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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ____________ TO ____________
COMMISSION FILE NO. 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
incorporation or organization) Identification No.)
23000 EUCLID AVENUE, CLEVELAND, OHIO 44117
- ------------------------------------------ ------------------------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 216/692-7200
Indicate by check mark whether the registrant:
(1) Has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the
registrant was required to file such reports):
and
(2) Has been subject to such filing requirements for the past 90
days.
YES [X] NO [ ]
Number of shares outstanding of registrant's Common Stock, par value $1.00 per
share, as of April 30, 1998: 11,147,462 including 157,461 shares in treasury.
The Exhibit Index is located on page 17.
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- March 31, 1998 and December
31, 1997
Consolidated statements of income -- Three months ended
March 31, 1998 and 1997
Consolidated statements of shareholders' equity -- Three
months ended March 31, 1998
Consolidated statements of cash flows -- Three months ended
March 31, 1998 and 1997
Notes to consolidated financial statements -- March 31, 1998
Independent accountants' review report
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
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PART I
FINANCIAL INFORMATION
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31 DECEMBER 31
1998 1997
----------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 783 $ 1,814
Accounts receivable, less allowances for doubtful accounts
of $2,062 at March 31, 1998 and $2,060 at December 31,
1997................................................... 96,134 86,787
Inventories............................................... 147,376 129,512
Deferred tax assets....................................... 3,240 3,240
Other current assets...................................... 4,359 5,075
-------- --------
Total Current Assets................................. 251,892 226,428
Property, Plant and Equipment............................... 140,783 132,864
Less accumulated depreciation............................. 63,146 59,795
-------- --------
77,637 73,069
Other Assets
Excess purchase price over net assets acquired, net of
accumulated amortization of $6,130 at March 31, 1998
and $5,749 at December 31, 1997........................ 71,109 68,996
Deferred taxes............................................ 12,960 12,960
Other..................................................... 32,232 31,656
-------- --------
$445,830 $413,109
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable.................................... $ 48,965 $ 49,470
Accrued expenses.......................................... 39,063 28,291
Current portion of long-term liabilities.................. 2,222 2,223
-------- --------
Total Current Liabilities............................ 90,250 79,984
Long-Term Liabilities, less current portion
Long-term debt............................................ 189,709 172,283
Other postretirement benefits............................. 27,215 27,537
Other..................................................... 4,460 4,295
-------- --------
221,384 204,115
Shareholders' Equity
Capital stock, par value $1 a share:
Serial Preferred Stock................................. -0- -0-
Common Stock........................................... 11,148 10,960
Additional paid-in capital................................ 55,782 53,476
Retained earnings......................................... 70,360 67,486
Treasury stock, at cost................................... (2,251) (2,087)
Accumulated other comprehensive earnings (loss)........... (843) (825)
-------- --------
134,196 129,010
-------- --------
$445,830 $413,109
======== ========
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to consolidated financial statements.
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-------------------
1998 1997
-------- -------
(DOLLARS IN
THOUSANDS -- EXCEPT
PER SHARE DATA)
Net sales................................................... $136,503 $93,806
Cost of products sold....................................... 113,171 78,763
-------- -------
Gross profit.............................................. 23,332 15,043
Selling, general and administrative expenses................ 14,137 9,862
-------- -------
Operating income............................................ 9,195 5,181
Interest expense............................................ 4,152 1,623
-------- -------
Income before income taxes................................ 5,043 3,558
Income taxes................................................ 2,169 1,316
-------- -------
Net income................................................ $ 2,874 $ 2,242
======== =======
Net income per common share:
Basic..................................................... $ .26 $ .21
======== =======
Diluted................................................... $ .26 $ .20
======== =======
Common shares used in the computation:
Basic..................................................... 10,996 10,666
======== =======
Diluted................................................... 11,246 12,124
======== =======
See notes to consolidated financial statements.
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK EARNINGS (LOSS) TOTAL
------- ---------- -------- -------- --------------- --------
(DOLLARS IN THOUSANDS)
Balance January 1, 1998........... $10,960 $53,476 $67,486 $(2,087) $(825) $129,010
--------
Net income........................ 2,874 2,874
Foreign currency translation
adjustment...................... (18) (18)
--------
Comprehensive earnings............ 2,856
--------
Issuance of General Aluminum Mfg.
Company earnout shares.......... 188 2,306 2,494
Exercise of stock options......... 73 73
Purchase of treasury stock........ (237) (237)
------- ------- ------- ------- -----
Balance March 31, 1998............ $11,148 $55,782 $70,360 $(2,251) $(843) $134,196
======= ======= ======= ======= ===== ========
See notes to consolidated financial statements.
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-----------------------
1998 1997
---------- ---------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income................................................ $ 2,874 $ 2,242
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization........................ 3,731 2,248
-------- -------
6,605 4,490
Changes in operating assets and liabilities excluding
acquisitions of businesses:
Accounts receivable.................................. (9,348) (5,578)
Inventories and other current assets................. (17,148) (2,597)
Accounts payable and accrued expenses................ 10,249 (251)
Other................................................ (2,296) (439)
-------- -------
Net Cash(Used) by Operating Activities............ (11,938) (4,375)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (6,254) (3,438)
Costs of acquisitions, net of cash acquired............... -0- (4,100)
Purchase of investments................................... (101) (1,323)
-------- -------
Net Cash (Used) by Investing Activities........... (6,355) (8,861)
FINANCING ACTIVITIES
Proceeds from bank arrangements for acquisitions.......... -0- 4,100
Proceeds from bank arrangements for operations............ 17,500 9,400
Payments on long-term debt................................ (74) (1,277)
Purchase of treasury stock................................ (237) (1,965)
Issuance of common stock under stock option plan.......... 73 -0-
-------- -------
Net Cash Provided by Financing Activities......... 17,262 10,258
-------- -------
(Decrease) in Cash and Cash Equivalents........... (1,031) (2,978)
Cash and Cash Equivalents at Beginning of
Period........................................... 1,814 4,659
-------- -------
Cash and Cash Equivalents at End of Period........ $ 783 $ 1,681
======== =======
See notes to consolidated financial statements.
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
(DOLLARS IN THOUSANDS - EXCEPT PER SHARE DATA)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
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 supplier of
specialty and standard fasteners to the industrial market. Arden is included in
the Company's Integrated Logistics Solutions 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 approximately $8.6 million. The
following unaudited pro-forma results of operations assume the acquisitions of
Arden and the other businesses occurred on January 1, 1997. 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 acquisitions occurred on the date indicated, or which may result in the
future.
THREE MONTHS
ENDED
MARCH 31, 1997
------------------
Net sales................................................... $123,388
Gross profit................................................ 24,421
Net income.................................................. 2,821
Net income per common share -- diluted...................... $ .25
========
On April 14, 1998, the Company completed the acquisition of Direct
Fasteners Limited located in Ontario, Canada. The aggregate purchase price and
the results of operations of Direct Fasteners Limited prior to the date of
acquisition were not material to the Company.
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- CONTINUED
NOTE C -- INVENTORIES
The components of inventory consist of the following:
MARCH 31 DECEMBER 31
1998 1997
-------- -----------
In-process and finished goods............................... $113,725 $100,283
Raw materials and supplies.................................. 33,651 29,229
-------- --------
$147,376 $129,512
======== ========
NOTE D -- SHAREHOLDERS' EQUITY
At March 31, 1998, capital stock consists of (i) Serial Preferred Stock of
which 632,470 shares were authorized and none were issued and (ii) Common Stock
of which 20,000,000 shares were authorized and 11,147,462 shares were issued and
outstanding including 157,461 shares held in treasury.
NOTE E -- NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board ("FASB") 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.
Earnings per share amounts for the period ended March 31, 1997 have been
restated to conform to the Statement 128 requirements which were adopted on
December 31, 1997.
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
MARCH 31
--------------------
1998 1997
-------- --------
NUMERATOR
Net income.................................................. $ 2,874 $ 2,242
Amortization of imputed goodwill associated with the earnout
shares.................................................... -0- (7)
-------- --------
Numerator for basic earnings per share-net income available
to common shareholders.................................... 2,874 2,235
Effect of dilutive securities:
Interest (net of income taxes) associated with convertible
senior subordinated debentures......................... -0- 250
-------- --------
Numerator for diluted earnings per share -- net income after
assumed conversions....................................... $ 2,874 $ 2,485
======== ========
DENOMINATOR
Denominator for basic earnings per share- weighted average
shares.................................................... 10,996 10,666
Effect of dilutive securities:
Effect of General Aluminum Mfg. Company earnout shares
deemed to be issued.................................... -0- 64
Employee stock options.................................... 250 243
Convertible subordinated debentures....................... -0- 1,151
-------- --------
Denominator for diluted earnings per share -- adjusted
weighted average shares and assumed conversions........... 11,246 12,124
Net income per common share -- basic........................ $ .26 $ .21
======== ========
Net income per common share -- diluted...................... $ .26 $ .20
======== ========
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- CONTINUED
NOTE F -- LONG-TERM INCENTIVE PLAN
In February, 1998 the Board of Directors of the Company approved the 1998
Long-Term Incentive Plan as a replacement for the Company's Amended and Restated
1992 Stock Option Plan. The Plan provides for the issuance of up to 550,000
shares of the Company's Common Stock and is subject to shareholder approval.
NOTE G -- CORPORATE REORGANIZATION
In February, 1998 the Board of Directors of the Company approved a proposal
to reorganize the Company into a holding company form of ownership ("the
Reorganization"). The Reorganization proposal contemplates a tax-free merger
("Merger") involving the Company, a newly formed subsidiary of the Company ( the
"Holding Company") and a newly formed subsidiary of the Holding Company ("Merger
Sub"). As a result of the Merger, (i) the shareholders of the Company would
become shareholders of the Holding Company, (ii) the Company would become a
wholly-owned subsidiary of the Holding Company, (iii) Merger Sub would be merged
out of existence and (iv) in all other respects, the pre-merger corporate
structure of the Company and its subsidiaries will remain unchanged. The
proposal is subject to shareholder approval.
NOTE H -- ACCOUNTING PRONOUNCEMENTS
The Company adopted FASB Statement No. 130 "Reporting Comprehensive
Income", at the beginning of 1998. Statement 130 establishes standards for
reporting and display of comprehensive earnings and its components in financial
statements; however, the adoption of this statement had no impact on the
Company's net earnings. Statement 130 requires foreign currency translation
adjustments to be included in other comprehensive earnings. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130. There were no material differences between net income and comprehensive
earnings for the quarters ended March 31, 1998 and 1997.
The FASB has issued two accounting pronouncements which the Company will
adopt in the fourth quarter of 1998. FASB Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" and FASB Statement No. 132,
"Employers' Disclosures about Pensions and Other Post Retirement Benefits -- an
amendment of FASB Statements No. 87, 88 and 106" both expand or modify
disclosures and accordingly, will have no impact on the Company's financial
position, results of operations or cash flows.
NOTE I -- RECLASSIFICATION
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period presentation.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Park-Ohio Industries, Inc.
We have reviewed the accompanying consolidated balance sheet of Park-Ohio
Industries, Inc. and subsidiaries as of March 31, 1998, and the related
consolidated statements of income for the three months ended March 31, 1998 and
1997, the consolidated statement of shareholders' equity for the three months
ended March 31, 1998, and the consolidated statements of cash flows for the
three months ended March 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated condensed financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Park-Ohio Industries, Inc. and
subsidiaries as of December 31, 1997, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended, not
presented herein, and in our report dated February 16, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1997, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
April 22, 1998
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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 financial information for the period
ended March 31, 1997, is not directly comparable to the financial information
for the period ended March 31, 1998, due to the 1997 acquisitions ("1997
Acquisitions"). During 1997, the Company acquired five businesses; two of which
were in the first quarter and three subsequent to the first quarter. The largest
of the 1997 Acquisitions was Arden Industrial Products, Inc. ("Arden") which was
acquired for $44 million as of August 1, 1997. Arden is a national supplier of
specialty and standard fasteners to the industrial market. In addition,
subsequent to March 31, 1997, the Company acquired two other businesses for an
aggregate purchase price approximating $14 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.
OVERVIEW
The Company operates diversified manufacturing ("Manufactured Products")
and logistics ("Integrated Logistics Solutions" or "ILS") businesses 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
original equipment manufacturers ("OEMs") and end-users in the automotive,
railroad, truck and aerospace industries. ILS 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, ILS provides a variety of value-added, cost-effective
procurement solutions. The principal customers of ILS are in the transportation,
industrial, electrical and lawn and garden equipment industries.
The Company announced on March 4, 1998 that it is planning to cause ILS to
issue shares of common stock to the public. ILS is comprised of RB&W Corporation
and Arden, the operating companies of the Company's logistics business. It is
anticipated that a registration statement will be filed in the third quarter of
1998 and that the offering will be completed during 1998.
A registration statement relating to these securities has not been filed
with the Securities and Exchange Commission. These securities may not be sold
absent registration or an applicable exemption from registration. The offering
will be made only by means of a prospectus. This disclosure shall not constitute
an offer to sell or the solicitation of an offer to buy, nor shall there be any
sale of these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any State.
The statements herein regarding the filing of a registration statement, the
timing of the offering and any other future aspects relating to the offering and
other statements which are not historical facts are forward-looking statements.
Such statements involve risks and uncertainties, including, but not limited to,
market conditions (including the price and market for the common stock) and
other factors detailed herein under the heading "Forward-Looking Statements."
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 50.4% compounded annual growth rate ("CAGR"), from $129.2 million to $441.1
million, and income from continuing operations on a fully taxed basis increased
at a 40.2% CAGR from $4.1 million to $11.3 million.
Recent growth 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 ILS customers under total fastening service ("TFS") contracts
and by the leveraging of existing customer relationships at Manufactured
Products.
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Between January 1, 1994 and March 31, 1998, the Company's continuing
operations incurred $44.0 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
FIRST THREE MONTHS 1998 VERSUS FIRST THREE MONTHS 1997
Net sales increased by $42.7 million, or 46%, from $93.8 million for the
three months ended March 31, 1997 to $136.5 million for the three months ended
March 31, 1998. Approximately 31% of this increase was attributable to internal
growth and 69% was a result of the 1997 Acquisitions. Of the internal sales
growth, approximately 91% was primarily attributable to ILS and the addition of
TFS customers 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 ILS and primarily pertains to Arden which
was acquired as of August 1, 1997.
Gross profit increased by $8.3 million, or 55%, from $15.0 million for the
three months ended March 31, 1997 to $23.3 million for the three months ended
March 31, 1998. Of the increase, 65% relates to the 1997 Acquisitions and 35%
was due to internal growth, primarily ILS. A majority of the increase
attributable to the 1997 Acquisitions was related to Arden. The Company's
consolidated gross margin increased to 17.1% for the three months ended March
31, 1998 from 16.0% for the three months ended March 31, 1997. This increase in
consolidated gross margin was due to a change in the Company's revenue mix and
to increased production in the manufactured products segment thereby allocating
fixed manufacturing overhead over a greater production base.
Selling, general and administrative costs increased by 43% to $14.1 million
for the three months ended March 31, 1998 from $9.9 million for the three months
ended March 31, 1997. Approximately 65% of such increase was related to the 1997
Acquisitions while the remainder related to the increase in internally generated
net sales. The relationship of consolidated selling, general and administrative
expenses to net sales was approximately 10% for both periods.
Interest expense increased by $2.6 million from $1.6 million for the period
ended March 31, 1997 to $4.2 million for the period ended March 31, 1998 due to
higher average debt outstanding during the current period and to higher average
interest rates in 1998 versus 1997. For the three month period ended March 31,
1998, the Company averaged outstanding borrowings of $182.6 million as compared
to $88.9 million outstanding for the three months ended March 31, 1997. Of the
increase of $93.7 million, $58 million related to acquisitions and the remainder
primarily related to working capital increases to sustain the growth in
business. The average borrowing rate of 9.1% for the three months ended March
31, 1998 is 1.8% higher than the average rate of 7.3% for the three months ended
March 31, 1997 primarily because of the $150 million bond offering in the fall
of 1997 which carries a coupon rate of 9.25% versus a 7.3% rate on the bank debt
it replaced.
The effective income tax rate at March 31, 1998, was 43% as compared to 37%
at March 31, 1997. The increase in the effective rate is directly attributable
to an increase in expenses recorded for financial reporting purposes, but not
deductible for income tax purposes, primarily certain goodwill amortization.
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.
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
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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 March 31,
1998, $37.5 million was outstanding 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.
Current financial resources (working capital and available bank borrowing
arrangements) and anticipated funds from continuing operations are expected to
be adequate to meet current cash requirements. 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 2.79 at March 31,
1998 versus 2.83 at December 31, 1997. Working capital increased by $15.2
million to $161.6 million at March 31, 1998 from $146.4 million at December 31,
1997 as a result of increases necessary to support the scheduled internal growth
of the Company.
During the three month period ended March 31, 1998, the Company generated
$6.6 million from operations before changes in operating assets and liabilities.
After giving effect to the use of $18.5 million in the operating accounts, the
Company used $11.9 million for operating activities. During the period, the
Company used $6.3 million for capital expenditures. These activities were funded
by a net increase in bank borrowings of $17.5 million and a decrease in cash
balances of $1.0 million.
SEASONALITY; VARIABILITY OF OPERATING RESULTS
As a result of the significant growth in the Company's net sales and
operating income in recent years, seasonal fluctuations have been substantially
mitigated. The Company, however, performs scheduled plant maintenance in the
third quarter to coincide with customer plant shut downs.
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 included in the Manufactured Products
segment, which typically ship a few large systems per year. In addition, the
Company experiences seasonality in the Kay Home Products, Inc. ("Kay Home
Products") operating unit of the Metal Forming Group included in the
Manufactured Products segment. 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.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Certain statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations contain forward-
looking statements, including without limitation, discussion regarding the
Company's anticipated 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;
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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
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.
REVIEW BY INDEPENDENT ACCOUNTANTS
The condensed consolidated financial statements at March 31, 1998, and the
three month period then ended have been reviewed, prior to filing, by Ernst &
Young LLP, the Company's independent accountants, and their report is included
herein.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
first quarter of 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
(2) Agreement of Merger, dated February 20, 1998 by and among Park-Ohio
Industries, Inc., PKOH Merger Corp., and PKOH Holding Corp. (filed as
Appendix A to the Company's Registration Statement on Form S-4, filed
on February 26, 1998, SEC File No. 333-46931 and incorporated by
reference and made a part hereof)
(15) Letter re: unaudited financial information
(27) Financial data schedule (Electronic Filing Only)
The Company filed a Form 8-K on January 23, 1998, relating to the entering of a
revolving senior credit facility (the "Credit Facility"), with a group of three
banks, under which it may borrow up to $100 million on an unsecured basis. The
Credit Facility has an initial term ending April 30, 2001, with one year renewal
options thereafter.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PARK-OHIO INDUSTRIES, INC.
------------------------------------
(Registrant)
By /s/ J. S. WALKER
-----------------------------------
Name: J. S. Walker
Title: Vice President and Chief
Financial Officer
Dated May 13, 1998
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EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
FOR THE QUARTER ENDED MARCH 31, 1998
EXHIBIT
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15 Letter re: unaudited financial information
27 Financial data schedule (Electronic filing only)
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