<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. 0-3134
PARK-OHIO HOLDINGS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
OHIO 34-1867219
- ------------------------------------------ ------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23000 EUCLID AVENUE, CLEVELAND, OHIO 44117
- ------------------------------------------ ------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 216/692-7200
PARK-OHIO HOLDINGS CORP. IS A SUCCESSOR ISSUER TO PARK-OHIO INDUSTRIES, INC.
Indicate by check mark whether the registrant:
<TABLE>
<S> <C>
(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 [ ]
</TABLE>
Number of shares outstanding of registrant's Common Stock, par value $1.00 per
share, as of July 31, 1998: 11,147,462 including 144,678 shares in treasury.
The Exhibit Index is located on page 20.
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<PAGE> 2
PARK-OHIO HOLDINGS CORP. 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 shareholders' 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 HOLDINGS CORP. 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 SHAREHOLDERS' 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
Shareholders' Equity
Capital stock, par value $1 a share:
Serial Preferred Stock................................. --0- --0-
Common Stock........................................... 11,148 10,960
Additional paid-in capital................................ 55,764 53,476
Retained earnings......................................... 73,696 67,486
Treasury stock, at cost................................... (2,068) (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 HOLDINGS CORP. 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 -- EXCEPT PER SHARE
DATA)
<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
======== ======== ======== ========
Net income per common share:
Basic......................................... $ .30 $ .29 $ .56 $ .50
======== ======== ======== ========
Diluted....................................... $ .30 $ .27 $ .55 $ .48
======== ======== ======== ========
Common shares used in the computation:
Basic......................................... 10,993 10,608 10,995 10,604
======== ======== ======== ========
Diluted....................................... 11,270 12,006 11,258 12,046
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK EARNINGS (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)
------- ------- ------- ------- ------- --------
Balance June 30, 1998............. $11,148 $55,764 $73,696 $(2,068) $(1,342) $137,198
======= ======= ======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
PARK-OHIO HOLDINGS CORP. 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 HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS- EXCEPT PER SHARE DATA)
NOTE A -- BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Park-Ohio
Holdings Corp. and its subsidiaries ("the Company"). 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
8
<PAGE> 9
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
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
Net income per common share -- diluted...................... $ .62
========
</TABLE>
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 -- SHAREHOLDERS' EQUITY
At June 30, 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 40,000,000 shares were authorized and 11,147,462 shares were issued and
outstanding including 144,678 shares held in treasury.
NOTE E -- 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 was approved by the shareholders.
NOTE F -- CORPORATE REORGANIZATION
At the 1998 Annual Meeting of Shareholders of Park-Ohio Industries, Inc.
("Park-Ohio") held on May 28, 1998, the shareholders of Park-Ohio 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
9
<PAGE> 10
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
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 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 G -- 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 three and six-month periods ended June 30,
1997 have been restated to conform to the Statement 128 requirements which were
adopted by the Company on December 31, 1997.
10
<PAGE> 11
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- --------------------
1998 1997 1998 1997
--------- --------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NUMERATOR
Net income.............................................. $3,336 $3,035 $6,210 $5,277
Amortization of imputed goodwill associated with the
earnout shares........................................ -0- (14) -0- (21)
------ ------ ------ ------
Numerator for basic earnings per share-net income
available to common shareholders...................... 3,336 3,021 6,210 5,256
Effect of dilutive securities:
Interest (net of income taxes) associated with
convertible senior subordinated debentures......... -0- 241 -0- 491
------ ------ ------ ------
Numerator for diluted earnings per share-net income
after assumed conversions............................. $3,336 $3,262 $6,210 $5,747
====== ====== ====== ======
DENOMINATOR
Denominator for basic earnings per share-weighted
average shares........................................ 10,993 10,608 10,995 10,604
Effect of dilutive securities:
Effect of General Aluminum Mfg. Company earnout shares
deemed to be issued................................ -0- 130 -0- 130
Employee stock options................................ 277 157 263 181
Convertible subordinated debentures................... -0- 1,111 -0- 1,131
------ ------ ------ ------
Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions....... 11,270 12,006 11,258 12,046
====== ====== ====== ======
Net income per common share-basic....................... $ .30 $ .29 $ .56 $ .50
====== ====== ====== ======
Net income per common share-diluted..................... $ .30 $ .27 $ .55 $ .48
====== ====== ====== ======
</TABLE>
NOTE H -- 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.
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.
11
<PAGE> 12
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
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 I -- RECLASSIFICATION
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period presentation.
12
<PAGE> 13
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Park-Ohio Holdings Corp.
We have reviewed the accompanying consolidated balance sheet of Park-Ohio
Holdings Corp. 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 shareholders' 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 review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with 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 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 generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Park-Ohio Holdings Corp. 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 is derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
July 22, 1998
13
<PAGE> 14
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 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.
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
14
<PAGE> 15
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.
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
15
<PAGE> 16
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.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity needs are primarily for working capital and capital
expenditures. The Company's primary sources of liquidity have been funds
provided by operations and funds available from existing bank credit
arrangements. On January 14, 1998, the Company executed a "New Credit Agreement"
for $100 million on an unsecured basis from a group of banks which will be used
for general corporate purposes. The New Credit Agreement expires on April 30,
2001. Amounts borrowed under the New Credit Agreement may be borrowed at the
Company's election at either (i) the bank's prime lending rate less 1% or (ii)
LIBOR plus 90 basis points. As of July 31, 1998, $53.5 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 operations are expected to be adequate
to meet current cash requirements. Capital expenditures for 1998 are projected
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 3.23 at June 30,
1998 versus 2.73 at June 30, 1997. Working capital increased by $28.8 million to
$175.2 million at June 30, 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 first half of 1998, the Company generated $13.7 million from
operations before changes in operating assets and liabilities. After giving
effect to the use of $29.9 million in the operating accounts, the Company used
$16.2 million for operating activities. During the period, the Company invested
$10.9 million in capital expenditures and used $6.0 for acquisitions. These
activities were funded by a net increase in bank borrowings of $35.4 million
offset by a $2.1 million increase in cash during the period.
YEAR 2000 CONVERSION
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. The Company has evaluated the
risks and is in the process of implementing actions to ensure the Company's
internal operations are Year 2000 compliant. The cost of achieving Year 2000
compliance for the Company's internal operations is not expected to have a
material adverse effect on the Company's results of operations or financial
condition and is based on management's best estimates. These estimates are based
upon many assumptions, including assumptions about the cost, availability and
ability of resources to locate, remediate and modify affected systems. Based
upon its activities to date, the Company does not believe that these factors
will cause results to differ significantly from those estimated. However, the
Company cannot reasonably estimate the potential impact on its financial
condition and operations if key third parties, including governments, do not
become Year 2000 compliant on a timely basis. The company is working through
various trade associations as well as communicating directly with its
significant suppliers and customers to determine their Year 2000 compliance. In
addition, the Company is evaluating contingency plans to handle potential
disruptions in electrical, telecommunications, transportation and distribution
services. There can be no
16
<PAGE> 17
guarantee that these efforts will prevent the failure of third parties to become
Year 2000 compliant from having a material adverse affect on the Company's
results of operations or financial condition.
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; 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.
17
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders of Park-Ohio was held on May 28,
1998.
(c) The following matters were voted upon at the annual meeting of
shareholders of Park-Ohio:
Proposal to approve the Holding Company Reorganization through the Merger
Agreement dated February 20, 1998 and the transactions contemplated
thereby as more fully described in the Proxy Statement/Prospectus dated
April 24, 1998.
8,111,010 voting shares were voted in favor of the proposal
1,114,938 voting shares were voted against the proposal
21,067 voting shares abstained
881,969 voting shares not voted
Proposal to approve the 1998 Long-Term Incentive Plan, the terms of which
were described in the Proxy Statement/ Prospectus dated April 24, 1998.
7,905,537 voting shares were voted in favor of the proposal
1,331,252 voting shares were voted against the proposal
31,174 voting shares abstained
861,021 voting shares not voted
Proposal to ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the current year ending December 31, 1998.
10,112,262 voting shares were voted in favor of the proposal
8,200 voting shares were voted against the proposal
8,522 voting shares abstained
0 voting shares not voted
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)
(3) (i) Amended and Restated Articles of Incorporation of PKOH Holding
Corp. (filed as appendix B to the Definitive Proxy Statement of
Park-Ohio Industries, Inc. filed on April 24, 1998, SEC File No.
000-03134 and incorporated by reference and made a part hereof)
(ii) Regulations of PKOH Holding Corp. (filed as appendix C to the
Definitive Proxy Statement of Park-Ohio Industries, Inc. filed on
April 24, 1998, SEC File No. 000-03134 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.
The Company filed a Form 8-K on June 15, 1998 relating to the completion of a
holding company reorganization which was approved by the shareholders of
Park-Ohio at its May 28, 1998 Annual Meeting of Shareholders.
18
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PARK-OHIO HOLDINGS CORP.
------------------------------------
(Registrant)
By /s/ J. S. WALKER
-----------------------------------
Name: J. S. Walker
Title: Vice President and Chief
Financial Officer
Dated August 13, 1998
---------------------------------
19
<PAGE> 20
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
PARK-OHIO HOLDINGS CORP. 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>
20
<PAGE> 1
EXHIBIT (15) LETTER RE: UNAUDITED FINANCIAL INFORMATION
Board of Directors and Shareholders
Park-Ohio Holdings Corp.
We are aware of the incorporation by reference in the following
Registration Statements of Park-Ohio Holdings Corp., for the registration of its
common stock of our report dated July 22, 1998 relating to the unaudited
consolidated interim financial statements of Park-Ohio Holdings Corp., 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-3 (33-86054) Convertible Senior Subordinated Debt 363,094
Form S-8 (33-64420) 1992 Stock Option Plan 350,000
Form S-8 (33-01047) Individual Account Retirement Plan 1,500,000
Form S-8 (333-28407) Amended and Restated 1992 Stock Option Plan and 1996 750,000
Non-Employee Director Stock Option Plan
Form S-4 (333-46931) Formation of PKOH Holding Corporation 11,000,000
</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> 0000076282
<NAME> PARK-OHIO HOLDINGS CORP.
<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> 11,148
<OTHER-SE> 126,050
<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> .56
<EPS-DILUTED> .55
</TABLE>
