<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, 2000, 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, 2000, 100 shares of the registrant's common stock,
$1 par value, was outstanding.
The Exhibit Index is located on page 18.
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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, 2000 and December
31, 1999
Consolidated statements of operations -- Six months and
three months ended June 30, 2000 and 1999
Consolidated statement of shareholder's equity -- Six months
ended June 30, 2000
Consolidated statements of cash flows -- Six months ended
June 30, 2000 and 1999
Notes to consolidated financial statements -- June 30, 2000
Independent accountants' review report
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II OTHER INFORMATION
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
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 3,209 $ 5,625
Accounts receivable, less allowances for doubtful accounts
of $3,300 at June 30, 2000 and $3,296 at December 31,
1999................................................... 122,492 112,896
Inventories............................................... 185,321 192,270
Deferred tax assets....................................... 600 600
Other current assets...................................... 12,328 5,754
-------- --------
Total Current Assets.............................. 323,950 317,145
Property, Plant and Equipment............................... 206,754 211,093
Less accumulated depreciation............................. 87,712 86,721
-------- --------
119,042 124,372
Other Assets
Excess purchase price over net assets acquired, net of
accumulated amortization of $10,358 at June 30, 2000
and $11,941 at December 31, 1999....................... 125,094 137,905
Deferred taxes............................................ 2,400 2,400
Other..................................................... 51,844 48,321
-------- --------
$622,330 $630,143
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Trade accounts payable.................................... $ 69,334 $ 72,452
Accrued expenses.......................................... 38,525 32,995
Current portion of long-term liabilities.................. 2,443 2,557
-------- --------
Total Current Liabilities......................... 110,302 108,004
Long-Term Liabilities, less current portion
Long-term debt............................................ 334,504 339,813
Other postretirement benefits............................. 24,748 25,470
Other..................................................... 1,886 1,840
-------- --------
361,138 367,123
Shareholder's Equity
Common Stock, par value $1 a share........................ -0- -0-
Additional paid-in capital................................ 64,844 64,844
Retained earnings......................................... 87,418 91,024
Accumulated other comprehensive earnings (loss)........... (1,372) (852)
-------- --------
150,890 155,016
-------- --------
$622,330 $630,143
======== ========
</TABLE>
Note: The balance sheet at December 31, 1999 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 OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales....................................... $204,539 $186,917 $410,899 $358,320
Cost of products sold........................... 167,246 153,104 337,329 293,540
-------- -------- -------- --------
Gross profit.................................. 37,293 33,813 73,570 64,780
Selling, general and administrative expenses.... 21,298 20,166 42,335 38,118
-------- -------- -------- --------
Operating income.............................. 15,995 13,647 31,235 26,662
Interest expense................................ 7,720 5,693 15,225 11,071
Loss on sale of Kay Home Products............... 15,318 -0- 15,318 -0-
-------- -------- -------- --------
Income (loss) before income taxes............. (7,043) 7,954 692 15,591
Income taxes.................................... 1,130 3,389 4,298 6,677
-------- -------- -------- --------
Net income (loss)............................. $ (8,173) $ 4,565 $ (3,606) $ 8,914
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED EARNINGS
STOCK CAPITAL EARNINGS (LOSS) TOTAL
------ ---------- -------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance January 1, 2000............ $-0- $64,844 $91,024 $ (852) $155,016
Comprehensive income:
Net loss......................... (3,606) (3,606)
Foreign currency translation
adjustment.................... (520) (520)
--------
Comprehensive income (loss)... (4,126)
---- ------- ------- ------- --------
Balance June 30, 2000.............. $-0- $64,844 $87,418 $(1,372) $150,890
==== ======= ======= ======= ========
</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
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $(3,606) $ 8,914
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 10,520 10,326
Loss on sale of Kay Home Products...................... 15,318 -0-
------- -------
22,232 19,240
Changes in operating assets and liabilities excluding
acquisitions of businesses:
Accounts receivable.................................... (13,841) (1,986)
Inventories and other current assets................... (2,859) (10,033)
Accounts payable and accrued expenses.................. 2,588 5,659
Other.................................................. (4,707) (8,109)
------- -------
Net Cash Provided by Operating Activities............ 3,413 4,771
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (9,584) (9,092)
Costs of acquisitions, net of cash acquired............... -0- (35,664)
Proceeds from sale of Kay Home Products................... 9,177 -0-
Purchase of investments................................... -0- (445)
------- -------
Net Cash (Used) by Investing Activities................ (407) (45,201)
FINANCING ACTIVITIES
Proceeds from bank arrangements........................... 14,000 49,000
Issuance of 9.25% Senior Subordinated Notes, net of
deferred financing costs............................... -0- 49,508
Payments on debt.......................................... (19,422) (56,129)
------- -------
Net Cash (Used) Provided by Financing Activities....... (5,422) 42,379
------- -------
(Decrease)Increase in Cash and Cash Equivalents........ (2,416) 1,949
Cash and Cash Equivalents at Beginning of Period....... 5,625 4,320
------- -------
Cash and Cash Equivalents at End of Period............. $ 3,209 $ 6,269
======= =======
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(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. All
significant intercompany transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month periods ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. 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, 1999.
NOTE B -- ACQUISITIONS AND DISPOSITION
During 1999, the Company acquired all of the stock of The Metalloy
Corporation ("Metalloy"), Columbia Nut and Bolt Corp. ("Columbia"), Industrial
Fasteners Corporation ("Industrial"), M.P. Colinet ("Colinet") and substantially
all of the assets of St. Louis Screw and Bolt ("St. Louis Screw") and PMC
Industries, Inc. ("PMC") for cash. Metalloy is a full service aluminum casting
and machining company. Columbia and Industrial are logistics providers of "Class
C" production components. St. Louis Screw is a manufacturer of bolts and PMC and
Colinet provide capital equipment and associated parts for the oil drilling
industry. Each of these transactions has been accounted for as a purchase. The
purchase price and the results of operations of each of these businesses prior
to their respective dates of acquisition were not deemed to be significant as
defined in Regulation S-X.
On June 30, 2000 the Company completed the sale of substantially all of the
assets of Kay Home Products, which was part of the Manufactured Products
segment, for cash of approximately $9.2 million and recorded a loss of
approximately $15.3 million. Kay Home Products was a non-core business producing
and distributing barbecue grills, tray tables, screen houses and plant stands.
NOTE C -- INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
-------- -----------
<S> <C> <C>
In process and finished goods............................... $155,539 $160,648
Raw materials and supplies.................................. 29,782 31,622
-------- --------
$185,321 $192,270
======== ========
</TABLE>
NOTE D -- ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June 1998 and subsequently amended in June 2000, to
provide guidance on its implementation. Statement 133 requires derivatives to be
recorded on the balance sheet at fair value and establishes accounting for three
different types of hedges:
8
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
hedges of changes in fair value of assets, liabilities, or firm commitments;
hedges of the variable cash flows of forecasted transactions; and hedges of
foreign currency exposures of net investments in foreign operations. Statement
133, as delayed by the issuance of Statement 138, is effective for years
beginning after June 15, 2000 and is not expected to have a significant impact
on the Company's financial position or results of operations.
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in
Financial Statements." SAB 101 outlines the basic criteria that must be met to
recognize revenue, and provides guidelines for disclosure related to revenue
recognition policies. This guidance is required to be implemented in the fourth
quarter of 2000. The Company is currently reviewing this guidance in order to
determine the impact of its provisions, if any, on the consolidated financial
statements. The impact of SAB 101, if any, will be reported as a change in
accounting principle in accordance with APB Opinion No. 20 and FASB Statement
No. 3.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: An Interpretation of APB
Opinion No. 25," which is effective July 1, 2000. This interpretation clarifies
various accounting issues for stock compensation plans. The Company has
determined that the interpretation will not have a significant effect on its
financial statements.
NOTE E -- SEGMENTS
The Company manages its business based upon three operating segments:
Integrated Logistics Solutions ("ILS"), Aluminum Products and Manufactured
Products. ILS is a leading national supplier of "Class C" production components
to original equipment manufacturers ("OEMs"), other manufacturers and
distributors. In connection with the supply of such industrial products, ILS
provides a variety of value-added, cost-effective procurement solutions.
Aluminum Products manufactures cast aluminum components primarily for automotive
OEMs. In addition, Aluminum Products also provides value-added services such as
design and engineering, machining and assembly. Manufactured Products operates a
diverse group of manufacturing businesses that design and manufacture a broad
range of high quality products for specific customer applications. Intersegment
sales are immaterial.
9
<PAGE> 10
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
Results by Business Segment were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales:
ILS....................................... $129,862 $109,123 $264,591 $215,535
Aluminum products......................... 31,283 37,128 65,064 68,747
Manufactured products..................... 43,394 40,666 81,244 74,038
-------- -------- -------- --------
$204,539 $186,917 $410,899 $358,320
======== ======== ======== ========
Income (loss) before income taxes:
ILS....................................... $ 12,085 $ 10,030 $ 25,715 $ 20,995
Aluminum products......................... 2,646 4,144 5,276 7,115
Manufactured products..................... 3,948 2,131 5,789 3,103
-------- -------- -------- --------
18,679 16,305 36,780 31,213
Amortization of excess purchase price over net
assets acquired.............................. (988) (894) (1,981) (1,708)
Corporate costs................................ (1,696) (1,764) (3,564) (2,843)
Interest expense............................... (7,720) (5,693) (15,225) (11,071)
Loss on the sale of Kay Home Products.......... (15,318) -0- (15,318) -0-
-------- -------- -------- --------
$ (7,043) $ 7,954 $ 692 $ 15,591
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Identifiable assets were as follows:
ILS.................................................... $349,095 $343,522
Aluminum products...................................... 107,282 97,717
Manufactured products.................................. 154,417 170,267
General corporate...................................... 11,536 18,637
-------- --------
$622,330 $630,143
======== ========
</TABLE>
NOTE F -- RECLASSIFICATION
Certain amounts have been reclassified to conform to current year
presentation.
NOTE G -- INVOLUNTARY CONVERSION OF ASSETS
On June 6, 2000 the Company experienced a fire at one of its manufacturing
facilities located in Cicero, Illinois. The Company carries both property damage
and business interruption insurance, and as a result, does not expect the fire
to have a material adverse impact on the Company's financial results. The total
loss from business interruption, extra expenses and property damage has not been
determined. The deductible portion of the loss was recorded during the quarter
ended June 30, 2000. The Company has recorded the book value of property damaged
by the fire as a receivable which is included in other current assets at June
30, 2000.
10
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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 June 30, 2000, and the related
consolidated statements of operations for the three-month and six-month periods
ended June 30, 2000 and 1999, the consolidated statement of shareholder's equity
for the six-month period ended June 30, 2000 and the consolidated statements of
cash flows for the six-month period ended June 30, 2000 and 1999. 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 auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based upon our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Park-Ohio
Industries, Inc. and subsidiaries as of December 31, 1999 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 22,
2000, 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, 1999, 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 19, 2000
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. and its subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. The financial information
for the six and three-month periods ended June 30, 2000 is not directly
comparable on a period-to-period basis to the financial information for the six
and three-month periods ended June 30, 1999 due to acquisitions and a
divestiture made subsequent to the second quarter of 1999. In July 1999, the
Company acquired all of the shares of Columbia Nut and Bolt Corp. ("Columbia")
and Industrial Fasteners Corporation ("Industrial"). Columbia and Industrial are
logistics providers of "Class C" production components. In September 1999, the
Company acquired all of the shares of M.P. Colinet ("Colinet"). Colinet provides
capital equipment and associated parts for the oil drilling industry and is
complementary to PMC Industries, a subsidiary of the Company acquired in
February 1999. These acquisitions are accounted for as purchases and
consequently their results are included in the consolidated financial statements
from their respective dates of acquisition. On June 30, 2000, the Company sold
substantially all the assets of Kay Home Products, for cash of approximately
$9.2 million and recorded a pretax loss of approximately $15.3 million. Kay Home
Products was a non-core business producing and distributing barbecue grills,
tray tables, screen houses and plant stands.
OVERVIEW
The Company operates diversified manufacturing and logistics businesses
that serve a wide variety of industrial markets. The Company has three operating
segments: Integrated Logistics Solutions ("ILS"), Aluminum Products, and
Manufactured Products. ILS is a leading national supplier of "Class C"
production components to original equipment manufacturers ("OEMs"), other
manufacturers and distributors. In connection with the supply of such industrial
products, ILS provides a variety of value-added, cost-effective procurement
solutions. The principal customers of ILS are in the transportation, industrial,
electrical and lawn and garden equipment industries. Aluminum Products
manufactures cast aluminum components primarily for automotive OEMs. Aluminum
Products also provides value-added services such as design and engineering,
machining and assembly. Manufactured Products operates a diverse group of niche
manufacturing businesses that design and manufacture a broad range of high
quality products engineered for specific customer applications. The principal
customers of Manufactured Products are OEMs and end-users in the automotive,
railroad, truck and aerospace industries.
Between 1993 and 1999, the Company has grown significantly, both internally
and through acquisitions. Over this period, the Company's net sales increased at
a 40% compound annual growth rate ("CAGR"), from $94.5 million to $717.2
million, and income from continuing operations on a fully taxed basis increased
at a 38% CAGR from $2.4 million to $16.4 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 under-performing 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 in the
Aluminum and Manufactured Products segments.
Between January 1, 1994 and June 30, 2000, the Company's continuing
operations incurred $96.5 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 2000 versus First Half 1999
Net sales increased by $52.6 million, or 15%, from $358.3 million for the
first half of 1999 to $410.9 million for the first half of 2000. Of the $52.6
million in growth for the first half, $39.1 million
12
<PAGE> 13
represented organic growth, primarily ILS, while the remainder was from
acquisitions made subsequent to June 30, 1999. For ILS, net sales increased 23%,
or $49.1 million, of which $35.6 million related to internal growth (a 17%
internal growth rate) and the remainder to the acquisitions of Columbia and
Industrial. For Aluminum Products, net sales decreased 5%, or $3.7 million,
resulting from an $8.8 million decrease related to the ending of sales contracts
at Metalloy which were expected at the time of its purchase in 1999, partially
offset by a $5.1 million increase in sales from internal growth. For
Manufactured Products, net sales increased 10%, or $7.2 million, related to
internal growth. Because it closed on June 30, 2000, the divestiture of Kay Home
Products did not affect Manufactured Products net sales for the first half of
2000.
Gross profit increased by $8.8 million, or 14%, from $64.8 million for the
first half of 1999 to $73.6 million for the first half of 2000. Of the increase
in gross profit, $4.7 million was attributable to the organic increase in sales
and the remainder to acquisitions. The Company's consolidated gross margin
decreased to 17.9% for the first six months of 2000 from 18.1% for the first six
months of 1999. This decrease in consolidated gross margin was due to decreased
margins in both the Aluminum Products and ILS segments offset by an increase in
gross margins in the Manufactured Products segment. For Aluminum Products, the
decrease in gross margins related to the ending of sales contracts at Metalloy
which were expected at the time of its purchase in 1999, resulting in the
allocation of fixed manufacturing overhead over a smaller production base. The
decrease in gross margins in the ILS segment related to a shift in product mix
to lower margin items. The increase in margins in the Manufactured Products
segment resulted from increased sales of higher margin products, particularly in
the oil drilling capital equipment business, and from increased production
levels which allocated fixed overhead costs over a larger productive base.
Selling, general and administrative ("SG&A") expenses increased by 11% to
$42.3 million for the first six months of 2000 from $38.1 million for the first
six months of 1999. The increase was related to recent acquisitions and to
increased sales. Columbia and Industrial, acquired in July 1999, incurred $2.0
million of SG&A expenses in the first six months of 2000. In the first half of
2000, SG&A costs benefited from an increase in net pension credits of $1.8
million, reflecting favorable investment returns on pension plan assets.
Consolidated SG&A expenses as a percentage of net sales decreased to 10.3% for
the first six months of 2000 from 10.6% for the first six months of 1999.
Interest expense increased by $4.1 million from $11.1 million for the first
six months of 1999 to $15.2 million for 2000 due to higher average debt
outstanding during the current period and higher average interest rates in 2000
versus 1999. During the first six months of 2000, the Company averaged
outstanding borrowings of $344.5 million as compared to $270.9 million for the
first six months of 1999. The $73.6 million increase in outstanding borrowings
related to acquisitions in the preceding twelve months and to increases in
working capital. The average interest rate of 8.84% for the six months ended
June 30, 2000 was 67 basis points higher than the average rate of 8.17% for
1999. This rate increase was due to both the $50 million add-on in June 1999 to
the Company's Senior Subordinated Notes at 9.25%, and to increased rates on the
Company's revolving credit facility caused by Federal Reserve actions.
Before considering the tax effect of the divestiture of Kay Home Products,
the effective income tax rate for the six-month period ended June 30, 2000 was
41%, while for the six months ended June 30, 1999 it was 43%. The decrease in
tax rate resulted from the relative reduction of non-deductible goodwill for tax
purposes and to a corresponding increase in research and experimental credits.
The divestiture of Kay Home Products generated a book loss of $15.3 million,
($13.2 million net of tax). The effective income tax rate for the first half of
2000 was impacted by the $10.2 million of non-deductible goodwill associated
with the business sold.
Second Quarter 2000 versus Second Quarter 1999
Net sales increased by $17.6 million, or 9%, from $186.9 million for the
quarter ended June 30, 1999 to $204.5 million for the three months ended June
30, 2000. Of the $17.6 million in growth for the quarter, $6.5 million
represented organic growth, primarily ILS, while the remainder was from
acquisitions made subsequent to June 30, 1999. For ILS, net sales increased 19%,
or $20.7 million, of which $9.6 million related to internal growth (a 9%
internal growth rate) and the remainder to the acquisitions of Columbia and
Industrial. For Manufactured Products, net sales increased by $2.7 million
related to internal growth. Because
13
<PAGE> 14
it closed on June 30, 2000, the divestiture of Kay Home Products did not affect
net sales for the second quarter. For Aluminum Products, net sales decreased
16%, or $5.8 million, resulting from an $8.0 million decrease related to the
ending of sales contracts at Metalloy which were expected at the time of its
purchase in 1999, partially offset by a $2.2 million increase in sales from
internal growth.
Gross profit increased by $3.5 million, or 10%, from $33.8 million for the
quarter ended June 30, 1999 to $37.3 million for the quarter ended June 30,
2000. Of the increase in gross profit, $1.1 million was attributable to an
organic increase in sales and the remainder to acquisitions. The Company's
consolidated gross margin increased to 18.2% for the current period from 18.1%
for the quarter ended June 30, 1999. Manufactured Products experienced increased
margins compared to the year earlier period, resulting primarily from increased
production activity, which allocated fixed overhead costs over a larger
productive base. Aluminum Products' gross margins declined slightly due to
decreased production volumes, which allocated fixed overhead over a smaller
production base. Gross Margins also declined slightly at ILS as a result of a
shift in product mix.
Selling, general and administrative ("SG&A") expenses increased by 6% to
$21.3 million for the quarter ended June 30, 2000 from $20.2 million for the
quarter ended June 30, 1999. The increase was related to Columbia and
Industrial, acquired in July, 1999, which incurred $.9 million of SG&A expenses
in the second quarter of 2000, and to increased sales. In second quarter 2000,
SG&A expenses benefited from an increase in net pension credits of $1.0 million,
reflecting favorable investment returns on pension plan assets. Consolidated
SG&A expenses as a percentage of net sales decreased to 10.4% in the second
quarter of 2000 from 10.8% in the second quarter of 1999.
Interest expense increased by $2.0 million from $5.7 million in second
quarter 1999 to $7.7 million in 2000 due to higher average debt outstanding
during the current period and higher average interest rates in 2000 versus 1999.
For the quarter ended June 30, 2000, the Company averaged outstanding borrowings
of $344.7 million as compared to $276.5 million outstanding for the quarter
ended June 30, 1999. The $68.2 million increase in outstanding borrowings
related to acquisitions in the preceding twelve months and to increases in
working capital. The average interest rate of 8.96% for second quarter 2000 was
72 basis points higher than the average rate of 8.24% for 1999. This rate
increase was due to both the $50 million add-on in June 1999 to the Company's
Senior Subordinated Notes at 9.25%, and to increased rates on the Company's
revolving credit facility caused by Federal Reserve actions.
Before considering the tax effect of the divestiture of Kay Home Products,
the effective income tax rate for the quarter ended June 30, 2000 was 41%, while
for the quarter ended June 30, 1999 it was 43%. The decrease in tax rate results
from the relative reduction of non-deductible goodwill for tax purposes and to a
corresponding increase in research and experimental credits. The divestiture of
Kay Home Products generated a book loss of $15.3 million ($13.2 million net of
tax). The effective income tax rate for the second quarter of 2000 was impacted
by the $10.2 million of non-deductible goodwill associated with the business
sold.
SEASONALITY; VARIABILITY OF OPERATING RESULTS
As a result of the significant growth in our net sales and operating income
in recent years, seasonal fluctuations have been mitigated. However, the
Company's results of operations are typically stronger in the first six months
rather than the last six months of each calendar year due to scheduled plant
maintenance in the third quarter coinciding with customer plant shutdowns and to
holidays in the fourth quarter.
The timing of orders placed by our customers has varied with, among other
factors, orders for customers' finished goods, customer production schedules,
competitive conditions and general economic conditions. The variability of the
level and timing of orders has, from time to time, resulted in significant
periodic and quarterly fluctuations in the operations of our business units.
This variability is particularly evident at the capital equipment businesses,
included in the Manufactured Products segment, which typically ship a few large
systems per year.
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<PAGE> 15
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 capital resources and anticipated levels of capital expenditures.
Forward-looking statements are necessarily subject to risks, uncertainties and
other factors, many of which are outside our control, which could cause actual
results to differ materially from such statements. These uncertainties and other
factors include such things as: our ability to renegotiate or extend the
existing credit facility, general business conditions, competitive factors,
including pricing pressures and product innovation and quality; raw material
availability and pricing; changes in our relationships with customers and
suppliers; our ability to successfully integrate recent and future acquisitions
into 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 our 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 we undertake no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. In light of
these and other uncertainties, the inclusion of a forward-looking statement
herein should not be regarded as a representation by us that our plans and
objectives will be achieved.
REVIEW BY INDEPENDENT ACCOUNTANTS
The consolidated financial statements at June 30, 2000, and for the
three-month and six-month periods ended June 30, 2000 and 1999, have been
reviewed by Ernst & Young LLP, our independent accountants, and their report is
included herein.
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<PAGE> 16
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
<TABLE>
<C> <S>
(15) Letter re: unaudited financial information
(27) Financial data schedule (Electronic filing only)
</TABLE>
The Company did not file any reports on Form 8-K during the three months
ended June 30, 2000.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PARK-OHIO INDUSTRIES, INC.
--------------------------------------
(Registrant)
By /s/ RICHARD PAUL ELLIOTT
--------------------------------------
Name: Richard Paul Elliott
Title: Vice President and Chief
Financial Officer
Dated August 14, 2000
--------------------------------------
17
<PAGE> 18
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
FOR THE QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
(15) Letter re: unaudited financial information
(27) Financial data schedule (Electronic filing only)
</TABLE>
18
