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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________________ to ____________________
Commission file number 0-3134
PARK-OHIO INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-6520107
- ----------------------------------------------------- -----------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
23000 EUCLID AVENUE
CLEVELAND, OHIO
- ----------------------------------------------------- 44117
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) -----------------------------------------------------
(ZIP CODE)
Registrant's telephone number, including area code: (216) 692-7200
Securities registered pursuant to Section 12(b) of the Act:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) of the Act:
Common Stock, Par Value $1.00 Per Share
(Title of class)
$.75 Cumulative Convertible Preferred Stock, Par Value $1.00 Per Share
(Title of class)
Indicate by check mark whether the registrant (1) has filed reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 19, 1998: Approximately $156,000,000.
Number of shares outstanding of the registrant's Common Stock, par value
$1.00 per share, as of February 27, 1998: 11,147,462
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
MEETING OF SHAREHOLDERS TO BE HELD ON MAY 28, 1998 ARE INCORPORATED BY REFERENCE
INTO PART III OF THIS FORM 10-K.
The Exhibit Index is located on page 43.
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PARK-OHIO INDUSTRIES, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
ITEM NO. PAGE NO.
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PART I
1. Business 1
2. Properties 10
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for the Registrant's Common Stock and Related 12
Security Holder Matters
6. Selected Consolidated Financial Data 12
7. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
8. Financial Statements and Supplementary Data 19
9. Changes in and Disagreements with Accountants on Accounting 38
and Financial Disclosure
PART III
Part III information will appear in the Registrant's Proxy Statement in 39
connection with its 1998 Annual Meeting of Shareholders. Such Proxy
Statement will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A and such information will be incorporated
herein by reference as of the date of such filing.
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 39
8-K
SIGNATURES 42
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PART I
ITEM 1. BUSINESS
THE COMPANY
Park-Ohio Industries, Inc. ("the Company"), an Ohio Corporation since
January, 1985, operates through two segments, Manufactured Products and
Logistics, which serve a wide variety of industrial markets. Manufactured
Products designs and manufactures a broad range of high quality products
engineered for specific customer applications. The principal customers of
Manufactured Products are original equipment manufacturers ("OEMs") and
end-users in the automotive, railroad, truck and aerospace industries. Logistics
is a leading national supplier of fasteners (e.g., nuts, bolts and screws) and
other industrial products to OEMs, other manufacturers and distributors. In
connection with the supply of such industrial products, Logistics provides a
variety of value-added, cost-effective procurement solutions. The principal
customers of Logistics are in the transportation, industrial, electrical and
lawn and garden equipment industries. The Company's diversified operations
moderate the effect on the Company of downturns affecting individual operating
units and industries served. Between 1993 and 1997, the Company has grown
significantly, both internally and through acquisitions. Over this period, the
Company's net sales increased from $94.5 million to $441.1 million, income from
continuing operations increased from $3.7 million to $11.3 million, and EBITDA
increased from $7.2 million to $40.0 million.
RECENT DEVELOPMENTS
The Company completed five acquisitions for cash in 1997 (collectively, the
"1997 Acquisitions"). In January 1997, the Company acquired the assets of Green
Ball Bearing Company ("Green Bearing"), a manufacturer of wheel, hub and clutch
bearings for the automotive aftermarket, for $0.7 million. In February 1997, the
Company acquired the assets of Feco Engineered Systems Limited ("Feco"), which
produces complete oven systems that combine heat processing and curing
technologies with material handling and conveying methods, for approximately $3
million. In May 1997, the Company acquired the assets of The Delo Screw Products
Company ("Delo"), a manufacturer of screw machine products, for $9.2 million.
These three Manufactured Products acquisitions were supplemented by two
acquisitions of Logistics businesses. In July 1997, the Company acquired Arden
Industrial Products, Inc. ("Arden") for approximately $44 million. In October
1997, the Company acquired the assets of Arcon Fastener Corporation ("Arcon")
for $5.6 million.
The information contained under the headings of "Note B -- Acquisitions"
and "Note C -- Sale of Bennett Industries" of notes to consolidated financial
statements included herein, relating to recent acquisitions and dispositions is
incorporated herein by reference.
OPERATIONS
The Company conducts its business through two segments: Manufactured
Products and Logistics. Manufactured Products consists of five groups, certain
of which are comprised of multiple businesses. Each of the Company's operating
units has its own management team and maintains its own independent market
identity. The following chart highlights the Company's two business segments,
the key products they sell and the primary industries they serve:
NET SALES FOR THE
YEAR ENDED
SEGMENT PRIMARY INDUSTRIES SERVED SELECTED PRODUCTS/SERVICES Dec. 31, 1997(a)
------- ------------------------- -------------------------- ----------------
(MILLIONS)
MANUFACTURED PRODUCTS
Aluminum Casting Group:
General Aluminum Mfg. Company Automotive Transmission pump $36.5
housings, pinion carriers,
clutch retainers
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NET SALES FOR THE
YEAR ENDED
SEGMENT PRIMARY INDUSTRIES SERVED SELECTED PRODUCTS/SERVICES Dec. 31, 1997(a)
------- ------------------------- -------------------------- ----------------
(MILLIONS)
Forged and Machined Products 49.9
Group:
Park Drop Forge Railroad, aerospace Crankshafts, camshafts,
aircraft landing gears
Ohio Crankshaft Railroad, power Crankshafts, camshafts
generation, shipbuilding
Cleveland City Forge Construction Specialized hardware
Blue Falcon Forge Railroad Center plates, couplings
Capital Equipment Group: 58.1
Tocco Automotive, truck Induction heating systems
Ajax Automotive, truck Forging presses
Feco Food and beverage Heat processing and curing
packaging, automotive systems/ conveyance
systems
Advanced Vehicles Paper, aluminum, steel, Specialty lift trucks
flooring
Metal Forming Group: 67.8
RB&W Manufacturing Automotive, truck, Nuts
railroad
Delo Plumbing Fixtures
Green Bearing Automotive Bearings
Kay Home Products Consumer products Barbecue grills, screen
retailers houses, television tables
Industrial Rubber Products Group: 19.1
Castle Fluid and gas, steel Valve seals, power and
conveyor rolls, slitter
rings
Cicero Automotive, food Wire harnesses, spark plug
processing, consumer boots and nipples, general
appliance sealing gaskets
Geneva Automotive, Primary wire harnesses,
telecommunications, transoceanic cable boots,
funeral, truck casket gaskets, shock and
vibration mounts
LOGISTICS Transportation, Standard and specialty 218.7
industrial, electrical fasteners and other
and lawn and garden industrial products,
equipment, HVAC value-added services
- ---------------
(a) Net sales for the year ended December 31, 1997 do not reflect $9.0 million
of intercompany eliminations.
MANUFACTURED PRODUCTS
Manufactured Products operates through five groups which capitalize on the
Company's expertise in efficiently converting raw materials into high quality
finished products. The five groups include: Aluminum Casting, Forged and
Machined Products, Capital Equipment, Metal Forming and Industrial Rubber
Products. Manufactured Products generated net sales of $222.4 million, or 51% of
the Company's net sales for the year ended December 31, 1997. The three largest
customers, comprised of many divisions, accounted for approximately 31% of
manufactured products sales in 1997. The loss of business from any one of these
customers would have an adverse effect on this segment.
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ALUMINUM CASTING GROUP
The Aluminum Casting Group operates through General Aluminum Mfg. Company
("GAMCO") and its wholly owned subsidiary. The Aluminum Casting Group, which
manufactures aluminum permanent mold castings primarily for the automotive
industry, generated net sales of $36.5 million for the year ended December 31,
1997, which represented 8% of the Company's net sales for such period.
Products and Services. GAMCO manufactures aluminum permanent mold
castings used primarily in automobile transmissions and engines. GAMCO's
aluminum castings are manufactured by transferring molten aluminum from a
melting furnace to a steel mold in which the aluminum then solidifies into the
final product. GAMCO's principal automotive products include: transmission pump
housings, planetary pinion carriers, clutch retainers, rotor castings and
bearing cups. In addition, GAMCO manufactures products for non-automotive end
users such as surgical table components, light housings and electrical meter
housings. GAMCO also provides value-added services such as secondary casting,
machining, drilling, tapping and part assembly.
GAMCO's cast aluminum parts are critical components manufactured primarily
for automotive OEMs. Although these parts are lightweight, they possess high
durability and integrity characteristics even under extreme pressure and
temperature conditions. Demand by automotive OEMs for aluminum permanent mold
products has increased in recent years as OEMs have sought lighter alternatives
to heavier steel and iron components. Lighter aluminum cast components increase
an automobile's fuel efficiency without decreasing its structural integrity.
Management believes this replacement trend will continue as government standards
regarding fuel efficiency become increasingly stringent.
Markets and Customers. GAMCO sells its products primarily to customers
located in North America. The market for aluminum permanent mold castings is
comprised of two segments: automotive and non-automotive.
Competition. The domestic aluminum permanent mold industry is highly
competitive and consists of several large participants. The Company's principal
competition comes from several large domestic companies, each of which provides
a broad array of products manufactured from a variety of metals, including
aluminum. GAMCO competes principally on the basis of its ability to: (i)
engineer and manufacture high quality, semi-machined castings in large volumes;
(ii) provide timely delivery; and (iii) retain the manufacturing flexibility
necessary to quickly adjust to the needs of its customers. Although there are a
number of smaller domestic companies with aluminum permanent mold casting
capabilities, the automotive industry's stringent quality and service standards
enable only large suppliers with the requisite quality certifications to compete
effectively. As one of these suppliers, GAMCO has benefited in recent years as
automotive OEMs have consolidated their supplier base. GAMCO, a well-established
name in the aluminum permanent mold industry, has achieved QS-9000 and ISO 9002
certifications and has been awarded numerous supplier quality awards.
FORGED AND MACHINED PRODUCTS GROUP
The Forged and Machined Products Group consists of four operating units:
Park Drop Forge, Ohio Crankshaft, Cleveland City Forge and Blue Falcon Forge.
The Forged and Machined Products Group designs and manufactures crankshafts,
camshafts and other high strength, high performance structural parts primarily
for aircraft and locomotive manufacturers. The Forged and Machined Products
Group generated net sales of $49.9 million for the year ended December 31, 1997,
which represented 11% of the Company's net sales for such period.
Products and Services. The Forged and Machined Products Group produces,
machines and finishes closed-die metal forgings for customers in the railroad,
aerospace, power generation, shipbuilding, construction and off-road vehicle
industries. The forging process enables metal to be shaped while generally
retaining higher structural integrity than metal shaped through other processes.
Ohio Crankshaft, one of the largest independent designers and machiners of
crankshafts and camshafts in the United States, machines, induction hardens and
surface finishes crankshafts and camshafts used prima-
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rily in locomotives, power generators and ships. Park Drop Forge manufactures
closed-die metal forgings of up to 6,000 pounds, including crankshafts,
camshafts and aircraft landing gears, primarily for customers in the railroad
and aerospace industries. Park Drop Forge is able to produce large forged
products as a result of its 50,000 pound hammer, one of only three of its kind
in North America. Cleveland City Forge manufactures and machines specialized
hardware such as turnbuckles and clevises for the construction industry. Its
products are manufactured according to customers' specific dimensional and/or
strength requirements. Blue Falcon Forge produces large forged products for the
railroad industry, such as center plates and couplings, both of which are used
in the undercarriage of rail cars.
Markets and Customers. The Forged and Machined Products Group's goods are
sold to a wide variety of domestic and international OEMs and other
manufacturers in the transportation, power generation and construction
industries. Park Drop Forge's products are sold primarily to machining companies
and subassemblers who finish the products for sale to OEMs in the railroad and
aerospace industries. Park Drop Forge's primary customers include machinists and
aircraft subassemblers who assemble components such as complete landing gear
units for aircraft OEMs. Cleveland City Forge's primary customers include
construction companies. Blue Falcon Forge's primary customers include major rail
car manufacturers.
Competition. The Forged and Machined Products Group competes domestically
and internationally with other small to medium-sized businesses. Ohio Crankshaft
competes domestically on the basis of product quality and precision. Park Drop
Forge competes domestically and internationally on the basis of product quality
and precision with approximately 20 forging manufacturers that are capable of
producing large forged components. Blue Falcon Forge and Cleveland City Forge
compete domestically on the basis of product quality, price and delivery time
with numerous small and medium-sized forging companies.
CAPITAL EQUIPMENT GROUP
The Capital Equipment Group consists of four operating units: Tocco, Ajax,
Feco and Advanced Vehicles. The Capital Equipment Group custom engineers and
manufactures induction heating systems, forging presses and heat processing and
curing systems, primarily for the automotive and packaging industries. The
Capital Equipment Group generated net sales of $58.1 million for the year ended
December 31, 1997, which represented 13% of the Company's net sales for such
period.
Products and Services. The Capital Equipment Group manufactures large
industrial equipment for a variety of industries including automotive, truck and
packaging. Tocco specializes in the engineering and construction of induction
heating systems primarily for the automotive and truck industries. Tocco's
induction heating systems are engineered and built to customer specifications
and are used primarily by OEMs for surface hardening. Ajax engineers,
manufactures and services mechanical forging presses ranging in size from 500 to
8,000 tons that are used worldwide in the automotive and truck manufacturing
industries. Feco produces complete oven systems that combine heat processing and
curing technologies with material handling and conveying methods. Feco's
principal products include industrial drying and curing ovens for automotive
components, metal can curing ovens, specialized conveyor and automation systems
for lightweight containers, and plastic and glass bottle coating and finishing
systems. Advanced Vehicles specializes in the design and production of specialty
lift trucks used by customers in the paper, aluminum, steel and flooring
industries.
Markets and Customers. The Capital Equipment Group's products are sold
domestically and internationally to a wide variety of heavy industrial
manufacturers in the automotive, truck and packaging industries.
Competition. The Capital Equipment Group competes domestically and
internationally with large equipment manufacturers on the basis of service
capability, ability to meet customer specifications, delivery performance and
engineering expertise.
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METAL FORMING GROUP
The Metal Forming Group consists of five operating units: RB&W
Manufacturing, Delo, Green Bearing, Kay Home Products and Friendly & Safe
Packaging Systems, Inc. (which commenced operations in January, 1998). The Metal
Forming Group manufactures standard and specialty engineered fasteners and
related hardware, bearings, plumbing fixtures, certain consumer products and
plastic pharmaceutical caps and vials. The Metal Forming Group generated net
sales of $67.8 million for the year ended December 31, 1997, which represented
15% of the Company's net sales for such period.
Products and Services. The Metal Forming Group engineers and manufactures
precision cold formed and cold extruded products, which are manufactured by
shaping cold raw materials, for the automotive, truck and railroad industries.
In addition, the Metal Forming Group screw-machines plumbing fixtures and
manufactures bearings and certain consumer products. RB&W Manufacturing produces
certain standard and specialty nuts to customer specifications, which are used
in large volumes by customers in the automobile, truck and railroad industries.
RB&W Manufacturing's products include lock nuts, spac nuts and wheel hardware,
which are principally used in applications where controlled tightening is
required due to high vibration. RB&W Manufacturing currently sells approximately
$5 million of product through Logistics. Delo screw-machines products for OEMs
in the plumbing industry and produces knobs and internal plumbing fixtures.
Green Bearing produces wheel, hub and clutch bearings, primarily for sale to the
automotive aftermarket. Kay Home Products, which manufactures products for sale
to consumers through various retail outlets, produces barbecue grills, screen
houses, television tray tables, plant stands and patio tables. Friendly & Safe
Packaging Systems, Inc. produces plastic pharmaceutical caps and vials.
Markets and Customers. The Metal Forming Group's products are sold to a
diverse set of industrial and retail customers. RB&W sells its products to OEMs
and distributors in the automotive, truck and railroad industries. Delo sells
its products to OEMs, primarily in the plumbing industry. Green Bearing sells
its products to distributors in the automotive aftermarket. Kay Home Products
sells its goods in North America through a network of mass merchandise
retailers, grocery chains, drug stores and hardware stores.
Competition. The Metal Forming Group's operating units compete against
other domestic and international, small to medium-sized manufacturers. Due to
the fragmented nature of the markets in which RB&W Manufacturing and Delo
compete and the substantial purchasing power of the large OEMs served, these
companies compete primarily on the basis of price, product quality, engineering
expertise and delivery reliability. Green Bearing competes primarily on the
basis of product quality and delivery reliability. Kay Home Products competes
primarily on the basis of price.
INDUSTRIAL RUBBER PRODUCTS GROUP
The Industrial Rubber Products Group consists of three operating units:
Castle Rubber Company ("Castle"), Cicero and Geneva. The Industrial Rubber
Products Group manufactures molded rubber products for use in automobiles, fluid
and gas lines, steel mills, and food processing and communications equipment.
The Industrial Rubber Products Group generated net sales of $19.1 million for
the year ended December 31, 1997, which represented 4% of the Company's net
sales for such period.
Products and Services. The Industrial Rubber Products Group manufactures
injection and transfer molded products, lathe-cut goods, roll coverings and
various items requiring rubber to metal bonding for use in industrial
applications. Castle manufactures valve seals, power and conveyor rolls and
slitter rings. Cicero is a developer and manufacturer of injection molded
silicone rubber products for customers in the automotive, food processing and
consumer appliance industries, such as wire harnesses, spark plug boots and
nipples and general sealing gaskets. Geneva is a manufacturer of injection
molded rubber products for customers in the automotive, telecommunications,
funeral and heavy truck industries. Its products include primary wire harnesses,
transoceanic cable boots, casket gaskets and shock and vibration mounts.
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Markets and Customers. The Industrial Rubber Products Group supplies the
fluid and gas, steel, food processing, consumer appliance, heavy truck,
telecommunications, funeral and aerospace industries, both domestically and
internationally.
Competition. The Industrial Rubber Products Group competes primarily on
the basis of price and product quality with other domestic small to medium-sized
manufacturers of rubber products.
LOGISTICS
Logistics is a leading national supplier of over 150,000 standard and
specialty fasteners and other industrial products pursuant to either supply
chain management agreements or traditional wholesale supply arrangements.
Logistics operates out of 33 branches located throughout the United States, two
branches in Mexico and branches in Canada, Puerto Rico and England, and has a
central distribution center located in Dayton, Ohio. Logistics generated net
sales of $218.7 million, or 49% of the Company's net sales for the year ended
December 31, 1997. The three largest customers, comprised of many divisions,
accounted for approximately 22% of sales of Logistics. The loss of any one of
these customers would have an adverse effect on this business.
Products and Services. Supply chain management, which is Logistics'
primary focus for future growth, involves offering customers procurement
solutions and comprehensive, on-site management for most of their fastener and
related hardware needs. Supply chain management customers receive value-added
services, such as part usage and cost analysis, product redesign
recommendations, supplier selection, quality assurance, bar coding, product
packaging and tracking, just-in-time delivery, electronic billing services and
ongoing technical support. Supply chain management services are typically
provided to customers' facilities pursuant to total fastening services ("TFS")
contracts. TFS contracts enable Logistics' customers to both reduce procurement
costs and better focus on their companies' core manufacturing competencies by:
(i) significantly reducing the administrative and labor costs associated with
fastener procurement by outsourcing certain internal purchasing, quality control
and inventory fulfillment responsibilities; (ii) reducing the amount of working
capital invested in inventory; (iii) achieving purchasing efficiencies as a
result of vendor consolidation; and (iv) receiving technical expertise in the
selection of fastener and other components for certain manufacturing processes.
Management believes that TFS contracts foster longer-lasting supply
relationships with customers, who increasingly rely on the Company for their
fastener needs, as compared to traditional buy/sell distribution relationships.
Sales pursuant to TFS contracts have increased significantly in recent years and
represented over 60% of Logistics' net sales for the year ended December 31,
1997. Logistics' remaining sales are generated through the wholesale supply of
fasteners and other industrial products to OEMs, other manufacturers and
distributors pursuant to master or authorized distributor relationships.
Logistics supplies standard and specialty engineered fasteners such as
nuts, bolts, screws and washers. In addition to fasteners, Logistics supplies,
among other things, valves, fittings, clamps and rubber products, which
currently represent approximately 10% of Logistics' net sales. Logistics also
provides engineering and design services to its customers.
Applications-engineering specialists and the direct sales force work closely
with the engineering staff of OEM customers to recommend the appropriate
fasteners for a new product or to suggest alternative fasteners that reduce
overall production costs, streamline assembly or enhance the appearance or
performance of the end product.
Markets and Customers. In 1997, more than 95% of Logistics' net sales
were to domestic customers. The domestic industrial fastener market is estimated
by industry sources to have generated between $7 and $9 billion in annual sales
in 1997 at the wholesale level. Fasteners are used extensively by OEMs in a
variety of industries, and demand is generally related to the state of the
economy and to the overall level of manufacturing activity.
Logistics markets and sells fasteners and other industrial products to over
7,000 customers domestically and internationally. The principal markets served
by Logistics are transportation equipment, including manufacturers of heavy
trucks, recreational vehicles and automotive parts and accessories,
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industrial equipment, electrical equipment, including manufacturers of
electrical controls, appliances and motors, lawn and garden equipment and HVAC.
In recent years, OEMs have made it a priority to reduce their total cost of
purchasing and handling fasteners. Due to the low unit cost and the large number
of different fasteners used to manufacture or assemble a single product,
administrative and overhead costs comprise a substantial portion of an OEM's
fastener-related costs. As a result, management believes that the number of
industrial fastener suppliers are consolidating as OEMs rely on fewer suppliers
to achieve purchasing efficiencies. Larger suppliers such as the Company that
provide a wide array of value-added services and are reliable sources for
just-in-time delivery are best positioned to capitalize on these trends. In
addition, OEMs are increasingly relying on fastener suppliers to provide design
and applications engineering support, enabling more efficient use of internal
engineering resources. Management believes that these developments will allow
Logistics to increase the amount of low unit cost fastener and non-fastener
items supplied to OEMs.
Competition. The industrial fastener supply industry is highly
competitive and fragmented, with over 2,500 domestic full-line, industrial
fastener suppliers and other domestic suppliers that offer a limited number of
fasteners in addition to other industrial products. Management believes that
substantially all of Logistics' competitors operate on a regional basis and do
not provide customers with the wide array of value-added services offered by
larger suppliers such as the Company. Logistics competes primarily on the basis
of its value-added services, extensive product selection and price with
primarily domestic competitors who are capable of providing inventory management
programs.
SALES AND MARKETING
Each of the operating units within Manufactured Products markets and sells
its products through both internal sales personnel and independent sales
representatives. In some instances, the internal engineering staff assists in
the sales and marketing effort through joint design and applications-engineering
efforts with major customers. In addition, some Manufactured Products operating
units market certain of their products through various regional and national
trade shows.
Logistics markets its products and services in the United States, Mexico,
Canada and Europe, primarily through its direct sales force, which is assisted
by applications engineers who provide the technical expertise necessary to
assist the engineering staff of OEM customers in designing new products and
improving existing products. Logistics often obtains new customers as a result
of referrals from existing customers.
RAW MATERIALS AND SUPPLIERS
Manufactured Products purchases substantially all of its raw materials,
principally metals and certain component parts incorporated into its products,
and Logistics purchases substantially all of its fasteners, from third-party
suppliers and manufacturers. Management believes that raw materials and
component parts other than certain specialty fasteners are available from
alternative sources. Most raw materials required by Manufactured Products are
commodity products available from several domestic suppliers. Park Drop Forge
supplies approximately 75% of the closed-die steel forgings used in the
production of crankshafts and camshafts by Ohio Crankshaft. Logistics has
multiple sources of supply for standard products, but has limited supply sources
for certain specialty products. Approximately 10% of Logistics' fasteners are
purchased from suppliers in foreign countries, primarily Taiwan, Japan and
Korea. The Company is dependent upon the ability of such suppliers to meet
stringent quality and performance standards and to conform to delivery
schedules. In addition, operating units of Manufactured Products supply
approximately $5 million of products to Logistics.
EMPLOYEES
As of December 31, 1997, the Company had a total of 2,659 employees, of
whom 2,637 were employed by the Company's operating units. Approximately 635
employees are subject to collective
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bargaining agreements that expire between May 1998 and June 2001. The Company
believes that its collective bargaining agreements will be renegotiated and
extended in the ordinary course of business. In the last six years, the Company
has experienced labor strikes at two operating units of Manufactured Products.
The following table provides information relating to the employees of the
Company's operating units as of December 31, 1997:
OPERATING EMPLOYEES
--------- ---------
Aluminum Casting............................................ 342
Forged and Machined Products................................ 372
Capital Equipment........................................... 345
Metal Forming............................................... 400
Industrial Rubber Products.................................. 299
Logistics................................................... 879
-----
Total operating unit employees............................ 2,637
=====
BACKLOG
Manufactured Products' backlog was as follows as of December 31, 1997
(dollars in millions):
PERCENTAGE
OPERATING UNIT AMOUNT OF TOTAL
-------------- ------ ----------
Aluminum Casting............................................ $ 6.1 7.1%
Forged and Machined Products................................ 40.3 46.6
Capital Equipment........................................... 14.1 16.3
Metal Forming............................................... 23.0 26.6
Industrial Rubber Products.................................. 2.9 3.4
----- -----
Total..................................................... $86.4 100.0%
===== =====
Management believes that Manufactured Products' backlog as of any
particular date may not be indicative of sales for any future period. The
Company expects that all of Manufactured Products' backlog as of December 31,
1997 will be shipped by December 31, 1998. Management believes that backlog is
not a meaningful measure for the Company's Logistics operating units, as a
majority of Logistics' customers require just-in-time delivery of fasteners and
other industrial products.
RESEARCH AND DEVELOPMENT
Research and development activities are conducted separately by each
operating unit. The Company's operating units focus on engineering products to
meet specific customer application requirements. Teams representing different
functional areas within an operating unit work closely with customers early in
the product design process to ensure that products meet customer specifications
and are designed for ease of manufacturing. As a general matter, the Company's
operating units have not required substantial research and development
expenditures.
ENVIRONMENTAL REGULATIONS
The Company is subject to numerous federal, state and local laws and
regulations designed to protect public health and the environment
("Environmental Laws"), particularly with regard to discharges and emissions, as
well as handling, storage, treatment and disposal, of various substances and
wastes. Pursuant to certain Environmental Laws, owners or operators of
facilities may be liable for the costs of response or other corrective actions
for contamination identified at or emanating from current or former locations,
without regard to whether the owner or operator knew of, or was responsible for,
the presence of any such contamination, and for related damages to natural
resources. Additionally, persons who arrange for the disposal or treatment of
hazardous substances or materials may be liable
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for costs of response at sites where they are located, whether or not the site
is owned or operated by such person.
The Company believes that it is currently in material compliance with
applicable Environmental Laws. In general, the Company has not experienced
difficulty in complying with Environmental Laws in the past, and compliance with
Environmental Laws has not had a material adverse effect on the Company's
financial condition, liquidity and results of operations. The Company's capital
expenditures on environmental control facilities were not material during the
past five years and such expenditures are not expected to be material to the
Company in the foreseeable future.
The Company has been identified as a potentially responsible party at
certain third-party sites under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or comparable state laws
which provide for strict and, under certain circumstances, joint and several
liability. The Company is participating in the cost of certain clean-up efforts
at several of these sites. However, the Company's share of such costs has not
been material and based on available information, the Company does not expect
its exposure at any of these locations to have a material adverse effect on its
results of operations, liquidity or financial condition.
At its facility in Kent, Ohio, the Company is conducting remediation of
groundwater impacted by operations and disposal activities. Contaminants known
to be present in the groundwater at the facility and/or to have migrated
off-site include oil and certain volatile organic compounds. In addition, the
Company is conducting soil and groundwater investigations in connection with a
closure under the Resource Conservation and Recovery Act of 1976, as amended, of
hazardous waste storage areas associated with former metal plating operations.
To date, the majority of the approximately $2.5 million cost associated with all
of these efforts at the Kent facility has been shared equally between the
Company and the former owner of the facility under a cost-sharing agreement. The
availability of third-party payments or insurance for environmental remediation
activities is subject to risks associated with the willingness and ability of
the third party to make payments. The Company does not believe that future costs
to address the currently identified environmental issues at its facilities will
be material.
INFORMATION AS TO INDUSTRY SEGMENT REPORTING
The information contained under the heading of "Note L--Industry Segments"
of notes to consolidated financial statements included herein, relating to net
sales, operating income, identifiable assets and other information by industry
segment for the years ended December 31, 1997, 1996, and 1995 is incorporated
herein by reference.
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ITEM 2. PROPERTIES
The following are the principal operating facilities of the Company's
Manufactured Products businesses, listed by operating unit, each of which also
has limited general office and administrative space:
APPROXIMATE
SQUARE OWNED/
OPERATING UNIT LOCATION FOOTAGE LEASED
-------------- -------- ------- ------
Aluminum Casting............... Conneaut, Ohio 211,500 Leased
(three locations)
Conneaut, Ohio 110,000 Owned
Hartsville, Tennessee 39,000 Leased
Forged and Machined Products... Cuyahoga Heights, Ohio 427,000 Owned
Cleveland, Ohio 391,000 Owned
Berwick, Pennsylvania 180,000 Leased
Wellington, Ohio 50,000 Owned
Capital Equipment.............. Cleveland, Ohio 167,000 Leased
Cleveland, Ohio 116,000 Owned
Boaz, Alabama 100,000 Leased
Madison Heights, Michigan 26,000 Leased
West Midland, England 11,500 Leased
Indianapolis, Indiana 10,000 Leased
Quatero, Mexico 10,000 Leased
Metal Forming.................. Antioch, Illinois 333,500 Owned
Kent, Ohio 225,000 Owned
Coraopolis, Pennsylvania 133,000 Owned
Cleveland, Ohio 72,000 Owned
Cleveland, Ohio 24,000 Owned
Delaware, Ohio 44,500 Owned
Mississauga, Ontario 37,000 Leased
Mississauga, Ontario 19,500 Leased
Industrial Rubber Products..... East Butler, Pennsylvania 136,000 Owned
Geneva, Ohio 81,000 Leased
Cicero, Illinois 17,000 Owned
Logistics leases 33 branch locations domestically in 20 states, and leases
two branches in Mexico and one in each of Canada, Puerto Rico and England. In
addition, Logistics leases its central distribution facility in Dayton, Ohio.
The Company leases its executive offices in Cleveland, Ohio.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various pending and threatened lawsuits in which
claims for monetary damages are asserted in the ordinary course of business.
While any litigation involves an element of uncertainty, in the opinion of
management, liabilities, if any, arising from currently pending or threatened
litigation will not have a material adverse effect on the Company's financial
condition, liquidity and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
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MANAGEMENT
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers of the Company is as follows:
NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS
Edward F. Crawford................. 58 Chairman of the Board, Chief Executive Officer and
President
James S. Walker.................... 55 Vice President and Chief Financial Officer
Felix J. Tarorick.................. 55 Vice President of Operations, President of Metal Forming
Group
Ronald J. Cozean................... 34 Secretary and General Counsel
Matthew V. Crawford................ 28 Assistant Secretary, Corporate Counsel and Director
Patrick W. Fogarty................. 37 Director of Corporate Development
Edward F. Crawford has been Chairman of the Board and Chief Executive
Officer of the Company since 1992. Mr. E. Crawford has also served as Chairman
of the Board, Chief Executive Officer and President of The Crawford Group, Inc.,
which operates a diversified group of manufacturing companies, since 1964. Mr.
E. Crawford served as a director of the Company from 1989 to 1991. Mr. E.
Crawford has over 30 years of entrepreneurial experience in buying, selling and
operating manufacturing companies. Mr. E. Crawford also serves as a director of
Continental Global Group, Inc., a manufacturer of conveyor equipment for use in
the coal mining industry.
James S. Walker has served as Vice President and Chief Financial Officer of
the Company since 1991. Mr. Walker has significant experience in evaluating
acquisitions and integrating acquired companies. Mr. Walker has been with the
Company for over 19 years and has served in several capacities, including
Corporate Controller and Assistant Treasurer.
Felix J. Tarorick became Vice President of Operations in 1996 and has been
President of the Metal Forming Group since 1995. From 1992 to 1995, Mr. Tarorick
served as President of Kay Home Products, Inc. Mr. Tarorick joined the Company
in 1992. Mr. Tarorick has over 30 years of relevant industry experience. Mr.
Tarorick became a director of the Company in February, 1998.
Ronald J. Cozean has served as Secretary and General Counsel since joining
the Company in 1994. Mr. Cozean was an associate at the law firm of Squire,
Sanders & Dempsey L.L.P. from 1991 to 1994.
Matthew V. Crawford has served as Assistant Secretary and Corporate Counsel
since joining the Company in February 1995 and has served as President of
Crawford Container Company since 1991. Mr. M. Crawford became a director of the
Company in August 1997. Prior to joining the Company, Mr. M. Crawford worked as
a Corporate Finance Analyst at McDonald & Co. Securities, Inc. Mr. E. Crawford
is the father of Mr. M. Crawford.
Patrick W. Fogarty has been Director of Corporate Development since 1997
and was Director of Finance since joining the Company in 1995. Prior thereto,
Mr. Fogarty held various positions, including Senior Manager, at Ernst & Young
LLP from 1983 to 1995.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Park-Ohio's common stock, $1 par value, is traded on the NASDAQ National
Market System. The table presents its high and low sales prices. No dividends
were paid during the periods.
QUARTERLY COMMON STOCK PRICE RANGES
1997 1996
------------ ----------
QUARTER HIGH LOW HIGH LOW
- ------- ---- --- ---- ---
1st 16 7/8 12 1/2 17 1/8 13 1/8
2nd 15 1/4 11 1/4 23 16 3/8
3rd 16 3/8 14 1/4 19 3/8 14 1/8
4th 18 3/8 15 16 5/8 12 7/8
The number of common shareholders of record for Park-Ohio's common stock as
of March 20, 1998 was 1,347.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Selected Income Statement Data:
Net sales............................... $441,110 $347,679 $289,501 $129,216 $ 94,472
Cost of products sold................... 368,734 289,400 240,871 104,225 75,892
-------- -------- -------- -------- --------
Gross profit.......................... 72,376 58,279 48,630 24,991 18,580
Selling, general and administrative
expenses.............................. 44,396 38,131 30,020 16,838 13,968
Restructuring charge.................... -- 2,652 -- -- --
-------- -------- -------- -------- --------
Operating income (a).................. 27,980 17,496 18,610 8,153 4,612
Other (income) expense.................. (320) (4,204)(b) (214) -- --
Interest expense........................ 9,101 6,947 5,911 1,501 683
-------- -------- -------- -------- --------
Income from continuing operations
before income taxes................ 19,199 14,753 12,913 6,652 3,929
Income taxes (benefit).................. 7,903 5,060 (6,900) (1,826) 242
-------- -------- -------- -------- --------
Income from continuing operations
before extraordinary charge........ $ 11,296 $ 9,693 $ 19,813 $ 8,478 $ 3,687
======== ======== ======== ======== ========
Income per common share from continuing
operations before extraordinary
charge -- diluted..................... $ 1.01 $ .88 $ 1.87 $ 1.03 $ .56
======== ======== ======== ======== ========
Supplemental per common share data:
Pro forma income per common share from
continuing operations before
extraordinary charge on a fully
taxable basis -- diluted.............. $ 1.01 $ .88 $ .75 $ .47 $ .34
======== ======== ======== ======== ========
Other Financial Data:
EBITDA(c)............................... $ 38,646 $ 28,146 $ 24,888 $ 11,366 $ 7,239
Capital expenditures.................... 15,947 15,590 13,632 11,749 4,992
Ratio of earnings to fixed charges(d)... 2.7x 2.7x 2.8x 3.8x 3.9x
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AS OF DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Selected Balance Sheet Data:
Cash and cash equivalents............. $ 1,814 $ 4,659 $ 2,662 $ 2,172 $ 133
Working capital....................... 147,269 99,723 96,719 29,596 18,409
Total assets.......................... 413,109 282,910 301,747 128,396 93,541
Total debt............................ 172,755 82,989 118,738 32,001 25,054
Shareholders' equity.................. 129,835 115,698 95,954 46,715 17,933
(a) Operating income is defined as net sales less cost of products sold,
selling, general and administrative expenses and a restructuring charge. In
1996, the Company incurred a restructuring charge of $2.7 million related to
the consolidation of three of the Company's consumer products manufacturing
facilities into one and the discontinuation of certain product lines.
(b) In 1996, other income was comprised of (i) a gain of $2.7 million in
connection with the full settlement of subordinated notes receivable
resulting from the sale of two manufacturing facilities and (ii) a gain of
$1.5 million on the sale of certain securities by the Company in the third
quarter of 1996.
(c) EBITDA is defined as earnings from continuing operations before interest,
income taxes, depreciation, amortization, other income and non-recurring
items. Non-recurring items include a restructuring charge of $2.7 million in
the fourth quarter of 1996 related to the consolidation of three of the
Company's consumer products manufacturing facilities into one and the
discontinuation of certain product lines. EBITDA is not a measure of
performance under generally accepted accounting principles ("GAAP"). While
EBITDA should not be considered in isolation or as a substitute for net
income, cash flows from operating activities and other income or cash flow
statement data prepared in accordance with GAAP or as a measure of
profitability or liquidity, management understands that EBITDA is
customarily used as an indication of a company's ability to incur and
service debt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of other measures of
liquidity and operations that are covered by the audited financial
statements. EBITDA as defined herein may not be comparable to other
similarly titled measures of other companies.
(d) Earnings are defined as income from continuing operations before income
taxes and fixed charges. Fixed charges are defined as interest expense and a
portion of rental expense representing the interest factor, which the
Company estimates to be one-third of rental expense, and amortization of
deferred financing costs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The consolidated financial statements of the Company include the accounts
of Park-Ohio Industries, Inc. and it subsidiaries after elimination of material
intercompany transactions and balances. The historical financial information of
the Company's continuing operations is not directly comparable on a year-to-year
basis due to the 1997 Acquisitions. During 1997, the Company acquired five
businesses, the largest of which was Arden Industrial Products, Inc. for $44.0
million as of August 1, 1997. Arden is a national distributor of specialty and
standard fasteners to the industrial market. In addition, during the year the
Company acquired four other businesses for an aggregate purchase price
approximating $18.5 million. All acquisitions were accounted for as purchases
and consequently their results are included in the consolidated financial
statements from their respective date of being acquired. In 1996, the Company
sold substantially all of the assets of Bennett Industries, Inc., a manufacturer
of plastic containers, in order to focus on its remaining manufacturing and
logistics businesses. Bennett generated net sales of $81.9 million in 1995. The
1996 and 1995 operating results of Bennett have been classified as discontinued
operations.
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OVERVIEW
The Company operates through two segments, Manufactured Products and
Logistics, that serve a wide variety of industrial markets. Manufactured
Products designs and manufactures 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
and aerospace industries. Logistics is a leading national supplier of fasteners
(e.g., nuts, bolts and screws) and other industrial products to OEMs, other
manufacturers and distributors. In connection with the supply of such industrial
products, Logistics provides a variety of value-added, cost-effective
procurement solutions. The principal customers of Logistics are in the
transportation, industrial, electrical and lawn and garden equipment industries.
Between 1994 and 1997, the Company has grown significantly, both internally and
through acquisitions. Over this period, the Company's net sales increased at a
51% compounded annual growth rate ("CAGR"), from $129.2 million to $441.1
million, and income from continuing operations increased at a 40% CAGR from $4.1
million on a fully taxed basis to $11.3 million.
Growth since 1992 has been primarily attributable to the Company's strategy
of making selective acquisitions in order to complement internal growth.
Historically, the Company has acquired underperforming businesses with potential
for: (i) significant cost reductions through improved labor, supplier and
customer relations and increased purchasing power and (ii) revenue enhancement
due to better asset utilization and management practices, as well as increased
access to capital. The Company's internal growth has been driven primarily by
the addition of Logistics customers under TFS contracts and by the leveraging of
existing customer relationships at Manufactured Products.
Between 1994 and December 31, 1997, the Company's continuing operations
incurred $45.2 million of capital expenditures, the majority of which was used
to expand and upgrade existing manufacturing facilities and enhance the
Company's management information systems.
RESULTS OF OPERATIONS
1997 versus 1996
Net sales from continuing operations increased by $93.4 million, or 27%,
from $347.7 million in 1996 to $441.1 million in 1997. Approximately 42% of this
increase was attributable to internal growth and 58% was a result of the 1997
Acquisitions. Of the internal sales growth, approximately 70% was primarily
attributable to the addition of TFS customers in the Logistics segment and the
remainder was due to increased orders from Manufactured Products' customers. Of
the growth in net sales attributable to the 1997 acquisitions, the majority
applies to the Logistics segment and primarily pertains to Arden which was
acquired as of August 1, 1997.
Gross profit from continuing operations increased by $14.1 million, or 24%,
from $58.3 million in 1996 to $72.4 million in 1997. Of the increase, 79%
relates to the 1997 Acquisitions and 21% was due to internal growth. A majority
of the increase attributable to the 1997 Acquisitions was related to Arden. The
Company's consolidated gross margin from continuing operations decreased to
16.4% in 1997 from 16.8% in 1996. This decrease in consolidated gross margin was
primarily due to a change in the Company's revenue mix.
Selling, general and administrative costs from continuing operations
increased by 16% to $44.4 million in 1997 from $38.1 million in 1996.
Approximately 93% of such increase was related to the 1997 Acquisitions.
Consolidated selling, general and administrative expenses decreased as a
percentage of net sales to 10.1% in 1997 from 11.0% in 1996 due to economies of
scale resulting from higher sales volume.
Interest expense from continuing operations increased by $2.2 million from
$6.9 million in 1996 to $9.1 million in 1997 due to average debt outstanding in
1997 increasing by $19.9 million and to the reclassification in 1996 of
approximately $.8 million of interest expense to discontinued operations
resulting from the sale of Bennett Industries. Average interest rates for the
period were approximately the same in 1997 and 1996.
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As a result of the early extinguishment of the Company's 7 1/4% Convertible
Senior Subordinated Debentures due June 15, 2004, and its then existing bank
credit facility, the Company recorded an extraordinary charge of $1.5 million,
net of income taxes in 1997.
At December 31, 1997, subsidiaries of the Company had net operating loss
carryforwards for tax purposes of approximately $9.4 million, subject to certain
limitations that expire between 2001 and 2007.
1996 versus 1995
On July 31, 1996, the Company completed the sale of substantially all of
the assets of Bennett for $50.8 million in cash, which resulted in a pre-tax
gain of $13.8 million. The results of operations and changes in cash flow of
Bennett have been classified as discontinued operations in the Company's
consolidated statements of income and cash flow for 1996 and 1995.
Net sales from continuing operations increased by $58.2 million, or 20%,
from $289.5 million in 1995 to $347.7 million in 1996. Of this increase,
approximately $57.5 million was due to the inclusion of the results of
acquisitions made in 1995 in the Company's consolidated results for a full year
in 1996 as compared to a partial year in 1995.
Gross profit from continuing operations increased by $9.7 million, or 20%,
from $48.6 million in 1995 to $58.3 million in 1996. Of this increase, $8.6
million was due to the inclusion of the results of acquisitions made in 1995 in
the Company's consolidated results for a full year in 1996 as compared to a
partial year in 1995. The remaining $1.1 million increase was primarily related
to Logistics' higher sales volumes and the addition of TFS customers. The
Company's consolidated gross margin was 16.8% in 1996 and 1995.
Selling, general and administrative expenses from continuing operations
increased $8.1 million, or 27%, from $30.0 million in 1995 to $38.1 million in
1996. This increase was primarily a result of the inclusion of the acquisitions
made in 1995 in the Company's consolidated results for a full year in 1996 as
compared to a partial year in 1995 and higher overhead costs to support higher
sales levels. Consolidated selling, general and administrative expenses
increased as a percentage of net sales to 11.0% in 1996 from 10.4% in 1995
primarily as a result of the acquisitions consummated in 1995.
During the fourth quarter of 1996, the Company commenced the reorganization
of its consumer products manufacturing operations which resulted in the
consolidation of three manufacturing facilities into one and the discontinuation
of certain product lines. As a result of these actions, the Company recorded a
non-cash charge of $2.7 million, primarily for the writedown of certain
property, equipment and inventory to their estimated realizable value.
The Company had other income of $4.2 million in 1996 as compared to $.2
million in 1995. In 1996, other income was comprised of (i) a gain of $2.7
million from the lump sum payment as full settlement of subordinated notes
receivable, resulting from the Company's sale of two manufacturing facilities
and (ii) a gain of $1.5 million on the sale of securities. In 1995, other income
was comprised of a gain on the sale of securities.
Interest expense from continuing operations increased $1.0 million from
$5.9 million in 1995 to $6.9 million in 1996, primarily due to higher levels of
bank debt outstanding during 1996 as compared to 1995. The Company's average
debt outstanding increased from $92.4 million in 1995 to $103.2 million in 1996.
The increase in average borrowings was caused by the acquisition of RB&W on
March 31, 1995 and higher levels of bank debt to support increased sales and
production as well as capital expenditures.
During the fourth quarter of 1995, the Company determined that utilization
of its net operating loss carryforwards was assured and therefore recorded
deferred tax assets of $8.1 million. Consequently, as of January 1, 1996, the
Company's financial statements included a provision for Federal income taxes.
Federal income tax expense from continuing operations for 1995 was reduced by
$3.7 million due to the
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18
utilization of net operating loss carryforwards. During 1996, as a result of the
gain on the sale of Bennett, all net operating loss carryforwards for tax
purposes relating to the Company were fully utilized. At December 31, 1996,
subsidiaries of the Company had net operating loss carryforwards for tax
purposes of approximately $15 million, subject to certain limitations that
expire between 2001 and 2007.
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 existing bank credit
arrangements. On January 14, 1998, the Company executed a "New Credit Agreement"
for $100 million on an unsecured basis from a group of banks which will be used
for general corporate purposes. The New Credit Agreement expires on April 30,
2001. Amounts borrowed under the New Credit Agreement may be borrowed at the
Company's election at either (i) the bank's prime lending rate less 1% or (ii)
LIBOR plus 90 basis points. As of December 31, 1997, $20.0 million was borrowed
under the facility.
On November 25, 1997, the Company sold $150 million of its 9.25% Senior
Subordinated Notes due 2007. The Company used the net proceeds of the Senior
Notes along with borrowings under its new credit facility to (i) redeem its
7 1/4% Convertible Senior Subordinated Debentures due June 15, 2004 and (ii) to
repay substantially all amounts of its then existing credit facility.
Capital expenditures for 1998 are anticipated to be approximately $16.0
million which will be used to invest in the Company's current facilities for
projected new business, for scheduled improvements and new equipment to expand
existing products.
The ratio of current assets to current liabilities was 2.86 at December 31,
1997, compared to 2.78 at December 31, 1996 and 2.80 at December 31, 1995.
Working capital increased by $47.6 million to $147.3 million at December 31,
1997 from $99.7 million at December 31, 1996 as a result of the inclusion of the
1997 Acquisitions, primarily Arden, and to increases necessary to support the
internal growth of the Company.
During 1997, the Company generated $27.2 million from continuing operations
before changes in operating assets and liabilities. After giving effect to the
use of $37.2 million in the operating accounts, the Company used $10.0 million
for operating activities. During the period, the Company invested $15.9 million
in capital expenditures and $60.4 million for acquisitions and investments
including the acquisition of Arden for $44.0 million. During the year, the
Company bought 221,494 shares of its common stock in the open market for $3.0
million. As of December 31, 1997, after issuing 199,000 common shares from the
treasury for the exercise of stock options, the Company has 148,719 shares of
its common stock in the treasury. During the year, 351,000 shares of common
stock were issued under stock option agreements for which the Company received
$3.2 million from the option holders. In addition, the Company purchased in the
open market $1.2 million of its convertible senior subordinated debentures.
These activities were funded by a net increase in long-term borrowings of $85.5
million and a decrease in cash balances of $2.8 million.
During 1996, the Company generated $20.6 million from continuing operations
before changes in operating assets and liabilities. After giving effect to the
use of $14.9 million in the operating accounts and $2.0 million provided from
discontinued operations, the Company provided $7.7 million from operating
activities. During 1996, the Company invested $15.6 million in capital
expenditures and purchased 126,225 shares of its common stock for $1.8 million,
all of which were funded by internally generated cash flow and bank borrowings.
During 1995, the Company generated $18.0 million from continuing operations
before changes in operating assets and liabilities. After giving effect to
changes in the operating accounts of $27.7 million and $5.7 million provided by
discontinued operations, the Company used $4.0 million in operating activities.
This amount and capital expenditures of $13.6 million were funded by an increase
in bank
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borrowings. In addition, the Company borrowed $68.6 million under its bank
facility to fund acquisitions, primarily RB&W, with an aggregate cash purchase
price of $35.8 million and to repay $32.8 million of acquired debt related to
the acquisitions.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share." All share and per share amounts,
including those of prior years, have been restated to comply with the new
provisions. In 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," both of which expand or
modify disclosures and, accordingly, will have no impact on the Company's
financial position, results of operations or cash flows. These Statements are
effective for periods beginning after December 31, 1997, and will be adopted by
the Company in the first and fourth quarters of 1998, respectively.
IMPACT OF INFLATION
Although inflation was not a significant factor in 1997, the Company
continues to seek ways to cope with its impact. To the extent permitted by
competition, the Company's operations generally attempt to pass on increased
costs by increasing sales prices over time. The Company primarily uses the FIFO
method of accounting for its inventories. Under this method, current costs are
generally reflected in cost of products. The charges to operations for
depreciation represent the allocation of historical costs incurred over past
years and are significantly less than if they were based on the current cost of
productive capacity being consumed.
YEAR 2000 CONVERSION
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. The Company has evaluated the
risks and is in the process of implementing actions to ensure the Company is
Year 2000 compliant. The cost of achieving Year 2000 compliance is not expected
to have a material adverse effect on the Company's results of operations or
financial condition.
ENVIRONMENTAL
The Company has been identified as a potentially responsible party at
certain third-party sites under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or comparable state laws
which provide for strict and, under certain circumstances, joint and several
liability. The Company is participating in the cost of certain clean-up efforts
at several of these sites. However, the Company's share of such costs has not
been material and based on available information, the Company does not expect
its exposure at any of these locations to have a material adverse effect on its
results of operations, liquidity or financial condition.
SEASONALITY; VARIABILITY OF OPERATING RESULTS
As a result of the significant growth in the Company's net sales and income
from continuing operations in recent years, seasonal fluctuations have been
substantially mitigated. 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
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 businesses in the Capital Equipment Group, which typically ship a
few large systems per year. In addition, the Company experiences seasonality in
the Kay Home Products operating unit of the Metal Forming Group. Kay Home
Products' goods are typically used by consumers in the spring and summer and
consequently its first two quarters of operating results are typically the
strongest.
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FORWARD-LOOKING STATEMENTS
This Annual Report to Shareholders and Form 10-K contains and incorporates
by reference 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 levels and funding of capital expenditures. Forward-looking
statements are necessarily subject to risks, uncertainties and other factors,
many of which are outside the control of the Company, that 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 and quality; 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 and tax
rates; increasingly stringent domestic and foreign governmental regulations
including those affecting the environment; inherent uncertainties involved in
assessing the Company's potential liability for environmental
remediation-related activities; the outcome of pending and future litigation and
other claims; dependence on the automotive industry; 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 the Company
undertakes 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 the Company that the Company's plans and
objectives will be achieved.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
PAGE
----
Report of Independent Auditors.............................. 20
Consolidated Balance Sheets -- December 31, 1997 and
December 31, 1996......................................... 21
Consolidated Statements of Income -- Years Ended December
31, 1997, 1996
and 1995.................................................. 22
Consolidated Statements of Shareholders' Equity -- Years
Ended December 31, 1997, 1996
and 1995.................................................. 23
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1997, 1996
and 1995.................................................. 24
Notes to Consolidated Financial Statements.................. 25
Supplementary Financial Data:
Selected Quarterly Financial Data (Unaudited) -- years
ended December 31, 1997
and 1996............................................... 38
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Park-Ohio Industries, Inc.
We have audited the accompanying consolidated financial statements of
Park-Ohio Industries, Inc. and subsidiaries listed in the Index at Item
14(a)(1). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Park-Ohio
Industries, Inc. and subsidiaries at December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
February 16, 1998
20
23
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 1,814 $ 4,659
Accounts receivable, less allowances for doubtful accounts
of $2,060 in
1997 and $1,048 in 1996................................. 86,787 58,764
Inventories............................................... 129,512 83,758
Deferred tax assets....................................... 3,240 3,000
Other current assets...................................... 5,075 5,718
-------- --------
Total Current Assets............................... 226,428 155,899
Property, Plant and Equipment
Land and land improvements................................ 4,126 2,599
Buildings................................................. 24,782 21,520
Machinery and equipment................................... 103,956 82,743
-------- --------
132,864 106,862
Less accumulated depreciation............................. 59,795 53,054
-------- --------
73,069 53,808
Other Assets
Excess purchase price over net assets acquired, net of
accumulated amortization of $5,749 in 1997 and $3,538 in
1996.................................................... 68,996 40,305
Deferred taxes............................................ 12,960 14,100
Other..................................................... 31,656 18,798
-------- --------
$413,109 $282,910
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable.................................... $ 49,470 $ 28,545
Accrued expenses.......................................... 27,466 20,695
Current portion of long-term liabilities.................. 2,223 6,936
-------- --------
Total Current Liabilities.......................... 79,159 56,176
Long-Term Liabilities, less current portion
Long-term debt............................................ 172,283 55,571
Other postretirement benefits............................. 27,537 28,442
Other..................................................... 4,295 4,788
-------- --------
204,115 88,801
Convertible Senior Subordinated Debentures.................. -0- 22,235
Shareholders' Equity
Capital stock, par value $1 a share
Serial preferred stock:
Authorized -- 632,470 shares; Issued -- none......... -0- -0-
Common stock:
Authorized -- 20,000,000 shares
Issued and outstanding -- 10,959,962 shares in 1997
and 10,432,998 in
1996............................................... 10,960 10,433
Additional paid-in capital................................ 53,476 49,337
Retained earnings......................................... 67,486 57,703
Treasury stock, at cost, 148,719 shares in 1997 and
126,225 in 1996......................................... (2,087) (1,775)
-------- --------
129,835 115,698
-------- --------
$413,109 $282,910
======== ========
See notes to consolidated financial statements.
21
24
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net sales................................................... $441,110 $347,679 $289,501
Cost of products sold....................................... 368,734 289,400 240,871
-------- -------- --------
Gross profit.............................................. 72,376 58,279 48,630
Selling, general and administrative expenses................ 44,396 38,131 30,020
Restructuring charge........................................ -0- 2,652 -0-
-------- -------- --------
Operating income.......................................... 27,980 17,496 18,610
Other income................................................ (320) (4,204) (214)
Interest expense............................................ 9,101 6,947 5,911
-------- -------- --------
Income from continuing operations before income
taxes................................................ 19,199 14,753 12,913
Income taxes (benefit)...................................... 7,903 5,060 (6,900)
-------- -------- --------
Income from continuing operations before extraordinary
charge............................................... 11,296 9,693 19,813
Extraordinary charge for early retirement of debt, net of
tax benefit of $928....................................... (1,513) -0- -0-
Income from discontinued operations, net of tax............. -0- 11,642 4,221
-------- -------- --------
Net income........................................ $ 9,783 $ 21,335 $ 24,034
======== ======== ========
Per common share:
Basic earnings per share:
Continuing operations..................................... $ 1.06 $ .93 $ 2.00
Extraordinary charge...................................... (.14) -0- -0-
Discontinued operations................................... -0- 1.12 .43
-------- -------- --------
Net Income........................................ $ .92 $ 2.05 $ 2.43
======== ======== ========
Diluted earnings per share:
Continuing operations..................................... $ 1.01 $ .88 $ 1.87
Extraordinary charge...................................... (.13) -0- -0-
Discontinued operations................................... -0- .96 .37
-------- -------- --------
Net income........................................ $ .88 $ 1.84 $ 2.24
======== ======== ========
See notes to consolidated financial statements.
22
25
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------ ---------- -------- -------- -----
(DOLLARS IN THOUSANDS)
Balance at January 1, 1995.............. $8,192 $26,189 $12,334 $ -0- $ 46,715
Net income.............................. 24,034 24,034
Acquisition of RB&W Corporation......... 2,023 21,251 23,274
Issuance of General Aluminum Mfg.
Company earn-out shares............... 187 1,744 1,931
------- ------- ------- ------- --------
Balance at December 31, 1995............ 10,402 49,184 36,368 -0- 95,954
Exercise of stock options............... 31 153 184
Purchase of treasury stock.............. (1,775) (1,775)
Net Income.............................. 21,335 21,335
------- ------- ------- ------- --------
Balance at December 31, 1996............ 10,433 49,337 57,703 (1,775) 115,698
Issuance of General Aluminum Mfg.
Company earn-out shares............... 375 3,600 3,975
Exercise of stock options............... 152 539 2,673 3,364
Purchase of treasury stock.............. (2,985) (2,985)
Net income.............................. 9,783 9,783
------- ------- ------- ------- --------
Balance at December 31, 1997............ $10,960 $53,476 $67,486 $(2,087) $129,835
======= ======= ======= ======= ========
See notes to consolidated financial statements.
23
26
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net Income................................................ $ 9,783 $ 21,335 $ 24,034
Adjustments to reconcile net income to net cash provided
(used) by continuing operations:
Extraordinary charge................................. 1,513 -0- -0-
Discontinued operations.............................. -0- (11,642) (4,221)
Gain on sale of investments.......................... (320) (1,552) -0-
Depreciation and amortization........................ 10,365 7,998 6,278
Tax benefit resulting from reduction of valuation
allowance on deferred tax assets.................. -0- -0- (8,100)
Deferred income taxes................................ 5,900 4,500 -0-
-------- -------- --------
27,241 20,639 17,991
Changes in operating assets and liabilities excluding
acquisitions of businesses:
Accounts receivable.................................. (14,008) (3,643) (2,479)
Inventories.......................................... (21,021) (3,056) (14,914)
Accounts payable and accrued expenses................ 5,623 (1,214) (5,473)
Other................................................ (7,874) (7,040) (4,855)
-------- -------- --------
Net Cash Provided (Used) by Continuing Operations.... (10,039) 5,686 (9,730)
Net Cash Provided by Discontinued Operations......... -0- 2,040 5,738
-------- -------- --------
Net Cash Provided (Used) by Operating Activities..... (10,039) 7,726 (3,992)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (15,947) (15,590) (13,632)
Costs of acquisitions..................................... (60,389) -0- (35,793)
Purchase of investments................................... (1,432) (5,427) -0-
Proceeds from sales of investments........................ 551 6,315 -0-
Proceeds from sale of discontinued operations, net of
$4,500 of income taxes................................. -0- 46,313 -0-
-------- -------- --------
Net Cash Provided (Used) by Investing Activities..... (77,217) 31,611 (49,425)
FINANCING ACTIVITIES
Proceeds from bank arrangements........................... 106,500 9,500 86,969
Payments on long-term debt................................ (166,657) (45,249) (33,062)
Issuance of 9.25% senior notes, net of deferred financing
costs.................................................. 145,604 -0- -0-
Cash paid to retire subordinated debentures............... (1,245) -0- -0-
Issuance of common stock under stock option plan.......... 3,194 184 -0-
Purchase of treasury stock................................ (2,985) (1,775) -0-
-------- -------- --------
Net Cash Provided (Used) by Financing Activities..... 84,411 (37,340) 53,907
Increase (decrease) in Cash and Cash Equivalents..... (2,845) 1,997 490
Cash and Cash Equivalents at Beginning of Year....... 4,659 2,662 2,172
-------- -------- --------
Cash and Cash Equivalents at End of Year............. $ 1,814 $ 4,659 $ 2,662
======== ======== ========
See notes to consolidated financial statements.
24
27
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts
of the Company and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated upon consolidation.
Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are stated at the lower of cost (principally the
first-in, first-out method) or market value. If the first-in, first-out method
of inventory accounting had been used exclusively by the Company, inventories
would have been approximately $4,895 and $4,921 higher than reported at December
31, 1997 and 1996, respectively.
Major Classes of Inventories
DECEMBER 31
------------------
1997 1996
-------- -------
In-process and finished goods........................ $100,283 $60,587
Raw materials and supplies........................... 29,229 23,171
-------- -------
$129,512 $83,758
======== =======
Property, Plant and Equipment: Property, plant and equipment are carried at
cost. Major additions are capitalized and betterments are charged to accumulated
depreciation; expenditures for repairs and maintenance are charged to
operations. Depreciation of fixed assets is computed principally by the
straight-line method based on the estimated useful lives of the assets.
Excess Purchase Price Over Net Assets Acquired: The Company records
amortization of excess purchase price over the fair value of net assets acquired
(see Note B) over periods from twenty-five to forty years using the
straight-line method. Management periodically evaluates for possible impairment
the current value of these intangibles through cash flow and income analyses of
the acquired businesses. The Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" establishes
accounting standards for determining the impairment of long-lived assets to be
held and used, certain identifiable intangibles, and goodwill related to those
assets and for long-lived assets and certain identifiable intangibles to be
disposed of. The company adopted Statement No. 121 during the first quarter of
1996. The financial statement effect of adoption was not material.
Pensions: The Company and its subsidiaries have pension plans, principally
noncontributory defined benefit or noncontributory defined contribution plans,
covering substantially all employees. For the defined benefit plans, benefits
are based on the employee's years of service and the Company's policy is to fund
that amount recommended by its independent actuaries. For the defined
contribution plans, the costs charged to operations and the amount funded are
based upon a percentage of the covered employees' compensation.
25
28
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Stock-Based Compensation: The Company has elected to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Income Taxes: The Company accounts for income taxes under the liability
method whereby deferred tax assets and liabilities are determined based on
temporary differences between the financial reporting and the tax bases of
assets and liabilities and are measured using the current enacted tax rates.
Net Income Per Common Share: In 1997, the Financial Accounting Standards
Board issued statement No. 128 "Earnings per Share". Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods have
been presented, and where necessary restated to conform to the Statement 128
requirements.
Interest Rate Swap Agreements: In 1995, the Company entered into interest
rate swap agreements to modify the interest characteristics of its outstanding
debt. Each interest rate swap agreement is designated with a portion of the
principal balance and term of a specific debt obligation. These agreements
involve the exchange of amounts based on a fixed interest rate for amounts based
on variable interest rates of the life of the agreement without an exchange of
the notional amount upon which the payments are based. The differential to be
paid or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt. During 1997, the interest
rate swap agreements were terminated resulting in an immaterial net gain.
Revenue Recognition: For the majority of its operations, the Company
recognizes revenues upon shipment of its product. Revenues on long-term
contracts are recognized using the percentage of completion method of
accounting, under which the sales value of performance is recognized on the
basis of the percentage each contract's cost to date bears to the total
estimated cost. The recognition of profit, based upon anticipated final costs,
is made only after evaluation of the contract status at critical milestones. The
Company's contracts generally provide for billing to customers at various points
prior to contract completion. Revenues earned on contracts in process in excess
of billings are classified in other current assets in the accompanying balance
sheet.
Environmental: The Company accrues environmental costs related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Costs which extend the life of the related
property or mitigate or prevent future environmental contamination are
capitalized. The Company records a liability when environmental assessments
and/or remedial efforts are probable and can be reasonably estimated. The
estimated liability of the Company is not discounted or reduced for possible
recoveries from insurance carriers.
Concentration of Credit Risk: The Company sells its products to customers
in diversified industries. The Company performs ongoing credit evaluations of
its customers' financial condition but does not require collateral to support
customer receivables. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information. As of December 31, 1997 the Company had
uncollateralized receivables with six customers in the automotive and truck
industry each with several locations approximating $24,939 which represents 29%
of the Company's trade accounts receivable. During 1997, sales to these
customers amounted to approximately $121,443 which represents 28% of the
Company's net sales.
26
29
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Impact of Recently Issued Accounting Standards: In 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," both of which expand or modify disclosures and,
accordingly, will have no impact on the Company's financial position, results of
operations or cash flows. These Statements are effective for periods beginning
after December 31, 1997, and will be adopted by the Company in the first and
fourth quarters of 1998, respectively.
NOTE B--ACQUISITIONS
On August 1, 1997, the Company acquired substantially all of the shares of
Arden Industrial Products, Inc. ("Arden") for cash of approximately $44 million.
The transaction has been accounted for as a purchase. Arden is a national
distributor of specialty and standard fasteners to the industrial market. Arden
is included in the Company's Logistics segment.
The following is the estimated value of the net assets of Arden as of
August 1, 1997:
Cash........................................................ $ 2,711
Accounts receivable......................................... 11,503
Inventories................................................. 17,764
Property, plant and equipment............................... 4,468
Excess purchase price over net assets acquired.............. 17,919
Other assets................................................ 5,258
Trade accounts payable...................................... (6,437)
Accrued expenses............................................ (2,828)
Long-term liabilities....................................... (6,358)
-------
Total estimated cost of acquisition......................... $44,000
=======
During the year ended December 31, 1997, the Company acquired four other
businesses for an aggregate purchase price of approximately $18.6 million. Each
of these transactions was accounted for as a purchase, resulting in excess
purchase price over net assets acquired of $8.6 million. The following unaudited
pro forma results of operations assume the acquisitions of Arden and the other
businesses discussed above occurred on January 1, 1996. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisition occurred on the date indicated, or which may result in the
future.
YEAR ENDED
-------------------
1997 1996
-------- --------
Net sales....................................... $508,724 $476,693
Gross profit.................................... 93,547 98,190
Income from continuing operations............... 12,454 8,777
Income from continuing operations per common
share assuming dilution....................... $ 1.10 $ .80
======== ========
On March 31, 1995, the Company acquired all of the shares of RB&W
Corporation (RB&W) in exchange for 2,023,000 shares of the Company's common
stock ($11.50 market value as of March 31, 1995) and cash of $30,968. The
transaction has been accounted for as a purchase.
27
30
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The table below reflects the current value of the net assets acquired of
RB&W:
Cash........................................................ $ 510
Accounts receivable......................................... 29,551
Inventories................................................. 36,131
Property, plant and equipment............................... 5,591
Excess purchase price over net assets acquired.............. 25,596
Deferred tax assets......................................... 13,300
Other assets................................................ 12,620
Notes payable............................................... (28,739)
Trade accounts payable...................................... (21,524)
Accrued expenses............................................ (9,172)
Long-term liabilities....................................... (9,622)
-------
$54,242
=======
The following unaudited pro forma results of operations assume the
acquisition occurred on January 1, 1995. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
the results of continuing operations which actually would have resulted had the
acquisition occurred on the date indicated.
YEAR ENDED
DECEMBER 31, 1995
-----------------
Net sales......................................... $336,533
Gross profit...................................... 47,255
Income from continuing operations................. 18,797
Income from continuing operations per common
share........................................... $ 1.79
During 1995, the Company also purchased certain assets of four companies
for a total cost of $6,400 which includes $1,500 for The Ajax Manufacturing
Company, purchased from a related party. The operations of these businesses
prior to the dates of acquisition were not material to the Company.
On October 15, 1993, the Company acquired General Aluminum Mfg. Company
(GAMCO), by issuing 250,000 shares of its common stock valued at $3,127 in
exchange for the outstanding shares of GAMCO. An additional 187,500 shares of
common stock valued at $1,931, were issued in March, 1995 and an additional
375,000 shares of common stock valued at $3,975 were issued in January, 1997.
The additional $5,906 represents purchase price in excess of net assets
acquired. An additional 187,500 shares of common stock, representing the final
earn-out shares to be issued under the GAMCO purchase agreement, will be issued
in 1998 as GAMCO achieved certain income levels during the year ended December
31, 1997.
NOTE C--SALE OF BENNETT INDUSTRIES
On July 31, 1996, the Company completed the sale of substantially all of
the assets of Bennett Industries, Inc. ("Bennett"), a wholly-owned subsidiary
which manufactures plastic containers, to North America Packaging Corporation, a
wholly-owned subsidiary of Southcorp Holdings Limited, an Australian company,
for $50.8 million in cash, resulting in a pre-tax gain of $13.8 million. The
results of operations and changes in cash flows for Bennett have been classified
as discontinued operations for all periods presented in the related consolidated
statements of income and consolidated statements of cash flows, respectively.
Interest expense has been allocated to discontinued operations based on the
ratio of net assets discontinued to the total net assets of the consolidated
entity plus consolidated debt.
28
31
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Summary operating results of the discontinued operations, excluding the
above gain on sale, for the years ended December 31, 1996 and 1995 were as
follows:
YEARS ENDED
DECEMBER 31,
------------------
1996 1995
------- -------
Sales....................................................... $49,448 $81,929
Costs and expenses.......................................... 44,502 77,708
------- -------
Income from discontinued operations before income taxes..... 4,946 4,221
Income taxes................................................ 1,820 -0-
------- -------
Net income from discontinued operations..................... $ 3,126 $ 4,221
======= =======
NOTE D--ACCRUED EXPENSES
Accrued expenses include the following:
DECEMBER 31
------------------
1997 1996
------- -------
Self-insured liabilities.................................... $ 2,827 $ 2,521
Warranty and installation accruals.......................... 3,401 2,752
Accrued payroll and payroll-related items................... 4,820 3,112
State and local taxes....................................... 2,324 2,422
Advance billings............................................ 2,215 1,646
Restructuring reserve (see Note M).......................... -0- 2,653
Acquisition liabilities..................................... 1,906 -0-
Interest payable............................................ 1,498 248
Sundry...................................................... 8,475 5,341
------- -------
Totals............................................ $27,466 $20,695
======= =======
NOTE E--FINANCING ARRANGEMENTS
Long-term debt consists of the following:
DECEMBER 31
-------------------
1997 1996
-------- -------
9.25% Senior Subordinated Notes due 2007.................... $150,000 $ -0-
Term loan................................................... -0- 32,500
Revolving credit maturing on April 30, 2001................. 20,000 26,000
Other....................................................... 2,755 2,254
-------- -------
172,755 60,754
Less current maturities..................................... 472 5,183
-------- -------
Total............................................. $172,283 $55,571
======== =======
Maturities of long-term debt during each of the five years following
December 31, 1997 are approximately $472 in 1998, $718 in 1999, $731 in 2000,
$20,348 in 2001 and $229 in 2002.
On November 25, 1997, the Company sold $150 million of its 9.25% Senior
Subordinated Notes due 2007 at a price of 97.375% of face value. Interest on the
Senior Notes is payable semi-annually on June 1 and December 1 of each year
beginning on June 1, 1998. The Company used the net proceeds of the Senior Notes
along with borrowings under its new credit facility to (i) redeem its 7 1/4%
Convertible
29
32
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Senior Subordinated Debentures due June 15, 2004 and (ii) to repay substantially
all amounts of its then existing credit facility. The early extinguishment of
the 7 1/4% Convertible Senior Subordinated Debentures and the then existing
credit facility resulted in an extraordinary charge of $1.5 million consisting
of the following:
Discount on prepayment of 7 1/4% Convertible Senior
Subordinated Debentures................................... $1,245
Write-off related unamortized financing costs............... 1,196
------
Extraordinary charge before income tax benefit.............. 2,441
Income tax benefit.......................................... 928
------
Net extraordinary charge.................................... $1,513
======
On January 14, 1998 the Company entered a new credit agreement with a group
of banks under which it may borrow up to $100 million on an unsecured basis.
Interest is payable quarterly at the prime lending rate less 1% (7.5% at
December 31, 1997) or at the Company's election at LIBOR plus .9% (which
aggregated 6.5% at December 31, 1997). The weighted average rate on borrowings
was 9.01% at December 31, 1997. The credit agreement expires on April 30, 2001.
The fair market value of debt securities approximates their carrying value at
December 31, 1997.
Provisions of the Senior Subordinated Notes and the revolving credit
agreement contain restrictions on the Company's ability to incur additional
indebtedness, to create liens or other encumbrances, to make certain payments,
investments, loans and guarantees and to sell or otherwise dispose of a
substantial portion of assets to or merge or consolidate with, an unaffiliated
entity. The revolving credit agreement also requires maintenance of specific
financial ratios.
The Company has agreements on which up to $5 million in standby letters of
credit and commercial letters of credit may be issued. In addition to the bank's
customary letter of credit fees, a 3/4% fee is assessed on standby letters of
credit on an annual basis. As of December 31, 1997, in addition to amounts
borrowed under the revolving credit agreement, there is $2.0 million outstanding
primarily for standby letters of credit. A fee of 1/4% is imposed by the bank
on the unused portion of available borrowings.
NOTE F -- INCOME TAXES
Significant components of the Company's net deferred tax assets and
liabilities are as follows:
DECEMBER 31
------------------
1997 1996
------- -------
Deferred tax assets:
Postretirement benefit obligation......................... $10,200 $10,600
Tax net operating loss carryforwards...................... 3,300 5,100
Inventory................................................. 6,500 4,500
Tax credits............................................... 800 600
Other -- net.............................................. 4,100 3,400
------- -------
Total deferred tax assets......................... 24,900 24,200
Deferred tax liabilities:
Tax over book depreciation................................ 5,200 4,400
Pension................................................... 3,500 2,700
------- -------
Total deferred tax liabilities.................... 8,700 7,100
------- -------
Net deferred tax assets..................................... $16,200 $17,100
======= =======
30
33
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The reasons for the difference between income taxes (benefit) and the
amount computed by applying the statutory Federal income tax rate to income from
continuing operations before income taxes are as follows:
YEARS ENDED DECEMBER 31
-----------------------------
1997 1996 1995
------- ------- -------
Computed statutory amount................................... $ 6,500 $ 5,000 $ 4,400
Effect of state income taxes payable........................ 800 600 500
Other....................................................... 603 (540) -0-
Utilization of net operating loss carryforwards............. -0- -0- (3,700)
Reduction in valuation allowance for deferred tax assets.... -0- -0- (8,100)
------- ------- -------
Income taxes (benefit)............................ $ 7,903 $ 5,060 $(6,900)
======= ======= =======
At December 31, 1997, subsidiaries of the Company have net operating loss
carryforwards for income tax purposes of approximately $9.4 million subject to
certain limitations, which expire in 2001 to 2007. As of December 31, 1995, the
Company reduced by $8,100 the remaining valuation allowance on deferred tax
assets relating to anticipated future income tax benefits from utilization of
net operating loss carryforwards as full realization of these assets is
expected.
NOTE G -- STOCK OPTIONS
Under the provisions of the Company's Amended and Restated 1992 Stock
Option Plan, incentive stock options or non-statutory options to purchase
850,000 shares of the Company's stock may be granted to officers and other key
employees at the market price on the respective date of grant. The option rights
are exercisable only if and after the employee shall have remained in the employ
of the Company for one year from the date the option is granted. During 1997,
30,000 options were granted at option prices ranging from $12.375--$14.50. No
options were granted in 1996. At December 31, 1997, there were a total of
355,000 options outstanding under the Plan (676,000 at December 31, 1996); all
of which become 100% exercisable after three years from the date of grant at
option prices ranging from $9.125--$14.50 ($3.813--$14.25 at December 31, 1996)
a share and terminate ten years from the option date. During 1997, 351,000
options under this Plan were exercised at prices ranging from $3.813--$13.625 a
share (31,167 at December 31, 1996 at prices ranging from $5.125--$10.625). At
December 31, 1997, there were 205,000 (348,992 at December 31, 1996) options
exercisable at option prices ranging from $9.125--$14.25 a share ($3.813--$14.25
at December 31, 1996).
The 1996 Non-Employee Director Stock Option Plan authorized the granting of
options on 250,000 shares of common stock to directors who are not employees of
the Company. Annually, each non-employee director will automatically receive
options to acquire 6,000 shares at the market price on the date of grant.
Options under this plan are exercisable six months from the date of grant. At
December 31, 1997 there were 60,000 (30,000 at December 31, 1996) options
outstanding and exercisable under this plan at an exercise price ranging from
$12.41--$13.625. Also during 1996 the Chairman and Chief Executive Officer of
the Company was granted a non-statutory stock option to purchase 500,000 shares
of common stock at $13.625 per share which was the market price at the date of
grant. The options become 100% exercisable after five years and shall terminate
fifteen years from the option date. At December 31, 1997, 100,000 of these
options were exercisable.
Had the compensation cost for the stock options granted in 1997, 1996 and
1995 been determined based on the fair value method of FASB Statement No. 123,
the Company's net income and earnings per share would have been reduced by
$1,304 ($.11 per share) in 1997, $1,290 ($.12 per share) in 1996 and $223 ($.02
per share) in 1995. The effects on 1997, 1996 and 1995 net earnings may not be
representative
31
34
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of the effect on future years net earnings amounts as the compensation cost on
each year's grant is recognized over the vesting period.
Fair value was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1997, 1996 and
1995, respectively: risk-free interest rates of 5.25%, 5.25% and 6.34%; zero
dividend yield; expected volatility of 40% in 1997 and 43% in 1996 and 1995 and
expected option lives of 6 years for 1997, 6 to 10 years for 1996 and 6 years
for 1995.
NOTE H -- LEGAL PROCEEDINGS
The Company is subject to various pending and threatened lawsuits in which
claims for monetary damages are asserted in the ordinary course of business.
While any litigation involves an element of uncertainty, in the opinion of
management, liabilities, if any, arising from currently pending or threatened
litigation will not have a material adverse effect on the Company's financial
condition, liquidity and results of operations.
NOTE I -- PENSIONS
A summary of the components of net periodic pension credit for the defined
benefit plans and the total contributions charged to pension expense for the
defined contribution plans is as follows:
YEARS ENDED DECEMBER 31
------------------------------
1997 1996 1995
------- -------- -------
Defined benefit plans:
Service cost.............................................. $ 304 $ 296 $ 287
Interest cost............................................. 3,252 3,249 3,362
Actual return on assets................................... (21,264) (7,499) (10,719)
Net amortization and deferral............................. 15,996 2,795 6,315
------- -------- -------
Net periodic pension credit of defined benefit plans... (1,712) (1,159) (755)
Defined contribution plans.................................. 1,098 796 680
------- -------- -------
Total pension credit................................... $ (614) $ (363) $ (75)
======= ======== =======
Assumptions used in the accounting for the defined benefit pension plans
were as follows:
DECEMBER 31
--------------------
1997 1996 1995
---- ---- ----
Weighted average discount rate.............................. 7.25% 7.5% 7.5%
Expected long-term rate of return on assets................. 8.5% 8.5% 8.5%
32
35
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets at December 31, 1997 and 1996 for the Company's
defined benefit pension plans.
DECEMBER 31
------------------
1997 1996
------- -------
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $43,313 $42,863
======= =======
Accumulated benefit obligation............................ $45,080 $44,671
======= =======
Plan assets at fair value................................... $80,274 $63,139
Projected benefit obligation................................ 45,474 45,049
------- -------
Plan assets in excess of projected benefit obligation..... 34,800 18,090
Unrecognized net gain....................................... (21,654) (6,959)
Unrecognized prior service cost............................. 1,430 1,442
Unrecognized net asset at January 1, 1987 net of
amortization.............................................. (279) (203)
------- -------
Net pension asset included in other assets................ $14,297 $12,370
======= =======
The plans' assets at December 31, 1997 and 1996 are invested in listed
stocks, bonds and unallocated insurance contracts.
NOTE J -- OTHER POSTRETIREMENT BENEFITS
The Company and certain of its subsidiaries provide health care and life
insurance benefits for retired employees. Employees may become eligible for
benefits if they qualify for retirement while working for the Company.
The following table presents the plan's funded status and amounts
recognized in the consolidated balance sheets at December 31, 1997 and 1996:
DECEMBER 31
------------------
1997 1996
------- -------
Accumulated postretirement benefit obligation:
Retirees.................................................. $19,578 $17,555
Fully eligible active plan participants................... 430 479
Other active plan participants............................ 1,665 1,854
------- -------
Accumulated Postretirement Benefit Obligations......... 21,673 19,888
Unrecognized net gain..................................... 7,614 10,307
------- -------
Accrued Postretirement Benefit Obligations............. $29,287 $30,195
======= =======
Net periodic benefit cost includes the following components for the years
ended December 31, 1997, 1996 and 1995:
DECEMBER 31
--------------------------
1997 1996 1995
------ ------ ------
Service cost................................................ $ 118 $ 106 $ 92
Interest cost............................................... 1,541 1,458 1,559
Net amortization and deferral............................... (486) (544) (819)
------ ------ ------
Net Periodic Postretirement Benefit Cost.................. $1,173 $1,020 $ 832
====== ====== ======
33
36
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The accumulated postretirement benefit obligation ("APBO") was determined
using an assumed discount rate of 7.25%, 7.5% and 7.5% for 1997, 1996 and 1995,
respectively. The assumed annual health care trend rate for retirees younger
than 65 was 9.0% in 1997 (9.0% in 1996 and 9.5% in 1995) decreasing to 6.0% in
2004. The assumed annual health care trend rate for retirees aged 65 and over
will decrease to 5.5% in 2004. A 1% change in the trend rate would increase the
APBO by 6.3% and annual expense by 11%.
NOTE K -- LEASES
Rental expense for 1997, 1996 and 1995 was $6,696, $4,751 and $3,527,
respectively. Future minimum lease commitments during each of the five years
following December 31, 1997 are as follows: $5,380 in 1998, $4,161 in 1999,
$3,272 in 2000, $2,625 in 2001 $1,915 in 2002 and $5,282 thereafter.
NOTE L -- INDUSTRY SEGMENTS
The Company conducts its business through two segments: Manufactured
Products and Logistics. Manufactured Products designs and manufactures 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 and aerospace industries. Manufactured Products
operates through five groups which include: Aluminum Casting, Forged and
Machined Products, Capital Equipment, Metal Forming and Industrial Rubber
Products. The Aluminum Casting Group manufactures aluminum permanent mold
castings. The Forged and Machined Products Group produces, machines and finishes
closed-die metal forgings. The Capital Equipment Group custom engineers and
manufactures induction heating systems, forging presses and heat processing and
curing systems. The Metal Forming Group manufactures standard and specialty
engineered fasteners and related hardware bearings, plumbing fixtures and
certain consumer products. The Industrial Rubber Products Group manufactures
injected and transfer molded products, lathe-cut goods, roll coverings and
various items requiring rubber to metal bonding for use in industrial
applications. Logistics is a leading national supplier of fasteners (e.g., nuts,
bolts and screws) and other industrial products to OEMs, other manufacturers and
distributors. In connection with the supply of such industrial products,
Logistics provides a variety of value--added, cost-effective procurement
solutions. The principal customers of Logistics are in the transportation,
industrial, electrical, lawn and garden equipment industries.
The Company's sales are made through its own sales organization,
distributors and representatives. Intersegment metal forming sales to the
Logistics segment are eliminated in consolidation and are not included in the
figures presented. Intersegment sales are accounted for at values based on
market prices. Income allocated to segments excludes interest expense and
amortization of excess purchase price over net assets acquired. Identifiable
assets by industry segment include assets directly identified with those
operations.
34
37
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Corporate assets generally consist of cash and cash equivalents, deferred
tax assets, and other assets.
YEARS ENDED DECEMBER 31
--------------------------------
1997 1996 1995
-------- -------- --------
Net sales
Manufactured products................................. $222,347 $196,327 $181,000
Logistics............................................. 218,763 151,352 108,501
-------- -------- --------
$441,110 $347,679 $289,501
======== ======== ========
Income from continuing operations before income taxes
Manufactured products................................. $ 17,653 $ 16,263 $ 14,525
Logistics............................................. 16,420 9,276 8,217
-------- -------- --------
34,073 25,539 22,742
Amortization of excess purchase price over net assets
acquired............................................ (2,211) (1,902) (1,504)
Corporate costs....................................... (3,562) (1,937) (2,414)
Interest expense...................................... (9,101) (6,947) (5,911)
-------- -------- --------
$ 19,199 $ 14,753 $ 12,913
======== ======== ========
Identifiable assets
Manufactured products................................. $212,054 $177,946 $162,114
Logistics............................................. 180,987 92,862 93,876
General corporate..................................... 20,068 12,102 12,063
Discontinued operations............................... -0- -0- 33,694
-------- -------- --------
$413,109 $282,910 $301,747
======== ======== ========
Depreciation and amortization expense
Manufactured products................................. $ 7,599 $ 6,644 $ 5,544
Logistics............................................. 2,766 1,354 734
-------- -------- --------
$ 10,365 $ 7,998 $ 6,278
======== ======== ========
Capital expenditures
Manufactured products................................. $ 13,114 $ 10,272 $ 4,974
Logistics............................................. 2,694 4,152 1,099
General corporate..................................... 139 1,054 237
Discontinued operations............................... -0- 112 7,322
-------- -------- --------
$ 15,947 $ 15,590 $ 13,632
======== ======== ========
The Company's manufactured products segment had sales of $38,646 in 1997,
$33,728 in 1996, and $32,200 in 1995 to Ford Motor Company (9%, 10% and 11% of
consolidated net sales, respectively).
NOTE M -- RESTRUCTURING CHARGES AND OTHER INCOME
During the fourth quarter of 1996, the Company commenced the reorganization
of its consumer products manufacturing operations which resulted in the
realignment of two manufacturing facilities and the discontinuance of certain
products lines. As a result of these actions, the Company recorded a charge of
$2,700 primarily for the writedown of certain property and equipment and
inventory to estimated net realizable value.
35
38
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In December 1996, the Company negotiated full settlement of subordinated
notes receivable, resulting from the sale of two manufacturing facilities, which
were fully reserved at the date of sale. The net proceeds received of $2,700
were recorded in income in the fourth quarter. In the third quarter of 1996, the
Company sold certain securities purchased during 1996 for $6,315 which resulted
in a gain of $1,500.
NOTE N -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
NUMERATOR
Income from continuing operations before extraordinary
charge.................................................... $11,296 $ 9,693 $19,813
Amortization of imputed goodwill associated with the earnout
shares.................................................... (63) (84) -0-
------- ------- -------
Numerator for basic earnings per share-income from
continuing operations available to common shareholders.... 11,233 9,609 19,813
Effect of dilutive securities:
Interest (net of income taxes) associated with convertible
senior subordinated debentures............................ 886 999 1,612
------- ------- -------
Numerator for diluted earnings per share-income from
continuing operations after assumed conversions........... $12,119 $10,608 $21,425
======= ======= =======
Discontinued operations..................................... $ -0- $11,642 $ 4,221
======= ======= =======
Extraordinary item, net of tax.............................. $(1,513) $ -0- $ -0-
======= ======= =======
Numerator for basic earnings per share-net income........... $ 9,783 $21,335 $24,034
======= ======= =======
Numerator for diluted earnings per share-net income after
assumed conversions....................................... $10,606 $22,250 $25,646
======= ======= =======
DENOMINATOR
Denominator for basic earnings per share-weighted average
shares.................................................... 10,691 10,401 9,886
Effect of dilutive securities:
Effect of General Aluminum Mfg. Company earnout shares
deemed to be issued.................................... 140 188 188
Employee stock options.................................... 204 340 183
Convertible subordinated debentures....................... 1,019 1,151 1,151
------- ------- -------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions........ 12,054 12,080 11,408
Basic earnings (loss) per share:
Continuing operations..................................... $ 1.06 $ .93 $ 2.00
======= ======= =======
Extraordinary item, net of tax............................ $ (.14) $ -0- $ -0-
======= ======= =======
Discontinued operations................................... $ -0- $ 1.12 $ .43
======= ======= =======
Net income................................................ $ .92 $ 2.05 $ 2.43
======= ======= =======
36
39
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
Diluted earnings (loss) per share:
Continuing operations..................................... $ 1.01 $ .88 $ 1.87
======= ======= =======
Extraordinary item, net of tax............................ $ (.13) $ -0- $ -0-
======= ======= =======
Discontinued operations................................... $ -0- $ .96 $ .37
======= ======= =======
Net income................................................ $ .88 $ 1.84 $ 2.24
======= ======= =======
During 1995, the Company's utilization of net operating loss carryforwards
and reduction in valuation allowances for deferred tax assets (See Note F) had
the effect of increasing income per common share from continuing operations by
$1.18. Accordingly, income per common share from continuing operations on a
fully taxable basis is as follows:
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
----- ---- ----
Pro forma income per common share from continuing operations
before extraordinary charge on a fully taxable
basis -- diluted.......................................... $1.01 $.88 $.75
===== ==== ====
37
40
SUPPLEMENTARY FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
---------------------------------------------------------
1997 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- -------- ------- -------- -------
Net sales............................... $93,806 $103,785 $114,325 $129,194
Gross profit............................ 15,043 16,820 17,993 22,520
Income from continuing operations....... 2,242 3,035 2,526 3,493
Extraordinary charge, net of tax........ -0- -0- -0- (1,513)
Net Income.............................. $ 2,242 $ 3,035 $ 2,526 $ 1,980
======= ======== ======== ========
Diluted Earnings Per Share:
Continuing Operations................. $ .20 $ .27 $ .22 $ .31
Extraordinary charge.................. -0- -0- -0- (.13)
------- -------- -------- --------
Net Income............................ $ .20 $ .27 $ .22 $ .18
======= ======== ======== ========
QUARTER ENDED
---------------------------------------------------------
1996 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- -------- ------- -------- -------
Net sales............................... $90,854 $ 90,693 $ 79,750 $ 86,382
Gross profit............................ 15,530 15,431 13,044 14,274
Income from continuing operations....... 2,582 2,550 2,113 2,448
Income from discontinued operations..... 1,499 1,326 8,817 -0-
Net Income.............................. $ 4,081 $ 3,876 $ 10,930 $ 2,448
======= ======== ======== ========
Diluted Earnings Per Share:
Continuing Operations................. $ .24 $ .23 $ .20 $ .22
Discontinued Operations............... .13 .11 .73 -0-
------- -------- -------- --------
Net Income............................ $ .37 $ .34 $ .93 $ .22
======= ======== ======== ========
NOTE 1 -- On July 31, 1996, the Company completed the sale of substantially all
of the assets of Bennett Industries, Inc., a wholly-owned subsidiary
which manufactures plastic containers, for $50.8 million in cash,
resulting in a pretax gain of $13.8 million recognized in the third
quarter of 1996. The results of operations for Bennett have been
classified as discontinued operations for all periods presented.
NOTE 2 -- Included in income from continuing operations for the quarter ended
September 30, 1996, is a gain on the sale of securities of $1.0
million, net of income taxes.
NOTE 3 -- On August 1, 1997, the Company acquired substantially all of the
shares of Arden Industrial Products, Inc. ("Arden") for cash of
approximately $44.0 million. The transaction has been accounted for as
a purchase. Arden is a national distributor of speciality and standard
fasteners to the industrial market. Arden is included in the Company's
Logistics segment.
NOTE 4 -- The extraordinary charge relates to the Company's decision to enter
into a new bank agreement, issue 9 1/4% Senior Subordinated Notes due
2007 and redeem the Convertible Senior Subordinated Debentures.
NOTE 5 -- Per share amounts are presented assuming dilution in accordance with
FASB Statement No. 128, "Earnings Per Share".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in nor disagreements with Park-Ohio's independent
auditors on accounting and financial disclosure matters within the two-year
period ended December 31, 1997.
38
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. Information relating
to executive officers is contained under Part I of this Annual Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation contained under the
headings "Certain Matters Pertaining to the Board of Directors" and "Executive
Compensation" in the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference from the material contained under the caption "Principal Shareholders"
in the registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference from the material contained under the caption "Certain Transactions"
in the registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Part II, Item 8:
PAGE
----
Report of Independent Auditors............................ 20
Financial Statements
Consolidated balance sheets -- December 31, 1997 and
1996.................................................. 21
Consolidated statements of income -- years ended
December 31, 1997, 1996 and 1995...................... 22
Consolidated statements of shareholders'
equity -- years ended December 31, 1997, 1996 and
1995.................................................. 23
Consolidated statements of cash flows -- years ended
December 31, 1997, 1996 and 1995...................... 24
Notes to consolidated financial statements............. 25
Selected quarterly financial data (unaudited) -- years
ended December 31, 1997 and 1996....................... 38
39
42
(3) Exhibits:
3.1 Restated Articles of Incorporation of Park-Ohio Industries,
Inc. (filed as Exhibit 4(a) of the Company's Registration
Statement on Form S-3, filed on November 7, 1994, SEC File
No. 33-86054 and incorporated by reference and made a part
hereof)
3.2 Code of Regulations of Park-Ohio Industries, Inc. (filed as
Exhibit 4(b) of the Company's Registration Statement on Form
S-3, filed on November 7, 1994, SEC File No. 33-86054 and
incorporated by reference and made a part hereof)
4.1 Indenture, dated November 25, 1997 by and among Park-Ohio
Industries, Inc. and Norwest Bank Minnesota, N.A. as trustee
(filed as Exhibit 4.1 of the Company's Registration
Statement on Form S-4, filed on December 23, 1997, SEC File
No. 333-43005 and incorporated by reference and made a part
hereof)
4.2 Credit Agreement among Park-Ohio Industries, Inc., and
various financial institutions dated January 14, 1998
)(filed as Exhibit 4.1 to the Form 8-K of Park-Ohio
Industries, Inc., filed on January 23, 1998, SEC File No.
000-03134 and incorporated by reference and made a part
hereof)
10.1 Form of Indemnification Agreement entered into between
Park-Ohio Industries, Inc. and each of its directors and
certain officers (filed as Exhibit 10(A) to the Form 10-K of
Park-Ohio Industries, Inc. for the year ended December 31,
1992, SEC File No. 000-03134 and incorporated by reference
and made a part hereof)
10.2 Park-Ohio Industries, Inc. Amended and Restated 1992 Stock
Option Plan (filed as Exhibit A to Schedule 14A of Park-Ohio
Industries, Inc. filed on May 12, 1995, SEC File No.
000-03134 and incorporated by reference and made a part
hereof)
10.3 Escrow Agreement dated October 15, 1993 among Park-Ohio
Industries, Inc., Edward F. Crawford and The Huntington
Trust Company, N.A. (filed as Exhibit 28.1 to the Form 8-K
of Park-Ohio Industries, Inc., filed on November 1, 1993,
SEC File No. 000-03134 and incorporated by reference and
made a part hereof)
10.4 Employment Agreement between Park-Ohio Industries, Inc. and
John J. Murray dated effective January 1, 1995 (filed as
Exhibit 10(a) to the Form 10-Q of Park-Ohio Industries,
Inc., for the quarter ended June 30, 1995, SEC File No.
000-03134 and incorporated by reference and made a part
hereof)
10.5 Asset Purchase Agreement dated as of May 28, 1996 among
North America Packaging Corporation, as Buyer, Bennett
Industries, Inc., as Seller, and Park-Ohio Industries, Inc.,
(filed as Exhibit 2 to the Form 10-Q of Park-Ohio
Industries, Inc., for the quarter ended June 30, 1996, SEC
File No. 000-03134 and incorporated by reference and made a
part hereof)
10.6 Non-Statutory Stock Option Agreement dated February 22, 1996
by and between Park-Ohio Industries, Inc., and Edward F.
Crawford (filed as Appendix A to the Definitive Proxy
Statement of Park-Ohio Industries, Inc., filed on April 16,
1996, SEC File No. 000-03134 and incorporated by reference
and made a part hereof)
10.7 1996 Non-employee Director Stock Option Plan (filed as
Appendix B to the Definitive Proxy Statement of Park-Ohio
Industries, Inc., filed on April 16, 1996, Sec File No.
000-03134 and incorporated by reference and made a part
hereof)
40
43
10.8 Agreement and Plan of Merger dated June 16, 1997 among
Park-Ohio Industries, Inc., PO Acquisitions Corp. and Arden
Industrial Products, Inc. (filed as Exhibit 2.1 to the
Schedule 14D-1 of Park-Ohio Industries, Inc., filed on June
23, 1997 and incorporated by reference and made a part
hereof)
12.1 Computation of Ratios
21.1 List of Subsidiaries of Park-Ohio Industries, Inc.,
23.1 Consent of Ernst & Young, LLP
- ---------------
(b) Reports on Form 8-K filed in the fourth quarter of 1997:
None
41
44
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PARK-OHIO INDUSTRIES, INC.
(Registrant)
By: /s/ RONALD J.
COZEAN
--------------------
Ronald J. Cozean,
Secretary
Date: March 27, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
/s/ EDWARD F. CRAWFORD Chairman and Chief Executive
- ------------------------------------------------ Officer (Principal Executive
Edward F. Crawford Officer) and Director
/s/ JAMES S. WALKER Vice President -- and Chief Financial
- ------------------------------------------------ Officer (Principal Financial and
James S. Walker Accounting Officer)
/s/ MATTHEW V. CRAWFORD Director
- ------------------------------------------------
Matthew V. Crawford
/s/ KEVIN R. GREENE Director
- ------------------------------------------------
Kevin R. Greene
/s/ LEWIS E. HATCH, JR. Director
- ------------------------------------------------
Lewis E. Hatch, Jr.
/s/ THOMAS E. MCGINTY Director
- ------------------------------------------------
Thomas E. McGinty
/s/ LAWRENCE O. SELHORST Director
- ------------------------------------------------
Lawrence O. Selhorst
/s/ FELIX J. TARORICK Director
- ------------------------------------------------
Felix J. Tarorick
/s/ JAMES W. WERT Director
- ------------------------------------------------
James W. Wert
March 27, 1998
42
45
ANNUAL REPORT ON FORM 10-K
PARK-OHIO INDUSTRIES, INC.
FOR THE YEAR ENDED DECEMBER 31, 1997
EXHIBIT INDEX
EXHIBIT
- -------
(12.1) Computation of Ratios
(21.1) List of Subsidiaries of Park-Ohio Industries, Inc.
(23.1) Consent of Independent Auditors
(27.1) Financial Data Schedule for period ended December 31, 1997
(Electronic Filing Only)
(27.2) Financial Data Schedule restated for period ended March 31,
1996
(27.3) Financial Data Schedule restated for period ended June 30,
1996
(27.4) Financial Data Schedule restated for period ended September
30, 1996
(27.5) Financial Data Schedule restated for period ended December
31, 1996
(27.6) Financial Data Schedule restated for period ended March 31,
1997
(27.7) Financial Data Schedule restated for period ended June 30,
1997
(27.8) Financial Data Schedule restated for period ended September
30, 1997
(27.9) Financial Data Schedule restated for period ended December
31, 1995
43