<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
<TABLE>
<S> <C>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NO. 333-43005
PARK-OHIO INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
OHIO 34-6520107
- ------------------------------------------ ------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23000 EUCLID AVENUE, CLEVELAND, OHIO 44117
- ------------------------------------------ ------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 216/692-7200
PURSUANT TO A CORPORATE REORGANIZATION EFFECTIVE JUNE 15, 1998, PARK-OHIO
INDUSTRIES, INC. BECAME A WHOLLY-OWNED SUBSIDIARY OF PARK-OHIO HOLDINGS CORP.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)
(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM IN THE REDUCED
DISCLOSURE FORMAT.
Indicate by check mark whether the registrant:
(1) Has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding twelve months
(or for such shorter period that the registrant was required to file
such reports):
and
(2) Has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
All of the outstanding capital stock of the registrant is held by Park-Ohio
Holdings Corp. As of July 31, 1998, 100 shares of the registrant's common stock,
$1 par value, were outstanding.
The Exhibit Index is located on page 17.
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<PAGE> 2
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- June 30, 1998 and December
31, 1997
Consolidated statements of income -- Six months and three
months ended June 30, 1998 and 1997
Consolidated statements of shareholder's equity -- Six
months ended June 30, 1998
Consolidated statements of cash flows -- Six months ended
June 30, 1998 and 1997
Notes to consolidated financial statements -- June 30, 1998
Independent accountants' review report
Management's Discussion and Analysis of Financial Condition
Item 2. 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
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
3
<PAGE> 4
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30 DECEMBER 31
1998 1997
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 3,931 $ 1,814
Accounts receivable, less allowances for doubtful accounts
of $2,330 at June 30, 1998 and $2,060 at December 31,
1997................................................... 94,239 86,787
Inventories............................................... 149,082 129,512
Deferred tax assets....................................... 3,240 3,240
Other current assets...................................... 3,251 5,075
-------- --------
Total Current Assets................................. 253,743 226,428
Property, Plant and Equipment............................... 145,631 132,864
Less accumulated depreciation............................. 66,318 59,795
-------- --------
79,313 73,069
Other Assets
Excess purchase price over net assets acquired, net of
accumulated amortization of $6,739 at June 30, 1998 and
$5,749 at December 31, 1997............................ 74,190 68,996
Deferred taxes............................................ 12,960 12,960
Other..................................................... 34,255 31,656
-------- --------
$454,461 $413,109
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Trade accounts payable.................................... $ 43,179 $ 49,470
Accrued expenses.......................................... 33,344 28,291
Current portion of long-term liabilities.................. 2,026 2,223
-------- --------
Total Current Liabilities............................ 78,549 79,984
Long-Term Liabilities, less current portion
Long-term debt............................................ 207,834 172,283
Other postretirement benefits............................. 26,957 27,537
Other..................................................... 3,923 4,295
-------- --------
238,714 204,115
Shareholder's Equity
Capital stock, par value $1 a share:
Serial Preferred Stock................................. -0- -0-
Common Stock........................................... -0- 10,960
Additional paid-in capital................................ 64,844 53,476
Retained earnings......................................... 73,696 67,486
Treasury stock, at cost................................... -0- (2,087)
Accumulated other comprehensive earnings (loss)........... (1,342) (825)
-------- --------
137,198 129,010
-------- --------
$454,461 $413,109
======== ========
</TABLE>
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.
4
<PAGE> 5
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales....................................... $140,765 $103,785 $277,268 $197,591
Cost of products sold........................... 117,179 86,965 230,350 165,728
-------- -------- -------- --------
Gross profit.................................. 23,586 16,820 46,918 31,863
Selling, general and administrative expenses.... 13,393 10,044 27,530 19,906
-------- -------- -------- --------
Operating income.............................. 10,193 6,776 19,388 11,957
Interest expense................................ 4,341 1,857 8,493 3,480
-------- -------- -------- --------
Income before income taxes.................... 5,852 4,919 10,895 8,477
Income taxes.................................... 2,516 1,884 4,685 3,200
-------- -------- -------- --------
Net income.................................... $ 3,336 $ 3,035 $ 6,210 $ 5,277
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED TREASURY EARNINGS
STOCK CAPITAL EARNINGS STOCK (LOSS) TOTAL
-------- ---------- -------- -------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance January 1,
1998.................. $ 10,960 $53,476 $67,486 $(2,087) $ (825) $129,010
--------
Net income.............. 6,210 6,210
Foreign currency
translation
adjustment............ (517) (517)
--------
Comprehensive
income........... 5,693
--------
Issuance of General
Aluminum Mfg. Company
earnout shares........ 188 2,306 2,494
Exercise of stock
options............... (18) 257 239
Purchase of treasury
stock................. (238) (238)
Corporate
reorganization........ (11,148) 9,080 2,068 -0-
-------- ------- ------- ------- ------- --------
Balance June 30, 1998... $ -0- $64,844 $73,696 $ -0- $(1,342) $137,198
======== ======= ======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 6,210 $ 5,277
Adjustments to reconcile net income to net cash (used) by
operating activities:
Depreciation and amortization.......................... 7,512 4,622
-------- --------
13,722 9,899
Changes in operating assets and liabilities excluding
acquisitions of businesses:
Accounts receivable.................................... (6,328) (8,086)
Inventories and other current assets................... (15,542) (3,243)
Accounts payable and accrued expenses.................. (3,200) 3,799
Other.................................................. (4,858) (5,081)
-------- --------
Net Cash (Used) by Operating Activities.............. (16,206) (2,712)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (10,896) (5,221)
Costs of acquisitions, net of cash acquired............... (6,036) (13,917)
Purchase of investments................................... (101) (1,323)
Other..................................................... -0- 231
-------- --------
Net Cash (Used) by Investing Activities.............. (17,033) (20,230)
FINANCING ACTIVITIES
Proceeds from bank arrangements for acquisitions.......... 6,000 13,900
Proceeds from bank arrangements for operations............ 30,500 15,100
Payments on long-term debt................................ (1,145) (3,777)
Purchase of treasury stock................................ (238) (2,369)
Issuance of common stock under stock option plan.......... 239 787
-------- --------
Net Cash Provided by Financing Activities............ 35,356 23,641
-------- --------
Increase in Cash and Cash Equivalents................ 2,117 699
Cash and Cash Equivalents at Beginning of Period..... 1,814 4,659
-------- --------
Cash and Cash Equivalents at End of Period........... $ 3,931 $ 5,358
======== ========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
NOTE A -- BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Park-Ohio
Industries, Inc. and its subsidiaries ("Park-Ohio", "the Company"). Park-Ohio is
a wholly-owned subsidiary of Park-Ohio Holdings Corp. as of June 10, 1998 (see
Note D). All significant intercompany transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six-month periods ended June
30, 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:
<TABLE>
<S> <C>
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
=======
</TABLE>
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.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997
-------------
<S> <C>
Net sales................................................... $256,482
Gross profit................................................ 50,392
Net income.................................................. $ 6,929
========
</TABLE>
8
<PAGE> 9
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- CONTINUED
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.
NOTE C -- INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
-------- -----------
<S> <C> <C>
In process and finished goods............................... $115,966 $100,283
Raw materials and supplies.................................. 33,116 29,229
-------- --------
$149,082 $129,512
======== ========
</TABLE>
NOTE D -- CORPORATE REORGANIZATION
At the 1998 Annual Meeting of Shareholders of Park-Ohio held on May 28,
1998, the shareholders approved an agreement of Merger ("Merger Agreement")
dated February 20, 1998 by and among Park-Ohio, PKOH Holding Corp. ("Holdings")
and PKOH Merger Corp. ("Merger Corp.") providing for a reorganization of
Park-Ohio into a holding company form of ownership with Holdings as its sole
parent. On June 10, 1998, Holdings amended and restated its articles of
incorporation to increase its authorized shares from 100 shares of common stock,
$1.00 par value per share, to 40,000,000 shares of common stock and 632,470
shares of preferred stock, all $1.00 par value per share, and changed its name
from PKOH Holding Corp. to Park-Ohio Holdings Corp. Effective as of the close of
business on June 15, 1998, Merger Corp. was merged with and into Park-Ohio upon
the terms and conditions of the Merger Agreement. At the effective time of the
Merger, (i) all of the shares of Park-Ohio's common stock issued and outstanding
immediately prior to the Merger were converted into an equal number of shares of
Holding's common stock (on a share-for-share basis), (ii) all of the shares of
Merger Corp.'s common stock issued and outstanding immediately prior to the
Merger were converted into 100 shares of Park-Ohio's common stock and (iii) all
of the shares of Holdings common stock issued and outstanding immediately prior
to the Merger were canceled.
Prior to the Merger, there was no public market for Holding's common stock,
and Park-Ohio's common stock was listed for trading on the NASDAQ National
Market under the symbol "PKOH". Upon the opening of the market after the
effective time of the Merger: (i) Holdings' common stock was registered under
Section 12 (g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and was listed for trading on the NASDAQ National Market under the symbol
"PKOH"; (ii) Park-Ohio's common stock was simultaneously delisted from the
NASDAQ National Market and ceased to be registered under Section 12 (g) of the
Exchange Act; and (iii) Holdings assumed Park-Ohio's reporting obligations under
the Exchange Act.
NOTE E -- ACCOUNTING PRONOUNCEMENTS
The Company adopted FASB Statement No. 130, "Reporting Comprehensive
Income", at the beginning of 1998. Statement 130 establishes standards for the
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, which prior to adoption were immaterial and included in accrued
expenses, 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 earnings and comprehensive
earnings for the three and six-month periods ended June 30, 1997.
9
<PAGE> 10
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- CONTINUED
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.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use". The SOP requires
companies to capitalize qualifying computer software costs incurred during the
application development stage. This statement will be applied prospectively and
is effective for financial statements for fiscal years beginning after December
15, 1998. The impact of this new standard is not expected to have a significant
effect on the Company's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Accounting for the Costs of
Start-up Activities". The SOP requires that costs of start-up activities be
expensed as incurred. The SOP is effective for fiscal years beginning after
December 15, 1998. The Company expects to adopt the SOP in the first quarter of
1999. The impact of adoption of the SOP on the Company's financial position,
results of operations or cash flows is expected to be immaterial.
NOTE F -- RECLASSIFICATION
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period presentation.
10
<PAGE> 11
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholder
Park-Ohio Industries, Inc.
We have reviewed the accompanying consolidated balance sheet of Park-Ohio
Industries, Inc. and subsidiaries as of June 30, 1998, and the related
consolidated statements of income for the three months and six months ended June
30, 1998 and 1997, the consolidated statement of shareholder's equity for the
six months ended June 30, 1998 and the consolidated statements of cash flows for
the six-month periods ended June 30, 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 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, shareholder's 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
July 22, 1998
11
<PAGE> 12
ITEM 2. 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., a wholly-owned subsidiary of Park-Ohio Holdings
Corp., and its subsidiaries after elimination of material intercompany
transactions and balances. The historical financial information for the six and
three-month periods ended June 30, 1997 is not directly comparable on a
period-to-period basis to the financial information for the six and three month
periods ended June 30, 1998 due to the 1997 acquisitions ("1997 Acquisitions").
During 1997, the Company acquired five businesses for $62.6 million. 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. 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. Integrated Logistics Solutions is
comprised of RB&W Corporation and Arden Industrial Products, Inc., the operating
companies of the Company's Logistics division. 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.
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.
Between January 1, 1994 and June 30, 1998, the Company's continuing
operations incurred $56.1 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 HALF 1998 VERSUS FIRST HALF 1997
Net sales increased by $79.7 million, or 40%, from $197.6 million for the
first half of 1997 to $277.3 million for the first half ended June 30, 1998.
Approximately 26% of this increase was attributable to internal growth and 74%
was a result of the 1997 Acquisitions. Of the internal sales growth,
approximately 84% 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.
12
<PAGE> 13
Gross profit increased by $15.1 million, or 47%, from $31.9 million for the
first half of 1997 to $46.9 million for the first half of 1998. Of the increase,
71% relates to the 1997 Acquisitions and 29% 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 16.9%
for the first half of 1998 from 16.1% for the first half of 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 38% to $27.5 million
for the first half of 1998 from $19.9 million for the first half of 1997.
Approximately 59% of such increase was related to the 1997 Acquisitions while
the remainder primarily related to the increase in internally generated net
sales. Consolidated selling, general and administrative expenses as a percentage
of net sales was approximately 10% for both periods.
Interest expense increased by $5.0 million from $3.5 million for the
six-month period ended June 30, 1997 to $8.5 million for the six-month period
ended June 30, 1998 due to higher average debt outstanding during the current
period and to higher average interest rates in 1998 versus 1997. For the
six-month period ended June 30, 1998, the Company averaged outstanding
borrowings of $194.2 million as compared to $96.1 million outstanding for the
six months ended June 30, 1997. Of the $98.1 million increase, approximately $60
million related to acquisitions and the remainder primarily related to working
capital increases to support the realized and anticipated growth in business.
The average borrowing rate of 9.1% for the six months ended June 30, 1998 is
1.9% higher than the average rate of 7.2% for the six months ended June 30, 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 shorter term debt it
replaced.
The effective income tax rate at June 30, 1998 was 43% as compared to 38%
at June 30, 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.
SECOND QUARTER 1998 VERSUS SECOND QUARTER 1997
Net sales increased by $37.0 million, or 36%, from $103.8 million for the
second quarter of 1997 to $140.8 million for the quarter ended June 30, 1998.
Approximately 19% of this increase was attributable to internal growth and 81%
was a result of the 1997 Acquisitions. Of the internal sales growth, 69% was
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 $6.8 million, or 40%, from $16.8 million for the
second quarter of 1997 to $23.6 million for the second quarter ended June 30,
1998. Of the increase, 80% relates to the 1997 Acquisitions and 20% 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 16.8% for the second quarter ended June 30, 1998 from 16.2% for the
second quarter ended June 30, 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 33% to $13.4 million
for the three months ended June 30, 1998 from $10.0 million for the three months
ended June 30, 1997. Approximately 84% of such increase was related to the 1997
Acquisitions while the remainder primarily related to the increase in internally
generated net sales. Consolidated selling, general and administrative expenses
as a percentage of net sales was approximately 10% for both periods.
13
<PAGE> 14
Interest expense increased by $2.6 million from $1.9 million for the
three-month period ended June 30, 1997 to $4.3 million for the three-month
period ended June 30, 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 June 30, 1998, the Company averaged outstanding
borrowings of $204.8 million as compared to $103.1 million outstanding for the
three months ended June 30, 1997. Of the increase of $101.7 million, $60 million
related to acquisitions and the remainder primarily related to working capital
increases to support the realized and anticipated growth in business. The
average borrowing rate of 9.1% for the three months ended June 30, 1998 is 1.9%
higher than the average rate of 7.2% for the three months ended June 30, 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 shorter term debt it
replaced.
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
Group, 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. 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; the outcome of pending and future
litigation and other claims; dependence on the automotive industry; dependence
on key management; dependence on information systems; and the ability of the
Company, its vendors and customers to achieve Year 2000 compliance. 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 consolidated financial statements at June 30, 1998, and for the
three-month and six-month periods ended June 30, 1998 and 1997, have been
reviewed, prior to filing, by Ernst & Young LLP, the Company's independent
accountants, and their report is included herein.
14
<PAGE> 15
PART II
OTHER INFORMATION
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 Registration Statement on Form S-4 of Park-Ohio
Industries, Inc., 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)
Park-Ohio filed a Form 8-K on April 22, 1998 relating to the press release
announcing its results for the first quarter of 1998.
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 August 13, 1998
---------------------------------
15
<PAGE> 16
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
FOR THE QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
15 Letter re: unaudited financial information
27 Financial data schedule (Electronic filing only)
</TABLE>
16
<PAGE> 1
EXHIBIT (15) LETTER RE: UNAUDITED FINANCIAL INFORMATION
Board of Directors and Shareholders
Park-Ohio Industries, Inc.
We are aware of the incorporation by reference in the following
Registration Statements of Park-Ohio Industries, Inc., for the registration of
its senior subordinated notes due 2007 of our report dated July 22, 1998
relating to the unaudited consolidated interim financial statements of Park-Ohio
Industries, Inc., which are included in its Form 10-Q for the quarter ended June
30, 1998:
<TABLE>
<CAPTION>
SHARES/DOLLARS
REGISTRATION STATEMENT DESCRIPTION REGISTERED
- ---------------------- ----------- --------------
<S> <C> <C>
Form S-4 (333-43005) Senior Subordinated Notes due 2007 $150,000,000
</TABLE>
Pursuant to Rule 436(c) of the Securities Act of 1933 our reports are not a
part of the registration statement prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
Cleveland, Ohio
August 7, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001068148
<NAME> PARK-OHIO INDUSTRIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,931
<SECURITIES> 0
<RECEIVABLES> 94,239
<ALLOWANCES> 2,330
<INVENTORY> 149,082
<CURRENT-ASSETS> 253,743
<PP&E> 145,631
<DEPRECIATION> 66,318
<TOTAL-ASSETS> 454,461
<CURRENT-LIABILITIES> 78,549
<BONDS> 207,834
0
0
<COMMON> 0
<OTHER-SE> 137,198
<TOTAL-LIABILITY-AND-EQUITY> 454,461
<SALES> 277,268
<TOTAL-REVENUES> 277,268
<CGS> 230,350
<TOTAL-COSTS> 230,350
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,493
<INCOME-PRETAX> 10,895
<INCOME-TAX> 4,685
<INCOME-CONTINUING> 6,210
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,210
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
