ ----- ------ --------
Net income (loss)................................ $ 141 $ (99) $5,476 $(49,082)
Foreign currency translation..................... (630) (697) 2,140 1,193
------ ----- ------ --------
Total comprehensive income (loss)................ $ (489) $(796) $7,616 $(47,889)
====== ===== ====== ========
</Table>
11
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The components of accumulated comprehensive loss at September 30, 2003 and
December 31, 2002 are as follows:
<Table>
<Caption>
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ -----------
Foreign currency translation adjustment..................... $ 401 $2,541
Minimum pension liability................................... 5,555 5,555
------ ------
$5,956 $8,096
====== ======
</Table>
NOTE I -- RESTRUCTURING ACTIVITIES
The Company responded to the economic downturn by reducing costs in a
variety of ways, including restructuring businesses and selling non-core
manufacturing assets. These activities, which included asset write-downs and
other exit costs related to the shutdown of facilities, generated restructuring
and asset impairment charges of $19.2 million and $28.5 million in 2002 and
2001, respectively (of which $5.6 million (490 employees) in 2002 and $6.9
million (525 employees) in 2001 related to severance and exit costs). For
further details on the restructuring plan, see Note L to the audited financial
statements contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
During the first quarter of 2003, the Company completed the sale of
substantially all of the assets of Green and St. Louis Screw for cash of
approximately $7.3 million. No gain or loss was recorded on these sales. Both of
these businesses had been identified as businesses the Company was selling as
part of its restructuring activities.
The accrued liability balance for severance and exit costs and related cash
payments consisted of:
<Table>
2001
Severance and exit charges.................................. $ 6,883
Cash payments............................................... (2,731)
-------
Balance at December 31, 2001................................ 4,152
2002
Severance and exit charges.................................. 5,599
Cash payments............................................... (5,706)
-------
Balance at December 31, 2002................................ 4,045
2003
Cash payments............................................... (2,095)
-------
Balance at September 30, 2003............................... $ 1,950
=======
</Table>
As of September 30, 2003, all of the 525 employees identified in 2001 and
all but 18 of the 490 employees identified in 2002 had been terminated. The
workforce reductions under the restructuring plan consisted of hourly and
salaried employees at various operating facilities due to either closure or
consolidation.
Net sales for the businesses that were included in net assets held for sale
were $1,139 and $14,210 for the nine months ended September 30, 2003 and 2002,
respectively. Operating income (loss) for these entities was $(8) and $(102) for
the nine months ended September 30, 2003 and 2002, respectively.
12
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE J -- 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:
<Table>
Balance at January 1, 2003.................................. $ 3,068
Claims paid during the year............................... (2,138)
Additional warranties issued during the year.............. 714
-------
Balance at September 30, 2003............................... $ 1,644
=======
</Table>
NOTE K -- INCOME TAXES
The effective income tax rate for the three-month period ended September
30, 2003 was 50%, compared to 112% for the corresponding period in 2002. The
effective income tax rate for the nine-month period ended September 30, 2003 was
17%. Only foreign and state income taxes were provided for in 2003. The federal
income tax provision was offset by the recognition of the tax benefit of net
operating loss carryforwards for which valuation allowances had been provided
for prior to 2003. At December 31, 2002, the Company had net operating loss
carryforwards of approximately $25.6 million. Tax benefits related to these
carryforwards were fully reserved in 2002, because the Company was in a
three-year cumulative loss position.
NOTE L -- DEBT RESTRUCTURING
On July 30, 2003, the Company entered into a new, four-year revolving
credit agreement with a group of banks under which it may borrow up to $165.0
million secured by substantially all the assets of the Company. On November 5,
2003, this credit agreement was amended to include the Company's subsidiaries in
Canada and the United Kingdom. Proceeds from this credit agreement, as amended
("Credit Agreement"), which expires on July 30, 2007, were used to repay the
existing borrowings under the old credit agreement. Amounts borrowed under the
Credit Agreement may be borrowed at Park-Ohio's election at either (i) LIBOR
plus 175 -- 250 basis points or (ii) the bank's prime lending rate. The interest
rate is dependent on the Company's Debt Service Coverage Ratio, as defined in
the Credit Agreement. Under the Credit Agreement, a detailed borrowing base
formula provides borrowing capacity to the Company based on percentages of
eligible accounts receivable, inventory and fixed assets. As of September 30,
2003, the Company had $104.5 million outstanding under the Credit Agreement.
After giving effect to the amendment, as of September 30, 2003, the Credit
Agreement provided approximately $40.0 million of unused borrowing capacity.
13
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
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 September 30, 2003 and the related
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 2003 and 2002, the consolidated statement of shareholder's
equity for the nine-month period ended September 30, 2003 and the consolidated
statements of cash flows for the nine-month periods ended September 30, 2003 and
2002. 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
Industries, Inc. and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, shareholder's equity, and cash flows for
the year then ended, not presented herein, and in our report dated February 25,
2003, we expressed an unqualified opinion on those consolidated financial
statements and included an explanatory paragraph for a change in accounting for
goodwill. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2002, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
As discussed in Note B to the consolidated financial statements, effective
June 30, 2003, the Company changed its method of accounting for inventories at
certain subsidiaries.
/s/ Ernst & Young LLP
Cleveland, Ohio
November 12, 2003
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial information for the three-month and nine-month periods ended
September 30, 2003 is not directly comparable to the financial information for
the same periods in 2002 primarily due to restructuring and impairment charges,
divestitures and acquisitions. Restructuring charges of $1.0 million and $5.3
million were recorded in the third quarter and the first nine months of 2002,
respectively. The Company divested Castle Rubber in second quarter 2002, and
Green and St. Louis Screw in first quarter 2003. The Company purchased the
assets of Ajax in third quarter 2002.
OVERVIEW
The Company operates through three segments, ILS, Aluminum Products and
Manufactured Products. ILS is a leading supply chain logistics provider of
production components, principally to large OEM manufacturers. In connection
with the supply of such production components, ILS provides a variety of value-
added, cost-effective supply chain management services. The principal customers
of ILS are in the semiconductor equipment, heavy-duty truck, industrial
equipment, aerospace and defense, electrical controls, HVAC, vehicle parts and
accessories, appliances, and lawn and garden equipment industries. Aluminum
Products manufactures cast aluminum components for automotive, agricultural
equipment, heavy-duty truck and construction equipment manufacturers. 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 aerospace,
automotive, steel, forging, railroad, truck, oil, food processing and consumer
appliance industries.
The Company's sales volumes and profitability declined during 2001, due to
overall weakness in the manufacturing economy, and particularly to contraction
in the heavy-duty truck and automotive industries. Despite these sales declines,
the Company retained or gained market share in most major markets served. The
Company responded to this downturn by reducing costs, increasing prices on
targeted products, restructuring many of its businesses and selling non-core
manufacturing assets. The Company continued and extended restructuring its
businesses through 2001 and 2002, closing 20 supply chain logistics facilities,
and closing or selling eight manufacturing plants in those two years. With
regard to these actions, the Company recorded restructuring and impairment
charges of $28.5 million in 2001 and $19.2 million in 2002. Management's actions
were aimed to position the Company for increased profitability when the
manufacturing economy stabilizes and returns to growth.
The Company's actions resulted in increased operating income in 2002
compared to 2001, despite flat sales. Operating income rose to $16.6 million in
2002, after restructuring and impairment charges of $19.2 million, compared to
an operating loss of $3.9 million in 2001, after restructuring and impairment
charges of $28.5 million and goodwill amortization of $3.7 million.
The Company's profitability improved again in the first nine months of
2003, on lower sales. Compared to the first nine months of 2002, operating
income increased 28%, or $5.6 million, to $26.6 million, on a 3% sales decline.
Operating income in the first nine months of 2002 was negatively impacted by
$5.3 million in restructuring charges. During the first nine months of 2003, the
Company continued to reduce costs and implement its restructuring plan,
including consolidating two logistics facilities and selling two additional non-
core manufacturing businesses.
The Company sold substantially all the assets of St. Louis Screw on January
29, 2003 and Green on February 21, 2003 for cash totaling approximately $7.3
million.
The Company sold substantially all the assets of Castle Rubber on April 26,
2002 for cash of approximately $2.5 million. The Company purchased substantially
all the assets of Ajax on September 10, 2002 for cash of approximately $5.5
million.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Under FAS
142, the Company reviewed its goodwill
15
and other intangible assets and recorded a non-cash goodwill impairment charge
of $48.8 million, which was recorded as the cumulative effect of a change in
accounting principle effective January 1, 2002.
Effective June 30, 2003, the Company changed its method of accounting for
the 15% of its inventories utilizing the LIFO method to the FIFO method. As
required by generally accepted accounting principles, the Company has restated
its balance sheet as of December 31, 2002 to increase inventories by the
recorded LIFO reserve ($4.4 million), increase deferred tax liabilities ($1.7
million), and increase shareholders' equity ($2.7 million). Previously reported
results of operations have not been restated because the impact of utilizing the
LIFO method had an insignificant impact on the Company's reported amounts for
consolidated net income (loss).
RESULTS OF OPERATIONS
Nine Months 2003 versus Nine Months 2002
Net sales decreased by $16.7 million, or 3%, from $478.3 million for the
first nine months of 2002 to $461.6 million in 2003. ILS net sales declined 9%,
or $26.2 million, of which $8.6 million related to the sale of Green and the
early termination of the pharmaceutical sales contract. The remainder related to
continued volume weakness in customer industries. Aluminum Products net sales
were 16%, or $13.2 million lower, primarily due to the ending of $9.7 million of
sales contracts, a significant portion of which related to the 2002 closure of
the Tupelo plant. Manufactured Products net sales increased 25%, or $22.7
million, primarily due to increased sales in the induction business.
Gross profit increased by $2.7 million, or 4%, to $72.0 million for the
first nine months of 2003 from $69.3 million for the same period of 2002, and
the Company's gross margin increased to approximately 15.6% for the first nine
months of 2003 from 14.5% for the same period of 2002. ILS gross margin
decreased, primarily due to reduced absorption of fixed overhead over a smaller
sales base and the positive effect on the first nine months of 2002 of the early
termination of a high margin pharmaceutical sales contract, partially offset by
lower inventory costs, facility costs and other cost reductions. Aluminum
Products gross margin increased significantly, primarily as a result of
restructuring and cost reductions and higher margins on new contracts. Gross
margin in the Manufactured Products segment increased, primarily as a result of
increased sales and overhead efficiencies achieved in the induction business.
Selling, general and administrative ("SG&A") expenses increased by 5%, or
$2.5 million, to $45.5 million for the first nine months of 2003 from $43.0
million for the same period in 2002. Consolidated SG&A expenses as a percentage
of net sales were 9.8% for the first nine months of 2003 as compared to 9.0% for
the same period in 2002. SG&A expenses increased by $5.3 million due to the net
effect of acquisitions and divestitures, partially offset by cost reductions in
the ILS and Aluminum Products segments. SG&A expenses were also impacted by a
$1.3 million reduction of net pension credits reflecting less favorable returns
on pension plan assets.
Interest expense decreased $.7 million from $20.7 million in the first nine
months of 2002 to $20.0 million in the same period of 2003, due to reduced
borrowings in 2003. During the first nine months of 2003, the Company averaged
outstanding borrowings of $323.0 million as compared to $333.7 million for the
corresponding period of the prior year. The $10.7 million decrease related
primarily to lower average working capital levels during the first nine months
and cash from the sale of non-core manufacturing assets. The average interest
rate of 8.24% for the first nine months of 2003 was 2 basis points lower than
the average rate of 8.26% for the same period in 2002.
The effective income tax rate for the nine-month period ended September 30,
2003 was 17%. Only foreign and certain state income taxes were provided for in
2003. The federal income tax provision was offset by the recognition of the
benefit of net operating loss carryforwards for which valuation allowances had
been provided for prior to 2003. At December 31, 2002, the Company had net
operating loss carryforwards of approximately $25.6 million. Tax benefits
related to these carryforwards were fully reserved in 2002 because the Company
was in a three-year cumulative loss position. For the first nine months of 2002,
the Company recorded a $.6 million income tax provision despite a loss before
income tax of $.1 million, due to foreign taxes
16
and a foreign tax rate difference in foreign subsidiaries, and a reduced tax
benefit from the Company's foreign sales corporations.
Third Quarter 2003 versus Third Quarter 2002
Net sales decreased by $11.0 million, or 7%, from $157.8 million in third
quarter 2002 to $146.8 million in the same quarter 2003. ILS net sales declined
15%, or $15.3 million, of which $4.3 million related to the sale of Green and
the early termination of the pharmaceutical sales contract. The remainder
related to continued volume weakness in customer industries. Aluminum Products
net sales declined 19%, or $4.7 million, due to a $1.4 million decrease relating
to the ending of certain sales contracts, and downturns in volumes on certain
parts. Manufactured Products net sales increased 32%, or $9.0 million, primarily
due to increased sales in the induction business.
Gross profit decreased by $1.4 million, or 6%, to $21.8 million for third
quarter 2003 from $23.2 million for the same quarter 2002. However, the
Company's gross margin increased to approximately 14.8% for third quarter 2003
from 14.7% for the same quarter 2002. ILS gross margin decreased, primarily due
to reduced absorption of fixed overhead over a smaller sales base and the
positive effect on the third quarter of 2002 of the early termination of a high
margin pharmaceutical sales contract, partially offset by lower inventory costs,
facility costs and other cost reductions. Aluminum Products gross margin
increased, primarily as a result of restructuring and cost reductions and higher
margins on new contracts. Gross margin in the Manufactured Products segment
increased, primarily as a result of increased sales and overhead efficiencies
achieved in the induction business.
SG&A expenses increased by 3%, or $.5 million, to $15.0 million for third
quarter 2003 from $14.4 million for the same quarter 2002. Consolidated SG&A
expenses as a percentage of net sales were 10.2% for third quarter 2003 as
compared to 9.1% for the same quarter 2002. SG&A expenses increased by $1.5
million due to the net effect of acquisitions and divestitures, partially offset
by cost reductions in the ILS and Aluminum Products segments. SG&A expenses were
also impacted by a $.5 million reduction of net pension credits reflecting less
favorable returns on pension plan assets.
Interest expense decreased $.5 million from $7.0 million in third quarter
2002 to $6.5 million in the same quarter 2003 primarily due to lower interest
rates under the Company's new revolving credit agreement entered into in July
2003, and reduced borrowings in 2003. During third quarter 2003, the Company
averaged outstanding borrowings of $320.2 million as compared to $331.7 million
for the same quarter of the prior year. The $11.5 million decrease related
primarily to lower average working capital levels during the quarter and cash
from the sale of non-core manufacturing assets. The average interest rate of
8.13% for the current quarter was 34 basis points lower than the average rate of
8.47% for same quarter 2002.
The effective income tax rate for third quarter 2003 was 50%. Only foreign
and certain state income taxes were provided for in 2003. The federal income tax
provision was offset by the recognition of the benefit of net operating loss
carryforwards for which valuation allowances had been provided for prior to
2003. At December 31, 2002, the Company had net operating loss carryforwards of
approximately $25.6 million. Tax benefits related to these carryforwards were
fully reserved in 2002, because the Company was in a three-year cumulative loss
position. The effective income tax rate for third quarter 2002 was over 100%,
because of a $.4 million tax provision adjustment for the first two quarters of
2002 based on revised estimates of foreign taxes and a foreign tax rate
difference in the Company's foreign subsidiaries, and a reduced tax benefit from
the Company's foreign sales corporations.
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 due to holidays in the fourth quarter.
The timing of orders placed by the Company's customers has varied with,
among other factors, orders for customers' finished goods, customer production
schedules, competitive conditions and general economic
17
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 the Company's business units. Such variability is particularly
evident at the capital equipment businesses included in the Manufactured
Products segment, which typically ship a few large systems per year.
FORWARD-LOOKING STATEMENTS
This 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, credit availability, levels
and funding of capital expenditures and trends for the remainder of 2003.
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 and competitive
factors, including pricing pressures and product innovation; raw material
availability and pricing; changes in our 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, foreign currency
exchange rates, tax rates and adverse impacts to us, our suppliers and customers
from acts of terrorism or hostilities; our ability to meet various covenants,
including financial covenants, contained in our 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.
REVIEW BY INDEPENDENT ACCOUNTANTS
The consolidated financial statements at September 30, 2003, and for the
three-month and nine-month periods ended September 30, 2003 and 2002, have been
reviewed, prior to filing, by Ernst & Young LLP, the Company's independent
accountants, and their report is included herein.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) as of the end of the period covered by this quarterly
report, have concluded that, as of the end of such period, the Company's
disclosure controls and procedures were effective and designed to ensure that
material information relating to the Company and the Company's consolidated
subsidiaries would be made known to them by others within those entities.
There were no significant changes in the Company's internal control over
financial reporting or in other factors that occurred during the period covered
by this quarterly report that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
18
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(4) Amended and Restated Credit Agreement, dated November 5, 2003,
among Park-Ohio Industries, Inc., the other loan parties party
thereto, the lenders party thereto, Bank One, NA and Banc One
Capital Markets, Inc.
(15) Letter re: unaudited financial information
(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
(b) The Company did not file any reports on Form 8-K during the three
months ended September 30, 2003.
19
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 INDUSTRIES, INC.
------------------------------------
(REGISTRANT)
By /s/ RICHARD P. ELLIOTT
-----------------------------------
Name: Richard P. Elliott
Title: Vice President and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
Dated November 12, 2003
---------------------------------
20
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
<Table>
<Caption>
EXHIBIT
- -------
(4) Amended and Restated Credit Agreement, dated November 5,
2003, among Park-Ohio Industries Inc., the other loan
parties party thereto, the lenders party thereto, Bank One,
NA and Banc One Capital Markets, Inc.
(15) Letter re: unaudited financial information
(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
</Table>
21